<PAGE>

    Filed with the Securities and Exchange Commission on September 16, 1999
                                                       Registration No. 333-
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                              -------------------
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
                              -------------------
                             PREVIEW SYSTEMS, INC.
            (Exact Name of Registrant as Specified in Its Charter)
                              -------------------
       Delaware                   7371                  77-0485517
    (State or Other         (Primary Standard        (I.R.S. Employer
    Jurisdiction of            Industrial         Identification Number)
   Incorporation or        Classification Code
     Organization)               Number)

                    1601 South DeAnza Boulevard, Suite 100
                          Cupertino, California 95014
                                (408) 873-3450
      (Address, Including Zip Code, and Telephone Number, Including Area
              Code, of Registrant's Principal Executive Offices)
                              -------------------
                               VINCENT PLUVINAGE
                            Chief Executive Officer
                             Preview Systems, Inc.
                    1601 South DeAnza Boulevard, Suite 100
                          Cupertino, California 95014
                                (408) 873-3450
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
                             of Agent for Service)
                              -------------------
                                  Copies to:
            Elias Blawie                            Alan Austin
            Tom Tobiason                          Steven Bernard
           Stephen Venuto                          John Whittle
             Mavis Yee                              Jon Layman
         Venture Law Group,              Wilson Sonsini Goodrich & Rosati
     A Professional Corporation             A Professional Corporation
        2800 Sand Hill Road                     650 Page Mill Road
    Menlo Park, California 94025            Palo Alto, California 94304
           (650) 854-4488                         (650) 493-9300
                              -------------------
       Approximate date of commencement of proposed sale to the public:
     As soon as practicable after the effective date of this Registration
                                  Statement.
                              -------------------
   If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
   If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
   If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
   If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
   If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
                        CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
                                                         Proposed
                                                          Maximum
                                                         Aggregate   Amount of
                Title of Each Class of                   Offering   Registration
              Securities to be Registered                Price(1)       Fee
--------------------------------------------------------------------------------
<S>                                                     <C>         <C>
Common Stock, par value $.0002 per share............... $46,000,000   $12,788
</TABLE>
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(1) Estimated solely for the purpose of computing the amount of the
    registration fee pursuant to Rule 457(o) under the Securities Act.

   The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell these securities and we are not soliciting offers to buy these  +
+securities in any state where the offer or sale is not permitted.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 1999


[LOGO]                       PREVIEW SYSTEMS, INC.


                                     Shares

                                  Common Stock

  Preview Systems, Inc. is offering             shares of its common stock.
This is our initial public offering, and no public market currently exists for
our shares. We have applied to have the shares we are offering approved for
quotation on the Nasdaq National Market under the symbol "PRVW." We anticipate
that the initial public offering price will be between $      and $     per
share.

                                --------------

                 INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
                    SEE "RISK FACTORS" BEGINNING ON PAGE 7.

<TABLE>
<CAPTION>
                                                                 Per Share Total
                                                                 --------- -----
<S>                                                              <C>       <C>
Public Offering Price...........................................   $       $
Underwriting Discounts and Commissions..........................   $       $
Proceeds to Preview Systems.....................................   $       $
</TABLE>

                                --------------

  The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.

  We have granted the underwriters a 30-day option to purchase up to an
additional            shares of our common stock to cover over-allotments.
BancBoston Robertson Stephens Inc. expects to deliver the shares of common
stock to purchasers on        , 1999.

                                --------------

BancBoston Robertson Stephens
                Dain Rauscher Wessels
                 a division of Dain Rauscher Incorporated
                             SoundView Technology Group
                                                                     E*OFFERING

                     The date of this prospectus is  , 1999
<PAGE>

  Narrative Description of Inside Front Cover

 Headline Upper Left Justified: "e-Commerce of Digital Goods."

    Below this headline, two diagrams descend down either side of the page,
separated by a series of centered arrows. The left diagram is labeled
"PHYSICAL" and the right is labeled "DIGITAL."

    The "PHYSICAL" diagram begins with four box-shaped graphics that represent
warehouses. A horizontal text block extends across the warehouses containing
the text: "warehouse: inventory" and "office building: order-taking." Directly
below is a second graphic which represents the computer screen of an online
environment. A smaller window on the right side of this screen contains the
words "Add to shopping cart," which represents shopping basket technology used
by online stores. Spanning this graphic is a horizontal text block containing
the words: "online storefront: order placed." Directly below is a third
graphic, which represents a single warehouse containing boxes. A horizontal
text block spans this graphic: "physical inventory accessed." The next graphic
below represents a truck loaded with boxes. Spanning the top of the truck is a
text block: "physical inventory delivered." Below and to the right of the truck
is a graphic representation of a person, which is intersected by a final
horizontal text block: "physical goods received." To the right of the person
graphic, at the tip of the final centered arrow, is a graphic representation of
a calendar, which has approximately two and a half weeks shaded in.

    The second diagram begins below the word "DIGITAL" with a graphic composed
of cylindrical figures resembling electric coils. A horizontal text block spans
this graphic, containing the text: "digital packaging: digital inventory" and
"license management." The background is a cloud-shaped graphic containing soft-
focus ones and zeros, a random representation of binary code. At the lower edge
of this cloud is a mirror image of the online environment and shopping basket
window graphic described in the "PHYSICAL" diagram. The text block near the
bottom of this graphic contains the same words: "online storefront: order
placed." A different pattern of ones and zeros leads us down to a smaller,
cloud-shaped binary code graphic, which is spanned by a horizontal text block
containing the text: "digital inventory accessed and delivered." Directly below
is a graphic representing a computer on a desk and person. A final text block
crosses this graphic containing the text: "digital goods received." Below and
to the right is a graphic representing a stopwatch, with a small shaded area
indicating that a short time has passed.
<PAGE>

  Narrative Description of Left and Right Gate Folds

    This two page spread contains a single diagram. The left side gate fold
contains the diagram's headline, upper left justified: "Preview Systems--
Enabling e-Commerce Networks for Digital Goods."

    The diagram is divided into three areas of vertical logo columns, one on
the left gate fold, two on the right. Each logo column is divided horizontally
with half the logos in the upper part of the page and the other half in the
lower part. A respective text heading is located where each column is divided,
designating the logo category. The left column, which appears on the left gate
fold, is labeled "PUBLISHERS." Ascending in the column above are company logos
for "Xerox: The Document Company," "NETObjects," "Digital Square.com" and
"Broderbund." Descending from the label in this column are logos for "Mattel,"
"Intuit," "macromedia," "Symantec," and "The Learning Company: For Greater
Knowledge." The center column, which appears on the left side of the right gate
fold, is labeled "DISTRIBUTORS AND SERVICE PROVIDERS." Ascending in this column
are logos for "Ingram Micro," "ChargeNow.com," "TrustMarque," "NAVARRE.COM your
link to software, music and DVD sales," "Softway" and "EC Direct: Ecommerce
Your Way." Descending from the label in this center column are logos for
"NetSales," "releasenow.com: the power of internet sales" and "SONY." The right
column is labeled "OEMs and RESELLERS." Ascending from this label are
"Somm.com: Your driving force on the Net," "beyond.com: The Software
Superstore," "PRISMA" and "e-Academy." The descending logos are "Ingram Micro,"
"softline," "DUSTIN AB," "Packard Bell: the computer the world," and "Vector."

    Spanning the background of this diagram, crossing the left and right folds,
is a graphic representation of the world. Beneath this is an additional diagram
containing three circles, arranged vertically and centered behind "DISTRIBUTORS
AND SERVICE PROVIDERS" utilizing, in equal portions, one half the vertical
height of the page. To the left of "PUBLISHERS," 30 small diamond shapes are
arranged vertically and centered on the circles utilizing three-fifths the
vertical height of the page. To the right of "OEMs and RESELLERS," 30 small
square shapes are arranged vertically and centered on the circles utilizing
three-fifths the vertical height of the page. From each of the top 10 diamonds
and boxes, a line of 1s and 0s, representing digital code, leads into the
center of the top circle. From each of the middle 10 diamonds and boxes, a line
of 1s and 0s, representing digital code, leads into the center of the center
circle. From each of the bottom 10 diamonds and boxes, a line of 1s and 0s,
representing digital code, leads into the center of the bottom circle. Beneath
this diagram lies a soft-focus, bow tie-shaped swath of color extending to the
left and right margins.
<PAGE>

    You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock. In this prospectus, references
to "Preview," "we," "us," and "our" refer to Preview Systems, Inc. and its
subsidiaries.

    Until           , 1999 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.

                             --------------------

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Prospectus Summary.......................................................   4
Risk Factors.............................................................   7
 Risks related to our business...........................................   7
 Risks related to our industry...........................................  15
 Risks related to our offering...........................................  17
You Should Not Rely on Forward-Looking Statements Because They Are
  Inherently Uncertain...................................................  19
How We Intend to Use the Proceeds From This Offering.....................  19
Dividend Policy..........................................................  19
Other Information........................................................  19
Capitalization...........................................................  20
Dilution.................................................................  21
Selected Consolidated Financial Data.....................................  22
Management's Discussion and Analysis of Financial Condition and Results
  of Operations..........................................................  23
Business.................................................................  30
Management...............................................................  42
Certain Transactions.....................................................  55
Principal Stockholders...................................................  57
Description of Capital Stock.............................................  59
Shares Eligible for Future Sale..........................................  62
Underwriting.............................................................  64
Legal Matters............................................................  66
Experts..................................................................  66
Additional Information...................................................  66
Index to Financial Statements............................................ F-1
</TABLE>

                             --------------------

    Our logo and certain titles and logos of our products mentioned in this
prospectus are our service marks or trademarks. Each trademark, trade name or
service mark of any other company appearing in this prospectus belongs to its
holder.

    Except where we state otherwise, information in this prospectus is based
on the following assumptions:

  .  a one-for-two reverse split of all outstanding shares of our common
     stock and preferred stock to be completed immediately prior to the
     effectiveness of this offering;

  .  the conversion of all outstanding shares of preferred stock into shares
     of common stock upon the effectiveness of this offering; and

  .  no exercise of the underwriters' overallotment option.

                                       3
<PAGE>


                               PROSPECTUS SUMMARY

    Because this is only a summary, it does not contain all the information
that may be important to you. You should read the entire prospectus, especially
"Risk Factors" and the consolidated financial statements and notes, before
deciding to invest in shares of our common stock.

                                  Our Company

    We develop and market an Internet-based infrastructure solution that
enables networks for the electronic distribution and licensing of digital
goods. Digital goods are products such as software, music, images, video and
documents that can be produced, delivered and licensed electronically. Our
solution is channel neutral, supports direct and indirect distribution and
enables publishers, distributors and resellers of digital goods to integrate
seamlessly within these networks. We earn transaction fees based on the value
of digital goods that are distributed and licensed using our solution.

    International Data Corporation projects that the retail market for
electronic software distribution will increase to $14.9 billion by 2003 from an
estimated $351 million in 1998. Electronic distribution of digital goods and
licenses can reduce costs, increase selling opportunities, and facilitate real-
time exchange of information among distribution channel participants. However,
many existing electronic distribution systems compete with existing
distribution channels, fail to adequately enforce distribution and licensing
rights and do not integrate sales information from multiple distribution
channels.

    Our solution provides publishers, distributors and resellers the ability to
implement networks for the electronic distribution and licensing of digital
goods. Our solution supports a variety of leading software and hardware
platforms, employs sophisticated encryption techniques to maximize security and
is scalable. In addition, it automates real-time exchange of information among
network participants.

    We have developed relationships with software publishers such as Symantec
and Macromedia that allows them to use our solution to distribute their
products electronically through direct or indirect channels. We have developed
a relationship with Ingram Micro, the leading worldwide wholesale distributor
of computer-based technology products and services. Our agreement enables
Ingram Micro to use our solution to supply its resellers electronically and to
sublicense appropriate network components to its resellers. We also have
established relationships with service providers who offer our solution on an
outsourcing basis. Finally, we are working directly and through third parties
with original equipment manufacturers, such as Packard Bell NEC, to bundle
encrypted digital goods for online licensing with its computer products.

    We seek to establish our solution as the de facto standard infrastructure
solution for participants in the electronic distribution and licensing of
digital goods. Key elements of our strategy are to target and secure the
support of leading software publishers and distributors, expand the number of
participants using digital goods networks, extend our solution into other
digital goods markets such as music, expand our solution to support volume
licensing to organizations and enhance our solution with value-added services.
We have an agreement with Intel Corporation to incorporate its content
protection agent system into our solution for secure electronic distribution of
digital music.

    Our principal executive offices are located at 1601 South De Anza
Boulevard, Suite 100, Cupertino, California 95014, and our telephone number is
(408) 873-3450. The information contained on our web site is not part of this
prospectus.

                                       4
<PAGE>


                                  The Offering

<TABLE>
 <C>                                                 <S>
 Common stock offered by Preview Systems............              shares
 Common stock to be outstanding after the offering..              shares
 Use of proceeds.................................... Working capital and
                                                     general corporate purposes
 Proposed Nasdaq National Market symbol............. PRVW
</TABLE>

    The common stock to be outstanding after the offering is based on the
number of shares outstanding as of July 31, 1999. This excludes:

  .  2,331,840 shares issuable upon exercise of outstanding options at a
     weighted average exercise price of $3.44 per share as of July 31, 1999;

  .  492,495 shares issuable upon exercise of outstanding warrants at a
     weighted average exercise price of $7.45 per share as of July 31, 1999,
     322,045 of which represent rights to acquire convertible preferred stock
     which convert one for one to common stock;

  .  460,097 shares available for future issuance under our stock option
     plans as of July 31, 1999; and

  .  300,000 shares available for issuance under our 1999 directors' stock
     option plan and 500,000 shares available for future issuance under our
     1999 employee stock purchase plan. See "Management--Stock Plans."

                      Summary Consolidated Financial Data
                     (in thousands, except per share data)

    We were incorporated in Delaware in April 1998 to acquire all of the
outstanding equity interests of Preview Software and Portland Software. We
completed both of these mergers on August 5, 1998. We accounted for our merger
with Preview Software as a reorganization under common control and we recorded
the underlying net assets at historical cost. We accounted for our merger with
Portland Software using the purchase method. Therefore, the following summary
consolidated financial data for the years ended December 31, 1996, 1997 and
1998 and the six months ended June 30, 1998 and 1999 reflect our operations and
those of Preview Software, and reflect the operations of Portland Software from
August 5, 1998. The statements of operations data displayed in the "Pro Forma
1998" columns give effect to the Portland Software merger as if the transaction
had occurred at the beginning of the specified periods.

<TABLE>
<CAPTION>
                                  Year Ended December 31,           Six Months Ended June 30,
                            -------------------------------------- ----------------------------
                                                        Pro Forma            Pro Forma
                             1996    1997      1998       1998      1998       1998      1999
                            ------  -------  --------  ----------- -------  ----------- -------
                                                       (unaudited)          (unaudited)
  <S>                       <C>     <C>      <C>       <C>         <C>      <C>         <C>
  Consolidated Statements
    of Operations Data:
  Revenues:
    Network transaction
      fees................  $  148  $   262  $    435   $    618   $   111    $   246   $   742
    Services..............      --       --       175        191        --         16       479
                            ------  -------  --------   --------   -------    -------   -------
       Total revenues.....     148      262       610        809       111        262     1,221
  Operating expenses:
    Research and
      development.........      34    1,016     2,978      4,056     1,091      2,016     3,080
    Sales and marketing...     172      822     2,915      4,202       980      2,103     2,494
    General and
      administrative......     184      785     3,127      5,179     1,186      2,148     2,048
    Amortization of
      intangibles.........      --       --       866      2,084        --      1,042     1,038
    Acquired in-process
      research and
      development.........      --       --     2,091         --        --         --        --
                            ------  -------  --------   --------   -------    -------   -------
       Total operating
         expenses.........     390    2,623    11,977     15,521     3,257      7,309     8,660
                            ------  -------  --------   --------   -------    -------   -------
  Loss from operations....    (242)  (2,361)  (11,367)   (14,712)   (3,146)    (7,047)   (7,439)
                            ------  -------  --------   --------   -------    -------   -------
  Net loss................  $ (242) $(2,380) $(11,276)  $(14,550)  $(3,111)   $(6,947)  $(7,436)
                            ======  =======  ========   ========   =======    =======   =======
  Basic and diluted net
    loss per share........  $(0.69) $ (6.45) $  (7.55)  $  (5.51)  $ (4.60)   $ (2.67)  $ (2.75)
                            ======  =======  ========   ========   =======    =======   =======
  Shares used in computing
    net loss per share....     350      369     1,494      2,641       676      2,605     2,708
                            ======  =======  ========   ========   =======    =======   =======
</TABLE>

                                       5
<PAGE>


    The As Adjusted consolidated balance sheets data summarized below reflects
the conversion of our preferred stock into 4,475,826 shares of common stock
upon the completion of this offering and the application of the net proceeds
from the sale of the            shares of common stock offered by us at the
initial public offering price of $        per share after deducting the
underwriting discounts and commissions and our estimated offering expenses.
<TABLE>
<CAPTION>
                                                              June 30, 1999
                                                               (unaudited)
                                                           --------------------
                                                           Actual   As Adjusted
                                                           -------  -----------
<S>                                                        <C>      <C>
Consolidated Balance Sheets Data:
Cash, cash equivalents and short-term investments......... $   427     $
Working capital (deficit).................................  (3,525)
Total assets..............................................   8,150
Long-term portion of debt and capital lease obligations...     443
Total stockholders' equity................................     767
</TABLE>

                                       6
<PAGE>

                                  RISK FACTORS

    You should carefully consider the risks described below before making an
investment in our company. In addition, you should keep in mind that the risks
described below are not the only risks that we face. The risks described below
are the risks that we currently believe are material risks of this offering.
However, additional risks not presently known to us, or risks that we currently
believe are not material, may also impair our business operations. Moreover,
you should refer to the other information contained in this prospectus for a
better understanding of our business.

    Our business, financial condition, or results of operations could be
adversely affected by any of the following risks. If we are adversely affected
by these risks, then the trading price of our common stock could decline, and
you could lose all or part of your investment.

                         Risks related to our business

Our business model is new and unproven, and we may not succeed in generating
sufficient revenues to sustain or increase our business.

    We generally provide rights to use our technology and ongoing support
through annual licensing agreements. These agreements typically require our
customers to pay us network transaction fees based on a percentage of the sales
fulfilled using our solution. Upon execution and renewal of the agreement, our
customers commit to annual minimum network transaction fees which entitle them
to fulfill an agreed amount of sales using our solution. When their sales using
our solution exceed this agreed amount, we earn incremental network transaction
fees. Some or all of the minimum network transaction fees are paid in advance
or are paid based on an agreed schedule. We defer the recognition of the
minimum network transaction fees and recognize them over the term of the
agreement which is typically one year. We recognize any incremental transaction
fees when these are known which is generally in the month following our
customers' transactions.

    We expect to generate the majority of our revenues in the future from
network transaction fees. We currently derive all of our network transaction
fee revenues from annual minimum network transaction fees. After we recognize
the revenue attributable to these minimum network transaction fees, future
network transaction fees will depend entirely on sales using our solution,
which is predominantly outside of our control. At June 30, 1999, the aggregate
unrecognized minimum network transaction fees totaled $2.4 million. These
minimum network transaction fees are insufficient to support our business. As a
result, our customers must generate significant sales using our solution for us
to be successful.

    Our customers have only recently begun to use our solution to distribute
their products and we have not received any significant network transaction
fees under this transaction fee model. Applications and services based on our
solution might not be commercially deployed by our customers or, if
commercially deployed, the sales using our solution may be too small to support
or grow our business. In addition, future customers or existing customers upon
renewal may wish to use different business models, such as the payment of a
one-time license fee instead of ongoing network transaction fees. Our existing
customers may not elect to renew our agreements or they, as well as future
customers, may seek more favorable terms.

We have a limited operating history, making it difficult for you to evaluate
our business and your investment.

    We were formed in April 1998 to acquire all of the outstanding equity
interests of Preview Software and Portland Software. These acquisitions closed
in August 1998. Prior to August 1998, Portland Software and Preview Software
had achieved only limited distribution of their respective products. For
example, in 1996, 1997 and the six months ended June 30, 1998, total revenues
generated by both businesses were approximately $335,000,

                                       7
<PAGE>

$763,000 and $262,000, respectively. In the 11 months since these acquisitions,
our total revenues were approximately $1.7 million. A majority of our
significant customers entered into their agreements with us since September
1998. Accordingly, we have a limited operating history and you have little
historical basis upon which to evaluate our business, products, markets and
general prospects of your investment.

Our success depends on our relationship with Ingram Micro.

    In June 1999, we entered into a non-exclusive agreement with Ingram Micro,
the leading worldwide wholesale distributor of computer-based technology
products and services, to license our solution to distribute software to
participants in Ingram Micro's distribution channel. This relationship is key
to our strategy of building networks of participants using our solution and
requires a great deal of effort to manage successfully. As of August 31, 1999,
Ingram Micro had not yet commercially launched, and under our agreement is not
obligated to launch, an electronic software distribution program using our
solution. Our agreement does not restrict Ingram Micro from using competitive
technologies instead of or in addition to our solution. Any failure or delay in
the launch of Ingram Micro's program using our solution would have a material
adverse effect on us.

    If Ingram Micro deploys a program using our solution, the success of this
program will depend on the participation rate of Ingram Micro's channel
partners. Getting these channel partners to participate is a complicated
process, involving many parties and requiring significant resources. Software
publishers must initially consent to allow Ingram Micro to distribute their
software titles electronically. We depend on Ingram Micro to obtain these
publisher consents. Obtaining publisher consents may prove difficult,
particularly if our digital goods solution is not perceived as secure or if the
participating reseller base is not significant. Because we depend on Ingram
Micro to obtain publisher consents, we do not know, and Ingram Micro is not
obligated to tell us, how many, if any, publishers have consented to distribute
their products electronically through Ingram Micro. In addition to software
publishers, resellers participating in Ingram Micro's distribution chain must
also be persuaded to adopt our system. Resellers may be reluctant to
participate in this electronic distribution network for a variety of reasons,
including the absence of a broad line of software titles and significant
publisher participation, the terms and conditions offered by Ingram Micro and
their perception as to whether our solution is becoming a de facto standard. As
of August 31, 1999, none of Ingram Micro's resellers has connected to this
electronic distribution network. We depend on Ingram Micro to facilitate
participation in this network by its resellers. Accordingly, the growth rate of
this network, to a large extent, is outside of our control. The failure of
Ingram Micro's channel partners to participate in this network on a timely
basis and generate significant sales using our solution would have a material
adverse effect on us.

    Our relationship with Ingram Micro is significant to us financially. In
exchange for the right to use our technology, Ingram Micro agreed to pay us
network transaction fees based on sales fulfilled using our solution. Ingram
Micro has recently disclosed that its net sales of software products have
decreased as a percentage of its total net sales in recent years and that it
expects this trend to continue. Our agreement with Ingram Micro has an initial
one-year term. The agreement provides for a one-year automatic renewal unless
terminated by providing advance notice. The failure to renew or termination of
this agreement would have a material adverse impact on us. In addition, the
agreement obligates us to indemnify Ingram Micro against claims our solution
infringes third-party intellectual property or contractual rights.

    As part of our strategy, we intend to pursue relationships with other
distributors of digital goods which could adversely affect our relationship
with Ingram Micro.

We expect operating expenses to increase significantly, we have incurred
significant net losses and we expect our losses will continue in the future.

    As of June 30, 1999, we had an accumulated deficit of $21.3 million. We
experienced net losses of $11.3 million and $2.4 million in 1998 and 1997,
respectively, and $7.4 million for the six months ended June 30, 1999. We have
not achieved profitability and we expect significant operating losses and
negative cash

                                       8
<PAGE>

flow to continue for at least the next two years, and possibly longer. Our
losses will continue to increase because we expect to incur additional costs
and expenses related to research and development as well as expanding our
organization, especially in general and administrative functions, sales,
marketing and consulting.

    In addition, we are in the early stages of expanding our solution to
address electronic distribution of digital music. We anticipate that this
effort will entail additional significant increases in research and development
costs as well as in sales and marketing. We do not expect to recognize
meaningful revenues from the music business for at least the next 12 months, if
ever. Because we will spend these amounts before we receive any incremental
revenues from these efforts, our losses will be greater than the losses we
would incur if we developed our business more slowly. In addition, we may find
that these efforts are more expensive than we currently anticipate, which would
further increase our losses.

We rely on only a few customers for the majority of our revenues.

    Sony Marketing of Japan accounted for approximately 45% of our revenues in
1998. Sony Marketing and Ingram Micro accounted for approximately 51% of our
revenues in the first six months of 1999. We expect that Ingram Micro will
account for a significant percentage of our future revenues although we can
give you no assurance in that regard. We expect that a small percentage of our
customers will continue to account for a substantial portion of our revenues
for the foreseeable future. Contracts with these customers are generally short
term in nature, varying in length from one to three years, and can be
terminated by the customer on short notice without significant penalties. If
any one of these contracts is not renewed or otherwise ends, our business could
be materially adversely affected.

A significant number of distribution channel participants must agree to sell
digital goods through our solution for us to be successful.

    The distribution channel for digital goods is complex and multi-tiered,
consisting of publishers which sell to distributors, resellers and end
customers; distributors which sell to resellers; original equipment
manufacturers (OEMs) which sell to resellers and end customers; and resellers
which sell to end customers. Unless a significant number of these channel
participants adopts our solution in a timely manner, we will not achieve the
critical mass of participants we believe necessary for our success. Our success
depends on the adoption of our solution not only by our customers but by the
distribution channel partners of our customers as well. For example, in order
for a distributor to sell digital goods using our solution, the publisher of
the goods must consent to distribute its goods electronically and the reseller
of the goods must also agree to use our solution. We do not know whether our
customers' distribution channel partners will agree to use our solution. Unless
a significant number of our customers' distribution channel partners agrees to
sell digital goods through our solution, we may not be able to earn enough
revenues from our network transaction fees to become profitable or execute our
business model.

If Microsoft does not consent to the electronic distribution of its products
through distributors using our solution or adopt our solution for direct sales,
our business may be seriously harmed.

    Sales of Microsoft products account for a large portion of worldwide
software sales. If Microsoft does not consent to the electronic distribution of
its products through distributors using our solution or adopt our solution for
direct sales, our business may be seriously harmed. Additionally, Microsoft may
initiate its own standard for the electronic distribution of its software over
the Internet. Microsoft has initiated programs for the secure electronic
distribution of music. If distribution channel participants favor Microsoft's
existing or future solution for electronic distribution of digital goods, our
business may be harmed.

Our sales cycle is lengthy and unpredictable which could cause us to fail to
achieve projected results.

    We market our solution directly to software publishers, music labels that
offer prerecorded music, distributors, resellers, OEMs and service providers.
These critical relationships are usually complex and take

                                       9
<PAGE>

time to finalize. We typically must provide a significant level of education
regarding the use and benefits of our solution. Our customers tend to engage in
extensive internal reviews before making a purchasing decision. Further, the
purchase and deployment of our solution within a customer's organization
involve a significant commitment of capital and other resources and, as a
result, are subject to delays beyond our control, such as customers' internal
procedures to approve large capital expenditures, budgetary constraints and the
testing and acceptance of new technologies that affect key operations. In
addition, our potential customers may delay or reduce spending for the
implementation of our solution as they attempt to stabilize their computer
systems before January 1, 2000 in order to reduce the risk of computer problems
associated with year 2000 issues. As a result, substantial time may pass
between selection of our solution by key decision makers and the signing of a
contract. Accordingly, the period between the initial sales call and the
signing of a contract with significant sales potential may typically range from
four to six months, and has been and can be significantly longer. Therefore,
the timing of sales to new customers is difficult to predict. Delays in
receiving signed contracts with major customers could cause us to fail to
achieve our projected results, as well as those of industry analysts, in a
given quarter, which would have a severe adverse effect on the price of our
stock.

Our solution has not yet been used under high-volume transaction conditions,
and we do not know if technical problems may significantly complicate the
operation of our solution on a large scale.

    Our solution has not yet been subjected to the volume of business and the
complexity we anticipate will be required to fully support the future
transactions of our largest customers. If our solution is not capable of
processing the necessary volume of transactions, our business will be seriously
harmed. In addition, it is likely that production software tools, diagnostic
tools and maintenance upgrades, as well as significant financial and other
resources, will be required to achieve reliability and resolve technical issues
related to large-scale transactions.

Our solution will require periodic upgrades and maintenance which may cause
disruptions in our service and will require the cooperation of our customers
and their channel partners.

    We will need to upgrade and improve our solution periodically. Upgrading or
deploying a new version of our solution requires the cooperation of our
existing customers and their network participants. These network participants
may be reluctant to upgrade our solution since this process can be complicated,
time-consuming and poses the risk of network failures. The existence of or
failure to resolve these technical issues on a timely basis would materially
adversely affect us.

Our solution must be integrated with our customers' and their channel partners'
existing systems and there will be significant delays between the licensing and
deployment of our solution.

    Our customers must integrate our solution into their existing systems or a
new system. Our business model is based on receiving network transaction fees.
Thus, our success depends upon the timely and successful deployment of our
solution by customers for the distribution and licensing of digital goods.

  The timing and success of commercial deployment depends upon the:

  .  complexity of our customers' systems and necessary development efforts;

  .  technical and engineering capabilities of our customers;

  .  budget for and relative importance of electronic distribution of
     digital goods to our customers;

  .  ability of our customers to integrate and test the implementation of
     our solution successfully; and

  .  efforts of our consulting, training and support services in providing
     technical support to our customers.

    We expect that the period between entering into a licensing arrangement and
the time a customer commercially deploys our solution will vary widely.

                                       10
<PAGE>

Variations in the volume of sales of digital goods and services over the
Internet will cause fluctuations in our quarterly operating results, which
could cause our stock price to decline.

    The amount of network transaction fees we receive in any given quarter will
depend on the sales of digital goods that occur using our solution. Because
sales of digital goods using our solution are outside of our control, it will
be difficult for us to make accurate quarterly revenue projections even if our
solution is deployed commercially by our licensees. In addition, our revenues
will depend on the number of new deployments of our solution that occur in a
particular quarter. However, in the short term our operating expenses are
relatively fixed and based in part on our revenue projections. As a result, if
our revenue projections are not accurate for a particular quarter, our actual
operating results for that quarter could fall below the expectations of
analysts and investors. Our failure to meet these expectations would likely
cause the market price of our common stock to decline significantly and
rapidly.

Security breaches to our encryption technology may harm our reputation and
business and may cause us to expend significant additional resources to protect
against future breaches.

    Individuals, referred to as crackers, have in the past gained unlicensed
access to secured digital goods distributed through our solution. While we
expend significant efforts to make unauthorized access increasingly difficult,
we expect that determined crackers will continue their attempts to crack our
solution and may prove successful. We will have to expend significant capital
and other resources to alleviate problems caused by these attempts to crack our
solution.

    Any breach of our security systems could harm our reputation, which could
materially harm our business. A party who is able to circumvent our security
measures could misappropriate digital goods without paying the required license
fees, gain unauthorized access to proprietary information, erase or modify
electronic audit trails, or disrupt our customers' operations. Security
breaches could also harm our reputation and expose us to litigation and
liability. We cannot assure you that our security measures will prevent
security breaches or that a failure to prevent such security breaches will not
seriously harm our business.

We do not expect to recognize any significant revenues from the use of our
solution by our customers to sell digital music for at least the next 12
months, and we may not ever recognize meaningful revenues from these sales.

    We have only recently begun to explore and market our solution for
electronic distribution of music and no customer is currently using our
solution to distribute music. As a result, we do not believe that we will
recognize any significant revenue from the use of our solution to sell music or
any type of digital goods other than software for at least the next 12 months,
if at all. We expect to incur significant expenses to develop and promote the
use of our solution for the electronic distribution of music. If electronic
distribution of music fails to develop or we are unable to penetrate this
market, we will have expended a great deal of time, effort and financial
resources that could have been directed to more beneficial activities. In
addition, our business may be adversely impacted if our efforts are not
successful. Recently, many public companies engaged in music e-commerce have
experienced significant volatility in their stock prices. To the extent we are
perceived as participating in music e-commerce, we may also experience similar
volatility in our stock price.

    We are relying on Intel to provide us with its content protection agent
system that we can integrate with our solution. If we are unable to
successfully integrate it into our solution, we may be unable to provide a
viable solution for electronic distribution of music. Even if we successfully
incorporate the content protection agent system into our solution, it may not
provide adequate security.

    We also rely upon third parties to create digital music players that
support the content protection agent system technology developed by Intel. If
such third parties fail to support this technology or end customers do not
purchase devices to play music distributed through our solution, our solution
may not gain market acceptance.

    Other companies, such as Microsoft and Liquid Audio, have already begun to
distribute digital music using their proprietary methods. If these methods are
successful before we are able to implement our solution, our plans to use our
solution for the distribution of digital music may be seriously harmed.

                                       11
<PAGE>

We have been, are and likely will in the future be subject to litigation that
may adversely affect us.

    From time to time we have been, currently are and expect to continue to be,
subject to legal proceedings and claims in the ordinary course of business,
including claims of alleged infringement of third-party intellectual property
rights by us and our licensees. We are also currently subject to litigation
initiated by 20/20 Software, Inc. in the United States Court for the District
of Northern California. The 20/20 complaint alleges that one of our employees,
a former 20/20 employee, misappropriated trade secrets and confidential
information of 20/20 and allegedly used them in a product of our predecessor
and subsidiary, Preview Software. Claims like these, whether or not
meritorious, could result in the expenditure of significant financial and
managerial resources and could materially and adversely affect our business.

Our intellectual property rights are difficult and costly to protect.

    We regard our patents, copyrights, trademarks, trade dress, trade secrets,
and similar intellectual property as critical to our success. We rely upon
patent, trademark and copyright law, trade secret protection and
confidentiality or license agreements with our employees, customers, partners
and others to protect our proprietary rights. Our proprietary technologies will
be protected from unauthorized use by third parties only to the extent that
they are covered by valid and enforceable patents or copyrights or are
effectively maintained as trade secrets. Any failure to protect our
intellectual property in a meaningful manner could materially and adversely
affect our business. In addition, litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others.
Litigation could result in substantial costs and diversion of management and
technical resources, which could materially and adversely affect us. We cannot
guarantee the adequacy of our efforts to protect our proprietary rights.

Any acquisitions we make could result in dilution, unfavorable accounting
charges and difficulties in successfully managing our business.

    As part of our business strategy, we review acquisition prospects that
would complement our existing business or enhance our technological
capabilities. Future acquisitions by us could result in potentially dilutive
issuances of equity securities, large and immediate write-offs, the incurrence
of debt and contingent liabilities or amortization expenses related to goodwill
and other intangible assets, any of which could materially and adversely affect
our results of operations. Furthermore, acquisitions entail numerous risks and
uncertainties, including:

  .  difficulties in the assimilation of operations, personnel,
     technologies, products and the information systems of the acquired
     companies;

  .  diversion of management's attention from other business concerns;

  .  risks of entering geographic and business markets in which we have no
     or limited prior experience; and

  .  potential loss of key employees of acquired organizations.

    We may be unsuccessful in integrating any businesses, products,
technologies or personnel that might be acquired in the future, and our failure
to do so could have a material adverse effect on our business. In addition,
public or analysts' perception of the value of a potential acquisition may be
negative and our stock price may fall as a result.

We face risks associated with international sales and operations.

    Although we sell our solution to customers outside the United States, we
might not succeed in expanding our international presence. Conducting our
business outside of the United States is subject to additional risks,
including:

  .  the possibility that the scarcity of high speed Internet access, the
     high cost of Internet access and the pace of future improvements in
     access to the Internet in countries outside the United States will
     limit the market for electronic distribution and licensing of digital
     goods;

                                       12
<PAGE>

  .  changes in regulatory requirements, taxes and tariffs;

  .  reduced protection of intellectual property rights;

  .  the burden of complying with a variety of international laws;

  .  potential tax withholding of our network transaction fees;

  .  longer collection periods;

  .  U.S. and international export and use restrictions on encryption
     technology;

  .  currency rate fluctuations that can impact our network transaction fees
     which are denominated in local currencies; and

  .  political or economic constraints on international trade or
     instability.

    One or more of these factors may materially and adversely affect our future
international operations, and consequently, our business.

    As a result of our agreement with Sony Marketing of Japan, which provides
Sony Marketing the exclusive right to distribute our products in Japan, our
success in this market depends on their efforts and ability to sell our
solution. This grant of an exclusive right to Sony Marketing may prevent
widespread adoption of our solution by the Japanese market which may prevent us
from being able to become a widely- used system in Japan.

We depend on key personnel, who may not continue to work for us.

    We are substantially dependent on the continued services of our officers
and key personnel who are all at-will employees. These individuals have
acquired specialized knowledge and skills with respect to our business. As a
result, if any of these individuals were to leave, we could face substantial
difficulty in hiring qualified successors and could experience a loss in
productivity while the new employee obtains the necessary training and
experience. We expect that we will need to hire additional personnel in all
areas. The competition for qualified personnel in our industry is intense,
particularly in the San Francisco Bay Area, where our corporate headquarters
are located. At times, we have experienced difficulties in hiring personnel
with the right training or experience, particularly in technical areas. If we
do not succeed in attracting new personnel or retaining and motivating existing
personnel, our business will be adversely affected.

The year 2000 bug could cause our solution and the software products of our
suppliers to malfunction.

    Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. As a result, many companies'
software and computer systems may need to be upgraded or replaced in order to
comply with these "year 2000" requirements.

 Internal Systems

    We are currently assessing the ability of our internal systems to satisfy
year 2000 requirements and expect to complete the program before December 31,
1999. We have not incurred material costs to date in this process, and
currently do not believe that the cost of additional actions will have a
material effect on our results of operations or financial condition. Although
we currently believe that our systems satisfy year 2000 requirements in all
material respects, our current systems may contain undetected errors or defects
with year 2000 date functions that may result in material costs. We do not have
a specific contingency plan to handle year 2000 problems if they occur. Based
on our assessment to date, we currently believe that year 2000 costs to us will
not exceed $50,000. However, in a worst case scenario, year 2000 problems could
cause us to cease normal operations for an indefinite period until we are able
to repair our internal systems. Although we are not

                                       13
<PAGE>

aware of any material operational issues or costs associated with preparing our
internal systems for the year 2000, we may experience serious unanticipated
negative consequences or material costs caused by undetected errors or defects
in the technology used in our internal systems.

 Products

    Our products are currently designed and tested to be year 2000 compliant.
By "year 2000 compliant," we mean that the products will operate according to
their published documentation and will record, store, process and present
calendar dates falling on or after January 1, 2000 in the same manner, and with
the same functionality, as they record, store, process and present calendar
dates falling on or before December 31, 1999. We believe that the current
version of our solution is year 2000 compliant.

    Prior versions of our solution in current production use by some of our
customers are not year 2000 compliant and must be upgraded prior to December
31, 1999 in order to avoid problems at the rollover to January 1, 2000. We will
complete the upgrade for our customers in the normal course of our customer
support. As a result, we have not incurred and do not expect to incur any
material expenses related to these upgrades. Customers who fail to upgrade our
solution or any other third party software or hardware that is not year 2000
compliant that our solution relies on prior to that time may suffer severe
outages. This may harm our relationships with these customers and may damage
our reputation with other current or prospective customers. It is also possible
that customers with non-year 2000 compliant systems may decide to sue us
because our software was not year 2000 compliant. Although we expect to contest
these claims, the cost of litigation surrounding this issue may be significant
and, in a worst case scenario, year 2000 problems could prevent any
transactions using our solution from taking place until we are able to repair
our solution.

    We have not independently verified whether any third-party software
encrypted with our solution is year 2000 compliant. We have encouraged users of
our solution to contact third-party vendors to determine the year 2000
compliant status of their products. We have not independently verified whether
the components from our third-party manufacturers are year 2000 compliant. We
have warranted in certain of our license agreements that our solution as
delivered by us and without customization, will be year 2000 compliant provided
that the entire system and supporting products with which our solution is used
are also year 2000 compliant. This includes hardware, system software such as
the operating system and database software, and application software, either
purchased, contracted, or created in-house. In addition, our customers may also
be concerned about year 2000 issues or distracted by their own year 2000
compliance programs, either of which could adversely affect our business.

                                       14
<PAGE>

                         Risks related to our industry

The success of our business will largely depend on the widespread acceptance of
commerce in digital goods over the Internet.

    The use of the Internet for distribution and licensing of digital goods may
not be commercially accepted for a number of reasons, including the:

  .  failure to adequately develop the necessary infrastructure for the
     electronic distribution and licensing of digital goods, including data
     compression or broadband communication technology;

  .  lack of adequate speed, access, or server reliability;

  .  public perception of the security and confidentiality of digital
     information and the confidentiality of its providers and users;

  .  development of competing technologies;

  .  rate of adoption of electronic distribution and licensing of digital
     goods by the existing retail and other channels;

  .  demand for digital goods that are available for purchase through
     electronic distribution; and

  .  level of end customer comfort with the process of downloading software,
     music and other digital goods over the Internet, including the ease of
     use.

    In addition, our business would be seriously harmed if publishers,
distributors or resellers of digital goods are unwilling to sell their digital
goods over the Internet. These factors are outside of our control. If commerce
in digital goods does not achieve widespread market acceptance or grow
significantly, our business will be seriously harmed.

Our market is subject to rapid technological changes; we may not be able to
introduce new products and enhancements on a timely basis.

    The market for electronic distribution and licensing of digital goods is
fragmented and marked by rapid technological change, frequent new product
introductions and enhancements, uncertain product life cycles, and changes in
customer demands. There is currently no standard for electronic distribution
and licensing of digital goods. New products based on new technologies or new
industry standards can quickly render existing products obsolete and
unmarketable. In the past we have experienced delays in new product releases
and we may experience similar delays in the future. Any delays in our ability
to develop and release enhanced or new systems could seriously harm our
business.

The market for electronic distribution of music may not develop, which could
adversely affect our revenue opportunities and business.

    The market for electronic distribution of music is new and rapidly
evolving. Electronic sales of music have been almost non-existent due to
uncertainty about whether, when and how a market for these sales will develop
as well as due to significant concerns regarding unauthorized use and
distribution of digitized music. As a result, a significant market for
electronically distributed music may not develop and our business may be
adversely affected.

We are in a highly competitive industry, and some of our competitors may be
more successful than we are in attracting and retaining customers.

    The market for electronic distribution and licensing of digital goods is
new, rapidly evolving and intensely competitive. We expect competition to
intensify in the future. We currently compete directly with other providers of
electronic commerce solutions for digital goods such as Cybersource, Digital
River and InterTrust Technologies. More broadly, we compete with other
providers of technology to secure digital content

                                       15
<PAGE>

such as AT&T, IBM, Liquid Audio, Microsoft, Real Networks, Reciprocal and
Xerox, as well as solutions developed in-house. In the future, operating system
manufacturers may include digital rights management solutions in their
operating systems.

  We believe that the principal competitive factors in our markets include:

  .  software publisher, music label, distributor and reseller
     relationships;

  .  system security, scalability and reliability;

  .  breadth of products and services;

  .  price; and

  .  speed of deployment.

    Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and much greater
financial, marketing and other resources than we do. In addition, larger, well-
established and well-financed entities may acquire, invest in or form joint
ventures with competitors as the use of the Internet and other online services
increases. Increased competition may result in reduced prices, and loss of
market share and may negatively impact our ability to obtain network
transaction fees. In addition, adoption by publishers, distributors and
resellers of competing systems can significantly limit the size of the
potential market for our solution. We may not be able to compete successfully
against current and future competitors, and any inability to do so would
materially adversely affect our business.

We may be sued for violating the intellectual property rights of others.

    The digital encryption and distribution industry is characterized by the
existence of a large number of patents and frequent litigation based on
allegations of patent infringement and the violation of other intellectual
property rights. We have not completed an in-depth and exhaustive analysis of
such patents or applications. Some of our competitors have extensive patent
portfolios with broad claims. As the number of competitors in the market grows
and the functionality of our solution increases, the possibility of an
intellectual property claim against us increases. In addition, because patent
applications can take many years to issue, there may be a patent application
now pending, of which we are unaware, which will cause us to be infringing when
it is issued in the future. To address these patent infringement or other
intellectual property claims, we may have to enter into royalty or licensing
agreements on disadvantageous commercial terms. Alternatively, we may be unable
to obtain a necessary license. A successful claim against us, and our failure
to license the infringed or similar technology, would harm our business. In
addition, any infringement or other intellectual property claims, with or
without merit, which are brought against us could be time consuming and
expensive to litigate or settle and could divert management's attention from
our business.

We may face increased governmental regulation and legal uncertainties that
could increase our costs and be a barrier to doing business.

    To date, communications and commerce on the Internet have not been highly
regulated. State and federal governments may decide to enact new laws or
regulations at any time and it may take years to determine the extent to which
existing laws relating to issues including property ownership, defamation, and
personal privacy apply to the Internet. Any new laws or regulations or
implementations of existing laws and regulations relating to the Internet could
harm our business.

    As of October 1998, the European Union has adopted a privacy directive that
regulates the collection and use of information that can be associated with
specific individuals. These regulations may inhibit or prohibit the collection
and sharing of personal information in ways that could harm our partners or us.
The globalization of Internet commerce may be harmed by these and similar
regulations since the European Union privacy directive prohibits transmission
of personal information outside the European Union unless the receiving country
has

                                       16
<PAGE>

enacted individual privacy protection laws at least as strong as those enacted
by the European Union privacy directive. The United States and the European
Union have not yet resolved this matter and they may not ever do so, in a
manner favorable to our customers or us.

Imposition of sales and other taxes on electronic commerce transactions may
hinder electronic commerce.

    The taxation of commerce activities in connection with the Internet has not
been established, may change in the future and may vary from jurisdiction to
jurisdiction. One or more states or other countries may seek to impose sales or
other taxes on companies that engage in or facilitate electronic commerce. A
number of proposals have been made at the local, state, and international level
that would impose additional taxes on the sale of products and services through
the Internet. These proposals, if adopted, could substantially impair the
growth of electronic commerce and could significantly harm our business.
Moreover, if any state or other country were to assert successfully that we
should collect sales or other taxes on the exchange of products and services
through the Internet, our business may be harmed.

                         Risks related to our offering

We may need to raise additional funds in the future, which could result in
dilution.

    We require substantial working capital to fund our business. We expect the
net proceeds from this offering, together with our existing capital resources,
to be sufficient to meet our working capital and capital expenditure needs for
at least the next 12 months. After that, we may need to raise additional funds,
and additional financing may not be available on favorable terms, if at all.
This could seriously harm our business and operating results. Furthermore, if
we issue additional equity securities, stockholders may experience dilution,
and the new equity securities could have rights senior to those of existing
holders of our common stock. If we raise additional funds through the issuance
of debt securities, holders of these securities could have rights, preferences,
and privileges senior to holders of common stock, and the terms of this debt
could impose restrictions on our operations. If we need to raise funds and
cannot do so on acceptable terms, we may not be able to develop or enhance our
solution, take advantage of future opportunities, or respond to competitive
pressures or unanticipated requirements.

Our securities have no prior market and our stock price may decline after the
offering.

    Before this offering, there has not been a public market for our common
stock and the trading market price of our common stock may decline below the
initial public offering price. The initial public offering price will be
determined by negotiations between us and the representatives of the
underwriters. In addition, an active public market for our common stock may not
develop or be sustained after this offering.

We are significantly influenced by existing stockholders.

    On completion of this offering, executive officers, key employees and
directors, and their affiliates will beneficially own, in the aggregate,
approximately     % of our outstanding common stock, assuming the underwriters
do not exercise their over-allotment option. As a result, these stockholders
will be able to exercise significant influence over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions, which could have the effect of delaying or
preventing a third party from acquiring control over us.

                                       17
<PAGE>

We have implemented anti-takeover provisions that could make it more difficult
to acquire us.

    Our certificate of incorporation, our bylaws and Delaware law contain
provisions that could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. These provisions
include:

  .  authorizing the issuance of shares of blank check preferred stock;

  .  prohibiting stockholder action by written consent; and

  .  limitations on stockholders' ability to call special stockholder
     meetings.

Substantial sales of our common stock could depress our stock price.

    If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. Based on shares outstanding as of July 31, 1999, upon completion of
this offering, we will have         outstanding shares of common stock. Other
than the shares of common stock sold in this offering, 20,730 shares will be
eligible for sale in the public market immediately. Most of our stockholders
will be subject to agreements with the underwriters or us that restrict their
ability to transfer their stock for 180 days from the date of this prospectus.
After these agreements expire, an additional 7,022,608 shares will be eligible
for sale in the public market. For a detailed discussion of the shares eligible
for future sale, please see "Shares Eligible for Future Sale."

As a new investor, you will incur substantial dilution as a result of this
offering and future equity issuances.

    The initial public offering price is substantially higher than the book
value per share of our outstanding common stock. As a result, investors
purchasing common stock in this offering will incur immediate substantial
dilution of $     per share. In addition, we have issued options to acquire
common stock at prices significantly below the initial public offering price.
To the extent outstanding options are ultimately exercised, there will be
further dilution to investors in this offering. We have in the past and may in
the future issue equity securities to our partners. Any issuances to these
partners may cause further dilution to investors in this offering.

                                       18
<PAGE>

               YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS
                     BECAUSE THEY ARE INHERENTLY UNCERTAIN

    This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words like "anticipate," "believe," "plan," "expect,"
"future," "intend," and similar expressions to identify forward-looking
statements. This prospectus also contains forward-looking statements attributed
to third parties relating to their estimates regarding the growth of Internet
use and electronic distribution and licensing of digital goods. You should not
place undue reliance on these forward-looking statements, which apply only as
of the date of this prospectus. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks faced by us and described in the preceding pages and
elsewhere in this prospectus. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results or to changes in our expectations.

              HOW WE INTEND TO USE THE PROCEEDS FROM THIS OFFERING

    Our net proceeds from the sale of the                   shares of common
stock we are offering are estimated to be $            million, or
$             million if the underwriters' option to purchase additional shares
is exercised in full, based on an assumed initial public offering price of
$     per share and after deducting the underwriting discounts and commissions
and estimated offering expenses. We currently expect to use the net proceeds
primarily for working capital and general corporate purposes, including
approximately $       million for expanding our sales and marketing
organization. In addition, although we have no present commitments or
agreements with respect to any acquisitions, we may use a portion of the net
proceeds for further development of our product lines through acquisitions of
products, technologies and businesses. We will have significant discretion in
applying the net proceeds of this offering. Prior to these uses, we will invest
the net proceeds in short-term, investment grade, interest-bearing securities.

                                DIVIDEND POLICY

    Our policy is to retain earnings to provide funds for the operation and
expansion of our business and, accordingly, we have never paid cash dividends
on our capital stock. Any payment of future cash dividends and the amounts
thereof will depend upon our earnings, financial requirements, and other
factors deemed relevant by our Board of Directors. In addition, our bank loan
arrangements restrict our ability to pay dividends. We have no plans to pay
dividends in the future. See "Description of Capital Stock--Dividends."

                               OTHER INFORMATION

    You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.

    This prospectus includes estimates regarding the Internet industry. The
estimates that we used were taken or derived from information published by
sources including International Data Corporation, a firm that provides market
and strategic information to the information technology industry. Although we
believe that the estimates we used were generally indicative of the matters for
which we used them, this data is inherently imprecise, and you are cautioned
not to place undue reliance on those estimates.

                                       19
<PAGE>

                                 CAPITALIZATION

    The following table sets forth the following information:

  .  our actual capitalization as of July 31, 1999;

  .  the filing of and amendment to our certificate of incorporation to
     provide for authorized capital stock of 75,000,000 shares of common
     stock and 5,000,000 shares of undesignated preferred stock;

  .  our pro forma capitalization, after giving effect to the automatic
     conversion of all outstanding shares of preferred stock into 8,788,273
     shares of common stock; and

  .  the pro forma as adjusted capitalization, after giving effect to the
     sale of shares of common stock at the initial public offering price of
     $       per share in this offering, after deducting the underwriting
     discounts and commissions and estimated offering expenses that we
     expect to pay in connection with this offering.

    This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and notes to the consolidated financial statements
included elsewhere in this prospectus.

<TABLE>
<CAPTION>
                                                         July 31, 1999
                                                 --------------------------------
                                                                       Pro Forma
                                                  Actual   Pro Forma  As Adjusted
                                                 --------  ---------  -----------
                                                  (in thousands, except share
                                                             data)
<S>                                              <C>       <C>        <C>
Long-term obligations, less current portion....  $  1,639  $  1,639     $
                                                 --------  --------     ------
Stockholders' equity:
  Preferred stock, par value $0.0002 per share;
    5,000,000 shares authorized, actual
    8,788,273 shares issued and outstanding;
    none issued or outstanding, pro forma; none
    issued or outstanding, pro forma as
    adjusted...................................        --        --         --
  Common stock, par value $0.0002 per share;
    75,000,000 shares authorized, 3,058,160
    shares issued and outstanding, actual;
    11,846,433 issued and outstanding, pro
    forma;         shares issued and
    outstanding, pro forma as adjusted ........        --        --         --
Additional paid-in capital.....................    51,213    51,213
Stockholder notes receivable ..................    (1,912)   (1,912)
Deferred compensation..........................      (128)     (128)
Accumulated deficit............................   (22,819)  (22,819)
                                                 --------  --------     ------
  Total stockholders' equity...................    26,354    26,354
                                                 --------  --------     ------
   Total capitalization........................  $ 27,993  $ 27,993     $
                                                 ========  ========     ======
</TABLE>
--------
    The information in the table above excludes:

  .  options outstanding to purchase an aggregate of 2,258,500 shares of
     common stock issued to our employees, directors and consultants under
     our stock option plans and an additional 460,097 shares available for
     future issuance under our 1998 Stock Option Plan;

  .  options outstanding to purchase an aggregate of 73,340 shares of common
     stock issued outside of our stock option plans;

  .  warrants to purchase an aggregate of 170,450 shares of our common
     stock;

  .  warrants to purchase an aggregate of 25,430 shares of our series C
     preferred stock;

  .  warrants to purchase an aggregate of 217,233 shares of our series E
     preferred stock;

  .  a warrant to purchase an aggregate of 2,700 shares of our series F
     preferred stock; and

  .  a warrant to purchase an aggregate of 76,682 shares of series G
     preferred stock.

                                       20
<PAGE>

                                    DILUTION

    We calculate pro forma net tangible book value per share by dividing our
net tangible book value (total assets less intangible assets and total
liabilities) by our total number of shares of common stock outstanding. Our pro
forma net tangible book value as of July 31, 1999 was approximately $       or
$      per share of common stock. After giving effect to the sale of the
shares of common stock offered by us at an assumed initial public offering
price of $        per share (less underwriting discounts and commissions and
expenses we expect to pay in connection with this offering) our pro forma net
tangible book value as of July 31, 1999 would have been $        or $
per share of common stock. This represents an immediate increase in net
tangible book value of $ per share to existing stockholders and an immediate
dilution of $       per share to new investors. The following table illustrates
this per share dilution:

<TABLE>
<CAPTION>
   <S>                                                     <C>        <C>
   Assumed initial public offering price per share.......  $          $
   Pro forma net tangible book value per share as of July
     31, 1999............................................
   Increase per share attributable to new investors......
                                                           ----------
   Pro forma net tangible book value per share after the
     offering............................................
                                                                      ---------
   Dilution per share to new investors...................             $
                                                                      =========
</TABLE>

    The following table shows on a pro forma basis, as of July 31, 1999, with
respect to existing stockholders and new investors, the number of shares of
common stock purchased from us, the total consideration paid to us, and the
average price per share paid to us.

<TABLE>
<CAPTION>
                         Shares Purchased   Total Consideration
                         -----------------  ---------------------  Average Price
                         Number   Percent    Amount     Percent      Per Share
                         -------- --------  ---------- ----------  -------------
<S>                      <C>      <C>       <C>        <C>         <C>
Existing stockholders..                   % $                    %    $
New investors..........
                         --------  -------  ----------  ---------     ------
  Totals...............              100.0% $               100.0%    $
                         ========  =======  ==========  =========
</TABLE>

    The information presented with respect to existing stockholders assumes no
exercise of warrants to purchase 492,495 shares that were outstanding on July
31, 1999 with a weighted average exercise price of $7.45 per share (of which we
expect that warrants to purchase         shares will be exercised immediately
prior to completion of the offering) and no exercise of outstanding options. As
of July 31, 1999, options to purchase 2,331,840 shares were outstanding under
our option plans and outside our option plans with a weighted average price of
$3.44 per share, and 460,097 shares were reserved for issuance upon exercise of
options that may be granted subsequent to July 31, 1999. In August 1999, the
1998 Stock Option Plan was amended to increase the total number of shares
reserved for issuance by 1,000,000 shares. Additionally, in August 1999,
300,000 shares were reserved for issuance upon exercise of options that may be
granted under the 1999 Directors' Stock Option Plan, and 500,000 shares were
reserved for issuance under the 1999 Employee Stock Purchase Plan. The issuance
of common stock under these plans will result in further dilution to new
investors. These figures also include 8,788,273 shares of preferred stock
(which will be converted into 8,788,273 shares of common stock upon the closing
of this offering) and warrants to purchase 322,045 shares of preferred stock.
See "Management--Stock Option Plans," "Certain Relationships and Related
Transactions" and Notes 7 and 12 to the Consolidated Financial Statements.

                                       21
<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA
                     (in thousands, except per share data)

    We were formed in April 1998 to acquire all of the outstanding equity
interests of Preview Software and Portland Software. We completed both of these
mergers on August 5, 1998. In accordance with Accounting Principles Board
Opinion No. 16, we determined the stockholders of Preview Software to be our
controlling stockholders. As a result, we accounted for our merger with Preview
Software as a reorganization under common control with the underlying net
assets recorded by us at historical cost. We accounted for our merger with
Portland Software using the purchase method. Therefore, the following selected
consolidated financial data for the years ended December 31, 1996, 1997 and
1998 and the six months ended June 30, 1998 and 1999 reflect our operations and
those of Preview Software, and reflect the operations of Portland Software from
August 5, 1998. The financial statements for the years ended December 31, 1996,
1997 and 1998 are derived from our audited financial statements. See
"Management's Discussion and Analysis of Financial Condition." The financial
statements for the six-month periods ended June 30, 1998 and 1999 and the pro
forma financial statements are derived from unaudited consolidated financial
statements. In our opinion, the unaudited consolidated financial statements
have been prepared on substantially the same basis as the audited consolidated
financial statements and include all adjustments, consisting only of recurring
adjustments, necessary for a fair presentation of the results of operations for
these periods. The pro forma statements of operations data for the year ended
December 31, 1998 and the six months ended June 30, 1998 give effect to the
merger with Portland Software as if this transaction had occurred on January 1,
1998.

<TABLE>
<CAPTION>
                                                                      Six Months Ended
                                Year Ended December 31,                   June 30,
                          -------------------------------------- ----------------------------
                                                      Pro Forma            Pro Forma
                           1996    1997      1998       1998      1998       1998      1999
                          ------  -------  --------  ----------- -------  ----------- -------
                                                     (unaudited)          (unaudited)
<S>                       <C>     <C>      <C>       <C>         <C>      <C>         <C>
Consolidated Statements
  of Operations Data:
Revenues:
  Network transaction
    fees................  $  148  $   262  $    435   $    618   $   111    $   246   $   742
  Services..............      --       --       175        191        --         16       479
                          ------  -------  --------   --------   -------    -------   -------
     Total revenues.....     148      262       610        809       111        262     1,221
Operating expenses:
  Research and
    development.........      34    1,016     2,978      4,056     1,091      2,016     3,080
  Sales and marketing...     172      822     2,915      4,202       980      2,103     2,494
  General and
    administrative......     184      785     3,127      5,179     1,186      2,148     2,048
  Amortization of
    intangibles.........      --       --       866      2,084        --      1,042     1,038
  Acquired in-process
    research and
    development.........      --       --     2,091         --        --         --        --
                          ------  -------  --------   --------   -------    -------   -------
     Total operating
       expenses.........     390    2,623    11,977     15,521     3,257      7,309     8,660
                          ------  -------  --------   --------   -------    -------   -------
Loss from operations....    (242)  (2,361)  (11,367)   (14,712)   (3,146)    (7,047)   (7,439)
Other income (expense),
  net...................      --      (19)       91        162        35        100         3
                          ------  -------  --------   --------   -------    -------   -------
Net loss................  $ (242) $(2,380) $(11,276)  $(14,550)  $(3,111)   $(6,947)  $(7,436)
                          ======  =======  ========   ========   =======    =======   =======
Basic and diluted net
  loss per share........  $(0.69) $ (6.45) $  (7.55)  $  (5.51)  $ (4.60)   $ (2.67)  $ (2.75)
                          ======  =======  ========   ========   =======    =======   =======
Shares used in computing
  net loss per share....     350      369     1,494      2,641       676      2,605     2,708
                          ======  =======  ========   ========   =======    =======   =======
</TABLE>

<TABLE>
<CAPTION>
                                                   December 31,       June 30,
                                               --------------------- -----------
                                               1996   1997    1998      1999
                                               ----  ------- ------- -----------
                                                                     (unaudited)
<S>                                            <C>   <C>     <C>     <C>
Balance Sheets Data:
Cash and cash equivalents..................... $ 30  $ 2,489 $ 4,886   $   427
Working capital (deficit).....................  (22)   2,291   3,021    (3,525)
Total assets..................................   90    3,122  12,490     8,150
Notes payable.................................   20       --     509     2,260
Stockholders' equity..........................   --    2,713   8,006       767
</TABLE>

                                       22
<PAGE>

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

    The following discussion should be read in conjunction with the
consolidated financial statements and notes appearing elsewhere in this
prospectus. The following discussion contains forward-looking statements. Our
actual results may differ significantly from those projected in the forward-
looking statements. Factors that might cause future results to differ
materially from those projected in the forward-looking statements include, but
are not limited to, those discussed below and elsewhere in this prospectus,
particularly in "Risk Factors."

Overview

    We acquired all of the outstanding equity interests of Preview Software and
Portland Software on August 5, 1998. Prior to the acquisitions, Portland
Software developed and licensed infrastructure software applications designed
to enable electronic software distribution among multiple distribution channel
partners. Preview Software developed and licensed electronic software
distribution products that enabled management and enforcement of licensing
rights both prior to and after electronic delivery to end customers. During the
period immediately preceding merger discussions, several key customers
expressed to both companies the desire to license a system that would feature
Portland Software's server software with the capabilities provided by Preview
Software's client software. As a result, the two companies decided to merge and
combine their software and services into a single comprehensive solution. We
were formed in April 1998 to effect this business combination.

    In accordance with Accounting Principles Board Opinion No. 16, we
determined that the stockholders of Preview Software were our controlling
stockholders. Accordingly, we accounted for our merger with Preview Software as
a reorganization under common control with the underlying net assets of Preview
Software recorded by us at historical cost. We accounted for our merger with
Portland Software using the purchase method. Therefore, the accompanying
consolidated financial statements reflect our operations and those of Preview
Software for all periods presented and reflect the operations of Portland
Software since August 5, 1998. Due to the impact of purchase accounting and our
short operating history, we believe that the results of operations for the
periods presented are not indicative of future results of operations.

    On August 5, 1998, we capitalized $6.0 million in the form of acquired
technology, patents and other intangibles in connection with the Portland
merger. We are amortizing these intangible assets over two to three years, the
estimated useful lives of the related assets. Amortization of intangibles will
result in a charge of approximately $521,000 and $2.1 million on a quarterly
and annual basis, respectively, through August 2000 and approximately $486,000
and $1.9 million on a quarterly and annual basis, respectively, from September
2000 through August 2001.

    We generally provide rights to use our solution and ongoing customer
support through annual licensing agreements. These agreements typically require
the payment of network transaction fees based on a percentage of the sales
fulfilled using our solution. Prior to the Portland merger, Preview Software's
revenues were typically based on one-time license fees which were recognized
over the term of the license. Currently, our network transaction fees are based
on a percentage of the sales fulfilled using our solution. Our customers
typically commit to minimum network transaction fees that entitle them to
fulfill an agreed amount of sales during the one-year term of the agreement.
Some or all of the minimum network transaction fees are prepaid upon signing
the agreement. We record deferred revenue related to these fees and recognize
them on a straight-line basis over the license period. To the extent sales
fulfilled using our solution exceed the agreed amount of sales, we recognize
incremental network transaction fees. We will recognize these incremental
network transaction fees when the amounts due are known, which will generally
be in the month subsequent to our customers' sales. Through June 30, 1999, we
have not earned any incremental network transaction fees.

    We entered into a three-year agreement with Sony Marketing of Japan in
September 1998 that gives Sony Marketing the exclusive right to use and
sublicense our solution in Japan, including future upgrades,

                                       23
<PAGE>

enhancements and new products. The agreement also provided for training and
support through June 1999. We received non-creditable, upfront payments for the
license, services and training to be performed by us. We recorded deferred
revenue on these upfront fees and recognize the license portion as network
transaction fees on a straight-line basis over the three-year term of the
agreement. We recognized the service revenue as work was performed. In
addition, beginning April 1999, Sony Marketing has agreed to pay us network
transaction fees based on a percentage of the revenue it receives from
distributing our solution and providing related services. Sony Marketing
committed to pay us annual minimum network transaction fees. If the network
transaction fees paid by Sony Marketing during the initial annual period are
less than the annual minimum network transactions fees, Sony Marketing must pay
us any shortfall. Beginning April 2000, if network transaction fees are less
than a specified target, Sony Marketing, at its option, may forego its
exclusivity rights rather than pay the shortfall. During the first year of the
agreement, we will recognize the annual minimum network transactions fees over
12 months until we have earned network transaction fees in excess of these
annual minimum network transaction fees. In subsequent years, we will recognize
the network transaction fees as they are earned.

    Service revenues generally consist of consulting, training and integration
fees. We typically bill these services and recognize them as the related
services are performed or when contract milestones are achieved.

Results of Operations

    References to pro forma financial information reflect our unaudited
combined results of operations after giving effect to the Portland merger as if
it had occurred on January 1, 1998. All period-to-period comparisons are made
on an historical basis unless otherwise specifically indicated.

 Six Months Ended June 30, 1999 Compared to June 30, 1998

    Revenues. Total revenues were $1.2 million for the six months ended June
30, 1999 compared to $111,000 for the six months ended June 30, 1998 and
$262,000 for the six months ended June 30, 1998 on a pro forma basis.

    Network transaction fees were $742,000 for the six months ended June 30,
1999 compared to $111,000 for the six months ended June 30, 1998 and $246,000
for the six months ended June 30, 1998 on a pro forma basis. The increase in
network transaction fees was primarily the result of the recognition of network
transaction fees related to agreements with publishers and our distributor in
Japan. The increase also reflected additional network transaction fees
resulting from the licensing of products acquired in the Portland merger.

    Service revenues were $479,000 for the six months ended June 30, 1999
compared to $0 for the six months ended June 30, 1998 and $16,000 for the six
months ended June 30, 1998 on a pro forma basis. The increase in service
revenues was primarily the result of training and consulting services performed
for Sony Marketing of Japan and Ingram Micro in connection with their
agreements.

    Research and Development. Research and development expenses consist
principally of salaries and related personnel expenses, consultant fees and the
cost of software used in product development. Research and development expenses
were $3.1 million for the six months ended June 30, 1999 compared to $1.1
million for the six months ended June 30, 1998 and $2.0 million for the six
months ended June 30, 1998 on a pro forma basis. The increase in research and
development expenses partially resulted from increases in personnel, consultant
fees and the cost of software used in product development. These expenses also
increased due to a higher combined level of expenses following the Portland
merger. We believe that continued investment in research and development is
critical to attaining our strategic objectives and we expect these expenses to
increase in the future.

    Sales and Marketing. Sales and marketing expenses consist of salaries and
related expenses for personnel engaged in direct sales, partner development,
marketing and field service support, consultant fees, advertising,

                                       24
<PAGE>

promotional materials and trade show exhibit expenses. Sales and marketing
expenses were $2.5 million for the six months ended June 30, 1999 compared to
$1.0 million for the six months ended June 30, 1998 and $2.1 million for the
six months ended June 30, 1998 on a pro forma basis. The increase was
primarily related to increased head count following the acquisition of
Portland Software and, to a lesser extent, rebranding efforts to reflect the
newly-combined entity. We expect sales and marketing expenses to increase in
the future due to planned growth of our sales and partner development efforts.

    General and Administrative. General and administrative expenses consist
primarily of salaries and related expenses for executive, legal, accounting
and administrative personnel, professional services and general corporate
expenses. General and administrative expenses were $2.0 million for the six
months ended June 30, 1999 compared to $1.2 million for the six months ended
June 30, 1998. This increase was primarily related to increased headcount
following the Portland Software merger, employee severance payments, and
increased legal costs. General and administrative expenses were $2.1 million
for the six months ended June 30, 1998 on a pro forma basis. We expect general
and administrative expenses to increase in the future as we add personnel,
incur additional costs to support continued growth and implement additional
internal systems necessary to support a public company.

    Amortization of Intangibles. Amortization of intangibles consists of the
amortization of patent costs and intangibles acquired in connection with the
Portland merger. Amortization of intangibles was $1.0 million for the six
months ended June 30, 1999 compared to $0 for the six months ended June 30,
1998 and $1.0 million for the six months ended June 30, 1998 on a pro forma
basis. The increase in amortization of intangibles in the first half of 1999
resulted from the Portland merger which occurred on August 5, 1998.

    Income Taxes. We have incurred net losses since inception for federal and
state tax purposes and have not recognized any tax benefit. We are in a net
deferred tax asset position, which has been fully reserved. We will continue
to provide a valuation allowance for our net deferred tax assets until it
becomes more likely than not, in our assessment, that our net deferred tax
assets will be realized.

    Inflation did not have a material impact on the results of operations for
the six-month periods ended June 30, 1999 and 1998.

 Year Ended December 31, 1998, 1997 and 1996

    Revenues. Total revenues were $610,000 in 1998 compared to $262,000 in
1997 and $148,000 in 1996.

  Network transaction fees were $435,000 in 1998 compared to $262,000 in 1997
and $148,000 in 1996. The increase in network transaction fees in 1998
compared to 1997 was primarily the result of the recognition of network
transaction fees related to an agreement with Sony Marketing of Japan. The
increase also reflected additional network transaction fees resulting from the
licensing of products acquired in the Portland merger. The increase in network
transaction fees in 1997 compared to 1996 was primarily the result of
increased sales and marketing activities.

    Service revenues were $175,000 in 1998 and $0 for the years ended December
31, 1997 and 1996. The increase in service revenues was primarily a result of
training and custom consulting services performed for Sony Marketing of Japan
in 1998 in connection with their agreement.

    Two customers accounted for 45% and 13%, respectively, of total revenues
in 1998. Two customers accounted for 21% and 12%, respectively, of total
revenues in 1997. Two customers accounted for 54% and 20%, respectively, of
total revenues in 1996.

    Research and Development. Research and development expenses were $3.0
million, $1.0 million and $34,000 in 1998, 1997 and 1996, respectively.
Research and development expenses for 1998 compared to 1997 increased
primarily due to increases in personnel, increases in headcount following the
Portland merger, consultant fees and the cost of software used in product
development. The increase in research and development expenses for 1997
compared to 1996 was primarily a result of increased personnel, consultant
fees and the cost of software used in product development.

                                      25
<PAGE>

    Sales and Marketing. Sales and marketing expenses were $2.9 million,
$822,000 and $172,000 in 1998, 1997 and 1996, respectively. Sales and marketing
expenses for 1998 compared to 1997 increased primarily due to increases in
personnel, increases in headcount following the Portland merger and rebranding
efforts related to the newly-combined entity. The increases for 1997 compared
to 1996 primarily resulted from increased personnel and sales and marketing
efforts.

    General and Administrative. General and administrative expenses were $3.1
million, $785,000 and $184,000 in 1998, 1997 and 1996, respectively. General
and administrative expenses for 1998 increased compared to 1997 primarily due
to increases in headcount following the Portland merger, employee severance
payments and reduction in force costs following the Portland merger. The
increases for 1997 compared to 1996 primarily resulted from increased personnel
and legal costs.

    Amortization of Intangibles. Amortization of intangibles was $866,000 in
1998 compared to $0 in 1997 and 1996. The increase was related to the Portland
merger in August 1998.

    Acquired In-Process Research and Development. In 1998, as a result of the
Portland merger, we recorded a one-time charge of $2.1 million related to the
purchase of in-process research and development. The value assigned to in-
process research and development represented research and development efforts
in process at the acquisition date for which technological feasibility had not
yet been established and which had no alternative future uses. Accounting
principles require that such costs be charged to expense as incurred. We
believe that these research and development efforts will result in commercially
viable products over the next one to two years.

