<PAGE>   1
 
     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 1999
 
                                                     REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                           -------------------------
 
                                    FORM S-1
            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
                           -------------------------
 
                             SILKNET SOFTWARE, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                <C>                                <C>
             DELAWARE                             7372                            02-0478949
 (STATE OR OTHER JURISDICTION OF      (PRIMARY STANDARD INDUSTRIAL             (I.R.S. EMPLOYER
  INCORPORATION OR ORGANIZATION)      CLASSIFICATION CODE NUMBER)           IDENTIFICATION NUMBER)
</TABLE>
 
                           -------------------------
 
                             SILKNET SOFTWARE, INC.
 
                            50 PHILLIPPE COTE STREET
                 MANCHESTER, NEW HAMPSHIRE 03101 (603) 625-0070
         (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
            AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                           -------------------------
 
              JAMES C. WOOD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
 
                             SILKNET SOFTWARE, INC.
                            50 PHILLIPPE COTE STREET
                        MANCHESTER, NEW HAMPSHIRE 03101
                                 (603) 625-0070
           (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
                   INCLUDING AREA CODE, OF AGENT FOR SERVICE)
 
                                   COPIES TO:
 
<TABLE>
<S>                                                      <C>
                   JOHN HESSION, ESQ.                                    PATRICK J. RONDEAU, ESQ.
                BRIAN D. GOLDSTEIN, ESQ.                                    HALE AND DORR LLP
            TESTA, HURWITZ & THIBEAULT, LLP                                  60 STATE STREET
                    125 HIGH STREET                                    BOSTON, MASSACHUSETTS 02109
              BOSTON, MASSACHUSETTS 02110                                     (617) 526-6000
                     (617) 248-7000
</TABLE>
 
                           -------------------------
 
        APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
  As soon as practicable after this registration statement becomes effective.
 
    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, 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,
check the following box.  [ ]
                           -------------------------
 
                        CALCULATION OF REGISTRATION FEE
 
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
                                                          PROPOSED MAXIMUM
             TITLE OF EACH CLASS OF                           AGGREGATE                           AMOUNT OF
          SECURITIES TO BE REGISTERED                     OFFERING PRICE(1)                   REGISTRATION FEE
------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                                 <C>
Common Stock, $.01 par value                                 $34,500,000                          $9,591.00
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
(1) In accordance with Rule 457(o) under the Securities Act of 1933, the number
    of shares of common stock being registered and the proposed maximum offering
    price per share are not included in this table. Estimated solely for the
    purpose of calculating the registration fee in accordance with Rule 457(a)
    under the Securities Act of 1933.
                           -------------------------
     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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2
 
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 IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
 
                   SUBJECT TO COMPLETION, DATED MARCH 3, 1999
 
                                               SHARES
 
                                 [SILKNET LOGO]
 
                                  COMMON STOCK
 
                               ------------------
 
All of the shares of common stock being sold are being offered by Silknet. Prior
 to this offering, there has been no public market for the common stock. The
    initial public offering price is expected to be between $          and
      $          per share. Application has been made to list the common
      stock on The Nasdaq Stock Market's National Market under the symbol
                                    "SILK."
 
    Silknet has granted the underwriters an option to purchase a maximum of
 
     additional shares of common stock to cover over-allotments of shares.
 
             INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS.
                    SEE "RISK FACTORS" BEGINNING ON PAGE 5.
 
<TABLE>
<CAPTION>
                                                             UNDERWRITING
                                              PRICE TO       DISCOUNTS AND     PROCEEDS TO
                                               PUBLIC         COMMISSIONS        SILKNET
                                            -------------    -------------    -------------
<S>                                         <C>              <C>              <C>
Per Share.................................   $                $                $
Total.....................................   $                $                $
</TABLE>
 
     Delivery of the shares of common stock will be made on or about
             , 1999, against payment in immediately available funds.
 
     Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
 
CREDIT SUISSE FIRST BOSTON
             BANCBOSTON ROBERTSON STEPHENS
 
                           NATIONSBANC MONTGOMERY SECURITIES LLC
 
                                       FIRST UNION CAPITAL MARKETS CORP.
 
                      Prospectus dated              , 1999
<PAGE>   3
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
PROSPECTUS SUMMARY..........................................    3
RISK FACTORS................................................    5
USE OF PROCEEDS.............................................   16
DIVIDEND POLICY.............................................   16
CAPITALIZATION..............................................   17
DILUTION....................................................   18
SELECTED CONSOLIDATED FINANCIAL DATA........................   19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
  AND RESULTS OF OPERATIONS.................................   20
BUSINESS....................................................   31
MANAGEMENT..................................................   48
CERTAIN TRANSACTIONS........................................   53
PRINCIPAL STOCKHOLDERS......................................   55
DESCRIPTION OF CAPITAL STOCK................................   57
SHARES ELIGIBLE FOR FUTURE SALE.............................   62
UNDERWRITING................................................   65
NOTICE TO CANADIAN RESIDENTS................................   67
LEGAL MATTERS...............................................   68
EXPERTS.....................................................   68
CHANGE IN INDEPENDENT ACCOUNTANTS...........................   68
ADDITIONAL INFORMATION......................................   68
INDEX TO FINANCIAL STATEMENTS...............................  F-1
</TABLE>
 
                            ------------------------
 
     YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
 
                            ------------------------
 
     Until                (25 days after the commencement of this offering), 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 obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
 
                            ------------------------
 
     Silknet has applied for federal registration of the trademarks "Silknet"
and "Silknet" combined with the Silknet logo. Other trademarks or service marks
appearing in this prospectus are the property of their respective holders.
 
                                        2
<PAGE>   4
 
                               PROSPECTUS SUMMARY
 
     This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in the common stock. You should read the entire prospectus
carefully. Unless otherwise specified, all information in this prospectus
assumes no exercise of the underwriters' over-allotment option, reflects the
1-for-2 exchange of common stock and preferred stock pursuant to the
reincorporation of Silknet from New Hampshire to Delaware and reflects the
mandatory conversion into common stock of all outstanding shares of preferred
stock upon the closing of this offering.
 
                                    SILKNET
 
     We provide software that allows companies to offer personalized marketing,
sales, electronic commerce and customer support services through a single,
company-tailored Web site interface. Our products enable a company to deliver
these services to its customers over the Web through real-time collaboration and
customer self-service. Our products allow a company to coordinate its
interactions with customers by integrating a variety of communications media,
such as the Web, e-mail and the telephone. Our software can capture and
consolidate data derived from all these sources and distribute it throughout a
company and to its partners to provide a single view of a customer. This
solution is more efficient for a company and also more efficient for its
customers, creating a competitive advantage for that company.
 
     Accompanying the growth in the use of the Web has been a trend toward
customer self-service. Just as consumers have extensively used automated teller
machines rather than using the services of a bank teller, the Web now allows a
wide range of businesses the ability to offer electronic self-service to their
customers. For example, consumers are now shopping for goods and services and
seeking answers to customer service questions on their own from their computers
at any hour of the day. The Gartner Group estimates that by 2001 companies will
receive 25% of all customer contacts and inquiries over the Web and through
e-mail messages and other Web-based forms. Companies are using this Web-based
customer interaction to augment more traditional means of handling customer
service and commerce, such as telephone-based customer service. Rather than
replacing the technology systems designed to support telephone-based customer
service, companies are actively seeking ways to integrate their various forms of
customer interaction, such as Web communications, e-mail and the telephone.
Businesses are seeking solutions such as our products to coordinate these
various media and present a consistent interface to their customers for service
and commerce.
 
     Our customers include:
 
          - 3Com
          - Bank of America
          - Bell Advanced Communications
          - Cigna
          - Compaq
          - Inacom
          - KPMG Peat Marwick
          - Microsoft
          - Provident Bank
          - Sprint PCS
 
     Silknet was incorporated in New Hampshire on March 6, 1995 and was
reincorporated in Delaware on February 25, 1999. Our principal executive offices
are located at 50 Phillippe Cote Street, Manchester, New Hampshire 03101, and
our telephone number is (603) 625-0070.
 
                                        3
<PAGE>   5
 
                                  THE OFFERING
 
<TABLE>
<S>                                                             <C>
Common Stock offered........................................    shares
Common Stock to be outstanding after the offering...........    shares
Use of proceeds.............................................    For general corporate purposes,
                                                                including working capital.
Proposed Nasdaq National Market symbol......................    SILK
</TABLE>
 
                             SUMMARY FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding preferred stock into
common stock, as if the shares had converted immediately upon their issuance.
Accordingly, accrued dividends on preferred stock are not included in the
calculation of pro forma basic and diluted net loss per share.
 
<TABLE>
<CAPTION>
                                                                                  SIX MONTHS ENDED
                                                     YEAR ENDED JUNE 30,            DECEMBER 31,
                                                 ----------------------------    ------------------
                                                  1996      1997       1998       1997       1998
                                                 ------    -------    -------    -------    -------
                                                                                    (UNAUDITED)
<S>                                              <C>       <C>        <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Total revenue..................................  $  266    $   194    $ 3,647    $   636    $ 5,544
Total cost of revenue..........................     141        341      1,386        579      1,703
Gross margin...................................     125       (147)     2,261         57      3,841
Total operating expenses.......................     583      2,545      8,398      3,252      7,800
Operating loss.................................    (458)    (2,692)    (6,137)    (3,195)    (3,959)
Net loss.......................................    (465)    (2,753)    (6,003)    (3,130)    (3,809)
Net loss attributable to common stockholders...    (465)    (2,943)    (6,906)    (3,181)    (4,722)
Basic and diluted net loss per share...........  $(0.18)   $ (1.15)   $ (2.69)   $ (1.24)   $ (1.76)
Shares used in computing basic and diluted net
  loss per share...............................   2,551      2,557      2,566      2,558      2,675
Unaudited pro forma basic and diluted net loss
  per share....................................  $(0.18)   $ (0.63)   $ (0.76)   $ (0.42)   $ (0.36)
Shares used in computing unaudited pro forma
  basic and diluted net loss per share.........   2,551      4,398      7,879      7,422     10,629
</TABLE>
 
     The pro forma as adjusted balance sheet data as of December 31, 1998 gives
effect to the conversion of all outstanding preferred stock into common stock
and has been adjusted to give effect to the sale of                shares of
common stock offered hereby at an assumed initial public offering price of
$     per share, after deducting estimated underwriting discounts and
commissions and offering expenses.
 
<TABLE>
<CAPTION>
                                                                               DECEMBER 31, 1998
                                                           JUNE 30,         ------------------------
                                                      ------------------                 PRO FORMA
                                                       1997       1998       ACTUAL     AS ADJUSTED
                                                      -------    -------    --------    ------------
                                                                                  (UNAUDITED)
<S>                                                   <C>        <C>        <C>         <C>
BALANCE SHEET DATA:
Cash and cash equivalents...........................  $ 4,752    $ 9,045    $  4,585        $
Working capital.....................................    4,155      8,472       4,477
Total assets........................................    5,402     12,129      10,598
Note payable to bank................................      115        222         156         156
Total convertible participating preferred stock.....    7,432     19,107      20,021          --
Total stockholders' equity (deficit)................   (2,834)    (9,587)    (14,168)
</TABLE>
 
                                        4
<PAGE>   6
 
                                  RISK FACTORS
 
     This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus before
deciding to invest in shares of our common stock.
 