    Income Taxes. We have incurred net losses since inception for federal and
state tax purposes and have not recognized any tax provision or benefit. As of
December 31, 1998, we had approximately $15.7 million of federal and state net
operating loss carryforwards to offset against future taxable income. The
federal net operating loss and tax credit carryforwards expire on various dates
through 2018, if not used. The state net operating loss carryforwards expire on
various dates through 2013, if not used. Utilization of net operating losses
and credits is subject to a substantial annual limitation due to the change in
ownership provisions of the Internal Revenue Code of 1986 and similar state
provisions. The annual limitation may result in the expiration of net operating
losses and credits before utilization.

    Inflation did not have a material impact on the results of operations for
1998, 1997 and 1996.

                                       26
<PAGE>

Quarterly Results of Operations

    The following table sets forth, for the periods presented, selected data
from our consolidated statements of operations. The historical data has been
derived from our unaudited consolidated financial statements, and, in our
opinion, include all adjustments, consisting only of normal recurring
adjustments, that are necessary for a fair presentation of the results of
operations for these periods. The unaudited pro forma financial information
reflects our combined results of operations after giving effect to the Portland
merger as if it had occurred on January 1, 1998.

    This unaudited historical and pro forma quarterly information should be
read in conjunction with the consolidated financial statements and notes
included elsewhere in this prospectus. The operating results in any quarter are
not necessarily indicative of the results that may be expected for any future
period. We have incurred losses in each quarter since inception and expect to
continue to incur losses for the foreseeable future.

<TABLE>
<CAPTION>
                                            Quarters Ended (unaudited)
                          ----------------------------------------------------------------
                           March 31,   June 30,    Sept. 30,
                             1998        1998        1998     Dec. 31,  March 31, June 30,
                          (Pro Forma) (Pro Forma) (Pro Forma)   1998      1999      1999
                          ----------- ----------- ----------- --------  --------- --------
                                                  (in thousands)
<S>                       <C>         <C>         <C>         <C>       <C>       <C>
Revenues:
 Network transaction
   fees.................    $    88     $   158     $   167   $   205    $   295  $   447
 Services...............         14           2          23       152        168      311
                            -------     -------     -------   -------    -------  -------
  Total revenues........        102         160         190       357        463      758
Operating expenses:
 Research and
   development..........      1,083         933         919     1,121      1,468    1,612
 Sales and marketing....      1,110         993       1,210       889      1,039    1,455
 General and
   administrative.......      1,186         962       1,773     1,258      1,042    1,006
 Amortization of
   intangibles..........        521         521         523       519        519      519
                            -------     -------     -------   -------    -------  -------
  Total operating
    expenses............      3,900       3,409       4,425     3,787      4,068    4,592
                            -------     -------     -------   -------    -------  -------
Loss from operations....     (3,798)     (3,249)     (4,235)   (3,430)    (3,605)  (3,834)
Other income (expense),
  net...................         63          37          16        46         27      (24)
                            -------     -------     -------   -------    -------  -------
Net loss................    $(3,735)    $(3,212)    $(4,219)  $(3,384)   $(3,578) $(3,858)
                            =======     =======     =======   =======    =======  =======
</TABLE>

    The increase in revenues for the periods presented primarily resulted from
the recognition of network transaction fees and service fees associated with
execution of agreements with publishers and with Sony Marketing of Japan in
September 1998 and Ingram Micro in June 1999.

    Operating expenses have increased primarily as a result of increased
operating activities and personnel. The increase in research and development
expenses over the four quarters ended June 30, 1999 resulted from increases in
personnel, consultant fees and the cost of software used in product
development. The increase in sales and marketing expenses for the quarter ended
September 30, 1998 was due to increases in personnel, increases in headcount
following the Portland merger, the Portland merger and rebranding efforts
related to the newly-combined entity. The increase in sales and marketing
expenses during the quarter ended June 30, 1999 was a result of increases in
sales and marketing personnel and increased expenditures on marketing programs.
The increase in general and administrative expenses for the quarter ended
September 30, 1998 related principally to costs associated with the Portland
merger.

    The pro forma results of operations reflect the elimination of the $2.1
million acquired in-process research and development charge, a material non-
recurring charge, incurred in the third quarter of 1998 in connection with the
Portland merger, and the addition of the quarterly amortization of capitalized
intangibles related to the Portland merger as if the merger had occurred on
January 1, 1998.

    Due to our limited operating history, we are unsure what effect, if any,
the seasonal nature of our customers' business will have on our quarterly
results of operations.

                                       27
<PAGE>

Liquidity and Capital Resources

    Historically, we have funded our operations through the sale of preferred
stock and, to a much lesser degree, our bank credit facility. Through June 30,
1999, we raised $12.5 million through these privately placed preferred stock
financings and had outstanding borrowings at June 30, 1999, including capital
lease commitments, of $2.7 million. At June 30, 1999, our principal sources of
liquidity included $427,000 in cash and cash equivalents and available
borrowings under the line of credit facility discussed below. In July 1999, we
sold preferred stock for net proceeds of approximately $27.0 million. As a
result of this preferred stock offering, $1.2 million of the notes payable on
our balance sheet at June 30, 1999 were automatically converted into shares of
our preferred stock.

    Through June 30, 1999, we have used the majority of our financing proceeds
to fund operating activities. To a much lesser extent, we have used the
financing proceeds to acquire computer hardware and software used to support
our product development and growing employee base. Expenditures for property
and equipment amounted to $561,000 in 1998 and $287,000 for the six months
ended June 30, 1999. In the future, we anticipate a substantial increase in
capital expenditures and lease commitments consistent with anticipated growth
in operations and personnel.

    In November 1998, we entered into a loan agreement with a bank, which
provides for borrowings under a revolving line of credit of up to $1.0 million,
and borrowing under a term loan. Amounts borrowed under the line of credit and
the term loan bear interest at the bank's prime rate plus 1% (9.0% at June 30,
1999). Interest is payable monthly on borrowings under the revolving line of
credit and the term loan is payable in 36 equal installments of $13,000 of
principal, plus interest. Borrowings are collateralized by all of our tangible
and intangible assets. As of June 30, 1999, amounts outstanding under the line
of credit were $700,000, and amounts outstanding under the term loan were
$380,000. Under this agreement, we are required to maintain compliance with
certain financial and other covenants including minimum tangible net worth,
liquidity coverage and ratio of quick assets to current liabilities minus
deferred revenue. We paid off all amounts outstanding on this line of credit in
July 1999 with the proceeds from the preferred stock offering. The revolving
line of credit expires on November 1, 1999 and the term loan matures on
November 2, 2001.

    Accounts receivable were $1.2 million at June 30, 1999 compared to $152,000
at December 31, 1998. The increase was primarily attributable to the execution
of new licensing agreements with publishers and Ingram Micro. Accounts payable
were $1.2 million at June 30, 1999 compared to $442,000 at December 31, 1998,
primarily as a result of increased business activity and costs incurred with
our preferred stock offering.

    We believe that the net proceeds of this offering, together with cash on
hand and cash available under our credit facilities, will be sufficient to meet
our working capital needs through at least the next 12 months. Thereafter, we
may require additional funds to support our working capital requirements or for
other purposes and may seek to raise additional funds through public or private
equity financing or from other sources. Additional financing may not be
available at all or, if available, may not be obtainable on terms favorable to
us. In addition, any additional financing may be dilutive to our stockholders.
If we raise additional funds through the issuance of debt securities, holders
of these securities could have rights, preferences, and privileges senior to
holders of common stock, and the terms of this debt could impose restrictions
on our operations.

Year 2000 Compliance

    Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. As a result, many companies'
software and computer systems may need to be upgraded or replaced in order to
comply with these "year 2000" requirements.

 Internal Systems

    We are currently assessing the ability of our internal systems to satisfy
the year 2000 requirements and expect to complete the program before December
31, 1999. We have not incurred material costs to date in this process, and
currently do not believe that the cost of additional actions will have a
material effect on our results

                                       28
<PAGE>

of operations or financial condition. Although we currently believe that our
systems satisfy year 2000 requirements in all material respects, our current
systems may contain undetected errors or defects with year 2000 date functions
that may result in material costs. We do not have a specific contingency plan
to handle year 2000 problems if they occur. Based on our assessment to date, we
currently believe that year 2000 costs to us will not exceed $50,000. However,
in a worst case scenario, year 2000 problems could cause us to cease normal
operations for an indefinite period until we are able to repair our internal
systems. Although we are not aware of any material operational issues or costs
associated with preparing our internal systems for the year 2000, we may
experience serious unanticipated negative consequences or material costs caused
by undetected errors or defects in the technology used in our internal systems.

 Products

    Our products are currently designed and tested to be year 2000 compliant.
By "year 2000 compliant," we mean that the products will operate according to
their published documentation and will record, store, process and present
calendar dates falling on or after January 1, 2000 in the same manner, and with
the same functionality, as they record, store, process and present calendar
dates falling on or before December 31, 1999. We believe that the current
version of our solution is year 2000 compliant.

    Prior versions of our solution in current production use by some of our
customers are not year 2000 compliant and must be upgraded prior to December
31, 1999 in order to avoid problems at the rollover to January 1, 2000. We will
complete the upgrade for our customers in the normal course of our customer
support. As a result, we have not incurred and do not expect to incur any
material expenses related to these upgrades. Customers who fail to upgrade our
solution or any other third party software or hardware that is not year 2000
compliant that our solution relies on prior to that time may suffer severe
outages. This may harm our relationships with these customers and may damage
our reputation with other current or prospective customers. It is also possible
that customers with non-year 2000 compliant systems may decide to sue us
because our software was not year 2000 compliant. Although we expect to contest
these claims, the costs of litigation surrounding this issue may be significant
and, in a worst case scenario, year 2000 problems could prevent any
transactions using our solution from taking place until we are able to repair
our solution.

    We have not independently verified whether any third-party software
encrypted with our solution is year 2000 compliant. We have encouraged users of
our solution to contact third-party vendors to determine the year 2000
compliant status of their products. We have not independently verified whether
the components from our third-party manufacturers are year 2000 compliant. We
have warranted in certain of our license agreements that our solution as
delivered by us and without customization, will be year 2000 compliant provided
that the entire system and supporting products with which our solution is used
are also year 2000 compliant. This includes hardware, system software such as
the operating system and database software, and application software, either
purchased, contracted, or created in-house. In addition, our customers may also
be concerned about year 2000 issues or distracted by their own year 2000
compliance programs, either of which could adversely affect our business.

 Qualitative and Quantitative Disclosures about Market Risks

    We develop products in the United States and make agreements with customers
in North America, Europe, and Asia. As a result, our financial results could be
adversely affected by various factors, including foreign currency exchange
rates or weak economic conditions in foreign markets. Network transaction fees
from our European and Asian partners will be primarily denominated in foreign
currencies and generally translated on a monthly basis to U.S. dollars to
determine the amount of fees we are due. As a result, we could be affected
adversely by fluctuations in foreign currency exchange rates.

    Our exposure to market risk for changes in interest rates is limited to the
exposure related to our debt instruments and credit facilities which are tied
to market rates. We do not plan to use derivative financial instruments in our
investment portfolio. We plan to ensure the safety and preservation of our
invested principal funds by limiting default risk market risk, and reinvestment
risk. We plan to mitigate default risk by investing in high credit quality
securities.

                                       29
<PAGE>

                                    BUSINESS

    The discussion in this prospectus contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially
from those discussed in the forward-looking statements as a result of a variety
of several factors, including those identified in "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Overview

    We develop and market an Internet-based infrastructure solution that
enables networks for the electronic distribution and licensing of digital
goods. Digital goods are products such as software, music, images, video and
documents that can be produced, delivered and licensed electronically. Our
solution is channel neutral, supports direct and indirect distribution and
enables publishers, distributors and resellers of digital goods to integrate
seamlessly within these networks. We earn transaction fees based on the value
of digital goods that are distributed and licensed using our solution.

Industry Overview

    The rapid growth of Internet users, content and functionality is enabling
complex business-to-business and business-to-consumer communications and
commerce. According to IDC, total worldwide Internet commerce spending in 1998
was $50.4 billion and is estimated to grow to $1.3 trillion in 2003,
representing a compound annual growth rate of 92%. Much of this spending to
date has been for products that were sold over the Internet and delivered to
the end customer in a physical form. As a result, the Internet has been
primarily used as an efficient sales and marketing channel. However, for
digital goods, the Internet can also be an efficient means for electronic
production, distribution and fulfillment. In addition, licensing rights can be
separated from digital content, distributed and managed electronically and
tailored to meet each customer's needs.

 The Sale and Distribution of Digital Goods

    Digital goods are characterized by two elements: digital content and
associated licensing rights. Both digital content and licenses can be produced,
stored and distributed physically or electronically. Digital goods such as
software programs or music have traditionally been distributed through a
physical distribution chain. The software or music is copied onto physical
media (e.g. floppy disks, CDs, DVDs), inserted into physical packaging (e.g.
cardboard boxes, plastic jewel cases) and physically distributed through a
multi-party distribution chain that eventually delivers the goods to a retail
store or a corporate reseller where they are ultimately purchased by the
customer. We refer to retail stores and corporate resellers collectively as
resellers.

    Although the multi-party distribution chain is complex, it delivers
critical value to each of its participants. Content publishers, at one end of
the distribution chain, desire to maximize the number of points of sale for
their products but generally cannot efficiently establish independent
relationships with tens of thousands of resellers. Similarly, resellers, at the
other end of the distribution chain, desire to maximize their product
selection, but generally cannot efficiently work with each publisher
independently and, therefore, value a few key sources for their product
inventory. Distributors link these two ends of the distribution chain by
offering broad product selection through their relationships with publishers
and extensive points of sale through their relationships with resellers.
Aggregating numerous publishers and resellers enables distributors to reduce
the administrative costs and logistical complexity entailed if every vendor had
to establish unique relationships with every existing or potential reseller of
its products.

                                       30
<PAGE>

    The distribution chain for digital goods has three common distribution
models: direct, 2-tier and 3-tier. The software industry provides a good
example of how these models work. Many publishers employ all three models
simultaneously to maximize their points of distribution.

  Narrative Description of Graphic #1 in body of S-1--1/3 size of total page
This graphic represents the distribution model. This is centered in the middle
of the graphic area. There is a solid bar that represents the Customers.
Directly below this bar is another solid bar that is 75% of the size above.
This represents the Resellers/GEMs. Directly below this bar is another solid
bar that is 75% of the Resellers/GEMs bar. This represents the Distributors.
Directly below this bar is another solid bar the same length as the Customers
bar at the top of the graphic. This represents the Publishers.

There are one way arrows that connect to the various bars. Starting from the
bottom of the graphic-- a solid direct arrow that starts at the Publisher bar
and goes straight to the Customers bar. A solid direct arrow that is 2/3 the
length of the first arrow, that starts at the Publisher bar and goes straight
to the Resellers/GEMs bar. A solid direct arrow that is 1/3 the length of the
first arrow, that starts at the Resellers/GEMs bar and goes straight to the
Customers bar. A solid direct arrow that is 1/3 the length of the first bar
that goes from the Publishers bar to the Distributors bar. A solid direct arrow
of the same 1/3 length that goes straight from the Distributor bar to the
Resellers/GEMs bar. A solid direct arrow of the same 1/3 length that goes
straight from the Resellers/GEMs bar to the Customers bar.

Behind the solid bar and direct arrows are three shadowed shapes. The first is
flush left on the graphic and is the standard shape of an hourglass. It is
widest on the upper and lower surfaces, and comes in slightly at the solid
Distributor bar -- this represents 3-Tier. The second is thin inverted
hourglass shadow that is widest on the upper and lower -surfaces, and comes in
slightly at the solid Resellers/GEMs bar this represents 2-Tier. Lastly, flush
right on the graphic and downward point arrow shape that is wider at the solid
Customer bar and narrow to point at the solid Publisher bar- this represents
Direct. Below the solid Publishers Bar are the words 3-Tier, 2-Tier, and
Direct.

    Direct--publishers use direct marketing and sales methods to generate
orders and ship products directly to the customer. The direct model gives
publishers valuable information about customer needs and allows them to control
pricing and quality of service.

    2-Tier--publishers establish relationships with resellers who purchase
products directly from the publisher and, in turn, offer them to their
customers. This model is used by publishers to distribute into specific
markets, expanding their market reach.

    3-Tier--publishers establish relationships with large distributors such as
Ingram Micro, Merisel and Tech Data who, in turn, establish relationships with
resellers, such as CompUSA and Software Spectrum, who, in turn, sell the
software to end customers. This model is an efficient means for publishers to
reach tens of thousands of large and small resellers through only a few
distributors.

    OEMs--original equipment manufacturers (OEMs) represent a variant of the 2-
tier and 3-tier models. OEMs include prepackaged or bundled software with their
equipment to increase the perceived value of their product offering. Publishers
provide their software to OEMs such as Compaq, Dell, Gateway and Packard Bell
NEC who distribute their products, together with the software, directly to
their customers in a 2-tier model or through resellers in a 3-tier model. This
model provides publishers with an effective means to increase unit volume.

    The distribution of music and other high volume digital goods is similar to
software distribution in many respects. For example, music labels acquire
rights to recorded works from artists. These labels distribute music in
physical media such as CDs through large retail chains as well as distribution
channels to other resellers. Music is also distributed through clubs, mail
order and other direct sales channels as well as over the Internet.

 Limitations of Physical Distribution of Digital Goods and Licenses

    In each distribution model, participants in the physical distribution of
digital goods must manage the costs of manufacturing, warehousing and shipping
physical inventory. In addition, the physical distribution process imposes
significant time delays and geographic constraints on the delivery of products
and licenses. These numerous and complex inter-relationships pose challenges to
the timely and accurate sharing of information

                                       31
<PAGE>

about customers, products, configuration, pricing, inventory and order status.
Further, limitations on warehousing, transportation systems and retail shelf
space restrict the number of products that publishers can make available to
customers and discourage distributors from carrying low volume products.
Finally, paper-based licenses are difficult to manage and enforce.

 Electronic Distribution of Digital Goods and Licenses

    The Internet provides a foundation for electronic distribution of digital
goods and licenses. IDC projects that the retail market for electronic software
distribution will increase to $14.9 billion by 2003 from an estimated $351
million in 1998. Electronic distribution of digital goods and licenses can:

  .  Reduce costs. Electronic distribution can reduce manufacturing,
     packaging, inventory and shipping costs associated with physical media
     alternatives. For software distributed electronically, businesses can:
     reduce costs incurred managing paper-based licenses; adjust the number
     of authorized users easily from a software master license; and improve
     asset management through the electronic use reporting. Secure
     electronic management of distribution and licensing rights can also
     reduce illegal distribution and piracy.

  .  Increase selling opportunities. Because electronic inventory requires
     no physical shelf space, resellers are able to offer a virtually
     unlimited number of products. Publishers can deliver new products and
     upgrades to distributors and resellers across the globe immediately
     upon their release. Resellers and OEMs can expand distribution by
     providing customers with digital content stored on computer hard
     drives, DVDs or CDs and by allowing customers to complete the sale
     process through the subsequent purchase of a license over the Internet.
     Publishers can more effectively tailor licensing fees and licensing
     options to meet customer needs.


  .  Facilitate real-time information exchange. Electronic distribution can
     provide publishers, distributors and resellers access to sales
     information in real time. Our interactive communications agent can
     enable the automatic flow of usage and marketing information with
     customers, whether or not there is a continuous Internet connection.

    Although electronic distribution of digital goods offers many advantages,
many existing systems for the electronic distribution of digital goods displace
and compete with existing distribution channels rather than support them. Some
systems offer insufficient security against improper distribution and piracy.
In addition, most systems provide insufficient real-time information on sales
transactions involving multiple distribution partners. Finally, we believe many
systems offer inadequate means for distributing licenses. For example, many
corporations that use some form of electronic software distribution still
employ manual processes for managing licenses.

    We believe that a distributed, scalable and flexible network infrastructure
is required to realize the full potential of electronic distribution. This
electronic network should meet the needs of the direct, 2-tier and 3-tier
distribution models, allowing the participants in these models to maintain
their existing relationships as well as create new ones. In addition,
participants should be allowed to transmit information about customers,
products, configuration, pricing, inventory and order status on a timely and
accurate basis. Finally, this network should secure and control access to
digital products in order to preserve intellectual property rights, protect
against piracy and provide flexible licensing rights.

The Preview Systems Solution

    We develop and market infrastructure software that allows our customers to
implement Internet-based networks for the electronic distribution and licensing
of digital goods. Our solution provides publishers, distributors, OEMs, and
resellers the ability to implement and maintain common networks that allows
them to conduct business with each other electronically and seamlessly. Our
solution is flexible and compatible with a

                                       32
<PAGE>

diversity of business and technical requirements and provides a common
technical infrastructure that uses the Internet to link participants engaged in
the electronic distribution of digital goods and associated licensing.
Our solution has the following characteristics:

    Channel neutral. Our solution is designed to support direct, 2-tier and 3-
tier models for the electronic distribution of digital goods. We do not compete
directly with channel participants but instead can electronically connect them
to one or more of their publisher, distributor or reseller channel partners.
Thus, our solution enables rather than limits our customers' business choices
and market reach. We have established relationships with Ingram Micro, the
leading worldwide wholesale distributor of computer-based technology products
and services, as well as several large software publishers such as Macromedia,
Mattel, through The Learning Company and other divisions, and Symantec. We are
pursuing similar relationships in the music industry.

    Integrates with existing systems. Our solution supports a variety of
leading hardware and software platforms, including: Microsoft, Sun and Apple
operating systems; BroadVision, Microsoft and Open Market e-commerce systems;
and Microsoft, Oracle and Sybase database management systems. Our solution is
designed to be deployed across large and technically diverse distribution
channels. It provides a common network for electronic distribution and
licensing of digital goods and exchanging information. Our solution can be used
to allow existing e-commerce websites to sell and distribute digital goods
electronically. Finally, customers can implement our solution directly or
outsource operations to a service provider.

    Enables many simultaneous distribution methods. Our solution enables
publishers to supply multiple distributors electronically, while simultaneously
selling directly to end customers. Similarly, resellers can connect
electronically to multiple distributors and sell digital goods from each
distributor's inventory of digital goods on a single integrated web site.

    Supports multiple licensing models. Our solution separates the delivery of
digital goods from the associated licensing rights, ensuring that access and
use of the digital goods complies with the license terms. For example, digital
goods can be stored in an encrypted format on hard drives of newly purchased
personal computers but cannot be accessed by customers until the associated
license rights are purchased online. Thus, software, music or video content can
be sold without having to actually download the content. Our solution enables a
variety of licensing models, such as selling perpetual licenses prior to
download, granting of limited time trials prior to sale and other licensing
models that may be requested by our customers.

    Enables international distribution. We designed our solution to support
global networks. We have localized our client software interfaces in the
following 14 languages: Chinese (simplified and traditional), Dutch, English,
Finnish, French, German, Italian, Japanese, Korean, Norwegian, Portuguese,
Spanish and Swedish. We have obtained export licenses for components of our
solution that use U.S. government regulated encryption technologies. When
required, we have obtained approval to use our encryption systems in other
countries.

    Automates communication among network participants. Our solution automates
the flow of digital goods, license rights, distribution rights, inventory
tracking data, branding and other information. Information for each transaction
is automatically transmitted to network participants. This means that a
publisher that uses our solution can automatically receive information in real
time about the sale of its products. Our solution can collect data from
multiple distribution channels as transactions in a single database,
consolidating direct and indirect sales information. In addition, we have
developed an interactive communications agent that can facilitate the flow of
information to and from the end customer.

    Secures digital goods and licenses. Our solution uses sophisticated
encryption techniques to maximize the security and integrity of digital goods
and licensing rights in a variety of secure licensing and distribution models.
Our solution provides secure communications between participants, produces
auditable transaction records, controls user access, and in general ensures
that agreed business rules are respected by all parties in the distribution
chain. Our solution can also provide persistent protection to enforce license
rights on an

                                       33
<PAGE>

ongoing basis after delivery of software to the end customer. We use secure
protocols for communication among our servers, client and gateway software
modules. We also signed an agreement with Intel to license its content
protection agent system and to incorporate it into our solution for secure
distribution and licensing of digital music.

    Scalable. Our solution employs a distributed network architecture. Our
solution is designed to allow customers to support modest transaction volumes
on a single inexpensive computer server and higher transaction volumes on
multiple load balanced servers. Customers that operate high volume e-commerce
web sites can deploy our solution on multiple servers to distribute the data
and processing more evenly, creating redundancy to protect against failures.

Strategy

    We seek to establish our solution as the de facto standard infrastructure
software for electronic distribution and licensing of digital goods. Key
elements of our strategy are to:

    Target and secure the support of leading software publishers and
distributors.  We have established relationships with Ingram Micro, Macromedia,
Mattel, through The Learning Company and other divisions, and Symantec. We have
worked closely for over two years with large publishers and distributors to
understand and solve their business and technical requirements. We intend to
maintain and build relationships with the publishers and distributors that
control the majority of software industry revenues.

    Expand the number of participants using digital goods networks. We believe
the benefits of digital goods networks increase as a network gains additional
participants. We intend to leverage our relationships with leading publishers
and distributors to add more resellers to distribute digital goods
electronically. We are working directly and through third parties with
manufacturers of personal computers, such as Packard Bell NEC, to bundle
encrypted digital goods for online licensing with its computer products. We
intend to expand our relationships with service providers such as NetSales and
ReleaseNow.com to enable publishers to outsource their direct sales and
accelerate their time to market. We also intend to expand into new geographical
markets. We have a marketing and distribution partnership with Sony Marketing
of Japan. Sony Marketing has licensed our solution to several Japanese
companies. In Europe, we have a number of customers, including Prisma,
Softline, Softway International, Somm.com and TrustMarque International.

    Extend our solution into other digital goods markets. To date, we have
focused predominantly on the software market because we believe it is the
largest and most commercialized market for digital goods. As electronic
distribution of other digital goods such as music develops commercially, we
intend to build a presence in these markets. We believe the security,
distribution and piracy concerns of these markets are similar to those of the
software industry and we believe that our solution will allow us to address
these needs successfully. We have an agreement with Intel to incorporate its
content protection agent system into our solution for secure electronic
distribution of digital music. We are currently pursuing relationships with
leading companies in the music industry. In addition, we intend to leverage our
relationships with customers who have a presence in multiple markets by
offering a convenient means to distribute music and software through our future
integrated solution.

    Expand our solution to support volume licensing for
organizations. Organizations frequently acquire software through volume
licenses and require licensing support to adjust the number of authorized
users. Currently, license distribution and management is often a burdensome
manual process for distribution channels. Our solution allows our customers to
automate aspects of the license distribution and management process. We intend
to work with our customers to enhance our volume licensing and software asset
management capabilities.

                                       34
<PAGE>

    Enhance our solution with value-added services. As digital goods networks
using our solution grow, we intend to develop and provide value-added services
that provide additional marketing and sales benefits to our customers. We have
also begun to offer a service based on our interactive communications agent
that enables software publishers to tailor product testing, marketing and
support to the needs of their individual customers.

Products

    We offer a flexible, secure and scalable infrastructure solution for
electronic distribution of digital goods. Our solution is specifically designed
to meet the needs of each participant in the distribution chain. The table
below describes each component of the network and includes product names, and
key features of our solution as well as target users.

<TABLE>
<CAPTION>
  Components       Key Features                                   Target Users
-------------------------------------------------------------------------------
  <S>              <C>                                            <C>
  Digital                                                         .Publisher
  Packaging        Encrypts products for digital
  (Vbox and        distribution and offers several
  ZipLock          options to protect intellectual
  Builder)         property and licensing rights


-------------------------------------------------------------------------------
  Inventory and    Manages the database                           .Publisher
  License          of digital goods, inventory and provides       .Distributor
  Management       secure, automated and reliable
  System           fulfillment of licenses and products,
  (ZipLock         records transactions and exchanges
  System)          information with other servers

-------------------------------------------------------------------------------

  Merchandizing                                                   .Publisher
  and License      Adds digital goods shopping                    .Reseller
  Selling System   cart functionality to Internet
  (ZipLock         storefronts and enables electronic delivery
  Gateway)         of digital inventory and licenses
-------------------------------------------------------------------------------
  Off-Line         Provides a software storefront                 .Publisher
  Storefront       using CD, DVD or hard disk                     .Reseller
  (PortableStore)  storage media that delivers                    .OEM
                   encrypted digital goods ready for online
                   licensing


-------------------------------------------------------------------------------
  Rights and       Manages the secure download                    .End customer
  Delivery Client  and the usage rights of digital goods
  (Vbox Client)    on the user's computer


-------------------------------------------------------------------------------
  Interactive      Monitors software use and hardware             .Publisher
  Communications   configuration, displays targeted               .Reseller
  Agent            messages within the publisher's                .End customer
                   applications and collects customer's responses
</TABLE>



                                       35
<PAGE>

    These components are designed to integrate with the infrastructure of each
network participant and automate the electronic flow of digital goods, license
rights and related information among them. An example is shown in the following
diagram.

Narrative Description of Graphic # 2 in Body of S-1- 1/3 size of total page

Upper left corner are two icon-based visuals. One represents the software
element and the other representing the music element.

There is a Unique Product key reference that is followed by an arrow. This
arrow points to the right and is in the direction of a rectangle. This
rectangle represents the Publisher. In this area is shaded box which is the
graphic representation of the server. Next to this box is a cylinder that
represents the digital inventory. Outside this rectangle to the right is the
title "Digital Packaging Below this title are three sub headings that are
bulleted with small hollow squares: Creation of Digital Good, Secure Packaging,
and Track Sales Information.

There is a two-way arrow that points directly below the Publisher rectangle to
another rectangle that represents the Distributor. Inside this rectangle is a
shaded box as mentioned about that represents the server. Next to this box is a
cylinder that represents the digital inventory. Outside the rectangle to the
right is the title "Digital Inventory & License Management." Below this title
are three sub headings, which are bulleted with small hollow squares: Digital
Inventory Management, Product Delivery, and Audit Trail. In addition, there is
a narrow one way arrow that goes from the Distributor rectangle to the Customer
rectangle referred to below.

There is a two-way arrow that points to another rectangle box that is half the
size in width. It is right justified approximately 45% and under the
Distributor rectangle and represents the Resellers. In this rectangle is one
box which symbolizes the gateway. Outside this rectangle to the right is the
title "Digital Merchandising & Licensing System." Below this title are four sub
headings, which are bulleted with small hollow squares: Delivery of License,
Reseller Branding, Digital Packing Slip, and Shopping Basket. In addition,
there is a narrow one way arrow that goes from the Resellers rectangle to the
Offline Storefront referred to below.

There is a two way arrow chat points to another rectangle box that is the same
size as the Resellers rectangle and represents the Customer. Outside this
rectangle to the right is the title "Hard Disk Delivery." Below this title are
two four sub headings which are bulleted with small hollow squares: Digital
Rights Management and Communications Agent.

Directly below the text placed to the right of the Customer rectangle, reads
the title "Offline Storefront." Below this title are two sub headings which are
bulleted with hollow squares: CD and DVD.

    The above diagram reflects only one possible network configuration. Our
solution enables other concurrent technical and business models.

Professional Services

    We provide our customers with the support needed to implement and maintain
flexible, scalable and secure networks for the electronic distribution of
digital goods.

    Our solution includes the following services:

  .  Consulting. We offer a range of consulting services, including
     installation, customization and integration. We work closely with our
     customers to define their unique business needs and provide services to
     meet these needs through business analysis and design, project planning
     and management, technology analysis, integration and configuration,
     testing and change management.

  .  Customer support. Our technical support services include email and
     phone support, remote diagnosis, online support and software updates.
     We also offer a premium support program that allows our customers to
     contact a support representative 24 hours a day, 7 days a week.

  .  Education and training. We offer technical training courses to help our
     customers implement, customize, use and administer our solution.

    We provide limited consulting, training and support as part of our
installation fee and maintenance agreements. We provide additional consulting,
training and premium support, generally on a time-and-materials basis.

                                       36
<PAGE>

Customers and Strategic Relationships

    We have developed relationships with software publishers, distributors,
OEMs and service providers. Some companies license our solutions directly from
us. Others use our technology through sublicenses or outsourced relationships
with our customers. The table below includes a partial list of companies with
whom we have direct or indirect relationships.

<TABLE>
<CAPTION>
  Business Type   Direct Relationships                  Indirect Relationships
------------------------------------------------------------------------------
  <S>             <C>                                   <C>
  Publishers      .Macromedia                                .Intuit
                  .Mattel                                    .INXight
                  (Broderbund and The Learning Company)      .NetObjects
                  .Symantec
------------------------------------------------------------------------------

  Service         .Chargenow.com
    providers     .Digital Square
                  .ECdirec
                  .NetSales
                  .ReleaseNow.com
                  .Scot Crest Group
                  .Trustmarque
------------------------------------------------------------------------------

  Distributors    .Ingram Micro                              .Navarre
                  .Softway
------------------------------------------------------------------------------

  Resellers and   .Dustin                                    .Beyond.com
    OEMs          .e-academy.com                             .Vector
                  .Packard Bell NEC
                  .Prisma
                  .Softline
                  .Somm.com
</TABLE>


    Several leading software publishers have selected our solution to
distribute their products electronically through direct and indirect channels.
Macromedia and Mattel have opted for an in-house model that integrates our
solution with the rest of their e-commerce systems. Symantec and Intuit have
chosen an outsource model and operate our solution through Beyond.com and the
Scot Crest Group, respectively. NetObjects and INXight have chosen NetSales and
ReleaseNow.com as their respective service providers to maintain and operate
our solution to distribute their products. Service providers can also aggregate
inventory from publishers to support direct and indirect sales through large
distributors. NetSales has established an electronic connection to our solution
at Ingram Micro. We have agreed to provide versions of our PortableStore to
Packard Bell NEC for distribution of encrypted digital goods for online
licensing with selected personal computers.

    We have the following strategic relationships:

    Ingram Micro. We have been working with Ingram Micro on electronic software
distribution since August 1998. On June 30, 1999, we signed an agreement with
Ingram Micro to use our solution and to sublicense appropriate components to
Ingram Micro's resellers. The contract grants Ingram Micro a nonexclusive
license to use our solution in exchange for network transaction fees that are
based on a percentage of sales that Ingram Micro fulfills using our solution.
Upon signing the agreement, Ingram Micro committed to minimum network
transaction fees. We will recognize these minimum network transaction fees on a
straight line basis over the one-year term of the agreement. Under the
agreement, we are entitled to additional fees for

                                       37
<PAGE>

training, technical support and maintenance related to Ingram Micro's use of
our solution. We anticipate that revenue from Ingram Micro may represent a
significant portion of our business although there can be no assurance in this
regard. As of August 31, 1999, Ingram Micro has not yet commercially deployed
our solution and is not obligated to do so under the agreement. Aside from the
minimum network transaction fees, we have not yet earned or received any
network transaction fees from this agreement. The contract automatically renews
for an additional year if neither party terminates the contract by providing a
45-day advance notice to the other party.

    Sony Marketing of Japan. In September 1998, we signed a three-year
agreement with Sony Marketing of Japan, granting it the exclusive right to use
and sublicense our solution in Japan, including future upgrades, enhancements
and new products. We received a non-creditable, upfront payment for the
license, training and support. Beginning April 1999, Sony Marketing has agreed
to pay us network transaction fees based on a percentage of the revenue it
receives from distributing our solution and providing related services. Sony
Marketing committed to pay us annual minimum network transaction fees. If the
network transaction fees paid by Sony Marketing during the initial annual
period are less than the annual minimum network transaction fees, Sony
Marketing must pay us any shortfall. Beginning April 2000, if network
transaction fees are less than the specified target, Sony Marketing, at its
option, may give up its exclusivity rights rather than pay the shortfall.
During the first year of the agreement, we are recognizing the annual minimum
network transaction fees on a straight line basis over 12 months until we have
earned network transaction fees in excess of the annual minimum network
transaction fees. In subsequent years we will recognize the network transaction
fees as they are earned. The exclusivity under this agreement means that we
cannot compete with Sony Marketing by offering our solution in Japan. This
exclusivity terminates if Sony Marketing provides us with 180-day prior notice
that it desires to offer a competing product. The agreement may be renewed by
Sony Marketing for up to three additional three-year terms upon providing us
prior notice and upon mutual agreement on performance and payment criteria for
such renewal terms.

    Sony Marketing of Japan and Ingram Micro each accounted for more than 10%
of our revenues in the six months ended June 30, 1999. Substantially all of the
revenues we have received from these two parties reflects minimum network
transaction fees and service fees associated with implementing our solution.

    Intel Corporation. In September 1999, we signed an agreement with Intel
Corporation to license Intel's content protection agent system and to
incorporate this technology into our solution. The objective of this agreement
is the development, sales and marketing of our solution for the digital music
market.

Sales and Marketing

    We promote and sell our solution to publishers, OEMs, distributors and
resellers through our direct sales force in North America and Europe. In Japan,
we promote and sell our solution through our exclusive relationship with Sony
Marketing of Japan. As of June 30, 1999, we had 21 employees in our sales and
marketing organization worldwide. We intend to increase the size of our direct
sales force and establish additional sales offices in the United States and
internationally.

    We complement our direct sales efforts with our service provider partners
who provide an outsource solution to some publishers and resellers. As of June
30, 1999 we had relationships with 13 service providers located in seven
countries. We intend to establish additional relationships with service
providers and broaden our indirect sales force through relationships with
systems integrators.

    Our marketing efforts are designed to create greater awareness of our
solution and the benefits it affords to publishers, distributors and resellers
of digital goods. We market our solution through targeted activities including
trade shows, conferences, direct mail, electronic marketing and marketing
materials. In addition, we engage in co-marketing activities with our
customers, including production and distribution of co-branded collateral,
joint sponsorship of conferences and public relations.

                                       38
<PAGE>

Technology

    We have developed a set of technologies for the establishment of channel
neutral, flexible, scalable and secure networks for the electronic distribution
of digital goods. These technologies include server components, components for
integration with shopping catalogs, databases and web browsers, management and
audit tools. They include tools for encryption of digital goods, and client
software for the reliable delivery of digital goods and management of digital
use rights. They also include agent software for monitoring usage and
personalized marketing.

    Our solution employs a distributed server architecture. Our inventory
license and management system is typically operated by large publishers,
service providers and distributors. Servers can be operated by resellers who
can choose to run their own inventory and license management system or simply
integrate into their web site a gateway component connected to a distributor.
Distributors can add additional gateways to support increasing numbers of
connected electronic resellers. Publishers, distributors and resellers, have
real-time control over the management of distribution rights and the issuance
of licenses to end-users. Upon completion of a license transaction by a
reseller, an electronic transaction is automatically recorded in the databases
of the relevant distributor and publisher, creating an audit trail for each
participant in the sale. Thus, immediately following the completion of a
license transaction between a reseller and a customer, the distributor can
directly and electronically deliver the purchased digital goods to the
customer. This distributed architecture of our solution contributes to its
flexibility, security, reliability and scalability.

    The architecture of our network separates the issuance of electronic
licenses from the delivery of digital goods. The distributor can provide
electronic delivery directly to all of the customers of its resellers. Our
solution integrates with standard web server technology for which highly
scalable solutions are readily available from third parties. Our solution is
capable of addressing high-bandwidth requirements associated with multiple
simultaneous downloads of large electronic files. Our solution can be deployed
on the Microsoft Windows NT and Sun Solaris operating systems. Customers can
support modest transaction volumes on a single inexpensive computer server
while higher transaction volumes can be supported by multiple load balanced
servers. Our solution can be integrated with industry standard web storefronts
such as Microsoft Site Server. Open Market and BroadVision and databases such
as Microsoft SQL Server, Oracle, and Sybase. Our solution allows our customers
to use their existing web storefronts and databases for processing and storage
of digital goods transactions, as well as to employ customary techniques for
data replication and load management.

    Our solution encrypts digital goods using our builder tools and records the
encryption key, distribution rights and licensing options in the database of a
computer server. The server has network administration functions that enable
electronic distribution to other networked servers, and each server can support
multiple gateways. Each gateway controls the pricing, branding and purchase
processes and communicates securely with servers to initiate the electronic
transfer of digital goods and/or licenses to end customers. Our solution
automatically provides an electronic audit trail with each transaction recorded
on servers in the distributed network.

    Our client software allows the end customer's personal computer to
communicate reliably and securely with the network to manage downloads of goods
and licenses. Our client software employs various encryption and tamper
resistant techniques to enforce rights even when the end customer's computer is
not connected to the Internet. In addition, our interactive communications
agent can enable the automatic flow of usage and marketing information with
customers, whether or not there is a continuous Internet connection.

    Communications between servers, from gateways to servers, and from client
software to servers and gateways are secured using standard encryption
techniques. Security is achieved through 90+ bit symmetric session keys and
1024 bit RSA keys for authentication and session key exchange. Our builder
tools use 90+ bit symmetric keys for the protection of digital goods from the
point of introduction to the network until their delivery to the customer.

                                       39
<PAGE>

    By employing a distributed architecture and by interfacing with standard
technologies where appropriate, we have designed a highly scalable and robust
network solution to enable secure and automated digital goods commerce and
real-time information flow between multiple business entities. We have also
enabled seamless communication and rights management with customers both when
connected and when disconnected from the Internet.

Competition

    The competition for digital goods solutions is strong and evolves quickly.
We expect that competition will intensify, both with respect to existing
competitors as well as with the entry of new competitors into our markets.
Several companies are currently offering, or are expected to offer in the near
future, products or services that compete with our solutions, including: AT&T,
CyberSource, Digital River, IBM, InterTrust, Liquid Audio, Microsoft,
Reciprocal and Xerox.

    The primary bases for competition currently include:

  .  level of acceptance and deployment by publishers, distributors and
     resellers;

  .  convenience and ease of use for customers;

  .  degree of security, scalability and reliability;

  .  compatibility with multiple distribution channels;

  .  price and pricing model;

  .  support of multiple operating systems;

  .  level of integration with existing e-commerce infrastructures;

  .  ability to support multiple licensing models;

  .  support for several types of digital goods;

  .  localization for foreign languages; and

  .  government approval for export of strong encryption techniques.

Intellectual Property

    Our success depends in part on our ability to protect our proprietary
rights to the technologies used in our solution. If we do not adequately
protect our proprietary rights, our competitors can use the intellectual
property that we have developed to enhance their products and services, which
would harm our business. We rely on a combination of patents, copyright and
trademark laws, trade secrets, confidentiality provisions and other contractual
provisions to protect our proprietary rights, but these legal means afford only
limited protection.

    We are actively seeking patent protection for our intellectual property. We
have filed 17 patent applications with the United States Patent and Trademark
Office.

    As of August 31, 1999, one patent was issued and two patents were allowed
by the Patent and Trademark Office based upon our inventions.We pursue
international counterpart patents where appropriate. In addition, in May 1998,
we acquired a United States patent that was issued in 1987.

    Despite any measures taken to protect our intellectual property,
unauthorized parties may attempt to copy aspects of our solution or to obtain
and use information that we regard as proprietary. In addition, the laws of
some countries may not protect our proprietary rights as fully as do the laws
of the United States. Thus, the measures we are taking to protect our
proprietary rights in the United States and internationally may not be
adequate. Finally, our competitors may independently develop similar
technologies.

                                       40
<PAGE>

Employees

    As of August 31, 1999, we had 96 employees, of which 49 were employed in
research and development, 34 were employed in sales and marketing, and 13 were
employed in administrative positions. In addition, we retain 14 full-time
contractors. Our employees are not represented by a collective bargaining unit.
We have never experienced a work stoppage and believe that our relations with
our employees are good.

Properties

    Our principal executive and administrative offices are located in
Cupertino, California where we lease approximately 10,400 square feet. In
addition, we have executive and administrative offices located in Portland,
Oregon, where we lease approximately 17,800 square feet. We are currently
negotiating to sublease approximately 3,500 square feet of additional office
space in Cupertino, California. We also maintain a small sales office in the
London metropolitan area. We believe our existing facilities are adequate to
meet current requirements and that additional or substitute space will be
available as needed to accommodate any expansion of operations.

Legal Proceedings

    In May 1999, 20/20 Software, Inc., filed a civil complaint against us in
the United States Court for the District of Northern California. The complaint
alleges that one of our employees, a former 20/20 employee, misappropriated
trade secrets and confidential information of 20/20 and allegedly used such
allegedly misappropriated information and trade secrets in a product of our
predecessor and subsidiary, Preview Software. The complaint alleges that based
on the foregoing allegations our predecessor infringed 20/20's copyrights,
tortiously interfered with 20/20's prospective advantage, engaged in unfair
competition and misappropriated 20/20's trade secrets and confidential
information. This complaint is a continuation of two earlier and similar
complaints by 20/20, one against us filed in, and dismissed for lack of
jurisdiction by, the United States Court for the Federal District of Oregon,
and one against an employee of ours filed in Oregon state court. Those two
complaints were both dismissed, the latter with prejudice. We believe that the
claims in the underlying litigation are without merit and intend to continue to
defend against them vigorously. However, litigation is subject to inherent
uncertainties and, therefore, there can be no assurance that this action will
not have a material adverse effect on our business results of operations or
financial condition.

                                       41
<PAGE>

                                   MANAGEMENT

Executive Officers and Directors

    Our executive officers and directors and their ages as of July 31, 1999 are
as follows:

<TABLE>
<CAPTION>
           Name             Age                    Position
--------------------------- --- -----------------------------------------------
<S>                         <C> <C>
Vincent Pluvinage..........  41 President, Chief Executive Officer and Director
G. Bradford Solso..........  43 Vice President, Chief Financial Officer
Jeffrey E. Brown...........  31 Vice President, Professional Services
Michael W. Davison.........  42 Vice President, Interactive Solutions
Christopher Dittmer........  40 Vice President, Marketing
Michel A. Floyd............  40 Vice President, Engineering
Cay S. Horstmann...........  40 Vice President, Chief Technology Officer
David Gregory Kott.........  39 Vice President, Sales
Frank A. Tycksen, Jr.......  36 Vice President and Co-Founder
Edward J. Wholihan.........  39 Vice President, Business Development
Gerard H. Langeler(2)......  48 Chairman of the Board of Directors
Bruce R. Bourbon(2)........  57 Director
Donald L. Lucas(1).........  69 Director
Gary E. Rieschel(1)........  43 Director
R. Douglas Rivers(1).......  43 Director
Jo Ann Heidi Roizen(2).....  41 Director
</TABLE>
--------
(1)Member of the audit committee.
(2)Member of the compensation committee.

    Vincent Pluvinage, President, Chief Executive Officer and Director, joined
Preview Software in June 1997 and has been with Preview Systems since the
mergers of Preview Software and Portland Software in August 1998. Prior to
joining Preview Software, Dr. Pluvinage led the research and development,
international operations, business development and strategic marketing efforts
for ReSound Corporation, a developer of advanced hearing technologies, where he
held a variety of senior management positions from March 1987 to May 1997. From
June 1985 to March 1987, Dr. Pluvinage was a member of the technical staff at
AT&T Bell Labs, a developer of advanced communication products, and
participated in the spin-off of technologies from AT&T Bell Labs to ReSound.
Dr. Pluvinage completed the Advanced Executive Management program at Stanford
University and holds a Ph.D. degree in Bioengineering from the University of
Michigan and an M.S. degree, summa cum laude, in Applied Physics Engineering
from the Universite Catholique de Louvain in Belgium.

    G. Bradford Solso, Vice President, Chief Financial Officer, joined Preview
in July 1999. Prior to joining Preview, Mr. Solso was the acting Chief
Financial Officer of Convoy Corporation, a software company, from April 1999 to
July 1999. From November 1998 to January 1999, Mr. Solso was the Chief
Financial Officer of Aloha Networks, Inc., an Internet service provider. From
October 1997 to August 1998, Mr. Solso was Vice President and Chief Financial
Officer of iPass, Inc., an Internet service provider. From November 1995 to
August 1997, Mr. Solso was Chief Financial Officer of CATS Software, Inc., a
risk management software company. Prior to 1995, Mr. Solso served for 14 years
at Visa International, a financial services company, in a variety of management
positions, most recently as Senior Vice President, where he was responsible for
all treasury activities including settlement operations, capital markets
activities and risk management. Mr. Solso holds a B.A. degree in Business
Administration from California State University, San Francisco. He is a
certified public accountant.

    Jeffrey E. Brown, Vice President, Professional Services, joined Preview in
July 1999. Prior to joining Preview, Mr. Brown was with Andersen Consulting, a
business consulting firm, from November 1991 to July 1999, most recently
serving as a senior manager. From 1996 through 1999, Mr. Brown managed an
Andersen

                                       42
<PAGE>

Consulting Internet solution center, where he was responsible for delivering
large-scale e-commerce solutions for companies. Mr. Brown holds a B.S. degree
in Mathematics from the University of Washington.

    Michael W. Davison, Vice President, Interactive Solutions, joined Preview
Software in March 1998 and has been with Preview Systems since the mergers of
Preview Software and Portland Software in August 1998. Prior to joining Preview
Software, Mr. Davison was the Director of Strategic Marketing at Claris
Corporation, a software company, from 1992 to 1998, where he was responsible
for development and implementation of Claris' online marketing and electronic
commerce strategies. From 1990 to 1992, he served as Imaging Market Manager for
Informix Software, a relational database supplier. Mr. Davison has also held
business development and marketing management positions at several start-up
companies in the technology industry. Mr. Davison was chairman of the Software
Publishers' Association, Electronic Software Distribution committee and a
member of the SPA Internet Section Board. Mr. Davison holds an M.B.A. degree
from Santa Clara University and a B.A. degree in History from the University of
California at Berkeley.

    Christopher Dittmer, Vice President, Marketing, joined Preview in May 1999.
From May 1998 to February 1999, he served as Vice President, Worldwide
Marketing and Business Development at CyberStar, a network service provider.
From November 1995 to May 1998, he held a variety of positions at Oracle
Corporation, a software company, most recently as Vice President International
Marketing and Field Support. From June 1991 to February 1995, he served in a
variety of positions at Microsoft Corporation, a software company, most
recently as End User Business Unit Manager at Microsoft Far East Headquarters,
and, prior to that, as Network Business Unit Manager at Microsoft Europe. Mr.
Dittmer holds an M.S. degree in Material Science and Engineering from Stanford
University and a B.S. degree in Physics and a B.A. degree in French and German
from Humboldt State University.

    Michel A. Floyd, Vice President, Engineering, joined Preview Software in
August 1997 and has been with Preview Systems since the mergers of Preview
Software and Portland Software in August 1998. Prior to joining Preview
Software, Dr. Floyd was Vice President of Engineering at Optimal Networks, a
developer of network monitoring and analysis tools, from March 1996 to June
1997. From January 1996 to March 1996, Dr. Floyd was Director of Engineering at
Cadence Design Systems, a developer of high-level network simulation tools.
From September 1995 to December 1995, Dr. Floyd was Vice President of
Engineering at Systems & Networks, a developer of network simulation and design
tools. From January 1995 to August 1995, he was Vice President of Engineering
at Covalent, a developer of commercial print management products. From 1994 to
1995, Dr. Floyd was a Manager at Xsoft, a division of Xerox, where he helped
develop an electronic commerce system for commercial printers. Dr. Floyd holds
B.S., M.S., and Sc.D. degrees in Aero-Astro Engineering from the Massachusetts
Institute of Technology.

    Cay S. Horstmann, Vice President, Chief Technology Officer, joined Preview
Software in 1997 and has been with Preview Systems since the mergers of Preview
Software and Portland Software in August 1998. Dr. Horstmann is also currently
a Professor of Computer Science at San Jose State University. Prior to joining
Preview Software, Dr. Horstmann was the President of Horstmann Software, a
developer of technical word processing software, from 1986 to 1996. From 1990
to 1996, Dr. Horstmann was active as a consultant and as an instructor for
Technology Exchange/ACM professional training courses. Dr. Horstmann has
authored many books and magazine articles, including columns for C++ Report and
Java Report, as well as the Sun Microsystems Press book "Core Java." He holds a
Ph.D. degree in Mathematics from the University of Michigan, an M.S. degree in
Computer Science from Syracuse University, and a Diploma in Mathematics and
Computer Science from the Christian-Albrechts-University in Kiel, Germany.

    David Gregory Kott, Vice President, Sales, joined Portland Software in 1997
and has been with Preview Systems since the mergers of Preview Software and
Portland Software in August 1998. Prior to joining Portland Software, Mr. Kott
served as Senior Vice President of Sales of Summit Design, a software company,
from 1994 to 1997. From 1987 to 1994, Mr. Kott served in several sales
management positions at Mentor Graphics, an electronic systems software and
hardware company. Mr. Kott holds a B.S. degree in Mechanical Engineering from
the University of Washington.

                                       43
<PAGE>

    Frank A. Tycksen, Jr., Vice President and Co-Founder, co-founded Portland
Software in 1994 and has been with Preview Systems since the mergers of Preview
Software and Portland Software in August 1998. Prior to joining Portland
Software, Mr. Tycksen was employed by Second Nature Software, a software
company, as Senior Software Engineer from 1992 to 1994. From 1987 to 1994, Mr.
Tycksen was employed by Central Point Software, a software company, as Manager
of Data Recovery Utilities, where he co-authored Central Point Software's PC
Tools utility. Mr. Tycksen holds A.S. and B.S. degrees in Computer Systems
Engineering from the Oregon Institute of Technology.

    Edward J. Wholihan, Vice President, Business Development, joined Portland
Software in August 1996 and has been with Preview Systems since the mergers of
Preview Software and Portland Software in August 1998. Prior to joining
Portland Software, he was employed by McKinsey and Company, a management
consulting firm, from 1989 to 1996, where he most recently served as Senior
Engagement Manager, developing and implementing marketing, operational, and
financial strategies. Mr. Wholihan holds an M.B.A. degree from Stanford
University and a B.A. degree in Economics from Yale University.

    Gerard H. Langeler has served as Chairman of the Board of Directors of
Preview Systems since the mergers of Preview Software and Portland Software in
August 1998 and, prior to that, served as a director of Portland Software
beginning in 1996. Since 1992, he has been a General Partner with Olympic
Venture Partners, a venture capital investment firm. Prior to joining Olympic
Venture Partners, he was a co-founder of Mentor Graphics Corporation, a
software company, where he served in a number of roles from 1981 to 1992,
including President and Chief Operating Officer. He currently serves as a
director for Vascular Solutions, 800.com, Captivate Networks, and Webridge, all
privately-held companies. Mr. Langeler holds an A.B. degree in Chemistry from
Cornell University and an M.B.A. degree from Harvard Business School.

    Bruce R. Bourbon has served as a director of Preview Systems since the
mergers of Preview Software and Portland Software in August 1998 and, prior to
that, served as a director of Preview Software beginning in 1997. Mr. Bourbon
is currently a Managing General Partner of Telos Venture Partners, a venture
capital investment fund, where he has been a general partner since December
1995. From 1994 to 1995, Mr. Bourbon was an independent management consultant.
From 1990 to 1994, he was President and Chief Executive Officer of Vertex
Semiconductor, a high-end ASIC gate arrays company. From 1991 to 1994, Mr.
Bourbon was Vice President of Marketing for Toshiba America, an electronic
component provider. From 1987 to 1990, Mr. Bourbon served as Vice President of
Marketing at Cadence Design Systems, a software company. He holds a B.S. degree
in Electrical Engineering from California State Polytechnic University and an
M.S. degree in Electrical Engineering from University of California, Los
Angeles.

    Donald L. Lucas has served as a director of Preview Systems since the
mergers of Preview Software and Portland Software in August 1998 and, prior to
that, served as a director of Preview Software beginning in 1997. Since 1967,
Mr. Lucas has been involved in venture capital activities as a private
individual. Mr. Lucas currently serves as a director for Cadence Design
Systems, Inc., Coulter Pharmaceutical, Inc., Macromedia, Inc., Oracle
Corporation, Transcend Services, Inc. and Tricord Systems, Inc. Mr. Lucas also
serves as a director for several privately held companies. He holds a B.A.
degree in Economics and an M.B.A. degree from Stanford University.

    Gary E. Rieschel has served as a director of Preview since July 1999. Mr.
Rieschel is the Executive Managing Director of SOFTBANK Technology Ventures, a
venture fund focused on early stage Internet companies. Since joining SOFTBANK
in January 1996, he has led SOFTBANK's venture capital activities in the United
States. Mr. Rieschel has over fifteen years experience in the high technology
field, including holding executive positions at nCUBE, a provider of broadcast
video, as Vice President Marketing in 1995; Cisco Systems, a provider of a
computer networking products, as Director Worldwide Channels from 1993 to 1994;
Sequent Computer Systems, a computer software company, as Director and General
Manager from 1992 to 1993; and Intel Corporation, a semiconductor and computer
company, from 1979 to 1982. Mr. Rieschel spent over four years in Tokyo as
General Manager of Sequent Computer Systems' Asian operations. He serves as a
director for Message Media, Inc. and Net2Phone, Inc. and is a member of
SOFTBANK's Global Executive

                                       44
<PAGE>

Board. Mr. Rieschel holds a B.A. degree in Biology from Reed College and an
M.B.A. degree from Harvard Business School.

    R. Douglas Rivers has served as a director of Preview Systems since the
mergers of Preview Software and Portland Software in August 1998 and, prior to
that, served as Chairman of Preview Software beginning in 1996. Dr. Rivers is
Co-founder, President and Chief Executive Officer of InterSurvey, a provider of
Internet-based market research services. Dr. Rivers was a Co-founder and
Partner at Pacific Economics Group, an economic consulting firm, from 1997 to
1998, and a Senior Economist at Arthur Andersen L.L.P., an accounting firm,
from 1992 to 1997. Since 1989, Dr. Rivers has been a Professor of Political
Science at Stanford University and, since 1994, a Senior Fellow at the Hoover
Institution. From 1987 to 1989, Dr. Rivers was an Associate Professor of
Political Science at University of California, Los Angeles. From 1983 to 1987,
Dr. Rivers was an Assistant Professor of Political Science at the California
Institute of Technology. From 1980 to 1983, Dr. Rivers was an Assistant
Professor of Government at Harvard University. Dr. Rivers holds a Ph.D. degree
in Political Science and Economics from Harvard University and a B.A. degree in
Political Science from Columbia University.

    Jo Ann Heidi Roizen has served as a director of Preview Systems since the
mergers of Preview Software and Portland Software in August 1998 and, prior to
that, served as a director of Preview Software beginning in 1997. Ms. Roizen is
a venture partner with SOFTBANK Technology Ventures, a venture fund focused on
early stage Internet companies. She also serves as a director for Great Plains
Software and Softbook Press, Inc., both privately held companies. She is also
an advisory board member of Time Domain Corporation, Garage.com and the
Microsoft Silicon Valley Developer Center. Ms. Roizen is also a member of the
Stanford Board of Trustees Nominating Committee. Prior to joining SOFTBANK in
April 1999, Ms. Roizen was Vice President of Worldwide Developer Relations for
Apple Computer, a computer manufacturer, from 1996 to 1997. From 1983 to 1996,
she was CEO of T/Maker Company, a software developer and publisher. Ms. Roizen
is a past president of the Software Publishers' Association and has served as a
Public Governor of the Pacific Exchange. Ms. Roizen holds an A.B. degree in
English and an M.B.A. degree from Stanford University.

    There are no family relationships among any of our directors or executive
officers.

Board Composition

    Our bylaws currently provide for a board of directors of seven directors.
In accordance with the terms of our amended and restated certificate of
incorporation, effective after the closing of this offering and upon our
qualification as a "listed corporation" pursuant to the California General
Corporation Code, the terms of office of the directors will be divided into
three classes:

  .  Class I, whose term will expire at the annual meeting of stockholders
     to be held in the year 2000 or a special meeting held instead of the
     annual meeting;

  .  Class II, whose term will expire at the annual meeting of stockholders
     to be held in the year 2001 or a special meeting held instead of the
     annual meeting; and

  .  Class III, whose term will expire at the annual meeting of stockholders
     to be held in the year 2002 or a special meeting held instead of the
     annual meeting.

    The Class I directors will be: Vincent Pluvinage and Bruce R. Bourbon, the
Class II directors will be Gerard H. Langeler and Gary Rieschel, and the Class
III directors will be Donald L. Lucas, R. Douglas Rivers and Jo Ann Heidi
Roizen. At each annual meeting of stockholders after the initial classification
or special meeting held instead of an annual meeting, the successors to those
directors whose terms will then expire will be elected to serve from the time
of election and qualification until the third annual meeting following the
election or special meeting.

    In addition, our amended and restated certificate of incorporation provides
that any additional directorships resulting from an increase in the number of
directors will be filled only by the affirmative vote of the directors then in
office, unless otherwise specified by resolution of the board of directors.
Additional

                                       45
<PAGE>

directorships will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the directors. This
classification of the board of directors may have the effect of delaying or
preventing changes in control or management of Preview, although our directors
may be removed for cause by the affirmative vote of the holders of a majority
of our common stock.

Board Compensation

    None of our directors is paid any fee or other compensation for acting as a
director, although directors are reimbursed for reasonable expenses incurred in
attending board or committee meetings. Directors who are also employees are
eligible to participate in our 1998 Stock Option Plan, and, as of this
offering, they will also be eligible to participate in our 1999 Employee Stock
Purchase Plan. Directors who are not employees are eligible to participate in
our 1998 Stock Option Plan and, as of this offering, will also be eligible for
automatic grants and to participate in our 1999 Directors' Stock Option Plan.
See "Stock Plans."

    We have entered into indemnification agreements with each member of the
board of directors and certain of our officers providing for the
indemnification of these persons to the fullest extent permitted by law.

Board Committees

    Our board of directors has an audit committee and a compensation committee.
The audit committee consists of Mr. Lucas, Mr. Rieschel and Dr. Rivers. The
audit committee reviews our financial statements and accounting practices and
makes recommendations to the board regarding the selection of independent
auditors. The compensation committee consists of Mr. Langeler, Mr. Bourbon and
Ms. Roizen. The compensation committee makes recommendations to the board
concerning salaries and incentive compensation for our officers and employees
and administers our employee benefit plans.

Compensation Committee Interlocks and Insider Participation

    None of the members of the compensation committee of the board is an
officer or employee of Preview. None of our executive officers serves as a
member of a board of directors or compensation committee of any entity that has
one or more executive officers serving on our compensation committee.

                                       46
<PAGE>

Executive Compensation

    The following table sets forth all compensation awarded to, earned by, or
paid to our Chief Executive Officer and each of our other four most highly
compensated executive officers, each of whose total cash compensation exceeded
$100,000 during fiscal year 1998.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                Long-Term
                                          Annual Compensation  Compensation
                                          -------------------- ------------
                                                                Securities
                                                                Underlying   All Other
       Name and Principal Position          Salary     Bonus    Options (#) Compensation
       ---------------------------        ---------- --------- ------------ ------------
<S>                                       <C>        <C>       <C>          <C>
Vincent Pluvinage........................ $  162,056 $       0   150,000        $229
 President and Chief Executive Officer
David Gregory Kott.......................    120,000    32,942   117,373         229
 Vice President, Sales
Michel A. Floyd..........................    130,091         0    35,000         201
 Vice President, Engineering
Cay S. Horstmann.........................    129,167         0    35,000         201
 Vice President, Chief Technology Officer
Frank A. Tycksen, Jr.....................    125,000         0    46,047         204
 Vice President and Co-Founder
</TABLE>

    The amounts listed under the column entitled "All Other Compensation"
represent term life insurance premiums we paid on behalf of these executive
officers. We also note that G. Bradford Solso, our Vice President, Chief
Financial Officer, who commenced employment with us in July 1999, earns an
annualized salary of $160,000, and Christopher Dittmer, our Vice President,
Marketing, who commenced employment with us in May 1999, earns an annualized
salary of $135,000.

                                       47
<PAGE>

Option Grants

    The following table shows certain information regarding stock options
granted to each of the executive officers listed in the Summary Compensation
Table during fiscal year 1998. We did not grant any stock appreciation rights
to these individuals during the year.

    The percentage of total options granted is based on a total of 899,585
options to purchase our common stock granted under all option plans in fiscal
year 1998. Potential realizable values are net of exercise price, but before
taxes associated with exercise. The 5% and 10% assumed annual rates of
compounded stock price appreciation are mandated by the Securities and Exchange
Commission. There is no assurance provided to any executive officer or any
other holder of our securities that the actual stock price appreciation over
the 10-year option term will be at the assumed 5% and 10% levels or at any
other defined level. Unless the market price of our common stock appreciates
over the option term, no value will be realized from the option grants.

                       Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
                                                                       Potential Realizable
                                       Individual Grants                 Value At Assumed
                         ---------------------------------------------    Annual Rates of
                         Number Of   Percent Of                                Stock
                         Securities Total Options                       Price Appreciation
                         Underlying  Granted To   Exercise                For Option Term
                          Options   Employees In  Price Per Expiration ---------------------
          Name            Granted    Fiscal Year    Share      Date        5%         10%
          ----           ---------- ------------- --------- ---------- ---------- ----------
<S>                      <C>        <C>           <C>       <C>        <C>        <C>
Vincent Pluvinage.......  150,000       16.7%       $2.00     9/10/08  $  188,668 $  478,123
David Gregory Kott......   50,000        5.6         2.00     9/10/08      62,889    159,374
Michel A. Floyd.........   35,000        3.9         2.00     9/10/08      44,023    111,562
Cay S. Horstmann........   35,000        3.9         2.00     9/10/08      44,023    111,562
Frank A. Tycksen, Jr....   30,000        3.3         2.00     9/10/08      37,734     95,625
                              500        0.1         2.00    12/21/08         629      1,594
</TABLE>

    All of the stock options granted in fiscal year 1998 to Dr. Pluvinage, Dr.
Floyd, Dr. Horstmann, Mr. Kott and Mr. Tycksen's options for 30,000 shares vest
in monthly installments equal to 2.08% of the total number of shares per month
for 48 months, in any case as long as the respective individual remains an
employee with, consultant to, or director of Preview.

    Mr. Tycksen's options for 500 shares vest 25% on December 3, 1999 and 2.08%
of the total each month thereafter as long as Mr. Tycksen remains an employee
with, consultant to, or director of Preview.

                                       48
<PAGE>

   Aggregate Option Exercises in Fiscal Year 1998 and Fiscal Year-End Option
                                     Values

    The following table sets forth the number of shares of common stock
acquired upon the exercise of stock options by each of the executive officers
listed in the Summary Compensation Table during fiscal year 1998, and the
number and value of securities underlying unexercised options held by each of
these individuals as of December 31, 1998. The value realized is based on the
fair market value of the shares on the date of exercise as determined by the
board of directors minus the exercise price. The value of unexercised in-the-
money options is based on a $2.00 per share value, the fair market value as of
December 31, 1998, as determined by the board of directors, minus the exercise
price, multiplied by the number of shares underlying the option.

<TABLE>
<CAPTION>
                                                  Number of Securities         Value of Unexercised
                           Shares                 Underlying Unexercised       In-the-Money Options
                          Acquired    Value    Options at December 31, 1998    at December 31, 1998
          Name           on Exercise Realized  (Exercisable/Unexercisable)  (Exercisable/Unexercisable)
          ----           ----------- -------- ----------------------------- ---------------------------
<S>                      <C>         <C>      <C>                           <C>
Vincent Pluvinage.......   50,000    $25,000         25,000/125,000                        $0/$0
David Gregory Kott......       --         --          19,438/97,934                          0/0
Michel A. Floyd.........       --         --          23,697/76,303                27,890/69,609
Cay S. Horstmann........   15,625      7,813          12,395/69,480                10,937/59,375
Frank A. Tycksen, Jr....       --         --           7,613/38,434                          0/0
</TABLE>

Stock Plans

    1998 Stock Option Plan. Our 1998 plan provides for the grant of incentive
stock options to employees, including employee directors, and of nonstatutory
stock options to employees, directors (including employee and non-employee
directors) and consultants. The purposes of the 1998 plan are to attract and
retain the best available personnel, to provide additional incentives to our
employees and consultants and to promote the success of our business. Our board
of directors and stockholders originally adopted and approved the 1998 plan in
July 1998. As of July 31, 1999, an aggregate of 1,850,000 shares were
authorized under the 1998 plan. In addition, the 1998 plan was amended in
August 1999 to increase the total number of shares authorized by 1,000,000
shares and to incorporate certain other changes. After this amendment, a total
of 2,850,000 shares of common stock were reserved for issuance under the 1998
plan. The 1998 plan was further amended to provide for an automatic annual
increase on the first day of each of our fiscal years beginning in 2000 and
ending in 2008 equal to the lesser of:

  .  800,000 shares;

  .  3% of our outstanding common stock on the last day of the immediately
     preceding fiscal year; or

  .  such lesser number of shares as the board of directors determines.

This amendment to the 1998 plan will be submitted for approval by our
stockholders prior to the completion of this offering. The application of these
automatic annual increase provisions will result in a maximum total authorized
pool of 10,050,000 shares. Unless terminated earlier by the board of directors,
the 1998 plan will terminate in July 2008.

    As of July 31, 1999, options to purchase 1,382,130 shares of common stock
were outstanding under the 1998 plan at a weighted average exercise price of
$4.42 per share, 7,773 shares had been issued upon exercise of outstanding
options, 460,097 shares remained available for future grant, and 1,842,227
shares were reserved for issuance.

    The 1998 plan may be administered by the board of directors or a committee
of the board, each known as the administrator. The administrator determines the
terms of options granted under the 1998 plan, including the number of shares
subject to the option, the exercise price, and the vesting and exercisability
of the option and any other conditions to which the option is subject. In no
event, however, may an employee receive awards for more than 1,000,000 shares
under the 1998 plan in any fiscal year. Incentive stock options granted under
the 1998 plan must have an exercise price of at least 100% of the fair market
value of the common stock on the date of grant, and not less than 110% of the
fair market value in the case of incentive stock options granted to

                                       49
<PAGE>

an employee who holds more than 10% of the total voting power of all classes of
our stock or parent or subsidiary's stock. Prior to this offering, nonstatutory
stock options granted under the 1998 plan were required to have an exercise
price of at least 85% of the fair market value of the common stock on the date
of grant. After the date of this offering, the exercise price of nonstatutory
stock options will no longer be subject to these restrictions, although
nonstatutory stock options granted to our Chief Executive Officer and our four
other most highly compensated officers will generally equal at least 100% of
the grant date fair market value if we intend that options to those individuals
will qualify as performance-based compensation under applicable tax law.
Payment of the exercise price may be made in cash or such other consideration
as determined by the administrator.

    With respect to options granted under the 1998 plan, the administrator
determines the term of options, which may not exceed 10 years (or 5 years in
the case of an incentive stock option granted to an employee who holds more
than 10% of the total voting power of all classes of our stock or a parent or
subsidiary's stock). Generally, an option granted under the 1998 plan is
nontransferable other than by will or the laws of descent and distribution, and
may be exercised during the lifetime of the optionee only by such optionee.
However, the administrator may, in its discretion, provide for the limited
transferability of nonstatutory stock options granted under the 1998 plan under
certain circumstances. The administrator determines when options become
exercisable. Options granted under the 1998 plan generally become exercisable
at the rate of 25% of the total number of shares subject to the options on the
first anniversary of the vesting commencement date and 1/48 of the total number
of shares subject to the options each month thereafter.

    If we sell all or substantially all of our assets or if we are acquired by
another corporation, each outstanding option may be assumed or an equivalent
award substituted by the successor corporation. However, if the successor
corporation does not agree to such assumption or substitution, the outstanding
options will terminate. The administrator has the authority to amend or
terminate the 1998 plan, but no action may be taken that impairs the rights of
any holder of an outstanding option without the holder's consent. In addition,
we must obtain stockholder approval of amendments to the plan as required by
applicable law.

    1999 Employee Stock Purchase Plan. Our board of directors adopted the 1999
employee stock purchase plan in August 1999. We intend to submit this plan to
our stockholders for approval in September 1999. A total of 500,000 were
reserved for issuance under the 1999 purchase plan, none of which have been
issued as of the date of this offering. The number of shares authorized and
reserved for issuance under the 1999 purchase plan will be subject to an
automatic annual increase on the first day of each of our fiscal years over the
10-year term of the plan, equal to the lesser of:

  .  400,000 shares;

  .  2% of our outstanding common stock on the last day of the immediately
     preceding fiscal year; or

  .  a lesser number of shares as the board of directors may determine.

The application of these provisions will result in a total pool of a maximum of
4,500,000 shares authorized and reserved. The 1999 purchase plan becomes
effective upon the date of this offering. Unless terminated earlier by the
board of directors, the 1999 purchase plan shall terminate in October 2009.

    The 1999 purchase plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, will be implemented by a series of overlapping
offering periods of approximately 24 months' duration, with new offering
periods (other than the first offering period) commencing on May 1 and November
1 of each year. Each offering period will generally consist of four consecutive
purchase periods of six months' duration, at the end of which an automatic
purchase will be made for participants. The initial offering period is expected
to commence on the date of this offering and end on October 31, 2001; the
initial purchase period is expected to begin on the date of this offering and
end on April 30, 2000. The 1999 purchase plan will be administered by the board
of directors or by a committee appointed by the board. Our employees (including
officers and employee directors), and employees of any majority-owned
subsidiary designated by the board, are eligible to participate in the 1999
purchase plan if they are employed by us or any such subsidiary for at least 20
hours

                                       50
<PAGE>

per week and more than five months per year. The 1999 purchase plan permits
eligible employees to purchase common stock through payroll deductions, which
in any event may not exceed 20% of an employee's eligible compensation. The
purchase price is equal to the lower of 85% of the fair market value of the
common stock at the beginning of each offering period or at the end of each
purchase period. Employees may end their participation in the 1999 purchase
plan at any time during an offering period, and participation ends
automatically on termination of employment.

    An employee cannot be granted an option under the 1999 purchase plan if
immediately after the grant the employee would own stock and/or hold
outstanding options to purchase stock equaling 5% or more of the total voting
power or value of all classes of our stock or stock of our subsidiaries, or if
the option would permit an employee's rights to purchase stock under the 1999
purchase plan at a rate that exceeds $25,000 of fair market value of such stock
for each calendar year in which the option is outstanding. In addition, no
employee may purchase more than 2,000 shares of common stock under the 1999
purchase plan in any one purchase period. If the fair market value of the
common stock on a purchase date of an offering period (other than the final
purchase date) is less than the fair market value at the beginning of the
offering period, each participant in that offering period shall automatically
be withdrawn from the offering period as of the end of the purchase date and
re-enrolled in a new 24 month offering period beginning on the first business
day following the purchase date.

    If we merge or consolidate with or into another corporation or sell all or
substantially all of our assets, each right to purchase stock under the 1999
purchase plan will be assumed or an equivalent right substituted by the
successor corporation. However, the board of directors will shorten any ongoing
offering period so that employees' rights to purchase stock under the 1999
purchase plan are exercised prior to the transaction in the event that the
successor corporation refuses to assume each purchase right or to substitute an
equivalent right. The board of directors has the power to amend or terminate
the 1999 purchase plan and to change or terminate offering periods as long as
such action does not adversely affect any outstanding rights to purchase stock
thereunder. However, the board of directors may amend or terminate the 1999
purchase plan or an offering period even if it would adversely affect
outstanding options in order to avoid our incurring adverse accounting charges.

    1999 Directors' Stock Option Plan. Our board of directors adopted the 1999
directors' stock option plan in August 1999 and we intend to submit the plan to
our stockholders for approval in September 1999. It will become effective upon
the date of this offering. A total of 300,000 shares of common stock were
reserved for issuance under the 1999 directors' plan. The number of shares
authorized and reserved for issuance under the 1999 directors' plan will be
subject to an automatic annual increase on the first day of each of our fiscal
years over the 10-year term of the plan, equal to the lesser of:

  .  150,000 shares;

  .  1% of our outstanding common stock on the last day of the immediately
     preceding fiscal year; or

  .  a lesser number of shares as the board of directors may determine.

The application of these provisions will result in a total pool of a maximum of
1,800,000 shares authorized and reserved for issuance. The directors' plan
provides for the grant of nonstatutory stock options to our non-employee
directors. The directors' plan is designed to work automatically without
administration; however, to the extent administration is necessary, it will be
performed by the board of directors. To the extent they arise, it is expected
that conflicts of interest will be addressed by abstention of any interested
director from both deliberations and voting regarding matters in which the
director has a personal interest. Unless terminated earlier, the directors'
plan will terminate in October 2009.

    The 1999 directors' plan provides that each person who is a non-employee
director upon the completion of this offering will be granted a nonstatutory
stock option to purchase 10,000 shares of common stock and that each person who
becomes a non-employee director after the completion of this offering will be
granted a nonstatutory stock option to purchase 20,000 shares of common stock
on the date on which the individual first becomes a member of our board of
directors. Thereafter, on the date of each annual stockholders' meeting

                                       51
<PAGE>

immediately after which the director is serving on the board, provided that he
or she has served on the board for at least six months prior to the meeting
date, each non-employee director will be granted an option to purchase 10,000
shares of common stock.

    All options granted under the 1999 directors' plan will have a term of 10
years and an exercise price equal to the fair market value of the common stock
on the date of grant and will be nontransferable. All options granted under the
directors' plan shall be vested and exercisable in full immediately upon grant
of such option. If a non-employee director ceases to serve as a director for
any reason other than death or disability, he or she may, but only within 90
days after the date he or she ceases to be a director, exercise options granted
under the directors' plan. If he or she does not exercise the option within
such 90-day period, the option shall terminate. If a director's service
terminates as a result of his or her disability or death, or if a director dies
within three months following termination for any reason, the director or his
or her estate will have 12 months after the date of termination or death, as
applicable, to exercise options that were vested as of the date of termination.

    If we merge or consolidate with or into another corporation or sell all or
substantially all of our assets, each option outstanding under the 1999
directors' plan will be assumed or equivalent options substituted by the
successor corporation, unless the successor corporation does not agree to such
assumption or substitution, in which case the options will terminate upon
consummation of the transaction to the extent not previously exercised. In
connection with any merger or asset sale, each director holding options under
the directors' plan will have the right to exercise his or her options
immediately before the consummation of the transaction as to all shares
underlying the options. Our board of directors may amend or terminate the 1999
directors' plan as long as the action does not adversely affect any outstanding
option and we obtain stockholder approval for any amendment to the extent
required by applicable law.

    Portland Software Amended and Restated 1994 Stock Incentive Plan. In
connection with the merger in August 1998 with Portland Software, we assumed
the outstanding options issued under the Portland Software plan. As of July 31,
1999, options to purchase 526,924 shares of our common stock were outstanding
under the Portland Software plan at a weighted average exercise price of $1.60
per share, 27,318 shares had been issued upon exercise of outstanding options
and no shares remained available for future grant. The terms of the Portland
Software options are similar to the terms of options issuable under our 1998
plan except that in the event of a sale of all or substantially all of our
assets or our merger with or into another corporation, the vesting of certain
options granted under the Portland Software plan may be accelerated prior to
the effective date of the transaction at the discretion of our board of
directors. Options granted under the Portland Software plan remain outstanding
in accordance with their original terms after conversion of the number of
shares and the exercise price per share that resulted from the merger.

    Preview Software 1997 Stock Option Plan. In connection with the merger in
August 1998 with Preview Software, we assumed the outstanding options issued
under the Preview Software 1997 plan. As of July 31, 1999, options to purchase
145,395 shares of our common stock were outstanding under the Preview Software
1997 plan at a weighted average exercise price of $.50 per share, 284,375
shares had been issued upon exercise of outstanding options and no shares
remained available for future grant. The terms of the Preview Software 1997
plan options are similar to the terms of options issuable under our 1998 plan
except that in the event of a sale of all or substantially all of our assets or
our merger with or into another corporation, if the successor corporation does
not agree to the assumption or substitution of outstanding options, the vesting
of all outstanding options shall be accelerated and the options shall become
fully exercisable prior to the effective date of the transaction. Options
granted under the Preview Software 1997 plan remain outstanding in accordance
with their original terms after conversion of the number of shares and the
exercise price per share that resulted from the merger.

    Preview Software New 1997 Stock Option Plan. In connection with the merger
in August 1998 with Preview Software, we assumed outstanding options issued
under the Preview Software New 1997 plan. As of July 31, 1999, options to
purchase 204,051 shares of our common stock were outstanding under the Preview
Software New 1997 plan at a weighted average exercise price of $.62 per share,
58,611 shares had been issued

                                       52
<PAGE>

upon exercise of outstanding options and no shares remained available for
future grant. The terms of the Preview Software New 1997 plan options are
similar to the terms of options issuable under our 1998 plan. Options granted
under the Preview Software New 1997 plan remain outstanding in accordance with
their original terms after conversion of the number of shares and the exercise
price per share that resulted from the merger.

Limitation of Liability and Indemnification Matters

    Our amended and restated certificate of incorporation limits the liability
of directors to the maximum extent permitted by Delaware law. Delaware law
provides that a director of a corporation will not be personally liable for
monetary damages for breach of the individual's fiduciary duties as a director
except for liability for any breach of the director's duty of loyalty to the
company or to its stockholders, for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law or for any transaction
from which a director derives an improper personal benefit.

    Our bylaws provide that we indemnify our directors and executive officers
and may indemnify our officers, employees and other agents to the full extent
permitted by law. We believe that indemnification under our bylaws covers at
least negligence on the part of an indemnified party. Our bylaws also permit us
to advance expenses incurred by an indemnified party in connection with the
defense of any action or proceeding arising out of his or her status or
services as a director, officer, employee or other agent for us upon an
undertaking by him or her to repay advances if it is ultimately determined that
he or she is not entitled to indemnification.

    We have entered into separate indemnification agreements with each of our
directors and executive officers. These agreements require us to indemnify the
director or executive officer against expenses, including attorney's fees,
judgments, fines and settlement paid by the individual in connection with any
action, suit or proceeding arising out of the individual's status or service as
a Preview director or officer, if the officer or director acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to
Preview's best interests and not unlawful, and to advance expenses incurred by
the director or executive officer in connection with any proceeding against the
officer or director with respect to which the officer or director is entitled
to indemnification by us. We believe that our amended and restated certificate
of incorporation and bylaw provisions and indemnification agreements are
necessary to attract and retain qualified persons as directors and executive
officers.

    At present, we are not aware of any pending litigation or proceeding
involving in any of our directors, officers, employees or agents where
indemnification will be required or permitted. Furthermore, we are not aware of
any threatened litigation or proceeding that might result in a claim for
indemnification.

    Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, executive officers or persons controlling
Preview, we have been informed that in the opinion of the Securities and
Exchange Commission the indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.

Change of Control and Termination Arrangements

    We have entered into an arrangement with Dr. Pluvinage, our President and
Chief Executive Officer, that provides him with benefits in the event of a
change of control of us or termination of his employment with us. In the event
of a change of control which is generally defined as the acquisition of a
majority of our stock or sale of all of our assets, 50% of the unvested options
granted to Dr. Pluvinage under the Preview Software 1997 Plan will immediately
vest at the time of the change of control. In addition, if the acquiring
company fails to assume or does not provide Dr. Pluvinage with options of
equivalent value, the remaining 50% of the unvested options will also
immediately vest. Moreover, in the event that Dr. Pluvinage is terminated for
any reason other than for cause or his own willful termination, 50% of any of
his unvested options under the Preview Software 1997 plan will immediately vest
and he will receive a cash amount equal to one year base salary.

                                       53
<PAGE>

    We have also entered into an arrangement with Mr. Kott, our Vice President,
Sales, that provides him with certain benefits in the event of a change of
control, which is generally defined as a consolidation or merger of us or the
sale of all of our assets. As to options to purchase 16,195 shares, 100% of the
shares will immediately vested if Mr. Kott is terminated without cause,
required to relocate or experiences a material reduction in his
responsibilities or compensation within 90 days of a change in control. In
addition, these shares will immediately vest in the event of an initial public
offering. As to options to purchase 98,587 shares, 50% of these shares will
immediately vest if Mr. Kott is terminated without cause, required to relocate
or experiences a material reduction in his responsibilities or compensation
within 90 days of a change of control. In addition, even if no change of
control occurs, 33 1/3% of these shares will immediately vest if Mr. Kott is
terminated without cause, required to relocate or experiences a material
reduction in his responsibilities or compensation.

                                       54
<PAGE>

                              CERTAIN TRANSACTIONS

Private Placements of Securities

    Background. Through a series of mergers in August 1998, we became the owner
of all of the capital stock of Preview Software and Portland Software. As a
part of these transactions, all of the previously outstanding shares of common
and preferred stock and options and warrants to purchase capital stock of each
of Preview Software and Portland Software were converted into outstanding
shares of common and preferred stock and options and warrants to purchase
capital stock of Preview Systems. The equity securities of Preview Software and
Portland Software were converted into equity securities of Preview Systems
based on a ratio designed so that the former security holders of Preview
Software and Portland Software would each own approximately 50% of Preview
Systems on a fully-diluted basis.

    In April 1998, Preview Software issued and sold an aggregate of 299,401
shares of its series D preferred stock at a price of $6.68 per share to several
investors, including the following persons or entities:

  .  28,839 shares to the Donald L. Lucas Profit Sharing Trust, with whom
     Mr. Lucas, one of our directors, is affiliated;

  .  18,713 shares to Mr. Rivers, one of our directors and an owner of more
     than 5% of our securities;

  .  64,522 shares, to Telos Venture Partners, an entity which beneficially
     holds more than 5% of our securities and with whom Mr. Bourbon, one of
     our directors, is affiliated; and

  .  42,879 shares to Teton Capital Company, with whom Mr. Lucas is
     affiliated.

    In September and October 1998, we issued and sold an aggregate of 1,162,518
shares of our series F preferred stock at a price of $5.00 to several
investors, including the following persons or entities:

  .  14,089 shares to the Donald L. Lucas Profit Sharing Trust;

  .  100,000 shares to Olympic Venture Partners, an entity which
     beneficially holds more than 5% of our securities and with whom Mr.
     Langeler, one of our directors, is affiliated;

  .  26,511 shares to Sand Hill Financial Company, with whom Mr. Lucas is
     affiliated;

  .  144,000 shares to Telos Venture Partners; and

  .  47,900 to Teton Capital Company.

    In July 1999, we issued and sold an aggregate of 4,312,448 shares of our
series G preferred stock at a price of $6.72 to several investors, including
the following persons or entities:

  .  14,881 shares to the Donald L. Lucas Profit Sharing Trust;

  .  44,643 shares to Olympic Venture Partners;

  .  1,190,476 shares to SOFTBANK Technology entities, entities which
     beneficially hold more than 5% of our securities and with which Mr.
     Rieschel and Ms. Roizen, two of our directors, are affiliated;

  .  37,202 shares to Telos Venture Partners; and

  .  892,857 shares to Whiting & Co. Guaranty Trust entities, entities which
     beneficially hold more than 5% of our securities.

    Since our inception, we have, from time to time, issued and sold shares of
our common stock and granted options to purchase common stock to our employees,
directors and consultants.


                                       55
<PAGE>

Transactions with Directors and Officers

    In September 1998, we provided a guarantee to a $300,000 loan from a
commercial bank to Dr. Pluvinage, our President and Chief Executive Officer. As
of July 31, 1999, this loan is currently outstanding. In connection with this
guarantee, Dr. Pluvinage has pledged to us all of his vested shares of our
capital stock.

    In July 1999, we sold 125,000 and 150,000 shares of our common stock at a
price of $6.50 to Dr. Pluvinage, our President and Chief Executive Officer, and
Mr. Solso, our Vice President, Chief Financial Officer, respectively. Under the
terms of these sales, we can repurchase a certain number of their shares of
stock if their employment is terminated voluntarily or involuntarily, subject
to a monthly vesting schedule. In addition, we have a right of first refusal to
purchase any or all of their shares if they decide to sell or transfer their
shares. Further, these shares may be subject to a 180 day lock-up period in the
event of an initial public offering upon the request of the underwriters or us.
In connection with these sales, Dr. Pluvinage and Mr. Solso executed full-
recourse promissory notes in the respective amounts of $812,475 and $974,970 in
favor of Preview with annual interest rates of 5.32%. These notes become due
and payable upon the earlier of July 2002 or termination of their employment
with us. Dr. Pluvinage and Mr. Solso have also entered into pledge and security
agreements granting us a security interest in these shares.

                                       56
<PAGE>

                            PRINCIPAL STOCKHOLDERS

    The following table sets forth information with respect to the beneficial
ownership of the shares of our common stock on a fully-diluted basis as of
July 31, 1999, and as adjusted to reflect the sale of common stock offered
hereby, as to:

  .  each person (or group of persons) who is known by us to own
     beneficially more than 5% of our common stock on a fully-diluted basis;

  .  each director and each of the executive officers listed on the Summary
     Compensation Table; and

  .  all directors and executive officers of Preview as a group.

<TABLE>
<CAPTION>
                                       Shares Beneficially  Shares Beneficially
                                              Owned                Owned
                                       Prior to Offering(2) After Offering(2)(4)
                                       -------------------- --------------------
Name and Address(1)                     Number   Percent(3)      Percent(3)
-------------------                    --------- ---------- --------------------
<S>                                    <C>       <C>        <C>
5% Stockholders
SOFTBANK Technology Ventures (5).....  1,190,476   10.05%
  333 W. San Carlos St., Suite 1225
  San Jose, CA 95110
Whiting & Co. Morgan Guaranty Trust
  Co. (6)............................    892,857    7.54
  522 Fifth Avenue
  New York, NY 10036
Telos Venture Partners, LP (7).......    723,262    6.10
  2350 Mission College Boulevard
  Suite 1070
  Santa Clara, CA 95054
Van Wagoner Capital Management.......    668,155    5.64
  345 California Street, Suite 2450
  San Francisco, CA 94104
Olympic Venture Partners and
  Affiliates (8).....................    604,886    5.07
  340 Oswego Point Drive, Suite 200
  Lake Oswego, OR 97503..............

Named Executive Officers and
  Directors
Vincent Pluvinage (9)................    450,000    3.78
Frank A. Tycksen, Jr. (10)...........    138,194    1.16
Cay S. Hortsmann (11)................     61,754       *
David Gregory Kott (12)..............     50,007       *
Michel A. Floyd (13).................     45,785       *
Jo Ann Heidi Roizen (5)..............  1,209,851   10.20
Gary Rieschel (5)....................  1,190,476   10.05
Bruce R. Bourbon (7).................    723,262    6.10
R. Douglas Rivers (14)...............    632,419    5.34
Gerard H. Langeler (8)...............    604,886    5.07
Donald L. Lucas (15).................    483,752    4.08
All executive officers and directors
  as a group
(16 persons) (16)....................  4,602,133   38.07
</TABLE>
--------
  *  Less than 1%.
 (1) Except as otherwise noted, the address of each person listed in the table
     is c/o Preview Systems, Inc., 1601 South DeAnza Boulevard, Suite 100,
     Cupertino, CA 95014, and the persons named in the table have sole voting
     and investment power with respect to all shares of common stock shown as
     beneficially owned by them, subject to community property laws where
     applicable.
 (2) Beneficial ownership is determined in accordance with the rules of the
     Securities and Exchange Commission. The number of shares beneficially
     owned by a person includes shares of common stock subject to options
     and/or warrants held by that person that are currently exercisable or
     exercisable within 60 days of July 31, 1999. Shares issuable pursuant to
     such options or warrants are deemed outstanding for

                                      57
<PAGE>

    computing the percentage ownership of the person holding such options or
    warrants but are not deemed outstanding for the purposes of computing the
    percentage ownership of each other person.
 (3) Percentage of shares beneficially owned is based on 11,846,433 shares of
     common stock outstanding as of July 31, 1999, assuming conversion of all
     shares of preferred stock into common stock, and      shares of common
     stock to be outstanding upon the consummation of this offering.
 (4) Assumes underwriters do not exercise their over-allotment option.
 (5) Mr. Rieschel and Ms. Roizen are general partners of SOFTBANK. Each of
     them disclaims beneficial ownership of these shares except to the extent
     of his or her pecuniary interest in them. Ms. Roizen also has 19,375
     shares exercisable under outstanding stock options within 60 days of July
     31, 1999, and this number is reflected opposite Ms. Roizen's name.
 (6) Consists of:
   .  625,000 shares held directly by Whiting & Co. Morgan Guaranty Trust Co.
      of NY as Trustee of the Commingled Pension Trust Fund;
   .  133,929 shares held directly by Bost & Co. Morgan Guaranty Trust Co. of
      NY as Investment Manager and Agent for The Alfred P. Sloan Foundation;
      and
   .  133,928 shares held directly by Whiting & Co. Morgan Guaranty Trust Co.
      of NY as Trustee of the Multi-Market Special Investment Trust Fund.
 (7) Includes a warrant to purchase 8,789 shares of common stock. Mr. Bourbon
     is a Managing Member of Telos Management LLC, the General Partner of
     Telos Venture Partners, LP. He disclaims beneficial ownership of these
     shares except to the extent of his pecuniary interest in the shares.
 (8) Consists of:
   .  510,123 shares held directly and warrants to purchase 72,583 shares of
      common stock held by Olympic Venture Partners III, LP; and
   .  18,464 shares held directly and warrants to purchase 3,716 shares of
      common stock held by OVP III Entrepreneurs Fund.
    Mr. Langeler is a General Partner of OVMC III, the General Partner of
    Olympic Venture Partners III, LP and OVP III Entrepreneurs Fund. He
    disclaims beneficial ownership of these shares except to the extent of his
    pecuniary interest in them.
 (9) Includes 50,000 shares exercisable under outstanding stock options within
     60 days of July 31, 1999.
(10) Includes 18,995 shares exercisable under outstanding stock options within
     60 days of July 31, 1999, and 7,773 shares held by members of Mr.
     Tycksen's family.
(11) Includes 30,582 shares exercisable under outstanding stock options within
     60 days of July 31, 1999.
(12) Includes 29,460 shares exercisable under outstanding stock options within
     60 days of July 31, 1999.
(13) Includes 40,603 shares exercisable under outstanding stock options within
     60 days of July 31, 1999.
(14) Includes a warrant to purchase 3,750 shares of common stock. Also
     includes 8,375 shares over which Dr. Rivers has voting power because of
     his capacity as co-trustee of three trusts containing shares of our
     common stock, for which he disclaims beneficial ownership.
(15) Consists of:
   .  57,601 shares held by the Donald L. Lucas Profit Sharing Trust dated
      1/1/84;
   .  62,500 shares held directly and a warrant to purchase 5,859 shares of
      common stock held by the Donald L. Lucas & Lygia S. Lucas Trust dated
      12/3/84;
   .  102,792 shares held by Sand Hill Financial Corporation; and
   .  255,000 shares held by Teton Capital Company.
    Mr. Lucas is the trustee for the Donald L. Lucas Profit Sharing Trust
    dated 1/1/84 and the Donald L. Lucas & Lygia S. Lucas Trust dated 12/3/84.
    He also is a General Partner of Teton Capital Company and Sand Hill
    Financial Corporation. He disclaims beneficial ownership of these shares
    except to the extent of his pecuniary interest in them.
(16) Includes 241,238 shares exercisable under outstanding stock options
     within 60 days of July 31, 1999 and warrants to purchase 94,697 shares of
     common and preferred stock.

                                      58
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

    Following the closing of the sale of the shares offered hereby, our
authorized capital stock will consist of 75,000,000 shares of common stock,
$0.0002 par value per share, and 5,000,000 shares of undesignated preferred
stock, $0.0002 par value per share. All currently designated shares of
preferred stock will be converted into common stock upon the closing of this
offering.

Common Stock

    As of July 31, 1999, there were 11,846,433 shares of our common stock
outstanding that were held of record by approximately 190 stockholders after
giving effect to the conversion of our preferred stock into common stock at a
one-to-one ratio, and assuming no exercise or conversion of outstanding
convertible securities after July 31, 1999. There will be         of common
stock outstanding (assuming no exercise of the underwriters' over-allotment
option and no exercise or conversion of outstanding convertible securities
after July 31, 1999) after giving effect to the sale of the shares of common
stock offered hereby.

    The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably the dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available therefor.
See "Dividend Policy." In the event of a liquidation, dissolution or winding up
of Preview, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior rights of
preferred stock, if any, then outstanding. The common stock has no preemptive
or conversion rights or other subscription rights. There are no redemption or
sinking fund provisions available to the common stock. All outstanding shares
of common stock are fully paid and non-assessable.

Preferred Stock

    Upon the closing of the offering, we will be authorized to issue 5,000,000
shares of undesignated preferred stock. The board of directors will have the
authority to issue the undesignated preferred stock in one or more series and
to determine the powers, preferences and rights and the qualifications,
limitations or restrictions granted to or imposed upon any wholly unissued
series of undesignated preferred stock and to fix the number of shares
constituting any series and the designation of the series, without any further
vote or action by the stockholders. The issuance of preferred stock may have
the effect of delaying, deferring or preventing a change in control of the
company without further action by the stockholders and may adversely affect the
voting and other rights of the holders of common stock. At present, we have no
plans to issue any shares of preferred stock.

Warrants

    At July 31, 1999, there were warrants outstanding to purchase an aggregate
of 170,450 shares of common stock at a weighted average exercise price of $1.53
per share, an aggregate of 25,430 shares of series C preferred stock at an
exercise price of $3.20 per share, an aggregate of 217,233 shares of series E
preferred stock at an exercise price of $12.88 per share, an aggregate of 2,700
shares of series F preferred stock at an exercise price of $5.00 per share, and
an aggregate of 76,682 shares of series G preferred stock at an exercise price
of $6.72 per share.

    Of these warrants, the warrants to purchase 170,450 shares of common stock
and the warrants to purchase 76,682 shares of series G preferred stock will
expire upon the consummation of this offering if not exercised prior to that
time. The warrants to purchase shares of preferred stock that survive the
closing of this offering will convert into warrants to purchase shares of
common stock on the closing of this offering on a one-to-one basis. Generally,
the warrants contain provisions for the adjustment of the exercise price and
the aggregate number of shares issuable upon the exercise of the warrant under
certain circumstances, including stock dividends, stock splits,
reorganizations, reclassifications, consolidations and certain dilutive
issuances of securities at prices below the then existing warrant exercise
price.

                                       59
<PAGE>

Registration Rights

    The holders of 8,788,273 shares of common stock (assuming the conversion of
all outstanding preferred stock upon completion of this offering) and the
holders of 492,495 shares issuable upon exercise of warrants, (referred to in
this prospectus as registrable securities), or their transferees are entitled
to certain rights with respect to the registration of the shares under the
Securities Act. These rights are provided under the terms of an agreement
between us and the holders of these securities dated July 2, 1999, as amended.
Subject to limitations in the agreement, the holders of at least 30% of the
registrable securities may require, on two occasions beginning six months after
the date of this prospectus, that we use our best efforts to register the
registrable securities for public resale if Form S-3 is not available, provided
that the aggregate offering price to the public is at least $10,000,000. If we
register any of our common stock either for our own account or for the account
of other security holders after the date of this prospectus, the holders of
registrable securities are entitled to include their shares of common stock in
that registration, subject to the ability of the underwriters to limit the
number of shares included in the offering. If the holders of registrable
securities are limited in the amount of shares they may sell in an offering
subsequent to this offering, no one is allowed to sell shares other than us or
the holders of registrable securities, if any, requesting registration. The
holders of registrable securities may also require us, not more than twice in
any twelve-month period, to register all or a portion of the registrable
securities on Form S-3 when the use of that form becomes available to us,
provided, among other limitations, that the proposed aggregate selling price,
net of any underwriters' discounts or commissions, is at least $1,000,000. We
will be responsible for paying all registration expenses, including the
reasonable expense of one special counsel of the selling stockholders, and the
holders selling their shares will be responsible for paying all selling
expenses. See "Shares Eligible for Future Sale."

Delaware Anti-Takeover Law and Charter and Bylaw Provisions

    Provisions of Delaware law and our charter documents could make the
acquisition of Preview and the removal of incumbent officers and directors more
difficult. These provisions are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of Preview to negotiate with us first. We
believe that the benefits of increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure Preview outweigh the disadvantages of discouraging these
proposals because, among other things, negotiation of these proposals could
result in an improvement of their terms.

    We are subject to the provisions of Section 203 of the Delaware law. In
general, the statute prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless, subject to exceptions, the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years prior, did
own, 15% or more of the corporation's voting stock. These provisions may have
the effect of delaying, deferring or preventing a change in control of Preview
without further action by the stockholders.

    Our amended and restated certificate of incorporation provides that
stockholder action can be taken only at an annual or special meeting of
stockholders and may not be taken by written consent. In addition, our amended
and restated certificate of incorporation provides that our board of directors
shall be classified, in which the directors are subject to re-election on a
rotating basis rather than every year. The bylaws provide that special meetings
of stockholders can be called only by the board of directors, the Chairman of
the Board or the President. Moreover, the bylaws set forth an advance notice
procedure with regard to the nomination, other than by or at the direction of
the board of directors, of candidates for election as directors and with regard
to business to be brought before a meeting of stockholders. The foregoing
provisions could have the effect of preventing a change in control of Preview
or making removal of management more difficult. These provisions could also
have the effect of decreasing the market price of the common stock, and
delaying, deferring or preventing a change in control of Preview without any
further action by our stockholders.

                                       60
<PAGE>

    Our stock option and stock purchase plans generally provide for assumption
of the plans or substitution of an equivalent option of a successor corporation
or, alternatively, at the discretion of the board of directors, exercise of
some or all of the stock options, including non-vested options, or acceleration
of vesting of options issued pursuant to stock grants, upon a change of control
or similar event. The board of directors has authority to issue up to 5,000,000
shares of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares without any further vote
or action by the stockholders. The rights of the holders of the 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 have the effect of
making it more difficult for a third party to acquire a majority of our
outstanding voting stock, thereby delaying, deferring or preventing a change in
control of Preview. Furthermore, the preferred stock may have other rights,
including economic rights senior to the common stock, and as a result, the
issuance of the preferred stock could have a material adverse effect on the
market value of the common stock. We have no present plan to issue shares of
preferred stock.

Transfer Agent and Registrar

    The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company. The transfer agent's address and telephone number is
40 Wall Street, New York, New York 10005, (212) 936-5100.

                                       61
<PAGE>

                        SHARES ELIGIBLE FOR FUTURE SALE

    Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. Furthermore, only a limited number
of shares will be available for sale shortly after this offering because of
contractual and legal restrictions on resale. After these restrictions lapse,
sales of substantial amounts of our common stock in the public market could
adversely affect the prevailing market price and our ability to raise equity
capital in the future.

    Based on shares outstanding as of July 31, 1999, upon completion of this
offering, we will have      outstanding shares of common stock. Of these
shares, the      shares sold in the offering (plus any shares issued upon
exercise of the underwriters' overallotment option) and 20,730 shares not
subject to a lock-up agreement will be freely tradable without restriction
under the Securities Act, unless purchased by our "affiliates" as that term is
defined in Rule 144 under the Securities Act, which generally includes
officers, directors or 10% stockholders.

    The remaining 11,825,703 shares outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act. These shares may be
sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act, which are summarized below. Sales of these shares in the
public market, or the availability of such shares for sale, could adversely
affect the market price of our common stock.

    Our stockholders have entered into lock-up agreements in which they have
agreed that they will not offer, sell, contract to sell or grant any option to
purchase or otherwise dispose of our common stock or any securities exercisable
for or convertible into our common stock owned by them for a period of 180 days
after the date of this prospectus without the prior written consent of
BancBoston Robertson Stephens. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, shares subject to lock-up agreements may not be sold
until such agreements expire or are waived by BancBoston Robertson Stephens.
Taking into account the lock-up agreements, and assuming BancBoston Robertson
Stephens does not release stockholders from these agreements, the following
shares will be eligible for sale in the public market at the following times:

  .  beginning on the effective date of this prospectus, only the shares
     sold in the offering will be immediately available for sale in the
     public market;

  .  beginning 181 days after the date of this prospectus, approximately
     7,022,608 shares will be eligible for sale pursuant to Rules 144,
     144(k) and 701; and

  .  the remaining shares will be eligible for sale pursuant to Rule 144 at
     various times thereafter.

    Under Rule 144, the number of shares that may be sold by affiliates are
subject to volume restrictions as described below. In general, under Rule 144,
and beginning after the expiration of the lock-up agreements, a person (or
persons whose shares are aggregated) who has beneficially owned restricted
shares for at least one year would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of:

  .  one percent of the number of shares of common stock then outstanding
     (which will equal approximately      shares immediately after the
     offering); or

  .  the average weekly trading volume of the common stock during the four
     calendar weeks preceding the sale. Sales under Rule 144 are also
     subject to manner of sale provisions and notice requirements and to the
     availability of current public information about us.

    Under Rule 144(k), a person who is not deemed to have been an affiliate of
us at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two

                                       62
<PAGE>

years, is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.

    The holders of approximately 8,788,273 shares of common stock and warrants
to purchase 492,495 shares of common stock or their transferees are also
entitled to certain rights with respect to registration of their shares of
common stock for offer or sale to the public. If the holders, by exercising
their registration rights, cause a large number of shares to be registered and
sold in the public market, the sales could have a material adverse effect on
the market price for our common stock.

    As a result of the lock-up agreements, all of our employees holding common
stock or stock options may not sell shares acquired upon exercise for 180 days
after the date of this prospectus. Beginning 181 days after the date of this
prospectus, any employee, officer or director of or consultant to us who
purchased shares pursuant to a written compensatory plan or contract may be
entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell shares in reliance on Rule 144 without having to comply
with the holding period, public information, volume limitation or notice
provisions of Rule 144.

    We intend to file registration statements under the Securities Act as
promptly as possible after the effective date to register shares to be issued
pursuant to our employee benefit plans. As a result, any options exercised
under our stock plan after the effectiveness of the registration statement will
also be freely tradable in the public market, except that shares held by
affiliates will still be subject to the volume limitation, manner of sale,
notice and public information requirements of Rule 144 unless otherwise
resalable under Rule 701. As of July 31, 1999, there were outstanding options
for the purchase of 2,331,840 shares, of which options to purchase 700,934
shares were exercisable. No shares have been issued to date under our 1999
employee stock purchase plan or 1999 directors' plan.

                                       63
<PAGE>

                                  UNDERWRITING

    The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated, SoundView Technology Group, Inc. and E*OFFERING Corp.,
have severally agreed with us, subject to the terms and conditions set forth in
the underwriting agreement, to purchase from us the number of shares of common
stock set forth opposite their respective names below. The underwriters are
committed to purchase and pay for all such shares if any are purchased.

<TABLE>
<CAPTION>
                           Underwriter                          Number of Shares
                           -----------                          ----------------
   <S>                                                          <C>
   BancBoston Robertson Stephens Inc. ........................
   Dain Rauscher Wessels......................................
   SoundView Technology Group, Inc. ..........................
   E*OFFERING Corp............................................
                                                                     -----
     Total....................................................
                                                                     =====
</TABLE>

    The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this prospectus and to certain dealers at this price less
a concession not in excess of $    per share, of which $    may be reallowed to
other dealers. After the initial public offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives. No
such reduction shall change the amount of proceeds to be received by us as set
forth on the cover page of this prospectus. The common stock is offered by the
underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.

    The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

    Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to        additional shares of common stock at the same price per
share as we will receive for the        shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage of the additional
shares that the number of shares of common stock to be purchased by it shown in
the above table represents as a percentage of the        shares offered hereby.
If purchased, the additional shares will be sold by the underwriters on the
same terms as those on which the        shares are being sold. We will be
obligated, pursuant to the option, to sell shares to the extent the option is
exercised. The underwriters may exercise the option only to cover over-
allotments made in connection with the sale of the shares of common stock
offered hereby. If such option is exercised in full, the total public offering
price, underwriting discounts and commissions and proceeds to us will be $
million, $    million and $    million, respectively.

    Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and us against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.

    Lock-Up Agreements. Each of our officers and directors and certain of our
stockholders have agreed with the representative, for a period of 180 days
after the date of this prospectus, subject to certain exceptions,

                                       64
<PAGE>

not to offer to sell, contract to sell, or otherwise sell, dispose of, loan,
pledge or grant any rights with respect to, any shares of common stock, or any
securities convertible into or exchangeable for shares of common stock, now
owned directly by such holders or with respect to which they now have the power
of disposition, without the prior written consent of BancBoston Robertson
Stephens. However, BancBoston Robertson Stephens may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to the lock-up agreement. There are no agreements between the
representatives and any of our stockholders providing consent to the sale of
shares prior to the expiration of the period ending 180 days after the date of
this prospectus.

    Future Sales. In addition, we have agreed that during the 180 days after
the date of this prospectus, we will not, subject to certain exceptions,
without the prior written consent of BancBoston Robertson Stephens:

  .  Consent to the disposition of any shares held by stockholders subject
     to lock-up agreements prior to the expiration of the period ending 180
     days after the date of this prospectus; or

  .  Issue, sell, contract to sell or otherwise dispose of any shares of
     common stock or any securities convertible into, exercisable for or
     exchangeable for shares of common stock, other than the sale of shares
     in this offering, the issuance of common stock upon the exercise of
     outstanding options or the issuance of options under our existing stock
     option and incentive plans.

    Listing. We have applied to have our common stock approved for listing on
the Nasdaq National Market under the symbol "PRVW."

    No Prior Public Market. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price
for the common stock offered hereby will be determined through negotiations
between us and the representatives. Among the factors to be considered in such
negotiations are prevailing market conditions, certain of our financial
information, market valuations of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential, the present state of our development and other factors deemed
relevant.

    Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Exchange Act, certain persons participating
in this offering may engage in transactions, including stabilizing bids,
syndicate covering transactions or the imposition of penalty bids, that may
have the effect of stabilizing or maintaining the market price of the common
stock at a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for, or the purchase of, the common stock on behalf
of the underwriters for the purpose of fixing or maintaining the price of the
common stock. A "syndicate covering transaction" is the bid for, or the
purchase of, the common stock on behalf of the underwriters to reduce a short
position incurred by the underwriters in connection with this offering. A
"penalty bid" is an arrangement permitting the representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with this offering if the common stock originally sold by such
underwriter or syndicate member is purchased by the representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such underwriter or syndicate member. The representatives have advised us that
such transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.

    Directed Share Program. At our request, the underwriters have reserved up
to        shares of common stock to be issued by us and offered hereby for
sales, at the initial public offering price, to our directors, officers,
employees, business associates and other related persons. Directors and
officers who purchase the reserved shares are subject to resale restrictions
promulgated by the Securities and Exchange Commission. The number of shares of
common stock available for sale to the general public will be reduced to the
extent such individuals purchase such reserved shares. Any reserved shares
which are not so purchased will be offered by the underwriters to the general
public on the same basis as the other shares offered hereby.

                                       65
<PAGE>

                                 LEGAL MATTERS

    The validity of the common stock offered by this prospectus will be passed
on for us by Venture Law Group, A Professional Corporation, Menlo Park,
California. Certain legal matters in connection with this offering will be
passed on for the underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. Attorneys employed with
Venture Law Group and an entity affiliated with Venture Law Group hold an
aggregate of 24,382 shares of our common stock.

                                    EXPERTS

    The consolidated financial statements of Preview Systems, Inc. included in
this registration statement as of December 31, 1997 and 1998 and for the three-
year period ended December 31, 1998, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.

    The financial statements of Portland Software, Inc. as of December 31, 1996
and 1997 and for each of the years in the two-year period ended December 31,
1997 have been included in this registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein and upon the authority of said firm as experts in accounting
and auditing.

                             ADDITIONAL INFORMATION

    We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits thereto.
For further information with respect to us and the common stock offered in this
offering, we refer you to the registration statement and to the attached
exhibits. Statements made in this prospectus concerning the contents of any
document referred to in this prospectus are not necessarily complete. With
respect to each document filed as an exhibit to the registration statement, we
refer you to the exhibit for a more complete description of the matter
involved. You may inspect our registration statement and the attached exhibits
without charge at the public reference facilities maintained by the Securities
and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the regional offices of the Commission located at Seven World Trade Center,
13th Floor, New York, NY 10048, and the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain copies of
all or any part of our registration statement from the Securities and Exchange
Commission upon payment of prescribed fees. You may also inspect reports, proxy
and information statements and other information regarding registrants that
file electronically with the Securities and Exchange Commission without charge
at a Web site maintained by the Securities and Exchange Commission at
http://www.sec.gov.

                                       66
<PAGE>

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S>                                                                        <C>
Report of Independent Public Accountants--Preview Systems, Inc. and
  Subsidiaries...........................................................   F-2
Preview Systems, Inc. and Subsidiaries Consolidated Balance Sheets,
  December 31, 1997 and 1998 and June 30, 1999 (unaudited)...............   F-3
Preview Systems, Inc. and Subsidiaries Consolidated Statements of
  Operations, Years Ended December 31, 1996, 1997 and 1998 and Six Months
  Ended June 30, 1998 (unaudited) and 1999 (unaudited)...................   F-4
Preview Systems, Inc. and Subsidiaries Consolidated Statements of
  Stockholders' Equity, Years Ended December 31, 1996, 1997 and 1998 and
  Six Months Ended June 30, 1999 (unaudited).............................   F-5
Preview Systems, Inc. and Subsidiaries Consolidated Statements of Cash
  Flows, Years Ended December 31, 1996, 1997 and 1998 and Six Months
  Ended June 30, 1998 (unaudited) and 1999 (unaudited)...................   F-6
Preview Systems, Inc. and Subsidiaries, Notes to Financial Statements....   F-7
Independent Auditors' Report--Portland Software, Inc.....................  F-25
Portland Software, Inc. Balance Sheets, December 31, 1996 and 1997.......  F-26

Portland Software, Inc. Statements of Operations, Years Ended December
  31, 1996 and 1997......................................................  F-27
Portland Software, Inc. Statements of Shareholders' Equity, Years Ended
  December 31, 1996 and 1997.............................................  F-28
Portland Software, Inc. Statements of Cash Flows, Years Ended December
  31, 1996 and 1997......................................................  F-29
Portland Software, Inc. Notes to Financial Statements....................  F-30
Preview Systems, Inc. and Subsidiaries Pro Forma Consolidated Statement
  of Operations, Year Ended December 31, 1998............................  F-40
Preview Systems, Inc. and Subsidiaries Notes to Pro Forma Consolidated
  Statement of Operations................................................  F-41
</TABLE>

                                      F-1
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Preview Systems, Inc.:

    We have audited the accompanying consolidated balance sheets of Preview
Systems, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Preview Systems, Inc. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.

Portland, Oregon
April 2, 1999, except for Note 12 as to which the date is September 14, 1999

                                      F-2
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                   December 31,
                                                 -----------------   June 30,
                                                  1997      1998       1999
                                                 -------  --------  -----------
                                                                    (unaudited)
<S>                                              <C>      <C>       <C>
ASSETS
Current assets:
  Cash and cash equivalents..................... $ 2,489  $  4,886   $    427
  Accounts receivable, net of allowance for
    uncollectible accounts of $0, $0, and $75,
    respectively................................      70       152      1,156
  Prepaid expenses..............................     130       360        426
  Other current assets..........................      --        55        156
                                                 -------  --------   --------
     Total current assets.......................   2,689     5,453      2,165
Property and equipment, net.....................     352       820        883
Patents, net....................................      --       922        794
Acquired technology, net........................      --     3,881      3,119
Other intangible assets, net....................      --       917        693
Other assets....................................      81       497        496
                                                 -------  --------   --------
     Total assets............................... $ 3,122  $ 12,490   $  8,150
                                                 =======  ========   ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Line of credit................................ $    --  $     --   $    700
  Notes payable.................................      --        50      1,180
  Current portion of long-term debt.............      --       157        157
  Current portion of capital lease
    obligations.................................       5       134        194
  Accounts payable..............................     183       442      1,241
  Accrued liabilities...........................     210       840        709
  Deferred revenue..............................      --       809      1,509
                                                 -------  --------   --------
     Total current liabilities..................     398     2,432      5,690
Long-term debt, less current portion............      --       302        223
Capital lease obligations, less current
  portion.......................................      11       133        220
Deferred revenue, less current portion..........      --     1,268        902
Other liabilities...............................      --       349        348
                                                 -------  --------   --------
     Total liabilities..........................     409     4,484      7,383
Commitments and contingencies (note 6)
Stockholders' equity:
  Preferred stock, $0.0002 per share par value:
   Authorized--5,253; issued and outstanding--
     2,176, 4,476 and 4,476 (unaudited) shares,
     respectively; aggregate liquidation
     preference of $5,279, $23,885 and $23,885
     (unaudited)................................      --        --         --
  Common stock, $0.0002 per share par value:
   Authorized--10,506 shares; issued and
     outstanding 582, 2,684 and 2,728
     (unaudited)................................      --        --         --
  Additional paid-in capital....................   5,520    22,115     22,364
  Stockholder notes receivable..................    (100)     (125)      (125)
  Deferred compensation.........................     (95)      (96)      (148)
  Accumulated deficit...........................  (2,612)  (13,888)   (21,324)
                                                 -------  --------   --------
     Total stockholders' equity.................   2,713     8,006        767
                                                 -------  --------   --------
     Total liabilities and stockholders'
       equity................................... $ 3,122  $ 12,490   $  8,150
                                                 =======  ========   ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-3
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                Six Months
                                   Year Ended December 31,    Ended June 30,
                                   -------------------------  ----------------
                                    1996    1997      1998     1998     1999
                                   ------  -------  --------  -------  -------
                                                                (unaudited)
<S>                                <C>     <C>      <C>       <C>      <C>
Revenues
  Network transaction fees........ $  148  $   262  $    435  $   111  $   742
  Services........................     --       --       175       --      479
                                   ------  -------  --------  -------  -------
     Total revenues...............    148      262       610      111    1,221
Operating expenses:
  Research and development........     34    1,016     2,978    1,091    3,080
  Sales and marketing.............    172      822     2,915      980    2,494
  General and administrative......    184      785     3,127    1,186    2,048
  Amortization of intangibles.....     --       --       866       --    1,038
  Acquired in-process research
    and development...............     --       --     2,091       --       --
                                   ------  -------  --------  -------  -------
     Total operating expenses.....    390    2,623    11,977    3,257    8,660
                                   ------  -------  --------  -------  -------
Loss from operations..............   (242)  (2,361)  (11,367)  (3,146)  (7,439)
Other income (expense):
  Interest expense................     --      (40)      (37)      (8)     (64)
  Interest income.................     --       21       123       41       65
  Other, net......................     --       --         5        2        2
                                   ------  -------  --------  -------  -------
     Total other income
       (expense)..................     --      (19)       91       35        3
                                   ------  -------  --------  -------  -------
Net loss.......................... $ (242) $(2,380) $(11,276) $(3,111) $(7,436)
                                   ======  =======  ========  =======  =======
Basic and diluted net loss per
  share........................... $(0.69) $ (6.45) $  (7.55) $ (4.60) $ (2.75)
                                   ======  =======  ========  =======  =======
Shares used in per share
  calculations....................    350      369     1,494      676    2,708
                                   ======  =======  ========  =======  =======
</TABLE>


  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-4
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                            Preferred
                              Stock     Common Stock  Additional Stockholder                              Total
                          ------------- -------------  Paid-In      Notes      Deferred   Accumulated Stockholders'
                          Shares Amount Shares Amount  Capital   Receivable  Compensation   Deficit      Equity
                          ------ ------ ------ ------ ---------- ----------- ------------ ----------- -------------
<S>                       <C>    <C>    <C>    <C>    <C>        <C>         <C>          <C>         <C>
Balance at December 31,
 1995 (see Note 1)......     --   $--      --   $--    $     6      $  --       $  --      $     10     $     16
 Issuance of common
  stock to predecessor
  entity (Note 1).......     --    --     350    --         66         --          --            --           66
 Issuance of Series A
  preferred stock at
  $1.00 per share.......    160    --      --    --        160         --          --            --          160
 Net loss...............     --    --      --    --         --         --          --          (242)        (242)
                          -----   ---   -----   ---    -------      -----       -----      --------     --------
Balance at December 31,
 1996...................    160    --     350    --        232         --          --          (232)          --
 Issuance of Series A
  preferred stock at
  $1.00 per share.......    414    --      --    --        413         --          --            --          413
 Issuance of Series B
  preferred stock at
  $2.00 per share, net
  of issuance costs.....    352    --      --    --        693         --          --            --          693
 Issuance of Series C
  preferred stock at
  $3.20 per share, net
  of issuance costs.....  1,250    --      --    --      3,916         --          --            --        3,916
 Fair value of Series C
  preferred stock
  warrants issued.......     --    --      --    --         40         --          --            --           40
 Exercise of common
  stock options for
  cash..................     --    --      32    --         31         --          --            --           31
 Exercise of common
  stock options for
  notes receivable......     --    --     200    --        100       (100)         --            --           --
 Compensation related to
  issuance of stock
  options...............     --    --      --    --         95         --         (95)           --           --
 Net loss...............     --    --      --    --         --         --          --        (2,380)      (2,380)
                          -----   ---   -----   ---    -------      -----       -----      --------     --------
Balance at December 31,
 1997...................  2,176    --     582    --      5,520       (100)        (95)       (2,612)       2,713
 Issuance of Series D
  preferred stock at
  $6.68 per share, net
  of issuance costs.....    299    --      --    --      1,965         --          --            --        1,965
 Acquisition of Portland
  Software, Inc.:
  Issuance of Series E
   preferred stock......    838    --      --    --      4,190         --          --            --        4,190
  Issuance of common
   stock................     --    --   1,929    --      3,857         --          --            --        3,857
  Issuance of stock
   options and
   warrants.............     --    --      --    --        732         --          --            --          732
 Issuance of Series F
  preferred stock at
  $5.00 per share, net
  of issuance costs.....  1,163    --      --    --      5,685         --          --            --        5,685
 Exercise of common
  stock options for cash
  and notes receivable..     --    --     118    --         61        (25)         --            --           36
 Issuance of common
  stock for patent
  rights................     --    --      55    --         55         --          --            --           55
 Compensation related to
  issuance of stock
  options...............     --    --      --    --         50         --         (50)           --           --
 Amortization of
  deferred
  compensation..........     --    --      --    --         --         --          49            --           49
 Net loss...............     --    --      --    --         --         --          --       (11,276)     (11,276)
                          -----   ---   -----   ---    -------      -----       -----      --------     --------
Balance at December 31,
 1998...................  4,476    --   2,684    --     22,115       (125)        (96)      (13,888)       8,006
 Exercise of common
  stock options and
  warrants for cash.....     --    --      44    --         52         --          --            --           52
 Compensation related to
  issuance of stock
  options...............     --    --      --    --        199         --        (199)           --           --
 Amortization of
  deferred
  compensation..........     --    --      --    --         (2)        --         147            --          145
 Net loss...............     --    --      --    --         --         --          --        (7,436)      (7,436)
                          -----   ---   -----   ---    -------      -----       -----      --------     --------
Balance at June 30, 1999
 (unaudited)............  4,476   $--   2,728   $--    $22,364      $(125)      $(148)     $(21,324)    $    767
                          =====   ===   =====   ===    =======      =====       =====      ========     ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-5
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                      Year Ended December        Six Months
                                              31,              Ended June 30,
                                     ------------------------  ----------------
                                     1996    1997      1998     1998     1999
                                     -----  -------  --------  -------  -------
                                                                 (unaudited)
<S>                                  <C>    <C>      <C>       <C>      <C>
Cash flows from operating
  activities:
 Net loss..........................  $(242) $(2,380) $(11,276) $(3,111) $(7,436)
 Adjustments to reconcile net loss
   to net cash used in operating
   activities:
  Depreciation and amortization....      1       51     1,420      121    1,338
  Other non-cash expenses..........     64       40       135      105      145
  Acquired in-process research and
    development....................     --       --     2,091       --       --
  Changes in operating assets and
    liabilities:
   Related party receivable........    (25)      25        --       --       --
   Accounts receivable.............    (10)     (61)      315       13   (1,004)
   Prepaid expenses and other
     current assets................     (4)    (126)      (77)    (275)    (167)
   Other assets....................     --      (81)     (313)      (4)       1
   Accounts payable................     37      146       171       63      799
   Accrued liabilities and other
     liabilities...................     54      176      (120)      94     (132)
   Deferred revenue................     --       --     1,729       --      334
                                     -----  -------  --------  -------  -------
     Net cash used in operating
       activities..................   (125)  (2,210)   (5,925)  (2,994)  (6,122)
Cash flows from investing
  activities:
 Acquisition of Portland Software,
   Inc., net of cash acquired......     --       --       978       --       --
 Shareholder notes receivable......     --       --       (25)     (25)      --
 Purchases of intangibles..........     --       --      (200)    (200)      --
 Purchases of property and
   equipment.......................     (5)    (363)     (561)    (245)    (287)
                                     -----  -------  --------  -------  -------
     Net cash (used in) provided by
       investing activities........     (5)    (363)      192     (470)    (287)
Cash flows from financing
  activities:
 Borrowings under line of credit,
   notes payable and long-term
   debt............................     --      271       459      446    1,880
 Repayments under line of credit,
   notes payable and long-term
   debt............................     --       --       (50)      --     (129)
 Issuance of preferred stock, net..    160    4,730     7,650    1,965       --
 Issuance of common stock..........     --       32        61       31       52
 Proceeds from obligations under
   capital leases..................     --       --       108       38      235
 Payment of obligations under
   capital leases..................     --       (1)      (98)     (38)     (88)
                                     -----  -------  --------  -------  -------
     Net cash provided by financing
       activities..................    160    5,032     8,130    2,442    1,950
                                     -----  -------  --------  -------  -------
Net increase (decrease) in cash and
  cash equivalents.................     30    2,459     2,397   (1,022)  (4,459)
Cash and cash equivalents:
 Beginning of period...............     --       30     2,489    2,489    4,886
                                     -----  -------  --------  -------  -------
 End of period.....................  $  30  $ 2,489  $  4,886  $ 1,467  $   427
                                     =====  =======  ========  =======  =======
Supplemental Disclosure of Cash
  Flow Information:
 Cash paid for interest............  $  --  $    --  $     53  $    26  $    60
 Cash paid for income taxes........     --        1        11        4       11
Supplemental Disclosure of
  Significant Non-Cash
  Transactions:
 Conversion of promissory notes
   into Series C preferred stock...  $  --  $   271  $     --  $    --  $    --
 Issuance of common stock pursuant
   to notes receivable.............     --      100        --       --       --
 Assets acquired in exchange for
   note payable and other
   obligations.....................     --       --       509      509       --
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-6
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                         NOTES TO FINANCIAL STATEMENTS
                     (In thousands, except per share data)

1. Description of Business and Significant Accounting Policies:

 The Company

    On August 5, 1998, all of the outstanding equity interests of Preview
Software, Inc. ("Preview Software") and Portland Software, Inc. ("Portland
Software") were merged into Preview Systems, Inc. ("the Company" or "Preview").
In accordance with Accounting Principles Board Opinion No. 16, the stockholders
of Preview Software were determined to be the controlling stockholders of the
Company. Accordingly, the merger of Preview Software into the Company was
accounted for as a reorganization under common control with the underlying net
assets recorded by the Company at historical cost. The merger of Portland
Software into the Company was accounted for using the purchase method.
Therefore, the accompanying consolidated financial statements reflect the
operations of Preview Software for all periods presented and reflect the
operations of Portland Software since August 5, 1998.

    Preview Software was incorporated on November 22, 1996, in the state of
California. Effective December 1, 1996, Preview Software acquired intellectual
property, engineering information and net assets from Dynasoft Publishing
Corporation, an S corporation with one stockholder ("Dynasoft"). Dynasoft was
incorporated in October 1995. The Company issued 350 shares of common stock to
Dynasoft in exchange for the net assets of Dynasoft which were recorded at the
predecessor's net book value. Preview Software was the successor entity to
Dynasoft and, accordingly, the 1996 financial statements include the activity
of Dynasoft from January 1, 1996 until the transfer date.

    Preview Systems is a provider of an Internet-based infrastructure solution
that enables networks for distribution and licensing of digital goods. Through
their infrastructure solution and strategic relationships, the Company links
software publishers and music labels to their channel partners and end-users
worldwide, creating an end-to-end electronic distribution chain that manages
the e-commerce of digital goods and associated licensing rights.

 Unaudited Interim Financial Information

    All information subsequent to December 31, 1998, except as included in Note
12, is unaudited. In the opinion of management, the unaudited interim financial
statements as of June 30, 1998 and 1999 and for the six month periods then
ended have been prepared on the same basis as the annual financial statements
and reflect all adjustments that are necessary for the fair presentation of
results for the periods shown. The results of operations for such periods are
not necessarily indicative of the results expected for the full fiscal year or
for any interim period.

 Consolidated Statements

    The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Portland Software and Preview
Software. All significant intercompany transactions have been eliminated in
consolidation.

 Cash and Cash Equivalents

    For the purposes of the consolidated balance sheets and the consolidated
statements of cash flows, the Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. At
December 31, 1997 and 1998, the Company held its cash and cash equivalents in
checking, money market accounts and commercial paper.

                                      F-7
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


 Restricted Cash

    The Company's Chief Executive Officer has a note payable to a bank in the
amount of $300. The Chief Executive Officer has pledged all of his vested
shares of the Company's common stock to the Company in return for its guarantee
of his $300 note payable. The Company has a time deposit in the amount of $300,
as required security by the bank, which is included in other assets in the
accompanying consolidated balance sheets at December 31, 1998. A deposit of $53
related to the Company's facility lease is included in other assets in the
accompanying consolidated balance sheets. See Note 6.

 Fair Value of Financial Instruments

    The Company's financial instruments consist of accounts receivable,
accounts payable, capital leases, notes payable and long-term debt. For the
periods presented, the fair value of the Company's financial instruments
approximate their carrying value.

 Advertising

    The Company expenses the costs of advertising when such costs are incurred.
Advertising expense was $27, $152 and $111 for 1996, 1997 and 1998,
respectively.

 Use of Estimates

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

 Property and Equipment

    Property and equipment are stated at cost. Capitalized leased property is
recorded at the lesser of the present value of minimum lease payments or the
fair value of the leased property.

    Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the assets. Leasehold improvements
are amortized on the straight-line method over the shorter of the term of the
related lease or the estimated useful life of the asset. The estimated useful
lives of property and equipment are as follows:

<TABLE>
<CAPTION>
                                                                           Years
                                                                           -----
      <S>                                                                  <C>
      Computer equipment and software..................................... three
      Furniture and fixtures..............................................  five
      Leasehold improvements.............................................. three
      Communications hardware.............................................  five
</TABLE>

 Acquired Technology and Other Intangible Assets

    Intangible assets associated with acquisitions are amortized using the
straight-line method over the estimated useful lives of the related assets,
from two to three years. See Note 2. Accumulated amortization related to
acquired technology and other intangible assets was $0 and $848 at December 31,
1997 and 1998, respectively.

                                      F-8
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


 Patents

    Patents are stated at acquisition cost and are amortized using the
straight-line method over three to six years. Accumulated amortization related
to patents was $0 and $130 at December 31, 1997 and 1998, respectively.

 Impairment of Long-lived Assets

    The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of," which establishes
criteria for measuring impairment losses of long-lived assets and determining
when such losses should be recognized. An impairment loss would be recognized
when estimated future cash flows expected to result from the use of the asset
and its eventual disposition are less than its carrying amount. The Company has
not identified any such impairment losses to date.

 Revenue Recognition

    The Company generally provides rights to use of their solution and ongoing
customer support (upgrades, enhancements, phone support, patches, etc) through
annual licensing agreements. These agreements typically require the payment of
a transaction fee based on a percentage of value of sales that are fulfilled
utilizing the Company's solution. Customers typically commit to annual minimum
network transaction fees that entitles them to fulfill an agreed amount of
sales during the one-year term of the agreement. Some or all of the minimum
network transaction fees are due upon execution of the agreement. The Company
records deferred revenue and is recognizing the minimum network transaction fee
on a straight-line basis over the license period. To the extent sales fulfilled
using our solution exceed the agreed minimum amount of sales, the Company
recognizes incremental network transaction fees. Through December 31, 1998, no
incremental transaction fees have been earned. In the future, the Company will
record the incremental network transaction fees, if any, when known, which may
be in the month subsequent to the transaction. Prior to the Portland merger,
Preview Software's revenues were typically based on one-time license fees which
were recognized over the term of the license.

    Service revenues generally consist of consulting, training and integration
fees. Such services are typically billed separately from the network
transaction fees and are recognized as the related services are performed or
when contract milestones are achieved.

    The Company entered into a three-year agreement with Sony Marketing of
Japan (SMOJ) in September 1998 that provided to SMOJ the exclusive right to use
and sublicense the Company's technology in Japan, including certain future
upgrades, enhancements and new products. The agreement also provided for
training and support through June 1999. The Company received upfront payments
for the license and services to be performed by the Company. The Company
recorded deferred revenue on the upfront fees and is recognizing the license
portion on a straight-line basis over the three-year term of the agreement and
the service revenue was recognized as work was performed through June 1999. In
addition, the Company will receive quarterly payments from SMOJ based on a
percentage of the dollar value of transactions and services performed by SMOJ
or its sublicenses utilizing the Company's technology. These payments are
subject to annual minimum network transaction fees beginning April 1, 1999.
Beginning April 1, 2000 SMOJ, at its option, may forgo its exclusive rights
rather than pay the annual minimums. During the first year of the agreement,
such minimums will be recognized over 12 months until such minimums are
exceeded; at which time incremental transaction fees will be recognized. In
subsequent years, network transaction fees will be recorded as earned.

 Software Development Costs

    Development costs related to software products are expensed as incurred
until technological feasibility of the product has been established. Based on
the Company's product development process, technological feasibility is
established upon completion of a working model. Costs incurred by the Company
between

                                      F-9
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

completion of the working model and the point at which the product is ready for
general release have not been significant, and, accordingly, no costs have been
capitalized.

 Income Taxes

    The Company is in a net deferred tax asset position and has generated net
operating losses to date. Accordingly, no provision for or benefit from income
taxes has been recorded in the accompanying consolidated statements of
operations. The Company will continue to provide a valuation allowance for its
net deferred tax assets until it becomes more likely than not, in management's
assessment, that the Company's net deferred tax assets will be realized.

 Comprehensive Income (Loss)

    The Company has adopted the accounting treatment prescribed by Financial
Accounting Standards Board SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for reporting comprehensive income
(loss) and its components in financial statements. Comprehensive income (loss),
as defined, includes all changes in equity during a period from non-owner
sources. To date, the Company has not had any transactions that are required to
be reported in comprehensive income (loss).

 Stock-Based Compensation

    The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." ("APB No. 25") and complies with
the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense is based on the
difference, if any, on the date of grant between the exercise price of the
instrument granted and the fair value of the underlying stock.

 Net Loss per Share

    Basic and diluted loss per share are the same for all periods presented
since the Company was in a loss position in all periods.

    Potentially dilutive securities that are not included in the diluted net
loss per share calculation because they would be antidilutive are as follows:

<TABLE>
<CAPTION>
                                                      December 31,    June 30,
                                                    ---------------- -----------
                                                    1996 1997  1998  1998  1999
                                                    ---- ----- ----- ----- -----
                                                                     (unaudited)
   <S>                                              <C>  <C>   <C>   <C>   <C>
   Stock options and warrants.....................   38    468 2,131   524 2,490
   Convertible preferred stock....................  160  2,176 4,476 2,475 4,476
                                                    ---  ----- ----- ----- -----
     Total........................................  198  2,644 6,607 2,999 6,966
                                                    ===  ===== ===== ===== =====
</TABLE>

 Segment Information

    In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS 131 did not affect results of operations or financial
position. The Company operates exclusively in one segment. Substantially all
revenues result from the sale of product licenses and related services. See
Note 9.

                                      F-10
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


 Concentration of Credit Risk

    Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable. The
Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral.

    At December 31, 1997, one customer represented 45% of the total accounts
receivable balance. At December 31, 1998, four customers represented 30%, 26%,
16% and 16%, respectively, of the total accounts receivable balance. At June
30, 1999, four customers represented 26%, 16%, 12% and 11%, respectively, of
the total accounts receivable balance.

 Recent Accounting Pronouncements

    In March 1998, the AICPA issued Statement of Position 98-4, "Deferral of
the Effective Date of a Provision of SOP 97-2 ("SOP 98-4"). SOP 98-4 defers for
one year the application of certain provisions of Statement of Position 97-2
"Software Revenue Recognition" ("SOP 97-2"). Different informal and non-
authoritative interpretations of certain provisions of SOP 97-2 have arisen
and, as a result, the AICPA issued SOP 98-9 in December 1998 which is effective
for periods beginning after March 15, 1999. SOP 98-9 extends the effective date
of SOP 98-4 and provides additional interpretive guidance. The Company's
accounting policies comply with SOP 97-2 and the Company does not anticipate
the need for any adjustments once SOP 98-4 becomes effective.

    In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 137").
SFAS 137 is an amendment to Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 137
establishes accounting and reporting standards for all derivative instruments.
SFAS 137 is effective for fiscal years beginning after June 15, 2000. The
Company does not currently have any derivative instruments and, accordingly,
does not expect the adoption of SFAS 137 to have an impact on its financial
position or results of operations.

 Reclassifications

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

2. Acquisition of Portland Software, Inc.:

    The Company was formed in April 1998 to acquire all of the outstanding
equity interests of Preview Software and Portland Software. The Company
completed both of these mergers on August 5, 1998. In accordance with
Accounting Principles Board Opinion No. 16, the stockholders of Preview
Software were determined to be the controlling stockholders of the Company.
Accordingly, the merger with Preview Software was accounted for as a
reorganization under common control with the underlying net assets recorded by
the Company at historical cost. The merger with Portland Software was accounted
for using the purchase method. Therefore, the accompanying consolidated
financial statements reflect the operations of Preview Software for all periods
presented and reflect the operations of Portland Software since August 5, 1998.

    The Company acquired all of the outstanding stock of Portland Software
through the issuance of 1,929 of its common shares and 838 of its Series E
preferred shares, at estimated fair values of $2.00 per common share and $5.00
per preferred share. Option and warrant holders of Portland Software exchanged
their rights in common and preferred stock of Portland Software for similar
rights in 998 common shares and 218 Series E

                                      F-11
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

preferred shares of the Company. The fair value of these options and warrants
was computed using the Black Scholes valuation model and was included in the
total consideration. Total consideration was approximately $9,217, allocated as
follows:

<TABLE>
   <S>                                                                    <C>
   Acquired technology..................................................  $4,453
   In-process research and development..................................   2,091
   Other intangible assets..............................................   1,085
   Patents..............................................................     484
   Net tangible assets..................................................   1,104
                                                                          ------
     Total purchase price...............................................  $9,217
                                                                          ======
</TABLE>

    Acquired technology and other intangible assets acquired are being
amortized over two to three years. In connection with the merger with Portland
Software, the Company acquired the ongoing research and development activities
of Portland Software resulting in a one-time pre-tax charge of $2,091 related
to the write off of certain in-process research and development costs. The
value assigned to in-process research and development represents research and
development efforts in process at the acquisition date for which technological
feasibility had not yet been established and which had no alternative future
uses. Accounting principles require that such costs be charged to expense as
incurred. The Company believes that these research and development efforts will
result in commercially viable products over the next one to two years.

    The summary unaudited pro forma financial information giving effect to the
merger with Portland Software as if it had occurred at the beginning of 1997
and 1998 were as follows:

<TABLE>
<CAPTION>
                                                                 Year Ended
                                                                December 31,
                                                              -----------------
                                                               1997      1998
                                                              -------  --------
   <S>                                                        <C>      <C>
   Revenues.................................................. $   763  $    809
   Net loss..................................................  (7,370)  (14,550)
   Net loss per share........................................   (3.21)    (5.51)
</TABLE>

    The summary unaudited pro forma information does not purport to be
indicative of the results which would actually have been obtained had the
acquisition occurred at the beginning of the periods indicated or which may be
obtained in the future.

3. Property and Equipment:

    Property and equipment consisted of the following as of December 31:

<TABLE>
<CAPTION>
                                                                   1997   1998
                                                                   ----  ------
   <S>                                                             <C>   <C>
   Computer equipment and software...............................  $286  $1,107
   Furniture and fixtures........................................    74     195
   Leasehold improvements........................................    11      44
   Communications hardware.......................................    33     115
                                                                   ----  ------
     Total property and equipment................................   404   1,461
   Less: Accumulated depreciation................................   (52)   (641)
                                                                   ----  ------
                                                                   $352  $  820
                                                                   ====  ======
</TABLE>

                                      F-12
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


4. Accrued Liabilities:

    Accrued liabilities consisted of the following as of December 31:

<TABLE>
<CAPTION>
                                                                       1997 1998
                                                                       ---- ----
   <S>                                                                 <C>  <C>
   Accrued commissions................................................ $ -- $280
   Legal fees payable.................................................   42   20
   Employee compensation..............................................   20  242
   Consulting fees....................................................   57   --
   Other..............................................................   91  298
                                                                       ---- ----
                                                                       $210 $840
                                                                       ==== ====
</TABLE>

5. Borrowings:

    In November 1998, the Company entered into a loan agreement with a bank
which provides for borrowings under a revolving line of credit of up to $1,000,
and borrowing under a term loan. Amounts borrowed under the line of credit and
the term loan bear interest at the bank's prime rate plus 1% (8.75% at December
31, 1998). Interest is payable monthly on borrowings under the revolving line
of credit and the term loan is payable in 36 equal installments of $13 of
principal, plus interest. Borrowings are collateralized by all of the tangible
and intangible assets of the Company. At December 31, 1998, amounts outstanding
under the line of credit were $0, and amounts outstanding under the term loan
were $459. Under this agreement, the Company is required to maintain compliance
with certain financial and other covenants including minimum tangible net
worth, liquidity coverage and ratio of quick assets to current liabilities
minus deferred revenue. At December 31, 1998, the Company was in compliance
with all such covenants. The revolving line of credit expires on November 1,
1999 and the term loan matures on November 2, 2001.

    Principal payment requirements on the term loan are as follows for the
years ending December 31:

<TABLE>
      <S>                                                                   <C>
      1999................................................................  $157
      2000................................................................   157
      2001................................................................   145
                                                                            ----
        Total.............................................................  $459
                                                                            ====
</TABLE>

    On May 28, 1999, the Company entered into various promissory notes with
certain persons for $1,180. Amounts borrowed under the promissory notes bear
interest at 4.9%. The promissory notes were automatically converted into shares
of the Company's Series G Convertible Preferred Stock ("Series G") upon closing
of the financing round in July 1999. See Note 12.

    As of June 30, 1999, the Company's amounts outstanding under the line of
credit were $700, and amounts outstanding under the term loan were $380. At
June 30, 1999, the Company was out of compliance with the covenants. With the
proceeds from the Series G offering, the Company paid off the $700 that was
outstanding under its line of credit. As a result of this transaction, the
Company was in compliance with all of the covenants at July 31, 1999.

                                      F-13
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


6. Commitments and Contingencies:

    The Company leases its facilities under noncancellable operating leases,
which expire through September 2003. The Company also leases equipment under
non-cancellable capital leases with terms expiring through the year 2002.
Future minimum lease payments relating to these agreements are as follows:

<TABLE>
<CAPTION>
                                                               Capital Operating
   Year Ending December 31,                                    Leases   Leases
   ------------------------                                    ------- ---------
   <S>                                                         <C>     <C>
   1999......................................................   $160    $  735
   2000......................................................    101       763
   2001......................................................     38       641
   2002......................................................      6       390
   2003......................................................     --        99
                                                                ----    ------
     Total minimum lease payments............................    305    $2,628
                                                                        ======
   Less: Amount representing interest........................    (38)
                                                                ----
   Present value of minimum lease payments...................    267
   Less: Current portion.....................................   (134)
                                                                ----
   Long term portion.........................................   $133
                                                                ====
</TABLE>

    Rent expense for the years ended December 31, 1996, 1997 and 1998 was
approximately $3, $111 and $432, respectively. The Company has a $53 deposit
with a bank. The amount is required to be deposited with the bank in accordance
with the terms of the Company's facility lease agreement and will be released
on a pro-rata basis over the term of the lease.

                                      F-14
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


7. Stockholders' Equity:

 Preferred Stock

    Series A Convertible Preferred Stock ("Series A"), Series B Convertible
Preferred Stock ("Series B"), Series C Convertible Preferred Stock ("Series
C"), Series D Convertible Preferred Stock ("Series D"), Series E Convertible
Preferred Stock ("Series E") and Series F Convertible Preferred Stock ("Series
F"), consisted of the following, net of issuance costs:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                 -------------
                                                                  1997   1998
                                                                 ------ ------
   <S>                                                           <C>    <C>
   Series A:
     Authorized--574
     Outstanding--574 shares; liquidation preference of $574...  $  574 $  574
   Series B:
     Authorized--352 shares
     Outstanding--352 shares; liquidation preference of $705...  $  693 $  693
   Series C:
     Authorized--1,276 shares
     Outstanding--1,250 shares; liquidation preference of
       $4,000..................................................  $3,916 $3,916
   Series D:
     Authorized--302 shares
     Outstanding--299 shares; liquidation preference of
       $2,000..................................................  $   -- $1,965
   Series E:
     Authorized--1,150 shares
     Outstanding--838 shares; liquidation preference of
       $10,793.................................................  $   -- $4,190
   Series F:
     Authorized--1,600 shares
     Outstanding--1,163 shares; liquidation preference of
       $5,813..................................................  $   -- $5,685
</TABLE>

    The significant rights, restrictions and preferences of the preferred stock
were as follows:

  .   Each share of preferred stock is convertible, at the right and option
      of the stockholder, into such number of fully paid and non-assessable
      shares of common stock as is determined by dividing $1.00, $2.00,
      $3.20, $6.68, $12.88 and $5.00 for each share of Series A, B, C, D, E,
      and F, respectively, by the conversion price at the time in effect for
      such shares. Based on this formula, the conversion ratio is currently
      one-for-one for all series, subject to adjustment in the event of
      stock splits, stock dividends, or the issuance of equity securities
      with a per share price lower than that of the Series A, B, C, D, E,
      and F.