RISKS RELATED TO OUR BUSINESS
 
WE HAVE A LIMITED OPERATING
HISTORY ON WHICH TO
EVALUATE
OUR PROSPECTS                    We commenced operations in March 1995 and we
                                 recorded our first license revenue upon
                                 delivery of Silknet eService in beta version to
                                 customers in January 1997. Accordingly, we have
                                 only a limited operating history on which you
                                 can base your evaluation of our business and
                                 prospects. In addition, because we are in an
                                 early stage of development in a new and rapidly
                                 evolving market, our prospects are difficult to
                                 predict and may change rapidly and without
                                 warning.
 
WE HAVE INCURRED
SUBSTANTIAL
OPERATING LOSSES AND WE MAY
NOT BE PROFITABLE IN THE
FUTURE                           Since we began operations, we have incurred
                                 substantial operating losses in every fiscal
                                 period. We cannot be certain if or when we will
                                 become profitable. Failure to achieve
                                 profitability within the timeframe expected by
                                 investors may adversely affect the market price
                                 of our common stock. As a result of accumulated
                                 operating losses, at December 31, 1998, we had
                                 an accumulated deficit of $13.1 million. We
                                 have generated relatively small amounts of
                                 revenue, while increasing expenditures in all
                                 areas, particularly in research and development
                                 and sales and marketing, in order to execute
                                 our business plan. Although we have experienced
                                 revenue growth in recent periods, the growth
                                 has been from a limited base of historical
                                 revenue, and it is unlikely that such growth
                                 rates are sustainable.
 
OUR QUARTERLY OPERATING
RESULTS
DEPEND ON A SMALL NUMBER OF
LARGE ORDERS                     We derive a significant portion of our software
                                 license revenue in each quarter from a small
                                 number of relatively large orders. Our
                                 operating results for a particular fiscal
                                 period could be materially adversely affected
                                 if we are unable to complete one or more
                                 substantial license sales planned for that
                                 period. In each of the last eight quarters, we
                                 had at least one customer that accounted for
                                 more than 30% of total revenue in that quarter.
                                 In addition, the purchase and implementation of
                                 our products typically involve a significant
                                 cost to our customers (including the purchase
                                 of related hardware and software, as well as
                                 training and integration costs) and a
                                 substantial commitment of resources by our
                                 customers or their consultants over an extended
                                 period of time. As a result, our sales cycle is
                                 relatively long.
 
                                 In addition, our services revenue increased
                                 significantly between the quarter ended
                                 September 30, 1998 and the quarter ended
                                 December 31, 1998, primarily due to significant
                                 consulting and implementation services
                                 performed for one customer. Investors should
                                 not expect a commensurate increase in services
                                 revenue between future quarters. See
 
                                        5
<PAGE>   7
 
                                 "Management's Discussion and Analysis of
                                 Financial Condition and Results of Operations."
 
OUR QUARTERLY OPERATING
RESULTS
MAY FAIL TO MEET
EXPECTATIONS
OF INVESTORS OR SECURITIES
ANALYSTS                         Our quarterly revenue and operating results are
                                 difficult to predict and may fluctuate
                                 significantly from quarter to quarter. If our
                                 quarterly revenue or operating results fall
                                 below the expectations of investors or
                                 securities analysts, the price of our common
                                 stock could fall substantially.
 
                                 Our quarterly revenue may fluctuate as a result
                                 of a variety of factors, many of which are
                                 outside our control, including the following:
 
                                      - the market for interactive, Web-based
                                        electronic business solutions is in an
                                        early stage of development and it is
                                        therefore difficult to accurately
                                        predict customer demand; and
 
                                      - the sales cycle for our products and
                                        services varies substantially from
                                        customer to customer, and we expect the
                                        sales cycle to be long. As a result, we
                                        have difficulty determining whether and
                                        when we will receive license revenue
                                        from a particular customer.
 
                                 In addition, because our revenue from
                                 implementation, maintenance and training
                                 services is largely correlated with our license
                                 revenue, a decline in license revenue could
                                 also cause a decline in our services revenue in
                                 the same quarter or in subsequent quarters.
 
                                 Most of our expenses, such as employee
                                 compensation and rent, are relatively fixed in
                                 the short term. Moreover, our expense levels
                                 are based, in part, on our expectations
                                 regarding future revenue levels. As a result,
                                 if revenue for a particular quarter is below
                                 our expectations, we could not proportionately
                                 reduce operating expenses for that quarter, and
                                 therefore this revenue shortfall would have a
                                 disproportionate effect on our expected
                                 operating results for that quarter.
 
OUR BUSINESS DEPENDS ON THE
DEVELOPMENT OF A NEW MARKET
AND THE CONTINUED GROWTH
AND COMMERCIAL ACCEPTANCE
OF THE WEB                       Our products address a new and emerging market
                                 for Web-based, interactive electronic business
                                 solutions. The failure of this market to
                                 develop, or a delay in the development of this
                                 market, would have a material adverse effect on
                                 our business, financial condition and operating
                                 results. Our future success also depends
                                 substantially upon the widespread adoption of
                                 the Web as a primary medium for commerce and
                                 business applications. If the Web does not
                                 continue to increase in importance as a
                                 commercial medium, our business, operating
                                 results and financial condition would be
                                 materially adversely affected. The Web has
                                 experienced, and is expected to continue to
                                 experience, significant user and traffic
                                 growth, which has, at times, caused user
                                 frustration with slow access and download
                                 times. The Web infrastructure may not be able
                                 to support the demands placed on it by the
                                 continued growth upon which our success
                                 depends. Moreover, critical issues
 
                                        6
<PAGE>   8
 
                                 concerning the commercial use of the Web, such
                                 as security, reliability, cost, accessibility
                                 and quality of service, remain unresolved and
                                 may negatively affect the growth of Web use or
                                 the attractiveness of commerce and business
                                 communication over the Web. In addition, the
                                 Web could lose its viability due to delays in
                                 the development or adoption of new standards
                                 and protocols to handle increased activity or
                                 due to increased government regulation and
                                 taxation of Internet commerce.
 
GOVERNMENT LAWS AND
REGULATIONS COULD LIMIT THE
MARKET FOR OUR PRODUCTS AND
SERVICES                         Federal, state or foreign agencies may adopt
                                 laws or regulations affecting the use of the
                                 Web as a commercial medium. If enacted, these
                                 laws or regulations could limit the market for
                                 our products, which could materially adversely
                                 affect our business, financial condition and
                                 operating results. Although many of these laws
                                 or regulations may not apply to our business
                                 directly, we expect that laws and regulations
                                 relating to user privacy, pricing, content and
                                 quality of products and services could
                                 indirectly affect our business. It is possible
                                 that these laws or regulations could expose
                                 companies involved in Web commerce to
                                 liability, which could limit the growth of Web
                                 commerce generally.
 
WE FACE SIGNIFICANT
COMPETITION
FROM OTHER TECHNOLOGY
COMPANIES                        The market for interactive, Web-based
                                 electronic business solutions is intensely
                                 competitive. If we are unable to compete
                                 effectively, our business, financial condition
                                 and operating results would be materially
                                 adversely affected. Many of our current and
                                 potential competitors have longer operating
                                 histories, greater name recognition and
                                 substantially greater financial, technical,
                                 marketing, management, service, support and
                                 other resources than we do. Therefore, they may
                                 be able to respond more quickly than we can to
                                 new or changing opportunities, technologies,
                                 standards or customer requirements.
 
                                 We expect that additional competitors will
                                 enter the market with competing products as the
                                 size and visibility of the market opportunity
                                 increases. We also expect that competition will
                                 increase as a result of software industry
                                 consolidations and formations of alliances
                                 among industry participants. Increased
                                 competition could result in pricing pressures,
                                 reduced margins or the failure of our products
                                 to achieve or maintain market acceptance.
 
                                 New technologies will likely increase the
                                 competitive pressures that we face. The
                                 development of competing technologies by market
                                 participants or the emergence of new industry
                                 standards may adversely affect our competitive
                                 position. As a result of these and other
                                 factors, we may not be able to compete
                                 effectively with current or future competitors,
                                 which would have a material adverse effect on
                                 our business, operating results and financial
                                 condition. See "Business -- Competition."
 
                                        7
<PAGE>   9
 
OUR SUCCESS DEPENDS ON OUR
ABILITY TO EXPAND
RELATIONSHIPS
WITH SYSTEMS INTEGRATORS
AND
CONSULTING FIRMS                 To increase our revenue and implementation
                                 capabilities, we must develop and expand
                                 relationships with systems integrators and
                                 consulting firms. A failure to do so could have
                                 a material adverse effect on our business,
                                 operating results and financial condition. We
                                 rely on systems integrators and consulting
                                 firms to recommend our products to their
                                 clients and to install and support our products
                                 for their clients. Systems integrators and
                                 consulting firms may develop, market or
                                 recommend software applications that compete
                                 with our products. Moreover, if these firms
                                 fail to implement our products successfully for
                                 their clients, we may not have the resources to
                                 implement our products on the schedule required
                                 by the client, which could have a material
                                 adverse effect on our business, operating
                                 results and financial condition.
 
OUR SUCCESS DEPENDS ON OUR
ABILITY TO EXPAND OUR
DIRECT
SALES FORCE AND THIRD-PARTY
DISTRIBUTION CHANNELS            To increase our revenue, we must increase the
                                 size of our direct sales force and the number
                                 of our indirect marketing and distribution
                                 partners, including software and hardware
                                 vendors and resellers. A failure to do so could
                                 have a material adverse effect on our business,
                                 operating results and financial condition.
                                 There is intense competition for sales
                                 personnel in our business, and we may not be
                                 successful in attracting, integrating,
                                 motivating or retaining new personnel for these
                                 positions. Our existing or future marketing and
                                 distribution partners may choose to devote
                                 greater resources to marketing and supporting
                                 the products of competitors.
 
OUR SUCCESS DEPENDS ON OUR
ABILITY TO ACHIEVE
PROFITABILITY
WITHIN OUR PROFESSIONAL
SERVICES
ORGANIZATION                     To date, our annual services costs have been
                                 significantly higher than our services revenue,
                                 and we expect that trend to continue for the
                                 foreseeable future. We cannot be certain that
                                 our professional services business will ever
                                 achieve or sustain profitability, and a failure
                                 to do so could have a material adverse effect
                                 on our business, operating results and
                                 financial condition. To gain initial acceptance
                                 of our products by customers in our targeted
                                 industries, we have assisted, and plan to
                                 continue to assist, customers with the
                                 implementation of our products, sometimes
                                 without compensation for some services on
                                 particular implementations.
 
WE MAY NOT BE ABLE TO
DEVELOP
NEW PRODUCTS OR ENHANCE
EXISTING PRODUCTS ON A
TIMELY
BASIS                            To be competitive, we must develop and
                                 introduce on a timely basis new products and
                                 product enhancements which meet the needs of
                                 companies seeking to deploy and manage
                                 electronic business applications over the Web.
                                 We have in the past failed to ship certain new
                                 products or product enhancements by our planned
                                 shipment date. If we fail to develop and
                                 introduce new products and enhancements
                                 successfully and on a timely basis, it could
                                 have a material adverse effect on our business,
                                 operating results and financial condition.
 