  .   Each stockholder of Series A, B, C, D, E, and F is entitled to the
      number of votes equal to the number of shares of common stock into
      which the preferred stock can be converted. In addition, as long as at
      least 312 shares of preferred stock remain outstanding, certain
      contemplated actions of the Company must be approved by a majority of
      outstanding preferred stock.

  .   Upon receiving written request from not less than 30% of the holders
      of the Series A, B, C, D, E and F that the Company effect any
      registration, qualification or compliance with respect to the common
      stock which the preferred stock is convertible into with a value equal
      to or greater than $10,000, the Company will promptly give written
      notice to all other holders and, as soon as practicable, use its best
      efforts to effect such registration, qualification or compliance.

                                      F-15
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


  .   Any entity holding at least 100 preferred shares has the right of
      first refusal to purchase its pro rata portion of any new securities
      which the Company may propose to sell and issue.

  .   Each share of Series A, B, C, D, E, and F will automatically convert
      into common stock at the then-effective conversion rate in the event
      of the closing of an underwritten public offering of the Company's
      common stock from which the Company receives aggregate cash proceeds
      in excess of $15,000 and prior to which the market capitalization
      (assuming the conversion of all preferred stock, the exercise of all
      outstanding warrants and options, and the issuance and exercise of all
      remaining unissued options under the Company's stockholder-approved
      stock option plans) of the Company at the proposed offering price is
      at least $200,000, upon the vote of at least a majority of the
      preferred stock or when a majority of the outstanding preferred stock
      has converted to common stock.

  .   Each stockholder of Series A, B, C, D, E, and F is entitled to receive
      annual dividends at the rates of $0.08, $0.16, $0.288, $0.60, $1.03
      and $0.45 per share, respectively, when and if declared by the Board
      of Directors, prior to payment of dividends on common stock. Dividends
      are non-cumulative, and no dividends have been declared to date.

  .   In the event of any consolidation or merger of the Company or a sale
      of substantially all of the assets of the Company for which the
      aggregate proceeds are less than $200,000, holders of preferred stock
      will be paid an amount equal to $1.00, $2.00, $3.20, $6.68, $12.88,
      and $5.00 per share, plus an amount equal to all declared but unpaid
      dividends for each share of Series A, B, C, D, E, and F, respectively.
      If the full amount is not available for distribution, amounts shall be
      paid out in proportion to the aggregate preferential amounts owed.
      Amounts remaining after the full amount has been paid out will be
      distributed to the holders of preferred stock and common stock on a
      pro rata basis until stockholders of Series A, B, C, D, E and F shall
      have received an amount equal to $2.00, $4.00, $6.40, $13.36, $25.76
      and $10.00 per share, respectively. Thereafter, any remaining assets
      shall be distributed to the holders of common stock on a pro rata
      basis.

  .   In the event of any consolidation or merger of the Company or a sale
      of substantially all of the assets of the Company for which the
      aggregate proceeds are more than $200,000, holders of preferred stock
      will be paid an amount equal to $1.00, $2.00, $3.20, $6.68, $12.88 and
      $5.00 per share, plus an amount equal to all declared but unpaid
      dividends for each share of Series A, B, C, D, E and F, respectively.
      If the full amount is not available for distribution, amounts shall be
      paid out in proportion to the aggregate preferential amounts owed.
      Amounts remaining after the full amount has been paid out will be
      distributed among the holders of common stock on a pro rata basis.

  .   In the event of any liquidation, dissolution, or winding up of the
      Company, either voluntary or involuntary, in which the aggregate
      proceeds to be distributed to all stockholders of the Company is equal
      to or less than $200,000, each stockholder of Series A, B, C, D, E and
      F shall be entitled to receive, prior and in preference to any
      distribution of any assets or surplus funds to the holders of common
      stock, an amount equal to $1.00, $2.00, $3.20, $6.68, $12.88 and $5.00
      per share for each share of Series A, B, C, D, E, and F, respectively
      and, in addition, an amount equal to all declared but unpaid dividends
      on Series A, B, C, D, E, and F, respectively. If the full amount is
      not available for distribution, amounts shall be paid out in
      proportion to the aggregate preferential amounts owed. Amounts
      remaining after the full amount has been paid out will be distributed
      among the holders of Series A, B, C, D, E and F and common stock on a
      pro rata basis, assuming conversion of all shares of Series A, B, C,
      D, E and F.

  .   In the event of any liquidation, dissolution or winding up of the
      Company, either voluntary or involuntary, in which the aggregate
      proceeds to be distributed to all stockholders of the Company is
      greater than $200,000, each

                                      F-16
<PAGE>

                    PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

      stockholder of Series A, B, C, D, E and F shall be entitled to
      receive, prior and in preference to any distribution of any assets or
      surplus funds to the holders of common stock, an amount equal to
      $1.00, $2.00, $3.20, $6.68, $12.88 and $5.00 per share for each share
      of Series A, B, C, D, E and F, respectively and, in addition, an
      amount equal to all declared but unpaid dividends on Series A, B, C,
      D, E and F, respectively. If the full amount is not available for
      distribution, amounts shall be paid out in proportion to the aggregate
      preferential amounts owed. Amounts remaining after the full amount has
      been paid out will be distributed among the holders of common stock on
      a pro rata basis.

 Common Stock

    As of December 31, 1998, and June 30, 1999 the Company had reserved shares
of its common stock for future issuance as follows:

<TABLE>
<CAPTION>
                                                        December 31,  June 30,
                                                            1998        1999
                                                        ------------ -----------
                                                                     (unaudited)
   <S>                                                  <C>          <C>
   Conversion of Series A.............................       574          574
   Conversion of Series B.............................       352          352
   Conversion of Series C.............................     1,250        1,250
   Conversion of Series D.............................       299          299
   Conversion of Series E.............................       838          838
   Conversion of Series F.............................     1,163        1,163
   Exercise of outstanding common stock warrants......       172          170
   Exercise of outstanding preferred stock warrants...       246          246
   Exercise of stock options..........................     3,221        2,348
                                                           -----        -----
     Total shares reserved............................     8,115        7,240
                                                           =====        =====
</TABLE>

 Warrants Outstanding

    As of December 31, 1998, the following warrants were outstanding:

<TABLE>
<CAPTION>
                                                        Exercise
                                              Number of   Price     Expiration
   Underlying Security                         Shares   Per Share      Date
   -------------------                        --------- --------- --------------
   <S>                                        <C>       <C>       <C>
   Common Stock.............................       1     $13.02   December 2000
   Common Stock.............................      44       3.86   October 2001
   Common Stock.............................      13       3.86   June 2002
   Common Stock.............................       8       3.86   July 2002
   Common Stock.............................     106       0.04   July 2002
                                                 ---
                                                 172
                                                 ===
   Preferred Stock:
     Series C...............................      25       3.20   September 2002
     Series E...............................     218      12.88   August 2004
     Series F...............................       3       5.00   September 2005
                                                 ---
                                                 246
                                                 ===
</TABLE>

    Common stock warrants exercisable for 2 shares of the Company's common
stock were exercised during the period January 1, 1999 through June 30, 1999.

                                     F-17
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


 Stock Based Compensation

    The Company has four stock option plans, the Old 1997 Stock Option Plan
("Old Plan"), the New 1997 Stock Option Plan ("New Plan"), the 1998 Stock
Option Plan ("98 Plan"), and the Amended and Restated 1994 Stock Option Plan
("94 Plan"), collectively "the Plans". As of December 31, 1998 and June 30,
1999, the Company had reserved an aggregate of 3,221 shares and 2,348 shares,
respectively, of common stock for issuance under the Plans and options issued
outside of the Plans combined. After December 31, 1998, the Company does not
intend to grant stock options from any of the above plans other than from the
98 Plan, under which as of that date there were approximately 634 shares
available for future grant. Subsequent to December 31, 1998, the Old Plan, the
New Plan and the 94 Plan were terminated and therefore, no shares are available
for future grant under these plans.

    The Plans provide for the granting of stock options to employees and
consultants of the Company. Options granted under the Plans may be either
incentive stock options or nonqualified stock options. Incentive stock options
("ISO's") may be granted only to employees of the Company and nonqualified
stock options ("NSO's") may be granted to employees of the Company and to
consultants.

    All options granted shall generally be exercisable over a period not to
exceed ten years from the date of grant; however in the case of an ISO granted
to a person owning more than 10% of the combined voting power of all classes of
stock of the Company, the term of the option will be five years from date of
grant. All options granted generally vest ratably over four years.

    In accordance with the Plans, the stated exercise price of options shall
not be less than 85% of the estimated fair value of the shares at the date of
grant as determined by the Board of Directors, provided, however, that (a) the
exercise price of an ISO and NSO shall not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (b)
the exercise price of an ISO and NSO granted to a 10% stockholder shall not be
less than 110% of the estimated fair value of the shares on the date of grant,
respectively.

                                      F-18
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


    The Company also has options outstanding outside of the Plans. A summary of
all stock option activity is as follows:

<TABLE>
<CAPTION>
                                                                   Weighted
                                      Shares                       Average
                                   Available for Shares Subject Exercise Price
                                       Grant       to Options     Per Share
                                   ------------- -------------- --------------
   <S>                             <C>           <C>            <C>
   Balances, December 31, 1995....        --             --         $  --
   Shares reserved................        70             --            --
   Options granted................       (35)            35          0.62
                                      ------         ------         -----
   Balances, December 31, 1996....        35             35          0.62
   Additional shares reserved.....       724             --            --
   Options granted................      (687)           687          0.50
   Options cancelled..............        22            (22)         0.50
   Options exercised..............        --           (232)         0.50
                                      ------         ------         -----
   Balances, December 31, 1997....        94            468          0.50
   Additional shares reserved.....     2,785             --            --
   Options granted................      (701)           701          1.67
   Options assumed in Portland
     Software acquisition.........      (826)           826          1.72
   Options cancelled..............       156           (164)         1.24
   Options exercised..............        --           (118)         0.61
                                      ------         ------         -----
   Balances, December 31, 1998....     1,508          1,713          1.84
   Additional shares reserved.....        50             --            --
   Terminated plans...............      (880)            --            --
   Options granted................      (442)           442          5.15
   Options cancelled..............        38            (38)         2.06
   Options exercised..............        --            (43)         1.12
                                      ------         ------         -----
   Balances, June 30, 1999
     (unaudited)..................       274          2,074         $2.68
                                      ======         ======         =====
</TABLE>

    Options cancelled that were granted outside of the Plans are not added back
to the shares available for grant.

    As of December 31, 1998, stock options outstanding, including options
granted outside of the stock option plans, were as follows:

<TABLE>
<CAPTION>
                         Options Outstanding              Options Exercisable
                   -------------------------------- --------------------------------
                                        Weighted                         Weighted
    Range of            Number          Average          Number          Average
  Contractual      Outstanding as of Exercise Price Exercisable as of Exercise Price
     Prices        December 31, 1998   Per Share    December 31, 1998   Per Share
  -----------      ----------------- -------------- ----------------- --------------
    <S>            <C>               <C>            <C>               <C>
    $0.00--
      0.20                 119          $0.0094            119           $0.0094
     0.40--
      0.60                 383             0.50            107              0.50
     0.80--
      1.00                  65             1.00             --                --
     1.80--
      2.00               1,146             2.00            310              2.00
    -------              -----          -------            ---           -------
    $0.00--
      2.00               1,713          $  1.48            536           $  1.26
    =======              =====          =======            ===           =======
</TABLE>

                                      F-19
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


    In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 ("SFAS 123") "Accounting for Stock-Based Compensation," which
establishes a fair value-based method of accounting for stock-based
compensation plans and requires additional disclosures for those companies who
elect not to adopt the new method of accounting. The Company has adopted SFAS
123 and in accordance with the provisions of SFAS 123, the Company has elected
to continue to apply APB Opinion No. 25 and related interpretations in
accounting for its stock option plans.

    Had compensation cost for the Company's stock option plans been determined
consistent with SFAS 123, the Company's net loss would have been adjusted to
the following pro forma amounts:

<TABLE>
<CAPTION>
                                                        Year Ended December
                                                                31,
                                                       ------------------------
                                                       1996    1997      1998
                                                       -----  -------  --------
   <S>                                                 <C>    <C>      <C>
   Net loss:
     As reported.....................................  $(242) $(2,380) $(11,276)
     Pro forma.......................................   (242)  (2,404)  (11,360)
   Net loss per share:
     As reported.....................................  (0.69)   (6.45)    (7.55)
     Pro forma.......................................  (0.69)   (6.51)    (7.60)
</TABLE>

    Because the Black-Scholes option valuation model requires the input of
subjective assumptions, the resulting pro forma compensation cost may not be
representative of that to be expected in future periods.

    The Company also issued options to non-employees. Compensation expense
related to these options was $0, $0 and $41 for 1996, 1997 and 1998,
respectively.

    The weighted average fair value of options granted during 1997 and 1998 was
$0.14 and $0.42, respectively. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing model and the
minimum value method which excludes volatility factors as the Company is
privately held. The following assumptions were used:

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                    --------------------------
                                                     1996     1997      1998
                                                    -------  --------  -------
   <S>                                              <C>      <C>       <C>
   Risk-free interest rate.........................     n/a      6.25%     5.5%
   Expected dividend yield.........................     n/a         0%       0%
   Expected lives (years)..........................     n/a         5        5
</TABLE>

    In connection with the issuance of stock options, the Company has recorded
deferred compensation of $145 as of December 31, 1998, representing the
difference between the deemed fair value of the Company's common stock and the
exercise price of stock options at the date of grant. The Company amortizes the
deferred compensation over the applicable vesting period, typically four years.

                                      F-20
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


8. Income Taxes:

    The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes," which requires recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income tax assets and liabilities are
determined using the current applicable enacted tax rates and provisions of the
enacted tax law. The Company had net deferred tax assets and liabilities as
follows:

<TABLE>
<CAPTION>
                                                               December 31,
                                                              ----------------
                                                               1997     1998
                                                              -------  -------
   <S>                                                        <C>      <C>
   Net operating loss carryforwards.........................  $   979  $ 6,174
   Accruals and reserves....................................       56      112
   Research and development costs capitalized for income tax
     purposes...............................................       --      742
   Deferred revenue.........................................       --      812
   Basis difference in acquired net assets of Portland
     Software...............................................       --   (1,900)
                                                              -------  -------
                                                                1,035    5,940
   Valuation allowance......................................   (1,035)  (5,940)
                                                              -------  -------
   Net deferred income taxes................................  $    --  $    --
                                                              =======  =======
</TABLE>

    At December 31, 1998, the Company had net operating loss carryforwards of
approximately $15,670 for both federal and state tax purposes. The federal net
operating loss carryforwards expire on various dates through 2018, while the
state net operating loss carryforwards expire on various dates through 2013.
The Company believes that, based on a number of factors, there is sufficient
uncertainty regarding the realizability of net deferred tax assets such that a
full valuation allowance should be recorded. These factors include a history of
operating losses, the competitive nature of the Company's market and the lack
of predictability of revenue. Management will continue to assess the
realizability of the tax benefits available to the Company based on actual and
forecasted operating results. Changes in ownership resulting from the merger
described in Note 2 and other ownership changes may significantly limit the
utilization of net operating loss carryforwards in the future.

9. Segment Information:

    The Company operates in one industry segment: the design, development and
marketing of technology that enables the distribution and licensing of digital
goods over the Internet and via other digital media. All long-lived assets are
located in the United States. The Company's geographic information is
summarized as follows:

<TABLE>
<CAPTION>
                                                                    Year Ended
                                                                   December 31,
                                                                  --------------
                                                                  1996 1997 1998
                                                                  ---- ---- ----
   <S>                                                            <C>  <C>  <C>
   Sales to unaffiliated customers:
     United States..............................................  $148 $262 $266
     Europe.....................................................    --   --   24
     Asia.......................................................    --   --  274
     Other......................................................    --   --   46
                                                                  ---- ---- ----
                                                                  $148 $262 $610
                                                                  ==== ==== ====
</TABLE>

                                      F-21
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


    Two customers accounted for 54% and 20%, respectively, of total revenues in
1996. Two customers accounted for 21% and 12%, respectively, of total revenues
in 1997. Two customers accounted for 45% and 13% respectively, of total
revenues in 1998. Two customers accounted for 38% and 13%, respectively, of
total revenues in the six months ended June 30, 1999.

10. Related Party Transactions:

    In conjunction with the exercise of stock options for the issuance of 250
shares of common stock to the Chief Executive Officer, the Company issued three
notes receivable aggregating $125. The notes receivable are full recourse,
secured by shares of the Company's common stock and bear interest at 6% per
annum. The principal and unpaid interest are due in full on May 27, 2001 for
$25 of the notes and June 6, 2001 for the remaining $100 of notes. The shares
issued are subject to repurchase by the Company until the notes are paid. See
Note 1--Restricted Cash.

11. Employee Savings Plan:

    The Company has a profit sharing plan and trust that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code
("401(k) Plan"). Under the terms of the 401(k) Plan, the employees of the
Company may make voluntary contributions to the 401(k) Plan as a percentage of
compensation, but not in excess of the maximum allowed under the Internal
Revenue Code. Employees become eligible to participate in the 401(k) Plan on
the first day of the month following date of hire. The Company currently does
not match employee contributions.

12. Subsequent Events:

    In May 1999, 20/20 Software, Inc., an Oregon corporation, filed a civil
complaint against the Company in the United States Court for the District of
Northern California. The complaint alleges that one of the Company's employees,
a former 20/20 employee, misappropriated trade secrets and confidential
information of 20/20 and allegedly used such allegedly misappropriated
information and trade secrets in a product of the Company's predecessor and
subsidiary, Preview Software. This complaint is a continuation of two earlier
and similar complaints by 20/20, one against the Company filed in, and
dismissed for lack of jurisdiction by, the United States Court for the Federal
District of Oregon, and one against an employee of the Company filed in Oregon
state court. Those two complaints were both dismissed, the latter with
prejudice. Management believes that the claims in the underlying litigation are
without merit and intend to continue to defend against them vigorously.
However, litigation is subject to inherent uncertainties and, therefore, there
can be no assurance that this action will not have a material adverse effect on
our business results of operations or financial condition.

    In July 1999, the Company sold 125 and 150 shares of common stock at a
price of $6.50 to the President and Chief Executive Officer and Vice President,
Chief Financial Officer, respectively. Under the terms of these sales, the
Company can repurchase a certain number of their shares of stock if they quit
or are terminated, subject to a monthly vesting schedule. In addition, the
Company has a right of first refusal to purchase any or all of their shares if
they decide to sell or transfer their shares. In connection with these sales,
the officers executed full-recourse promissory notes in the respective amounts
of $812 and $975 in favor of the Company with annual interest rates of 5.32%.
These notes become due and payable upon the earlier of July 2002 or termination
of their employment with the Company. The officers have also entered into
pledge and security agreements granting the Company a security interest in
these shares.

    In July 1999, the Company issued shares of Series G for purposes of
additional working capital and continued development of technology. A total of
4,312 shares of Series G were issued for net proceeds to the

                                      F-22
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

Company of $27,045. The Series G has substantially the same rights and
preferences as other preferred shares outstanding at December 31, 1998. The
Company had $1,180 of notes payable outstanding at June 30, 1999 which were
automatically converted into shares of the Company's Series G. In connection
with the Series G offering, the Company also issued a warrant to purchase 77
shares of Series G.

    In July 1999, the Board of Directors of the Company authorized the
reservation of an additional 500 shares of the Company's common stock for
issuance under the 98 Plan. In addition, the 98 Plan was amended in August 1999
to increase the total number of shares authorized by 1,000 and to incorporate
certain other changes. The Board of Directors approved a further amendment to
the 98 Plan subject to stockholder approval, to provide for an automatic annual
increase on the first day of each of the Company's fiscal years beginning in
2000 and ending in 2008 equal to the lesser of (i) 800 shares, (ii) 3% of the
Company's outstanding common stock on the last day of the immediately preceding
fiscal year, or (iii) such lesser number of shares as the Board of Directors
determines.

    During August 1999, the Board of Directors approved the 1999 Employee Stock
Purchase Plan ("1999 ESPP"), subject to stockholder approval, and reserved 500
shares of common stock for issuance thereunder. The 1999 ESPP will be subject
to an automatic annual increase on the first day of each of the Company's
fiscal years over the 10-year term of the plan, equal to the lesser of (i) 400
shares, (ii) 2% of the Company's outstanding common stock on the last day of
the immediately preceding fiscal year, or (iii) such lesser number of shares as
the Board of Directors determines.

    During August 1999, the Board of Directors also approved the 1999 Directors
Stock Option Plan ("1999 Directors Plan"), subject to stockholder approval, and
reserved 300 shares of common stock for issuance thereunder. The 1999 Directors
Plan will be subject to an automatic annual increase to the number of shares
reserved under the plan on the first day of each of the Company's fiscal years
over the 10-year term of the plan, equal to the lesser of (i) 150 shares, (ii)
1% of the Company's outstanding common stock on the last day of the preceding
fiscal year, or (iii) a lesser number of shares as determined by the Board of
Directors.

    On September 14, 1999, the Company authorized a 1 for 2 reverse stock split
of its common and preferred stock, effective immediately prior to the closing
of the initial public offering. All share and per share amounts have been
retroactively adjusted to reflect this stock split. The Board of Directors,
subject to stockholder approval, amended the number of authorized common stock
to 75,000 shares and the number of preferred stock to 5,000 shares, to be
effective upon the closing of the initial public offering.

                                      F-23
<PAGE>

                            PORTLAND SOFTWARE, INC.

                              FINANCIAL STATEMENTS

                           December 31, 1996 and 1997

                  (With Independent Auditors' Report Thereon)

                                      F-24
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
Portland Software, Inc.:

    We have audited the accompanying balance sheets of Portland Software, Inc.
as of December 31, 1996 and 1997 and the related statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Portland Software, Inc. as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.

                                                       /s/ KPMG LLP

Portland, Oregon
February 20, 1998

                                      F-25
<PAGE>

                            PORTLAND SOFTWARE, INC.

                                 BALANCE SHEETS

                           December 31, 1996 and 1997
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                1996     1997
                                                               -------  -------
<S>                                                            <C>      <C>
ASSETS
Current assets:
  Cash and cash equivalents..................................  $ 1,990  $ 4,745
  Accounts receivable, net...................................        8      268
  Prepaid expenses...........................................       27       10
  Other current assets, net..................................       13      181
                                                               -------  -------
     Total current assets....................................    2,038    5,204
Property and equipment, net..................................      181      372
Note receivable from officer.................................       --       55
Other non-current assets.....................................       42       48
Prepaid license fee, net.....................................       --      289
                                                               -------  -------
     Total assets............................................  $ 2,261  $ 5,968
                                                               =======  =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable...........................................      272      169
  Accrued expenses...........................................       25      255
  Current installments of obligations under capital leases...       81      111
  Deferred revenue...........................................       --       40
                                                               -------  -------
     Total current liabilities...............................      378      575
Obligations under capital leases, less current installments..       59      134
Other non-current liabilities................................       27       40
                                                               -------  -------
     Total liabilities.......................................      464      749
                                                               -------  -------
Commitments and contingencies
Shareholders' equity:
  Series B preferred stock, $.01 par value; 4,500 share
    authorized; convertible; $.2672 cumulative dividends;
    issued and outstanding -0- shares and 2,395 shares at
    December 31, 1996 and 1997, respectively (liquidation
    preference of $8,000)....................................       --       24
  Series A preferred stock, $.01 par value; 838 shares
    authorized; convertible; issued and outstanding 838
    shares at December 31, 1996 and 1997 (liquidation
    preference of $2,800)....................................        8        8
  Common stock, $.01 par value; 20,000 shares authorized;
    issued and outstanding 6,945 shares and 6,988 shares at
    December 31, 1996 and 1997, respectively.................       69       70
  Additional paid-in capital.................................    5,077   13,464
  Accumulated deficit........................................   (3,357)  (8,347)
                                                               -------  -------
     Total shareholders' equity..............................    1,797    5,219
                                                               -------  -------
     Total liabilities and shareholders' equity..............  $ 2,261  $ 5,968
                                                               =======  =======
</TABLE>

                See accompanying notes to financial statements.

                                      F-26
<PAGE>

                            PORTLAND SOFTWARE, INC.

                            STATEMENTS OF OPERATIONS

                     Years ended December 31, 1996 and 1997
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                               1996     1997
                                                              -------  -------
<S>                                                           <C>      <C>
Net revenue.................................................. $   187  $   501
Cost of goods sold...........................................      64      156
                                                              -------  -------
     Gross profit............................................     123      345
                                                              -------  -------
Operating expenses:
  Sales and marketing........................................     749    1,901
  Research and development...................................   1,044    1,640
  General and administrative.................................   1,154    1,849
                                                              -------  -------
     Total operating expenses................................   2,947    5,390
                                                              -------  -------
  Loss from operations.......................................  (2,824)  (5,045)
                                                              -------  -------
Other income (expense):
  Interest income............................................      30      107
  Interest expense...........................................     (23)     (52)
                                                              -------  -------
     Total other income (expense)............................       7       55
                                                              -------  -------
  Loss before income taxes...................................  (2,817)  (4,990)
Income taxes.................................................      --       --
                                                              -------  -------
     Net loss................................................ $(2,817) $(4,990)
                                                              =======  =======
Earnings per share computation:
  Net loss................................................... $(2,817) $(4,990)
  Preferred stock dividends..................................      --     (234)
                                                              -------  -------
  Net loss available to common shareholders.................. $(2,817) $(5,224)
                                                              =======  =======
Basic and diluted net loss per share:
  Weighted average shares outstanding........................   5,899    6,978
                                                              =======  =======
  Net loss................................................... $ (0.48) $ (0.75)
                                                              =======  =======
</TABLE>


                See accompanying notes to financial statements.

                                      F-27
<PAGE>

                            PORTLAND SOFTWARE, INC.

                       STATEMENTS OF SHAREHOLDERS' EQUITY

                     Years ended December 31, 1996 and 1997
                                 (In thousands)

<TABLE>
<CAPTION>
                            Series B           Series A
                         preferred stock    preferred stock     Common stock  Additional                 Total
                         -----------------  -----------------   -------------  paid-in   Accumulated shareholders'
                         Shares    Amount   Shares    Amount    Shares Amount  capital     deficit      equity
                         --------  -------  -------   -------   ------ ------ ---------- ----------- -------------
<S>                      <C>       <C>      <C>       <C>       <C>    <C>    <C>        <C>         <C>
Balance at December 31,
  1995..................       --   $   --        --   $    --  4,417   $44    $   523     $  (540)     $    27
 Issuance of preferred
   stock, net...........       --       --       838         8     --    --      2,792          --        2,800
 Issuance of common
   stock................       --       --        --        --  1,577    16      1,248          --        1,264
 Exercise of common
   stock options........       --       --        --        --    175     2         (2)         --           --
 Common stock issued in
   lieu of cash.........       --       --        --        --    621     6        417          --          423
 Conversion of
   convertible debt to
   common stock.........       --       --        --        --    155     1         99          --          100
 Net loss...............       --       --        --        --     --    --         --      (2,817)      (2,817)
                         --------   ------   -------   -------  -----   ---    -------     -------      -------
Balance, December 31,
  1996..................       --       --       838         8  6,945    69      5,077      (3,357)       1,797
 Issuance of preferred
   stock, net...........    2,149       22        --        --     --    --      7,109          --        7,131
 Conversion of
   convertible debt to
   preferred stock......      246        2        --        --     --    --        818          --          820
 Exercise of common
   stock options........       --       --        --        --     43     1         10          --           11
 Common stock options
   issued in lieu of
   cash.................       --       --        --        --     --    --         21          --           21
 Warrants issued in
   payment of license
   fee..................       --       --        --        --     --    --        429          --          429
 Net loss...............       --       --        --        --     --    --         --      (4,990)      (4,990)
                         --------   ------   -------   -------  -----   ---    -------     -------      -------
Balance, December 31,
  1997..................    2,395   $   24       838   $     8  6,988   $70    $13,464     $(8,347)     $ 5,219
                         ========   ======   =======   =======  =====   ===    =======     =======      =======
</TABLE>


                See accompanying notes to financial statements.

                                      F-28
<PAGE>

                            PORTLAND SOFTWARE, INC.

                            STATEMENTS OF CASH FLOWS

                     Years ended December 31, 1996 and 1997
                                 (In thousands)

<TABLE>
<CAPTION>
                                                               1996     1997
                                                              -------  -------
<S>                                                           <C>      <C>
Cash flows from operating activities:
 Net loss.................................................... $(2,817) $(4,990)
 Adjustments to reconcile net loss to net cash used by
   operating activities:
  Depreciation and amortization..............................      61      173
  Loss on sale of property and equipment.....................      29       --
  Common stock and options issued in lieu of cash............     423       21
  Net changes in operating assets and liabilities:
   Accounts receivable.......................................      15     (260)
   Prepaid expenses..........................................     (27)      17
   Other assets..............................................     (55)    (116)
   Accounts payable..........................................     258     (103)
   Accrued expenses..........................................      27      230
   Other liabilities.........................................      --       53
                                                              -------  -------
     Net cash used in operating activities...................  (2,086)  (4,975)
                                                              -------  -------
Cash flows from investing activities:
 Purchase of property and equipment..........................     (49)    (111)
                                                              -------  -------
     Net cash used in investing activities...................     (49)    (111)
                                                              -------  -------
Cash flows from financing activities:
 Borrowings under line of credit agreement...................      --      250
 Payments on line of credit..................................      --     (250)
 Payments on obligations under capital lease.................     (45)    (121)
 Proceeds from issuance of common stock......................   1,264       11
 Proceeds from issuance of preferred stock...................   2,800    7,131
 Proceeds from issuance of convertible debt..................      --      820
                                                              -------  -------
     Net cash from financing activities......................   4,019    7,841
                                                              -------  -------
     Net increase in cash and cash equivalents...............   1,884    2,755
Cash and cash equivalents at beginning of year...............     106    1,990
                                                              -------  -------
Cash and cash equivalents at end of year..................... $ 1,990    4,745
                                                              =======  =======
Supplemental disclosure of cash flow information:
 Cash paid for interest...................................... $    15       60
 Cash paid for income taxes..................................      --       --
Supplemental disclosure of non-cash investing and financing
  activities:
 Obligations under capital lease incurred for the purchase of
   property and equipment.................................... $   160      226
 Preferred stock issued upon conversion of debt..............      --      820
 Common stock issued upon conversion of debt.................     100       --
 Warrants issued in payment of license fee...................      --      429
</TABLE>

                See accompanying notes to financial statements.

                                      F-29
<PAGE>

                            PORTLAND SOFTWARE, INC.

                         NOTES TO FINANCIAL STATEMENTS

                           December 31, 1996 and 1997
                     (In thousands, except per share data)

(1) Summary of Significant Accounting Policies

 (a) Description of Business

    Portland Software, Inc. (the Company) was incorporated in October 1994. The
Company develops and markets systems and tools for the electronic distribution,
primarily through the internet, of software and other digital content.

 (b) Use of Estimates in the Preparation of Financial Statements

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

 (c) Cash and Cash Equivalents

    Cash and cash equivalents consist of cash and short-term investments with
maturities of less than three months.

 (d) Accounts Receivable

    The allowance for doubtful accounts is as follows at December 31:

<TABLE>
<CAPTION>
                                                                      1996 1997
                                                                      ---- ----
   <S>                                                                <C>  <C>
   Balance--beginning of period...................................... $--  $--
   Provision.........................................................  --   56
   Charge offs.......................................................  --   (6)
                                                                      ---  ---
   Balance--end of period............................................ $--  $50
                                                                      ===  ===
</TABLE>

 (e) License Fee

    License fees are stated at cost. Amortization is provided for by the
straight-line method over four years. Amortization expense totaled $-0- and $27
for the years ended December 31, 1996 and 1997, respectively.

 (f) Advertising

    The Company expenses the costs of advertising when the costs are incurred.
Advertising expense was $105 and $66 for the years ended December 31, 1996 and
1997, respectively.

 (g) Property and Equipment

    Property and equipment are stated at cost. Property and equipment under
capital leases are stated at the present value of the minimum lease payments.
Equipment is depreciated using the straight-line method over the estimated
useful lives of the assets, generally three to five years. Property and
equipment under capital leases

                                      F-30
<PAGE>

                            PORTLAND SOFTWARE, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

and leasehold improvements are amortized straight-line over the shorter of the
lease term or estimated useful life of the asset.

 (h) Income Taxes

    Deferred tax assets and liabilities are recognized for future tax
consequences of differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
losses and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.

 (i) Net Loss Per Share

    The Company follows the provisions of SFAS 128, "Earnings Per Share" which
requires presentation of both basic and diluted earnings per share (EPS) on the
face of the income statement. Basic EPS is computed using the weighted average
number of common shares outstanding during the period. Diluted EPS reflects the
potential dilution that could occur if convertible preferred shares outstanding
at the beginning of each year were converted at those dates with related
interest, preferred stock dividend requirements and outstanding common shares
adjusted accordingly. It also assumes that outstanding common shares were
increased by shares issuable upon exercise of those stock options or warrants
for which market price exceeds exercise price, less shares which could have
been purchased by the Company with related proceeds. Neither convertible
preferred stock, warrants, or stock options have been included in the
computation of diluted earnings per share for the years ended December 31, 1996
or 1997, since it would have resulted in an antidilutive effect.

 (j) Revenue Recognition

    Revenue results primarily from 1) product license and installation fees, 2)
fees charged for transactions processed using the Company's product, and 3)
license fees recognized upon shipment of the product and when no significant
contractual obligations remain outstanding. For those agreements which derive
revenue on a per-transaction basis in exchange for guaranteed amounts, revenue
is recognized at the time of product delivery. Per-transaction fees that exceed
the guarantee are recognized as earned.

    A portion of product license revenue is allocated to customer support. This
amount is deferred and recognized ratably over the license period. The Company
generally does not provide for a right of return policy for its software sales.

 (k) Royalties

    Royalties are accrued based on certain revenues, pursuant to contractual
agreements with developers of software products published by the Company.
Royalty costs are included in the cost of goods sold.

 (l) Software Development Costs

    Under Statement of Financial Accounting Standards No. 86, software
development costs are to be capitalized beginning when a product's
technological feasibility has been established and ending when a product is
made available for general release to customers. To date, the establishment of
technological feasibility of the Company's products has occurred shortly before
general release and, accordingly, no costs have been capitalized.

                                      F-31
<PAGE>

                            PORTLAND SOFTWARE, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


 (m) Stock-Based Compensation

    The Company accounts for stock-based compensation using the Financial
Accounting Standard Board's Statement of Financial Accounting Standards No. 123
(SFAS 123), Accounting for Stock-Based Compensation. This statement permits a
company to choose either a fair-value-based method of accounting for its stock-
based compensation arrangements or to comply with the current Accounting
Principles Board Opinion 25 (APB Opinion 25) intrinsic-value-based method
adding pro forma disclosures of net income (loss) computed as if the fair-
value-based method had been applied in the financial statements. The Company
applies SFAS No. 123 by retaining the APB Opinion 25 method of accounting for
stock-based compensation for employees with annual pro forma disclosures of net
income (loss). Stock-based compensation for non-employees is accounted for
using the fair-value-based method.

(2) Property and Equipment

    Property and equipment, net consist of the following at December 31:

<TABLE>
<CAPTION>
                                                                    1996  1997
                                                                    ----  -----
   <S>                                                              <C>   <C>
   Software........................................................ $  9  $  85
   Furniture and fixtures..........................................    6     13
   Equipment.......................................................  236    478
   Leasehold improvements..........................................   --     12
                                                                    ----  -----
                                                                     251    588
   Less accumulated depreciation and amortization..................  (70)  (216)
                                                                    ----  -----
                                                                    $181  $ 372
                                                                    ====  =====
</TABLE>

(3) Prepaid License Fee

    On August 1, 1997, the Company entered into an agreement to license the
rights to certain software developed by another company. The Company issued 479
Series B preferred stock warrants in consideration for the license. The value
of warrants granted using the Black-Scholes method utilized the following
assumptions: risk free interest rate of 6.25%, no expected dividend yield or
volatility, and an expected life of two years. Using these assumptions these
warrants have a fair value of $429, a weighted average exercise price of $3.34,
a contractual life of seven years and will be fully vested in 1998. At December
31, 1997, 359 warrants were exercisable. The prepaid license fee is being
amortized over its estimated useful life of four years.

<TABLE>
<CAPTION>
                                                                     1996 1997
                                                                     ---- -----
   <S>                                                               <C>  <C>
   License fee...................................................... $--  $ 429
   Less accumulated amortization....................................  --    (27)
                                                                     ---  -----
                                                                      --    402
   Less current portion included in other current assets, net.......  --   (113)
                                                                     ---  -----
                                                                     $--  $ 289
                                                                     ===  =====
</TABLE>

(4) Line of Credit

    In January 1997, the Company arranged a $250 credit facility (the line of
credit) with a bank. The line of credit is secured by the assets of the
Company. The interest rate is a floating rate based on prime (8.5% at

                                      F-32
<PAGE>

                            PORTLAND SOFTWARE, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1997) plus 2% with principal due upon demand. The agreement
contains no covenants. There was no amount outstanding on this line of credit
at December 31, 1997.

(5) Accrued Expenses

    Accrued expenses consist of the following at December 31:

<TABLE>
<CAPTION>
                                                                      1996 1997
                                                                      ---- ----
   <S>                                                                <C>  <C>
   Accrued consulting................................................ $--   89
   Accrued vacation..................................................  11   51
   Accrued bonuses...................................................  --   33
   Other accrued expenses............................................  14   82
                                                                      ---  ---
                                                                      $25  255
                                                                      ===  ===
</TABLE>

(6) Income Taxes

    The actual income tax benefit differs from the "expected" benefit computed
by applying the U.S. federal corporate rate as follows:

<TABLE>
<CAPTION>
                                                                   1996  1997
                                                                   ----  ----
   <S>                                                             <C>   <C>
   Computed "expected" income tax rate benefit...................  (34)% (34)%
   Increases (decreases) resulting from:
     State income taxes, net of federal tax benefit..............    (4)   (4)
     Exclusion of earnings for period that S Corporation was
       valid.....................................................     1    --
     Research and development credit.............................    --    (2)
     Increase in valuation allowance.............................    37    40
                                                                   ----  ----
   Actual income tax rate benefit................................    --%   --%
                                                                   ====  ====
</TABLE>

    The tax effects of temporary differences and net operating loss
carryforwards which give rise to significant portions of deferred tax assets
and deferred tax liabilities at December 31 are as follows:

<TABLE>
<CAPTION>
                                                               1996     1997
                                                              -------  -------
   <S>                                                        <C>      <C>
   Deferred tax assets:
     Net operating losses and U.S. research and
       experimentation credits............................... $   904    2,506
     Property and equipment, due to differences in
       depreciation..........................................      40      462
     Accrual to cash basis adjustment........................     109       65
                                                              -------  -------
                                                                1,053    3,033
     Less valuation allowance................................  (1,053)  (3,033)
                                                              -------  -------
        Net deferred taxes................................... $    --       --
                                                              =======  =======
</TABLE>

    The net change in the total valuation allowance for the years ended
December 31, 1996 and 1997 was an increase of $1,053 and $1,980, respectively.

    The Company has available federal and state net operating loss
carryforwards for tax purposes of approximately $6,351 and research and
experimentation credits of approximately $121, which expire in years 2011-2012.

                                      F-33
<PAGE>

                            PORTLAND SOFTWARE, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


    Approximately $4,682 of the net operating losses are subject to annual
utilization limitation due to ownership changes under Internal Revenue Code
Section 382 in 1996 and 1997.

(7) Shareholders' Equity

 (a) Series B Preferred Stock

    The Series B preferred stock has a stated value of $3.34 per share and a
liquidation preference over holders of common stock and Series A preferred
stock of an amount per share equal to $3.34 (the original issue price) plus all
declared but unpaid dividends. Series B preferred stock has a cumulative per
share dividend, on a non-compounded basis, of $.2672 per annum payable at the
Company's option in cash or additional shares of Series B preferred stock. The
dividends are to be declared by the Board of Directors and paid on June 30,
2001 and on a quarterly basis thereafter, unless a liquidating event occurs
before June 30, 2001, in which case the aggregate amount of arrearages in
cumulative Series B preferred stock dividends will be canceled and no further
dividends will accrue. No dividend declarations have been made, and the
aggregate amount of arrearages in cumulative Series B preferred stock dividends
is $234 at December 31, 1997.

    Each share is convertible into common stock at any time at the option of
the holder. The initial conversion ratio is one-to-one, but this ratio is
subject to modification under the Company's Articles of Incorporation in the
event of certain dilutive issuance of securities, stock splits, stock
dividends, stock distributions or other common stock equivalent distributions.
Automatic conversion to common stock at the then effective conversion rate will
occur upon the 1) closing of the issuance of shares following an effective
registration statement under the Securities Act of 1933, in which the aggregate
price to the public exceeds $10,000 and in which the public offering price per
share of common stock equals or exceeds $10.00, or 2) the date on which a two-
thirds majority of the shares have been converted into shares of common stock
or are otherwise no longer outstanding. The holders of each share of Series B
preferred stock will have the right to the number of votes to which they would
be entitled if the shares were converted to common stock. The Company has
reserved 3,234 shares of the Company's common stock for the conversion of
Series B preferred stock.

    Under the Series B preferred stock agreement, the Company is required to
comply with certain operating covenants, including requirements associated with
the issuance of stock options.

 (b) Series A Preferred Stock

    The Series A preferred stock has a stated value and liquidation preference
of $3.34 per share and carries a dividend of $.2672 per annum payable when and
if declared by the Board of Directors. No dividend declarations have been made.
Series A preferred shareholders have a liquidation preference over holders of
common stock of an amount per share equal to $3.34 (the original issue price)
plus all declared but unpaid dividends. Each share is convertible into common
stock on a one-to-one basis at any time at the option of the holder. The
conversion ratio is subject to modification under the Company's Articles of
Incorporation in the event of stock splits, stock dividends, stock
distributions or other common stock equivalent distributions. Automatic
conversion to common stock at the then effective conversion rate will occur
upon the 1) closing of the issuance of shares following an effective
registration statement under the Securities Act of 1933, in which the aggregate
price to the public equals or exceeds $7,500 and in which the public offering
price per share of common stock equals or exceeds $8.34, or 2) the date on
which a majority of the shares have been converted into shares of common stock
or are otherwise no longer outstanding. The holders of each share of Series A
preferred stock will have the right to the number of votes to which they would
be entitled if the shares were converted to common stock. The Company has
reserved 838 shares of the Company's common stock for the conversion of Series
A preferred stock.

                                      F-34
<PAGE>

                            PORTLAND SOFTWARE, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


 (c) Warrants

    The Company has granted warrants for 266 shares of common stock at exercise
prices ranging from $.675 to $1.00 per share primarily to the holders of Series
A and Series B preferred stock. The warrants are exercisable at December 31,
1997 at a weighted average exercise price of $.983. Expiration of 14 warrants
will occur on December 21, 2000 or upon consummation of an initial public
offering or upon a change in control, whichever is earlier. 170 warrants expire
on October 18, 2001 or upon consummation of an initial public offering or upon
a change in control, whichever is earlier. The Company has reserved 266 shares
of common stock for the exercise of warrants. The value ascribed to the common
stock warrants using the Black-Scholes method was not significant. The Company
also granted 838 warrants for Series B preferred stock at an exercise price of
$3.34 with an expiration date of August 1, 2004. Both the number of shares of
warrant stock and the exercise price are subject to modification under the
terms of the Series B preferred stock purchase agreement in the event of
certain dilutive issuance of securities, stock splits, stock dividends, stock
distributions or other stock equivalent distributions. A value of $429 was
ascribed to 479 of these warrants using the Black-Scholes method, which were
issued in connection with a license fee. The Company has reserved 838 shares of
Series B preferred stock for the exercise of warrants.

 (d) Shareholders' Agreement

    The Company and its shareholders have entered into agreements that include
restrictions on the transfer of the Company's common stock. Except for
expressly provided exceptions, no shareholder is allowed to transfer ownership
of stock without the shares being first offered for sale to the Company.

(8) 1994 Stock Incentive Plan

    In 1994, the Company adopted an incentive stock option plan (the Plan)
whereby a total of 5,000 shares of common stock have been reserved for the
grant of stock options to selected employees, officers, directors, consultants
and advisors. Options granted pursuant to the Plan may be either incentive
stock options as defined in Section 442A of the Internal Revenue Code of 1986,
as amended, or non-qualified stock options, at the discretion of the Board.
Under the Plan, options generally vest over four years. 25% become exercisable
one year after grant, 25% two years after grant and the remaining 50% vest
ratably over the following two years. Options granted under the Plan must be
exercised within three months of the optionee's termination of employment and
within ten years of the date of the grant. Option prices are generally not less
than the fair market value of the shares at the date of grant. At the time of
the exercise of the option, all optionees must grant the Company or its
designee a right of first refusal with respect to all transfers.

    The Company has elected to account for its stock-based compensation plans
under APB Opinion 25; however, the Company has computed, for pro forma
disclosure purposes, the value of all options granted during 1996 and 1997
using the minimum value option-pricing model as prescribed by SFAS 123 using
the following assumptions used for grants in 1996 and 1997:

<TABLE>
<CAPTION>
                                                                  1996    1997
                                                                 ------- -------
   <S>                                                           <C>     <C>
   Risk-free interest...........................................    6.0%   6.25%
   Expected dividend yield......................................    None    None
   Expected lives............................................... 5 years 5 years
</TABLE>

    The total value of options granted during 1996 and 1997 was computed as
approximately $260 and $304, respectively, which would be amortized on a pro
forma basis over the four-year vesting period of the options. The weighted
average fair market value of the option grants during 1996 and 1997 was $0.32
and $1.00 per share, respectively. If the Company had accounted for these
options in accordance with SFAS 123, the

                                      F-35
<PAGE>

                            PORTLAND SOFTWARE, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

Company's net loss and net loss per share for the years ended December 31, 1996
and 1997 would have increased to the following pro forma amounts:

<TABLE>
<CAPTION>
                                                                1996     1997
                                                               -------  -------
   <S>                                                         <C>      <C>
   Net loss:
     As reported.............................................  $(2,817) $(4,990)
     Pro forma...............................................   (2,886)  (5,265)
   Earnings per share--basic and diluted:
     As reported.............................................  $ (0.48) $ (0.75)
     Pro forma...............................................    (0.49)   (0.79)
</TABLE>

    A summary of the status of the Company's Plan at December 31, 1996 and 1997
and changes during the years then ended is presented in the following table:

<TABLE>
<CAPTION>
                                                                        Weighted
                                                                        average
                                                                        exercise
                                                                Options  price
                                                                ------- --------
   <S>                                                          <C>     <C>
   Outstanding at December 31, 1995............................  1,058   $.0555
   Granted.....................................................  1,012    .9511
   Exercised...................................................   (175)   .0020
   Forfeited...................................................    (42)   .6032
                                                                 -----   ------
   Outstanding at December 31, 1996............................  1,853    .5163
   Granted.....................................................    922    .9774
   Exercised...................................................    (43)   .2434
   Forfeited...................................................   (292)   .5415
                                                                 -----   ------
   Outstanding at December 31, 1997............................  2,440   $.7191
                                                                 =====   ======
</TABLE>

    A total of 632 and 1,083 incentive and non-qualified stock options were
exercisable at weighted average exercise prices of $.21 and $.36 at December
31, 1996 and 1997, respectively.

    At December 31, 1997, the Company has committed to issue 29 non-qualified
stock options in fiscal year 1998 under the Plan to non-employee consultants
for consulting services performed in 1997. The Company accrued a liability of
$29 in 1997 related to this obligation.

    During 1997, the Company issued 21 stock options to non-employee
consultants. These options have a weighted average exercise price of $0.01 and
a contractual life of ten years. The options were exercisable at the date of
grant. Included in general and administrative expense is $21 relating to the
value ascribed to these warrants.

    The following table sets forth the exercise price range, number of shares
and weighted average remaining contractual lives for stock options at December
31, 1997:

<TABLE>
<CAPTION>
                                                        Currently exercisable
                                               ---------------------------------------
                                   Weighted                                Weighted
                        Weighted    average                     Weighted    average
   Exercise             average    remaining                    average    remaining
    price      Number   exercise  contractual                   exercise  contractual
    range     of shares  price   life in years Number of shares  price   life in years
   --------   --------- -------- ------------- ---------------- -------- -------------
   <S>        <C>       <C>      <C>           <C>              <C>      <C>
   $.002
     to
     .0105        671    $.005       6.86             671        $.005       6.86
   $.75           135     .750       8.24             115         .750       8.24
   $.825
     to
     1.00       1,384     .990       9.17             234         .970       8.64
   $1.10          250    1.100       8.63              63        1.100       8.63
                -----    -----       ----           -----        -----       ----
   $.002
     to
     1.10       2,440    $.720       8.43           1,083        $.360       7.49
                =====    =====       ====           =====        =====       ====
</TABLE>


                                      F-36
<PAGE>

                            PORTLAND SOFTWARE, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

(9) Commitments and Contingencies

 (a) Leases

    The Company leases equipment and office space under capital leases and
non-cancelable operating leases which expire at various dates through 2002.

    Included in equipment in the accompanying balance sheets are the following
assets held under capital leases at December 31:

<TABLE>
<CAPTION>
                                                                    1996  1997
                                                                    ----  -----
   <S>                                                              <C>   <C>
   Equipment....................................................... $181  $ 408
   Less accumulated amortization...................................  (53)  (113)
                                                                    ----  -----
                                                                    $128  $ 295
                                                                    ====  =====
</TABLE>

    Future minimum lease payments under capital and operating leases are as
follows:

<TABLE>
<CAPTION>
                                                               Capital Operating
                                                               leases   leases
                                                               ------- ---------
   <S>                                                         <C>     <C>
   Year ending December 31:
     1998....................................................   $137    $  293
     1999....................................................    107       330
     2000....................................................     52       344
     2001....................................................      4       354
     2002....................................................     --       390
     Thereafter..............................................     --       100
                                                                ----    ------
                                                                 300    $1,811
                                                                        ======
   Less amounts representing interest........................     55
                                                                ----
                                                                 245
   Less current installment..................................    111
                                                                ----
                                                                $134
                                                                ====
</TABLE>

    The Company incurred $87 and $210 in operating lease expense during 1996
and 1997, respectively.

 (b) Benefit Plan

    The Company has a defined contribution plan (the Plan). The Plan covers
primarily all officers and employees of the Company who meet prescribed age
and service requirements. Employees may contribute up to 15% of their
compensation. Matching contributions are determined at the discretion of the
Board of Directors. The Company did not make a matching contribution in 1996
or 1997.

 (c) Legal Proceedings

    The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on the
Company's financial position.

                                     F-37
<PAGE>

                            PORTLAND SOFTWARE, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


(10) Major Customers

    Most of the Company's customers are located in the United States. Aggregate
revenues for three significant customers were 77% and 40% of total revenues for
the years ended December 31, 1996 and 1997, respectively. Related receivables
from such customers were 0% and 30% of trade accounts receivable at December
31, 1996 and 1997, respectively. The Company estimates an allowance for
doubtful accounts based on the credit worthiness of its customers as well as
general economic conditions. Consequently, an adverse change in those factors
could affect the Company's estimate of its bad debts.

(11) Unaudited Recent Developments

    On August 5, 1998, the Company was acquired by Preview Systems, Inc.
through the exchange of all of its outstanding stock for 1,929 common shares
(post split) and 1,676 Series E Preferred Shares (post split) of Preview
Systems, Inc.

                                      F-38
<PAGE>

                             PREVIEW SYSTEMS, INC.

                       PRO FORMA STATEMENT OF OPERATIONS

                      For the Year Ended December 31, 1998


                                      F-39
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                 PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

                      For the Year Ended December 31, 1998
                     (In thousands, except per share data)
                                  (unaudited)

<TABLE>
<CAPTION>
                                           Portland                   Preview
                                Preview    Software,               Systems, Inc.
                             Systems, Inc.   Inc.    Adjustments     Pro Forma
                             ------------- --------- -----------   -------------
<S>                          <C>           <C>       <C>           <C>
Revenues....................   $    610     $   199    $   --        $    809
Operating expenses:
  Research and
    development.............      2,978       1,078        --           4,056
  Sales and marketing.......      2,915       1,287        --           4,202
  General and
    administrative..........      3,127       2,052        --           5,179
  Amortization of
    intangibles.............        866          --     1,218 (a)       2,084
  Acquired in-process
    research and
    development.............      2,091          --    (2,091)(b)          --
                               --------     -------    ------        --------
     Total operating
       expenses.............     11,977       4,417      (873)         15,521
                               --------     -------    ------        --------
Operating loss..............    (11,367)     (4,218)      873         (14,712)
Other income................         91          71        --             162
                               --------     -------    ------        --------
Net loss....................   $(11,276)    $(4,147)   $  873        $(14,550)
                               ========     =======    ======        ========
Net loss per basic and
  diluted share.............   $  (7.55)    $    --    $   --        $  (5.51)
                               ========     =======    ======        ========
Shares used in per share
  calculations..............      1,494          --     1,147           2,641
                               ========     =======    ======        ========
</TABLE>

                                      F-40
<PAGE>

                     PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

            NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

1. General

    The Company was formed in April 1998 to acquire all of the outstanding
equity interests of Preview Software, Inc. ("Preview Software") and Portland
Software, Inc. ("Portland Software"). The Company completed both of these
mergers on August 5, 1998. In accordance with Accounting Principles Board
Opinion No. 16, the stockholders of Preview Software were determined to be the
controlling shareholders of the Company. Accordingly, the merger of Preview
Software into the Company was accounted for as a reorganization under common
control with the underlying net assets recorded by the Company at historical
cost. The merger of Portland Software into the Company was accounted for using
the purchase method. Therefore, the amounts in the Preview Systems, Inc. column
reflect the consolidated results of operations of Preview Systems, Inc. for the
period January 1, 1998 through August 4, 1998, and the results of operations of
the combined entity from August 5, 1998 through December 31, 1998. The amounts
in the Preview Systems, Inc. Pro Forma column, which are unaudited, also
include the effect of Portland Software, Inc. from January 1, 1998 through
August 4, 1998 when it was acquired.

2. Pro Forma Adjustments

    (a) To record additional amortization of acquired capitalized intangibles
as if the merger had occurred on January 1, 1998.

    (b) To reverse acquired in-process research and development, a material
non-recurring charge.

                                      F-41
<PAGE>

Edgar Text Description:

 Narrative Description of Inside Back Cover

 Headline Upper Left Justified: "Delivering Digital Goods to the Desktop."

    Centered below the headline are two arrows that point to the first of three
computer screen samples, all of which are centered on the page. Each screen
represents a step in the selection process that a customer would take to order
and download a digital product, which in this example is Norton AntiVirus 5.0
for WinNT. This first screen is topped by a yellow window bar containing a
centered title: "Single Order." Below this bar is a gray box with a series of
text lines. Justified left on the first is: "Placed on: Aug 9 1999." Near the
center of this line is: "View Receipt." Justified right on this line is: "Order
#: 5712674." Justified with the left margin of the next line down is a heading
title: "Software Product Supplier Name & Version." Three column headings appear
on the right side of the same line: "Quantity," "Unit Price" and "Extended
Price." Justified with the left margin of the next line is: "SYMANTEC Norton
AntiVirus 5.0 for WinNT." Below the three column headers on the right of the
previous line are the following: "1," "$36.00" and "$36.00." Centered below
this line are a labeled icon and a line of text. The icon is yellow with a red
arrow pointing down, which is labeled, "Download." The underlined, blue text to
the right of the icon reads "Click here to download product." Centered below
this is the following text: "Status: Billed" and "As of: Aug 9 1999." On the
next line down is text in-line with the two furthest right columns from above:
"Subtotal Cost:" and "$36.00." The final line runs across the bottom of this
screen. Left justified text reads: "Payment Method: VISA." To the right, in-
line with the two furthest right columns from above, is: "Total:" and "$36.00."

    An arrow points from the first screen down to the second, which contains a
blue window bar with a right justified title: "Downloading Norton AntiVirus for
WinNT." In the left quarter of the screen below is a rectangular yellow box
containing four lines of text. From top to bottom, they are: "Shop,"
"SYMANTEC," "Powered by" and "beyond.com."

    The right three-quarters of this screen are made up of a gray section,
which is topped by a paragraph of text: "Now downloading and verifying your
product and license. A shortcut has been saved on your desktop should you need
to restart this download." Below this is a line of text: "Downloading Norton
AntiVirus for WinNT." Below this is a horizontal graphic bar, which is
approximately sixty percent blue. Below the bar, justified to the right, is a
line of text: "Received: 10584 KB of 12238 KB Completed." Below this, in the
right corner of the screen, is a button containing the text: "Finish Later."

    An arrow points down to the final screen, which contains a blue window bar
with a right-justified title: "Thank You for Your Purchase of Norton AntiVirus
for WinNT." In the left quarter of the screen is the same rectangular yellow
box with text as in the previous screen, but in a more elongated shape. The
right, gray section of this screen is divided into five horizontal sections,
each separated by a thin blue line. The first section contains a paragraph of
text: "Your purchase and download has completed successfully. If you
established a connection to the Internet, you may now disconnect." The second
section has a left-justified green and white icon that looks like a pad of
paper. To the right of this is a paragraph: "A packing slip for this purchase
is located in the following directory. Select one of these choices if you would
like to view or print a copy." Below this is another line of text:
"C:\\WINNT\Vbox\PackingSlips." On the right margin of this section are two
buttons containing text. The top reads, "View Slip," and the bottom reads,
"Print Slip." The third section has a left-justified yellow and white icon that
looks like a piece of paper. To the right of this is a paragraph: "A license
for this product has been installed on this machine and is required should you
ever need to reinstall. Please select Backup to make a copy to guard against
loss." To the right of this paragraph is a button containing the word:
"Backup." The fourth section has a left-justified icon that looks like a
computer. To the right of this is a paragraph: "Your product has been saved in
the following directory. Thank you for shopping at Symantec.
C:\WINNT\Vbox\Installers." The fifth section has three buttons containing text.
The first is flush left and reads: "About Vbox." The other two are in the
bottom right corner of the screen: the left one reads, "Launch," and the right
one reads: "Exit."

    Most of the background of the page is white, except for the lower right
quarter, which contains two layers of soft-focus ones and zeros, a continuation
of the random, graphic imitation of binary code.
<PAGE>






                             [PREVIEW SYSTEMS LOGO]

                              [OUTSIDE BACK COVER]
<PAGE>

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

    The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Preview in connection with
the sale of common stock being registered. All amounts are estimates except the
Securities and Exchange Commission registration fee and the NASD filing fee and
the Nasdaq National Market listing fee.

<TABLE>
<CAPTION>
                                                                        Amount
                                                                      to be paid
                                                                      ----------
   <S>                                                                <C>
   Securities and Exchange Commission registration fee..............   $ 12,788
   NASD filing fee..................................................      5,100
   Nasdaq National Market listing fee...............................     85,500
   Printing and engraving expenses..................................    225,000
   Legal fees and expenses..........................................    400,000
   Accounting fees and expenses.....................................    200,000
   Blue Sky qualification fees and expenses.........................      3,000
   Transfer Agent and Registrar fees................................     15,000
   Miscellaneous fees and expenses..................................     20,112
                                                                       --------
     Total .........................................................    966,500
                                                                       ========
</TABLE>

Item 14. Indemnification of Directors and Officers

    Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended. Articles XII
and XIV of Preview's Sixth Amended and Restated Certificate of Incorporation
(Exhibit 3.3 hereto) and Article VI of Preview's Amended and Restated Bylaws
(Exhibit 3.5 hereto) provide for indemnification of Preview's directors,
officers, employees and other agents to the maximum extent permitted by
Delaware Law. In addition, Preview has entered into indemnification agreements
(Exhibit 10.1 hereto) with its officers and directors. The underwriting
agreement (Exhibit 1.1 hereto) also provides for cross-indemnification among
Preview and the underwriters with respect to certain matters, including matters
arising under the Securities Act.

Item 15. Recent Sales of Unregistered Securities

    (a)Since July 1996, we and our predecessors, Preview Software and Portland
Software, have sold and issued the following unregistered securities (giving
effect to the conversion of the equity securities of Preview Software and
Portland Software after the mergers of these two companies in August 1998):

    1. In October 1996, Portland Software issued and sold 217,236 shares of
  its series A preferred stock to seven investors for aggregate
  consideration of $2,800,000.

    2. In December 1996 and September 1997, Preview Software issued and sold
  573,500 shares of its series A preferred stock to 12 investors for
  aggregate consideration of $573,000.

    3. In August and September 1997, Portland Software issued and sold
  620,675 shares of its series B preferred stock to 15 investors for
  aggregate consideration of $8,000,000. In connection with this financing,
  Portland Software also issued warrants to purchase an aggregate of 217,233
  shares of series B preferred stock to these same 15 investors at an
  exercise price of $6.68 per share.

                                      II-1
<PAGE>

    4. In September 1997, Preview Software issued and sold 352,500 shares of
  series B preferred stock to 13 investors for aggregate consideration of
  $705,000.

    5. In October 1997, Preview Software issued and sold 1,250,000 shares of
  its series C preferred stock to nine investors for aggregate consideration
  of $4,000,000. In connection with this financing, Preview Software also
  issued warrants to purchase 25,430 shares of series C preferred stock at
  an exercise price of $3.20 per share to six of these same investors.

    6. In April 1998, Preview Software issued and sold 299,401 shares of
  series D preferred stock to 17 investors for aggregate consideration of
  $2,000,000.

    7. In August 1998, in connection with the mergers of Portland Software
  and Preview Software, we issued 2,671,032 shares of common stock,
  3,313,307 shares of preferred stock and assumed warrants to purchase
  171,746 shares of our common stock and 242,663 shares of our preferred
  stock. We also assumed outstanding options to purchase 1,060,443 shares of
  common stock. The aggregate purchase price for all of these shares was
  paid in shares of Portland Software and Preview Software in connection
  with the merger. The exchange ratio for Preview Software capital stock was
  1 for 1. The exchange ratio for Portland Software capital stock was
  0.518263943 for 1.

    8. In September and October 1998, we issued and sold 1,162,518 shares of
  series F preferred stock to 37 investors for aggregate consideration of
  $5,812,592.

    9. In November 1998, we issued a warrant to purchase 2,700 shares of
  series F preferred stock at an exercise price of $5.00 to FirstCorp.

    10. In July 1999, we issued and sold 4,312,448 shares of series G
  preferred stock to 39 investors for aggregate consideration of
  $28,979,682. In connection with this financing, we also issued a warrant
  to purchase 76,682 shares of series G preferred stock at an exercise price
  of $6.72 per share to BancBoston Robertson Stephens, Inc.

    11. From inception to July 31, 1999, we and our predecessors granted
  options and stock purchase rights to purchase an aggregate of 3,274,147
  shares of common stock to our employees, directors and consultants with
  exercise prices ranging from $.50 to $8.40. As of July 31, 1999, we had
  outstanding options for the purchase of 2,331,840 shares and no
  outstanding stock purchase rights.

    (b)There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).

    The issuances of the securities listed in Item 15(a)(7) above were deemed
to be exempt from registration under the Securities Act in reliance upon
Section 3(a)(10) of the Securities Act. In addition, the issuances described in
Item 15 (a)(11) were deemed exempt from registration under the Securities Act
in reliance upon Rule 701 promulgated under the Securities Act. The issuances
of the other above-referenced securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such
Securities Act as transactions by an issuer not involving any public offering.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and warrants issued in such
transactions. All recipients had adequate access, through their relationships
with Preview and its predecessors, to information about Preview and its
predecessors.

                                      II-2
<PAGE>

Item 16. Exhibits and Financial Statement Schedules

    (a)Exhibits

<TABLE>
<CAPTION>
 Exhibit
   No.  Description
 ------------------

 <C>      <S>
   1.1*   Form of Underwriting Agreement.

   3.1    Fourth Amended and Restated Certificate of Incorporation, as
          currently in effect.

   3.2    Form of Fifth Amended and Restated Certificate of Incorporation, to
          be filed and become effective prior to the completion of this
          offering.

   3.3    Form of Sixth Amended and Restated Certificate of Incorporation, to
          be filed and become effective upon the completion of this offering.

   3.4    Bylaws, as currently in effect.

   3.5    Form of Amended and Restated Bylaws, to become effective upon the
          completion of this offering.

   4.1*   Form of Common Stock Certificate.

   5.1*   Opinion of Venture Law Group, A Professional Corporation.

  10.1    Form of Indemnification Agreement.

  10.2    Portland Software Amended and Restated 1994 Stock Option Plan,
          including form of stock option agreement.

  10.3    Preview Software 1997 Stock Option Plan, as amended, including form
          of stock option agreement.

  10.4    Preview Software New 1997 Stock Option Plan, as amended, including
          form of stock option agreement.

  10.5    Preview Systems 1998 Stock Option Plan as amended, including form of
          stock option agreement.

  10.6    Preview Systems 1999 Directors' Stock Option Plan, including form of
          stock option agreement.

  10.7    Preview Systems 1999 Employee Stock Purchase Plan, including form of
          subscription agreement.

  10.8*   (a) Second Amended and Restated Rights Agreement between Preview
          Systems and certain holders of our securities dated July 2, 1999.

          (b) Amendment to Second Amended and Restated Rights Agreement between
          Preview Systems and certain holders of our securities dated September
          14, 1999.

  10.9    Common Stock Purchase Agreement between Preview Systems and Vincent
          Pluvinage dated July 5, 1999.

 10.10    Common Stock Purchase Agreement between Preview Systems and Brad
          Solso dated July 6, 1999.

 10.11    (a) One Thousand Broadway Building Lease Agreement between Portland
          Software and One Thousand Broadway Building Limited Partnership dated
          July 3, 1996.

          (b) 1000 Broadway Building First Lease Amendment between Portland
          Software and 1000 Broadway Building LP dated August 14, 1996.

          (c) First Amendment to One Thousand Broadway Building Lease Agreement
          between Portland Software and One Thousand Broadway Building Limited
          Partnership dated November 26, 1996.

          (d) Second Amendment to One Thousand Broadway Building Lease
          Agreement between Portland Software and One Thousand Broadway
          Building Limited Partnership dated November 9, 1997.

 10.12    (a) Standard Office Lease--Gross between Preview Software and South
          Bay/Copley Venture, Inc. dated September 5, 1997.

          (b) First Amendment to Lease between Preview Software and South
          Bay/Copley Venture, Inc. dated November 25, 1997.

</TABLE>

                                      II-3
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.  Description
 ------------------


 <C>      <S>
          (c) Second Amendment to Lease Agreement between Preview Software and
          Limar Realty Corp. #26 dated August 26, 1998.

 10.13    (a) Loan and Security Agreement between Silicon Valley Bank and
          Preview Systems dated
          November 2, 1998.

          (b) Loan Modification Agreement between Silicon Valley Bank and
          Preview Systems dated July 1, 1999.

 10.14+*  ZipLock ESD System License Agreement between Preview Systems and
          Ingram Micro Inc., dated June 30, 1999.

 10.15+*  License Agreement between Preview Systems and Sony Marketing of Japan,
          dated as of September 29, 1998.

 10.16    Agreement and Plan of Reorganization by and among Preview Systems,
          Preview Software, Portland Software, Preview Acquisition Corp. and
          Portland Acquisition Corp. dated as of May 28, 1998.

 10.17    Series G Preferred Stock Purchase Agreement between Preview Systems
          and certain investors dated as of July 2, 1999.

 10.18    Series F Preferred Stock Purchase Agreement between Preview Systems
          and certain investors dated as of September 15, 1998.

 10.19    Series D Preferred Stock Purchase Agreement between Preview Software
          and certain investors dated as of April 21, 1998.

 10.20    Pledge Agreement between Preview Systems Inc. and Vincent Pluvinage
          dated September 14, 1998.

  21.1    Subsidiaries of Preview Systems.

  23.1    Consent of Arthur Andersen LLP.

  23.2    Consent of KPMG LLP.

  23.3*   Consent of Counsel (See Exhibit 5.1).

  24.1    Power of Attorney (See Page II-6).

  27.1    Financial Data Schedule, December 31, 1998.

  27.2    Financial Data Schedule, June 30, 1999.
</TABLE>
--------
 *To be filed by amendment.
 +Confidential treatment requested as to certain portions of this exhibit.

    (b)Financial Statement Schedules

    All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or
notes thereto.

Item 17. Undertakings

    The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

    Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a

                                      II-4
<PAGE>

director, officer, or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

    The undersigned registrant hereby undertakes that:

      (1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

      (2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

                                      II-5
<PAGE>

                                   SIGNATURES

    Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Cupertino, State of
California on September 16, 1999.

                                          PREVIEW SYSTEMS, INC.

                                                    /s/ Dr. Vincent Pluvinage
                                          By:
                                             ----------------------------------
                                                   Dr. Vincent Pluvinage
                                               President and Chief Executive
                                                          Officer

                               POWER OF ATTORNEY

    KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, Vincent
Pluvinage and G. Bradford Solso and each of them, as his or her attorney-in-
fact, with full power of substitution, for him or her in any and all
capacities, to sign any and all amendments to this Registration Statement
(including post-effective amendments), and any and all Registration Statements
filed pursuant to Rule 462 under the Securities Act of 1933, as amended, in
connection with or related to the offering contemplated by this Registration
Statement and its amendments, if any, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorney to any and all amendments to said Registration
Statement.

    Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
             Signature                           Title                    Date
             ---------                           -----                    ----

<S>                                  <C>                           <C>
     /s/ Dr. Vincent Pluvinage       President, Chief Executive    September 16, 1999
____________________________________ Officer, Director
       Dr. Vincent Pluvinage

     /s/ Mr. G. Bradford Solso       Vice President, Chief         September 16, 1999
____________________________________ Financial Officer
       Mr. G. Bradford Solso

     /s/ Mr. Gerard H. Langeler      Chairman of the Board of      September 16, 1999
____________________________________ Directors
       Mr. Gerard H. Langeler

      /s/ Mr. Bruce R. Bourbon       Director                      September 16, 1999
____________________________________
        Mr. Bruce R. Bourbon

      /s/ Mr. Donald L. Lucas        Director                      September 16, 1999
____________________________________
        Mr. Donald L. Lucas

      /s/ Mr. Gary E. Rieschel       Director                      September 16, 1999
____________________________________
        Mr. Gary E. Rieschel

     /s/ Dr. R. Douglas Rivers       Director                      September 16, 1999
____________________________________
       Dr. R. Douglas Rivers

    /s/ Ms. Jo Ann Heidi Roizen      Director                      September 16, 1999
____________________________________
      Ms. Jo Ann Heidi Roizen
</TABLE>

                                      II-6
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit
   No.  Description
 ------------------

 <C>      <S>
   1.1*   Form of Underwriting Agreement.

   3.1    Fourth Amended and Restated Certificate of Incorporation, as
          currently in effect.

   3.2    Form of Fifth Amended and Restated Certificate of Incorporation, to
          be filed and become effective prior to the completion of this
          offering.

   3.3    Form of Sixth Amended and Restated Certificate of Incorporation, to
          be filed and become effective upon the completion of this offering.

   3.4    Bylaws, as currently in effect.

   3.5    Form of Amended and Restated Bylaws, to become effective upon the
          completion of this offering.

   4.1*   Form of Common Stock Certificate.

   5.1*   Opinion of Venture Law Group, A Professional Corporation.

  10.1    Form of Indemnification Agreement.

  10.2    Portland Software Amended and Restated 1994 Stock Option Plan,
          including form of stock option agreement.

  10.3    Preview Software 1997 Stock Option Plan, as amended, including form
          of stock option agreement.

  10.4    Preview Software New 1997 Stock Option Plan, as amended, including
          form of stock option agreement.

  10.5    Preview Systems 1998 Stock Option Plan as amended, including form of
          stock option agreement.

  10.6    Preview Systems 1999 Directors' Stock Option Plan, including form of
          stock option agreement.

  10.7    Preview Systems 1999 Employee Stock Purchase Plan, including form of
          subscription agreement.

  10.8*   (a) Second Amended and Restated Rights Agreement between Preview
          Systems and certain holders of our securities dated July 2, 1999.

          (b) Amendment to Second Amended and Restated Rights Agreement between
          Preview Systems and certain holders of our securities dated September
          14, 1999.

  10.9    Common Stock Purchase Agreement between Preview Systems and Vincent
          Pluvinage dated
          July 5, 1999.

 10.10    Common Stock Purchase Agreement between Preview Systems and Brad
          Solso dated July 6, 1999.

 10.11    (a) One Thousand Broadway Building Lease Agreement between Portland
          Software and One Thousand Broadway Building Limited Partnership dated
          July 3, 1996.

          (b) 1000 Broadway Building First Lease Amendment between Portland
          Software and 1000 Broadway Building LP dated August 14, 1996.

          (c) First Amendment to One Thousand Broadway Building Lease Agreement
          between Portland Software and One Thousand Broadway Building Limited
          Partnership dated November 26, 1996.

          (d) Second Amendment to One Thousand Broadway Building Lease
          Agreement between Portland Software and One Thousand Broadway
          Building Limited Partnership dated November 9, 1997.

 10.12    (a) Standard Office Lease--Gross between Preview Software and South
          Bay/Copley Venture, Inc. dated September 5, 1997.

          (b) First Amendment to Lease between Preview Software and South
          Bay/Copley Venture, Inc. dated November 25, 1997.

</TABLE>
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.  Description
 ------------------


 <C>      <S>
          (c) Second Amendment to Lease Agreement between Preview Software and
          Limar Realty Corp. #26 dated August 26, 1998.

 10.13    (a) Loan and Security Agreement between Silicon Valley Bank and
          Preview Systems dated
          November 2, 1998.

          (b) Loan Modification Agreement between Silicon Valley Bank and
          Preview Systems dated July 1, 1999.

 10.14+*  ZipLock ESD System License Agreement between Preview Systems and
          Ingram Micro Inc., dated June 30, 1999.

 10.15+*  License Agreement between Preview Systems and Sony Marketing of Japan,
          dated as of September 29, 1998.

 10.16    Agreement and Plan of Reorganization by and among Preview Systems,
          Preview Software, Portland Software, Preview Acquisition Corp. and
          Portland Acquisition Corp. dated as of May 28, 1998.

 10.17    Series G Preferred Stock Purchase Agreement between Preview Systems
          and certain investors dated as of July 2, 1999.

 10.18    Series F Preferred Stock Purchase Agreement between Preview Systems
          and certain investors dated as of September 15, 1998.

 10.19    Series D Preferred Stock Purchase Agreement between Preview Software
          and certain investors dated as of April 21, 1998.

 10.20    Pledge Agreement between Preview Systems Inc. and Vincent Pluvinage
          dated September 14, 1998.

  21.1    Subsidiaries of Preview Systems.

  23.1    Consent of Arthur Andersen LLP.

  23.2    Consent of KPMG LLP.

  23.3*   Consent of Counsel (See Exhibit 5.1).

  24.1    Power of Attorney (See Page II-6).

  27.1    Financial Data Schedule, December 31, 1998.

  27.2    Financial Data Schedule, June 30, 1999.
</TABLE>
--------
 *To be filed by amendment.
 +Confidential treatment requested as to certain portions of this exhibit.
[{"type": "S-1", "sequence": "1", "description": "FORM S-1", "secsgml_size_bytes": 435553}]
{"company-data": {"conformed-name": "PREVIEW SYSTEMS INC", "cik": "0001091271", "assigned-sic": "", "irs-number": "770485517", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-87181", "film-number": "99712334"}, "business-address": {"street1": "1600 S DEANZA BLVD", "street2": "SUITE 100", "city": "CUPERTINO", "state": "CA", "zip": "95014"}, "mail-address": {"street1": "1600 SOUTH DEANZA BLVD", "street2": "SUITE 100", "city": "CUPERTINO", "state": "CA", "zip": "95014"}}
Filed with the Securities and Exchange Commission on September 16, 1999
                                                       Registration No. 333-
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                              -------------------
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
                              -------------------
                             PREVIEW SYSTEMS, INC.
            (Exact Name of Registrant as Specified in Its Charter)
                              -------------------
       Delaware                   7371                  77-0485517
    (State or Other         (Primary Standard        (I.R.S. Employer
    Jurisdiction of            Industrial         Identification Number)
   Incorporation or        Classification Code
     Organization)               Number)

                    1601 South DeAnza Boulevard, Suite 100
                          Cupertino, California 95014
                                (408) 873-3450
      (Address, Including Zip Code, and Telephone Number, Including Area
              Code, of Registrant's Principal Executive Offices)
                              -------------------
                               VINCENT PLUVINAGE
                            Chief Executive Officer
                             Preview Systems, Inc.
                    1601 South DeAnza Boulevard, Suite 100
                          Cupertino, California 95014
                                (408) 873-3450
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
                             of Agent for Service)
                              -------------------
                                  Copies to:
            Elias Blawie                            Alan Austin
            Tom Tobiason                          Steven Bernard
           Stephen Venuto                          John Whittle
             Mavis Yee                              Jon Layman
         Venture Law Group,              Wilson Sonsini Goodrich & Rosati
     A Professional Corporation             A Professional Corporation
        2800 Sand Hill Road                     650 Page Mill Road
    Menlo Park, California 94025            Palo Alto, California 94304
           (650) 854-4488                         (650) 493-9300
                              -------------------
       Approximate date of commencement of proposed sale to the public:
     As soon as practicable after the effective date of this Registration
                                  Statement.
                              -------------------
   If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
   If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
   If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
   If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
   If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
                        CALCULATION OF REGISTRATION FEE
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Proposed
                                                          Maximum
                                                         Aggregate   Amount of
                Title of Each Class of                   Offering   Registration
              Securities to be Registered                Price(1)       Fee
--------------------------------------------------------------------------------
Common Stock, par value $.0002 per share............... $46,000,000   $12,788
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
    registration fee pursuant to Rule 457(o) under the Securities Act.

   The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell these securities and we are not soliciting offers to buy these  +
+securities in any state where the offer or sale is not permitted.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 1999

[LOGO]                       PREVIEW SYSTEMS, INC.

                                     Shares

                                  Common Stock

  Preview Systems, Inc. is offering             shares of its common stock.
This is our initial public offering, and no public market currently exists for
our shares. We have applied to have the shares we are offering approved for
quotation on the Nasdaq National Market under the symbol "PRVW." We anticipate
that the initial public offering price will be between $      and $     per
share.

                                --------------

                 INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
                    SEE "RISK FACTORS" BEGINNING ON PAGE 7.
Per Share Total
                                                                 --------- -----
Public Offering Price...........................................   $       $
Underwriting Discounts and Commissions..........................   $       $
Proceeds to Preview Systems.....................................   $       $
--------------

  The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.

  We have granted the underwriters a 30-day option to purchase up to an
additional            shares of our common stock to cover over-allotments.
BancBoston Robertson Stephens Inc. expects to deliver the shares of common
stock to purchasers on        , 1999.

                                --------------

BancBoston Robertson Stephens
                Dain Rauscher Wessels
                 a division of Dain Rauscher Incorporated
                             SoundView Technology Group
                                                                     E*OFFERING

                     The date of this prospectus is  , 1999
Narrative Description of Inside Front Cover

 Headline Upper Left Justified: "e-Commerce of Digital Goods."

    Below this headline, two diagrams descend down either side of the page,
separated by a series of centered arrows. The left diagram is labeled
"PHYSICAL" and the right is labeled "DIGITAL."

    The "PHYSICAL" diagram begins with four box-shaped graphics that represent
warehouses. A horizontal text block extends across the warehouses containing
the text: "warehouse: inventory" and "office building: order-taking." Directly
below is a second graphic which represents the computer screen of an online
environment. A smaller window on the right side of this screen contains the
words "Add to shopping cart," which represents shopping basket technology used
by online stores. Spanning this graphic is a horizontal text block containing
the words: "online storefront: order placed." Directly below is a third
graphic, which represents a single warehouse containing boxes. A horizontal
text block spans this graphic: "physical inventory accessed." The next graphic
below represents a truck loaded with boxes. Spanning the top of the truck is a
text block: "physical inventory delivered." Below and to the right of the truck
is a graphic representation of a person, which is intersected by a final
horizontal text block: "physical goods received." To the right of the person
graphic, at the tip of the final centered arrow, is a graphic representation of
a calendar, which has approximately two and a half weeks shaded in.

    The second diagram begins below the word "DIGITAL" with a graphic composed
of cylindrical figures resembling electric coils. A horizontal text block spans
this graphic, containing the text: "digital packaging: digital inventory" and
"license management." The background is a cloud-shaped graphic containing soft-
focus ones and zeros, a random representation of binary code. At the lower edge
of this cloud is a mirror image of the online environment and shopping basket
window graphic described in the "PHYSICAL" diagram. The text block near the
bottom of this graphic contains the same words: "online storefront: order
placed." A different pattern of ones and zeros leads us down to a smaller,
cloud-shaped binary code graphic, which is spanned by a horizontal text block
containing the text: "digital inventory accessed and delivered." Directly below
is a graphic representing a computer on a desk and person. A final text block
crosses this graphic containing the text: "digital goods received." Below and
to the right is a graphic representing a stopwatch, with a small shaded area
indicating that a short time has passed.
Narrative Description of Left and Right Gate Folds

    This two page spread contains a single diagram. The left side gate fold
contains the diagram's headline, upper left justified: "Preview Systems--
Enabling e-Commerce Networks for Digital Goods."

    The diagram is divided into three areas of vertical logo columns, one on
the left gate fold, two on the right. Each logo column is divided horizontally
with half the logos in the upper part of the page and the other half in the
lower part. A respective text heading is located where each column is divided,
designating the logo category. The left column, which appears on the left gate
fold, is labeled "PUBLISHERS." Ascending in the column above are company logos
for "Xerox: The Document Company," "NETObjects," "Digital Square.com" and
"Broderbund." Descending from the label in this column are logos for "Mattel,"
"Intuit," "macromedia," "Symantec," and "The Learning Company: For Greater
Knowledge." The center column, which appears on the left side of the right gate
fold, is labeled "DISTRIBUTORS AND SERVICE PROVIDERS." Ascending in this column
are logos for "Ingram Micro," "ChargeNow.com," "TrustMarque," "NAVARRE.COM your
link to software, music and DVD sales," "Softway" and "EC Direct: Ecommerce
Your Way." Descending from the label in this center column are logos for
"NetSales," "releasenow.com: the power of internet sales" and "SONY." The right
column is labeled "OEMs and RESELLERS." Ascending from this label are
"Somm.com: Your driving force on the Net," "beyond.com: The Software
Superstore," "PRISMA" and "e-Academy." The descending logos are "Ingram Micro,"
"softline," "DUSTIN AB," "Packard Bell: the computer the world," and "Vector."

    Spanning the background of this diagram, crossing the left and right folds,
is a graphic representation of the world. Beneath this is an additional diagram
containing three circles, arranged vertically and centered behind "DISTRIBUTORS
AND SERVICE PROVIDERS" utilizing, in equal portions, one half the vertical
height of the page. To the left of "PUBLISHERS," 30 small diamond shapes are
arranged vertically and centered on the circles utilizing three-fifths the
vertical height of the page. To the right of "OEMs and RESELLERS," 30 small
square shapes are arranged vertically and centered on the circles utilizing
three-fifths the vertical height of the page. From each of the top 10 diamonds
and boxes, a line of 1s and 0s, representing digital code, leads into the
center of the top circle. From each of the middle 10 diamonds and boxes, a line
of 1s and 0s, representing digital code, leads into the center of the center
circle. From each of the bottom 10 diamonds and boxes, a line of 1s and 0s,
representing digital code, leads into the center of the bottom circle. Beneath
this diagram lies a soft-focus, bow tie-shaped swath of color extending to the
left and right margins.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock. In this prospectus, references
to "Preview," "we," "us," and "our" refer to Preview Systems, Inc. and its
subsidiaries.

    Until           , 1999 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.

                             --------------------

                               TABLE OF CONTENTS
Page
                                                                          ----
Prospectus Summary.......................................................   4
Risk Factors.............................................................   7
 Risks related to our business...........................................   7
 Risks related to our industry...........................................  15
 Risks related to our offering...........................................  17
You Should Not Rely on Forward-Looking Statements Because They Are
  Inherently Uncertain...................................................  19
How We Intend to Use the Proceeds From This Offering.....................  19
Dividend Policy..........................................................  19
Other Information........................................................  19
Capitalization...........................................................  20
Dilution.................................................................  21
Selected Consolidated Financial Data.....................................  22
Management's Discussion and Analysis of Financial Condition and Results
  of Operations..........................................................  23
Business.................................................................  30
Management...............................................................  42
Certain Transactions.....................................................  55
Principal Stockholders...................................................  57
Description of Capital Stock.............................................  59
Shares Eligible for Future Sale..........................................  62
Underwriting.............................................................  64
Legal Matters............................................................  66
Experts..................................................................  66
Additional Information...................................................  66
Index to Financial Statements............................................ F-1
--------------------

    Our logo and certain titles and logos of our products mentioned in this
prospectus are our service marks or trademarks. Each trademark, trade name or
service mark of any other company appearing in this prospectus belongs to its
holder.

    Except where we state otherwise, information in this prospectus is based
on the following assumptions:

  .  a one-for-two reverse split of all outstanding shares of our common
     stock and preferred stock to be completed immediately prior to the
     effectiveness of this offering;

  .  the conversion of all outstanding shares of preferred stock into shares
     of common stock upon the effectiveness of this offering; and

  .  no exercise of the underwriters' overallotment option.

                                       3
PROSPECTUS SUMMARY

    Because this is only a summary, it does not contain all the information
that may be important to you. You should read the entire prospectus, especially
"Risk Factors" and the consolidated financial statements and notes, before
deciding to invest in shares of our common stock.

                                  Our Company

    We develop and market an Internet-based infrastructure solution that
enables networks for the electronic distribution and licensing of digital
goods. Digital goods are products such as software, music, images, video and
documents that can be produced, delivered and licensed electronically. Our
solution is channel neutral, supports direct and indirect distribution and
enables publishers, distributors and resellers of digital goods to integrate
seamlessly within these networks. We earn transaction fees based on the value
of digital goods that are distributed and licensed using our solution.

    International Data Corporation projects that the retail market for
electronic software distribution will increase to $14.9 billion by 2003 from an
estimated $351 million in 1998. Electronic distribution of digital goods and
licenses can reduce costs, increase selling opportunities, and facilitate real-
time exchange of information among distribution channel participants. However,
many existing electronic distribution systems compete with existing
distribution channels, fail to adequately enforce distribution and licensing
rights and do not integrate sales information from multiple distribution
channels.

    Our solution provides publishers, distributors and resellers the ability to
implement networks for the electronic distribution and licensing of digital
goods. Our solution supports a variety of leading software and hardware
platforms, employs sophisticated encryption techniques to maximize security and
is scalable. In addition, it automates real-time exchange of information among
network participants.

    We have developed relationships with software publishers such as Symantec
and Macromedia that allows them to use our solution to distribute their
products electronically through direct or indirect channels. We have developed
a relationship with Ingram Micro, the leading worldwide wholesale distributor
of computer-based technology products and services. Our agreement enables
Ingram Micro to use our solution to supply its resellers electronically and to
sublicense appropriate network components to its resellers. We also have
established relationships with service providers who offer our solution on an
outsourcing basis. Finally, we are working directly and through third parties
with original equipment manufacturers, such as Packard Bell NEC, to bundle
encrypted digital goods for online licensing with its computer products.

    We seek to establish our solution as the de facto standard infrastructure
solution for participants in the electronic distribution and licensing of
digital goods. Key elements of our strategy are to target and secure the
support of leading software publishers and distributors, expand the number of
participants using digital goods networks, extend our solution into other
digital goods markets such as music, expand our solution to support volume
licensing to organizations and enhance our solution with value-added services.
We have an agreement with Intel Corporation to incorporate its content
protection agent system into our solution for secure electronic distribution of
digital music.

    Our principal executive offices are located at 1601 South De Anza
Boulevard, Suite 100, Cupertino, California 95014, and our telephone number is
(408) 873-3450. The information contained on our web site is not part of this
prospectus.

                                       4
The Offering
Common stock offered by Preview Systems............              shares
 Common stock to be outstanding after the offering..              shares
 Use of proceeds.................................... Working capital and
                                                     general corporate purposes
 Proposed Nasdaq National Market symbol............. PRVW
The common stock to be outstanding after the offering is based on the
number of shares outstanding as of July 31, 1999. This excludes:

  .  2,331,840 shares issuable upon exercise of outstanding options at a
     weighted average exercise price of $3.44 per share as of July 31, 1999;

  .  492,495 shares issuable upon exercise of outstanding warrants at a
     weighted average exercise price of $7.45 per share as of July 31, 1999,
     322,045 of which represent rights to acquire convertible preferred stock
     which convert one for one to common stock;

  .  460,097 shares available for future issuance under our stock option
     plans as of July 31, 1999; and

  .  300,000 shares available for issuance under our 1999 directors' stock
     option plan and 500,000 shares available for future issuance under our
     1999 employee stock purchase plan. See "Management--Stock Plans."

                      Summary Consolidated Financial Data
                     (in thousands, except per share data)

    We were incorporated in Delaware in April 1998 to acquire all of the
outstanding equity interests of Preview Software and Portland Software. We
completed both of these mergers on August 5, 1998. We accounted for our merger
with Preview Software as a reorganization under common control and we recorded
the underlying net assets at historical cost. We accounted for our merger with
Portland Software using the purchase method. Therefore, the following summary
consolidated financial data for the years ended December 31, 1996, 1997 and
1998 and the six months ended June 30, 1998 and 1999 reflect our operations and
those of Preview Software, and reflect the operations of Portland Software from
August 5, 1998. The statements of operations data displayed in the "Pro Forma
1998" columns give effect to the Portland Software merger as if the transaction
had occurred at the beginning of the specified periods.
Year Ended December 31,           Six Months Ended June 30,
                            -------------------------------------- ----------------------------
                                                        Pro Forma            Pro Forma
                             1996    1997      1998       1998      1998       1998      1999
                            ------  -------  --------  ----------- -------  ----------- -------
                                                       (unaudited)          (unaudited)
Consolidated Statements
    of Operations Data:
  Revenues:
    Network transaction
      fees................  $  148  $   262  $    435   $    618   $   111    $   246   $   742
    Services..............      --       --       175        191        --         16       479
                            ------  -------  --------   --------   -------    -------   -------
       Total revenues.....     148      262       610        809       111        262     1,221
  Operating expenses:
    Research and
      development.........      34    1,016     2,978      4,056     1,091      2,016     3,080
    Sales and marketing...     172      822     2,915      4,202       980      2,103     2,494
    General and
      administrative......     184      785     3,127      5,179     1,186      2,148     2,048
    Amortization of
      intangibles.........      --       --       866      2,084        --      1,042     1,038
    Acquired in-process
      research and
      development.........      --       --     2,091         --        --         --        --
                            ------  -------  --------   --------   -------    -------   -------
       Total operating
         expenses.........     390    2,623    11,977     15,521     3,257      7,309     8,660
                            ------  -------  --------   --------   -------    -------   -------
  Loss from operations....    (242)  (2,361)  (11,367)   (14,712)   (3,146)    (7,047)   (7,439)
                            ------  -------  --------   --------   -------    -------   -------
  Net loss................  $ (242) $(2,380) $(11,276)  $(14,550)  $(3,111)   $(6,947)  $(7,436)
                            ======  =======  ========   ========   =======    =======   =======
  Basic and diluted net
    loss per share........  $(0.69) $ (6.45) $  (7.55)  $  (5.51)  $ (4.60)   $ (2.67)  $ (2.75)
                            ======  =======  ========   ========   =======    =======   =======
  Shares used in computing
    net loss per share....     350      369     1,494      2,641       676      2,605     2,708
                            ======  =======  ========   ========   =======    =======   =======
5
The As Adjusted consolidated balance sheets data summarized below reflects
the conversion of our preferred stock into 4,475,826 shares of common stock
upon the completion of this offering and the application of the net proceeds
from the sale of the            shares of common stock offered by us at the
initial public offering price of $        per share after deducting the
underwriting discounts and commissions and our estimated offering expenses.
June 30, 1999
                                                               (unaudited)
                                                           --------------------
                                                           Actual   As Adjusted
                                                           -------  -----------
Consolidated Balance Sheets Data:
Cash, cash equivalents and short-term investments......... $   427     $
Working capital (deficit).................................  (3,525)
Total assets..............................................   8,150
Long-term portion of debt and capital lease obligations...     443
Total stockholders' equity................................     767
6
RISK FACTORS

    You should carefully consider the risks described below before making an
investment in our company. In addition, you should keep in mind that the risks
described below are not the only risks that we face. The risks described below
are the risks that we currently believe are material risks of this offering.
However, additional risks not presently known to us, or risks that we currently
believe are not material, may also impair our business operations. Moreover,
you should refer to the other information contained in this prospectus for a
better understanding of our business.

    Our business, financial condition, or results of operations could be
adversely affected by any of the following risks. If we are adversely affected
by these risks, then the trading price of our common stock could decline, and
you could lose all or part of your investment.

                         Risks related to our business

Our business model is new and unproven, and we may not succeed in generating
sufficient revenues to sustain or increase our business.

    We generally provide rights to use our technology and ongoing support
through annual licensing agreements. These agreements typically require our
customers to pay us network transaction fees based on a percentage of the sales
fulfilled using our solution. Upon execution and renewal of the agreement, our
customers commit to annual minimum network transaction fees which entitle them
to fulfill an agreed amount of sales using our solution. When their sales using
our solution exceed this agreed amount, we earn incremental network transaction
fees. Some or all of the minimum network transaction fees are paid in advance
or are paid based on an agreed schedule. We defer the recognition of the
minimum network transaction fees and recognize them over the term of the
agreement which is typically one year. We recognize any incremental transaction
fees when these are known which is generally in the month following our
customers' transactions.

    We expect to generate the majority of our revenues in the future from
network transaction fees. We currently derive all of our network transaction
fee revenues from annual minimum network transaction fees. After we recognize
the revenue attributable to these minimum network transaction fees, future
network transaction fees will depend entirely on sales using our solution,
which is predominantly outside of our control. At June 30, 1999, the aggregate
unrecognized minimum network transaction fees totaled $2.4 million. These
minimum network transaction fees are insufficient to support our business. As a
result, our customers must generate significant sales using our solution for us
to be successful.

    Our customers have only recently begun to use our solution to distribute
their products and we have not received any significant network transaction
fees under this transaction fee model. Applications and services based on our
solution might not be commercially deployed by our customers or, if
commercially deployed, the sales using our solution may be too small to support
or grow our business. In addition, future customers or existing customers upon
renewal may wish to use different business models, such as the payment of a
one-time license fee instead of ongoing network transaction fees. Our existing
customers may not elect to renew our agreements or they, as well as future
customers, may seek more favorable terms.

We have a limited operating history, making it difficult for you to evaluate
our business and your investment.

    We were formed in April 1998 to acquire all of the outstanding equity
interests of Preview Software and Portland Software. These acquisitions closed
in August 1998. Prior to August 1998, Portland Software and Preview Software
had achieved only limited distribution of their respective products. For
example, in 1996, 1997 and the six months ended June 30, 1998, total revenues
generated by both businesses were approximately $335,000,

                                       7
$763,000 and $262,000, respectively. In the 11 months since these acquisitions,
our total revenues were approximately $1.7 million. A majority of our
significant customers entered into their agreements with us since September
1998. Accordingly, we have a limited operating history and you have little
historical basis upon which to evaluate our business, products, markets and
general prospects of your investment.

Our success depends on our relationship with Ingram Micro.

    In June 1999, we entered into a non-exclusive agreement with Ingram Micro,
the leading worldwide wholesale distributor of computer-based technology
products and services, to license our solution to distribute software to
participants in Ingram Micro's distribution channel. This relationship is key
to our strategy of building networks of participants using our solution and
requires a great deal of effort to manage successfully. As of August 31, 1999,
Ingram Micro had not yet commercially launched, and under our agreement is not
obligated to launch, an electronic software distribution program using our
solution. Our agreement does not restrict Ingram Micro from using competitive
technologies instead of or in addition to our solution. Any failure or delay in
the launch of Ingram Micro's program using our solution would have a material
adverse effect on us.

    If Ingram Micro deploys a program using our solution, the success of this
program will depend on the participation rate of Ingram Micro's channel
partners. Getting these channel partners to participate is a complicated
process, involving many parties and requiring significant resources. Software
publishers must initially consent to allow Ingram Micro to distribute their
software titles electronically. We depend on Ingram Micro to obtain these
publisher consents. Obtaining publisher consents may prove difficult,
particularly if our digital goods solution is not perceived as secure or if the
participating reseller base is not significant. Because we depend on Ingram
Micro to obtain publisher consents, we do not know, and Ingram Micro is not
obligated to tell us, how many, if any, publishers have consented to distribute
their products electronically through Ingram Micro. In addition to software
publishers, resellers participating in Ingram Micro's distribution chain must
also be persuaded to adopt our system. Resellers may be reluctant to
participate in this electronic distribution network for a variety of reasons,
including the absence of a broad line of software titles and significant
publisher participation, the terms and conditions offered by Ingram Micro and
their perception as to whether our solution is becoming a de facto standard. As
of August 31, 1999, none of Ingram Micro's resellers has connected to this
electronic distribution network. We depend on Ingram Micro to facilitate
participation in this network by its resellers. Accordingly, the growth rate of
this network, to a large extent, is outside of our control. The failure of
Ingram Micro's channel partners to participate in this network on a timely
basis and generate significant sales using our solution would have a material
adverse effect on us.

    Our relationship with Ingram Micro is significant to us financially. In
exchange for the right to use our technology, Ingram Micro agreed to pay us
network transaction fees based on sales fulfilled using our solution. Ingram
Micro has recently disclosed that its net sales of software products have
decreased as a percentage of its total net sales in recent years and that it
expects this trend to continue. Our agreement with Ingram Micro has an initial
one-year term. The agreement provides for a one-year automatic renewal unless
terminated by providing advance notice. The failure to renew or termination of
this agreement would have a material adverse impact on us. In addition, the
agreement obligates us to indemnify Ingram Micro against claims our solution
infringes third-party intellectual property or contractual rights.

    As part of our strategy, we intend to pursue relationships with other
distributors of digital goods which could adversely affect our relationship
with Ingram Micro.

We expect operating expenses to increase significantly, we have incurred
significant net losses and we expect our losses will continue in the future.

    As of June 30, 1999, we had an accumulated deficit of $21.3 million. We
experienced net losses of $11.3 million and $2.4 million in 1998 and 1997,
respectively, and $7.4 million for the six months ended June 30, 1999. We have
not achieved profitability and we expect significant operating losses and
negative cash

                                       8
flow to continue for at least the next two years, and possibly longer. Our
losses will continue to increase because we expect to incur additional costs
and expenses related to research and development as well as expanding our
organization, especially in general and administrative functions, sales,
marketing and consulting.

    In addition, we are in the early stages of expanding our solution to
address electronic distribution of digital music. We anticipate that this
effort will entail additional significant increases in research and development
costs as well as in sales and marketing. We do not expect to recognize
meaningful revenues from the music business for at least the next 12 months, if
ever. Because we will spend these amounts before we receive any incremental
revenues from these efforts, our losses will be greater than the losses we
would incur if we developed our business more slowly. In addition, we may find
that these efforts are more expensive than we currently anticipate, which would
further increase our losses.

We rely on only a few customers for the majority of our revenues.

    Sony Marketing of Japan accounted for approximately 45% of our revenues in
1998. Sony Marketing and Ingram Micro accounted for approximately 51% of our
revenues in the first six months of 1999. We expect that Ingram Micro will
account for a significant percentage of our future revenues although we can
give you no assurance in that regard. We expect that a small percentage of our
customers will continue to account for a substantial portion of our revenues
for the foreseeable future. Contracts with these customers are generally short
term in nature, varying in length from one to three years, and can be
terminated by the customer on short notice without significant penalties. If
any one of these contracts is not renewed or otherwise ends, our business could
be materially adversely affected.

A significant number of distribution channel participants must agree to sell
digital goods through our solution for us to be successful.

    The distribution channel for digital goods is complex and multi-tiered,
consisting of publishers which sell to distributors, resellers and end
customers; distributors which sell to resellers; original equipment
manufacturers (OEMs) which sell to resellers and end customers; and resellers
which sell to end customers. Unless a significant number of these channel
participants adopts our solution in a timely manner, we will not achieve the
critical mass of participants we believe necessary for our success. Our success
depends on the adoption of our solution not only by our customers but by the
distribution channel partners of our customers as well. For example, in order
for a distributor to sell digital goods using our solution, the publisher of
the goods must consent to distribute its goods electronically and the reseller
of the goods must also agree to use our solution. We do not know whether our
customers' distribution channel partners will agree to use our solution. Unless
a significant number of our customers' distribution channel partners agrees to
sell digital goods through our solution, we may not be able to earn enough
revenues from our network transaction fees to become profitable or execute our
business model.

If Microsoft does not consent to the electronic distribution of its products
through distributors using our solution or adopt our solution for direct sales,
our business may be seriously harmed.

    Sales of Microsoft products account for a large portion of worldwide
software sales. If Microsoft does not consent to the electronic distribution of
its products through distributors using our solution or adopt our solution for
direct sales, our business may be seriously harmed. Additionally, Microsoft may
initiate its own standard for the electronic distribution of its software over
the Internet. Microsoft has initiated programs for the secure electronic
distribution of music. If distribution channel participants favor Microsoft's
existing or future solution for electronic distribution of digital goods, our
business may be harmed.

Our sales cycle is lengthy and unpredictable which could cause us to fail to
achieve projected results.

    We market our solution directly to software publishers, music labels that
offer prerecorded music, distributors, resellers, OEMs and service providers.
These critical relationships are usually complex and take

                                       9
time to finalize. We typically must provide a significant level of education
regarding the use and benefits of our solution. Our customers tend to engage in
extensive internal reviews before making a purchasing decision. Further, the
purchase and deployment of our solution within a customer's organization
involve a significant commitment of capital and other resources and, as a
result, are subject to delays beyond our control, such as customers' internal
procedures to approve large capital expenditures, budgetary constraints and the
testing and acceptance of new technologies that affect key operations. In
addition, our potential customers may delay or reduce spending for the
implementation of our solution as they attempt to stabilize their computer
systems before January 1, 2000 in order to reduce the risk of computer problems
associated with year 2000 issues. As a result, substantial time may pass
between selection of our solution by key decision makers and the signing of a
contract. Accordingly, the period between the initial sales call and the
signing of a contract with significant sales potential may typically range from
four to six months, and has been and can be significantly longer. Therefore,
the timing of sales to new customers is difficult to predict. Delays in
receiving signed contracts with major customers could cause us to fail to
achieve our projected results, as well as those of industry analysts, in a
given quarter, which would have a severe adverse effect on the price of our
stock.

Our solution has not yet been used under high-volume transaction conditions,
and we do not know if technical problems may significantly complicate the
operation of our solution on a large scale.

    Our solution has not yet been subjected to the volume of business and the
complexity we anticipate will be required to fully support the future
transactions of our largest customers. If our solution is not capable of
processing the necessary volume of transactions, our business will be seriously
harmed. In addition, it is likely that production software tools, diagnostic
tools and maintenance upgrades, as well as significant financial and other
resources, will be required to achieve reliability and resolve technical issues
related to large-scale transactions.

Our solution will require periodic upgrades and maintenance which may cause
disruptions in our service and will require the cooperation of our customers
and their channel partners.

    We will need to upgrade and improve our solution periodically. Upgrading or
deploying a new version of our solution requires the cooperation of our
existing customers and their network participants. These network participants
may be reluctant to upgrade our solution since this process can be complicated,
time-consuming and poses the risk of network failures. The existence of or
failure to resolve these technical issues on a timely basis would materially
adversely affect us.

Our solution must be integrated with our customers' and their channel partners'
existing systems and there will be significant delays between the licensing and
deployment of our solution.

    Our customers must integrate our solution into their existing systems or a
new system. Our business model is based on receiving network transaction fees.
Thus, our success depends upon the timely and successful deployment of our
solution by customers for the distribution and licensing of digital goods.

  The timing and success of commercial deployment depends upon the:

  .  complexity of our customers' systems and necessary development efforts;

  .  technical and engineering capabilities of our customers;

  .  budget for and relative importance of electronic distribution of
     digital goods to our customers;

  .  ability of our customers to integrate and test the implementation of
     our solution successfully; and

  .  efforts of our consulting, training and support services in providing
     technical support to our customers.

    We expect that the period between entering into a licensing arrangement and
the time a customer commercially deploys our solution will vary widely.

                                       10
Variations in the volume of sales of digital goods and services over the
Internet will cause fluctuations in our quarterly operating results, which
could cause our stock price to decline.

    The amount of network transaction fees we receive in any given quarter will
depend on the sales of digital goods that occur using our solution. Because
sales of digital goods using our solution are outside of our control, it will
be difficult for us to make accurate quarterly revenue projections even if our
solution is deployed commercially by our licensees. In addition, our revenues
will depend on the number of new deployments of our solution that occur in a
particular quarter. However, in the short term our operating expenses are
relatively fixed and based in part on our revenue projections. As a result, if
our revenue projections are not accurate for a particular quarter, our actual
operating results for that quarter could fall below the expectations of
analysts and investors. Our failure to meet these expectations would likely
cause the market price of our common stock to decline significantly and
rapidly.

Security breaches to our encryption technology may harm our reputation and
business and may cause us to expend significant additional resources to protect
against future breaches.

    Individuals, referred to as crackers, have in the past gained unlicensed
access to secured digital goods distributed through our solution. While we
expend significant efforts to make unauthorized access increasingly difficult,
we expect that determined crackers will continue their attempts to crack our
solution and may prove successful. We will have to expend significant capital
and other resources to alleviate problems caused by these attempts to crack our
solution.

    Any breach of our security systems could harm our reputation, which could
materially harm our business. A party who is able to circumvent our security
measures could misappropriate digital goods without paying the required license
fees, gain unauthorized access to proprietary information, erase or modify
electronic audit trails, or disrupt our customers' operations. Security
breaches could also harm our reputation and expose us to litigation and
liability. We cannot assure you that our security measures will prevent
security breaches or that a failure to prevent such security breaches will not
seriously harm our business.

We do not expect to recognize any significant revenues from the use of our
solution by our customers to sell digital music for at least the next 12
months, and we may not ever recognize meaningful revenues from these sales.

    We have only recently begun to explore and market our solution for
electronic distribution of music and no customer is currently using our
solution to distribute music. As a result, we do not believe that we will
recognize any significant revenue from the use of our solution to sell music or
any type of digital goods other than software for at least the next 12 months,
if at all. We expect to incur significant expenses to develop and promote the
use of our solution for the electronic distribution of music. If electronic
distribution of music fails to develop or we are unable to penetrate this
market, we will have expended a great deal of time, effort and financial
resources that could have been directed to more beneficial activities. In
addition, our business may be adversely impacted if our efforts are not
successful. Recently, many public companies engaged in music e-commerce have
experienced significant volatility in their stock prices. To the extent we are
perceived as participating in music e-commerce, we may also experience similar
volatility in our stock price.

    We are relying on Intel to provide us with its content protection agent
system that we can integrate with our solution. If we are unable to
successfully integrate it into our solution, we may be unable to provide a
viable solution for electronic distribution of music. Even if we successfully
incorporate the content protection agent system into our solution, it may not
provide adequate security.

    We also rely upon third parties to create digital music players that
support the content protection agent system technology developed by Intel. If
such third parties fail to support this technology or end customers do not
purchase devices to play music distributed through our solution, our solution
may not gain market acceptance.

    Other companies, such as Microsoft and Liquid Audio, have already begun to
distribute digital music using their proprietary methods. If these methods are
successful before we are able to implement our solution, our plans to use our
solution for the distribution of digital music may be seriously harmed.

                                       11
We have been, are and likely will in the future be subject to litigation that
may adversely affect us.

    From time to time we have been, currently are and expect to continue to be,
subject to legal proceedings and claims in the ordinary course of business,
including claims of alleged infringement of third-party intellectual property
rights by us and our licensees. We are also currently subject to litigation
initiated by 20/20 Software, Inc. in the United States Court for the District
of Northern California. The 20/20 complaint alleges that one of our employees,
a former 20/20 employee, misappropriated trade secrets and confidential
information of 20/20 and allegedly used them in a product of our predecessor
and subsidiary, Preview Software. Claims like these, whether or not
meritorious, could result in the expenditure of significant financial and
managerial resources and could materially and adversely affect our business.

Our intellectual property rights are difficult and costly to protect.

    We regard our patents, copyrights, trademarks, trade dress, trade secrets,
and similar intellectual property as critical to our success. We rely upon
patent, trademark and copyright law, trade secret protection and
confidentiality or license agreements with our employees, customers, partners
and others to protect our proprietary rights. Our proprietary technologies will
be protected from unauthorized use by third parties only to the extent that
they are covered by valid and enforceable patents or copyrights or are
effectively maintained as trade secrets. Any failure to protect our
intellectual property in a meaningful manner could materially and adversely
affect our business. In addition, litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others.
Litigation could result in substantial costs and diversion of management and
technical resources, which could materially and adversely affect us. We cannot
guarantee the adequacy of our efforts to protect our proprietary rights.

Any acquisitions we make could result in dilution, unfavorable accounting
charges and difficulties in successfully managing our business.

    As part of our business strategy, we review acquisition prospects that
would complement our existing business or enhance our technological
capabilities. Future acquisitions by us could result in potentially dilutive
issuances of equity securities, large and immediate write-offs, the incurrence
of debt and contingent liabilities or amortization expenses related to goodwill
and other intangible assets, any of which could materially and adversely affect
our results of operations. Furthermore, acquisitions entail numerous risks and
uncertainties, including:

  .  difficulties in the assimilation of operations, personnel,
     technologies, products and the information systems of the acquired
     companies;

  .  diversion of management's attention from other business concerns;

  .  risks of entering geographic and business markets in which we have no
     or limited prior experience; and

  .  potential loss of key employees of acquired organizations.

    We may be unsuccessful in integrating any businesses, products,
technologies or personnel that might be acquired in the future, and our failure
to do so could have a material adverse effect on our business. In addition,
public or analysts' perception of the value of a potential acquisition may be
negative and our stock price may fall as a result.

We face risks associated with international sales and operations.

    Although we sell our solution to customers outside the United States, we
might not succeed in expanding our international presence. Conducting our
business outside of the United States is subject to additional risks,
including:

  .  the possibility that the scarcity of high speed Internet access, the
     high cost of Internet access and the pace of future improvements in
     access to the Internet in countries outside the United States will
     limit the market for electronic distribution and licensing of digital
     goods;

                                       12
.  changes in regulatory requirements, taxes and tariffs;

  .  reduced protection of intellectual property rights;

  .  the burden of complying with a variety of international laws;

  .  potential tax withholding of our network transaction fees;

  .  longer collection periods;

  .  U.S. and international export and use restrictions on encryption
     technology;

  .  currency rate fluctuations that can impact our network transaction fees
     which are denominated in local currencies; and

  .  political or economic constraints on international trade or
     instability.

    One or more of these factors may materially and adversely affect our future
international operations, and consequently, our business.

    As a result of our agreement with Sony Marketing of Japan, which provides
Sony Marketing the exclusive right to distribute our products in Japan, our
success in this market depends on their efforts and ability to sell our
solution. This grant of an exclusive right to Sony Marketing may prevent
widespread adoption of our solution by the Japanese market which may prevent us
from being able to become a widely- used system in Japan.

We depend on key personnel, who may not continue to work for us.

    We are substantially dependent on the continued services of our officers
and key personnel who are all at-will employees. These individuals have
acquired specialized knowledge and skills with respect to our business. As a
result, if any of these individuals were to leave, we could face substantial
difficulty in hiring qualified successors and could experience a loss in
productivity while the new employee obtains the necessary training and
experience. We expect that we will need to hire additional personnel in all
areas. The competition for qualified personnel in our industry is intense,
particularly in the San Francisco Bay Area, where our corporate headquarters
are located. At times, we have experienced difficulties in hiring personnel
with the right training or experience, particularly in technical areas. If we
do not succeed in attracting new personnel or retaining and motivating existing
personnel, our business will be adversely affected.

The year 2000 bug could cause our solution and the software products of our
suppliers to malfunction.

    Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. As a result, many companies'
software and computer systems may need to be upgraded or replaced in order to
comply with these "year 2000" requirements.

 Internal Systems

    We are currently assessing the ability of our internal systems to satisfy
year 2000 requirements and expect to complete the program before December 31,
1999. We have not incurred material costs to date in this process, and
currently do not believe that the cost of additional actions will have a
material effect on our results of operations or financial condition. Although
we currently believe that our systems satisfy year 2000 requirements in all
material respects, our current systems may contain undetected errors or defects
with year 2000 date functions that may result in material costs. We do not have
a specific contingency plan to handle year 2000 problems if they occur. Based
on our assessment to date, we currently believe that year 2000 costs to us will
not exceed $50,000. However, in a worst case scenario, year 2000 problems could
cause us to cease normal operations for an indefinite period until we are able
to repair our internal systems. Although we are not

                                       13
aware of any material operational issues or costs associated with preparing our
internal systems for the year 2000, we may experience serious unanticipated
negative consequences or material costs caused by undetected errors or defects
in the technology used in our internal systems.

 Products

    Our products are currently designed and tested to be year 2000 compliant.
By "year 2000 compliant," we mean that the products will operate according to
their published documentation and will record, store, process and present
calendar dates falling on or after January 1, 2000 in the same manner, and with
the same functionality, as they record, store, process and present calendar
dates falling on or before December 31, 1999. We believe that the current
version of our solution is year 2000 compliant.

    Prior versions of our solution in current production use by some of our
customers are not year 2000 compliant and must be upgraded prior to December
31, 1999 in order to avoid problems at the rollover to January 1, 2000. We will
complete the upgrade for our customers in the normal course of our customer
support. As a result, we have not incurred and do not expect to incur any
material expenses related to these upgrades. Customers who fail to upgrade our
solution or any other third party software or hardware that is not year 2000
compliant that our solution relies on prior to that time may suffer severe
outages. This may harm our relationships with these customers and may damage
our reputation with other current or prospective customers. It is also possible
that customers with non-year 2000 compliant systems may decide to sue us
because our software was not year 2000 compliant. Although we expect to contest
these claims, the cost of litigation surrounding this issue may be significant
and, in a worst case scenario, year 2000 problems could prevent any
transactions using our solution from taking place until we are able to repair
our solution.

    We have not independently verified whether any third-party software
encrypted with our solution is year 2000 compliant. We have encouraged users of
our solution to contact third-party vendors to determine the year 2000
compliant status of their products. We have not independently verified whether
the components from our third-party manufacturers are year 2000 compliant. We
have warranted in certain of our license agreements that our solution as
delivered by us and without customization, will be year 2000 compliant provided
that the entire system and supporting products with which our solution is used
are also year 2000 compliant. This includes hardware, system software such as
the operating system and database software, and application software, either
purchased, contracted, or created in-house. In addition, our customers may also
be concerned about year 2000 issues or distracted by their own year 2000
compliance programs, either of which could adversely affect our business.

                                       14
Risks related to our industry

The success of our business will largely depend on the widespread acceptance of
commerce in digital goods over the Internet.

    The use of the Internet for distribution and licensing of digital goods may
not be commercially accepted for a number of reasons, including the:

  .  failure to adequately develop the necessary infrastructure for the
     electronic distribution and licensing of digital goods, including data
     compression or broadband communication technology;

  .  lack of adequate speed, access, or server reliability;

  .  public perception of the security and confidentiality of digital
     information and the confidentiality of its providers and users;

  .  development of competing technologies;

  .  rate of adoption of electronic distribution and licensing of digital
     goods by the existing retail and other channels;

  .  demand for digital goods that are available for purchase through
     electronic distribution; and

  .  level of end customer comfort with the process of downloading software,
     music and other digital goods over the Internet, including the ease of
     use.

    In addition, our business would be seriously harmed if publishers,
distributors or resellers of digital goods are unwilling to sell their digital
goods over the Internet. These factors are outside of our control. If commerce
in digital goods does not achieve widespread market acceptance or grow
significantly, our business will be seriously harmed.

Our market is subject to rapid technological changes; we may not be able to
introduce new products and enhancements on a timely basis.

    The market for electronic distribution and licensing of digital goods is
fragmented and marked by rapid technological change, frequent new product
introductions and enhancements, uncertain product life cycles, and changes in
customer demands. There is currently no standard for electronic distribution
and licensing of digital goods. New products based on new technologies or new
industry standards can quickly render existing products obsolete and
unmarketable. In the past we have experienced delays in new product releases
and we may experience similar delays in the future. Any delays in our ability
to develop and release enhanced or new systems could seriously harm our
business.

The market for electronic distribution of music may not develop, which could
adversely affect our revenue opportunities and business.

    The market for electronic distribution of music is new and rapidly
evolving. Electronic sales of music have been almost non-existent due to
uncertainty about whether, when and how a market for these sales will develop
as well as due to significant concerns regarding unauthorized use and
distribution of digitized music. As a result, a significant market for
electronically distributed music may not develop and our business may be
adversely affected.

We are in a highly competitive industry, and some of our competitors may be
more successful than we are in attracting and retaining customers.

    The market for electronic distribution and licensing of digital goods is
new, rapidly evolving and intensely competitive. We expect competition to
intensify in the future. We currently compete directly with other providers of
electronic commerce solutions for digital goods such as Cybersource, Digital
River and InterTrust Technologies. More broadly, we compete with other
providers of technology to secure digital content

                                       15
such as AT&T, IBM, Liquid Audio, Microsoft, Real Networks, Reciprocal and
Xerox, as well as solutions developed in-house. In the future, operating system
manufacturers may include digital rights management solutions in their
operating systems.

  We believe that the principal competitive factors in our markets include:

  .  software publisher, music label, distributor and reseller
     relationships;

  .  system security, scalability and reliability;

  .  breadth of products and services;

  .  price; and

  .  speed of deployment.

    Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and much greater
financial, marketing and other resources than we do. In addition, larger, well-
established and well-financed entities may acquire, invest in or form joint
ventures with competitors as the use of the Internet and other online services
increases. Increased competition may result in reduced prices, and loss of
market share and may negatively impact our ability to obtain network
transaction fees. In addition, adoption by publishers, distributors and
resellers of competing systems can significantly limit the size of the
potential market for our solution. We may not be able to compete successfully
against current and future competitors, and any inability to do so would
materially adversely affect our business.

We may be sued for violating the intellectual property rights of others.

    The digital encryption and distribution industry is characterized by the
existence of a large number of patents and frequent litigation based on
allegations of patent infringement and the violation of other intellectual
property rights. We have not completed an in-depth and exhaustive analysis of
such patents or applications. Some of our competitors have extensive patent
portfolios with broad claims. As the number of competitors in the market grows
and the functionality of our solution increases, the possibility of an
intellectual property claim against us increases. In addition, because patent
applications can take many years to issue, there may be a patent application
now pending, of which we are unaware, which will cause us to be infringing when
it is issued in the future. To address these patent infringement or other
intellectual property claims, we may have to enter into royalty or licensing
agreements on disadvantageous commercial terms. Alternatively, we may be unable
to obtain a necessary license. A successful claim against us, and our failure
to license the infringed or similar technology, would harm our business. In
addition, any infringement or other intellectual property claims, with or
without merit, which are brought against us could be time consuming and
expensive to litigate or settle and could divert management's attention from
our business.

We may face increased governmental regulation and legal uncertainties that
could increase our costs and be a barrier to doing business.

    To date, communications and commerce on the Internet have not been highly
regulated. State and federal governments may decide to enact new laws or
regulations at any time and it may take years to determine the extent to which
existing laws relating to issues including property ownership, defamation, and
personal privacy apply to the Internet. Any new laws or regulations or
implementations of existing laws and regulations relating to the Internet could
harm our business.

    As of October 1998, the European Union has adopted a privacy directive that
regulates the collection and use of information that can be associated with
specific individuals. These regulations may inhibit or prohibit the collection
and sharing of personal information in ways that could harm our partners or us.
The globalization of Internet commerce may be harmed by these and similar
regulations since the European Union privacy directive prohibits transmission
of personal information outside the European Union unless the receiving country
has

                                       16
enacted individual privacy protection laws at least as strong as those enacted
by the European Union privacy directive. The United States and the European
Union have not yet resolved this matter and they may not ever do so, in a
manner favorable to our customers or us.

Imposition of sales and other taxes on electronic commerce transactions may
hinder electronic commerce.

    The taxation of commerce activities in connection with the Internet has not
been established, may change in the future and may vary from jurisdiction to
jurisdiction. One or more states or other countries may seek to impose sales or
other taxes on companies that engage in or facilitate electronic commerce. A
number of proposals have been made at the local, state, and international level
that would impose additional taxes on the sale of products and services through
the Internet. These proposals, if adopted, could substantially impair the
growth of electronic commerce and could significantly harm our business.
Moreover, if any state or other country were to assert successfully that we
should collect sales or other taxes on the exchange of products and services
through the Internet, our business may be harmed.

                         Risks related to our offering

We may need to raise additional funds in the future, which could result in
dilution.

    We require substantial working capital to fund our business. We expect the
net proceeds from this offering, together with our existing capital resources,
to be sufficient to meet our working capital and capital expenditure needs for
at least the next 12 months. After that, we may need to raise additional funds,
and additional financing may not be available on favorable terms, if at all.
This could seriously harm our business and operating results. Furthermore, if
we issue additional equity securities, stockholders may experience dilution,
and the new equity securities could have rights senior to those of existing
holders of our common stock. If we raise additional funds through the issuance
of debt securities, holders of these securities could have rights, preferences,
and privileges senior to holders of common stock, and the terms of this debt
could impose restrictions on our operations. If we need to raise funds and
cannot do so on acceptable terms, we may not be able to develop or enhance our
solution, take advantage of future opportunities, or respond to competitive
pressures or unanticipated requirements.

Our securities have no prior market and our stock price may decline after the
offering.

    Before this offering, there has not been a public market for our common
stock and the trading market price of our common stock may decline below the
initial public offering price. The initial public offering price will be
determined by negotiations between us and the representatives of the
underwriters. In addition, an active public market for our common stock may not
develop or be sustained after this offering.

We are significantly influenced by existing stockholders.

    On completion of this offering, executive officers, key employees and
directors, and their affiliates will beneficially own, in the aggregate,
approximately     % of our outstanding common stock, assuming the underwriters
do not exercise their over-allotment option. As a result, these stockholders
will be able to exercise significant influence over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions, which could have the effect of delaying or
preventing a third party from acquiring control over us.

                                       17
We have implemented anti-takeover provisions that could make it more difficult
to acquire us.

    Our certificate of incorporation, our bylaws and Delaware law contain
provisions that could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. These provisions
include:

  .  authorizing the issuance of shares of blank check preferred stock;

  .  prohibiting stockholder action by written consent; and

  .  limitations on stockholders' ability to call special stockholder
     meetings.

Substantial sales of our common stock could depress our stock price.

    If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. Based on shares outstanding as of July 31, 1999, upon completion of
this offering, we will have         outstanding shares of common stock. Other
than the shares of common stock sold in this offering, 20,730 shares will be
eligible for sale in the public market immediately. Most of our stockholders
will be subject to agreements with the underwriters or us that restrict their
ability to transfer their stock for 180 days from the date of this prospectus.
After these agreements expire, an additional 7,022,608 shares will be eligible
for sale in the public market. For a detailed discussion of the shares eligible
for future sale, please see "Shares Eligible for Future Sale."

As a new investor, you will incur substantial dilution as a result of this
offering and future equity issuances.

    The initial public offering price is substantially higher than the book
value per share of our outstanding common stock. As a result, investors
purchasing common stock in this offering will incur immediate substantial
dilution of $     per share. In addition, we have issued options to acquire
common stock at prices significantly below the initial public offering price.
To the extent outstanding options are ultimately exercised, there will be
further dilution to investors in this offering. We have in the past and may in
the future issue equity securities to our partners. Any issuances to these
partners may cause further dilution to investors in this offering.

                                       18
YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS
                     BECAUSE THEY ARE INHERENTLY UNCERTAIN

    This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words like "anticipate," "believe," "plan," "expect,"
"future," "intend," and similar expressions to identify forward-looking
statements. This prospectus also contains forward-looking statements attributed
to third parties relating to their estimates regarding the growth of Internet
use and electronic distribution and licensing of digital goods. You should not
place undue reliance on these forward-looking statements, which apply only as
of the date of this prospectus. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks faced by us and described in the preceding pages and
elsewhere in this prospectus. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results or to changes in our expectations.

              HOW WE INTEND TO USE THE PROCEEDS FROM THIS OFFERING

    Our net proceeds from the sale of the                   shares of common
stock we are offering are estimated to be $            million, or
$             million if the underwriters' option to purchase additional shares
is exercised in full, based on an assumed initial public offering price of
$     per share and after deducting the underwriting discounts and commissions
and estimated offering expenses. We currently expect to use the net proceeds
primarily for working capital and general corporate purposes, including
approximately $       million for expanding our sales and marketing
organization. In addition, although we have no present commitments or
agreements with respect to any acquisitions, we may use a portion of the net
proceeds for further development of our product lines through acquisitions of
products, technologies and businesses. We will have significant discretion in
applying the net proceeds of this offering. Prior to these uses, we will invest
the net proceeds in short-term, investment grade, interest-bearing securities.

                                DIVIDEND POLICY

    Our policy is to retain earnings to provide funds for the operation and
expansion of our business and, accordingly, we have never paid cash dividends
on our capital stock. Any payment of future cash dividends and the amounts
thereof will depend upon our earnings, financial requirements, and other
factors deemed relevant by our Board of Directors. In addition, our bank loan
arrangements restrict our ability to pay dividends. We have no plans to pay
dividends in the future. See "Description of Capital Stock--Dividends."

                               OTHER INFORMATION

    You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.

    This prospectus includes estimates regarding the Internet industry. The
estimates that we used were taken or derived from information published by
sources including International Data Corporation, a firm that provides market
and strategic information to the information technology industry. Although we
believe that the estimates we used were generally indicative of the matters for
which we used them, this data is inherently imprecise, and you are cautioned
not to place undue reliance on those estimates.

                                       19
CAPITALIZATION

    The following table sets forth the following information:

  .  our actual capitalization as of July 31, 1999;

  .  the filing of and amendment to our certificate of incorporation to
     provide for authorized capital stock of 75,000,000 shares of common
     stock and 5,000,000 shares of undesignated preferred stock;

  .  our pro forma capitalization, after giving effect to the automatic
     conversion of all outstanding shares of preferred stock into 8,788,273
     shares of common stock; and

  .  the pro forma as adjusted capitalization, after giving effect to the
     sale of shares of common stock at the initial public offering price of
     $       per share in this offering, after deducting the underwriting
     discounts and commissions and estimated offering expenses that we
     expect to pay in connection with this offering.

    This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and notes to the consolidated financial statements
included elsewhere in this prospectus.
July 31, 1999
                                                 --------------------------------
                                                                       Pro Forma
                                                  Actual   Pro Forma  As Adjusted
                                                 --------  ---------  -----------
                                                  (in thousands, except share
                                                             data)
Long-term obligations, less current portion....  $  1,639  $  1,639     $
                                                 --------  --------     ------
Stockholders' equity:
  Preferred stock, par value $0.0002 per share;
    5,000,000 shares authorized, actual
    8,788,273 shares issued and outstanding;
    none issued or outstanding, pro forma; none
    issued or outstanding, pro forma as
    adjusted...................................        --        --         --
  Common stock, par value $0.0002 per share;
    75,000,000 shares authorized, 3,058,160
    shares issued and outstanding, actual;
    11,846,433 issued and outstanding, pro
    forma;         shares issued and
    outstanding, pro forma as adjusted ........        --        --         --
Additional paid-in capital.....................    51,213    51,213
Stockholder notes receivable ..................    (1,912)   (1,912)
Deferred compensation..........................      (128)     (128)
Accumulated deficit............................   (22,819)  (22,819)
                                                 --------  --------     ------
  Total stockholders' equity...................    26,354    26,354
                                                 --------  --------     ------
   Total capitalization........................  $ 27,993  $ 27,993     $
                                                 ========  ========     ======
--------
    The information in the table above excludes:

  .  options outstanding to purchase an aggregate of 2,258,500 shares of
     common stock issued to our employees, directors and consultants under
     our stock option plans and an additional 460,097 shares available for
     future issuance under our 1998 Stock Option Plan;

  .  options outstanding to purchase an aggregate of 73,340 shares of common
     stock issued outside of our stock option plans;

  .  warrants to purchase an aggregate of 170,450 shares of our common
     stock;

  .  warrants to purchase an aggregate of 25,430 shares of our series C
     preferred stock;

  .  warrants to purchase an aggregate of 217,233 shares of our series E
     preferred stock;

  .  a warrant to purchase an aggregate of 2,700 shares of our series F
     preferred stock; and

  .  a warrant to purchase an aggregate of 76,682 shares of series G
     preferred stock.

                                       20
DILUTION

    We calculate pro forma net tangible book value per share by dividing our
net tangible book value (total assets less intangible assets and total
liabilities) by our total number of shares of common stock outstanding. Our pro
forma net tangible book value as of July 31, 1999 was approximately $       or
$      per share of common stock. After giving effect to the sale of the
shares of common stock offered by us at an assumed initial public offering
price of $        per share (less underwriting discounts and commissions and
expenses we expect to pay in connection with this offering) our pro forma net
tangible book value as of July 31, 1999 would have been $        or $
per share of common stock. This represents an immediate increase in net
tangible book value of $ per share to existing stockholders and an immediate
dilution of $       per share to new investors. The following table illustrates
this per share dilution:
Assumed initial public offering price per share.......  $          $
   Pro forma net tangible book value per share as of July
     31, 1999............................................
   Increase per share attributable to new investors......
                                                           ----------
   Pro forma net tangible book value per share after the
     offering............................................
                                                                      ---------
   Dilution per share to new investors...................             $
                                                                      =========
The following table shows on a pro forma basis, as of July 31, 1999, with
respect to existing stockholders and new investors, the number of shares of
common stock purchased from us, the total consideration paid to us, and the
average price per share paid to us.
Shares Purchased   Total Consideration
                         -----------------  ---------------------  Average Price
                         Number   Percent    Amount     Percent      Per Share
                         -------- --------  ---------- ----------  -------------
Existing stockholders..                   % $                    %    $
New investors..........
                         --------  -------  ----------  ---------     ------
  Totals...............              100.0% $               100.0%    $
                         ========  =======  ==========  =========
The information presented with respect to existing stockholders assumes no
exercise of warrants to purchase 492,495 shares that were outstanding on July
31, 1999 with a weighted average exercise price of $7.45 per share (of which we
expect that warrants to purchase         shares will be exercised immediately
prior to completion of the offering) and no exercise of outstanding options. As
of July 31, 1999, options to purchase 2,331,840 shares were outstanding under
our option plans and outside our option plans with a weighted average price of
$3.44 per share, and 460,097 shares were reserved for issuance upon exercise of
options that may be granted subsequent to July 31, 1999. In August 1999, the
1998 Stock Option Plan was amended to increase the total number of shares
reserved for issuance by 1,000,000 shares. Additionally, in August 1999,
300,000 shares were reserved for issuance upon exercise of options that may be
granted under the 1999 Directors' Stock Option Plan, and 500,000 shares were
reserved for issuance under the 1999 Employee Stock Purchase Plan. The issuance
of common stock under these plans will result in further dilution to new
investors. These figures also include 8,788,273 shares of preferred stock
(which will be converted into 8,788,273 shares of common stock upon the closing
of this offering) and warrants to purchase 322,045 shares of preferred stock.
See "Management--Stock Option Plans," "Certain Relationships and Related
Transactions" and Notes 7 and 12 to the Consolidated Financial Statements.

                                       21
SELECTED CONSOLIDATED FINANCIAL DATA
                     (in thousands, except per share data)

    We were formed in April 1998 to acquire all of the outstanding equity
interests of Preview Software and Portland Software. We completed both of these
mergers on August 5, 1998. In accordance with Accounting Principles Board
Opinion No. 16, we determined the stockholders of Preview Software to be our
controlling stockholders. As a result, we accounted for our merger with Preview
Software as a reorganization under common control with the underlying net
assets recorded by us at historical cost. We accounted for our merger with
Portland Software using the purchase method. Therefore, the following selected
consolidated financial data for the years ended December 31, 1996, 1997 and
1998 and the six months ended June 30, 1998 and 1999 reflect our operations and
those of Preview Software, and reflect the operations of Portland Software from
August 5, 1998. The financial statements for the years ended December 31, 1996,
1997 and 1998 are derived from our audited financial statements. See
"Management's Discussion and Analysis of Financial Condition." The financial
statements for the six-month periods ended June 30, 1998 and 1999 and the pro
forma financial statements are derived from unaudited consolidated financial
statements. In our opinion, the unaudited consolidated financial statements
have been prepared on substantially the same basis as the audited consolidated
financial statements and include all adjustments, consisting only of recurring
adjustments, necessary for a fair presentation of the results of operations for
these periods. The pro forma statements of operations data for the year ended
December 31, 1998 and the six months ended June 30, 1998 give effect to the
merger with Portland Software as if this transaction had occurred on January 1,
1998.
Six Months Ended
                                Year Ended December 31,                   June 30,
                          -------------------------------------- ----------------------------
                                                      Pro Forma            Pro Forma
                           1996    1997      1998       1998      1998       1998      1999
                          ------  -------  --------  ----------- -------  ----------- -------
                                                     (unaudited)          (unaudited)
Consolidated Statements
  of Operations Data:
Revenues:
  Network transaction
    fees................  $  148  $   262  $    435   $    618   $   111    $   246   $   742
  Services..............      --       --       175        191        --         16       479
                          ------  -------  --------   --------   -------    -------   -------
     Total revenues.....     148      262       610        809       111        262     1,221
Operating expenses:
  Research and
    development.........      34    1,016     2,978      4,056     1,091      2,016     3,080
  Sales and marketing...     172      822     2,915      4,202       980      2,103     2,494
  General and
    administrative......     184      785     3,127      5,179     1,186      2,148     2,048
  Amortization of
    intangibles.........      --       --       866      2,084        --      1,042     1,038
  Acquired in-process
    research and
    development.........      --       --     2,091         --        --         --        --
                          ------  -------  --------   --------   -------    -------   -------
     Total operating
       expenses.........     390    2,623    11,977     15,521     3,257      7,309     8,660
                          ------  -------  --------   --------   -------    -------   -------
Loss from operations....    (242)  (2,361)  (11,367)   (14,712)   (3,146)    (7,047)   (7,439)
Other income (expense),
  net...................      --      (19)       91        162        35        100         3
                          ------  -------  --------   --------   -------    -------   -------
Net loss................  $ (242) $(2,380) $(11,276)  $(14,550)  $(3,111)   $(6,947)  $(7,436)
                          ======  =======  ========   ========   =======    =======   =======
Basic and diluted net
  loss per share........  $(0.69) $ (6.45) $  (7.55)  $  (5.51)  $ (4.60)   $ (2.67)  $ (2.75)
                          ======  =======  ========   ========   =======    =======   =======
Shares used in computing
  net loss per share....     350      369     1,494      2,641       676      2,605     2,708
                          ======  =======  ========   ========   =======    =======   =======
December 31,       June 30,
                                               --------------------- -----------
                                               1996   1997    1998      1999
                                               ----  ------- ------- -----------
                                                                     (unaudited)
Balance Sheets Data:
Cash and cash equivalents..................... $ 30  $ 2,489 $ 4,886   $   427
Working capital (deficit).....................  (22)   2,291   3,021    (3,525)
Total assets..................................   90    3,122  12,490     8,150
Notes payable.................................   20       --     509     2,260
Stockholders' equity..........................   --    2,713   8,006       767
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

    The following discussion should be read in conjunction with the
consolidated financial statements and notes appearing elsewhere in this
prospectus. The following discussion contains forward-looking statements. Our
actual results may differ significantly from those projected in the forward-
looking statements. Factors that might cause future results to differ
materially from those projected in the forward-looking statements include, but
are not limited to, those discussed below and elsewhere in this prospectus,
particularly in "Risk Factors."

Overview

    We acquired all of the outstanding equity interests of Preview Software and
Portland Software on August 5, 1998. Prior to the acquisitions, Portland
Software developed and licensed infrastructure software applications designed
to enable electronic software distribution among multiple distribution channel
partners. Preview Software developed and licensed electronic software
distribution products that enabled management and enforcement of licensing
rights both prior to and after electronic delivery to end customers. During the
period immediately preceding merger discussions, several key customers
expressed to both companies the desire to license a system that would feature
Portland Software's server software with the capabilities provided by Preview
Software's client software. As a result, the two companies decided to merge and
combine their software and services into a single comprehensive solution. We
were formed in April 1998 to effect this business combination.

    In accordance with Accounting Principles Board Opinion No. 16, we
determined that the stockholders of Preview Software were our controlling
stockholders. Accordingly, we accounted for our merger with Preview Software as
a reorganization under common control with the underlying net assets of Preview
Software recorded by us at historical cost. We accounted for our merger with
Portland Software using the purchase method. Therefore, the accompanying
consolidated financial statements reflect our operations and those of Preview
Software for all periods presented and reflect the operations of Portland
Software since August 5, 1998. Due to the impact of purchase accounting and our
short operating history, we believe that the results of operations for the
periods presented are not indicative of future results of operations.

    On August 5, 1998, we capitalized $6.0 million in the form of acquired
technology, patents and other intangibles in connection with the Portland
merger. We are amortizing these intangible assets over two to three years, the
estimated useful lives of the related assets. Amortization of intangibles will
result in a charge of approximately $521,000 and $2.1 million on a quarterly
and annual basis, respectively, through August 2000 and approximately $486,000
and $1.9 million on a quarterly and annual basis, respectively, from September
2000 through August 2001.

    We generally provide rights to use our solution and ongoing customer
support through annual licensing agreements. These agreements typically require
the payment of network transaction fees based on a percentage of the sales
fulfilled using our solution. Prior to the Portland merger, Preview Software's
revenues were typically based on one-time license fees which were recognized
over the term of the license. Currently, our network transaction fees are based
on a percentage of the sales fulfilled using our solution. Our customers
typically commit to minimum network transaction fees that entitle them to
fulfill an agreed amount of sales during the one-year term of the agreement.
Some or all of the minimum network transaction fees are prepaid upon signing
the agreement. We record deferred revenue related to these fees and recognize
them on a straight-line basis over the license period. To the extent sales
fulfilled using our solution exceed the agreed amount of sales, we recognize
incremental network transaction fees. We will recognize these incremental
network transaction fees when the amounts due are known, which will generally
be in the month subsequent to our customers' sales. Through June 30, 1999, we
have not earned any incremental network transaction fees.

    We entered into a three-year agreement with Sony Marketing of Japan in
September 1998 that gives Sony Marketing the exclusive right to use and
sublicense our solution in Japan, including future upgrades,

                                       23
enhancements and new products. The agreement also provided for training and
support through June 1999. We received non-creditable, upfront payments for the
license, services and training to be performed by us. We recorded deferred
revenue on these upfront fees and recognize the license portion as network
transaction fees on a straight-line basis over the three-year term of the
agreement. We recognized the service revenue as work was performed. In
addition, beginning April 1999, Sony Marketing has agreed to pay us network
transaction fees based on a percentage of the revenue it receives from
distributing our solution and providing related services. Sony Marketing
committed to pay us annual minimum network transaction fees. If the network
transaction fees paid by Sony Marketing during the initial annual period are
less than the annual minimum network transactions fees, Sony Marketing must pay
us any shortfall. Beginning April 2000, if network transaction fees are less
than a specified target, Sony Marketing, at its option, may forego its
exclusivity rights rather than pay the shortfall. During the first year of the
agreement, we will recognize the annual minimum network transactions fees over
12 months until we have earned network transaction fees in excess of these
annual minimum network transaction fees. In subsequent years, we will recognize
the network transaction fees as they are earned.

    Service revenues generally consist of consulting, training and integration
fees. We typically bill these services and recognize them as the related
services are performed or when contract milestones are achieved.

Results of Operations

    References to pro forma financial information reflect our unaudited
combined results of operations after giving effect to the Portland merger as if
it had occurred on January 1, 1998. All period-to-period comparisons are made
on an historical basis unless otherwise specifically indicated.

 Six Months Ended June 30, 1999 Compared to June 30, 1998

    Revenues. Total revenues were $1.2 million for the six months ended June
30, 1999 compared to $111,000 for the six months ended June 30, 1998 and
$262,000 for the six months ended June 30, 1998 on a pro forma basis.

    Network transaction fees were $742,000 for the six months ended June 30,
1999 compared to $111,000 for the six months ended June 30, 1998 and $246,000
for the six months ended June 30, 1998 on a pro forma basis. The increase in
network transaction fees was primarily the result of the recognition of network
transaction fees related to agreements with publishers and our distributor in
Japan. The increase also reflected additional network transaction fees
resulting from the licensing of products acquired in the Portland merger.

    Service revenues were $479,000 for the six months ended June 30, 1999
compared to $0 for the six months ended June 30, 1998 and $16,000 for the six
months ended June 30, 1998 on a pro forma basis. The increase in service
revenues was primarily the result of training and consulting services performed
for Sony Marketing of Japan and Ingram Micro in connection with their
agreements.

    Research and Development. Research and development expenses consist
principally of salaries and related personnel expenses, consultant fees and the
cost of software used in product development. Research and development expenses
were $3.1 million for the six months ended June 30, 1999 compared to $1.1
million for the six months ended June 30, 1998 and $2.0 million for the six
months ended June 30, 1998 on a pro forma basis. The increase in research and
development expenses partially resulted from increases in personnel, consultant
fees and the cost of software used in product development. These expenses also
increased due to a higher combined level of expenses following the Portland
merger. We believe that continued investment in research and development is
critical to attaining our strategic objectives and we expect these expenses to
increase in the future.

    Sales and Marketing. Sales and marketing expenses consist of salaries and
related expenses for personnel engaged in direct sales, partner development,
marketing and field service support, consultant fees, advertising,

                                       24
promotional materials and trade show exhibit expenses. Sales and marketing
expenses were $2.5 million for the six months ended June 30, 1999 compared to
$1.0 million for the six months ended June 30, 1998 and $2.1 million for the
six months ended June 30, 1998 on a pro forma basis. The increase was
primarily related to increased head count following the acquisition of
Portland Software and, to a lesser extent, rebranding efforts to reflect the
newly-combined entity. We expect sales and marketing expenses to increase in
the future due to planned growth of our sales and partner development efforts.

    General and Administrative. General and administrative expenses consist
primarily of salaries and related expenses for executive, legal, accounting
and administrative personnel, professional services and general corporate
expenses. General and administrative expenses were $2.0 million for the six
months ended June 30, 1999 compared to $1.2 million for the six months ended
June 30, 1998. This increase was primarily related to increased headcount
following the Portland Software merger, employee severance payments, and
increased legal costs. General and administrative expenses were $2.1 million
for the six months ended June 30, 1998 on a pro forma basis. We expect general
and administrative expenses to increase in the future as we add personnel,
incur additional costs to support continued growth and implement additional
internal systems necessary to support a public company.

    Amortization of Intangibles. Amortization of intangibles consists of the
amortization of patent costs and intangibles acquired in connection with the
Portland merger. Amortization of intangibles was $1.0 million for the six
months ended June 30, 1999 compared to $0 for the six months ended June 30,
1998 and $1.0 million for the six months ended June 30, 1998 on a pro forma
basis. The increase in amortization of intangibles in the first half of 1999
resulted from the Portland merger which occurred on August 5, 1998.

    Income Taxes. We have incurred net losses since inception for federal and
state tax purposes and have not recognized any tax benefit. We are in a net
deferred tax asset position, which has been fully reserved. We will continue
to provide a valuation allowance for our net deferred tax assets until it
becomes more likely than not, in our assessment, that our net deferred tax
assets will be realized.

    Inflation did not have a material impact on the results of operations for
the six-month periods ended June 30, 1999 and 1998.

 Year Ended December 31, 1998, 1997 and 1996

    Revenues. Total revenues were $610,000 in 1998 compared to $262,000 in
1997 and $148,000 in 1996.