FAILURE TO PROPERLY MANAGE
GROWTH COULD ADVERSELY
AFFECT
OUR BUSINESS                     We have been experiencing a period of rapid
                                 growth that has been placing a significant
                                 strain on all of our resources. Our revenue
                                 increased 587% in the quarter ended December
                                 31,
 
                                        8
<PAGE>   10
 
                                 1998 from the same period the year earlier.
                                 From January 1, 1998 to December 31, 1998, the
                                 number of our employees increased from 55 to
                                 108. Additional growth may further strain our
                                 management, financial and other resources. To
                                 manage future growth effectively we must
                                 maintain and enhance our financial and
                                 accounting systems and controls, integrate new
                                 personnel and manage expanded operations. Any
                                 failure to do so could have a material adverse
                                 effect on the quality of our products, our
                                 ability to retain key personnel and our
                                 business, operating results and financial
                                 condition.
 
LOSS OF KEY PERSONNEL COULD
ADVERSELY AFFECT OUR
BUSINESS                         Our future success depends to a significant
                                 degree on the skills, experience and efforts of
                                 James C. Wood, our founder, Chairman of the
                                 Board, President and Chief Executive Officer.
                                 The loss of the services of Mr. Wood could have
                                 a material adverse effect on our business,
                                 operating results and financial condition. We
                                 also depend on the ability of our executive
                                 officers and other members of senior management
                                 to work effectively as a team. We do not have
                                 employment agreements with any of our executive
                                 officers, and the loss of one or more of our
                                 executive officers and other members of senior
                                 management could have a material adverse effect
                                 on our business, operating results and
                                 financial condition.
 
WE MUST HIRE AND RETAIN
SKILLED PERSONNEL IN A
TIGHT
LABOR MARKET                     Qualified personnel are in great demand
                                 throughout the software industry. The demand
                                 for qualified personnel is particularly acute
                                 in the New England area, due to the large
                                 number of software companies and the low
                                 unemployment in the region. Our success depends
                                 in large part upon our ability to attract,
                                 train, motivate and retain highly skilled
                                 employees, particularly sales and marketing
                                 personnel, software engineers and other senior
                                 personnel. Our failure to attract and retain
                                 the highly-trained technical personnel that are
                                 integral to our direct sales, product
                                 development, professional services and support
                                 teams may limit the rate at which we can
                                 generate sales and develop new products or
                                 product enhancements. This could have a
                                 material adverse effect on our business,
                                 operating results and financial condition.
 
OUR SUCCESS DEPENDS ON OUR
ABILITY TO PROTECT OUR
PROPRIETARY TECHNOLOGY
RIGHTS                           Our success depends to a significant degree
                                 upon the protection of our software and other
                                 proprietary technology rights. We rely on trade
                                 secret, copyright and trademark laws and
                                 confidentiality agreements with employees and
                                 third-parties, all of which offer only limited
                                 protection. Moreover, the laws of other
                                 countries in which we market our products may
                                 afford little or no effective protection of our
                                 proprietary technology. The reverse
                                 engineering, unauthorized copying or other
                                 misappropriation of our proprietary technology
                                 could enable third parties to benefit from our
                                 technology without paying us for it. This could
                                 have a material adverse effect on our business,
                                 operating results and financial condition. If
                                 we resort to legal proceedings to enforce our
                                 intellectual property rights, the proceedings
                                 could be burdensome and expensive
 
                                        9
<PAGE>   11
 
                                 and could involve a high degree of risk.
                                 Further, names such as eBusiness, eCommerce and
                                 eService are becoming widely used and
                                 descriptive. As a result, we do not expect to
                                 be able to prevent third parties from using
                                 these names for competing products. See
                                 "Business -- Intellectual Property and
                                 Proprietary Rights."
 
OTHER COMPANIES MAY CLAIM
THAT WE INFRINGE THEIR
INTELLECTUAL PROPERTY OR
PROPRIETARY RIGHTS               If any of our products violate third party
                                 proprietary rights, we may be required to
                                 reengineer our products or seek to obtain
                                 licenses from third parties to continue
                                 offering our products without substantial
                                 reengineering, and such efforts may not be
                                 successful. We do not conduct comprehensive
                                 patent searches to determine whether the
                                 technology used in our products infringes
                                 patents held by third parties. In addition,
                                 product development is inherently uncertain in
                                 a rapidly evolving technological environment in
                                 which there may be numerous patent applications
                                 pending, many of which are confidential when
                                 filed, with regard to similar technologies.
 
                                 We have applied for registration of some of our
                                 trademarks in the United States, Canada and the
                                 European Community. None of these applications
                                 has been approved. Our applications for the
                                 registration of "Silknet" and "Silknet"
                                 combined with the Silknet logo were denied in
                                 Canada because a company filed an earlier
                                 application for the use of "Silk" in connection
                                 with Internet information resource services. We
                                 have filed an appeal, but there can be no
                                 assurance that we will be able to register the
                                 trademark "Silknet" in Canada.
 
                                 Other companies have filed trademark
                                 applications for marks similar to the names of
                                 Silknet's products. For example, IBM has filed
                                 a trademark application for "e-Business" for
                                 use in creating, implementing and maintaining
                                 Web sites and integration of computer systems
                                 and networks. Silknet's use of "Silknet
                                 eBusiness System" could infringe the rights of
                                 IBM and other companies using a mark that
                                 contains "eBusiness." Silknet's use of
                                 "eBusiness," as well as the use of other names,
                                 may result in costly litigation, divert
                                 management's attention and resources, cause
                                 product shipment delays or require Silknet to
                                 pay damages and/or to enter into royalty or
                                 license agreements. There can be no assurance
                                 that a license agreement would be available to
                                 Silknet on any commercially reasonable terms,
                                 if at all, and Silknet may be required to stop
                                 using the name "eBusiness" or other names
                                 currently used for its products. Any of these
                                 events could have a material adverse effect on
                                 our business, operating results and financial
                                 condition. See "Business -- Intellectual
                                 Property and Proprietary Rights."
 
OUR BUSINESS COULD BE
ADVERSELY
AFFECTED IF OUR PRODUCTS
FAIL TO
PERFORM PROPERLY                 Software products as complex as ours may
                                 contain undetected errors or "bugs," which
                                 result in product failures, or otherwise fail
                                 to perform in accordance with customer
                                 expectations. Our products may be particularly
                                 susceptible to bugs or perform-
 
                                       10
<PAGE>   12
 
                                 ance degradation because of the emerging nature
                                 of Web technologies and the stress that may be
                                 placed on our products by the full deployment
                                 of our products over the Web to thousands of
                                 end-users. The Web has experienced, and is
                                 expected to continue to experience, significant
                                 user and traffic growth, which has, at times,
                                 caused user frustration with slow access and
                                 download times. Product performance problems
                                 could result in loss of or delay in revenue,
                                 loss of market share, failure to achieve market
                                 acceptance, diversion of development resources
                                 or injury to our reputation, any of which could
                                 have a material adverse effect on our business,
                                 operating results and financial condition.
                                 Prior to November 1998, we warranted some of
                                 our products for five years, providing
                                 customers a right to refund a portion of the
                                 license fee if we are unable to correct an
                                 error in the product. To date, no customer has
                                 requested a refund under the warranty
                                 provisions. However, if we are required to
                                 refund significant portions of license fees,
                                 our business, operating results and financial
                                 condition could be materially adversely
                                 affected.
 
WE COULD BE SUBJECT TO
PRODUCT
LIABILITY CLAIMS RELATING
TO OUR
CUSTOMERS' CRITICAL
BUSINESS
OPERATIONS                       Our products are critical to the operations of
                                 our customers' businesses. If one of our
                                 products fails, a customer may assert a claim
                                 for substantial damages against us, regardless
                                 of our responsibility for such failure.
                                 Although we maintain general liability
                                 insurance, including coverage for errors and
                                 omissions, there can be no assurance that such
                                 coverage will continue to be available on
                                 reasonable terms or will be available in
                                 amounts sufficient to cover one or more large
                                 claims, or that the insurer will not disclaim
                                 coverage as to any future claim.
 
WE MAY LOSE ACCESS TO
THIRD-PARTY TECHNOLOGY USED
IN
OUR PRODUCTS                     We incorporate into our products technology
                                 licensed from third parties, such as Microsoft
                                 Corporation. The loss of access to this
                                 technology could result in delays in the
                                 development and introduction of new products or
                                 enhancements until equivalent or replacement
                                 technology could be accessed, if available, or
                                 developed internally, if feasible. These delays
                                 could have a material adverse effect on our
                                 business, operating results and financial
                                 condition. It is possible that technology from
                                 others will not be available to us on
                                 commercially reasonable terms, if at all.
 
OUR SUCCESS DEPENDS ON OUR
ABILITY TO EXPAND AND
MANAGE
OUR INTERNATIONAL
OPERATIONS                       We expect international revenue to account for
                                 a significant percentage of total revenue in
                                 the future and we believe that we must continue
                                 to expand our international sales activities in
                                 order to be successful. Our international sales
                                 growth will be limited if we are unable to:
 
                                      - establish additional foreign operations;
 
                                      - expand international sales channel
                                        management and support organizations;
 
                                      - hire additional personnel;
 
                                      - customize products for local markets;
 
                                       11
<PAGE>   13
 
                                      - develop relationships with international
                                        service providers; or
 
                                      - establish relationships with additional
                                        distributors and systems integrators.
 
                                 Even if we are able to successfully expand our
                                 international operations, we cannot be certain
                                 that we will be able to maintain or increase
                                 international market demand for our products.
                                 International operations are generally subject
                                 to a number of risks, including:
 
                                      - expenses associated with customizing
                                        products for foreign countries;
 
                                      - challenges inherent in managing
                                        geographically dispersed operations;
 
                                      - protectionist laws and business
                                        practices that favor local competitors;
 
                                      - dependence on local vendors;
 
                                      - multiple, conflicting and changing
                                        governmental laws and regulations;
 
                                      - foreign currency exchange rate
                                        fluctuations; and
 
                                      - political and economic instability.
 
WE MAY BE SUBJECT TO RISKS
ASSOCIATED WITH FUTURE
ACQUISITIONS                     In the future, we may pursue acquisitions to
                                 obtain products, services and technologies that
                                 we believe will complement or enhance our
                                 current product or services offerings. At
                                 present, we have no agreements or other
                                 arrangements with respect to any acquisition.
                                 An acquisition may not produce the revenue,
                                 earnings or business synergies that we
                                 anticipated, and an acquired product, service
                                 or technology might not perform as we expected.
                                 If we pursue any acquisition, our management
                                 could spend a significant amount of time and
                                 effort in identifying and completing the
                                 acquisition and may be distracted from the
                                 operations of our business. If we complete an
                                 acquisition, we would probably have to devote a
                                 significant amount of management resources to
                                 integrating the acquired business with our
                                 existing business, and that integration may not
                                 be successful.
 
                                 To pay for an acquisition, we might use capital
                                 stock or cash, including proceeds of this
                                 offering. Alternatively, we might borrow money
                                 from a bank or other lender. If we use capital
                                 stock, our stockholders would experience
                                 dilution of their ownership interests. If we
                                 use cash or debt financing, our financial
                                 liquidity will be reduced.
 
WE MAY BE AFFECTED BY
UNEXPECTED YEAR 2000
TECHNOLOGY PROBLEMS              Many existing computer systems and software
                                 products do not properly recognize dates after
                                 December 31, 1999. This "Year 2000" problem
                                 could result in miscalculations, data
                                 corruption,
 
                                       12
<PAGE>   14
 
                                 system failures or disruptions of operations.
                                 We are subject to potential Year 2000 problems
                                 affecting our products, our customers' systems,
                                 our internal systems and the systems of our
                                 vendors, any of which could have a material
                                 adverse effect on our business, operating
                                 results and financial condition.
 
                                 Changing purchasing patterns of customers
                                 impacted by Year 2000 issues may result in
                                 reduced resources available for purchases of
                                 interactive electronic business solutions. In
                                 addition, there can be no assurance that Year
                                 2000 errors or defects will not be discovered
                                 in our internal software systems and, if such
                                 errors or defects are discovered, there can be
                                 no assurance that the costs of making such
                                 systems Year 2000 compliant will not be
                                 material.
 
                                 Year 2000 errors or defects in the internal
                                 systems maintained by our vendors could require
                                 us to incur significant unanticipated expenses
                                 to remedy any problems or replace affected
                                 vendors. See "Management's Discussion and
                                 Analysis and Results of Operations -- Year 2000
                                 Readiness Disclosure."
 
RISKS ASSOCIATED WITH THIS OFFERING OF OUR COMMON STOCK
 
THE PRICE OF OUR COMMON
STOCK
AFTER THIS OFFERING MAY BE
LOWER
THAN THE PRICE YOU PAY           Prior to this offering, there has been no
                                 public market for our common stock. After this
                                 offering, an active trading market in our stock
                                 might not develop or continue. If you purchase
                                 shares of our common stock in this offering,
                                 you will pay a price that was not established
                                 in a competitive market. Rather, you will pay a
                                 price that we negotiated with the
                                 representatives of the underwriters based upon
                                 several factors. See "Underwriting." The price
                                 of our common stock that will prevail in the
                                 market after this offering may be higher or
                                 lower than the price you pay.
 
                                 The stock market in general has recently
                                 experienced extreme price and volume
                                 fluctuations. In addition, the market prices of
                                 securities of technology companies,
                                 particularly Web-related companies, have been
                                 extremely volatile, and have experienced
                                 fluctuations that have often been unrelated or
                                 disproportionate to the operating performance
                                 of such companies. These broad market
                                 fluctuations could adversely affect the market
                                 price of our common stock.
 
                                 Recently, when the market price of a stock has
                                 been volatile, holders of that stock have
                                 occasionally instituted securities class action
                                 litigation against the company that issued the
                                 stock. If any of our stockholders brought such
                                 a lawsuit against us, even if the lawsuit is
                                 without merit, we could incur substantial costs
                                 defending the lawsuit. The lawsuit could also
                                 divert the time and attention of our
                                 management.
 
                                       13
<PAGE>   15
 
OUR EXECUTIVE OFFICERS AND
DIRECTORS WILL EXERCISE
SIGNIFICANT CONTROL OVER
SILKNET                          After this offering, our executive officers and
                                 directors and their affiliates will together
                                 control approximately      % of the outstanding
                                 common stock. As a result, these stockholders,
                                 if they act together, will be able to control
                                 all matters requiring stockholder approval,
                                 including the election of directors and
                                 approval of significant corporate transactions.
                                 This concentration of ownership may have the
                                 effect of delaying, preventing or deterring a
                                 change in control of Silknet, could deprive our
                                 stockholders of an opportunity to receive a
                                 premium for their common stock as part of a
                                 sale of Silknet and might affect the market
                                 price of our common stock.
 
CERTAIN PROVISIONS OF OUR
CHARTER AND OF DELAWARE LAW
MAKE A TAKEOVER OF SILKNET
MORE DIFFICULT                   Our corporate documents and Delaware law
                                 contain provisions that might enable our
                                 management to resist a takeover of Silknet.
                                 These provisions might discourage, delay or
                                 prevent a change in the control of Silknet or a
                                 change in our management. These provisions
                                 could also discourage proxy contests and make
                                 it more difficult for you and other
                                 stockholders to elect directors and take other
                                 corporate actions. The existence of these
                                 provisions could limit the price that investors
                                 might be willing to pay in the future for
                                 shares of common stock and could deprive our
                                 stockholders of an opportunity to receive a
                                 premium for their common stock as part of a
                                 sale of Silknet. See "Description of Capital
                                 Stock-Anti-Takeover Effects of Provisions of
                                 Silknet's Certificate of Incorporation and
                                 By-laws and Delaware Law."
 
FUTURE SALES BY EXISTING
SECURITY HOLDERS COULD
DEPRESS
THE MARKET PRICE OF THE
COMMON STOCK                     If our existing stockholders sell a large
                                 number of shares of our common stock, the
                                 market price of the common stock could decline
                                 significantly. Moreover, the perception in the
                                 public market that our existing stockholders
                                 might sell shares of common stock could depress
                                 the market price of the common stock.
                                 Immediately after this offering, approximately
                                      shares (including the      shares being
                                 sold in this offering) will be outstanding. Of
                                 these shares,      shares will be available for
                                 resale in the public market without restriction
                                 immediately following this offering. Of the
                                 additional           shares of our common stock
                                 which will be outstanding, approximately
                                 shares will become eligible for sale in the
                                 public market (subject to compliance with Rule
                                 144 in certain cases) upon the expiration of
                                 "lock-up" agreements with the Underwriters 180
                                 days after the date of this prospectus.
 
                                 Some of our existing stockholders have the
                                 right to require us to register their shares of
                                 common stock with the Securities and Exchange
                                 Commission. If we register their shares of
                                 common stock, they can freely sell those shares
                                 in the public market.
 
                                 After this offering, we intend to register
                                 approximately 4,091,900 shares of our common
                                 stock that we have issued or
 
                                       14
<PAGE>   16
 
                                 may issue under our stock plans. Once we
                                 register these shares, they can be freely sold
                                 in the public market upon issuance, subject to
                                 the "lock-up" agreements described above.
 
WE WILL HAVE BROAD
DISCRETION
IN USING THE PROCEEDS FROM
THIS
OFFERING                         We have not identified specific uses for the
                                 proceeds from this offering, and we will have
                                 broad discretion in how we use them. You will
                                 not have the opportunity to evaluate the
                                 economic, financial or other information on
                                 which we base our decisions on how to use the
                                 proceeds.
 
INVESTORS WILL EXPERIENCE
IMMEDIATE AND SUBSTANTIAL
DILUTION IN THE BOOK VALUE
OF
THEIR INVESTMENT                 If you purchase shares of our common stock in
                                 this offering, you will experience immediate
                                 and substantial dilution, in that the price you
                                 pay will be substantially greater than the net
                                 tangible book value per share of the shares you
                                 acquire. This dilution is due in large part to
                                 the fact that earlier investors in Silknet paid
                                 substantially less than the public offering
                                 price when they purchased their shares of
                                 common stock. You will experience additional
                                 dilution upon the exercise of outstanding stock
                                 options or warrants to purchase common stock.
 
               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
     Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this prospectus constitute
forward-looking statements. These statements relate to future events or our
future financial performance, and are identified by terminology such as "may,"
"will," "should," "expects," "scheduled," "plans," "intends," "anticipates,"
"believes," "estimates," "potential," or "continue" or the negative of such
terms or other comparable terminology. These statements are only predictions.
Actual events or results may differ materially. In evaluating these statements,
you should specifically consider various factors, including the risks outlined
under "Risk Factors." These factors may cause our actual results to differ
materially from any forward-looking statement.
 
     Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform such statements to actual results.
 
                                       15
<PAGE>   17
 
                                USE OF PROCEEDS
 
     The net proceeds to Silknet from the issuance and sale of the
          shares of common stock offered hereby are estimated to be
approximately $          million (approximately $          million if the
underwriters' over-allotment option is exercised in full), at an assumed initial
public offering price of $     per share, after deducting estimated underwriting
discounts and commissions and offering expenses. Silknet intends to use the
proceeds for general corporate purposes, including working capital, product
development and expansion of its international operations and sales and
marketing capabilities. A portion of the proceeds may also be used to acquire or
invest in complementary businesses or products or to obtain the right to use
complementary technologies. Silknet has no specific understandings, commitments
or agreements with respect to any such acquisition or investment. Pending such
uses, the proceeds of this offering will be invested in short-term,
interest-bearing, investment-grade securities, certificates of deposit or direct
or guaranteed obligations of the United States.
 
                                DIVIDEND POLICY
 
     Silknet has never declared or paid any cash dividends on its capital stock
and does not anticipate paying cash dividends in the foreseeable future. Silknet
currently intends to retain future earnings, if any, to fund the expansion and
growth of its business. Payment of future dividends, if any, will be at the
discretion of Silknet's Board of Directors after taking into account various
factors, including Silknet's financial condition, operating results, current and
anticipated cash needs and plans for expansion. Under the terms of Silknet's
line of credit, there are certain restrictions on Silknet's ability to declare
and pay dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
 
                                       16
<PAGE>   18
 
                                 CAPITALIZATION
 
     The following table sets forth the capitalization of Silknet as of December
31, 1998:
 
     - on an actual basis;
 
     - on a pro forma basis giving effect to the conversion of all outstanding
       shares of preferred stock into common stock; and
 
     - on a pro forma as adjusted basis to reflect the sale by Silknet of
                      shares of common stock offered hereby at an assumed
       initial public offering price of $     per share, after deducting
       estimated underwriting discounts and commissions and offering expenses.
 
This information should be read in conjunction with Silknet's consolidated
financial statements and notes thereto appearing elsewhere in this prospectus.
 
<TABLE>
<CAPTION>
                                                                          DECEMBER 31, 1998
                                                              -----------------------------------------
                                                                                            PRO FORMA
                                                               ACTUAL       PRO FORMA      AS ADJUSTED
                                                              ---------     ----------     ------------
                                                              (IN THOUSANDS, EXCEPT SHARE AND PER SHARE
                                                                                DATA)
                                                                                    (UNAUDITED)
<S>                                                           <C>           <C>            <C>
Note payable to bank, excluding current portion.............  $    156       $    156          $156
Convertible participating preferred stock, $.01 par value
  (1):
  Series A -- 2,364,584 shares authorized, issued and
    outstanding actual; none authorized, issued and
    outstanding pro forma and pro forma as adjusted.........     2,781             --            --
  Series B -- 2,500,000 shares authorized, issued and
    outstanding actual; none authorized, issued and
    outstanding pro forma and pro forma as adjusted.........     5,770             --            --
  Series C -- 3,089,157 shares authorized, issued and
    outstanding actual; none authorized, issued and
    outstanding pro forma and pro forma as adjusted.........    11,470             --            --
                                                              --------       --------          ----
         Total convertible participating preferred
           stock(2).........................................    20,021             --            --
                                                              --------       --------          ----
Stockholders' equity (deficit):
  Common stock, $.01 par value; 15,000,000 shares
    authorized, 2,716,650 shares issued outstanding actual;
    10,670,391 shares issued and outstanding pro forma;
    10,670,391 shares issued and outstanding pro forma as
    adjusted(1).............................................        27            107
  Additional paid-in capital................................     1,298         19,233
  Accumulated dividends on preferred stock(3)...............    (2,006)            --            --
  Deferred compensation.....................................      (398)          (398)         (398)
  Other comprehensive income................................         1              1             1
  Accumulated deficit.......................................   (13,091)       (13,091)
                                                              --------       --------          ----
Total stockholders' equity (deficit)........................  $(14,169)         5,852
                                                              --------       --------          ----
Total capitalization........................................  $  6,008       $  6,008          $
                                                              ========       ========          ====
</TABLE>
 
---------------
(1) On February 25, 1999, Silknet increased its authorized capital stock to
    50,000,000 shares of common stock and 15,000,000 shares of preferred stock.
 