  Network transaction fees were $435,000 in 1998 compared to $262,000 in 1997
and $148,000 in 1996. The increase in network transaction fees in 1998
compared to 1997 was primarily the result of the recognition of network
transaction fees related to an agreement with Sony Marketing of Japan. The
increase also reflected additional network transaction fees resulting from the
licensing of products acquired in the Portland merger. The increase in network
transaction fees in 1997 compared to 1996 was primarily the result of
increased sales and marketing activities.

    Service revenues were $175,000 in 1998 and $0 for the years ended December
31, 1997 and 1996. The increase in service revenues was primarily a result of
training and custom consulting services performed for Sony Marketing of Japan
in 1998 in connection with their agreement.

    Two customers accounted for 45% and 13%, respectively, of total revenues
in 1998. Two customers accounted for 21% and 12%, respectively, of total
revenues in 1997. Two customers accounted for 54% and 20%, respectively, of
total revenues in 1996.

    Research and Development. Research and development expenses were $3.0
million, $1.0 million and $34,000 in 1998, 1997 and 1996, respectively.
Research and development expenses for 1998 compared to 1997 increased
primarily due to increases in personnel, increases in headcount following the
Portland merger, consultant fees and the cost of software used in product
development. The increase in research and development expenses for 1997
compared to 1996 was primarily a result of increased personnel, consultant
fees and the cost of software used in product development.

                                      25
Sales and Marketing. Sales and marketing expenses were $2.9 million,
$822,000 and $172,000 in 1998, 1997 and 1996, respectively. Sales and marketing
expenses for 1998 compared to 1997 increased primarily due to increases in
personnel, increases in headcount following the Portland merger and rebranding
efforts related to the newly-combined entity. The increases for 1997 compared
to 1996 primarily resulted from increased personnel and sales and marketing
efforts.

    General and Administrative. General and administrative expenses were $3.1
million, $785,000 and $184,000 in 1998, 1997 and 1996, respectively. General
and administrative expenses for 1998 increased compared to 1997 primarily due
to increases in headcount following the Portland merger, employee severance
payments and reduction in force costs following the Portland merger. The
increases for 1997 compared to 1996 primarily resulted from increased personnel
and legal costs.

    Amortization of Intangibles. Amortization of intangibles was $866,000 in
1998 compared to $0 in 1997 and 1996. The increase was related to the Portland
merger in August 1998.

    Acquired In-Process Research and Development. In 1998, as a result of the
Portland merger, we recorded a one-time charge of $2.1 million related to the
purchase of in-process research and development. The value assigned to in-
process research and development represented research and development efforts
in process at the acquisition date for which technological feasibility had not
yet been established and which had no alternative future uses. Accounting
principles require that such costs be charged to expense as incurred. We
believe that these research and development efforts will result in commercially
viable products over the next one to two years.

    Income Taxes. We have incurred net losses since inception for federal and
state tax purposes and have not recognized any tax provision or benefit. As of
December 31, 1998, we had approximately $15.7 million of federal and state net
operating loss carryforwards to offset against future taxable income. The
federal net operating loss and tax credit carryforwards expire on various dates
through 2018, if not used. The state net operating loss carryforwards expire on
various dates through 2013, if not used. Utilization of net operating losses
and credits is subject to a substantial annual limitation due to the change in
ownership provisions of the Internal Revenue Code of 1986 and similar state
provisions. The annual limitation may result in the expiration of net operating
losses and credits before utilization.

    Inflation did not have a material impact on the results of operations for
1998, 1997 and 1996.

                                       26
Quarterly Results of Operations

    The following table sets forth, for the periods presented, selected data
from our consolidated statements of operations. The historical data has been
derived from our unaudited consolidated financial statements, and, in our
opinion, include all adjustments, consisting only of normal recurring
adjustments, that are necessary for a fair presentation of the results of
operations for these periods. The unaudited pro forma financial information
reflects our combined results of operations after giving effect to the Portland
merger as if it had occurred on January 1, 1998.

    This unaudited historical and pro forma quarterly information should be
read in conjunction with the consolidated financial statements and notes
included elsewhere in this prospectus. The operating results in any quarter are
not necessarily indicative of the results that may be expected for any future
period. We have incurred losses in each quarter since inception and expect to
continue to incur losses for the foreseeable future.
Quarters Ended (unaudited)
                          ----------------------------------------------------------------
                           March 31,   June 30,    Sept. 30,
                             1998        1998        1998     Dec. 31,  March 31, June 30,
                          (Pro Forma) (Pro Forma) (Pro Forma)   1998      1999      1999
                          ----------- ----------- ----------- --------  --------- --------
                                                  (in thousands)
Revenues:
 Network transaction
   fees.................    $    88     $   158     $   167   $   205    $   295  $   447
 Services...............         14           2          23       152        168      311
                            -------     -------     -------   -------    -------  -------
  Total revenues........        102         160         190       357        463      758
Operating expenses:
 Research and
   development..........      1,083         933         919     1,121      1,468    1,612
 Sales and marketing....      1,110         993       1,210       889      1,039    1,455
 General and
   administrative.......      1,186         962       1,773     1,258      1,042    1,006
 Amortization of
   intangibles..........        521         521         523       519        519      519
                            -------     -------     -------   -------    -------  -------
  Total operating
    expenses............      3,900       3,409       4,425     3,787      4,068    4,592
                            -------     -------     -------   -------    -------  -------
Loss from operations....     (3,798)     (3,249)     (4,235)   (3,430)    (3,605)  (3,834)
Other income (expense),
  net...................         63          37          16        46         27      (24)
                            -------     -------     -------   -------    -------  -------
Net loss................    $(3,735)    $(3,212)    $(4,219)  $(3,384)   $(3,578) $(3,858)
                            =======     =======     =======   =======    =======  =======
The increase in revenues for the periods presented primarily resulted from
the recognition of network transaction fees and service fees associated with
execution of agreements with publishers and with Sony Marketing of Japan in
September 1998 and Ingram Micro in June 1999.

    Operating expenses have increased primarily as a result of increased
operating activities and personnel. The increase in research and development
expenses over the four quarters ended June 30, 1999 resulted from increases in
personnel, consultant fees and the cost of software used in product
development. The increase in sales and marketing expenses for the quarter ended
September 30, 1998 was due to increases in personnel, increases in headcount
following the Portland merger, the Portland merger and rebranding efforts
related to the newly-combined entity. The increase in sales and marketing
expenses during the quarter ended June 30, 1999 was a result of increases in
sales and marketing personnel and increased expenditures on marketing programs.
The increase in general and administrative expenses for the quarter ended
September 30, 1998 related principally to costs associated with the Portland
merger.

    The pro forma results of operations reflect the elimination of the $2.1
million acquired in-process research and development charge, a material non-
recurring charge, incurred in the third quarter of 1998 in connection with the
Portland merger, and the addition of the quarterly amortization of capitalized
intangibles related to the Portland merger as if the merger had occurred on
January 1, 1998.

    Due to our limited operating history, we are unsure what effect, if any,
the seasonal nature of our customers' business will have on our quarterly
results of operations.

                                       27
Liquidity and Capital Resources

    Historically, we have funded our operations through the sale of preferred
stock and, to a much lesser degree, our bank credit facility. Through June 30,
1999, we raised $12.5 million through these privately placed preferred stock
financings and had outstanding borrowings at June 30, 1999, including capital
lease commitments, of $2.7 million. At June 30, 1999, our principal sources of
liquidity included $427,000 in cash and cash equivalents and available
borrowings under the line of credit facility discussed below. In July 1999, we
sold preferred stock for net proceeds of approximately $27.0 million. As a
result of this preferred stock offering, $1.2 million of the notes payable on
our balance sheet at June 30, 1999 were automatically converted into shares of
our preferred stock.

    Through June 30, 1999, we have used the majority of our financing proceeds
to fund operating activities. To a much lesser extent, we have used the
financing proceeds to acquire computer hardware and software used to support
our product development and growing employee base. Expenditures for property
and equipment amounted to $561,000 in 1998 and $287,000 for the six months
ended June 30, 1999. In the future, we anticipate a substantial increase in
capital expenditures and lease commitments consistent with anticipated growth
in operations and personnel.

    In November 1998, we entered into a loan agreement with a bank, which
provides for borrowings under a revolving line of credit of up to $1.0 million,
and borrowing under a term loan. Amounts borrowed under the line of credit and
the term loan bear interest at the bank's prime rate plus 1% (9.0% at June 30,
1999). Interest is payable monthly on borrowings under the revolving line of
credit and the term loan is payable in 36 equal installments of $13,000 of
principal, plus interest. Borrowings are collateralized by all of our tangible
and intangible assets. As of June 30, 1999, amounts outstanding under the line
of credit were $700,000, and amounts outstanding under the term loan were
$380,000. Under this agreement, we are required to maintain compliance with
certain financial and other covenants including minimum tangible net worth,
liquidity coverage and ratio of quick assets to current liabilities minus
deferred revenue. We paid off all amounts outstanding on this line of credit in
July 1999 with the proceeds from the preferred stock offering. The revolving
line of credit expires on November 1, 1999 and the term loan matures on
November 2, 2001.

    Accounts receivable were $1.2 million at June 30, 1999 compared to $152,000
at December 31, 1998. The increase was primarily attributable to the execution
of new licensing agreements with publishers and Ingram Micro. Accounts payable
were $1.2 million at June 30, 1999 compared to $442,000 at December 31, 1998,
primarily as a result of increased business activity and costs incurred with
our preferred stock offering.

    We believe that the net proceeds of this offering, together with cash on
hand and cash available under our credit facilities, will be sufficient to meet
our working capital needs through at least the next 12 months. Thereafter, we
may require additional funds to support our working capital requirements or for
other purposes and may seek to raise additional funds through public or private
equity financing or from other sources. Additional financing may not be
available at all or, if available, may not be obtainable on terms favorable to
us. In addition, any additional financing may be dilutive to our stockholders.
If we raise additional funds through the issuance of debt securities, holders
of these securities could have rights, preferences, and privileges senior to
holders of common stock, and the terms of this debt could impose restrictions
on our operations.

Year 2000 Compliance

    Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. As a result, many companies'
software and computer systems may need to be upgraded or replaced in order to
comply with these "year 2000" requirements.

 Internal Systems

    We are currently assessing the ability of our internal systems to satisfy
the year 2000 requirements and expect to complete the program before December
31, 1999. We have not incurred material costs to date in this process, and
currently do not believe that the cost of additional actions will have a
material effect on our results

                                       28
of operations or financial condition. Although we currently believe that our
systems satisfy year 2000 requirements in all material respects, our current
systems may contain undetected errors or defects with year 2000 date functions
that may result in material costs. We do not have a specific contingency plan
to handle year 2000 problems if they occur. Based on our assessment to date, we
currently believe that year 2000 costs to us will not exceed $50,000. However,
in a worst case scenario, year 2000 problems could cause us to cease normal
operations for an indefinite period until we are able to repair our internal
systems. Although we are not aware of any material operational issues or costs
associated with preparing our internal systems for the year 2000, we may
experience serious unanticipated negative consequences or material costs caused
by undetected errors or defects in the technology used in our internal systems.

 Products

    Our products are currently designed and tested to be year 2000 compliant.
By "year 2000 compliant," we mean that the products will operate according to
their published documentation and will record, store, process and present
calendar dates falling on or after January 1, 2000 in the same manner, and with
the same functionality, as they record, store, process and present calendar
dates falling on or before December 31, 1999. We believe that the current
version of our solution is year 2000 compliant.

    Prior versions of our solution in current production use by some of our
customers are not year 2000 compliant and must be upgraded prior to December
31, 1999 in order to avoid problems at the rollover to January 1, 2000. We will
complete the upgrade for our customers in the normal course of our customer
support. As a result, we have not incurred and do not expect to incur any
material expenses related to these upgrades. Customers who fail to upgrade our
solution or any other third party software or hardware that is not year 2000
compliant that our solution relies on prior to that time may suffer severe
outages. This may harm our relationships with these customers and may damage
our reputation with other current or prospective customers. It is also possible
that customers with non-year 2000 compliant systems may decide to sue us
because our software was not year 2000 compliant. Although we expect to contest
these claims, the costs of litigation surrounding this issue may be significant
and, in a worst case scenario, year 2000 problems could prevent any
transactions using our solution from taking place until we are able to repair
our solution.

    We have not independently verified whether any third-party software
encrypted with our solution is year 2000 compliant. We have encouraged users of
our solution to contact third-party vendors to determine the year 2000
compliant status of their products. We have not independently verified whether
the components from our third-party manufacturers are year 2000 compliant. We
have warranted in certain of our license agreements that our solution as
delivered by us and without customization, will be year 2000 compliant provided
that the entire system and supporting products with which our solution is used
are also year 2000 compliant. This includes hardware, system software such as
the operating system and database software, and application software, either
purchased, contracted, or created in-house. In addition, our customers may also
be concerned about year 2000 issues or distracted by their own year 2000
compliance programs, either of which could adversely affect our business.

 Qualitative and Quantitative Disclosures about Market Risks

    We develop products in the United States and make agreements with customers
in North America, Europe, and Asia. As a result, our financial results could be
adversely affected by various factors, including foreign currency exchange
rates or weak economic conditions in foreign markets. Network transaction fees
from our European and Asian partners will be primarily denominated in foreign
currencies and generally translated on a monthly basis to U.S. dollars to
determine the amount of fees we are due. As a result, we could be affected
adversely by fluctuations in foreign currency exchange rates.

    Our exposure to market risk for changes in interest rates is limited to the
exposure related to our debt instruments and credit facilities which are tied
to market rates. We do not plan to use derivative financial instruments in our
investment portfolio. We plan to ensure the safety and preservation of our
invested principal funds by limiting default risk market risk, and reinvestment
risk. We plan to mitigate default risk by investing in high credit quality
securities.

                                       29
BUSINESS

    The discussion in this prospectus contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially
from those discussed in the forward-looking statements as a result of a variety
of several factors, including those identified in "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Overview

    We develop and market an Internet-based infrastructure solution that
enables networks for the electronic distribution and licensing of digital
goods. Digital goods are products such as software, music, images, video and
documents that can be produced, delivered and licensed electronically. Our
solution is channel neutral, supports direct and indirect distribution and
enables publishers, distributors and resellers of digital goods to integrate
seamlessly within these networks. We earn transaction fees based on the value
of digital goods that are distributed and licensed using our solution.

Industry Overview

    The rapid growth of Internet users, content and functionality is enabling
complex business-to-business and business-to-consumer communications and
commerce. According to IDC, total worldwide Internet commerce spending in 1998
was $50.4 billion and is estimated to grow to $1.3 trillion in 2003,
representing a compound annual growth rate of 92%. Much of this spending to
date has been for products that were sold over the Internet and delivered to
the end customer in a physical form. As a result, the Internet has been
primarily used as an efficient sales and marketing channel. However, for
digital goods, the Internet can also be an efficient means for electronic
production, distribution and fulfillment. In addition, licensing rights can be
separated from digital content, distributed and managed electronically and
tailored to meet each customer's needs.

 The Sale and Distribution of Digital Goods

    Digital goods are characterized by two elements: digital content and
associated licensing rights. Both digital content and licenses can be produced,
stored and distributed physically or electronically. Digital goods such as
software programs or music have traditionally been distributed through a
physical distribution chain. The software or music is copied onto physical
media (e.g. floppy disks, CDs, DVDs), inserted into physical packaging (e.g.
cardboard boxes, plastic jewel cases) and physically distributed through a
multi-party distribution chain that eventually delivers the goods to a retail
store or a corporate reseller where they are ultimately purchased by the
customer. We refer to retail stores and corporate resellers collectively as
resellers.

    Although the multi-party distribution chain is complex, it delivers
critical value to each of its participants. Content publishers, at one end of
the distribution chain, desire to maximize the number of points of sale for
their products but generally cannot efficiently establish independent
relationships with tens of thousands of resellers. Similarly, resellers, at the
other end of the distribution chain, desire to maximize their product
selection, but generally cannot efficiently work with each publisher
independently and, therefore, value a few key sources for their product
inventory. Distributors link these two ends of the distribution chain by
offering broad product selection through their relationships with publishers
and extensive points of sale through their relationships with resellers.
Aggregating numerous publishers and resellers enables distributors to reduce
the administrative costs and logistical complexity entailed if every vendor had
to establish unique relationships with every existing or potential reseller of
its products.

                                       30
The distribution chain for digital goods has three common distribution
models: direct, 2-tier and 3-tier. The software industry provides a good
example of how these models work. Many publishers employ all three models
simultaneously to maximize their points of distribution.

  Narrative Description of Graphic #1 in body of S-1--1/3 size of total page
This graphic represents the distribution model. This is centered in the middle
of the graphic area. There is a solid bar that represents the Customers.
Directly below this bar is another solid bar that is 75% of the size above.
This represents the Resellers/GEMs. Directly below this bar is another solid
bar that is 75% of the Resellers/GEMs bar. This represents the Distributors.
Directly below this bar is another solid bar the same length as the Customers
bar at the top of the graphic. This represents the Publishers.

There are one way arrows that connect to the various bars. Starting from the
bottom of the graphic-- a solid direct arrow that starts at the Publisher bar
and goes straight to the Customers bar. A solid direct arrow that is 2/3 the
length of the first arrow, that starts at the Publisher bar and goes straight
to the Resellers/GEMs bar. A solid direct arrow that is 1/3 the length of the
first arrow, that starts at the Resellers/GEMs bar and goes straight to the
Customers bar. A solid direct arrow that is 1/3 the length of the first bar
that goes from the Publishers bar to the Distributors bar. A solid direct arrow
of the same 1/3 length that goes straight from the Distributor bar to the
Resellers/GEMs bar. A solid direct arrow of the same 1/3 length that goes
straight from the Resellers/GEMs bar to the Customers bar.

Behind the solid bar and direct arrows are three shadowed shapes. The first is
flush left on the graphic and is the standard shape of an hourglass. It is
widest on the upper and lower surfaces, and comes in slightly at the solid
Distributor bar -- this represents 3-Tier. The second is thin inverted
hourglass shadow that is widest on the upper and lower -surfaces, and comes in
slightly at the solid Resellers/GEMs bar this represents 2-Tier. Lastly, flush
right on the graphic and downward point arrow shape that is wider at the solid
Customer bar and narrow to point at the solid Publisher bar- this represents
Direct. Below the solid Publishers Bar are the words 3-Tier, 2-Tier, and
Direct.

    Direct--publishers use direct marketing and sales methods to generate
orders and ship products directly to the customer. The direct model gives
publishers valuable information about customer needs and allows them to control
pricing and quality of service.

    2-Tier--publishers establish relationships with resellers who purchase
products directly from the publisher and, in turn, offer them to their
customers. This model is used by publishers to distribute into specific
markets, expanding their market reach.

    3-Tier--publishers establish relationships with large distributors such as
Ingram Micro, Merisel and Tech Data who, in turn, establish relationships with
resellers, such as CompUSA and Software Spectrum, who, in turn, sell the
software to end customers. This model is an efficient means for publishers to
reach tens of thousands of large and small resellers through only a few
distributors.

    OEMs--original equipment manufacturers (OEMs) represent a variant of the 2-
tier and 3-tier models. OEMs include prepackaged or bundled software with their
equipment to increase the perceived value of their product offering. Publishers
provide their software to OEMs such as Compaq, Dell, Gateway and Packard Bell
NEC who distribute their products, together with the software, directly to
their customers in a 2-tier model or through resellers in a 3-tier model. This
model provides publishers with an effective means to increase unit volume.

    The distribution of music and other high volume digital goods is similar to
software distribution in many respects. For example, music labels acquire
rights to recorded works from artists. These labels distribute music in
physical media such as CDs through large retail chains as well as distribution
channels to other resellers. Music is also distributed through clubs, mail
order and other direct sales channels as well as over the Internet.

 Limitations of Physical Distribution of Digital Goods and Licenses

    In each distribution model, participants in the physical distribution of
digital goods must manage the costs of manufacturing, warehousing and shipping
physical inventory. In addition, the physical distribution process imposes
significant time delays and geographic constraints on the delivery of products
and licenses. These numerous and complex inter-relationships pose challenges to
the timely and accurate sharing of information

                                       31
about customers, products, configuration, pricing, inventory and order status.
Further, limitations on warehousing, transportation systems and retail shelf
space restrict the number of products that publishers can make available to
customers and discourage distributors from carrying low volume products.
Finally, paper-based licenses are difficult to manage and enforce.

 Electronic Distribution of Digital Goods and Licenses

    The Internet provides a foundation for electronic distribution of digital
goods and licenses. IDC projects that the retail market for electronic software
distribution will increase to $14.9 billion by 2003 from an estimated $351
million in 1998. Electronic distribution of digital goods and licenses can:

  .  Reduce costs. Electronic distribution can reduce manufacturing,
     packaging, inventory and shipping costs associated with physical media
     alternatives. For software distributed electronically, businesses can:
     reduce costs incurred managing paper-based licenses; adjust the number
     of authorized users easily from a software master license; and improve
     asset management through the electronic use reporting. Secure
     electronic management of distribution and licensing rights can also
     reduce illegal distribution and piracy.

  .  Increase selling opportunities. Because electronic inventory requires
     no physical shelf space, resellers are able to offer a virtually
     unlimited number of products. Publishers can deliver new products and
     upgrades to distributors and resellers across the globe immediately
     upon their release. Resellers and OEMs can expand distribution by
     providing customers with digital content stored on computer hard
     drives, DVDs or CDs and by allowing customers to complete the sale
     process through the subsequent purchase of a license over the Internet.
     Publishers can more effectively tailor licensing fees and licensing
     options to meet customer needs.

  .  Facilitate real-time information exchange. Electronic distribution can
     provide publishers, distributors and resellers access to sales
     information in real time. Our interactive communications agent can
     enable the automatic flow of usage and marketing information with
     customers, whether or not there is a continuous Internet connection.

    Although electronic distribution of digital goods offers many advantages,
many existing systems for the electronic distribution of digital goods displace
and compete with existing distribution channels rather than support them. Some
systems offer insufficient security against improper distribution and piracy.
In addition, most systems provide insufficient real-time information on sales
transactions involving multiple distribution partners. Finally, we believe many
systems offer inadequate means for distributing licenses. For example, many
corporations that use some form of electronic software distribution still
employ manual processes for managing licenses.

    We believe that a distributed, scalable and flexible network infrastructure
is required to realize the full potential of electronic distribution. This
electronic network should meet the needs of the direct, 2-tier and 3-tier
distribution models, allowing the participants in these models to maintain
their existing relationships as well as create new ones. In addition,
participants should be allowed to transmit information about customers,
products, configuration, pricing, inventory and order status on a timely and
accurate basis. Finally, this network should secure and control access to
digital products in order to preserve intellectual property rights, protect
against piracy and provide flexible licensing rights.

The Preview Systems Solution

    We develop and market infrastructure software that allows our customers to
implement Internet-based networks for the electronic distribution and licensing
of digital goods. Our solution provides publishers, distributors, OEMs, and
resellers the ability to implement and maintain common networks that allows
them to conduct business with each other electronically and seamlessly. Our
solution is flexible and compatible with a

                                       32
diversity of business and technical requirements and provides a common
technical infrastructure that uses the Internet to link participants engaged in
the electronic distribution of digital goods and associated licensing.
Our solution has the following characteristics:

    Channel neutral. Our solution is designed to support direct, 2-tier and 3-
tier models for the electronic distribution of digital goods. We do not compete
directly with channel participants but instead can electronically connect them
to one or more of their publisher, distributor or reseller channel partners.
Thus, our solution enables rather than limits our customers' business choices
and market reach. We have established relationships with Ingram Micro, the
leading worldwide wholesale distributor of computer-based technology products
and services, as well as several large software publishers such as Macromedia,
Mattel, through The Learning Company and other divisions, and Symantec. We are
pursuing similar relationships in the music industry.

    Integrates with existing systems. Our solution supports a variety of
leading hardware and software platforms, including: Microsoft, Sun and Apple
operating systems; BroadVision, Microsoft and Open Market e-commerce systems;
and Microsoft, Oracle and Sybase database management systems. Our solution is
designed to be deployed across large and technically diverse distribution
channels. It provides a common network for electronic distribution and
licensing of digital goods and exchanging information. Our solution can be used
to allow existing e-commerce websites to sell and distribute digital goods
electronically. Finally, customers can implement our solution directly or
outsource operations to a service provider.

    Enables many simultaneous distribution methods. Our solution enables
publishers to supply multiple distributors electronically, while simultaneously
selling directly to end customers. Similarly, resellers can connect
electronically to multiple distributors and sell digital goods from each
distributor's inventory of digital goods on a single integrated web site.

    Supports multiple licensing models. Our solution separates the delivery of
digital goods from the associated licensing rights, ensuring that access and
use of the digital goods complies with the license terms. For example, digital
goods can be stored in an encrypted format on hard drives of newly purchased
personal computers but cannot be accessed by customers until the associated
license rights are purchased online. Thus, software, music or video content can
be sold without having to actually download the content. Our solution enables a
variety of licensing models, such as selling perpetual licenses prior to
download, granting of limited time trials prior to sale and other licensing
models that may be requested by our customers.

    Enables international distribution. We designed our solution to support
global networks. We have localized our client software interfaces in the
following 14 languages: Chinese (simplified and traditional), Dutch, English,
Finnish, French, German, Italian, Japanese, Korean, Norwegian, Portuguese,
Spanish and Swedish. We have obtained export licenses for components of our
solution that use U.S. government regulated encryption technologies. When
required, we have obtained approval to use our encryption systems in other
countries.

    Automates communication among network participants. Our solution automates
the flow of digital goods, license rights, distribution rights, inventory
tracking data, branding and other information. Information for each transaction
is automatically transmitted to network participants. This means that a
publisher that uses our solution can automatically receive information in real
time about the sale of its products. Our solution can collect data from
multiple distribution channels as transactions in a single database,
consolidating direct and indirect sales information. In addition, we have
developed an interactive communications agent that can facilitate the flow of
information to and from the end customer.

    Secures digital goods and licenses. Our solution uses sophisticated
encryption techniques to maximize the security and integrity of digital goods
and licensing rights in a variety of secure licensing and distribution models.
Our solution provides secure communications between participants, produces
auditable transaction records, controls user access, and in general ensures
that agreed business rules are respected by all parties in the distribution
chain. Our solution can also provide persistent protection to enforce license
rights on an

                                       33
ongoing basis after delivery of software to the end customer. We use secure
protocols for communication among our servers, client and gateway software
modules. We also signed an agreement with Intel to license its content
protection agent system and to incorporate it into our solution for secure
distribution and licensing of digital music.

    Scalable. Our solution employs a distributed network architecture. Our
solution is designed to allow customers to support modest transaction volumes
on a single inexpensive computer server and higher transaction volumes on
multiple load balanced servers. Customers that operate high volume e-commerce
web sites can deploy our solution on multiple servers to distribute the data
and processing more evenly, creating redundancy to protect against failures.

Strategy

    We seek to establish our solution as the de facto standard infrastructure
software for electronic distribution and licensing of digital goods. Key
elements of our strategy are to:

    Target and secure the support of leading software publishers and
distributors.  We have established relationships with Ingram Micro, Macromedia,
Mattel, through The Learning Company and other divisions, and Symantec. We have
worked closely for over two years with large publishers and distributors to
understand and solve their business and technical requirements. We intend to
maintain and build relationships with the publishers and distributors that
control the majority of software industry revenues.

    Expand the number of participants using digital goods networks. We believe
the benefits of digital goods networks increase as a network gains additional
participants. We intend to leverage our relationships with leading publishers
and distributors to add more resellers to distribute digital goods
electronically. We are working directly and through third parties with
manufacturers of personal computers, such as Packard Bell NEC, to bundle
encrypted digital goods for online licensing with its computer products. We
intend to expand our relationships with service providers such as NetSales and
ReleaseNow.com to enable publishers to outsource their direct sales and
accelerate their time to market. We also intend to expand into new geographical
markets. We have a marketing and distribution partnership with Sony Marketing
of Japan. Sony Marketing has licensed our solution to several Japanese
companies. In Europe, we have a number of customers, including Prisma,
Softline, Softway International, Somm.com and TrustMarque International.

    Extend our solution into other digital goods markets. To date, we have
focused predominantly on the software market because we believe it is the
largest and most commercialized market for digital goods. As electronic
distribution of other digital goods such as music develops commercially, we
intend to build a presence in these markets. We believe the security,
distribution and piracy concerns of these markets are similar to those of the
software industry and we believe that our solution will allow us to address
these needs successfully. We have an agreement with Intel to incorporate its
content protection agent system into our solution for secure electronic
distribution of digital music. We are currently pursuing relationships with
leading companies in the music industry. In addition, we intend to leverage our
relationships with customers who have a presence in multiple markets by
offering a convenient means to distribute music and software through our future
integrated solution.

    Expand our solution to support volume licensing for
organizations. Organizations frequently acquire software through volume
licenses and require licensing support to adjust the number of authorized
users. Currently, license distribution and management is often a burdensome
manual process for distribution channels. Our solution allows our customers to
automate aspects of the license distribution and management process. We intend
to work with our customers to enhance our volume licensing and software asset
management capabilities.

                                       34
Enhance our solution with value-added services. As digital goods networks
using our solution grow, we intend to develop and provide value-added services
that provide additional marketing and sales benefits to our customers. We have
also begun to offer a service based on our interactive communications agent
that enables software publishers to tailor product testing, marketing and
support to the needs of their individual customers.

Products

    We offer a flexible, secure and scalable infrastructure solution for
electronic distribution of digital goods. Our solution is specifically designed
to meet the needs of each participant in the distribution chain. The table
below describes each component of the network and includes product names, and
key features of our solution as well as target users.
Components       Key Features                                   Target Users
-------------------------------------------------------------------------------
Digital                                                         .Publisher
  Packaging        Encrypts products for digital
  (Vbox and        distribution and offers several
  ZipLock          options to protect intellectual
  Builder)         property and licensing rights

-------------------------------------------------------------------------------
  Inventory and    Manages the database                           .Publisher
  License          of digital goods, inventory and provides       .Distributor
  Management       secure, automated and reliable
  System           fulfillment of licenses and products,
  (ZipLock         records transactions and exchanges
  System)          information with other servers

-------------------------------------------------------------------------------

  Merchandizing                                                   .Publisher
  and License      Adds digital goods shopping                    .Reseller
  Selling System   cart functionality to Internet
  (ZipLock         storefronts and enables electronic delivery
  Gateway)         of digital inventory and licenses
-------------------------------------------------------------------------------
  Off-Line         Provides a software storefront                 .Publisher
  Storefront       using CD, DVD or hard disk                     .Reseller
  (PortableStore)  storage media that delivers                    .OEM
                   encrypted digital goods ready for online
                   licensing

-------------------------------------------------------------------------------
  Rights and       Manages the secure download                    .End customer
  Delivery Client  and the usage rights of digital goods
  (Vbox Client)    on the user's computer

-------------------------------------------------------------------------------
  Interactive      Monitors software use and hardware             .Publisher
  Communications   configuration, displays targeted               .Reseller
  Agent            messages within the publisher's                .End customer
                   applications and collects customer's responses
35
These components are designed to integrate with the infrastructure of each
network participant and automate the electronic flow of digital goods, license
rights and related information among them. An example is shown in the following
diagram.

Narrative Description of Graphic # 2 in Body of S-1- 1/3 size of total page

Upper left corner are two icon-based visuals. One represents the software
element and the other representing the music element.

There is a Unique Product key reference that is followed by an arrow. This
arrow points to the right and is in the direction of a rectangle. This
rectangle represents the Publisher. In this area is shaded box which is the
graphic representation of the server. Next to this box is a cylinder that
represents the digital inventory. Outside this rectangle to the right is the
title "Digital Packaging Below this title are three sub headings that are
bulleted with small hollow squares: Creation of Digital Good, Secure Packaging,
and Track Sales Information.

There is a two-way arrow that points directly below the Publisher rectangle to
another rectangle that represents the Distributor. Inside this rectangle is a
shaded box as mentioned about that represents the server. Next to this box is a
cylinder that represents the digital inventory. Outside the rectangle to the
right is the title "Digital Inventory & License Management." Below this title
are three sub headings, which are bulleted with small hollow squares: Digital
Inventory Management, Product Delivery, and Audit Trail. In addition, there is
a narrow one way arrow that goes from the Distributor rectangle to the Customer
rectangle referred to below.

There is a two-way arrow that points to another rectangle box that is half the
size in width. It is right justified approximately 45% and under the
Distributor rectangle and represents the Resellers. In this rectangle is one
box which symbolizes the gateway. Outside this rectangle to the right is the
title "Digital Merchandising & Licensing System." Below this title are four sub
headings, which are bulleted with small hollow squares: Delivery of License,
Reseller Branding, Digital Packing Slip, and Shopping Basket. In addition,
there is a narrow one way arrow that goes from the Resellers rectangle to the
Offline Storefront referred to below.

There is a two way arrow chat points to another rectangle box that is the same
size as the Resellers rectangle and represents the Customer. Outside this
rectangle to the right is the title "Hard Disk Delivery." Below this title are
two four sub headings which are bulleted with small hollow squares: Digital
Rights Management and Communications Agent.

Directly below the text placed to the right of the Customer rectangle, reads
the title "Offline Storefront." Below this title are two sub headings which are
bulleted with hollow squares: CD and DVD.

    The above diagram reflects only one possible network configuration. Our
solution enables other concurrent technical and business models.

Professional Services

    We provide our customers with the support needed to implement and maintain
flexible, scalable and secure networks for the electronic distribution of
digital goods.

    Our solution includes the following services:

  .  Consulting. We offer a range of consulting services, including
     installation, customization and integration. We work closely with our
     customers to define their unique business needs and provide services to
     meet these needs through business analysis and design, project planning
     and management, technology analysis, integration and configuration,
     testing and change management.

  .  Customer support. Our technical support services include email and
     phone support, remote diagnosis, online support and software updates.
     We also offer a premium support program that allows our customers to
     contact a support representative 24 hours a day, 7 days a week.

  .  Education and training. We offer technical training courses to help our
     customers implement, customize, use and administer our solution.

    We provide limited consulting, training and support as part of our
installation fee and maintenance agreements. We provide additional consulting,
training and premium support, generally on a time-and-materials basis.

                                       36
Customers and Strategic Relationships

    We have developed relationships with software publishers, distributors,
OEMs and service providers. Some companies license our solutions directly from
us. Others use our technology through sublicenses or outsourced relationships
with our customers. The table below includes a partial list of companies with
whom we have direct or indirect relationships.
Business Type   Direct Relationships                  Indirect Relationships
------------------------------------------------------------------------------
Publishers      .Macromedia                                .Intuit
                  .Mattel                                    .INXight
                  (Broderbund and The Learning Company)      .NetObjects
                  .Symantec
------------------------------------------------------------------------------

  Service         .Chargenow.com
    providers     .Digital Square
                  .ECdirec
                  .NetSales
                  .ReleaseNow.com
                  .Scot Crest Group
                  .Trustmarque
------------------------------------------------------------------------------

  Distributors    .Ingram Micro                              .Navarre
                  .Softway
------------------------------------------------------------------------------

  Resellers and   .Dustin                                    .Beyond.com
    OEMs          .e-academy.com                             .Vector
                  .Packard Bell NEC
                  .Prisma
                  .Softline
                  .Somm.com
Several leading software publishers have selected our solution to
distribute their products electronically through direct and indirect channels.
Macromedia and Mattel have opted for an in-house model that integrates our
solution with the rest of their e-commerce systems. Symantec and Intuit have
chosen an outsource model and operate our solution through Beyond.com and the
Scot Crest Group, respectively. NetObjects and INXight have chosen NetSales and
ReleaseNow.com as their respective service providers to maintain and operate
our solution to distribute their products. Service providers can also aggregate
inventory from publishers to support direct and indirect sales through large
distributors. NetSales has established an electronic connection to our solution
at Ingram Micro. We have agreed to provide versions of our PortableStore to
Packard Bell NEC for distribution of encrypted digital goods for online
licensing with selected personal computers.

    We have the following strategic relationships:

    Ingram Micro. We have been working with Ingram Micro on electronic software
distribution since August 1998. On June 30, 1999, we signed an agreement with
Ingram Micro to use our solution and to sublicense appropriate components to
Ingram Micro's resellers. The contract grants Ingram Micro a nonexclusive
license to use our solution in exchange for network transaction fees that are
based on a percentage of sales that Ingram Micro fulfills using our solution.
Upon signing the agreement, Ingram Micro committed to minimum network
transaction fees. We will recognize these minimum network transaction fees on a
straight line basis over the one-year term of the agreement. Under the
agreement, we are entitled to additional fees for

                                       37
training, technical support and maintenance related to Ingram Micro's use of
our solution. We anticipate that revenue from Ingram Micro may represent a
significant portion of our business although there can be no assurance in this
regard. As of August 31, 1999, Ingram Micro has not yet commercially deployed
our solution and is not obligated to do so under the agreement. Aside from the
minimum network transaction fees, we have not yet earned or received any
network transaction fees from this agreement. The contract automatically renews
for an additional year if neither party terminates the contract by providing a
45-day advance notice to the other party.

    Sony Marketing of Japan. In September 1998, we signed a three-year
agreement with Sony Marketing of Japan, granting it the exclusive right to use
and sublicense our solution in Japan, including future upgrades, enhancements
and new products. We received a non-creditable, upfront payment for the
license, training and support. Beginning April 1999, Sony Marketing has agreed
to pay us network transaction fees based on a percentage of the revenue it
receives from distributing our solution and providing related services. Sony
Marketing committed to pay us annual minimum network transaction fees. If the
network transaction fees paid by Sony Marketing during the initial annual
period are less than the annual minimum network transaction fees, Sony
Marketing must pay us any shortfall. Beginning April 2000, if network
transaction fees are less than the specified target, Sony Marketing, at its
option, may give up its exclusivity rights rather than pay the shortfall.
During the first year of the agreement, we are recognizing the annual minimum
network transaction fees on a straight line basis over 12 months until we have
earned network transaction fees in excess of the annual minimum network
transaction fees. In subsequent years we will recognize the network transaction
fees as they are earned. The exclusivity under this agreement means that we
cannot compete with Sony Marketing by offering our solution in Japan. This
exclusivity terminates if Sony Marketing provides us with 180-day prior notice
that it desires to offer a competing product. The agreement may be renewed by
Sony Marketing for up to three additional three-year terms upon providing us
prior notice and upon mutual agreement on performance and payment criteria for
such renewal terms.

    Sony Marketing of Japan and Ingram Micro each accounted for more than 10%
of our revenues in the six months ended June 30, 1999. Substantially all of the
revenues we have received from these two parties reflects minimum network
transaction fees and service fees associated with implementing our solution.

    Intel Corporation. In September 1999, we signed an agreement with Intel
Corporation to license Intel's content protection agent system and to
incorporate this technology into our solution. The objective of this agreement
is the development, sales and marketing of our solution for the digital music
market.

Sales and Marketing

    We promote and sell our solution to publishers, OEMs, distributors and
resellers through our direct sales force in North America and Europe. In Japan,
we promote and sell our solution through our exclusive relationship with Sony
Marketing of Japan. As of June 30, 1999, we had 21 employees in our sales and
marketing organization worldwide. We intend to increase the size of our direct
sales force and establish additional sales offices in the United States and
internationally.

    We complement our direct sales efforts with our service provider partners
who provide an outsource solution to some publishers and resellers. As of June
30, 1999 we had relationships with 13 service providers located in seven
countries. We intend to establish additional relationships with service
providers and broaden our indirect sales force through relationships with
systems integrators.

    Our marketing efforts are designed to create greater awareness of our
solution and the benefits it affords to publishers, distributors and resellers
of digital goods. We market our solution through targeted activities including
trade shows, conferences, direct mail, electronic marketing and marketing
materials. In addition, we engage in co-marketing activities with our
customers, including production and distribution of co-branded collateral,
joint sponsorship of conferences and public relations.

                                       38
Technology

    We have developed a set of technologies for the establishment of channel
neutral, flexible, scalable and secure networks for the electronic distribution
of digital goods. These technologies include server components, components for
integration with shopping catalogs, databases and web browsers, management and
audit tools. They include tools for encryption of digital goods, and client
software for the reliable delivery of digital goods and management of digital
use rights. They also include agent software for monitoring usage and
personalized marketing.

    Our solution employs a distributed server architecture. Our inventory
license and management system is typically operated by large publishers,
service providers and distributors. Servers can be operated by resellers who
can choose to run their own inventory and license management system or simply
integrate into their web site a gateway component connected to a distributor.
Distributors can add additional gateways to support increasing numbers of
connected electronic resellers. Publishers, distributors and resellers, have
real-time control over the management of distribution rights and the issuance
of licenses to end-users. Upon completion of a license transaction by a
reseller, an electronic transaction is automatically recorded in the databases
of the relevant distributor and publisher, creating an audit trail for each
participant in the sale. Thus, immediately following the completion of a
license transaction between a reseller and a customer, the distributor can
directly and electronically deliver the purchased digital goods to the
customer. This distributed architecture of our solution contributes to its
flexibility, security, reliability and scalability.

    The architecture of our network separates the issuance of electronic
licenses from the delivery of digital goods. The distributor can provide
electronic delivery directly to all of the customers of its resellers. Our
solution integrates with standard web server technology for which highly
scalable solutions are readily available from third parties. Our solution is
capable of addressing high-bandwidth requirements associated with multiple
simultaneous downloads of large electronic files. Our solution can be deployed
on the Microsoft Windows NT and Sun Solaris operating systems. Customers can
support modest transaction volumes on a single inexpensive computer server
while higher transaction volumes can be supported by multiple load balanced
servers. Our solution can be integrated with industry standard web storefronts
such as Microsoft Site Server. Open Market and BroadVision and databases such
as Microsoft SQL Server, Oracle, and Sybase. Our solution allows our customers
to use their existing web storefronts and databases for processing and storage
of digital goods transactions, as well as to employ customary techniques for
data replication and load management.

    Our solution encrypts digital goods using our builder tools and records the
encryption key, distribution rights and licensing options in the database of a
computer server. The server has network administration functions that enable
electronic distribution to other networked servers, and each server can support
multiple gateways. Each gateway controls the pricing, branding and purchase
processes and communicates securely with servers to initiate the electronic
transfer of digital goods and/or licenses to end customers. Our solution
automatically provides an electronic audit trail with each transaction recorded
on servers in the distributed network.

    Our client software allows the end customer's personal computer to
communicate reliably and securely with the network to manage downloads of goods
and licenses. Our client software employs various encryption and tamper
resistant techniques to enforce rights even when the end customer's computer is
not connected to the Internet. In addition, our interactive communications
agent can enable the automatic flow of usage and marketing information with
customers, whether or not there is a continuous Internet connection.

    Communications between servers, from gateways to servers, and from client
software to servers and gateways are secured using standard encryption
techniques. Security is achieved through 90+ bit symmetric session keys and
1024 bit RSA keys for authentication and session key exchange. Our builder
tools use 90+ bit symmetric keys for the protection of digital goods from the
point of introduction to the network until their delivery to the customer.

                                       39
By employing a distributed architecture and by interfacing with standard
technologies where appropriate, we have designed a highly scalable and robust
network solution to enable secure and automated digital goods commerce and
real-time information flow between multiple business entities. We have also
enabled seamless communication and rights management with customers both when
connected and when disconnected from the Internet.

Competition

    The competition for digital goods solutions is strong and evolves quickly.
We expect that competition will intensify, both with respect to existing
competitors as well as with the entry of new competitors into our markets.
Several companies are currently offering, or are expected to offer in the near
future, products or services that compete with our solutions, including: AT&T,
CyberSource, Digital River, IBM, InterTrust, Liquid Audio, Microsoft,
Reciprocal and Xerox.

    The primary bases for competition currently include:

  .  level of acceptance and deployment by publishers, distributors and
     resellers;

  .  convenience and ease of use for customers;

  .  degree of security, scalability and reliability;

  .  compatibility with multiple distribution channels;

  .  price and pricing model;

  .  support of multiple operating systems;

  .  level of integration with existing e-commerce infrastructures;

  .  ability to support multiple licensing models;

  .  support for several types of digital goods;

  .  localization for foreign languages; and

  .  government approval for export of strong encryption techniques.

Intellectual Property

    Our success depends in part on our ability to protect our proprietary
rights to the technologies used in our solution. If we do not adequately
protect our proprietary rights, our competitors can use the intellectual
property that we have developed to enhance their products and services, which
would harm our business. We rely on a combination of patents, copyright and
trademark laws, trade secrets, confidentiality provisions and other contractual
provisions to protect our proprietary rights, but these legal means afford only
limited protection.

    We are actively seeking patent protection for our intellectual property. We
have filed 17 patent applications with the United States Patent and Trademark
Office.

    As of August 31, 1999, one patent was issued and two patents were allowed
by the Patent and Trademark Office based upon our inventions.We pursue
international counterpart patents where appropriate. In addition, in May 1998,
we acquired a United States patent that was issued in 1987.

    Despite any measures taken to protect our intellectual property,
unauthorized parties may attempt to copy aspects of our solution or to obtain
and use information that we regard as proprietary. In addition, the laws of
some countries may not protect our proprietary rights as fully as do the laws
of the United States. Thus, the measures we are taking to protect our
proprietary rights in the United States and internationally may not be
adequate. Finally, our competitors may independently develop similar
technologies.

                                       40
Employees

    As of August 31, 1999, we had 96 employees, of which 49 were employed in
research and development, 34 were employed in sales and marketing, and 13 were
employed in administrative positions. In addition, we retain 14 full-time
contractors. Our employees are not represented by a collective bargaining unit.
We have never experienced a work stoppage and believe that our relations with
our employees are good.

Properties

    Our principal executive and administrative offices are located in
Cupertino, California where we lease approximately 10,400 square feet. In
addition, we have executive and administrative offices located in Portland,
Oregon, where we lease approximately 17,800 square feet. We are currently
negotiating to sublease approximately 3,500 square feet of additional office
space in Cupertino, California. We also maintain a small sales office in the
London metropolitan area. We believe our existing facilities are adequate to
meet current requirements and that additional or substitute space will be
available as needed to accommodate any expansion of operations.

Legal Proceedings

    In May 1999, 20/20 Software, Inc., filed a civil complaint against us in
the United States Court for the District of Northern California. The complaint
alleges that one of our employees, a former 20/20 employee, misappropriated
trade secrets and confidential information of 20/20 and allegedly used such
allegedly misappropriated information and trade secrets in a product of our
predecessor and subsidiary, Preview Software. The complaint alleges that based
on the foregoing allegations our predecessor infringed 20/20's copyrights,
tortiously interfered with 20/20's prospective advantage, engaged in unfair
competition and misappropriated 20/20's trade secrets and confidential
information. This complaint is a continuation of two earlier and similar
complaints by 20/20, one against us filed in, and dismissed for lack of
jurisdiction by, the United States Court for the Federal District of Oregon,
and one against an employee of ours filed in Oregon state court. Those two
complaints were both dismissed, the latter with prejudice. We believe that the
claims in the underlying litigation are without merit and intend to continue to
defend against them vigorously. However, litigation is subject to inherent
uncertainties and, therefore, there can be no assurance that this action will
not have a material adverse effect on our business results of operations or
financial condition.

                                       41
MANAGEMENT

Executive Officers and Directors

    Our executive officers and directors and their ages as of July 31, 1999 are
as follows:
Name             Age                    Position
--------------------------- --- -----------------------------------------------
Vincent Pluvinage..........  41 President, Chief Executive Officer and Director
G. Bradford Solso..........  43 Vice President, Chief Financial Officer
Jeffrey E. Brown...........  31 Vice President, Professional Services
Michael W. Davison.........  42 Vice President, Interactive Solutions
Christopher Dittmer........  40 Vice President, Marketing
Michel A. Floyd............  40 Vice President, Engineering
Cay S. Horstmann...........  40 Vice President, Chief Technology Officer
David Gregory Kott.........  39 Vice President, Sales
Frank A. Tycksen, Jr.......  36 Vice President and Co-Founder
Edward J. Wholihan.........  39 Vice President, Business Development
Gerard H. Langeler(2)......  48 Chairman of the Board of Directors
Bruce R. Bourbon(2)........  57 Director
Donald L. Lucas(1).........  69 Director
Gary E. Rieschel(1)........  43 Director
R. Douglas Rivers(1).......  43 Director
Jo Ann Heidi Roizen(2).....  41 Director
--------
(1)Member of the audit committee.
(2)Member of the compensation committee.

    Vincent Pluvinage, President, Chief Executive Officer and Director, joined
Preview Software in June 1997 and has been with Preview Systems since the
mergers of Preview Software and Portland Software in August 1998. Prior to
joining Preview Software, Dr. Pluvinage led the research and development,
international operations, business development and strategic marketing efforts
for ReSound Corporation, a developer of advanced hearing technologies, where he
held a variety of senior management positions from March 1987 to May 1997. From
June 1985 to March 1987, Dr. Pluvinage was a member of the technical staff at
AT&T Bell Labs, a developer of advanced communication products, and
participated in the spin-off of technologies from AT&T Bell Labs to ReSound.
Dr. Pluvinage completed the Advanced Executive Management program at Stanford
University and holds a Ph.D. degree in Bioengineering from the University of
Michigan and an M.S. degree, summa cum laude, in Applied Physics Engineering
from the Universite Catholique de Louvain in Belgium.

    G. Bradford Solso, Vice President, Chief Financial Officer, joined Preview
in July 1999. Prior to joining Preview, Mr. Solso was the acting Chief
Financial Officer of Convoy Corporation, a software company, from April 1999 to
July 1999. From November 1998 to January 1999, Mr. Solso was the Chief
Financial Officer of Aloha Networks, Inc., an Internet service provider. From
October 1997 to August 1998, Mr. Solso was Vice President and Chief Financial
Officer of iPass, Inc., an Internet service provider. From November 1995 to
August 1997, Mr. Solso was Chief Financial Officer of CATS Software, Inc., a
risk management software company. Prior to 1995, Mr. Solso served for 14 years
at Visa International, a financial services company, in a variety of management
positions, most recently as Senior Vice President, where he was responsible for
all treasury activities including settlement operations, capital markets
activities and risk management. Mr. Solso holds a B.A. degree in Business
Administration from California State University, San Francisco. He is a
certified public accountant.

    Jeffrey E. Brown, Vice President, Professional Services, joined Preview in
July 1999. Prior to joining Preview, Mr. Brown was with Andersen Consulting, a
business consulting firm, from November 1991 to July 1999, most recently
serving as a senior manager. From 1996 through 1999, Mr. Brown managed an
Andersen

                                       42
Consulting Internet solution center, where he was responsible for delivering
large-scale e-commerce solutions for companies. Mr. Brown holds a B.S. degree
in Mathematics from the University of Washington.

    Michael W. Davison, Vice President, Interactive Solutions, joined Preview
Software in March 1998 and has been with Preview Systems since the mergers of
Preview Software and Portland Software in August 1998. Prior to joining Preview
Software, Mr. Davison was the Director of Strategic Marketing at Claris
Corporation, a software company, from 1992 to 1998, where he was responsible
for development and implementation of Claris' online marketing and electronic
commerce strategies. From 1990 to 1992, he served as Imaging Market Manager for
Informix Software, a relational database supplier. Mr. Davison has also held
business development and marketing management positions at several start-up
companies in the technology industry. Mr. Davison was chairman of the Software
Publishers' Association, Electronic Software Distribution committee and a
member of the SPA Internet Section Board. Mr. Davison holds an M.B.A. degree
from Santa Clara University and a B.A. degree in History from the University of
California at Berkeley.

    Christopher Dittmer, Vice President, Marketing, joined Preview in May 1999.
From May 1998 to February 1999, he served as Vice President, Worldwide
Marketing and Business Development at CyberStar, a network service provider.
From November 1995 to May 1998, he held a variety of positions at Oracle
Corporation, a software company, most recently as Vice President International
Marketing and Field Support. From June 1991 to February 1995, he served in a
variety of positions at Microsoft Corporation, a software company, most
recently as End User Business Unit Manager at Microsoft Far East Headquarters,
and, prior to that, as Network Business Unit Manager at Microsoft Europe. Mr.
Dittmer holds an M.S. degree in Material Science and Engineering from Stanford
University and a B.S. degree in Physics and a B.A. degree in French and German
from Humboldt State University.

    Michel A. Floyd, Vice President, Engineering, joined Preview Software in
August 1997 and has been with Preview Systems since the mergers of Preview
Software and Portland Software in August 1998. Prior to joining Preview
Software, Dr. Floyd was Vice President of Engineering at Optimal Networks, a
developer of network monitoring and analysis tools, from March 1996 to June
1997. From January 1996 to March 1996, Dr. Floyd was Director of Engineering at
Cadence Design Systems, a developer of high-level network simulation tools.
From September 1995 to December 1995, Dr. Floyd was Vice President of
Engineering at Systems & Networks, a developer of network simulation and design
tools. From January 1995 to August 1995, he was Vice President of Engineering
at Covalent, a developer of commercial print management products. From 1994 to
1995, Dr. Floyd was a Manager at Xsoft, a division of Xerox, where he helped
develop an electronic commerce system for commercial printers. Dr. Floyd holds
B.S., M.S., and Sc.D. degrees in Aero-Astro Engineering from the Massachusetts
Institute of Technology.

    Cay S. Horstmann, Vice President, Chief Technology Officer, joined Preview
Software in 1997 and has been with Preview Systems since the mergers of Preview
Software and Portland Software in August 1998. Dr. Horstmann is also currently
a Professor of Computer Science at San Jose State University. Prior to joining
Preview Software, Dr. Horstmann was the President of Horstmann Software, a
developer of technical word processing software, from 1986 to 1996. From 1990
to 1996, Dr. Horstmann was active as a consultant and as an instructor for
Technology Exchange/ACM professional training courses. Dr. Horstmann has
authored many books and magazine articles, including columns for C++ Report and
Java Report, as well as the Sun Microsystems Press book "Core Java." He holds a
Ph.D. degree in Mathematics from the University of Michigan, an M.S. degree in
Computer Science from Syracuse University, and a Diploma in Mathematics and
Computer Science from the Christian-Albrechts-University in Kiel, Germany.

    David Gregory Kott, Vice President, Sales, joined Portland Software in 1997
and has been with Preview Systems since the mergers of Preview Software and
Portland Software in August 1998. Prior to joining Portland Software, Mr. Kott
served as Senior Vice President of Sales of Summit Design, a software company,
from 1994 to 1997. From 1987 to 1994, Mr. Kott served in several sales
management positions at Mentor Graphics, an electronic systems software and
hardware company. Mr. Kott holds a B.S. degree in Mechanical Engineering from
the University of Washington.

                                       43
Frank A. Tycksen, Jr., Vice President and Co-Founder, co-founded Portland
Software in 1994 and has been with Preview Systems since the mergers of Preview
Software and Portland Software in August 1998. Prior to joining Portland
Software, Mr. Tycksen was employed by Second Nature Software, a software
company, as Senior Software Engineer from 1992 to 1994. From 1987 to 1994, Mr.
Tycksen was employed by Central Point Software, a software company, as Manager
of Data Recovery Utilities, where he co-authored Central Point Software's PC
Tools utility. Mr. Tycksen holds A.S. and B.S. degrees in Computer Systems
Engineering from the Oregon Institute of Technology.

    Edward J. Wholihan, Vice President, Business Development, joined Portland
Software in August 1996 and has been with Preview Systems since the mergers of
Preview Software and Portland Software in August 1998. Prior to joining
Portland Software, he was employed by McKinsey and Company, a management
consulting firm, from 1989 to 1996, where he most recently served as Senior
Engagement Manager, developing and implementing marketing, operational, and
financial strategies. Mr. Wholihan holds an M.B.A. degree from Stanford
University and a B.A. degree in Economics from Yale University.

    Gerard H. Langeler has served as Chairman of the Board of Directors of
Preview Systems since the mergers of Preview Software and Portland Software in
August 1998 and, prior to that, served as a director of Portland Software
beginning in 1996. Since 1992, he has been a General Partner with Olympic
Venture Partners, a venture capital investment firm. Prior to joining Olympic
Venture Partners, he was a co-founder of Mentor Graphics Corporation, a
software company, where he served in a number of roles from 1981 to 1992,
including President and Chief Operating Officer. He currently serves as a
director for Vascular Solutions, 800.com, Captivate Networks, and Webridge, all
privately-held companies. Mr. Langeler holds an A.B. degree in Chemistry from
Cornell University and an M.B.A. degree from Harvard Business School.

    Bruce R. Bourbon has served as a director of Preview Systems since the
mergers of Preview Software and Portland Software in August 1998 and, prior to
that, served as a director of Preview Software beginning in 1997. Mr. Bourbon
is currently a Managing General Partner of Telos Venture Partners, a venture
capital investment fund, where he has been a general partner since December
1995. From 1994 to 1995, Mr. Bourbon was an independent management consultant.
From 1990 to 1994, he was President and Chief Executive Officer of Vertex
Semiconductor, a high-end ASIC gate arrays company. From 1991 to 1994, Mr.
Bourbon was Vice President of Marketing for Toshiba America, an electronic
component provider. From 1987 to 1990, Mr. Bourbon served as Vice President of
Marketing at Cadence Design Systems, a software company. He holds a B.S. degree
in Electrical Engineering from California State Polytechnic University and an
M.S. degree in Electrical Engineering from University of California, Los
Angeles.

    Donald L. Lucas has served as a director of Preview Systems since the
mergers of Preview Software and Portland Software in August 1998 and, prior to
that, served as a director of Preview Software beginning in 1997. Since 1967,
Mr. Lucas has been involved in venture capital activities as a private
individual. Mr. Lucas currently serves as a director for Cadence Design
Systems, Inc., Coulter Pharmaceutical, Inc., Macromedia, Inc., Oracle
Corporation, Transcend Services, Inc. and Tricord Systems, Inc. Mr. Lucas also
serves as a director for several privately held companies. He holds a B.A.
degree in Economics and an M.B.A. degree from Stanford University.

    Gary E. Rieschel has served as a director of Preview since July 1999. Mr.
Rieschel is the Executive Managing Director of SOFTBANK Technology Ventures, a
venture fund focused on early stage Internet companies. Since joining SOFTBANK
in January 1996, he has led SOFTBANK's venture capital activities in the United
States. Mr. Rieschel has over fifteen years experience in the high technology
field, including holding executive positions at nCUBE, a provider of broadcast
video, as Vice President Marketing in 1995; Cisco Systems, a provider of a
computer networking products, as Director Worldwide Channels from 1993 to 1994;
Sequent Computer Systems, a computer software company, as Director and General
Manager from 1992 to 1993; and Intel Corporation, a semiconductor and computer
company, from 1979 to 1982. Mr. Rieschel spent over four years in Tokyo as
General Manager of Sequent Computer Systems' Asian operations. He serves as a
director for Message Media, Inc. and Net2Phone, Inc. and is a member of
SOFTBANK's Global Executive

                                       44
Board. Mr. Rieschel holds a B.A. degree in Biology from Reed College and an
M.B.A. degree from Harvard Business School.

    R. Douglas Rivers has served as a director of Preview Systems since the
mergers of Preview Software and Portland Software in August 1998 and, prior to
that, served as Chairman of Preview Software beginning in 1996. Dr. Rivers is
Co-founder, President and Chief Executive Officer of InterSurvey, a provider of
Internet-based market research services. Dr. Rivers was a Co-founder and
Partner at Pacific Economics Group, an economic consulting firm, from 1997 to
1998, and a Senior Economist at Arthur Andersen L.L.P., an accounting firm,
from 1992 to 1997. Since 1989, Dr. Rivers has been a Professor of Political
Science at Stanford University and, since 1994, a Senior Fellow at the Hoover
Institution. From 1987 to 1989, Dr. Rivers was an Associate Professor of
Political Science at University of California, Los Angeles. From 1983 to 1987,
Dr. Rivers was an Assistant Professor of Political Science at the California
Institute of Technology. From 1980 to 1983, Dr. Rivers was an Assistant
Professor of Government at Harvard University. Dr. Rivers holds a Ph.D. degree
in Political Science and Economics from Harvard University and a B.A. degree in
Political Science from Columbia University.

    Jo Ann Heidi Roizen has served as a director of Preview Systems since the
mergers of Preview Software and Portland Software in August 1998 and, prior to
that, served as a director of Preview Software beginning in 1997. Ms. Roizen is
a venture partner with SOFTBANK Technology Ventures, a venture fund focused on
early stage Internet companies. She also serves as a director for Great Plains
Software and Softbook Press, Inc., both privately held companies. She is also
an advisory board member of Time Domain Corporation, Garage.com and the
Microsoft Silicon Valley Developer Center. Ms. Roizen is also a member of the
Stanford Board of Trustees Nominating Committee. Prior to joining SOFTBANK in
April 1999, Ms. Roizen was Vice President of Worldwide Developer Relations for
Apple Computer, a computer manufacturer, from 1996 to 1997. From 1983 to 1996,
she was CEO of T/Maker Company, a software developer and publisher. Ms. Roizen
is a past president of the Software Publishers' Association and has served as a
Public Governor of the Pacific Exchange. Ms. Roizen holds an A.B. degree in
English and an M.B.A. degree from Stanford University.

    There are no family relationships among any of our directors or executive
officers.

Board Composition

    Our bylaws currently provide for a board of directors of seven directors.
In accordance with the terms of our amended and restated certificate of
incorporation, effective after the closing of this offering and upon our
qualification as a "listed corporation" pursuant to the California General
Corporation Code, the terms of office of the directors will be divided into
three classes:

  .  Class I, whose term will expire at the annual meeting of stockholders
     to be held in the year 2000 or a special meeting held instead of the
     annual meeting;

  .  Class II, whose term will expire at the annual meeting of stockholders
     to be held in the year 2001 or a special meeting held instead of the
     annual meeting; and

  .  Class III, whose term will expire at the annual meeting of stockholders
     to be held in the year 2002 or a special meeting held instead of the
     annual meeting.

    The Class I directors will be: Vincent Pluvinage and Bruce R. Bourbon, the
Class II directors will be Gerard H. Langeler and Gary Rieschel, and the Class
III directors will be Donald L. Lucas, R. Douglas Rivers and Jo Ann Heidi
Roizen. At each annual meeting of stockholders after the initial classification
or special meeting held instead of an annual meeting, the successors to those
directors whose terms will then expire will be elected to serve from the time
of election and qualification until the third annual meeting following the
election or special meeting.

    In addition, our amended and restated certificate of incorporation provides
that any additional directorships resulting from an increase in the number of
directors will be filled only by the affirmative vote of the directors then in
office, unless otherwise specified by resolution of the board of directors.
Additional

                                       45
directorships will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the directors. This
classification of the board of directors may have the effect of delaying or
preventing changes in control or management of Preview, although our directors
may be removed for cause by the affirmative vote of the holders of a majority
of our common stock.

Board Compensation

    None of our directors is paid any fee or other compensation for acting as a
director, although directors are reimbursed for reasonable expenses incurred in
attending board or committee meetings. Directors who are also employees are
eligible to participate in our 1998 Stock Option Plan, and, as of this
offering, they will also be eligible to participate in our 1999 Employee Stock
Purchase Plan. Directors who are not employees are eligible to participate in
our 1998 Stock Option Plan and, as of this offering, will also be eligible for
automatic grants and to participate in our 1999 Directors' Stock Option Plan.
See "Stock Plans."

    We have entered into indemnification agreements with each member of the
board of directors and certain of our officers providing for the
indemnification of these persons to the fullest extent permitted by law.

Board Committees

    Our board of directors has an audit committee and a compensation committee.
The audit committee consists of Mr. Lucas, Mr. Rieschel and Dr. Rivers. The
audit committee reviews our financial statements and accounting practices and
makes recommendations to the board regarding the selection of independent
auditors. The compensation committee consists of Mr. Langeler, Mr. Bourbon and
Ms. Roizen. The compensation committee makes recommendations to the board
concerning salaries and incentive compensation for our officers and employees
and administers our employee benefit plans.

Compensation Committee Interlocks and Insider Participation

    None of the members of the compensation committee of the board is an
officer or employee of Preview. None of our executive officers serves as a
member of a board of directors or compensation committee of any entity that has
one or more executive officers serving on our compensation committee.

                                       46
Executive Compensation

    The following table sets forth all compensation awarded to, earned by, or
paid to our Chief Executive Officer and each of our other four most highly
compensated executive officers, each of whose total cash compensation exceeded
$100,000 during fiscal year 1998.

                           Summary Compensation Table
Long-Term
                                          Annual Compensation  Compensation
                                          -------------------- ------------
                                                                Securities
                                                                Underlying   All Other
       Name and Principal Position          Salary     Bonus    Options (#) Compensation
       ---------------------------        ---------- --------- ------------ ------------
Vincent Pluvinage........................ $  162,056 $       0   150,000        $229
 President and Chief Executive Officer
David Gregory Kott.......................    120,000    32,942   117,373         229
 Vice President, Sales
Michel A. Floyd..........................    130,091         0    35,000         201
 Vice President, Engineering
Cay S. Horstmann.........................    129,167         0    35,000         201
 Vice President, Chief Technology Officer
Frank A. Tycksen, Jr.....................    125,000         0    46,047         204
 Vice President and Co-Founder
The amounts listed under the column entitled "All Other Compensation"
represent term life insurance premiums we paid on behalf of these executive
officers. We also note that G. Bradford Solso, our Vice President, Chief
Financial Officer, who commenced employment with us in July 1999, earns an
annualized salary of $160,000, and Christopher Dittmer, our Vice President,
Marketing, who commenced employment with us in May 1999, earns an annualized
salary of $135,000.

                                       47
Option Grants

    The following table shows certain information regarding stock options
granted to each of the executive officers listed in the Summary Compensation
Table during fiscal year 1998. We did not grant any stock appreciation rights
to these individuals during the year.

    The percentage of total options granted is based on a total of 899,585
options to purchase our common stock granted under all option plans in fiscal
year 1998. Potential realizable values are net of exercise price, but before
taxes associated with exercise. The 5% and 10% assumed annual rates of
compounded stock price appreciation are mandated by the Securities and Exchange
Commission. There is no assurance provided to any executive officer or any
other holder of our securities that the actual stock price appreciation over
the 10-year option term will be at the assumed 5% and 10% levels or at any
other defined level. Unless the market price of our common stock appreciates
over the option term, no value will be realized from the option grants.

                       Option Grants in Last Fiscal Year
Potential Realizable
                                       Individual Grants                 Value At Assumed
                         ---------------------------------------------    Annual Rates of
                         Number Of   Percent Of                                Stock
                         Securities Total Options                       Price Appreciation
                         Underlying  Granted To   Exercise                For Option Term
                          Options   Employees In  Price Per Expiration ---------------------
          Name            Granted    Fiscal Year    Share      Date        5%         10%
          ----           ---------- ------------- --------- ---------- ---------- ----------
Vincent Pluvinage.......  150,000       16.7%       $2.00     9/10/08  $  188,668 $  478,123
David Gregory Kott......   50,000        5.6         2.00     9/10/08      62,889    159,374
Michel A. Floyd.........   35,000        3.9         2.00     9/10/08      44,023    111,562
Cay S. Horstmann........   35,000        3.9         2.00     9/10/08      44,023    111,562
Frank A. Tycksen, Jr....   30,000        3.3         2.00     9/10/08      37,734     95,625
                              500        0.1         2.00    12/21/08         629      1,594
All of the stock options granted in fiscal year 1998 to Dr. Pluvinage, Dr.
Floyd, Dr. Horstmann, Mr. Kott and Mr. Tycksen's options for 30,000 shares vest
in monthly installments equal to 2.08% of the total number of shares per month
for 48 months, in any case as long as the respective individual remains an
employee with, consultant to, or director of Preview.

    Mr. Tycksen's options for 500 shares vest 25% on December 3, 1999 and 2.08%
of the total each month thereafter as long as Mr. Tycksen remains an employee
with, consultant to, or director of Preview.

                                       48
Aggregate Option Exercises in Fiscal Year 1998 and Fiscal Year-End Option
                                     Values

    The following table sets forth the number of shares of common stock
acquired upon the exercise of stock options by each of the executive officers
listed in the Summary Compensation Table during fiscal year 1998, and the
number and value of securities underlying unexercised options held by each of
these individuals as of December 31, 1998. The value realized is based on the
fair market value of the shares on the date of exercise as determined by the
board of directors minus the exercise price. The value of unexercised in-the-
money options is based on a $2.00 per share value, the fair market value as of
December 31, 1998, as determined by the board of directors, minus the exercise
price, multiplied by the number of shares underlying the option.
Number of Securities         Value of Unexercised
                           Shares                 Underlying Unexercised       In-the-Money Options
                          Acquired    Value    Options at December 31, 1998    at December 31, 1998
          Name           on Exercise Realized  (Exercisable/Unexercisable)  (Exercisable/Unexercisable)
          ----           ----------- -------- ----------------------------- ---------------------------
Vincent Pluvinage.......   50,000    $25,000         25,000/125,000                        $0/$0
David Gregory Kott......       --         --          19,438/97,934                          0/0
Michel A. Floyd.........       --         --          23,697/76,303                27,890/69,609
Cay S. Horstmann........   15,625      7,813          12,395/69,480                10,937/59,375
Frank A. Tycksen, Jr....       --         --           7,613/38,434                          0/0
Stock Plans

    1998 Stock Option Plan. Our 1998 plan provides for the grant of incentive
stock options to employees, including employee directors, and of nonstatutory
stock options to employees, directors (including employee and non-employee
directors) and consultants. The purposes of the 1998 plan are to attract and
retain the best available personnel, to provide additional incentives to our
employees and consultants and to promote the success of our business. Our board
of directors and stockholders originally adopted and approved the 1998 plan in
July 1998. As of July 31, 1999, an aggregate of 1,850,000 shares were
authorized under the 1998 plan. In addition, the 1998 plan was amended in
August 1999 to increase the total number of shares authorized by 1,000,000
shares and to incorporate certain other changes. After this amendment, a total
of 2,850,000 shares of common stock were reserved for issuance under the 1998
plan. The 1998 plan was further amended to provide for an automatic annual
increase on the first day of each of our fiscal years beginning in 2000 and
ending in 2008 equal to the lesser of:

  .  800,000 shares;

  .  3% of our outstanding common stock on the last day of the immediately
     preceding fiscal year; or

  .  such lesser number of shares as the board of directors determines.

This amendment to the 1998 plan will be submitted for approval by our
stockholders prior to the completion of this offering. The application of these
automatic annual increase provisions will result in a maximum total authorized
pool of 10,050,000 shares. Unless terminated earlier by the board of directors,
the 1998 plan will terminate in July 2008.

    As of July 31, 1999, options to purchase 1,382,130 shares of common stock
were outstanding under the 1998 plan at a weighted average exercise price of
$4.42 per share, 7,773 shares had been issued upon exercise of outstanding
options, 460,097 shares remained available for future grant, and 1,842,227
shares were reserved for issuance.

    The 1998 plan may be administered by the board of directors or a committee
of the board, each known as the administrator. The administrator determines the
terms of options granted under the 1998 plan, including the number of shares
subject to the option, the exercise price, and the vesting and exercisability
of the option and any other conditions to which the option is subject. In no
event, however, may an employee receive awards for more than 1,000,000 shares
under the 1998 plan in any fiscal year. Incentive stock options granted under
the 1998 plan must have an exercise price of at least 100% of the fair market
value of the common stock on the date of grant, and not less than 110% of the
fair market value in the case of incentive stock options granted to

                                       49
an employee who holds more than 10% of the total voting power of all classes of
our stock or parent or subsidiary's stock. Prior to this offering, nonstatutory
stock options granted under the 1998 plan were required to have an exercise
price of at least 85% of the fair market value of the common stock on the date
of grant. After the date of this offering, the exercise price of nonstatutory
stock options will no longer be subject to these restrictions, although
nonstatutory stock options granted to our Chief Executive Officer and our four
other most highly compensated officers will generally equal at least 100% of
the grant date fair market value if we intend that options to those individuals
will qualify as performance-based compensation under applicable tax law.
Payment of the exercise price may be made in cash or such other consideration
as determined by the administrator.

    With respect to options granted under the 1998 plan, the administrator
determines the term of options, which may not exceed 10 years (or 5 years in
the case of an incentive stock option granted to an employee who holds more
than 10% of the total voting power of all classes of our stock or a parent or
subsidiary's stock). Generally, an option granted under the 1998 plan is
nontransferable other than by will or the laws of descent and distribution, and
may be exercised during the lifetime of the optionee only by such optionee.
However, the administrator may, in its discretion, provide for the limited
transferability of nonstatutory stock options granted under the 1998 plan under
certain circumstances. The administrator determines when options become
exercisable. Options granted under the 1998 plan generally become exercisable
at the rate of 25% of the total number of shares subject to the options on the
first anniversary of the vesting commencement date and 1/48 of the total number
of shares subject to the options each month thereafter.