(2) On February 26, 1999, Silknet issued 1,205,913 shares of Series D
    Convertible Preferred Stock at $7.324109 per share for total consideration
    of approximately $8.8 million. These shares will convert to 1,205,913 shares
    of common stock upon the closing of this offering. The Series D Convertible
    Preferred Stock has not been included in the above capitalization table.
 
(3) Upon conversion of the convertible participating preferred stock, all
    accrued dividends will be eliminated.
 
                                       17
<PAGE>   19
 
                                    DILUTION
 
     The pro forma net tangible book value of Silknet at December 31, 1998 was
$5,852,000, or $.55 per share of common stock. Pro forma net tangible book value
per share represents the amount of total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding after giving effect
to the conversion of all shares of preferred stock. After giving effect to the
sale of           shares of common stock offered hereby by Silknet at an assumed
initial public offering price of $     per share and after deducting estimated
underwriting discounts and commissions and offering expenses, Silknet's pro
forma net tangible book value as of December 31, 1998 would have been
approximately $     , or $     per share. This represents an immediate increase
in pro forma net tangible book value of $     per share to existing stockholders
and an immediate dilution of $     per share to new investors purchasing shares
of common stock in this offering. The following table illustrates this dilution:
 
<TABLE>
<S>                                                           <C>      <C>
Assumed initial public offering price per share.....................   $
  Pro forma net tangible book value per share at December
     31, 1998...............................................  $  .55
  Increase attributable to this offering....................
                                                              ------
Pro forma net tangible book value per share after this offering.....   $
                                                                       ------
Net tangible book value dilution per share to new investors in this
  offering..........................................................   $
                                                                       ======
</TABLE>
 
     The following table summarizes, as of December 31, 1998, on the pro forma
basis described above, the total number of shares purchased, the consideration
paid to Silknet and the average price per share paid by the existing
stockholders and by new investors purchasing shares of common stock in this
offering at an assumed initial public offering price of $     per share (before
deducting the estimated underwriting discounts and commissions and offering
expenses):
 
<TABLE>
<CAPTION>
                                         SHARES PURCHASED      TOTAL CONSIDERATION
                                       --------------------   ---------------------   AVERAGE PRICE
                                         NUMBER     PERCENT     AMOUNT      PERCENT     PER SHARE
                                       ----------   -------   -----------   -------   -------------
<S>                                    <C>          <C>       <C>           <C>       <C>
Existing stockholders................  10,670,391        %    $18,372,363        %        $1.72
New investors........................                    %    $                  %        $
                                       ----------     ---     -----------    ----
          Totals.....................                 100%                    100%
                                       ==========     ===     ===========    ====
</TABLE>
 
     As of December 31, 1998, there were (a) 732,451 shares of common stock
issuable upon exercise of outstanding stock options, at a weighted average
exercise price of $.43 per share; (b) 53,188 shares of common stock reserved for
issuance under Silknet's Employee Stock Option Plan; and (c) 750,000 shares of
common stock issuable under exercise of outstanding warrants, at a weighted
average exercise price of $1.80. In addition, in February 1999 Silknet adopted
the 1999 Stock Option and Incentive Plan, pursuant to which 1,000,000 shares of
common stock were initially reserved for issuance, the 1999 Employee Stock
Purchase Plan, pursuant to which 350,000 shares of common stock were reserved
for issuance, and the 1999 Non-Employee Director Stock Option Plan, pursuant to
which 350,000 shares of common stock were reserved for issuance. To the extent
that these options or warrants are exercised, there will be further dilution to
new investors. See "Management -- Stock Plans" and Note M to consolidated
financial statements.
 
                                       18
<PAGE>   20
 
                      SELECTED CONSOLIDATED FINANCIAL DATA
 
    The selected financial data set forth below should be read in conjunction
with Silknet's consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing elsewhere in this prospectus. The statement of operations
data for the years ended June 30, 1996, 1997 and 1998, and the balance sheet
data as of June 30, 1997 and 1998, are derived from, and are qualified by
reference to, audited consolidated financial statements included elsewhere in
this prospectus. The statement of operations data for the six months ended
December 31, 1997 and 1998 and the balance sheet data as of December 31, 1998
are derived from unaudited financial statements of Silknet appearing elsewhere
in this prospectus. The statement of operations data for the period from March
6, 1995 (date of inception) to June 30, 1995 and the balance sheet data as of
June 30, 1995 and 1996 are derived from unaudited consolidated financial
statements not included in this prospectus. The unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of Silknet's management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information set forth therein. The historical results
are not necessarily indicative of the operating results to be expected in the
future.
 
    Accrued dividends of convertible participating preferred stock are not
included in the calculation of pro forma basic and diluted net loss per share.
 
<TABLE>
<CAPTION>
                                                               PERIOD FROM                                   SIX MONTHS ENDED
                                                              MARCH 6, 1995        YEAR ENDED JUNE 30,         DECEMBER 31,
                                                              (INCEPTION) TO   ---------------------------   -----------------
                                                              JUNE 30, 1995     1996      1997      1998      1997      1998
                                                              --------------   ------   --------   -------   -------   -------
                                                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                               (UNAUDITED)                                      (UNAUDITED)
<S>                                                           <C>              <C>      <C>        <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
  License...................................................          --           --   $    75    $ 2,977   $   508   $ 3,689
  Services..................................................          --       $  266       119        670       128     1,855
                                                                  ------       ------   -------    -------   -------   -------
        Total revenue.......................................          --          266       194      3,647       636     5,544
                                                                  ------       ------   -------    -------   -------   -------
Cost of revenue:
  License...................................................          --           --        29         32         5       184
  Services..................................................          --          141       312      1,354       574     1,519
                                                                  ------       ------   -------    -------   -------   -------
        Total cost of revenue...............................          --          141       341      1,386       579     1,703
                                                                  ------       ------   -------    -------   -------   -------
Gross margin................................................          --          125      (147)     2,261        57     3,841
                                                                  ------       ------   -------    -------   -------   -------
Operating expenses:
  Sales and marketing.......................................          --           33       888      4,802     1,814     4,236
  Research and development..................................      $   26          120       961      2,409       944     2,274
  General and administrative................................          35          430       696      1,187       494     1,290
                                                                  ------       ------   -------    -------   -------   -------
        Total operating expenses............................          61          583     2,545      8,398     3,252     7,800
                                                                  ------       ------   -------    -------   -------   -------
Operating loss..............................................         (61)        (458)   (2,692)    (6,137)   (3,195)   (3,959)
Interest income (expense), net..............................          --           (7)      (61)       134        65       150
                                                                  ------       ------   -------    -------   -------   -------
Net loss....................................................         (61)        (465)   (2,753)    (6,003)   (3,130)   (3,809)
Accrued dividends for preferred stockholders................          --           --       190        903        51       913
                                                                  ------       ------   -------    -------   -------   -------
Net loss attributable to common stockholders................      $  (61)      $ (465)  $(2,943)   $(6,906)  $(3,181)  $(4,722)
                                                                  ======       ======   =======    =======   =======   =======
Basic and diluted net loss per share attributable to common
  stockholders..............................................      $(0.02)      $(0.18)  $ (1.15)   $ (2.69)  $ (1.24)  $ (1.76)
Shares used in computing basic and diluted net loss per
  share attributable to common stockholders.................       2,478        2,551     2,557      2,566     2,558     2,675
Unaudited pro forma basic and diluted net loss per share....       (0.02)       (0.18)    (0.63)     (0.76)    (0.42)    (0.36)
Shares used in computing unaudited pro forma basic and
  diluted net loss per share................................       2,478        2,551     4,398      7,879     7,422    10,629
</TABLE>
 
    The pro forma as adjusted balance sheet data as of December 31, 1998 gives
effect to the conversion of all outstanding preferred stock into common stock
upon the closing of this offering and has been adjusted to give effect to the
sale of               shares of common stock offered hereby at an assumed
initial public offering price of $    per share, after deducting estimated
underwriting discounts and commissions and offering expenses.
 
<TABLE>
<CAPTION>
                                                                                                     DECEMBER 31, 1998
                                                                          JUNE 30,               -------------------------
                                                              --------------------------------                  PRO FORMA
                                                              1995   1996     1997      1998       ACTUAL      AS ADJUSTED
                                                              ----   -----   -------   -------   -----------   -----------
                                                                                     (IN THOUSANDS)
                                                              (UNAUDITED)                               (UNAUDITED)
<S>                                                           <C>    <C>     <C>       <C>       <C>           <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................  $ 17   $  40   $ 4,752   $ 9,045    $  4,585        $
Working capital (deficit)...................................   (28)   (102)    4,155     8,472       4,477
Total assets................................................    64     170     5,402    12,129      10,598
Note payable to bank........................................    --      --       115       222         156         156
Total convertible participating preferred stock.............    --      --     7,432    19,107      20,021          --
Total stockholders' equity (deficit)........................    19     (34)   (2,834)   (9,587)    (14,168)
</TABLE>
 
                                       19
<PAGE>   21
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
     The following discussion and analysis of the financial condition and
results of operations of Silknet should be read in conjunction with "Selected
Consolidated Financial Data" and Silknet's consolidated financial statements and
notes thereto appearing elsewhere in this prospectus. This discussion and
analysis contains forward-looking statements that involve risks and
uncertainties. Silknet's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this prospectus.
 
OVERVIEW
 
     Silknet provides software that allows companies to offer personalized
marketing, sales, electronic commerce and customer support services through a
single, company-tailored Web site interface. Silknet's products enable a company
to deliver these services to its customers over the Web through real-time
collaboration and customer self-service. In January 1997, Silknet recorded its
first license revenue upon delivery of the beta version of its initial product,
Silknet eService, to customers. Silknet commercially released Silknet eService
in July 1997, and since that time has introduced Silknet eBusiness, Silknet
eCommerce, and Silknet eService Commerce Edition.
 
     In the fiscal years ended June 30, 1998 and 1997, Silknet's revenue was
derived principally from licenses for software products and from professional
services including consulting, training, implementation, technical support and
maintenance. Revenue from sales of licenses to use Silknet's software products
is recognized upon delivery of products to customers, provided no significant
post-delivery obligations or uncertainties remain and collection of the related
receivable is probable. License or services revenue subject to a significant
acceptance clause is deferred until acceptance is received from the customer.
Revenue under arrangements where multiple products or services are sold together
under one contract is allocated to each element based on its relative fair
value, with these fair values being determined using the price charged when that
element is sold separately. For agreements with specified upgrade rights, the
revenue related to those upgrade rights is deferred until the specified upgrade
is delivered. Revenue for consulting and training services is recognized as
services are provided, and revenue for maintenance services is recognized
ratably over the term of the service agreement.
 
     Silknet generates its license revenue through direct sales to its customers
and sales through its relationships with systems integrators and consulting
firms. International revenue generated to date has been insignificant.
 
     Silknet has only a limited operating history on which to base an evaluation
of its business and prospects. Silknet's prospects must be considered in light
of the risks and uncertainties encountered by companies in an early stage of
development in new and rapidly evolving markets. To address these risks, Silknet
must, among other things:
 
     - develop new products and product enhancements more rapidly than its
       competitors;
 
     - attract, integrate, motivate and train qualified personnel;
 
     - successfully implement its sales and marketing strategy; and
 
     - expand relationships with implementation partners and grow its internal
       services staff.
 
There can be no assurance that Silknet will succeed in addressing any or all of
these risks, and the failure to do so would have a material adverse effect on
Silknet's business, operating results and financial condition.
 
                                       20
<PAGE>   22
 
     Silknet has experienced substantial net losses since its inception, and as
of December 31, 1998, it had an accumulated deficit of $13.1 million. These net
losses and accumulated deficit resulted from Silknet's lack of substantial
revenue and the significant costs incurred in the development of its products
and in the establishment of its sales and marketing organization. Silknet
expects to increase its expenditures in all areas in order to execute its
business plan, particularly in research and development and sales and marketing.
The planned increase in sales and marketing expense will primarily result from
the hiring of additional sales force personnel and expansion of marketing
programs.
 
     Although Silknet has experienced revenue growth in recent periods, there
can be no assurance that such growth rates are sustainable, and therefore such
growth rates should not be considered indicative of future operating results.
There can also be no assurance that Silknet will be able to continue to increase
its revenue or attain profitability or, if increases in revenue and
profitability are achieved, that they can be sustained. Silknet believes that
period-to-period comparisons of its historical operating results are not
meaningful and should not be relied upon as an indication of future performance.
 
RESULTS OF OPERATIONS
 
     The following table sets forth for the periods indicated the percentage of
total revenue of certain line items included in Silknet's statements of
operations.
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED             SIX MONTHS ENDED
                                                     JUNE 30,                DECEMBER 31,
                                           ----------------------------    -----------------
                                            1996       1997       1998      1997       1998
                                           ------    --------    ------    -------    ------
<S>                                        <C>       <C>         <C>       <C>        <C>
Revenue:
  License................................      --        38.5%     81.6%     79.9%     66.5%
  Services...............................   100.0%       61.5      18.4      20.1      33.5
                                           ------    --------    ------    ------     -----
     Total revenue.......................   100.0       100.0     100.0     100.0     100.0
                                           ------    --------    ------    ------     -----
Cost of revenue:
  License................................      --        14.9       0.9       0.9       3.3
  Services...............................    53.0       160.9      37.1      90.2      27.4
                                           ------    --------    ------    ------     -----
     Total cost of revenue...............    53.0       175.8      38.0      91.1      30.7
                                           ------    --------    ------    ------     -----
Gross margin.............................    47.0       (75.8)     62.0       8.9      69.3
                                           ------    --------    ------    ------     -----
Operating expenses:
  Sales and marketing....................    12.4       458.4     131.7     285.1      76.4
  Research and development...............    45.0       496.0      66.0     148.4      41.0
  General and administrative.............   161.8       359.6      32.6      77.6      23.3
                                           ------    --------    ------    ------     -----
     Total operating expenses............   219.2     1,314.1     230.2     511.1     140.7
                                           ------    --------    ------    ------     -----
Operating loss...........................  (172.1)   (1,389.7)   (168.3)   (502.2)    (71.4)
Interest income (expense), net...........    (2.5)      (31.1)      3.7      10.4       2.7
                                           ------    --------    ------    ------     -----
Net loss.................................  (174.6)%  (1,420.9)%  (164.6)%  (491.8)%   (68.7)%
                                           ======    ========    ======    ======     =====
</TABLE>
 
                                       21
<PAGE>   23
 
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
 
  REVENUE
 
     Total revenue increased to $5.5 million for the six-month period ended
December 31, 1998 from $636,000 for the six-month period ended December 31,
1997.
 
     License Revenue.  License revenue increased to $3.7 million for the
six-month period ended December 31, 1998 from $508,000 for the six-month period
ended December 31, 1997. The increase was primarily due to an increase in the
number of licenses sold for Silknet eService, and other new products introduced
and shipped during the six months ended December 31, 1998. These new products
included a new version of Silknet eService and Silknet eBusiness System, which
was released in November 1998.
 
     Services Revenue.  Services revenue increased to $1.9 million for the
six-month period ended December 31, 1998 from $128,000 for the six-month period
ended December 31, 1997. Of this increase, $850,000 was attributable to a
consulting services project which was eventually completed in January 1999 and
$523,000 was related to maintenance contracts sold to Silknet's new customers.
The remaining increase was related to additional training and consulting
services sold to both new and existing customers. The total number of customers
increased to 24 as of December 31, 1998 from eight as of December 31, 1997.
 
  COST OF REVENUE
 
     Cost of License Revenue.  Cost of license revenue includes royalties paid
to third parties under technology license arrangements. Cost of license revenue
increased to $184,000, or 5.0% of license revenue, for the six-month period
ended December 31, 1998 from $5,000, or 1.1% of license revenue, for the
six-month period ended December 31, 1997. Silknet anticipates that the cost of
license revenue will continue to increase in absolute dollars. Cost of license
revenue as a percent of license revenue has varied in the past due to the timing
and volume of product sales and the nature of royalty agreements in place at the
time.
 
     Cost of Services Revenue.  Cost of services revenue consists primarily of
personnel costs. Cost of services revenue increased to $1.5 million, or 81.9% of
services revenue, for the six-month period ended December 31, 1998 from
$574,000, or 449.2% of services revenue, for the six-month period ended December
31, 1997. The dollar increase resulted primarily from the hiring of additional
employees and the use of contractors to support increased customer demand for
maintenance and consulting services. The number of customer services employees
increased to 18 as of December 31, 1998 from 10 as of December 31, 1997, and
Silknet anticipates that it will continue to increase the number of customer
service employees in 1999. The improvement in services gross margins to 18.1%
for the six-month period ended December 31, 1998 from a negative margin of
349.2% for the six-month period ended December 31, 1997 was primarily
attributable to the substantial growth in consulting and maintenance revenue
from Silknet's increased installed base. Silknet realized negative margin on
services revenue for several quarters prior to the six-month period ended
December 31, 1998 due to insufficient revenue to cover the cost of a growing
service department. The continued improvement in services gross margins is
contingent upon the future demand for the services offered by Silknet.
 
     Overall gross margins are primarily affected by the mix of license revenue
and services revenue. Silknet historically has realized higher gross margins on
license revenue than on services revenue. If services revenue increases as a
percentage of total revenue, Silknet's overall gross margins may be adversely
affected.
 
                                       22
<PAGE>   24
 
  OPERATING EXPENSES
 
     Sales and Marketing.  Sales and marketing expenses consist primarily of
employee salaries, commissions and costs associated with marketing programs,
such as trade shows, seminars, public relations and new product launches. Sales
and marketing expenses increased to $4.2 million, or 76.4% of total revenue, for
the six-month period ended December 31, 1998 from $1.8 million, or 285.1% of
total revenue, for the six-month period ended December 31, 1997. The increase
was primarily attributable to an increase in the number of direct sales,
pre-sales support and marketing employees to 31 as of December 31, 1998 from 12
as of December 31, 1997. To a lesser extent, the increase was related to an
increase in marketing programs, including trade shows and public relations
related to product launch activities. Sales and marketing expenses may continue
to increase in absolute dollars as Silknet continues to expand its marketing
programs and its sales force to support product launches and international
expansion.
 
     Research and Development.  Research and development expenses consist
primarily of employee salaries, fees for outside consultants and related costs
associated with the development of new products, the enhancement of existing
products, quality assurance, testing and documentation. Research and development
expenses increased to $2.3 million, or 41.0% of total revenue, for the six-
month period ended December 31, 1998 from $944,000, or 148.4% of total revenue,
for the six-month period ended December 31, 1997. The increase primarily
resulted from salaries associated with newly hired development personnel. The
number of research and development employees increased to 42 as of December 31,
1998 from 20 as of December 31, 1997 to support the development of new products.
Silknet anticipates that research and development expenses will continue to
increase in absolute dollars.
 
     General and Administrative.  General and administrative expenses consist
primarily of employee salaries and other personnel related costs for executive
and financial personnel, as well as legal, accounting and insurance costs.
General and administrative expenses increased to $1.3 million, or 23.3% of total
revenue, for the six-month period ended December 31, 1998 from $494,000, or
77.6% of total revenue, for the six-month period ended December 31, 1997.
Substantially all of the increase was due to salaries associated with newly
hired personnel and related costs required to manage Silknet's growth and
facilities expansion. The number of general and administrative employees
increased to 15 as of December 31, 1998 from six as of December 31, 1997.
Silknet expects that its general and administrative expenses will increase in
absolute dollars as it continues to expand its staffing to support expanded
operations and facilities and incurs expenses relating to its new
responsibilities as a public company.
 
     Interest Income (Expense), Net.  Interest income, net of interest expense,
increased to $151,000, or 2.7% of total revenue, for the six-month period ended
December 31, 1998 from $66,000, or 10.4% of total revenue, for the six-month
period ended December 31, 1997. The increase was primarily due to an increase in
Silknet's average cash balances related to capital financing activities.
 
     Provision for Income Taxes.  Silknet incurred aggregate operating losses of
$13.1 million from inception through December 31, 1998. Silknet has recorded a
valuation allowance for the full amount of its net deferred tax assets as the
future realization of the tax benefit is not sufficiently assured.
 
YEARS ENDED JUNE 30, 1998 AND 1997
 
  REVENUE
 
     Silknet's total revenue increased to $3.6 million for the period ended June
30, 1998 from $194,000 for the period ended June 30, 1997.
 
     License Revenue.  License revenue increased to $3.0 million for the year
ended June 30, 1998 from $75,000 for the year ended June 30, 1997. The increase
was primarily due to an increase in the
 
                                       23
<PAGE>   25
 
number of licenses sold for Silknet's first product, Silknet eService, which was
commercially released in July 1997, and new versions of products introduced and
shipped during the year ended June 30, 1998.
 
     Services Revenue.  Services revenue increased to $671,000 for the year
ended June 30, 1998 from $119,000 for the year ended June 30, 1997. The increase
related primarily to an increase in maintenance contracts and consulting
services sold to Silknet's new customers. The total number of customers
increased to 17 as of June 30, 1998 from two as of June 30, 1997.
 
  COST OF REVENUE
 
     Cost of License Revenue.  Cost of license revenue increased to $32,000, or
1.1% of license revenue, for the year ended June 30, 1998 from $29,000, or 38.8%
of license revenue, for the year ended June 30, 1997. The improvement in license
gross margin to 98.9% for the year ended June 30, 1998 from 61.2% for the year
ended June 30, 1997 was primarily attributable to increased license revenue.
 