    If we sell all or substantially all of our assets or if we are acquired by
another corporation, each outstanding option may be assumed or an equivalent
award substituted by the successor corporation. However, if the successor
corporation does not agree to such assumption or substitution, the outstanding
options will terminate. The administrator has the authority to amend or
terminate the 1998 plan, but no action may be taken that impairs the rights of
any holder of an outstanding option without the holder's consent. In addition,
we must obtain stockholder approval of amendments to the plan as required by
applicable law.

    1999 Employee Stock Purchase Plan. Our board of directors adopted the 1999
employee stock purchase plan in August 1999. We intend to submit this plan to
our stockholders for approval in September 1999. A total of 500,000 were
reserved for issuance under the 1999 purchase plan, none of which have been
issued as of the date of this offering. The number of shares authorized and
reserved for issuance under the 1999 purchase plan will be subject to an
automatic annual increase on the first day of each of our fiscal years over the
10-year term of the plan, equal to the lesser of:

  .  400,000 shares;

  .  2% of our outstanding common stock on the last day of the immediately
     preceding fiscal year; or

  .  a lesser number of shares as the board of directors may determine.

The application of these provisions will result in a total pool of a maximum of
4,500,000 shares authorized and reserved. The 1999 purchase plan becomes
effective upon the date of this offering. Unless terminated earlier by the
board of directors, the 1999 purchase plan shall terminate in October 2009.

    The 1999 purchase plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, will be implemented by a series of overlapping
offering periods of approximately 24 months' duration, with new offering
periods (other than the first offering period) commencing on May 1 and November
1 of each year. Each offering period will generally consist of four consecutive
purchase periods of six months' duration, at the end of which an automatic
purchase will be made for participants. The initial offering period is expected
to commence on the date of this offering and end on October 31, 2001; the
initial purchase period is expected to begin on the date of this offering and
end on April 30, 2000. The 1999 purchase plan will be administered by the board
of directors or by a committee appointed by the board. Our employees (including
officers and employee directors), and employees of any majority-owned
subsidiary designated by the board, are eligible to participate in the 1999
purchase plan if they are employed by us or any such subsidiary for at least 20
hours

                                       50
per week and more than five months per year. The 1999 purchase plan permits
eligible employees to purchase common stock through payroll deductions, which
in any event may not exceed 20% of an employee's eligible compensation. The
purchase price is equal to the lower of 85% of the fair market value of the
common stock at the beginning of each offering period or at the end of each
purchase period. Employees may end their participation in the 1999 purchase
plan at any time during an offering period, and participation ends
automatically on termination of employment.

    An employee cannot be granted an option under the 1999 purchase plan if
immediately after the grant the employee would own stock and/or hold
outstanding options to purchase stock equaling 5% or more of the total voting
power or value of all classes of our stock or stock of our subsidiaries, or if
the option would permit an employee's rights to purchase stock under the 1999
purchase plan at a rate that exceeds $25,000 of fair market value of such stock
for each calendar year in which the option is outstanding. In addition, no
employee may purchase more than 2,000 shares of common stock under the 1999
purchase plan in any one purchase period. If the fair market value of the
common stock on a purchase date of an offering period (other than the final
purchase date) is less than the fair market value at the beginning of the
offering period, each participant in that offering period shall automatically
be withdrawn from the offering period as of the end of the purchase date and
re-enrolled in a new 24 month offering period beginning on the first business
day following the purchase date.

    If we merge or consolidate with or into another corporation or sell all or
substantially all of our assets, each right to purchase stock under the 1999
purchase plan will be assumed or an equivalent right substituted by the
successor corporation. However, the board of directors will shorten any ongoing
offering period so that employees' rights to purchase stock under the 1999
purchase plan are exercised prior to the transaction in the event that the
successor corporation refuses to assume each purchase right or to substitute an
equivalent right. The board of directors has the power to amend or terminate
the 1999 purchase plan and to change or terminate offering periods as long as
such action does not adversely affect any outstanding rights to purchase stock
thereunder. However, the board of directors may amend or terminate the 1999
purchase plan or an offering period even if it would adversely affect
outstanding options in order to avoid our incurring adverse accounting charges.

    1999 Directors' Stock Option Plan. Our board of directors adopted the 1999
directors' stock option plan in August 1999 and we intend to submit the plan to
our stockholders for approval in September 1999. It will become effective upon
the date of this offering. A total of 300,000 shares of common stock were
reserved for issuance under the 1999 directors' plan. The number of shares
authorized and reserved for issuance under the 1999 directors' plan will be
subject to an automatic annual increase on the first day of each of our fiscal
years over the 10-year term of the plan, equal to the lesser of:

  .  150,000 shares;

  .  1% of our outstanding common stock on the last day of the immediately
     preceding fiscal year; or

  .  a lesser number of shares as the board of directors may determine.

The application of these provisions will result in a total pool of a maximum of
1,800,000 shares authorized and reserved for issuance. The directors' plan
provides for the grant of nonstatutory stock options to our non-employee
directors. The directors' plan is designed to work automatically without
administration; however, to the extent administration is necessary, it will be
performed by the board of directors. To the extent they arise, it is expected
that conflicts of interest will be addressed by abstention of any interested
director from both deliberations and voting regarding matters in which the
director has a personal interest. Unless terminated earlier, the directors'
plan will terminate in October 2009.

    The 1999 directors' plan provides that each person who is a non-employee
director upon the completion of this offering will be granted a nonstatutory
stock option to purchase 10,000 shares of common stock and that each person who
becomes a non-employee director after the completion of this offering will be
granted a nonstatutory stock option to purchase 20,000 shares of common stock
on the date on which the individual first becomes a member of our board of
directors. Thereafter, on the date of each annual stockholders' meeting

                                       51
immediately after which the director is serving on the board, provided that he
or she has served on the board for at least six months prior to the meeting
date, each non-employee director will be granted an option to purchase 10,000
shares of common stock.

    All options granted under the 1999 directors' plan will have a term of 10
years and an exercise price equal to the fair market value of the common stock
on the date of grant and will be nontransferable. All options granted under the
directors' plan shall be vested and exercisable in full immediately upon grant
of such option. If a non-employee director ceases to serve as a director for
any reason other than death or disability, he or she may, but only within 90
days after the date he or she ceases to be a director, exercise options granted
under the directors' plan. If he or she does not exercise the option within
such 90-day period, the option shall terminate. If a director's service
terminates as a result of his or her disability or death, or if a director dies
within three months following termination for any reason, the director or his
or her estate will have 12 months after the date of termination or death, as
applicable, to exercise options that were vested as of the date of termination.

    If we merge or consolidate with or into another corporation or sell all or
substantially all of our assets, each option outstanding under the 1999
directors' plan will be assumed or equivalent options substituted by the
successor corporation, unless the successor corporation does not agree to such
assumption or substitution, in which case the options will terminate upon
consummation of the transaction to the extent not previously exercised. In
connection with any merger or asset sale, each director holding options under
the directors' plan will have the right to exercise his or her options
immediately before the consummation of the transaction as to all shares
underlying the options. Our board of directors may amend or terminate the 1999
directors' plan as long as the action does not adversely affect any outstanding
option and we obtain stockholder approval for any amendment to the extent
required by applicable law.

    Portland Software Amended and Restated 1994 Stock Incentive Plan. In
connection with the merger in August 1998 with Portland Software, we assumed
the outstanding options issued under the Portland Software plan. As of July 31,
1999, options to purchase 526,924 shares of our common stock were outstanding
under the Portland Software plan at a weighted average exercise price of $1.60
per share, 27,318 shares had been issued upon exercise of outstanding options
and no shares remained available for future grant. The terms of the Portland
Software options are similar to the terms of options issuable under our 1998
plan except that in the event of a sale of all or substantially all of our
assets or our merger with or into another corporation, the vesting of certain
options granted under the Portland Software plan may be accelerated prior to
the effective date of the transaction at the discretion of our board of
directors. Options granted under the Portland Software plan remain outstanding
in accordance with their original terms after conversion of the number of
shares and the exercise price per share that resulted from the merger.

    Preview Software 1997 Stock Option Plan. In connection with the merger in
August 1998 with Preview Software, we assumed the outstanding options issued
under the Preview Software 1997 plan. As of July 31, 1999, options to purchase
145,395 shares of our common stock were outstanding under the Preview Software
1997 plan at a weighted average exercise price of $.50 per share, 284,375
shares had been issued upon exercise of outstanding options and no shares
remained available for future grant. The terms of the Preview Software 1997
plan options are similar to the terms of options issuable under our 1998 plan
except that in the event of a sale of all or substantially all of our assets or
our merger with or into another corporation, if the successor corporation does
not agree to the assumption or substitution of outstanding options, the vesting
of all outstanding options shall be accelerated and the options shall become
fully exercisable prior to the effective date of the transaction. Options
granted under the Preview Software 1997 plan remain outstanding in accordance
with their original terms after conversion of the number of shares and the
exercise price per share that resulted from the merger.

    Preview Software New 1997 Stock Option Plan. In connection with the merger
in August 1998 with Preview Software, we assumed outstanding options issued
under the Preview Software New 1997 plan. As of July 31, 1999, options to
purchase 204,051 shares of our common stock were outstanding under the Preview
Software New 1997 plan at a weighted average exercise price of $.62 per share,
58,611 shares had been issued

                                       52
upon exercise of outstanding options and no shares remained available for
future grant. The terms of the Preview Software New 1997 plan options are
similar to the terms of options issuable under our 1998 plan. Options granted
under the Preview Software New 1997 plan remain outstanding in accordance with
their original terms after conversion of the number of shares and the exercise
price per share that resulted from the merger.

Limitation of Liability and Indemnification Matters

    Our amended and restated certificate of incorporation limits the liability
of directors to the maximum extent permitted by Delaware law. Delaware law
provides that a director of a corporation will not be personally liable for
monetary damages for breach of the individual's fiduciary duties as a director
except for liability for any breach of the director's duty of loyalty to the
company or to its stockholders, for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law or for any transaction
from which a director derives an improper personal benefit.

    Our bylaws provide that we indemnify our directors and executive officers
and may indemnify our officers, employees and other agents to the full extent
permitted by law. We believe that indemnification under our bylaws covers at
least negligence on the part of an indemnified party. Our bylaws also permit us
to advance expenses incurred by an indemnified party in connection with the
defense of any action or proceeding arising out of his or her status or
services as a director, officer, employee or other agent for us upon an
undertaking by him or her to repay advances if it is ultimately determined that
he or she is not entitled to indemnification.

    We have entered into separate indemnification agreements with each of our
directors and executive officers. These agreements require us to indemnify the
director or executive officer against expenses, including attorney's fees,
judgments, fines and settlement paid by the individual in connection with any
action, suit or proceeding arising out of the individual's status or service as
a Preview director or officer, if the officer or director acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to
Preview's best interests and not unlawful, and to advance expenses incurred by
the director or executive officer in connection with any proceeding against the
officer or director with respect to which the officer or director is entitled
to indemnification by us. We believe that our amended and restated certificate
of incorporation and bylaw provisions and indemnification agreements are
necessary to attract and retain qualified persons as directors and executive
officers.

    At present, we are not aware of any pending litigation or proceeding
involving in any of our directors, officers, employees or agents where
indemnification will be required or permitted. Furthermore, we are not aware of
any threatened litigation or proceeding that might result in a claim for
indemnification.

    Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, executive officers or persons controlling
Preview, we have been informed that in the opinion of the Securities and
Exchange Commission the indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.

Change of Control and Termination Arrangements

    We have entered into an arrangement with Dr. Pluvinage, our President and
Chief Executive Officer, that provides him with benefits in the event of a
change of control of us or termination of his employment with us. In the event
of a change of control which is generally defined as the acquisition of a
majority of our stock or sale of all of our assets, 50% of the unvested options
granted to Dr. Pluvinage under the Preview Software 1997 Plan will immediately
vest at the time of the change of control. In addition, if the acquiring
company fails to assume or does not provide Dr. Pluvinage with options of
equivalent value, the remaining 50% of the unvested options will also
immediately vest. Moreover, in the event that Dr. Pluvinage is terminated for
any reason other than for cause or his own willful termination, 50% of any of
his unvested options under the Preview Software 1997 plan will immediately vest
and he will receive a cash amount equal to one year base salary.

                                       53
We have also entered into an arrangement with Mr. Kott, our Vice President,
Sales, that provides him with certain benefits in the event of a change of
control, which is generally defined as a consolidation or merger of us or the
sale of all of our assets. As to options to purchase 16,195 shares, 100% of the
shares will immediately vested if Mr. Kott is terminated without cause,
required to relocate or experiences a material reduction in his
responsibilities or compensation within 90 days of a change in control. In
addition, these shares will immediately vest in the event of an initial public
offering. As to options to purchase 98,587 shares, 50% of these shares will
immediately vest if Mr. Kott is terminated without cause, required to relocate
or experiences a material reduction in his responsibilities or compensation
within 90 days of a change of control. In addition, even if no change of
control occurs, 33 1/3% of these shares will immediately vest if Mr. Kott is
terminated without cause, required to relocate or experiences a material
reduction in his responsibilities or compensation.

                                       54
CERTAIN TRANSACTIONS

Private Placements of Securities

    Background. Through a series of mergers in August 1998, we became the owner
of all of the capital stock of Preview Software and Portland Software. As a
part of these transactions, all of the previously outstanding shares of common
and preferred stock and options and warrants to purchase capital stock of each
of Preview Software and Portland Software were converted into outstanding
shares of common and preferred stock and options and warrants to purchase
capital stock of Preview Systems. The equity securities of Preview Software and
Portland Software were converted into equity securities of Preview Systems
based on a ratio designed so that the former security holders of Preview
Software and Portland Software would each own approximately 50% of Preview
Systems on a fully-diluted basis.

    In April 1998, Preview Software issued and sold an aggregate of 299,401
shares of its series D preferred stock at a price of $6.68 per share to several
investors, including the following persons or entities:

  .  28,839 shares to the Donald L. Lucas Profit Sharing Trust, with whom
     Mr. Lucas, one of our directors, is affiliated;

  .  18,713 shares to Mr. Rivers, one of our directors and an owner of more
     than 5% of our securities;

  .  64,522 shares, to Telos Venture Partners, an entity which beneficially
     holds more than 5% of our securities and with whom Mr. Bourbon, one of
     our directors, is affiliated; and

  .  42,879 shares to Teton Capital Company, with whom Mr. Lucas is
     affiliated.

    In September and October 1998, we issued and sold an aggregate of 1,162,518
shares of our series F preferred stock at a price of $5.00 to several
investors, including the following persons or entities:

  .  14,089 shares to the Donald L. Lucas Profit Sharing Trust;

  .  100,000 shares to Olympic Venture Partners, an entity which
     beneficially holds more than 5% of our securities and with whom Mr.
     Langeler, one of our directors, is affiliated;

  .  26,511 shares to Sand Hill Financial Company, with whom Mr. Lucas is
     affiliated;

  .  144,000 shares to Telos Venture Partners; and

  .  47,900 to Teton Capital Company.

    In July 1999, we issued and sold an aggregate of 4,312,448 shares of our
series G preferred stock at a price of $6.72 to several investors, including
the following persons or entities:

  .  14,881 shares to the Donald L. Lucas Profit Sharing Trust;

  .  44,643 shares to Olympic Venture Partners;

  .  1,190,476 shares to SOFTBANK Technology entities, entities which
     beneficially hold more than 5% of our securities and with which Mr.
     Rieschel and Ms. Roizen, two of our directors, are affiliated;

  .  37,202 shares to Telos Venture Partners; and

  .  892,857 shares to Whiting & Co. Guaranty Trust entities, entities which
     beneficially hold more than 5% of our securities.

    Since our inception, we have, from time to time, issued and sold shares of
our common stock and granted options to purchase common stock to our employees,
directors and consultants.

                                       55
Transactions with Directors and Officers

    In September 1998, we provided a guarantee to a $300,000 loan from a
commercial bank to Dr. Pluvinage, our President and Chief Executive Officer. As
of July 31, 1999, this loan is currently outstanding. In connection with this
guarantee, Dr. Pluvinage has pledged to us all of his vested shares of our
capital stock.

    In July 1999, we sold 125,000 and 150,000 shares of our common stock at a
price of $6.50 to Dr. Pluvinage, our President and Chief Executive Officer, and
Mr. Solso, our Vice President, Chief Financial Officer, respectively. Under the
terms of these sales, we can repurchase a certain number of their shares of
stock if their employment is terminated voluntarily or involuntarily, subject
to a monthly vesting schedule. In addition, we have a right of first refusal to
purchase any or all of their shares if they decide to sell or transfer their
shares. Further, these shares may be subject to a 180 day lock-up period in the
event of an initial public offering upon the request of the underwriters or us.
In connection with these sales, Dr. Pluvinage and Mr. Solso executed full-
recourse promissory notes in the respective amounts of $812,475 and $974,970 in
favor of Preview with annual interest rates of 5.32%. These notes become due
and payable upon the earlier of July 2002 or termination of their employment
with us. Dr. Pluvinage and Mr. Solso have also entered into pledge and security
agreements granting us a security interest in these shares.

                                       56
PRINCIPAL STOCKHOLDERS

    The following table sets forth information with respect to the beneficial
ownership of the shares of our common stock on a fully-diluted basis as of
July 31, 1999, and as adjusted to reflect the sale of common stock offered
hereby, as to:

  .  each person (or group of persons) who is known by us to own
     beneficially more than 5% of our common stock on a fully-diluted basis;

  .  each director and each of the executive officers listed on the Summary
     Compensation Table; and

  .  all directors and executive officers of Preview as a group.
Shares Beneficially  Shares Beneficially
                                              Owned                Owned
                                       Prior to Offering(2) After Offering(2)(4)
                                       -------------------- --------------------
Name and Address(1)                     Number   Percent(3)      Percent(3)
-------------------                    --------- ---------- --------------------
5% Stockholders
SOFTBANK Technology Ventures (5).....  1,190,476   10.05%
  333 W. San Carlos St., Suite 1225
  San Jose, CA 95110
Whiting & Co. Morgan Guaranty Trust
  Co. (6)............................    892,857    7.54
  522 Fifth Avenue
  New York, NY 10036
Telos Venture Partners, LP (7).......    723,262    6.10
  2350 Mission College Boulevard
  Suite 1070
  Santa Clara, CA 95054
Van Wagoner Capital Management.......    668,155    5.64
  345 California Street, Suite 2450
  San Francisco, CA 94104
Olympic Venture Partners and
  Affiliates (8).....................    604,886    5.07
  340 Oswego Point Drive, Suite 200
  Lake Oswego, OR 97503..............

Named Executive Officers and
  Directors
Vincent Pluvinage (9)................    450,000    3.78
Frank A. Tycksen, Jr. (10)...........    138,194    1.16
Cay S. Hortsmann (11)................     61,754       *
David Gregory Kott (12)..............     50,007       *
Michel A. Floyd (13).................     45,785       *
Jo Ann Heidi Roizen (5)..............  1,209,851   10.20
Gary Rieschel (5)....................  1,190,476   10.05
Bruce R. Bourbon (7).................    723,262    6.10
R. Douglas Rivers (14)...............    632,419    5.34
Gerard H. Langeler (8)...............    604,886    5.07
Donald L. Lucas (15).................    483,752    4.08
All executive officers and directors
  as a group
(16 persons) (16)....................  4,602,133   38.07
--------
  *  Less than 1%.
 (1) Except as otherwise noted, the address of each person listed in the table
     is c/o Preview Systems, Inc., 1601 South DeAnza Boulevard, Suite 100,
     Cupertino, CA 95014, and the persons named in the table have sole voting
     and investment power with respect to all shares of common stock shown as
     beneficially owned by them, subject to community property laws where
     applicable.
 (2) Beneficial ownership is determined in accordance with the rules of the
     Securities and Exchange Commission. The number of shares beneficially
     owned by a person includes shares of common stock subject to options
     and/or warrants held by that person that are currently exercisable or
     exercisable within 60 days of July 31, 1999. Shares issuable pursuant to
     such options or warrants are deemed outstanding for

                                      57
computing the percentage ownership of the person holding such options or
    warrants but are not deemed outstanding for the purposes of computing the
    percentage ownership of each other person.
 (3) Percentage of shares beneficially owned is based on 11,846,433 shares of
     common stock outstanding as of July 31, 1999, assuming conversion of all
     shares of preferred stock into common stock, and      shares of common
     stock to be outstanding upon the consummation of this offering.
 (4) Assumes underwriters do not exercise their over-allotment option.
 (5) Mr. Rieschel and Ms. Roizen are general partners of SOFTBANK. Each of
     them disclaims beneficial ownership of these shares except to the extent
     of his or her pecuniary interest in them. Ms. Roizen also has 19,375
     shares exercisable under outstanding stock options within 60 days of July
     31, 1999, and this number is reflected opposite Ms. Roizen's name.
 (6) Consists of:
   .  625,000 shares held directly by Whiting & Co. Morgan Guaranty Trust Co.
      of NY as Trustee of the Commingled Pension Trust Fund;
   .  133,929 shares held directly by Bost & Co. Morgan Guaranty Trust Co. of
      NY as Investment Manager and Agent for The Alfred P. Sloan Foundation;
      and
   .  133,928 shares held directly by Whiting & Co. Morgan Guaranty Trust Co.
      of NY as Trustee of the Multi-Market Special Investment Trust Fund.
 (7) Includes a warrant to purchase 8,789 shares of common stock. Mr. Bourbon
     is a Managing Member of Telos Management LLC, the General Partner of
     Telos Venture Partners, LP. He disclaims beneficial ownership of these
     shares except to the extent of his pecuniary interest in the shares.
 (8) Consists of:
   .  510,123 shares held directly and warrants to purchase 72,583 shares of
      common stock held by Olympic Venture Partners III, LP; and
   .  18,464 shares held directly and warrants to purchase 3,716 shares of
      common stock held by OVP III Entrepreneurs Fund.
    Mr. Langeler is a General Partner of OVMC III, the General Partner of
    Olympic Venture Partners III, LP and OVP III Entrepreneurs Fund. He
    disclaims beneficial ownership of these shares except to the extent of his
    pecuniary interest in them.
 (9) Includes 50,000 shares exercisable under outstanding stock options within
     60 days of July 31, 1999.
(10) Includes 18,995 shares exercisable under outstanding stock options within
     60 days of July 31, 1999, and 7,773 shares held by members of Mr.
     Tycksen's family.
(11) Includes 30,582 shares exercisable under outstanding stock options within
     60 days of July 31, 1999.
(12) Includes 29,460 shares exercisable under outstanding stock options within
     60 days of July 31, 1999.
(13) Includes 40,603 shares exercisable under outstanding stock options within
     60 days of July 31, 1999.
(14) Includes a warrant to purchase 3,750 shares of common stock. Also
     includes 8,375 shares over which Dr. Rivers has voting power because of
     his capacity as co-trustee of three trusts containing shares of our
     common stock, for which he disclaims beneficial ownership.
(15) Consists of:
   .  57,601 shares held by the Donald L. Lucas Profit Sharing Trust dated
      1/1/84;
   .  62,500 shares held directly and a warrant to purchase 5,859 shares of
      common stock held by the Donald L. Lucas & Lygia S. Lucas Trust dated
      12/3/84;
   .  102,792 shares held by Sand Hill Financial Corporation; and
   .  255,000 shares held by Teton Capital Company.
    Mr. Lucas is the trustee for the Donald L. Lucas Profit Sharing Trust
    dated 1/1/84 and the Donald L. Lucas & Lygia S. Lucas Trust dated 12/3/84.
    He also is a General Partner of Teton Capital Company and Sand Hill
    Financial Corporation. He disclaims beneficial ownership of these shares
    except to the extent of his pecuniary interest in them.
(16) Includes 241,238 shares exercisable under outstanding stock options
     within 60 days of July 31, 1999 and warrants to purchase 94,697 shares of
     common and preferred stock.

                                      58
DESCRIPTION OF CAPITAL STOCK

    Following the closing of the sale of the shares offered hereby, our
authorized capital stock will consist of 75,000,000 shares of common stock,
$0.0002 par value per share, and 5,000,000 shares of undesignated preferred
stock, $0.0002 par value per share. All currently designated shares of
preferred stock will be converted into common stock upon the closing of this
offering.

Common Stock

    As of July 31, 1999, there were 11,846,433 shares of our common stock
outstanding that were held of record by approximately 190 stockholders after
giving effect to the conversion of our preferred stock into common stock at a
one-to-one ratio, and assuming no exercise or conversion of outstanding
convertible securities after July 31, 1999. There will be         of common
stock outstanding (assuming no exercise of the underwriters' over-allotment
option and no exercise or conversion of outstanding convertible securities
after July 31, 1999) after giving effect to the sale of the shares of common
stock offered hereby.

    The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably the dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available therefor.
See "Dividend Policy." In the event of a liquidation, dissolution or winding up
of Preview, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior rights of
preferred stock, if any, then outstanding. The common stock has no preemptive
or conversion rights or other subscription rights. There are no redemption or
sinking fund provisions available to the common stock. All outstanding shares
of common stock are fully paid and non-assessable.

Preferred Stock

    Upon the closing of the offering, we will be authorized to issue 5,000,000
shares of undesignated preferred stock. The board of directors will have the
authority to issue the undesignated preferred stock in one or more series and
to determine the powers, preferences and rights and the qualifications,
limitations or restrictions granted to or imposed upon any wholly unissued
series of undesignated preferred stock and to fix the number of shares
constituting any series and the designation of the series, without any further
vote or action by the stockholders. The issuance of preferred stock may have
the effect of delaying, deferring or preventing a change in control of the
company without further action by the stockholders and may adversely affect the
voting and other rights of the holders of common stock. At present, we have no
plans to issue any shares of preferred stock.

Warrants

    At July 31, 1999, there were warrants outstanding to purchase an aggregate
of 170,450 shares of common stock at a weighted average exercise price of $1.53
per share, an aggregate of 25,430 shares of series C preferred stock at an
exercise price of $3.20 per share, an aggregate of 217,233 shares of series E
preferred stock at an exercise price of $12.88 per share, an aggregate of 2,700
shares of series F preferred stock at an exercise price of $5.00 per share, and
an aggregate of 76,682 shares of series G preferred stock at an exercise price
of $6.72 per share.

    Of these warrants, the warrants to purchase 170,450 shares of common stock
and the warrants to purchase 76,682 shares of series G preferred stock will
expire upon the consummation of this offering if not exercised prior to that
time. The warrants to purchase shares of preferred stock that survive the
closing of this offering will convert into warrants to purchase shares of
common stock on the closing of this offering on a one-to-one basis. Generally,
the warrants contain provisions for the adjustment of the exercise price and
the aggregate number of shares issuable upon the exercise of the warrant under
certain circumstances, including stock dividends, stock splits,
reorganizations, reclassifications, consolidations and certain dilutive
issuances of securities at prices below the then existing warrant exercise
price.

                                       59
Registration Rights

    The holders of 8,788,273 shares of common stock (assuming the conversion of
all outstanding preferred stock upon completion of this offering) and the
holders of 492,495 shares issuable upon exercise of warrants, (referred to in
this prospectus as registrable securities), or their transferees are entitled
to certain rights with respect to the registration of the shares under the
Securities Act. These rights are provided under the terms of an agreement
between us and the holders of these securities dated July 2, 1999, as amended.
Subject to limitations in the agreement, the holders of at least 30% of the
registrable securities may require, on two occasions beginning six months after
the date of this prospectus, that we use our best efforts to register the
registrable securities for public resale if Form S-3 is not available, provided
that the aggregate offering price to the public is at least $10,000,000. If we
register any of our common stock either for our own account or for the account
of other security holders after the date of this prospectus, the holders of
registrable securities are entitled to include their shares of common stock in
that registration, subject to the ability of the underwriters to limit the
number of shares included in the offering. If the holders of registrable
securities are limited in the amount of shares they may sell in an offering
subsequent to this offering, no one is allowed to sell shares other than us or
the holders of registrable securities, if any, requesting registration. The
holders of registrable securities may also require us, not more than twice in
any twelve-month period, to register all or a portion of the registrable
securities on Form S-3 when the use of that form becomes available to us,
provided, among other limitations, that the proposed aggregate selling price,
net of any underwriters' discounts or commissions, is at least $1,000,000. We
will be responsible for paying all registration expenses, including the
reasonable expense of one special counsel of the selling stockholders, and the
holders selling their shares will be responsible for paying all selling
expenses. See "Shares Eligible for Future Sale."

Delaware Anti-Takeover Law and Charter and Bylaw Provisions

    Provisions of Delaware law and our charter documents could make the
acquisition of Preview and the removal of incumbent officers and directors more
difficult. These provisions are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of Preview to negotiate with us first. We
believe that the benefits of increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure Preview outweigh the disadvantages of discouraging these
proposals because, among other things, negotiation of these proposals could
result in an improvement of their terms.

    We are subject to the provisions of Section 203 of the Delaware law. In
general, the statute prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless, subject to exceptions, the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years prior, did
own, 15% or more of the corporation's voting stock. These provisions may have
the effect of delaying, deferring or preventing a change in control of Preview
without further action by the stockholders.

    Our amended and restated certificate of incorporation provides that
stockholder action can be taken only at an annual or special meeting of
stockholders and may not be taken by written consent. In addition, our amended
and restated certificate of incorporation provides that our board of directors
shall be classified, in which the directors are subject to re-election on a
rotating basis rather than every year. The bylaws provide that special meetings
of stockholders can be called only by the board of directors, the Chairman of
the Board or the President. Moreover, the bylaws set forth an advance notice
procedure with regard to the nomination, other than by or at the direction of
the board of directors, of candidates for election as directors and with regard
to business to be brought before a meeting of stockholders. The foregoing
provisions could have the effect of preventing a change in control of Preview
or making removal of management more difficult. These provisions could also
have the effect of decreasing the market price of the common stock, and
delaying, deferring or preventing a change in control of Preview without any
further action by our stockholders.

                                       60
Our stock option and stock purchase plans generally provide for assumption
of the plans or substitution of an equivalent option of a successor corporation
or, alternatively, at the discretion of the board of directors, exercise of
some or all of the stock options, including non-vested options, or acceleration
of vesting of options issued pursuant to stock grants, upon a change of control
or similar event. The board of directors has authority to issue up to 5,000,000
shares of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares without any further vote
or action by the stockholders. The rights of the holders of the 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 have the effect of
making it more difficult for a third party to acquire a majority of our
outstanding voting stock, thereby delaying, deferring or preventing a change in
control of Preview. Furthermore, the preferred stock may have other rights,
including economic rights senior to the common stock, and as a result, the
issuance of the preferred stock could have a material adverse effect on the
market value of the common stock. We have no present plan to issue shares of
preferred stock.

Transfer Agent and Registrar

    The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company. The transfer agent's address and telephone number is
40 Wall Street, New York, New York 10005, (212) 936-5100.

                                       61
SHARES ELIGIBLE FOR FUTURE SALE

    Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. Furthermore, only a limited number
of shares will be available for sale shortly after this offering because of
contractual and legal restrictions on resale. After these restrictions lapse,
sales of substantial amounts of our common stock in the public market could
adversely affect the prevailing market price and our ability to raise equity
capital in the future.

    Based on shares outstanding as of July 31, 1999, upon completion of this
offering, we will have      outstanding shares of common stock. Of these
shares, the      shares sold in the offering (plus any shares issued upon
exercise of the underwriters' overallotment option) and 20,730 shares not
subject to a lock-up agreement will be freely tradable without restriction
under the Securities Act, unless purchased by our "affiliates" as that term is
defined in Rule 144 under the Securities Act, which generally includes
officers, directors or 10% stockholders.

    The remaining 11,825,703 shares outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act. These shares may be
sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act, which are summarized below. Sales of these shares in the
public market, or the availability of such shares for sale, could adversely
affect the market price of our common stock.

    Our stockholders have entered into lock-up agreements in which they have
agreed that they will not offer, sell, contract to sell or grant any option to
purchase or otherwise dispose of our common stock or any securities exercisable
for or convertible into our common stock owned by them for a period of 180 days
after the date of this prospectus without the prior written consent of
BancBoston Robertson Stephens. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, shares subject to lock-up agreements may not be sold
until such agreements expire or are waived by BancBoston Robertson Stephens.
Taking into account the lock-up agreements, and assuming BancBoston Robertson
Stephens does not release stockholders from these agreements, the following
shares will be eligible for sale in the public market at the following times:

  .  beginning on the effective date of this prospectus, only the shares
     sold in the offering will be immediately available for sale in the
     public market;

  .  beginning 181 days after the date of this prospectus, approximately
     7,022,608 shares will be eligible for sale pursuant to Rules 144,
     144(k) and 701; and

  .  the remaining shares will be eligible for sale pursuant to Rule 144 at
     various times thereafter.

    Under Rule 144, the number of shares that may be sold by affiliates are
subject to volume restrictions as described below. In general, under Rule 144,
and beginning after the expiration of the lock-up agreements, a person (or
persons whose shares are aggregated) who has beneficially owned restricted
shares for at least one year would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of:

  .  one percent of the number of shares of common stock then outstanding
     (which will equal approximately      shares immediately after the
     offering); or

  .  the average weekly trading volume of the common stock during the four
     calendar weeks preceding the sale. Sales under Rule 144 are also
     subject to manner of sale provisions and notice requirements and to the
     availability of current public information about us.

    Under Rule 144(k), a person who is not deemed to have been an affiliate of
us at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two

                                       62
years, is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.

    The holders of approximately 8,788,273 shares of common stock and warrants
to purchase 492,495 shares of common stock or their transferees are also
entitled to certain rights with respect to registration of their shares of
common stock for offer or sale to the public. If the holders, by exercising
their registration rights, cause a large number of shares to be registered and
sold in the public market, the sales could have a material adverse effect on
the market price for our common stock.

    As a result of the lock-up agreements, all of our employees holding common
stock or stock options may not sell shares acquired upon exercise for 180 days
after the date of this prospectus. Beginning 181 days after the date of this
prospectus, any employee, officer or director of or consultant to us who
purchased shares pursuant to a written compensatory plan or contract may be
entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell shares in reliance on Rule 144 without having to comply
with the holding period, public information, volume limitation or notice
provisions of Rule 144.

    We intend to file registration statements under the Securities Act as
promptly as possible after the effective date to register shares to be issued
pursuant to our employee benefit plans. As a result, any options exercised
under our stock plan after the effectiveness of the registration statement will
also be freely tradable in the public market, except that shares held by
affiliates will still be subject to the volume limitation, manner of sale,
notice and public information requirements of Rule 144 unless otherwise
resalable under Rule 701. As of July 31, 1999, there were outstanding options
for the purchase of 2,331,840 shares, of which options to purchase 700,934
shares were exercisable. No shares have been issued to date under our 1999
employee stock purchase plan or 1999 directors' plan.

                                       63
UNDERWRITING

    The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated, SoundView Technology Group, Inc. and E*OFFERING Corp.,
have severally agreed with us, subject to the terms and conditions set forth in
the underwriting agreement, to purchase from us the number of shares of common
stock set forth opposite their respective names below. The underwriters are
committed to purchase and pay for all such shares if any are purchased.
Underwriter                          Number of Shares
                           -----------                          ----------------
BancBoston Robertson Stephens Inc. ........................
   Dain Rauscher Wessels......................................
   SoundView Technology Group, Inc. ..........................
   E*OFFERING Corp............................................
                                                                     -----
     Total....................................................
                                                                     =====
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this prospectus and to certain dealers at this price less
a concession not in excess of $    per share, of which $    may be reallowed to
other dealers. After the initial public offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives. No
such reduction shall change the amount of proceeds to be received by us as set
forth on the cover page of this prospectus. The common stock is offered by the
underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.

    The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

    Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to        additional shares of common stock at the same price per
share as we will receive for the        shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage of the additional
shares that the number of shares of common stock to be purchased by it shown in
the above table represents as a percentage of the        shares offered hereby.
If purchased, the additional shares will be sold by the underwriters on the
same terms as those on which the        shares are being sold. We will be
obligated, pursuant to the option, to sell shares to the extent the option is
exercised. The underwriters may exercise the option only to cover over-
allotments made in connection with the sale of the shares of common stock
offered hereby. If such option is exercised in full, the total public offering
price, underwriting discounts and commissions and proceeds to us will be $
million, $    million and $    million, respectively.

    Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and us against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.

    Lock-Up Agreements. Each of our officers and directors and certain of our
stockholders have agreed with the representative, for a period of 180 days
after the date of this prospectus, subject to certain exceptions,

                                       64
not to offer to sell, contract to sell, or otherwise sell, dispose of, loan,
pledge or grant any rights with respect to, any shares of common stock, or any
securities convertible into or exchangeable for shares of common stock, now
owned directly by such holders or with respect to which they now have the power
of disposition, without the prior written consent of BancBoston Robertson
Stephens. However, BancBoston Robertson Stephens may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to the lock-up agreement. There are no agreements between the
representatives and any of our stockholders providing consent to the sale of
shares prior to the expiration of the period ending 180 days after the date of
this prospectus.

    Future Sales. In addition, we have agreed that during the 180 days after
the date of this prospectus, we will not, subject to certain exceptions,
without the prior written consent of BancBoston Robertson Stephens:

  .  Consent to the disposition of any shares held by stockholders subject
     to lock-up agreements prior to the expiration of the period ending 180
     days after the date of this prospectus; or

  .  Issue, sell, contract to sell or otherwise dispose of any shares of
     common stock or any securities convertible into, exercisable for or
     exchangeable for shares of common stock, other than the sale of shares
     in this offering, the issuance of common stock upon the exercise of
     outstanding options or the issuance of options under our existing stock
     option and incentive plans.

    Listing. We have applied to have our common stock approved for listing on
the Nasdaq National Market under the symbol "PRVW."

    No Prior Public Market. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price
for the common stock offered hereby will be determined through negotiations
between us and the representatives. Among the factors to be considered in such
negotiations are prevailing market conditions, certain of our financial
information, market valuations of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential, the present state of our development and other factors deemed
relevant.

    Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Exchange Act, certain persons participating
in this offering may engage in transactions, including stabilizing bids,
syndicate covering transactions or the imposition of penalty bids, that may
have the effect of stabilizing or maintaining the market price of the common
stock at a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for, or the purchase of, the common stock on behalf
of the underwriters for the purpose of fixing or maintaining the price of the
common stock. A "syndicate covering transaction" is the bid for, or the
purchase of, the common stock on behalf of the underwriters to reduce a short
position incurred by the underwriters in connection with this offering. A
"penalty bid" is an arrangement permitting the representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with this offering if the common stock originally sold by such
underwriter or syndicate member is purchased by the representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such underwriter or syndicate member. The representatives have advised us that
such transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.

    Directed Share Program. At our request, the underwriters have reserved up
to        shares of common stock to be issued by us and offered hereby for
sales, at the initial public offering price, to our directors, officers,
employees, business associates and other related persons. Directors and
officers who purchase the reserved shares are subject to resale restrictions
promulgated by the Securities and Exchange Commission. The number of shares of
common stock available for sale to the general public will be reduced to the
extent such individuals purchase such reserved shares. Any reserved shares
which are not so purchased will be offered by the underwriters to the general
public on the same basis as the other shares offered hereby.

                                       65
LEGAL MATTERS

    The validity of the common stock offered by this prospectus will be passed
on for us by Venture Law Group, A Professional Corporation, Menlo Park,
California. Certain legal matters in connection with this offering will be
passed on for the underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. Attorneys employed with
Venture Law Group and an entity affiliated with Venture Law Group hold an
aggregate of 24,382 shares of our common stock.

                                    EXPERTS

    The consolidated financial statements of Preview Systems, Inc. included in
this registration statement as of December 31, 1997 and 1998 and for the three-
year period ended December 31, 1998, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.

    The financial statements of Portland Software, Inc. as of December 31, 1996
and 1997 and for each of the years in the two-year period ended December 31,
1997 have been included in this registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein and upon the authority of said firm as experts in accounting
and auditing.

                             ADDITIONAL INFORMATION

    We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits thereto.
For further information with respect to us and the common stock offered in this
offering, we refer you to the registration statement and to the attached
exhibits. Statements made in this prospectus concerning the contents of any
document referred to in this prospectus are not necessarily complete. With
respect to each document filed as an exhibit to the registration statement, we
refer you to the exhibit for a more complete description of the matter
involved. You may inspect our registration statement and the attached exhibits
without charge at the public reference facilities maintained by the Securities
and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the regional offices of the Commission located at Seven World Trade Center,
13th Floor, New York, NY 10048, and the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain copies of
all or any part of our registration statement from the Securities and Exchange
Commission upon payment of prescribed fees. You may also inspect reports, proxy
and information statements and other information regarding registrants that
file electronically with the Securities and Exchange Commission without charge
at a Web site maintained by the Securities and Exchange Commission at
http://www.sec.gov.

                                       66
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants--Preview Systems, Inc. and
  Subsidiaries...........................................................   F-2
Preview Systems, Inc. and Subsidiaries Consolidated Balance Sheets,
  December 31, 1997 and 1998 and June 30, 1999 (unaudited)...............   F-3
Preview Systems, Inc. and Subsidiaries Consolidated Statements of
  Operations, Years Ended December 31, 1996, 1997 and 1998 and Six Months
  Ended June 30, 1998 (unaudited) and 1999 (unaudited)...................   F-4
Preview Systems, Inc. and Subsidiaries Consolidated Statements of
  Stockholders' Equity, Years Ended December 31, 1996, 1997 and 1998 and
  Six Months Ended June 30, 1999 (unaudited).............................   F-5
Preview Systems, Inc. and Subsidiaries Consolidated Statements of Cash
  Flows, Years Ended December 31, 1996, 1997 and 1998 and Six Months
  Ended June 30, 1998 (unaudited) and 1999 (unaudited)...................   F-6
Preview Systems, Inc. and Subsidiaries, Notes to Financial Statements....   F-7
Independent Auditors' Report--Portland Software, Inc.....................  F-25
Portland Software, Inc. Balance Sheets, December 31, 1996 and 1997.......  F-26

Portland Software, Inc. Statements of Operations, Years Ended December
  31, 1996 and 1997......................................................  F-27
Portland Software, Inc. Statements of Shareholders' Equity, Years Ended
  December 31, 1996 and 1997.............................................  F-28
Portland Software, Inc. Statements of Cash Flows, Years Ended December
  31, 1996 and 1997......................................................  F-29
Portland Software, Inc. Notes to Financial Statements....................  F-30
Preview Systems, Inc. and Subsidiaries Pro Forma Consolidated Statement
  of Operations, Year Ended December 31, 1998............................  F-40
Preview Systems, Inc. and Subsidiaries Notes to Pro Forma Consolidated
  Statement of Operations................................................  F-41
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Preview Systems, Inc.:

    We have audited the accompanying consolidated balance sheets of Preview
Systems, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Preview Systems, Inc. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.

Portland, Oregon
April 2, 1999, except for Note 12 as to which the date is September 14, 1999

                                      F-2
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                     (In thousands, except per share data)
December 31,
                                                 -----------------   June 30,
                                                  1997      1998       1999
                                                 -------  --------  -----------
                                                                    (unaudited)
ASSETS
Current assets:
  Cash and cash equivalents..................... $ 2,489  $  4,886   $    427
  Accounts receivable, net of allowance for
    uncollectible accounts of $0, $0, and $75,
    respectively................................      70       152      1,156
  Prepaid expenses..............................     130       360        426
  Other current assets..........................      --        55        156
                                                 -------  --------   --------
     Total current assets.......................   2,689     5,453      2,165
Property and equipment, net.....................     352       820        883
Patents, net....................................      --       922        794
Acquired technology, net........................      --     3,881      3,119
Other intangible assets, net....................      --       917        693
Other assets....................................      81       497        496
                                                 -------  --------   --------
     Total assets............................... $ 3,122  $ 12,490   $  8,150
                                                 =======  ========   ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Line of credit................................ $    --  $     --   $    700
  Notes payable.................................      --        50      1,180
  Current portion of long-term debt.............      --       157        157
  Current portion of capital lease
    obligations.................................       5       134        194
  Accounts payable..............................     183       442      1,241
  Accrued liabilities...........................     210       840        709
  Deferred revenue..............................      --       809      1,509
                                                 -------  --------   --------
     Total current liabilities..................     398     2,432      5,690
Long-term debt, less current portion............      --       302        223
Capital lease obligations, less current
  portion.......................................      11       133        220
Deferred revenue, less current portion..........      --     1,268        902
Other liabilities...............................      --       349        348
                                                 -------  --------   --------
     Total liabilities..........................     409     4,484      7,383
Commitments and contingencies (note 6)
Stockholders' equity:
  Preferred stock, $0.0002 per share par value:
   Authorized--5,253; issued and outstanding--
     2,176, 4,476 and 4,476 (unaudited) shares,
     respectively; aggregate liquidation
     preference of $5,279, $23,885 and $23,885
     (unaudited)................................      --        --         --
  Common stock, $0.0002 per share par value:
   Authorized--10,506 shares; issued and
     outstanding 582, 2,684 and 2,728
     (unaudited)................................      --        --         --
  Additional paid-in capital....................   5,520    22,115     22,364
  Stockholder notes receivable..................    (100)     (125)      (125)
  Deferred compensation.........................     (95)      (96)      (148)
  Accumulated deficit...........................  (2,612)  (13,888)   (21,324)
                                                 -------  --------   --------
     Total stockholders' equity.................   2,713     8,006        767
                                                 -------  --------   --------
     Total liabilities and stockholders'
       equity................................... $ 3,122  $ 12,490   $  8,150
                                                 =======  ========   ========
The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-3
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)
Six Months
                                   Year Ended December 31,    Ended June 30,
                                   -------------------------  ----------------
                                    1996    1997      1998     1998     1999
                                   ------  -------  --------  -------  -------
                                                                (unaudited)
Revenues
  Network transaction fees........ $  148  $   262  $    435  $   111  $   742
  Services........................     --       --       175       --      479
                                   ------  -------  --------  -------  -------
     Total revenues...............    148      262       610      111    1,221
Operating expenses:
  Research and development........     34    1,016     2,978    1,091    3,080
  Sales and marketing.............    172      822     2,915      980    2,494
  General and administrative......    184      785     3,127    1,186    2,048
  Amortization of intangibles.....     --       --       866       --    1,038
  Acquired in-process research
    and development...............     --       --     2,091       --       --
                                   ------  -------  --------  -------  -------
     Total operating expenses.....    390    2,623    11,977    3,257    8,660
                                   ------  -------  --------  -------  -------
Loss from operations..............   (242)  (2,361)  (11,367)  (3,146)  (7,439)
Other income (expense):
  Interest expense................     --      (40)      (37)      (8)     (64)
  Interest income.................     --       21       123       41       65
  Other, net......................     --       --         5        2        2
                                   ------  -------  --------  -------  -------
     Total other income
       (expense)..................     --      (19)       91       35        3
                                   ------  -------  --------  -------  -------
Net loss.......................... $ (242) $(2,380) $(11,276) $(3,111) $(7,436)
                                   ======  =======  ========  =======  =======
Basic and diluted net loss per
  share........................... $(0.69) $ (6.45) $  (7.55) $ (4.60) $ (2.75)
                                   ======  =======  ========  =======  =======
Shares used in per share
  calculations....................    350      369     1,494      676    2,708
                                   ======  =======  ========  =======  =======
The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-4
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     (In thousands, except per share data)
Preferred
                              Stock     Common Stock  Additional Stockholder                              Total
                          ------------- -------------  Paid-In      Notes      Deferred   Accumulated Stockholders'
                          Shares Amount Shares Amount  Capital   Receivable  Compensation   Deficit      Equity
                          ------ ------ ------ ------ ---------- ----------- ------------ ----------- -------------
Balance at December 31,
 1995 (see Note 1)......     --   $--      --   $--    $     6      $  --       $  --      $     10     $     16
 Issuance of common
  stock to predecessor
  entity (Note 1).......     --    --     350    --         66         --          --            --           66
 Issuance of Series A
  preferred stock at
  $1.00 per share.......    160    --      --    --        160         --          --            --          160
 Net loss...............     --    --      --    --         --         --          --          (242)        (242)
                          -----   ---   -----   ---    -------      -----       -----      --------     --------
Balance at December 31,
 1996...................    160    --     350    --        232         --          --          (232)          --
 Issuance of Series A
  preferred stock at
  $1.00 per share.......    414    --      --    --        413         --          --            --          413
 Issuance of Series B
  preferred stock at
  $2.00 per share, net
  of issuance costs.....    352    --      --    --        693         --          --            --          693
 Issuance of Series C
  preferred stock at
  $3.20 per share, net
  of issuance costs.....  1,250    --      --    --      3,916         --          --            --        3,916
 Fair value of Series C
  preferred stock
  warrants issued.......     --    --      --    --         40         --          --            --           40
 Exercise of common
  stock options for
  cash..................     --    --      32    --         31         --          --            --           31
 Exercise of common
  stock options for
  notes receivable......     --    --     200    --        100       (100)         --            --           --
 Compensation related to
  issuance of stock
  options...............     --    --      --    --         95         --         (95)           --           --
 Net loss...............     --    --      --    --         --         --          --        (2,380)      (2,380)
                          -----   ---   -----   ---    -------      -----       -----      --------     --------
Balance at December 31,
 1997...................  2,176    --     582    --      5,520       (100)        (95)       (2,612)       2,713
 Issuance of Series D
  preferred stock at
  $6.68 per share, net
  of issuance costs.....    299    --      --    --      1,965         --          --            --        1,965
 Acquisition of Portland
  Software, Inc.:
  Issuance of Series E
   preferred stock......    838    --      --    --      4,190         --          --            --        4,190
  Issuance of common
   stock................     --    --   1,929    --      3,857         --          --            --        3,857
  Issuance of stock
   options and
   warrants.............     --    --      --    --        732         --          --            --          732
 Issuance of Series F
  preferred stock at
  $5.00 per share, net
  of issuance costs.....  1,163    --      --    --      5,685         --          --            --        5,685
 Exercise of common
  stock options for cash
  and notes receivable..     --    --     118    --         61        (25)         --            --           36
 Issuance of common
  stock for patent
  rights................     --    --      55    --         55         --          --            --           55
 Compensation related to
  issuance of stock
  options...............     --    --      --    --         50         --         (50)           --           --
 Amortization of
  deferred
  compensation..........     --    --      --    --         --         --          49            --           49
 Net loss...............     --    --      --    --         --         --          --       (11,276)     (11,276)
                          -----   ---   -----   ---    -------      -----       -----      --------     --------
Balance at December 31,
 1998...................  4,476    --   2,684    --     22,115       (125)        (96)      (13,888)       8,006
 Exercise of common
  stock options and
  warrants for cash.....     --    --      44    --         52         --          --            --           52
 Compensation related to
  issuance of stock
  options...............     --    --      --    --        199         --        (199)           --           --
 Amortization of
  deferred
  compensation..........     --    --      --    --         (2)        --         147            --          145
 Net loss...............     --    --      --    --         --         --          --        (7,436)      (7,436)
                          -----   ---   -----   ---    -------      -----       -----      --------     --------
Balance at June 30, 1999
 (unaudited)............  4,476   $--   2,728   $--    $22,364      $(125)      $(148)     $(21,324)    $    767
                          =====   ===   =====   ===    =======      =====       =====      ========     ========
The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-5
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
Year Ended December        Six Months
                                              31,              Ended June 30,
                                     ------------------------  ----------------
                                     1996    1997      1998     1998     1999
                                     -----  -------  --------  -------  -------
                                                                 (unaudited)
Cash flows from operating
  activities:
 Net loss..........................  $(242) $(2,380) $(11,276) $(3,111) $(7,436)
 Adjustments to reconcile net loss
   to net cash used in operating
   activities:
  Depreciation and amortization....      1       51     1,420      121    1,338
  Other non-cash expenses..........     64       40       135      105      145
  Acquired in-process research and
    development....................     --       --     2,091       --       --
  Changes in operating assets and
    liabilities:
   Related party receivable........    (25)      25        --       --       --
   Accounts receivable.............    (10)     (61)      315       13   (1,004)
   Prepaid expenses and other
     current assets................     (4)    (126)      (77)    (275)    (167)
   Other assets....................     --      (81)     (313)      (4)       1
   Accounts payable................     37      146       171       63      799
   Accrued liabilities and other
     liabilities...................     54      176      (120)      94     (132)
   Deferred revenue................     --       --     1,729       --      334
                                     -----  -------  --------  -------  -------
     Net cash used in operating
       activities..................   (125)  (2,210)   (5,925)  (2,994)  (6,122)
Cash flows from investing
  activities:
 Acquisition of Portland Software,
   Inc., net of cash acquired......     --       --       978       --       --
 Shareholder notes receivable......     --       --       (25)     (25)      --
 Purchases of intangibles..........     --       --      (200)    (200)      --
 Purchases of property and
   equipment.......................     (5)    (363)     (561)    (245)    (287)
                                     -----  -------  --------  -------  -------
     Net cash (used in) provided by
       investing activities........     (5)    (363)      192     (470)    (287)
Cash flows from financing
  activities:
 Borrowings under line of credit,
   notes payable and long-term
   debt............................     --      271       459      446    1,880
 Repayments under line of credit,
   notes payable and long-term
   debt............................     --       --       (50)      --     (129)
 Issuance of preferred stock, net..    160    4,730     7,650    1,965       --
 Issuance of common stock..........     --       32        61       31       52
 Proceeds from obligations under
   capital leases..................     --       --       108       38      235
 Payment of obligations under
   capital leases..................     --       (1)      (98)     (38)     (88)
                                     -----  -------  --------  -------  -------
     Net cash provided by financing
       activities..................    160    5,032     8,130    2,442    1,950
                                     -----  -------  --------  -------  -------
Net increase (decrease) in cash and
  cash equivalents.................     30    2,459     2,397   (1,022)  (4,459)
Cash and cash equivalents:
 Beginning of period...............     --       30     2,489    2,489    4,886
                                     -----  -------  --------  -------  -------
 End of period.....................  $  30  $ 2,489  $  4,886  $ 1,467  $   427
                                     =====  =======  ========  =======  =======
Supplemental Disclosure of Cash
  Flow Information:
 Cash paid for interest............  $  --  $    --  $     53  $    26  $    60
 Cash paid for income taxes........     --        1        11        4       11
Supplemental Disclosure of
  Significant Non-Cash
  Transactions:
 Conversion of promissory notes
   into Series C preferred stock...  $  --  $   271  $     --  $    --  $    --
 Issuance of common stock pursuant
   to notes receivable.............     --      100        --       --       --
 Assets acquired in exchange for
   note payable and other
   obligations.....................     --       --       509      509       --
The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-6
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                         NOTES TO FINANCIAL STATEMENTS
                     (In thousands, except per share data)

1. Description of Business and Significant Accounting Policies:

 The Company

    On August 5, 1998, all of the outstanding equity interests of Preview
Software, Inc. ("Preview Software") and Portland Software, Inc. ("Portland
Software") were merged into Preview Systems, Inc. ("the Company" or "Preview").
In accordance with Accounting Principles Board Opinion No. 16, the stockholders
of Preview Software were determined to be the controlling stockholders of the
Company. Accordingly, the merger of Preview Software into the Company was
accounted for as a reorganization under common control with the underlying net
assets recorded by the Company at historical cost. The merger of Portland
Software into the Company was accounted for using the purchase method.
Therefore, the accompanying consolidated financial statements reflect the
operations of Preview Software for all periods presented and reflect the
operations of Portland Software since August 5, 1998.

    Preview Software was incorporated on November 22, 1996, in the state of
California. Effective December 1, 1996, Preview Software acquired intellectual
property, engineering information and net assets from Dynasoft Publishing
Corporation, an S corporation with one stockholder ("Dynasoft"). Dynasoft was
incorporated in October 1995. The Company issued 350 shares of common stock to
Dynasoft in exchange for the net assets of Dynasoft which were recorded at the
predecessor's net book value. Preview Software was the successor entity to
Dynasoft and, accordingly, the 1996 financial statements include the activity
of Dynasoft from January 1, 1996 until the transfer date.

    Preview Systems is a provider of an Internet-based infrastructure solution
that enables networks for distribution and licensing of digital goods. Through
their infrastructure solution and strategic relationships, the Company links
software publishers and music labels to their channel partners and end-users
worldwide, creating an end-to-end electronic distribution chain that manages
the e-commerce of digital goods and associated licensing rights.

 Unaudited Interim Financial Information

    All information subsequent to December 31, 1998, except as included in Note
12, is unaudited. In the opinion of management, the unaudited interim financial
statements as of June 30, 1998 and 1999 and for the six month periods then
ended have been prepared on the same basis as the annual financial statements
and reflect all adjustments that are necessary for the fair presentation of
results for the periods shown. The results of operations for such periods are
not necessarily indicative of the results expected for the full fiscal year or
for any interim period.

 Consolidated Statements

    The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Portland Software and Preview
Software. All significant intercompany transactions have been eliminated in
consolidation.

 Cash and Cash Equivalents

    For the purposes of the consolidated balance sheets and the consolidated
statements of cash flows, the Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. At
December 31, 1997 and 1998, the Company held its cash and cash equivalents in
checking, money market accounts and commercial paper.

                                      F-7
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

 Restricted Cash

    The Company's Chief Executive Officer has a note payable to a bank in the
amount of $300. The Chief Executive Officer has pledged all of his vested
shares of the Company's common stock to the Company in return for its guarantee
of his $300 note payable. The Company has a time deposit in the amount of $300,
as required security by the bank, which is included in other assets in the
accompanying consolidated balance sheets at December 31, 1998. A deposit of $53
related to the Company's facility lease is included in other assets in the
accompanying consolidated balance sheets. See Note 6.

 Fair Value of Financial Instruments

    The Company's financial instruments consist of accounts receivable,
accounts payable, capital leases, notes payable and long-term debt. For the
periods presented, the fair value of the Company's financial instruments
approximate their carrying value.

 Advertising

    The Company expenses the costs of advertising when such costs are incurred.
Advertising expense was $27, $152 and $111 for 1996, 1997 and 1998,
respectively.

 Use of Estimates

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

 Property and Equipment

    Property and equipment are stated at cost. Capitalized leased property is
recorded at the lesser of the present value of minimum lease payments or the
fair value of the leased property.

    Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the assets. Leasehold improvements
are amortized on the straight-line method over the shorter of the term of the
related lease or the estimated useful life of the asset. The estimated useful
lives of property and equipment are as follows:
Years
                                                                           -----
Computer equipment and software..................................... three
      Furniture and fixtures..............................................  five
      Leasehold improvements.............................................. three
      Communications hardware.............................................  five
Acquired Technology and Other Intangible Assets

    Intangible assets associated with acquisitions are amortized using the
straight-line method over the estimated useful lives of the related assets,
from two to three years. See Note 2. Accumulated amortization related to
acquired technology and other intangible assets was $0 and $848 at December 31,
1997 and 1998, respectively.

                                      F-8
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

 Patents

    Patents are stated at acquisition cost and are amortized using the
straight-line method over three to six years. Accumulated amortization related
to patents was $0 and $130 at December 31, 1997 and 1998, respectively.

 Impairment of Long-lived Assets

    The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of," which establishes
criteria for measuring impairment losses of long-lived assets and determining
when such losses should be recognized. An impairment loss would be recognized
when estimated future cash flows expected to result from the use of the asset
and its eventual disposition are less than its carrying amount. The Company has
not identified any such impairment losses to date.

 Revenue Recognition

    The Company generally provides rights to use of their solution and ongoing
customer support (upgrades, enhancements, phone support, patches, etc) through
annual licensing agreements. These agreements typically require the payment of
a transaction fee based on a percentage of value of sales that are fulfilled
utilizing the Company's solution. Customers typically commit to annual minimum
network transaction fees that entitles them to fulfill an agreed amount of
sales during the one-year term of the agreement. Some or all of the minimum
network transaction fees are due upon execution of the agreement. The Company
records deferred revenue and is recognizing the minimum network transaction fee
on a straight-line basis over the license period. To the extent sales fulfilled
using our solution exceed the agreed minimum amount of sales, the Company
recognizes incremental network transaction fees. Through December 31, 1998, no
incremental transaction fees have been earned. In the future, the Company will
record the incremental network transaction fees, if any, when known, which may
be in the month subsequent to the transaction. Prior to the Portland merger,
Preview Software's revenues were typically based on one-time license fees which
were recognized over the term of the license.

    Service revenues generally consist of consulting, training and integration
fees. Such services are typically billed separately from the network
transaction fees and are recognized as the related services are performed or
when contract milestones are achieved.

    The Company entered into a three-year agreement with Sony Marketing of
Japan (SMOJ) in September 1998 that provided to SMOJ the exclusive right to use
and sublicense the Company's technology in Japan, including certain future
upgrades, enhancements and new products. The agreement also provided for
training and support through June 1999. The Company received upfront payments
for the license and services to be performed by the Company. The Company
recorded deferred revenue on the upfront fees and is recognizing the license
portion on a straight-line basis over the three-year term of the agreement and
the service revenue was recognized as work was performed through June 1999. In
addition, the Company will receive quarterly payments from SMOJ based on a
percentage of the dollar value of transactions and services performed by SMOJ
or its sublicenses utilizing the Company's technology. These payments are
subject to annual minimum network transaction fees beginning April 1, 1999.
Beginning April 1, 2000 SMOJ, at its option, may forgo its exclusive rights
rather than pay the annual minimums. During the first year of the agreement,
such minimums will be recognized over 12 months until such minimums are
exceeded; at which time incremental transaction fees will be recognized. In
subsequent years, network transaction fees will be recorded as earned.

 Software Development Costs

    Development costs related to software products are expensed as incurred
until technological feasibility of the product has been established. Based on
the Company's product development process, technological feasibility is
established upon completion of a working model. Costs incurred by the Company
between

                                      F-9
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

completion of the working model and the point at which the product is ready for
general release have not been significant, and, accordingly, no costs have been
capitalized.

 Income Taxes

    The Company is in a net deferred tax asset position and has generated net
operating losses to date. Accordingly, no provision for or benefit from income
taxes has been recorded in the accompanying consolidated statements of
operations. The Company will continue to provide a valuation allowance for its
net deferred tax assets until it becomes more likely than not, in management's
assessment, that the Company's net deferred tax assets will be realized.

 Comprehensive Income (Loss)

    The Company has adopted the accounting treatment prescribed by Financial
Accounting Standards Board SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for reporting comprehensive income
(loss) and its components in financial statements. Comprehensive income (loss),
as defined, includes all changes in equity during a period from non-owner
sources. To date, the Company has not had any transactions that are required to
be reported in comprehensive income (loss).

 Stock-Based Compensation

    The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." ("APB No. 25") and complies with
the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense is based on the
difference, if any, on the date of grant between the exercise price of the
instrument granted and the fair value of the underlying stock.

 Net Loss per Share

    Basic and diluted loss per share are the same for all periods presented
since the Company was in a loss position in all periods.

    Potentially dilutive securities that are not included in the diluted net
loss per share calculation because they would be antidilutive are as follows:
December 31,    June 30,
                                                    ---------------- -----------
                                                    1996 1997  1998  1998  1999
                                                    ---- ----- ----- ----- -----
                                                                     (unaudited)
Stock options and warrants.....................   38    468 2,131   524 2,490
   Convertible preferred stock....................  160  2,176 4,476 2,475 4,476
                                                    ---  ----- ----- ----- -----
     Total........................................  198  2,644 6,607 2,999 6,966
                                                    ===  ===== ===== ===== =====
Segment Information

    In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS 131 did not affect results of operations or financial
position. The Company operates exclusively in one segment. Substantially all
revenues result from the sale of product licenses and related services. See
Note 9.

                                      F-10
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

 Concentration of Credit Risk

    Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable. The
Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral.

    At December 31, 1997, one customer represented 45% of the total accounts
receivable balance. At December 31, 1998, four customers represented 30%, 26%,
16% and 16%, respectively, of the total accounts receivable balance. At June
30, 1999, four customers represented 26%, 16%, 12% and 11%, respectively, of
the total accounts receivable balance.

 Recent Accounting Pronouncements

    In March 1998, the AICPA issued Statement of Position 98-4, "Deferral of
the Effective Date of a Provision of SOP 97-2 ("SOP 98-4"). SOP 98-4 defers for
one year the application of certain provisions of Statement of Position 97-2
"Software Revenue Recognition" ("SOP 97-2"). Different informal and non-
authoritative interpretations of certain provisions of SOP 97-2 have arisen
and, as a result, the AICPA issued SOP 98-9 in December 1998 which is effective
for periods beginning after March 15, 1999. SOP 98-9 extends the effective date
of SOP 98-4 and provides additional interpretive guidance. The Company's
accounting policies comply with SOP 97-2 and the Company does not anticipate
the need for any adjustments once SOP 98-4 becomes effective.

    In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 137").
SFAS 137 is an amendment to Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 137
establishes accounting and reporting standards for all derivative instruments.
SFAS 137 is effective for fiscal years beginning after June 15, 2000. The
Company does not currently have any derivative instruments and, accordingly,
does not expect the adoption of SFAS 137 to have an impact on its financial
position or results of operations.

 Reclassifications

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

2. Acquisition of Portland Software, Inc.:

    The Company was formed in April 1998 to acquire all of the outstanding
equity interests of Preview Software and Portland Software. The Company
completed both of these mergers on August 5, 1998. In accordance with
Accounting Principles Board Opinion No. 16, the stockholders of Preview
Software were determined to be the controlling stockholders of the Company.
Accordingly, the merger with Preview Software was accounted for as a
reorganization under common control with the underlying net assets recorded by
the Company at historical cost. The merger with Portland Software was accounted
for using the purchase method. Therefore, the accompanying consolidated
financial statements reflect the operations of Preview Software for all periods
presented and reflect the operations of Portland Software since August 5, 1998.

    The Company acquired all of the outstanding stock of Portland Software
through the issuance of 1,929 of its common shares and 838 of its Series E
preferred shares, at estimated fair values of $2.00 per common share and $5.00
per preferred share. Option and warrant holders of Portland Software exchanged
their rights in common and preferred stock of Portland Software for similar
rights in 998 common shares and 218 Series E

                                      F-11
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

preferred shares of the Company. The fair value of these options and warrants
was computed using the Black Scholes valuation model and was included in the
total consideration. Total consideration was approximately $9,217, allocated as
follows:
Acquired technology..................................................  $4,453
   In-process research and development..................................   2,091
   Other intangible assets..............................................   1,085
   Patents..............................................................     484
   Net tangible assets..................................................   1,104
                                                                          ------
     Total purchase price...............................................  $9,217
                                                                          ======
Acquired technology and other intangible assets acquired are being
amortized over two to three years. In connection with the merger with Portland
Software, the Company acquired the ongoing research and development activities
of Portland Software resulting in a one-time pre-tax charge of $2,091 related
to the write off of certain in-process research and development costs. The
value assigned to in-process research and development represents research and
development efforts in process at the acquisition date for which technological
feasibility had not yet been established and which had no alternative future
uses. Accounting principles require that such costs be charged to expense as
incurred. The Company believes that these research and development efforts will
result in commercially viable products over the next one to two years.

    The summary unaudited pro forma financial information giving effect to the
merger with Portland Software as if it had occurred at the beginning of 1997
and 1998 were as follows:
Year Ended
                                                                December 31,
                                                              -----------------
                                                               1997      1998
                                                              -------  --------
Revenues.................................................. $   763  $    809
   Net loss..................................................  (7,370)  (14,550)
   Net loss per share........................................   (3.21)    (5.51)
The summary unaudited pro forma information does not purport to be
indicative of the results which would actually have been obtained had the
acquisition occurred at the beginning of the periods indicated or which may be
obtained in the future.

3. Property and Equipment:

    Property and equipment consisted of the following as of December 31:
1997   1998
                                                                   ----  ------
Computer equipment and software...............................  $286  $1,107
   Furniture and fixtures........................................    74     195
   Leasehold improvements........................................    11      44
   Communications hardware.......................................    33     115
                                                                   ----  ------
     Total property and equipment................................   404   1,461
   Less: Accumulated depreciation................................   (52)   (641)
                                                                   ----  ------
                                                                   $352  $  820
                                                                   ====  ======
F-12
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

4. Accrued Liabilities:

    Accrued liabilities consisted of the following as of December 31:
1997 1998
                                                                       ---- ----
Accrued commissions................................................ $ -- $280
   Legal fees payable.................................................   42   20
   Employee compensation..............................................   20  242
   Consulting fees....................................................   57   --
   Other..............................................................   91  298
                                                                       ---- ----
                                                                       $210 $840
                                                                       ==== ====
5. Borrowings:

    In November 1998, the Company entered into a loan agreement with a bank
which provides for borrowings under a revolving line of credit of up to $1,000,
and borrowing under a term loan. Amounts borrowed under the line of credit and
the term loan bear interest at the bank's prime rate plus 1% (8.75% at December
31, 1998). Interest is payable monthly on borrowings under the revolving line
of credit and the term loan is payable in 36 equal installments of $13 of
principal, plus interest. Borrowings are collateralized by all of the tangible
and intangible assets of the Company. At December 31, 1998, amounts outstanding
under the line of credit were $0, and amounts outstanding under the term loan
were $459. Under this agreement, the Company is required to maintain compliance
with certain financial and other covenants including minimum tangible net
worth, liquidity coverage and ratio of quick assets to current liabilities
minus deferred revenue. At December 31, 1998, the Company was in compliance
with all such covenants. The revolving line of credit expires on November 1,
1999 and the term loan matures on November 2, 2001.

    Principal payment requirements on the term loan are as follows for the
years ending December 31:
1999................................................................  $157
      2000................................................................   157
      2001................................................................   145
                                                                            ----
        Total.............................................................  $459
                                                                            ====
On May 28, 1999, the Company entered into various promissory notes with
certain persons for $1,180. Amounts borrowed under the promissory notes bear
interest at 4.9%. The promissory notes were automatically converted into shares
of the Company's Series G Convertible Preferred Stock ("Series G") upon closing
of the financing round in July 1999. See Note 12.

    As of June 30, 1999, the Company's amounts outstanding under the line of
credit were $700, and amounts outstanding under the term loan were $380. At
June 30, 1999, the Company was out of compliance with the covenants. With the
proceeds from the Series G offering, the Company paid off the $700 that was
outstanding under its line of credit. As a result of this transaction, the
Company was in compliance with all of the covenants at July 31, 1999.

                                      F-13
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

6. Commitments and Contingencies:

    The Company leases its facilities under noncancellable operating leases,
which expire through September 2003. The Company also leases equipment under
non-cancellable capital leases with terms expiring through the year 2002.
Future minimum lease payments relating to these agreements are as follows:
Capital Operating
   Year Ending December 31,                                    Leases   Leases
   ------------------------                                    ------- ---------
1999......................................................   $160    $  735
   2000......................................................    101       763
   2001......................................................     38       641
   2002......................................................      6       390
   2003......................................................     --        99
                                                                ----    ------
     Total minimum lease payments............................    305    $2,628
                                                                        ======
   Less: Amount representing interest........................    (38)
                                                                ----
   Present value of minimum lease payments...................    267
   Less: Current portion.....................................   (134)
                                                                ----
   Long term portion.........................................   $133
                                                                ====
Rent expense for the years ended December 31, 1996, 1997 and 1998 was
approximately $3, $111 and $432, respectively. The Company has a $53 deposit
with a bank. The amount is required to be deposited with the bank in accordance
with the terms of the Company's facility lease agreement and will be released
on a pro-rata basis over the term of the lease.

                                      F-14
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

7. Stockholders' Equity:

 Preferred Stock

    Series A Convertible Preferred Stock ("Series A"), Series B Convertible
Preferred Stock ("Series B"), Series C Convertible Preferred Stock ("Series
C"), Series D Convertible Preferred Stock ("Series D"), Series E Convertible
Preferred Stock ("Series E") and Series F Convertible Preferred Stock ("Series
F"), consisted of the following, net of issuance costs:
December 31,
                                                                 -------------
                                                                  1997   1998
                                                                 ------ ------
Series A:
     Authorized--574
     Outstanding--574 shares; liquidation preference of $574...  $  574 $  574
   Series B:
     Authorized--352 shares
     Outstanding--352 shares; liquidation preference of $705...  $  693 $  693
   Series C:
     Authorized--1,276 shares
     Outstanding--1,250 shares; liquidation preference of
       $4,000..................................................  $3,916 $3,916
   Series D:
     Authorized--302 shares
     Outstanding--299 shares; liquidation preference of
       $2,000..................................................  $   -- $1,965
   Series E:
     Authorized--1,150 shares
     Outstanding--838 shares; liquidation preference of
       $10,793.................................................  $   -- $4,190
   Series F:
     Authorized--1,600 shares
     Outstanding--1,163 shares; liquidation preference of
       $5,813..................................................  $   -- $5,685
The significant rights, restrictions and preferences of the preferred stock
were as follows:

  .   Each share of preferred stock is convertible, at the right and option
      of the stockholder, into such number of fully paid and non-assessable
      shares of common stock as is determined by dividing $1.00, $2.00,
      $3.20, $6.68, $12.88 and $5.00 for each share of Series A, B, C, D, E,
      and F, respectively, by the conversion price at the time in effect for
      such shares. Based on this formula, the conversion ratio is currently
      one-for-one for all series, subject to adjustment in the event of
      stock splits, stock dividends, or the issuance of equity securities
      with a per share price lower than that of the Series A, B, C, D, E,
      and F.