     Cost of Services Revenue.  Cost of services revenue increased to $1.4
million, or 201.9% of services revenue, for the year ended June 30, 1998 from
$312,000, or 261.7% of services revenue, for the year ended June 30, 1997. The
dollar increase resulted primarily from an increase in the numbers of services
employees to 12 as of June 30, 1998 from six as of June 30, 1997, as well as
hiring consultants to supplement Silknet's internal workforce. During the years
ended June 30, 1998 and 1997, Silknet realized negative margins on services
revenue as a result of Silknet increasing the number of services employees.
 
  OPERATING EXPENSES
 
     Sales and Marketing.  Sales and marketing expenses increased to $4.8
million, or 131.7% of total revenue, for the year ended June 30, 1998 from
$888,000, or 458.4% of total revenue, for the year ended June 30, 1997. The
increase was primarily attributable to costs associated with an increase in
direct sales, pre-sales support and marketing employees to 25 as of June 30,
1998 from 10 as of June 30, 1997. Approximately $1.0 million of the remaining
increase was related to marketing programs, including trade shows and seminars
related to product launch activity during the year ended June 30, 1998.
 
     Research and Development.  Research and development expenses increased to
$2.4 million, or 66.0% of total revenue, for the year ended June 30, 1998 from
$961,000, or 496.0% of total revenue, for the year ended June 30, 1997. The
increase primarily resulted from an increase in the number of research and
development employees to 32 as of June 30, 1998 from 13 as of June 30, 1997 to
support the development of new products.
 
     General and Administrative.  General and administrative expenses increased
to $1.2 million, or 32.6% of total revenue, for the year ended June 30, 1998
from $697,000, or 359.6% of total revenue, for the year ended June 30, 1997.
Substantially all of the increase was due to salaries associated with an
increase in the number of general and administrative employees to 11 as of June
30, 1998 from six as of June 30, 1997, and the related costs required to manage
Silknet's growth.
 
     Interest Income (Expense), Net.  Interest income, net of interest expense,
increased to $134,000, or 3.7% of total revenue, for the year ended June 30,
1998 from a net expense of $60,000, or 31.1% of total revenue, for the year
ended June 30, 1997. The increase was primarily due to an increase in Silknet's
average cash balances resulting from capital financing activities combined with
a decrease in Silknet's debt obligations.
 
                                       24
<PAGE>   26
 
YEARS ENDED JUNE 30, 1997 AND 1996
 
  REVENUE
 
     License Revenue.  License revenue was $75,000 for the year ended June 30,
1997. The license revenue in fiscal 1997 was due to the introduction of
Silknet's first product, Silknet eService, which Silknet began shipping in beta
version in January 1997.
 
     Services Revenue.  Services revenue decreased to $119,000 for the year
ended June 30, 1997 from $266,000 for the year ended June 30, 1996. This
decrease was due to Silknet shifting its efforts from providing custom
development Web-related consulting services to providing services related to its
new Silknet eService product.
 
  COST OF REVENUE
 
     Cost of License Revenue.  Cost of license revenue was $29,000, or 38.8% of
license revenue, for the year ended June 30, 1997. For the year ended June 30,
1996, Silknet incurred no cost of license revenue.
 
     Cost of Services Revenue.  Cost of services revenue increased to $312,000,
or 261.7% of services revenue, for the year ended June 30, 1997 from $141,000,
or 53.0% of services revenue, for the year ended June 30, 1996. The increase
resulted primarily from an increase in the number of services employees to six
as of June 30, 1997 from one as of June 30, 1996.
 
  OPERATING EXPENSES
 
     Sales and Marketing.  Sales and marketing expenses increased to $888,000,
or 458.4% of total revenue, for the year ended June 30, 1997 from $33,000, or
12.4% of total revenue, for the year ended June 30, 1996. The increase was
primarily attributable to costs associated with an increase in the number of
direct sales, pre-sales support and marketing employees to 10 as of June 30,
1997 from zero as of June 30, 1996. The remaining increase was related to a
substantial expansion in marketing programs, including trade shows and seminars
related to product launch activities.
 
     Research and Development.  Research and development expenses increased to
$961,000, or 496.0% of total revenue, for the year ended June 30, 1997 from
$120,000, or 45.0% of total revenue, for the year ended June 30, 1996. The
increase primarily resulted from an increase in the number of research and
development employees to 13 as of June 30, 1997 from four as of June 30, 1996.
 
     General and Administrative.  General and administrative expenses increased
to $697,000, or 359.6% of total revenue, for the year ended June 30, 1997 from
$431,000, or 161.8% of total revenue, for the year ended June 30, 1996.
Substantially all of the increase was due to salaries associated with an
increase in the number of general and administrative employees to six as of June
30, 1997 from two as of June 30, 1996, and the related costs required to manage
Silknet's growth.
 
     Interest Income (Expense), Net.  Interest expense, net of interest income,
increased to $60,000, or 31.1% of total revenue, for the year ended June 30,
1997 from $7,000, or 2.5% of total revenue, for the year ended June 30, 1996.
The increase was primarily due to an increase in Silknet's average outstanding
debt obligations.
 
QUARTERLY RESULTS OF OPERATIONS
 
     The following tables set forth a summary of Silknet's unaudited quarterly
operating results for each of the eight quarters in the period ended December
31, 1998. This information has been derived from unaudited interim financial
statements that, in the opinion of management, have been prepared on a basis
consistent with the financial statements contained elsewhere in this prospectus
and include all adjustments, consisting of only normal recurring adjustments,
necessary for a fair statement of
 
                                       25
<PAGE>   27
 
such information when read in conjunction with Silknet's financial statements
and notes thereto. The operating results for any quarter are not necessarily
indicative of results for any future period.
 
<TABLE>
<CAPTION>
                                                                         QUARTER ENDED
                                   -----------------------------------------------------------------------------------------
                                   MAR. 31,    JUNE 30,    SEPT. 30,   DEC. 31,   MAR. 31,   JUNE 30,   SEPT. 30,   DEC. 31,
                                     1997        1997        1997        1997       1998       1998       1998        1998
                                   ---------   ---------   ---------   --------   --------   --------   ---------   --------
                                                                        (IN THOUSANDS)
<S>                                <C>         <C>         <C>         <C>        <C>        <C>        <C>         <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
  License........................  $      25   $      50    $   142    $   366    $ 1,218    $ 1,250     $ 1,648    $ 2,040
  Services.......................         14          14         17        111        240        303         621      1,234
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
    Total revenue................         39          64        159        477      1,458      1,553       2,269      3,274
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Cost of revenue:
  License........................         10          19          1          4         13         14          92         91
  Services.......................         95         152        237        337        327        453         538        981
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
    Total cost of revenue........        105         171        238        341        340        467         630      1,072
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Gross margin.....................        (66)       (107)       (79)       136      1,118      1,086       1,639      2,202
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Operating expenses:
  Sales and marketing............        313         503        832        982      1,209      1,779       1,892      2,343
  Research and development.......        322         345        443        501        651        813       1,005      1,270
  General and administrative.....        195         259        172        322        306        388         630        660
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
    Total operating expenses.....        830       1,107      1,447      1,805      2,166      2,980       3,527      4,273
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Operating loss...................       (896)     (1,214)    (1,526)    (1,669)    (1,048)    (1,894)     (1,888)    (2,071)
Interest income, net.............         12          11         45         21          4         64          91         59
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Net loss.........................  $    (884)  $  (1,203)   $(1,481)   $(1,648)   $(1,044)   $(1,830)    $(1,797)   $(2,012)
                                   =========   =========    =======    =======    =======    =======     =======    =======
AS A PERCENTAGE OF TOTAL REVENUE:
Revenue:
  License........................       64.1%       78.1%      89.3%      76.7%      83.5%      80.5%       72.6%      62.3%
  Services.......................       35.9        21.9       10.7       23.3       16.5       19.5        27.4       37.7
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
    Total revenue................      100.0       100.0      100.0      100.0      100.0      100.0       100.0      100.0
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Cost of Revenue:
  License........................       25.6        29.7        0.6        0.8        0.9        0.9         4.1        2.8
  Services.......................      243.6       237.5      149.1       70.7       22.4       29.2        23.7       29.9
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
    Total cost of revenue........      269.2       267.2      149.7       71.5       23.3       30.1        27.8       32.7
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Gross margin.....................     (169.2)     (167.2)     (49.7)      28.5       76.7       69.9        72.2       67.3
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Operating expenses:
  Sales and marketing............      802.6       785.9      523.3      205.9       82.9      114.6        83.4       71.6
  Research and development.......      825.6       539.1      278.6      105.0       44.7       52.4        44.3       38.8
  General and administrative.....      500.0       404.7      108.2       67.5       21.0       25.0        27.7       20.2
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
    Total operating expenses.....    2,128.2     1,729.7      910.1      378.4      148.6      192.0       155.4      130.6
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Operating loss...................   (2,297.4)   (1,896.9)    (959.8)    (349.9)     (71.9)    (122.1)      (83.2)     (63.3)
Interest income, net.............       30.7        17.2       28.3        4.4        0.3        4.1         4.0        1.8
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Net loss.........................   (2,266.7)%  (1,897.7)%   (931.5)%   (345.5)%    (71.6)%   (118.0)%     (79.2)%    (61.5)%
                                   =========   =========    =======    =======    =======    =======     =======    =======
</TABLE>
 
     Silknet has experienced significant fluctuations in revenues, expenses and
results of operations from quarter to quarter, and such fluctuations are likely
to continue. A significant portion of Silknet's revenue has been generated from
a limited number of customers and it is difficult to predict the timing of
future orders and shipment to these and other customers. Silknet anticipates
that its results of operations in any given period will continue to depend to a
significant extent upon sales to a small number of customers.
 
     Silknet has also experienced significant variations in its quarterly gross
margins. These fluctuations were caused by several factors. Silknet's gross
margins for license revenue have varied
 
                                       26
<PAGE>   28
 
due to the volume of revenue, the timing of recognition and the nature of
related royalty arrangements. Silknet's gross margins for services revenue have
varied due to the volume of services revenue, which is related to the changes in
the installed customer base, and the timing and number of additions in
professional services personnel and compensation and related costs.
 
     Silknet's expenditures for research and development have varied from
quarter to quarter primarily as a result of the timing and number of additions
of personnel and related compensation costs. Silknet's sales and marketing and
general and administrative expenses have generally increased on a quarterly
basis primarily as a result of the timing and number of additions in personnel
and compensation and related costs and the timing, number and significance of
specific marketing and sales activities, such as trade shows and other
promotional activities.
 
     In addition, a variety of factors, many of which are outside of Silknet's
control, may affect Silknet's quarterly operating results. These factors
include:
 
     - the evolution of the market for interactive Web-based electronic business
       solutions;
 
     - market acceptance of Silknet's products;
 
     - Silknet's success and timing in developing and introducing new products
       and enhancements to existing products;
 
     - market acceptance of products developed by competitors;
 
     - changes in pricing policies by Silknet or its competitors;
 
     - length of sales cycle;
 
     - changes in customer buying patterns;
 
     - market entry by new competitors;
 
     - general economic conditions; and
 
     - economic conditions specific to Internet-related industries.
 