  .   Each stockholder of Series A, B, C, D, E, and F is entitled to the
      number of votes equal to the number of shares of common stock into
      which the preferred stock can be converted. In addition, as long as at
      least 312 shares of preferred stock remain outstanding, certain
      contemplated actions of the Company must be approved by a majority of
      outstanding preferred stock.

  .   Upon receiving written request from not less than 30% of the holders
      of the Series A, B, C, D, E and F that the Company effect any
      registration, qualification or compliance with respect to the common
      stock which the preferred stock is convertible into with a value equal
      to or greater than $10,000, the Company will promptly give written
      notice to all other holders and, as soon as practicable, use its best
      efforts to effect such registration, qualification or compliance.

                                      F-15
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

  .   Any entity holding at least 100 preferred shares has the right of
      first refusal to purchase its pro rata portion of any new securities
      which the Company may propose to sell and issue.

  .   Each share of Series A, B, C, D, E, and F will automatically convert
      into common stock at the then-effective conversion rate in the event
      of the closing of an underwritten public offering of the Company's
      common stock from which the Company receives aggregate cash proceeds
      in excess of $15,000 and prior to which the market capitalization
      (assuming the conversion of all preferred stock, the exercise of all
      outstanding warrants and options, and the issuance and exercise of all
      remaining unissued options under the Company's stockholder-approved
      stock option plans) of the Company at the proposed offering price is
      at least $200,000, upon the vote of at least a majority of the
      preferred stock or when a majority of the outstanding preferred stock
      has converted to common stock.

  .   Each stockholder of Series A, B, C, D, E, and F is entitled to receive
      annual dividends at the rates of $0.08, $0.16, $0.288, $0.60, $1.03
      and $0.45 per share, respectively, when and if declared by the Board
      of Directors, prior to payment of dividends on common stock. Dividends
      are non-cumulative, and no dividends have been declared to date.

  .   In the event of any consolidation or merger of the Company or a sale
      of substantially all of the assets of the Company for which the
      aggregate proceeds are less than $200,000, holders of preferred stock
      will be paid an amount equal to $1.00, $2.00, $3.20, $6.68, $12.88,
      and $5.00 per share, plus an amount equal to all declared but unpaid
      dividends for each share of Series A, B, C, D, E, and F, respectively.
      If the full amount is not available for distribution, amounts shall be
      paid out in proportion to the aggregate preferential amounts owed.
      Amounts remaining after the full amount has been paid out will be
      distributed to the holders of preferred stock and common stock on a
      pro rata basis until stockholders of Series A, B, C, D, E and F shall
      have received an amount equal to $2.00, $4.00, $6.40, $13.36, $25.76
      and $10.00 per share, respectively. Thereafter, any remaining assets
      shall be distributed to the holders of common stock on a pro rata
      basis.

  .   In the event of any consolidation or merger of the Company or a sale
      of substantially all of the assets of the Company for which the
      aggregate proceeds are more than $200,000, holders of preferred stock
      will be paid an amount equal to $1.00, $2.00, $3.20, $6.68, $12.88 and
      $5.00 per share, plus an amount equal to all declared but unpaid
      dividends for each share of Series A, B, C, D, E and F, respectively.
      If the full amount is not available for distribution, amounts shall be
      paid out in proportion to the aggregate preferential amounts owed.
      Amounts remaining after the full amount has been paid out will be
      distributed among the holders of common stock on a pro rata basis.

  .   In the event of any liquidation, dissolution, or winding up of the
      Company, either voluntary or involuntary, in which the aggregate
      proceeds to be distributed to all stockholders of the Company is equal
      to or less than $200,000, each stockholder of Series A, B, C, D, E and
      F shall be entitled to receive, prior and in preference to any
      distribution of any assets or surplus funds to the holders of common
      stock, an amount equal to $1.00, $2.00, $3.20, $6.68, $12.88 and $5.00
      per share for each share of Series A, B, C, D, E, and F, respectively
      and, in addition, an amount equal to all declared but unpaid dividends
      on Series A, B, C, D, E, and F, respectively. If the full amount is
      not available for distribution, amounts shall be paid out in
      proportion to the aggregate preferential amounts owed. Amounts
      remaining after the full amount has been paid out will be distributed
      among the holders of Series A, B, C, D, E and F and common stock on a
      pro rata basis, assuming conversion of all shares of Series A, B, C,
      D, E and F.

  .   In the event of any liquidation, dissolution or winding up of the
      Company, either voluntary or involuntary, in which the aggregate
      proceeds to be distributed to all stockholders of the Company is
      greater than $200,000, each

                                      F-16
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

      stockholder of Series A, B, C, D, E and F shall be entitled to
      receive, prior and in preference to any distribution of any assets or
      surplus funds to the holders of common stock, an amount equal to
      $1.00, $2.00, $3.20, $6.68, $12.88 and $5.00 per share for each share
      of Series A, B, C, D, E and F, respectively and, in addition, an
      amount equal to all declared but unpaid dividends on Series A, B, C,
      D, E and F, respectively. If the full amount is not available for
      distribution, amounts shall be paid out in proportion to the aggregate
      preferential amounts owed. Amounts remaining after the full amount has
      been paid out will be distributed among the holders of common stock on
      a pro rata basis.

 Common Stock

    As of December 31, 1998, and June 30, 1999 the Company had reserved shares
of its common stock for future issuance as follows:
December 31,  June 30,
                                                            1998        1999
                                                        ------------ -----------
                                                                     (unaudited)
Conversion of Series A.............................       574          574
   Conversion of Series B.............................       352          352
   Conversion of Series C.............................     1,250        1,250
   Conversion of Series D.............................       299          299
   Conversion of Series E.............................       838          838
   Conversion of Series F.............................     1,163        1,163
   Exercise of outstanding common stock warrants......       172          170
   Exercise of outstanding preferred stock warrants...       246          246
   Exercise of stock options..........................     3,221        2,348
                                                           -----        -----
     Total shares reserved............................     8,115        7,240
                                                           =====        =====
Warrants Outstanding

    As of December 31, 1998, the following warrants were outstanding:
Exercise
                                              Number of   Price     Expiration
   Underlying Security                         Shares   Per Share      Date
   -------------------                        --------- --------- --------------
Common Stock.............................       1     $13.02   December 2000
   Common Stock.............................      44       3.86   October 2001
   Common Stock.............................      13       3.86   June 2002
   Common Stock.............................       8       3.86   July 2002
   Common Stock.............................     106       0.04   July 2002
                                                 ---
                                                 172
                                                 ===
   Preferred Stock:
     Series C...............................      25       3.20   September 2002
     Series E...............................     218      12.88   August 2004
     Series F...............................       3       5.00   September 2005
                                                 ---
                                                 246
                                                 ===
Common stock warrants exercisable for 2 shares of the Company's common
stock were exercised during the period January 1, 1999 through June 30, 1999.

                                     F-17
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

 Stock Based Compensation

    The Company has four stock option plans, the Old 1997 Stock Option Plan
("Old Plan"), the New 1997 Stock Option Plan ("New Plan"), the 1998 Stock
Option Plan ("98 Plan"), and the Amended and Restated 1994 Stock Option Plan
("94 Plan"), collectively "the Plans". As of December 31, 1998 and June 30,
1999, the Company had reserved an aggregate of 3,221 shares and 2,348 shares,
respectively, of common stock for issuance under the Plans and options issued
outside of the Plans combined. After December 31, 1998, the Company does not
intend to grant stock options from any of the above plans other than from the
98 Plan, under which as of that date there were approximately 634 shares
available for future grant. Subsequent to December 31, 1998, the Old Plan, the
New Plan and the 94 Plan were terminated and therefore, no shares are available
for future grant under these plans.

    The Plans provide for the granting of stock options to employees and
consultants of the Company. Options granted under the Plans may be either
incentive stock options or nonqualified stock options. Incentive stock options
("ISO's") may be granted only to employees of the Company and nonqualified
stock options ("NSO's") may be granted to employees of the Company and to
consultants.

    All options granted shall generally be exercisable over a period not to
exceed ten years from the date of grant; however in the case of an ISO granted
to a person owning more than 10% of the combined voting power of all classes of
stock of the Company, the term of the option will be five years from date of
grant. All options granted generally vest ratably over four years.

    In accordance with the Plans, the stated exercise price of options shall
not be less than 85% of the estimated fair value of the shares at the date of
grant as determined by the Board of Directors, provided, however, that (a) the
exercise price of an ISO and NSO shall not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (b)
the exercise price of an ISO and NSO granted to a 10% stockholder shall not be
less than 110% of the estimated fair value of the shares on the date of grant,
respectively.

                                      F-18
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

    The Company also has options outstanding outside of the Plans. A summary of
all stock option activity is as follows:
Weighted
                                      Shares                       Average
                                   Available for Shares Subject Exercise Price
                                       Grant       to Options     Per Share
                                   ------------- -------------- --------------
Balances, December 31, 1995....        --             --         $  --
   Shares reserved................        70             --            --
   Options granted................       (35)            35          0.62
                                      ------         ------         -----
   Balances, December 31, 1996....        35             35          0.62
   Additional shares reserved.....       724             --            --
   Options granted................      (687)           687          0.50
   Options cancelled..............        22            (22)         0.50
   Options exercised..............        --           (232)         0.50
                                      ------         ------         -----
   Balances, December 31, 1997....        94            468          0.50
   Additional shares reserved.....     2,785             --            --
   Options granted................      (701)           701          1.67
   Options assumed in Portland
     Software acquisition.........      (826)           826          1.72
   Options cancelled..............       156           (164)         1.24
   Options exercised..............        --           (118)         0.61
                                      ------         ------         -----
   Balances, December 31, 1998....     1,508          1,713          1.84
   Additional shares reserved.....        50             --            --
   Terminated plans...............      (880)            --            --
   Options granted................      (442)           442          5.15
   Options cancelled..............        38            (38)         2.06
   Options exercised..............        --            (43)         1.12
                                      ------         ------         -----
   Balances, June 30, 1999
     (unaudited)..................       274          2,074         $2.68
                                      ======         ======         =====
Options cancelled that were granted outside of the Plans are not added back
to the shares available for grant.

    As of December 31, 1998, stock options outstanding, including options
granted outside of the stock option plans, were as follows:
Options Outstanding              Options Exercisable
                   -------------------------------- --------------------------------
                                        Weighted                         Weighted
    Range of            Number          Average          Number          Average
  Contractual      Outstanding as of Exercise Price Exercisable as of Exercise Price
     Prices        December 31, 1998   Per Share    December 31, 1998   Per Share
  -----------      ----------------- -------------- ----------------- --------------
$0.00--
      0.20                 119          $0.0094            119           $0.0094
     0.40--
      0.60                 383             0.50            107              0.50
     0.80--
      1.00                  65             1.00             --                --
     1.80--
      2.00               1,146             2.00            310              2.00
    -------              -----          -------            ---           -------
    $0.00--
      2.00               1,713          $  1.48            536           $  1.26
    =======              =====          =======            ===           =======
F-19
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

    In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 ("SFAS 123") "Accounting for Stock-Based Compensation," which
establishes a fair value-based method of accounting for stock-based
compensation plans and requires additional disclosures for those companies who
elect not to adopt the new method of accounting. The Company has adopted SFAS
123 and in accordance with the provisions of SFAS 123, the Company has elected
to continue to apply APB Opinion No. 25 and related interpretations in
accounting for its stock option plans.

    Had compensation cost for the Company's stock option plans been determined
consistent with SFAS 123, the Company's net loss would have been adjusted to
the following pro forma amounts:
Year Ended December
                                                                31,
                                                       ------------------------
                                                       1996    1997      1998
                                                       -----  -------  --------
Net loss:
     As reported.....................................  $(242) $(2,380) $(11,276)
     Pro forma.......................................   (242)  (2,404)  (11,360)
   Net loss per share:
     As reported.....................................  (0.69)   (6.45)    (7.55)
     Pro forma.......................................  (0.69)   (6.51)    (7.60)
Because the Black-Scholes option valuation model requires the input of
subjective assumptions, the resulting pro forma compensation cost may not be
representative of that to be expected in future periods.

    The Company also issued options to non-employees. Compensation expense
related to these options was $0, $0 and $41 for 1996, 1997 and 1998,
respectively.

    The weighted average fair value of options granted during 1997 and 1998 was
$0.14 and $0.42, respectively. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing model and the
minimum value method which excludes volatility factors as the Company is
privately held. The following assumptions were used:
Year Ended December 31,
                                                    --------------------------
                                                     1996     1997      1998
                                                    -------  --------  -------
Risk-free interest rate.........................     n/a      6.25%     5.5%
   Expected dividend yield.........................     n/a         0%       0%
   Expected lives (years)..........................     n/a         5        5
In connection with the issuance of stock options, the Company has recorded
deferred compensation of $145 as of December 31, 1998, representing the
difference between the deemed fair value of the Company's common stock and the
exercise price of stock options at the date of grant. The Company amortizes the
deferred compensation over the applicable vesting period, typically four years.

                                      F-20
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

8. Income Taxes:

    The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes," which requires recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income tax assets and liabilities are
determined using the current applicable enacted tax rates and provisions of the
enacted tax law. The Company had net deferred tax assets and liabilities as
follows:
December 31,
                                                              ----------------
                                                               1997     1998
                                                              -------  -------
Net operating loss carryforwards.........................  $   979  $ 6,174
   Accruals and reserves....................................       56      112
   Research and development costs capitalized for income tax
     purposes...............................................       --      742
   Deferred revenue.........................................       --      812
   Basis difference in acquired net assets of Portland
     Software...............................................       --   (1,900)
                                                              -------  -------
                                                                1,035    5,940
   Valuation allowance......................................   (1,035)  (5,940)
                                                              -------  -------
   Net deferred income taxes................................  $    --  $    --
                                                              =======  =======
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $15,670 for both federal and state tax purposes. The federal net
operating loss carryforwards expire on various dates through 2018, while the
state net operating loss carryforwards expire on various dates through 2013.
The Company believes that, based on a number of factors, there is sufficient
uncertainty regarding the realizability of net deferred tax assets such that a
full valuation allowance should be recorded. These factors include a history of
operating losses, the competitive nature of the Company's market and the lack
of predictability of revenue. Management will continue to assess the
realizability of the tax benefits available to the Company based on actual and
forecasted operating results. Changes in ownership resulting from the merger
described in Note 2 and other ownership changes may significantly limit the
utilization of net operating loss carryforwards in the future.

9. Segment Information:

    The Company operates in one industry segment: the design, development and
marketing of technology that enables the distribution and licensing of digital
goods over the Internet and via other digital media. All long-lived assets are
located in the United States. The Company's geographic information is
summarized as follows:
Year Ended
                                                                   December 31,
                                                                  --------------
                                                                  1996 1997 1998
                                                                  ---- ---- ----
Sales to unaffiliated customers:
     United States..............................................  $148 $262 $266
     Europe.....................................................    --   --   24
     Asia.......................................................    --   --  274
     Other......................................................    --   --   46
                                                                  ---- ---- ----
                                                                  $148 $262 $610
                                                                  ==== ==== ====
F-21
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

    Two customers accounted for 54% and 20%, respectively, of total revenues in
1996. Two customers accounted for 21% and 12%, respectively, of total revenues
in 1997. Two customers accounted for 45% and 13% respectively, of total
revenues in 1998. Two customers accounted for 38% and 13%, respectively, of
total revenues in the six months ended June 30, 1999.

10. Related Party Transactions:

    In conjunction with the exercise of stock options for the issuance of 250
shares of common stock to the Chief Executive Officer, the Company issued three
notes receivable aggregating $125. The notes receivable are full recourse,
secured by shares of the Company's common stock and bear interest at 6% per
annum. The principal and unpaid interest are due in full on May 27, 2001 for
$25 of the notes and June 6, 2001 for the remaining $100 of notes. The shares
issued are subject to repurchase by the Company until the notes are paid. See
Note 1--Restricted Cash.

11. Employee Savings Plan:

    The Company has a profit sharing plan and trust that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code
("401(k) Plan"). Under the terms of the 401(k) Plan, the employees of the
Company may make voluntary contributions to the 401(k) Plan as a percentage of
compensation, but not in excess of the maximum allowed under the Internal
Revenue Code. Employees become eligible to participate in the 401(k) Plan on
the first day of the month following date of hire. The Company currently does
not match employee contributions.

12. Subsequent Events:

    In May 1999, 20/20 Software, Inc., an Oregon corporation, filed a civil
complaint against the Company in the United States Court for the District of
Northern California. The complaint alleges that one of the Company's employees,
a former 20/20 employee, misappropriated trade secrets and confidential
information of 20/20 and allegedly used such allegedly misappropriated
information and trade secrets in a product of the Company's predecessor and
subsidiary, Preview Software. This complaint is a continuation of two earlier
and similar complaints by 20/20, one against the Company filed in, and
dismissed for lack of jurisdiction by, the United States Court for the Federal
District of Oregon, and one against an employee of the Company filed in Oregon
state court. Those two complaints were both dismissed, the latter with
prejudice. Management believes that the claims in the underlying litigation are
without merit and intend to continue to defend against them vigorously.
However, litigation is subject to inherent uncertainties and, therefore, there
can be no assurance that this action will not have a material adverse effect on
our business results of operations or financial condition.

    In July 1999, the Company sold 125 and 150 shares of common stock at a
price of $6.50 to the President and Chief Executive Officer and Vice President,
Chief Financial Officer, respectively. Under the terms of these sales, the
Company can repurchase a certain number of their shares of stock if they quit
or are terminated, subject to a monthly vesting schedule. In addition, the
Company has a right of first refusal to purchase any or all of their shares if
they decide to sell or transfer their shares. In connection with these sales,
the officers executed full-recourse promissory notes in the respective amounts
of $812 and $975 in favor of the Company with annual interest rates of 5.32%.
These notes become due and payable upon the earlier of July 2002 or termination
of their employment with the Company. The officers have also entered into
pledge and security agreements granting the Company a security interest in
these shares.

    In July 1999, the Company issued shares of Series G for purposes of
additional working capital and continued development of technology. A total of
4,312 shares of Series G were issued for net proceeds to the

                                      F-22
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

Company of $27,045. The Series G has substantially the same rights and
preferences as other preferred shares outstanding at December 31, 1998. The
Company had $1,180 of notes payable outstanding at June 30, 1999 which were
automatically converted into shares of the Company's Series G. In connection
with the Series G offering, the Company also issued a warrant to purchase 77
shares of Series G.

    In July 1999, the Board of Directors of the Company authorized the
reservation of an additional 500 shares of the Company's common stock for
issuance under the 98 Plan. In addition, the 98 Plan was amended in August 1999
to increase the total number of shares authorized by 1,000 and to incorporate
certain other changes. The Board of Directors approved a further amendment to
the 98 Plan subject to stockholder approval, to provide for an automatic annual
increase on the first day of each of the Company's fiscal years beginning in
2000 and ending in 2008 equal to the lesser of (i) 800 shares, (ii) 3% of the
Company's outstanding common stock on the last day of the immediately preceding
fiscal year, or (iii) such lesser number of shares as the Board of Directors
determines.

    During August 1999, the Board of Directors approved the 1999 Employee Stock
Purchase Plan ("1999 ESPP"), subject to stockholder approval, and reserved 500
shares of common stock for issuance thereunder. The 1999 ESPP will be subject
to an automatic annual increase on the first day of each of the Company's
fiscal years over the 10-year term of the plan, equal to the lesser of (i) 400
shares, (ii) 2% of the Company's outstanding common stock on the last day of
the immediately preceding fiscal year, or (iii) such lesser number of shares as
the Board of Directors determines.

    During August 1999, the Board of Directors also approved the 1999 Directors
Stock Option Plan ("1999 Directors Plan"), subject to stockholder approval, and
reserved 300 shares of common stock for issuance thereunder. The 1999 Directors
Plan will be subject to an automatic annual increase to the number of shares
reserved under the plan on the first day of each of the Company's fiscal years
over the 10-year term of the plan, equal to the lesser of (i) 150 shares, (ii)
1% of the Company's outstanding common stock on the last day of the preceding
fiscal year, or (iii) a lesser number of shares as determined by the Board of
Directors.

    On September 14, 1999, the Company authorized a 1 for 2 reverse stock split
of its common and preferred stock, effective immediately prior to the closing
of the initial public offering. All share and per share amounts have been
retroactively adjusted to reflect this stock split. The Board of Directors,
subject to stockholder approval, amended the number of authorized common stock
to 75,000 shares and the number of preferred stock to 5,000 shares, to be
effective upon the closing of the initial public offering.

                                      F-23
PORTLAND SOFTWARE, INC.

                              FINANCIAL STATEMENTS

                           December 31, 1996 and 1997

                  (With Independent Auditors' Report Thereon)

                                      F-24
INDEPENDENT AUDITORS' REPORT

The Board of Directors
Portland Software, Inc.:

    We have audited the accompanying balance sheets of Portland Software, Inc.
as of December 31, 1996 and 1997 and the related statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Portland Software, Inc. as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.

                                                       /s/ KPMG LLP

Portland, Oregon
February 20, 1998

                                      F-25
PORTLAND SOFTWARE, INC.

                                 BALANCE SHEETS

                           December 31, 1996 and 1997
                     (In thousands, except per share data)
1996     1997
                                                               -------  -------
ASSETS
Current assets:
  Cash and cash equivalents..................................  $ 1,990  $ 4,745
  Accounts receivable, net...................................        8      268
  Prepaid expenses...........................................       27       10
  Other current assets, net..................................       13      181
                                                               -------  -------
     Total current assets....................................    2,038    5,204
Property and equipment, net..................................      181      372
Note receivable from officer.................................       --       55
Other non-current assets.....................................       42       48
Prepaid license fee, net.....................................       --      289
                                                               -------  -------
     Total assets............................................  $ 2,261  $ 5,968
                                                               =======  =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable...........................................      272      169
  Accrued expenses...........................................       25      255
  Current installments of obligations under capital leases...       81      111
  Deferred revenue...........................................       --       40
                                                               -------  -------
     Total current liabilities...............................      378      575
Obligations under capital leases, less current installments..       59      134
Other non-current liabilities................................       27       40
                                                               -------  -------
     Total liabilities.......................................      464      749
                                                               -------  -------
Commitments and contingencies
Shareholders' equity:
  Series B preferred stock, $.01 par value; 4,500 share
    authorized; convertible; $.2672 cumulative dividends;
    issued and outstanding -0- shares and 2,395 shares at
    December 31, 1996 and 1997, respectively (liquidation
    preference of $8,000)....................................       --       24
  Series A preferred stock, $.01 par value; 838 shares
    authorized; convertible; issued and outstanding 838
    shares at December 31, 1996 and 1997 (liquidation
    preference of $2,800)....................................        8        8
  Common stock, $.01 par value; 20,000 shares authorized;
    issued and outstanding 6,945 shares and 6,988 shares at
    December 31, 1996 and 1997, respectively.................       69       70
  Additional paid-in capital.................................    5,077   13,464
  Accumulated deficit........................................   (3,357)  (8,347)
                                                               -------  -------
     Total shareholders' equity..............................    1,797    5,219
                                                               -------  -------
     Total liabilities and shareholders' equity..............  $ 2,261  $ 5,968
                                                               =======  =======
See accompanying notes to financial statements.

                                      F-26
PORTLAND SOFTWARE, INC.

                            STATEMENTS OF OPERATIONS

                     Years ended December 31, 1996 and 1997
                     (In thousands, except per share data)
1996     1997
                                                              -------  -------
Net revenue.................................................. $   187  $   501
Cost of goods sold...........................................      64      156
                                                              -------  -------
     Gross profit............................................     123      345
                                                              -------  -------
Operating expenses:
  Sales and marketing........................................     749    1,901
  Research and development...................................   1,044    1,640
  General and administrative.................................   1,154    1,849
                                                              -------  -------
     Total operating expenses................................   2,947    5,390
                                                              -------  -------
  Loss from operations.......................................  (2,824)  (5,045)
                                                              -------  -------
Other income (expense):
  Interest income............................................      30      107
  Interest expense...........................................     (23)     (52)
                                                              -------  -------
     Total other income (expense)............................       7       55
                                                              -------  -------
  Loss before income taxes...................................  (2,817)  (4,990)
Income taxes.................................................      --       --
                                                              -------  -------
     Net loss................................................ $(2,817) $(4,990)
                                                              =======  =======
Earnings per share computation:
  Net loss................................................... $(2,817) $(4,990)
  Preferred stock dividends..................................      --     (234)
                                                              -------  -------
  Net loss available to common shareholders.................. $(2,817) $(5,224)
                                                              =======  =======
Basic and diluted net loss per share:
  Weighted average shares outstanding........................   5,899    6,978
                                                              =======  =======
  Net loss................................................... $ (0.48) $ (0.75)
                                                              =======  =======
See accompanying notes to financial statements.

                                      F-27
PORTLAND SOFTWARE, INC.

                       STATEMENTS OF SHAREHOLDERS' EQUITY

                     Years ended December 31, 1996 and 1997
                                 (In thousands)
Series B           Series A
                         preferred stock    preferred stock     Common stock  Additional                 Total
                         -----------------  -----------------   -------------  paid-in   Accumulated shareholders'
                         Shares    Amount   Shares    Amount    Shares Amount  capital     deficit      equity
                         --------  -------  -------   -------   ------ ------ ---------- ----------- -------------
Balance at December 31,
  1995..................       --   $   --        --   $    --  4,417   $44    $   523     $  (540)     $    27
 Issuance of preferred
   stock, net...........       --       --       838         8     --    --      2,792          --        2,800
 Issuance of common
   stock................       --       --        --        --  1,577    16      1,248          --        1,264
 Exercise of common
   stock options........       --       --        --        --    175     2         (2)         --           --
 Common stock issued in
   lieu of cash.........       --       --        --        --    621     6        417          --          423
 Conversion of
   convertible debt to
   common stock.........       --       --        --        --    155     1         99          --          100
 Net loss...............       --       --        --        --     --    --         --      (2,817)      (2,817)
                         --------   ------   -------   -------  -----   ---    -------     -------      -------
Balance, December 31,
  1996..................       --       --       838         8  6,945    69      5,077      (3,357)       1,797
 Issuance of preferred
   stock, net...........    2,149       22        --        --     --    --      7,109          --        7,131
 Conversion of
   convertible debt to
   preferred stock......      246        2        --        --     --    --        818          --          820
 Exercise of common
   stock options........       --       --        --        --     43     1         10          --           11
 Common stock options
   issued in lieu of
   cash.................       --       --        --        --     --    --         21          --           21
 Warrants issued in
   payment of license
   fee..................       --       --        --        --     --    --        429          --          429
 Net loss...............       --       --        --        --     --    --         --      (4,990)      (4,990)
                         --------   ------   -------   -------  -----   ---    -------     -------      -------
Balance, December 31,
  1997..................    2,395   $   24       838   $     8  6,988   $70    $13,464     $(8,347)     $ 5,219
                         ========   ======   =======   =======  =====   ===    =======     =======      =======
See accompanying notes to financial statements.

                                      F-28
PORTLAND SOFTWARE, INC.

                            STATEMENTS OF CASH FLOWS

                     Years ended December 31, 1996 and 1997
                                 (In thousands)
1996     1997
                                                              -------  -------
Cash flows from operating activities:
 Net loss.................................................... $(2,817) $(4,990)
 Adjustments to reconcile net loss to net cash used by
   operating activities:
  Depreciation and amortization..............................      61      173
  Loss on sale of property and equipment.....................      29       --
  Common stock and options issued in lieu of cash............     423       21
  Net changes in operating assets and liabilities:
   Accounts receivable.......................................      15     (260)
   Prepaid expenses..........................................     (27)      17
   Other assets..............................................     (55)    (116)
   Accounts payable..........................................     258     (103)
   Accrued expenses..........................................      27      230
   Other liabilities.........................................      --       53
                                                              -------  -------
     Net cash used in operating activities...................  (2,086)  (4,975)
                                                              -------  -------
Cash flows from investing activities:
 Purchase of property and equipment..........................     (49)    (111)
                                                              -------  -------
     Net cash used in investing activities...................     (49)    (111)
                                                              -------  -------
Cash flows from financing activities:
 Borrowings under line of credit agreement...................      --      250
 Payments on line of credit..................................      --     (250)
 Payments on obligations under capital lease.................     (45)    (121)
 Proceeds from issuance of common stock......................   1,264       11
 Proceeds from issuance of preferred stock...................   2,800    7,131
 Proceeds from issuance of convertible debt..................      --      820
                                                              -------  -------
     Net cash from financing activities......................   4,019    7,841
                                                              -------  -------
     Net increase in cash and cash equivalents...............   1,884    2,755
Cash and cash equivalents at beginning of year...............     106    1,990
                                                              -------  -------
Cash and cash equivalents at end of year..................... $ 1,990    4,745
                                                              =======  =======
Supplemental disclosure of cash flow information:
 Cash paid for interest...................................... $    15       60
 Cash paid for income taxes..................................      --       --
Supplemental disclosure of non-cash investing and financing
  activities:
 Obligations under capital lease incurred for the purchase of
   property and equipment.................................... $   160      226
 Preferred stock issued upon conversion of debt..............      --      820
 Common stock issued upon conversion of debt.................     100       --
 Warrants issued in payment of license fee...................      --      429
See accompanying notes to financial statements.

                                      F-29
PORTLAND SOFTWARE, INC.

                         NOTES TO FINANCIAL STATEMENTS

                           December 31, 1996 and 1997
                     (In thousands, except per share data)

(1) Summary of Significant Accounting Policies

 (a) Description of Business

    Portland Software, Inc. (the Company) was incorporated in October 1994. The
Company develops and markets systems and tools for the electronic distribution,
primarily through the internet, of software and other digital content.

 (b) Use of Estimates in the Preparation of Financial Statements

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

 (c) Cash and Cash Equivalents

    Cash and cash equivalents consist of cash and short-term investments with
maturities of less than three months.

 (d) Accounts Receivable

    The allowance for doubtful accounts is as follows at December 31:
1996 1997
                                                                      ---- ----
Balance--beginning of period...................................... $--  $--
   Provision.........................................................  --   56
   Charge offs.......................................................  --   (6)
                                                                      ---  ---
   Balance--end of period............................................ $--  $50
                                                                      ===  ===
(e) License Fee

    License fees are stated at cost. Amortization is provided for by the
straight-line method over four years. Amortization expense totaled $-0- and $27
for the years ended December 31, 1996 and 1997, respectively.

 (f) Advertising

    The Company expenses the costs of advertising when the costs are incurred.
Advertising expense was $105 and $66 for the years ended December 31, 1996 and
1997, respectively.

 (g) Property and Equipment

    Property and equipment are stated at cost. Property and equipment under
capital leases are stated at the present value of the minimum lease payments.
Equipment is depreciated using the straight-line method over the estimated
useful lives of the assets, generally three to five years. Property and
equipment under capital leases

                                      F-30
PORTLAND SOFTWARE, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

and leasehold improvements are amortized straight-line over the shorter of the
lease term or estimated useful life of the asset.

 (h) Income Taxes

    Deferred tax assets and liabilities are recognized for future tax
consequences of differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
losses and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.

 (i) Net Loss Per Share

    The Company follows the provisions of SFAS 128, "Earnings Per Share" which
requires presentation of both basic and diluted earnings per share (EPS) on the
face of the income statement. Basic EPS is computed using the weighted average
number of common shares outstanding during the period. Diluted EPS reflects the
potential dilution that could occur if convertible preferred shares outstanding
at the beginning of each year were converted at those dates with related
interest, preferred stock dividend requirements and outstanding common shares
adjusted accordingly. It also assumes that outstanding common shares were
increased by shares issuable upon exercise of those stock options or warrants
for which market price exceeds exercise price, less shares which could have
been purchased by the Company with related proceeds. Neither convertible
preferred stock, warrants, or stock options have been included in the
computation of diluted earnings per share for the years ended December 31, 1996
or 1997, since it would have resulted in an antidilutive effect.

 (j) Revenue Recognition

    Revenue results primarily from 1) product license and installation fees, 2)
fees charged for transactions processed using the Company's product, and 3)
license fees recognized upon shipment of the product and when no significant
contractual obligations remain outstanding. For those agreements which derive
revenue on a per-transaction basis in exchange for guaranteed amounts, revenue
is recognized at the time of product delivery. Per-transaction fees that exceed
the guarantee are recognized as earned.

    A portion of product license revenue is allocated to customer support. This
amount is deferred and recognized ratably over the license period. The Company
generally does not provide for a right of return policy for its software sales.

 (k) Royalties

    Royalties are accrued based on certain revenues, pursuant to contractual
agreements with developers of software products published by the Company.
Royalty costs are included in the cost of goods sold.

 (l) Software Development Costs

    Under Statement of Financial Accounting Standards No. 86, software
development costs are to be capitalized beginning when a product's
technological feasibility has been established and ending when a product is
made available for general release to customers. To date, the establishment of
technological feasibility of the Company's products has occurred shortly before
general release and, accordingly, no costs have been capitalized.

                                      F-31
PORTLAND SOFTWARE, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

 (m) Stock-Based Compensation

    The Company accounts for stock-based compensation using the Financial
Accounting Standard Board's Statement of Financial Accounting Standards No. 123
(SFAS 123), Accounting for Stock-Based Compensation. This statement permits a
company to choose either a fair-value-based method of accounting for its stock-
based compensation arrangements or to comply with the current Accounting
Principles Board Opinion 25 (APB Opinion 25) intrinsic-value-based method
adding pro forma disclosures of net income (loss) computed as if the fair-
value-based method had been applied in the financial statements. The Company
applies SFAS No. 123 by retaining the APB Opinion 25 method of accounting for
stock-based compensation for employees with annual pro forma disclosures of net
income (loss). Stock-based compensation for non-employees is accounted for
using the fair-value-based method.

(2) Property and Equipment

    Property and equipment, net consist of the following at December 31:
1996  1997
                                                                    ----  -----
Software........................................................ $  9  $  85
   Furniture and fixtures..........................................    6     13
   Equipment.......................................................  236    478
   Leasehold improvements..........................................   --     12
                                                                    ----  -----
                                                                     251    588
   Less accumulated depreciation and amortization..................  (70)  (216)
                                                                    ----  -----
                                                                    $181  $ 372
                                                                    ====  =====
(3) Prepaid License Fee

    On August 1, 1997, the Company entered into an agreement to license the
rights to certain software developed by another company. The Company issued 479
Series B preferred stock warrants in consideration for the license. The value
of warrants granted using the Black-Scholes method utilized the following
assumptions: risk free interest rate of 6.25%, no expected dividend yield or
volatility, and an expected life of two years. Using these assumptions these
warrants have a fair value of $429, a weighted average exercise price of $3.34,
a contractual life of seven years and will be fully vested in 1998. At December
31, 1997, 359 warrants were exercisable. The prepaid license fee is being
amortized over its estimated useful life of four years.
1996 1997
                                                                     ---- -----
License fee...................................................... $--  $ 429
   Less accumulated amortization....................................  --    (27)
                                                                     ---  -----
                                                                      --    402
   Less current portion included in other current assets, net.......  --   (113)
                                                                     ---  -----
                                                                     $--  $ 289
                                                                     ===  =====
(4) Line of Credit

    In January 1997, the Company arranged a $250 credit facility (the line of
credit) with a bank. The line of credit is secured by the assets of the
Company. The interest rate is a floating rate based on prime (8.5% at

                                      F-32
PORTLAND SOFTWARE, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1997) plus 2% with principal due upon demand. The agreement
contains no covenants. There was no amount outstanding on this line of credit
at December 31, 1997.

(5) Accrued Expenses

    Accrued expenses consist of the following at December 31:
1996 1997
                                                                      ---- ----
Accrued consulting................................................ $--   89
   Accrued vacation..................................................  11   51
   Accrued bonuses...................................................  --   33
   Other accrued expenses............................................  14   82
                                                                      ---  ---
                                                                      $25  255
                                                                      ===  ===
(6) Income Taxes

    The actual income tax benefit differs from the "expected" benefit computed
by applying the U.S. federal corporate rate as follows:
1996  1997
                                                                   ----  ----
Computed "expected" income tax rate benefit...................  (34)% (34)%
   Increases (decreases) resulting from:
     State income taxes, net of federal tax benefit..............    (4)   (4)
     Exclusion of earnings for period that S Corporation was
       valid.....................................................     1    --
     Research and development credit.............................    --    (2)
     Increase in valuation allowance.............................    37    40
                                                                   ----  ----
   Actual income tax rate benefit................................    --%   --%
                                                                   ====  ====
The tax effects of temporary differences and net operating loss
carryforwards which give rise to significant portions of deferred tax assets
and deferred tax liabilities at December 31 are as follows:
1996     1997
                                                              -------  -------
Deferred tax assets:
     Net operating losses and U.S. research and
       experimentation credits............................... $   904    2,506
     Property and equipment, due to differences in
       depreciation..........................................      40      462
     Accrual to cash basis adjustment........................     109       65
                                                              -------  -------
                                                                1,053    3,033
     Less valuation allowance................................  (1,053)  (3,033)
                                                              -------  -------
        Net deferred taxes................................... $    --       --
                                                              =======  =======
The net change in the total valuation allowance for the years ended
December 31, 1996 and 1997 was an increase of $1,053 and $1,980, respectively.

    The Company has available federal and state net operating loss
carryforwards for tax purposes of approximately $6,351 and research and
experimentation credits of approximately $121, which expire in years 2011-2012.

                                      F-33
PORTLAND SOFTWARE, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

    Approximately $4,682 of the net operating losses are subject to annual
utilization limitation due to ownership changes under Internal Revenue Code
Section 382 in 1996 and 1997.

(7) Shareholders' Equity

 (a) Series B Preferred Stock

    The Series B preferred stock has a stated value of $3.34 per share and a
liquidation preference over holders of common stock and Series A preferred
stock of an amount per share equal to $3.34 (the original issue price) plus all
declared but unpaid dividends. Series B preferred stock has a cumulative per
share dividend, on a non-compounded basis, of $.2672 per annum payable at the
Company's option in cash or additional shares of Series B preferred stock. The
dividends are to be declared by the Board of Directors and paid on June 30,
2001 and on a quarterly basis thereafter, unless a liquidating event occurs
before June 30, 2001, in which case the aggregate amount of arrearages in
cumulative Series B preferred stock dividends will be canceled and no further
dividends will accrue. No dividend declarations have been made, and the
aggregate amount of arrearages in cumulative Series B preferred stock dividends
is $234 at December 31, 1997.

    Each share is convertible into common stock at any time at the option of
the holder. The initial conversion ratio is one-to-one, but this ratio is
subject to modification under the Company's Articles of Incorporation in the
event of certain dilutive issuance of securities, stock splits, stock
dividends, stock distributions or other common stock equivalent distributions.
Automatic conversion to common stock at the then effective conversion rate will
occur upon the 1) closing of the issuance of shares following an effective
registration statement under the Securities Act of 1933, in which the aggregate
price to the public exceeds $10,000 and in which the public offering price per
share of common stock equals or exceeds $10.00, or 2) the date on which a two-
thirds majority of the shares have been converted into shares of common stock
or are otherwise no longer outstanding. The holders of each share of Series B
preferred stock will have the right to the number of votes to which they would
be entitled if the shares were converted to common stock. The Company has
reserved 3,234 shares of the Company's common stock for the conversion of
Series B preferred stock.

    Under the Series B preferred stock agreement, the Company is required to
comply with certain operating covenants, including requirements associated with
the issuance of stock options.

 (b) Series A Preferred Stock

    The Series A preferred stock has a stated value and liquidation preference
of $3.34 per share and carries a dividend of $.2672 per annum payable when and
if declared by the Board of Directors. No dividend declarations have been made.
Series A preferred shareholders have a liquidation preference over holders of
common stock of an amount per share equal to $3.34 (the original issue price)
plus all declared but unpaid dividends. Each share is convertible into common
stock on a one-to-one basis at any time at the option of the holder. The
conversion ratio is subject to modification under the Company's Articles of
Incorporation in the event of stock splits, stock dividends, stock
distributions or other common stock equivalent distributions. Automatic
conversion to common stock at the then effective conversion rate will occur
upon the 1) closing of the issuance of shares following an effective
registration statement under the Securities Act of 1933, in which the aggregate
price to the public equals or exceeds $7,500 and in which the public offering
price per share of common stock equals or exceeds $8.34, or 2) the date on
which a majority of the shares have been converted into shares of common stock
or are otherwise no longer outstanding. The holders of each share of Series A
preferred stock will have the right to the number of votes to which they would
be entitled if the shares were converted to common stock. The Company has
reserved 838 shares of the Company's common stock for the conversion of Series
A preferred stock.

                                      F-34
PORTLAND SOFTWARE, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

 (c) Warrants

    The Company has granted warrants for 266 shares of common stock at exercise
prices ranging from $.675 to $1.00 per share primarily to the holders of Series
A and Series B preferred stock. The warrants are exercisable at December 31,
1997 at a weighted average exercise price of $.983. Expiration of 14 warrants
will occur on December 21, 2000 or upon consummation of an initial public
offering or upon a change in control, whichever is earlier. 170 warrants expire
on October 18, 2001 or upon consummation of an initial public offering or upon
a change in control, whichever is earlier. The Company has reserved 266 shares
of common stock for the exercise of warrants. The value ascribed to the common
stock warrants using the Black-Scholes method was not significant. The Company
also granted 838 warrants for Series B preferred stock at an exercise price of
$3.34 with an expiration date of August 1, 2004. Both the number of shares of
warrant stock and the exercise price are subject to modification under the
terms of the Series B preferred stock purchase agreement in the event of
certain dilutive issuance of securities, stock splits, stock dividends, stock
distributions or other stock equivalent distributions. A value of $429 was
ascribed to 479 of these warrants using the Black-Scholes method, which were
issued in connection with a license fee. The Company has reserved 838 shares of
Series B preferred stock for the exercise of warrants.

 (d) Shareholders' Agreement

    The Company and its shareholders have entered into agreements that include
restrictions on the transfer of the Company's common stock. Except for
expressly provided exceptions, no shareholder is allowed to transfer ownership
of stock without the shares being first offered for sale to the Company.

(8) 1994 Stock Incentive Plan

    In 1994, the Company adopted an incentive stock option plan (the Plan)
whereby a total of 5,000 shares of common stock have been reserved for the
grant of stock options to selected employees, officers, directors, consultants
and advisors. Options granted pursuant to the Plan may be either incentive
stock options as defined in Section 442A of the Internal Revenue Code of 1986,
as amended, or non-qualified stock options, at the discretion of the Board.
Under the Plan, options generally vest over four years. 25% become exercisable
one year after grant, 25% two years after grant and the remaining 50% vest
ratably over the following two years. Options granted under the Plan must be
exercised within three months of the optionee's termination of employment and
within ten years of the date of the grant. Option prices are generally not less
than the fair market value of the shares at the date of grant. At the time of
the exercise of the option, all optionees must grant the Company or its
designee a right of first refusal with respect to all transfers.

    The Company has elected to account for its stock-based compensation plans
under APB Opinion 25; however, the Company has computed, for pro forma
disclosure purposes, the value of all options granted during 1996 and 1997
using the minimum value option-pricing model as prescribed by SFAS 123 using
the following assumptions used for grants in 1996 and 1997:
1996    1997
                                                                 ------- -------
Risk-free interest...........................................    6.0%   6.25%
   Expected dividend yield......................................    None    None
   Expected lives............................................... 5 years 5 years
The total value of options granted during 1996 and 1997 was computed as
approximately $260 and $304, respectively, which would be amortized on a pro
forma basis over the four-year vesting period of the options. The weighted
average fair market value of the option grants during 1996 and 1997 was $0.32
and $1.00 per share, respectively. If the Company had accounted for these
options in accordance with SFAS 123, the

                                      F-35
PORTLAND SOFTWARE, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

Company's net loss and net loss per share for the years ended December 31, 1996
and 1997 would have increased to the following pro forma amounts:
1996     1997
                                                               -------  -------
Net loss:
     As reported.............................................  $(2,817) $(4,990)
     Pro forma...............................................   (2,886)  (5,265)
   Earnings per share--basic and diluted:
     As reported.............................................  $ (0.48) $ (0.75)
     Pro forma...............................................    (0.49)   (0.79)
A summary of the status of the Company's Plan at December 31, 1996 and 1997
and changes during the years then ended is presented in the following table:
Weighted
                                                                        average
                                                                        exercise
                                                                Options  price
                                                                ------- --------
Outstanding at December 31, 1995............................  1,058   $.0555
   Granted.....................................................  1,012    .9511
   Exercised...................................................   (175)   .0020
   Forfeited...................................................    (42)   .6032
                                                                 -----   ------
   Outstanding at December 31, 1996............................  1,853    .5163
   Granted.....................................................    922    .9774
   Exercised...................................................    (43)   .2434
   Forfeited...................................................   (292)   .5415
                                                                 -----   ------
   Outstanding at December 31, 1997............................  2,440   $.7191
                                                                 =====   ======
A total of 632 and 1,083 incentive and non-qualified stock options were
exercisable at weighted average exercise prices of $.21 and $.36 at December
31, 1996 and 1997, respectively.

    At December 31, 1997, the Company has committed to issue 29 non-qualified
stock options in fiscal year 1998 under the Plan to non-employee consultants
for consulting services performed in 1997. The Company accrued a liability of
$29 in 1997 related to this obligation.

    During 1997, the Company issued 21 stock options to non-employee
consultants. These options have a weighted average exercise price of $0.01 and
a contractual life of ten years. The options were exercisable at the date of
grant. Included in general and administrative expense is $21 relating to the
value ascribed to these warrants.

    The following table sets forth the exercise price range, number of shares
and weighted average remaining contractual lives for stock options at December
31, 1997:
Currently exercisable
                                               ---------------------------------------
                                   Weighted                                Weighted
                        Weighted    average                     Weighted    average
   Exercise             average    remaining                    average    remaining
    price      Number   exercise  contractual                   exercise  contractual
    range     of shares  price   life in years Number of shares  price   life in years
   --------   --------- -------- ------------- ---------------- -------- -------------
$.002
     to
     .0105        671    $.005       6.86             671        $.005       6.86
   $.75           135     .750       8.24             115         .750       8.24
   $.825
     to
     1.00       1,384     .990       9.17             234         .970       8.64
   $1.10          250    1.100       8.63              63        1.100       8.63
                -----    -----       ----           -----        -----       ----
   $.002
     to
     1.10       2,440    $.720       8.43           1,083        $.360       7.49
                =====    =====       ====           =====        =====       ====
F-36
PORTLAND SOFTWARE, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

(9) Commitments and Contingencies

 (a) Leases

    The Company leases equipment and office space under capital leases and
non-cancelable operating leases which expire at various dates through 2002.

    Included in equipment in the accompanying balance sheets are the following
assets held under capital leases at December 31:
1996  1997
                                                                    ----  -----
Equipment....................................................... $181  $ 408
   Less accumulated amortization...................................  (53)  (113)
                                                                    ----  -----
                                                                    $128  $ 295
                                                                    ====  =====
Future minimum lease payments under capital and operating leases are as
follows:
Capital Operating
                                                               leases   leases
                                                               ------- ---------
Year ending December 31:
     1998....................................................   $137    $  293
     1999....................................................    107       330
     2000....................................................     52       344
     2001....................................................      4       354
     2002....................................................     --       390
     Thereafter..............................................     --       100
                                                                ----    ------
                                                                 300    $1,811
                                                                        ======
   Less amounts representing interest........................     55
                                                                ----
                                                                 245
   Less current installment..................................    111
                                                                ----
                                                                $134
                                                                ====
The Company incurred $87 and $210 in operating lease expense during 1996
and 1997, respectively.

 (b) Benefit Plan

    The Company has a defined contribution plan (the Plan). The Plan covers
primarily all officers and employees of the Company who meet prescribed age
and service requirements. Employees may contribute up to 15% of their
compensation. Matching contributions are determined at the discretion of the
Board of Directors. The Company did not make a matching contribution in 1996
or 1997.

 (c) Legal Proceedings

    The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on the
Company's financial position.

                                     F-37
PORTLAND SOFTWARE, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

(10) Major Customers

    Most of the Company's customers are located in the United States. Aggregate
revenues for three significant customers were 77% and 40% of total revenues for
the years ended December 31, 1996 and 1997, respectively. Related receivables
from such customers were 0% and 30% of trade accounts receivable at December
31, 1996 and 1997, respectively. The Company estimates an allowance for
doubtful accounts based on the credit worthiness of its customers as well as
general economic conditions. Consequently, an adverse change in those factors
could affect the Company's estimate of its bad debts.

(11) Unaudited Recent Developments

    On August 5, 1998, the Company was acquired by Preview Systems, Inc.
through the exchange of all of its outstanding stock for 1,929 common shares
(post split) and 1,676 Series E Preferred Shares (post split) of Preview
Systems, Inc.

                                      F-38
PREVIEW SYSTEMS, INC.

                       PRO FORMA STATEMENT OF OPERATIONS

                      For the Year Ended December 31, 1998

                                      F-39
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

                 PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

                      For the Year Ended December 31, 1998
                     (In thousands, except per share data)
                                  (unaudited)
Portland                   Preview
                                Preview    Software,               Systems, Inc.
                             Systems, Inc.   Inc.    Adjustments     Pro Forma
                             ------------- --------- -----------   -------------
Revenues....................   $    610     $   199    $   --        $    809
Operating expenses:
  Research and
    development.............      2,978       1,078        --           4,056
  Sales and marketing.......      2,915       1,287        --           4,202
  General and
    administrative..........      3,127       2,052        --           5,179
  Amortization of
    intangibles.............        866          --     1,218 (a)       2,084
  Acquired in-process
    research and
    development.............      2,091          --    (2,091)(b)          --
                               --------     -------    ------        --------
     Total operating
       expenses.............     11,977       4,417      (873)         15,521
                               --------     -------    ------        --------
Operating loss..............    (11,367)     (4,218)      873         (14,712)
Other income................         91          71        --             162
                               --------     -------    ------        --------
Net loss....................   $(11,276)    $(4,147)   $  873        $(14,550)
                               ========     =======    ======        ========
Net loss per basic and
  diluted share.............   $  (7.55)    $    --    $   --        $  (5.51)
                               ========     =======    ======        ========
Shares used in per share
  calculations..............      1,494          --     1,147           2,641
                               ========     =======    ======        ========
F-40
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES

            NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

1. General

    The Company was formed in April 1998 to acquire all of the outstanding
equity interests of Preview Software, Inc. ("Preview Software") and Portland
Software, Inc. ("Portland Software"). The Company completed both of these
mergers on August 5, 1998. In accordance with Accounting Principles Board
Opinion No. 16, the stockholders of Preview Software were determined to be the
controlling shareholders of the Company. Accordingly, the merger of Preview
Software into the Company was accounted for as a reorganization under common
control with the underlying net assets recorded by the Company at historical
cost. The merger of Portland Software into the Company was accounted for using
the purchase method. Therefore, the amounts in the Preview Systems, Inc. column
reflect the consolidated results of operations of Preview Systems, Inc. for the
period January 1, 1998 through August 4, 1998, and the results of operations of
the combined entity from August 5, 1998 through December 31, 1998. The amounts
in the Preview Systems, Inc. Pro Forma column, which are unaudited, also
include the effect of Portland Software, Inc. from January 1, 1998 through
August 4, 1998 when it was acquired.

2. Pro Forma Adjustments

    (a) To record additional amortization of acquired capitalized intangibles
as if the merger had occurred on January 1, 1998.

    (b) To reverse acquired in-process research and development, a material
non-recurring charge.

                                      F-41
Edgar Text Description:

 Narrative Description of Inside Back Cover

 Headline Upper Left Justified: "Delivering Digital Goods to the Desktop."

    Centered below the headline are two arrows that point to the first of three
computer screen samples, all of which are centered on the page. Each screen
represents a step in the selection process that a customer would take to order
and download a digital product, which in this example is Norton AntiVirus 5.0
for WinNT. This first screen is topped by a yellow window bar containing a
centered title: "Single Order." Below this bar is a gray box with a series of
text lines. Justified left on the first is: "Placed on: Aug 9 1999." Near the
center of this line is: "View Receipt." Justified right on this line is: "Order
#: 5712674." Justified with the left margin of the next line down is a heading
title: "Software Product Supplier Name & Version." Three column headings appear
on the right side of the same line: "Quantity," "Unit Price" and "Extended
Price." Justified with the left margin of the next line is: "SYMANTEC Norton
AntiVirus 5.0 for WinNT." Below the three column headers on the right of the
previous line are the following: "1," "$36.00" and "$36.00." Centered below
this line are a labeled icon and a line of text. The icon is yellow with a red
arrow pointing down, which is labeled, "Download." The underlined, blue text to
the right of the icon reads "Click here to download product." Centered below
this is the following text: "Status: Billed" and "As of: Aug 9 1999." On the
next line down is text in-line with the two furthest right columns from above:
"Subtotal Cost:" and "$36.00." The final line runs across the bottom of this
screen. Left justified text reads: "Payment Method: VISA." To the right, in-
line with the two furthest right columns from above, is: "Total:" and "$36.00."

    An arrow points from the first screen down to the second, which contains a
blue window bar with a right justified title: "Downloading Norton AntiVirus for
WinNT." In the left quarter of the screen below is a rectangular yellow box
containing four lines of text. From top to bottom, they are: "Shop,"
"SYMANTEC," "Powered by" and "beyond.com."

    The right three-quarters of this screen are made up of a gray section,
which is topped by a paragraph of text: "Now downloading and verifying your
product and license. A shortcut has been saved on your desktop should you need
to restart this download." Below this is a line of text: "Downloading Norton
AntiVirus for WinNT." Below this is a horizontal graphic bar, which is
approximately sixty percent blue. Below the bar, justified to the right, is a
line of text: "Received: 10584 KB of 12238 KB Completed." Below this, in the
right corner of the screen, is a button containing the text: "Finish Later."

    An arrow points down to the final screen, which contains a blue window bar
with a right-justified title: "Thank You for Your Purchase of Norton AntiVirus
for WinNT." In the left quarter of the screen is the same rectangular yellow
box with text as in the previous screen, but in a more elongated shape. The
right, gray section of this screen is divided into five horizontal sections,
each separated by a thin blue line. The first section contains a paragraph of
text: "Your purchase and download has completed successfully. If you
established a connection to the Internet, you may now disconnect." The second
section has a left-justified green and white icon that looks like a pad of
paper. To the right of this is a paragraph: "A packing slip for this purchase
is located in the following directory. Select one of these choices if you would
like to view or print a copy." Below this is another line of text:
"C:\\WINNT\Vbox\PackingSlips." On the right margin of this section are two
buttons containing text. The top reads, "View Slip," and the bottom reads,
"Print Slip." The third section has a left-justified yellow and white icon that
looks like a piece of paper. To the right of this is a paragraph: "A license
for this product has been installed on this machine and is required should you
ever need to reinstall. Please select Backup to make a copy to guard against
loss." To the right of this paragraph is a button containing the word:
"Backup." The fourth section has a left-justified icon that looks like a
computer. To the right of this is a paragraph: "Your product has been saved in
the following directory. Thank you for shopping at Symantec.
C:\WINNT\Vbox\Installers." The fifth section has three buttons containing text.
The first is flush left and reads: "About Vbox." The other two are in the
bottom right corner of the screen: the left one reads, "Launch," and the right
one reads: "Exit."

    Most of the background of the page is white, except for the lower right
quarter, which contains two layers of soft-focus ones and zeros, a continuation
of the random, graphic imitation of binary code.
[PREVIEW SYSTEMS LOGO]

                              [OUTSIDE BACK COVER]
PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

    The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Preview in connection with
the sale of common stock being registered. All amounts are estimates except the
Securities and Exchange Commission registration fee and the NASD filing fee and
the Nasdaq National Market listing fee.
Amount
                                                                      to be paid
                                                                      ----------
Securities and Exchange Commission registration fee..............   $ 12,788
   NASD filing fee..................................................      5,100
   Nasdaq National Market listing fee...............................     85,500
   Printing and engraving expenses..................................    225,000
   Legal fees and expenses..........................................    400,000
   Accounting fees and expenses.....................................    200,000
   Blue Sky qualification fees and expenses.........................      3,000
   Transfer Agent and Registrar fees................................     15,000
   Miscellaneous fees and expenses..................................     20,112
                                                                       --------
     Total .........................................................    966,500
                                                                       ========
Item 14. Indemnification of Directors and Officers

    Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended. Articles XII
and XIV of Preview's Sixth Amended and Restated Certificate of Incorporation
(Exhibit 3.3 hereto) and Article VI of Preview's Amended and Restated Bylaws
(Exhibit 3.5 hereto) provide for indemnification of Preview's directors,
officers, employees and other agents to the maximum extent permitted by
Delaware Law. In addition, Preview has entered into indemnification agreements
(Exhibit 10.1 hereto) with its officers and directors. The underwriting
agreement (Exhibit 1.1 hereto) also provides for cross-indemnification among
Preview and the underwriters with respect to certain matters, including matters
arising under the Securities Act.

Item 15. Recent Sales of Unregistered Securities

    (a)Since July 1996, we and our predecessors, Preview Software and Portland
Software, have sold and issued the following unregistered securities (giving
effect to the conversion of the equity securities of Preview Software and
Portland Software after the mergers of these two companies in August 1998):

    1. In October 1996, Portland Software issued and sold 217,236 shares of
  its series A preferred stock to seven investors for aggregate
  consideration of $2,800,000.

    2. In December 1996 and September 1997, Preview Software issued and sold
  573,500 shares of its series A preferred stock to 12 investors for
  aggregate consideration of $573,000.

    3. In August and September 1997, Portland Software issued and sold
  620,675 shares of its series B preferred stock to 15 investors for
  aggregate consideration of $8,000,000. In connection with this financing,
  Portland Software also issued warrants to purchase an aggregate of 217,233
  shares of series B preferred stock to these same 15 investors at an
  exercise price of $6.68 per share.

                                      II-1
4. In September 1997, Preview Software issued and sold 352,500 shares of
  series B preferred stock to 13 investors for aggregate consideration of
  $705,000.

    5. In October 1997, Preview Software issued and sold 1,250,000 shares of
  its series C preferred stock to nine investors for aggregate consideration
  of $4,000,000. In connection with this financing, Preview Software also
  issued warrants to purchase 25,430 shares of series C preferred stock at
  an exercise price of $3.20 per share to six of these same investors.

    6. In April 1998, Preview Software issued and sold 299,401 shares of
  series D preferred stock to 17 investors for aggregate consideration of
  $2,000,000.

    7. In August 1998, in connection with the mergers of Portland Software
  and Preview Software, we issued 2,671,032 shares of common stock,
  3,313,307 shares of preferred stock and assumed warrants to purchase
  171,746 shares of our common stock and 242,663 shares of our preferred
  stock. We also assumed outstanding options to purchase 1,060,443 shares of
  common stock. The aggregate purchase price for all of these shares was
  paid in shares of Portland Software and Preview Software in connection
  with the merger. The exchange ratio for Preview Software capital stock was
  1 for 1. The exchange ratio for Portland Software capital stock was
  0.518263943 for 1.

    8. In September and October 1998, we issued and sold 1,162,518 shares of
  series F preferred stock to 37 investors for aggregate consideration of
  $5,812,592.

    9. In November 1998, we issued a warrant to purchase 2,700 shares of
  series F preferred stock at an exercise price of $5.00 to FirstCorp.

    10. In July 1999, we issued and sold 4,312,448 shares of series G
  preferred stock to 39 investors for aggregate consideration of
  $28,979,682. In connection with this financing, we also issued a warrant
  to purchase 76,682 shares of series G preferred stock at an exercise price
  of $6.72 per share to BancBoston Robertson Stephens, Inc.

    11. From inception to July 31, 1999, we and our predecessors granted
  options and stock purchase rights to purchase an aggregate of 3,274,147
  shares of common stock to our employees, directors and consultants with
  exercise prices ranging from $.50 to $8.40. As of July 31, 1999, we had
  outstanding options for the purchase of 2,331,840 shares and no
  outstanding stock purchase rights.

    (b)There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).

    The issuances of the securities listed in Item 15(a)(7) above were deemed
to be exempt from registration under the Securities Act in reliance upon
Section 3(a)(10) of the Securities Act. In addition, the issuances described in
Item 15 (a)(11) were deemed exempt from registration under the Securities Act
in reliance upon Rule 701 promulgated under the Securities Act. The issuances
of the other above-referenced securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such
Securities Act as transactions by an issuer not involving any public offering.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and warrants issued in such
transactions. All recipients had adequate access, through their relationships
with Preview and its predecessors, to information about Preview and its
predecessors.

                                      II-2
Item 16. Exhibits and Financial Statement Schedules

    (a)Exhibits
Exhibit
   No.  Description
 ------------------
1.1*   Form of Underwriting Agreement.

   3.1    Fourth Amended and Restated Certificate of Incorporation, as
          currently in effect.

   3.2    Form of Fifth Amended and Restated Certificate of Incorporation, to
          be filed and become effective prior to the completion of this
          offering.

   3.3    Form of Sixth Amended and Restated Certificate of Incorporation, to
          be filed and become effective upon the completion of this offering.

   3.4    Bylaws, as currently in effect.

   3.5    Form of Amended and Restated Bylaws, to become effective upon the
          completion of this offering.

   4.1*   Form of Common Stock Certificate.

   5.1*   Opinion of Venture Law Group, A Professional Corporation.

  10.1    Form of Indemnification Agreement.

  10.2    Portland Software Amended and Restated 1994 Stock Option Plan,
          including form of stock option agreement.

  10.3    Preview Software 1997 Stock Option Plan, as amended, including form
          of stock option agreement.

  10.4    Preview Software New 1997 Stock Option Plan, as amended, including
          form of stock option agreement.

  10.5    Preview Systems 1998 Stock Option Plan as amended, including form of
          stock option agreement.

  10.6    Preview Systems 1999 Directors' Stock Option Plan, including form of
          stock option agreement.

  10.7    Preview Systems 1999 Employee Stock Purchase Plan, including form of
          subscription agreement.

  10.8*   (a) Second Amended and Restated Rights Agreement between Preview
          Systems and certain holders of our securities dated July 2, 1999.

          (b) Amendment to Second Amended and Restated Rights Agreement between
          Preview Systems and certain holders of our securities dated September
          14, 1999.

  10.9    Common Stock Purchase Agreement between Preview Systems and Vincent
          Pluvinage dated July 5, 1999.

 10.10    Common Stock Purchase Agreement between Preview Systems and Brad
          Solso dated July 6, 1999.

 10.11    (a) One Thousand Broadway Building Lease Agreement between Portland
          Software and One Thousand Broadway Building Limited Partnership dated
          July 3, 1996.

          (b) 1000 Broadway Building First Lease Amendment between Portland
          Software and 1000 Broadway Building LP dated August 14, 1996.

          (c) First Amendment to One Thousand Broadway Building Lease Agreement
          between Portland Software and One Thousand Broadway Building Limited
          Partnership dated November 26, 1996.

          (d) Second Amendment to One Thousand Broadway Building Lease
          Agreement between Portland Software and One Thousand Broadway
          Building Limited Partnership dated November 9, 1997.

 10.12    (a) Standard Office Lease--Gross between Preview Software and South
          Bay/Copley Venture, Inc. dated September 5, 1997.

          (b) First Amendment to Lease between Preview Software and South
          Bay/Copley Venture, Inc. dated November 25, 1997.
II-3
Exhibit
   No.  Description
 ------------------
(c) Second Amendment to Lease Agreement between Preview Software and
          Limar Realty Corp. #26 dated August 26, 1998.

 10.13    (a) Loan and Security Agreement between Silicon Valley Bank and
          Preview Systems dated
          November 2, 1998.

          (b) Loan Modification Agreement between Silicon Valley Bank and
          Preview Systems dated July 1, 1999.

 10.14+*  ZipLock ESD System License Agreement between Preview Systems and
          Ingram Micro Inc., dated June 30, 1999.

 10.15+*  License Agreement between Preview Systems and Sony Marketing of Japan,
          dated as of September 29, 1998.

 10.16    Agreement and Plan of Reorganization by and among Preview Systems,
          Preview Software, Portland Software, Preview Acquisition Corp. and
          Portland Acquisition Corp. dated as of May 28, 1998.

 10.17    Series G Preferred Stock Purchase Agreement between Preview Systems
          and certain investors dated as of July 2, 1999.

 10.18    Series F Preferred Stock Purchase Agreement between Preview Systems
          and certain investors dated as of September 15, 1998.

 10.19    Series D Preferred Stock Purchase Agreement between Preview Software
          and certain investors dated as of April 21, 1998.

 10.20    Pledge Agreement between Preview Systems Inc. and Vincent Pluvinage
          dated September 14, 1998.

  21.1    Subsidiaries of Preview Systems.

  23.1    Consent of Arthur Andersen LLP.

  23.2    Consent of KPMG LLP.

  23.3*   Consent of Counsel (See Exhibit 5.1).

  24.1    Power of Attorney (See Page II-6).

  27.1    Financial Data Schedule, December 31, 1998.

  27.2    Financial Data Schedule, June 30, 1999.
--------
 *To be filed by amendment.
 +Confidential treatment requested as to certain portions of this exhibit.

    (b)Financial Statement Schedules

    All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or
notes thereto.

Item 17. Undertakings

    The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

    Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a

                                      II-4
director, officer, or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

    The undersigned registrant hereby undertakes that:

      (1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

      (2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

                                      II-5
SIGNATURES

    Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Cupertino, State of
California on September 16, 1999.

                                          PREVIEW SYSTEMS, INC.

                                                    /s/ Dr. Vincent Pluvinage
                                          By:
                                             ----------------------------------
                                                   Dr. Vincent Pluvinage
                                               President and Chief Executive
                                                          Officer

                               POWER OF ATTORNEY

    KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, Vincent
Pluvinage and G. Bradford Solso and each of them, as his or her attorney-in-
fact, with full power of substitution, for him or her in any and all
capacities, to sign any and all amendments to this Registration Statement
(including post-effective amendments), and any and all Registration Statements
filed pursuant to Rule 462 under the Securities Act of 1933, as amended, in
connection with or related to the offering contemplated by this Registration
Statement and its amendments, if any, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorney to any and all amendments to said Registration
Statement.

    Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature                           Title                    Date
             ---------                           -----                    ----
/s/ Dr. Vincent Pluvinage       President, Chief Executive    September 16, 1999
____________________________________ Officer, Director
       Dr. Vincent Pluvinage

     /s/ Mr. G. Bradford Solso       Vice President, Chief         September 16, 1999
____________________________________ Financial Officer
       Mr. G. Bradford Solso

     /s/ Mr. Gerard H. Langeler      Chairman of the Board of      September 16, 1999
____________________________________ Directors
       Mr. Gerard H. Langeler

      /s/ Mr. Bruce R. Bourbon       Director                      September 16, 1999
____________________________________
        Mr. Bruce R. Bourbon

      /s/ Mr. Donald L. Lucas        Director                      September 16, 1999
____________________________________
        Mr. Donald L. Lucas

      /s/ Mr. Gary E. Rieschel       Director                      September 16, 1999
____________________________________
        Mr. Gary E. Rieschel

     /s/ Dr. R. Douglas Rivers       Director                      September 16, 1999
____________________________________
       Dr. R. Douglas Rivers

    /s/ Ms. Jo Ann Heidi Roizen      Director                      September 16, 1999
____________________________________
      Ms. Jo Ann Heidi Roizen
II-6
EXHIBIT INDEX
Exhibit
   No.  Description
 ------------------
1.1*   Form of Underwriting Agreement.

   3.1    Fourth Amended and Restated Certificate of Incorporation, as
          currently in effect.

   3.2    Form of Fifth Amended and Restated Certificate of Incorporation, to
          be filed and become effective prior to the completion of this
          offering.

   3.3    Form of Sixth Amended and Restated Certificate of Incorporation, to
          be filed and become effective upon the completion of this offering.

   3.4    Bylaws, as currently in effect.

   3.5    Form of Amended and Restated Bylaws, to become effective upon the
          completion of this offering.

   4.1*   Form of Common Stock Certificate.

   5.1*   Opinion of Venture Law Group, A Professional Corporation.

  10.1    Form of Indemnification Agreement.

  10.2    Portland Software Amended and Restated 1994 Stock Option Plan,
          including form of stock option agreement.

  10.3    Preview Software 1997 Stock Option Plan, as amended, including form
          of stock option agreement.

  10.4    Preview Software New 1997 Stock Option Plan, as amended, including
          form of stock option agreement.

  10.5    Preview Systems 1998 Stock Option Plan as amended, including form of
          stock option agreement.

  10.6    Preview Systems 1999 Directors' Stock Option Plan, including form of
          stock option agreement.

  10.7    Preview Systems 1999 Employee Stock Purchase Plan, including form of
          subscription agreement.

  10.8*   (a) Second Amended and Restated Rights Agreement between Preview
          Systems and certain holders of our securities dated July 2, 1999.

          (b) Amendment to Second Amended and Restated Rights Agreement between
          Preview Systems and certain holders of our securities dated September
          14, 1999.

  10.9    Common Stock Purchase Agreement between Preview Systems and Vincent
          Pluvinage dated
          July 5, 1999.

 10.10    Common Stock Purchase Agreement between Preview Systems and Brad
          Solso dated July 6, 1999.

 10.11    (a) One Thousand Broadway Building Lease Agreement between Portland
          Software and One Thousand Broadway Building Limited Partnership dated
          July 3, 1996.

          (b) 1000 Broadway Building First Lease Amendment between Portland
          Software and 1000 Broadway Building LP dated August 14, 1996.

          (c) First Amendment to One Thousand Broadway Building Lease Agreement
          between Portland Software and One Thousand Broadway Building Limited
          Partnership dated November 26, 1996.

          (d) Second Amendment to One Thousand Broadway Building Lease
          Agreement between Portland Software and One Thousand Broadway
          Building Limited Partnership dated November 9, 1997.

 10.12    (a) Standard Office Lease--Gross between Preview Software and South
          Bay/Copley Venture, Inc. dated September 5, 1997.

          (b) First Amendment to Lease between Preview Software and South
          Bay/Copley Venture, Inc. dated November 25, 1997.
Exhibit
   No.  Description
 ------------------
(c) Second Amendment to Lease Agreement between Preview Software and
          Limar Realty Corp. #26 dated August 26, 1998.

 10.13    (a) Loan and Security Agreement between Silicon Valley Bank and
          Preview Systems dated
          November 2, 1998.

          (b) Loan Modification Agreement between Silicon Valley Bank and
          Preview Systems dated July 1, 1999.

 10.14+*  ZipLock ESD System License Agreement between Preview Systems and
          Ingram Micro Inc., dated June 30, 1999.

 10.15+*  License Agreement between Preview Systems and Sony Marketing of Japan,
          dated as of September 29, 1998.

 10.16    Agreement and Plan of Reorganization by and among Preview Systems,
          Preview Software, Portland Software, Preview Acquisition Corp. and
          Portland Acquisition Corp. dated as of May 28, 1998.

 10.17    Series G Preferred Stock Purchase Agreement between Preview Systems
          and certain investors dated as of July 2, 1999.

 10.18    Series F Preferred Stock Purchase Agreement between Preview Systems
          and certain investors dated as of September 15, 1998.

 10.19    Series D Preferred Stock Purchase Agreement between Preview Software
          and certain investors dated as of April 21, 1998.

 10.20    Pledge Agreement between Preview Systems Inc. and Vincent Pluvinage
          dated September 14, 1998.

  21.1    Subsidiaries of Preview Systems.

  23.1    Consent of Arthur Andersen LLP.

  23.2    Consent of KPMG LLP.

  23.3*   Consent of Counsel (See Exhibit 5.1).

  24.1    Power of Attorney (See Page II-6).

  27.1    Financial Data Schedule, December 31, 1998.

  27.2    Financial Data Schedule, June 30, 1999.
--------
 *To be filed by amendment.
 +Confidential treatment requested as to certain portions of this exhibit.