     Silknet's limited operating history and the undeveloped nature of the
market for interactive, Web-based electronic business solutions make predicting
future revenue difficult. Silknet's expense levels are based, in part, on its
expectations regarding future revenue increases, and to a large extent such
expenses are fixed, particularly in the short term. There can be no assurance
that Silknet's expectations regarding future revenue are accurate. Moreover,
Silknet may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant shortfall of
revenue in relation to Silknet's expectations would likely cause significant
declines in Silknet's net income for that period.
 
     Due to the foregoing factors, Silknet's operating results are difficult to
forecast. Silknet believes that period-to-period comparisons of its historical
operating results are not meaningful and should not be relied upon as an
indication of future performance. Also, Silknet's operating results may fall
below its expectations or the expectations of securities analysts or investors
in some future quarter. In such event, the market price of Silknet's common
stock would likely be materially adversely affected.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Since its inception, Silknet has funded operations primarily through net
cash proceeds from private placements of preferred stock totaling $17.8 million
through December 31, 1998. As of December 31, 1998, Silknet had cash and cash
equivalents totaling $4.6 million. In February 1999, Silknet received gross
proceeds of approximately $8.8 million from the sale of 1,205,913 shares of
Series D Preferred Stock.
 
                                       27
<PAGE>   29
 
     Cash used for operating activities for the six-month period ended December
31, 1998 was $3.8 million, primarily due to a net loss of $3.8 million and an
increase in accounts receivable, partially offset by increases in accounts
payable, accrued expenses and deferred revenue. As of December 31, 1998,
accounts receivable included $2.5 million from one significant customer which
has since been collected. Cash used for operating activities for the year ended
June 30, 1998 was $5.7 million, primarily due to a net loss of $6.0 million and
an increase in accounts receivable, partially offset by increases in accounts
payable, accrued expenses and deferred revenue.
 
     Cash used for investing activities for the six-month period ended December
31, 1998 and the year ended June 30, 1998 was $577,000 and $1.0 million,
respectively. Investing activities for the periods were primarily purchases of
equipment, consisting largely of computer servers, workstations and networking
equipment.
 
     Cash used in financing activities for the six-months ended December 31,
1998 was $55,000 as a result of payments made on notes payable, partially offset
by proceeds received from the exercise of stock options. Cash provided by
financing activities for the year ended June 30, 1998 was $11.0 million,
primarily due to the issuance of preferred stock for net proceeds totaling $10.8
million.
 
     As of December 31, 1998 and June 30, 1998, Silknet's primary financial
commitments consisted of obligations outstanding under operating leases, and
notes payable under the equipment loan line of $328,000 and $471,000,
respectively.
 
     In March 1999, Silknet entered into a new line of credit with a bank which
allows Silknet to borrow up to $3.0 million for working capital purposes and for
the issuance of letters of credit. The line of credit expires in March 2000.
Amounts available under the line of credit are a function of eligible accounts
receivable and bear interest at the bank's prime rate (7.75% as of March 2,
1999) plus 0.5%. As of March 2, 1999, $3.0 million was available for borrowing.
 
     As of December 31, 1998, Silknet had net operating loss carryforwards of
approximately $12.4 million available for federal purposes to reduce future
taxable income expiring on various dates beginning in 2012. Under the provisions
of the Internal Revenue Code, certain substantial changes in Silknet's ownership
may have limited, or may limit in the future, the amount of net operating loss
carryforwards which could be utilized annually to offset future taxable income.
 
     Since its inception, Silknet has significantly increased its operating
expenses. Silknet anticipates that it will continue to experience significant
growth in its operating expenses for the foreseeable future and that its
operating expenses and capital expenditures will constitute a material use of
Silknet's cash resources. In addition, Silknet may utilize cash resources to
fund acquisitions or investments in businesses, technologies, products or
services that are complementary to Silknet's business. Silknet believes that the
net proceeds of this offering will be sufficient to meet its anticipated cash
requirements for working capital and capital expenditures for at least 12
months. Thereafter, if cash generated from operations is insufficient to satisfy
Silknet's liquidity requirements, Silknet may seek to sell additional equity or
debt securities, or obtain additional credit facilities. The issuance of
additional equity or convertible debt securities could result in additional
dilution to Silknet's stockholders. See "Risk Factors -- We may be subject to
risks associated with future acquisitions" and "-- We will have broad discretion
in using the proceeds from this offering."
 
YEAR 2000 READINESS DISCLOSURE
 
     Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to 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. The use of software and computer systems that are not Year 2000
ready could result in
 
                                       28
<PAGE>   30
 
system failures or miscalculations causing disruptions of operations including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities.
 
     The purchasing patterns of customers or potential customers may be affected
by Year 2000 issues as companies expend significant resources to make their
current systems Year 2000 ready. These expenditures may result in reduced funds
available for purchases of interactive, Web-based electronic business solutions,
which could have a material adverse effect on Silknet's business, operating
results and financial condition. Year 2000 complications may disrupt the
operations, viability or commercial acceptance of the Internet, which also could
have a material adverse impact on Silknet's business, operating results and
financial condition.
 
     Silknet has conducted a review of its products, including the third-party
products embedded into the products, and believes that they are substantially
Year 2000 ready. Silknet expects that modifications with respect to any
remaining Year 2000 issues will be made by the end of calendar year 1999.
Nevertheless, there can be no assurances that the implementation of
modifications to any embedded products will not be delayed or that Silknet will
not experience unexpected Year 2000 problems with its products.
 
     There is no assurance that other Web applications, database software or
computer hardware of Silknet's customers which interface with Silknet's products
(and which may be necessary in order to use Silknet's products) are Year 2000
ready. Therefore, there can also be no assurance that implementations of
Silknet's products on its customers' systems are, or will be, Year 2000 ready.
 
     Silknet installed new internal software systems in July 1998, and it has
received written confirmations from software vendors that the software they
installed is Year 2000 ready. Based on the foregoing, Silknet currently has no
reason to believe that its internal software systems are not Year 2000 ready.
Silknet is in the process of obtaining written certifications from suppliers of
hardware systems to the effect that the hardware they provide are Year 2000
ready. These vendors are under no contractual obligation to provide written
certifications to Silknet. Failure of the internal hardware or software systems
to operate properly with regard to the Year 2000 and thereafter could require
Silknet to incur significant unanticipated expenses to remedy any problems or
replace affected vendors, and could have a material adverse effect on Silknet's
business, operating results and financial condition.
 
     To date, Silknet has not incurred significant incremental costs in order to
comply with Year 2000 requirements for its products or internal systems, and
Silknet does not believe it will incur significant incremental costs in the
foreseeable future. However, there can be no assurance that Year 2000 issues
will not be discovered in Silknet's products or internal software systems and,
if such issues are discovered, there can also be no assurance that the costs of
making such products and systems Year 2000 ready will not have a material
adverse effect on Silknet's business, operating results and financial condition.
 
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income." This statement establishes standards for the reporting
and display of comprehensive income and its components. SFAS No. 130 is
effective for Silknet's fiscal year ending June 30, 1999 including interim
periods for that year. Comprehensive income consists of net income and foreign
currency translation adjustments as presented in the consolidated statements of
convertible participating preferred stock and stockholders' equity (deficit).
Prior year financial statements have been reclassified to conform to the SFAS
No. 130 requirements. The adoption of SFAS No. 130 has not affected and will not
affect Silknet's financial position or results of operations.
 
                                       29
<PAGE>   31
 
     In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise. This statement changes the way
that public business enterprises report segment information, including financial
and descriptive information about their selected segment information. Under SFAS
No. 131, operating segments are defined as revenue-producing components of the
enterprise which are generally used internally for evaluating segment
performance. SFAS No. 131 is effective for Silknet's fiscal year ending June 30,
1999 and will not affect Silknet's financial position or results of operations.
 
     In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post retirement Benefits." SFAS No. 132 standardizes
the disclosure requirements for pensions and other post retirement benefits and
is effective for Silknet's fiscal year ending June 30, 1999. SFAS No. 132
relates to disclosure only and will not affect Silknet's financial position or
results of operations.
 
     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. Silknet does not expect SFAS No. 133 to have a material effect on its
financial position or results of operations.
 
     In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SoP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SoP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. Silknet does not expect
SoP 98-1, which is effective for Silknet beginning July 1, 1999, to have a
material effect on its financial position or results of operations.
 
     In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of
Start-Up Activities." Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SoP 98-5, the cost of start-up activities should be expensed as incurred.
SoP 98-5 is effective for Silknet beginning July 1, 1999 and Silknet does not
expect its adoption to have a material effect on its financial position or
results of operations.
 
     In October 1997, the AcSEC of the American Institute of Certified Public
Accountants issued SoP 97-2, "Software Revenue Recognition," which provides
guidance on the timing and amount of revenue recognition when licensing,
selling, leasing or otherwise marketing computer software and related services.
Subsequently, in March 1998, the FASB approved SoP 98-4, "Deferral of the
Effective Date of a Provision of SoP 97-2, Software Revenue Recognition." SoP
98-4 provides for the one-year deferral of certain provisions of SoP 97-2
pertaining to its requirements for what constitutes vendor specific objective
evidence of the fair value of multiple elements included in an arrangement. In
December 1998, the FASB approved SoP 98-9, "Modification of SoP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions," which will retain
the limitations of SoP 97-2 on what constitutes vendor-specific objective
evidence of fair value. SoP 98-9 will be effective for transactions entered into
in fiscal years beginning after March 15, 1999. Silknet adopted SoP 97-2 for all
transactions entered into after June 30, 1998. Based upon its interpretation of
SoP 97-2, 98-4 and 98-9, Silknet believes that its current revenue recognition
policies and practices are consistent with the provisions of the new guidance.
Adoption of SoP 97-2 and SoP 98-4 did not have a material impact on Silknet's
financial position or results of operation. Silknet believes that the adoption
of SoP 98-9 will not have a material impact on Silknet's financial position or
results of operations.
 
                                       30
<PAGE>   32
 
                                    BUSINESS
 
SILKNET
 
     Silknet provides software that allows companies to offer personalized
marketing, sales, electronic commerce and customer support services through a
single, company-tailored Web site interface. Silknet's products enable a company
to deliver these services to its customers over the Web through real-time
collaboration and customer self-service. Silknet's products allow a company to
coordinate its interactions with customers by integrating a variety of
communications media, such as the Web, e-mail and the telephone. Silknet's
software can capture and consolidate data derived from all these sources and
distribute it throughout a company and to its partners to provide a single view
of a customer. This solution is more efficient for a company and also more
efficient for its customers, creating a competitive advantage for that company.
 
INDUSTRY BACKGROUND
 
     The Web has experienced dramatic growth in recent years, both in the number
of users and as a means of conducting commercial transactions, and is expected
to continue to grow rapidly. According to a report by Forrester Research, the
value of goods bought and sold over the Web is expected to increase from $43
billion in 1998 to $1.3 trillion in 2003. The growth and accessibility of the
Web has created significant new opportunities for marketing, sales, electronic
commerce and customer support services for businesses.
 
     Accompanying the growth in the use of the Web has been a trend toward
customer self-service. Just as consumers have extensively used automated teller
machines rather than using the services of a bank teller, the Web now allows a
wide range of businesses the ability to offer electronic self-service to their
customers. For example, consumers are now shopping for goods and services and
seeking answers to customer service questions on their own from their computers
at any hour of the day. Businesses have found that self-service and electronic
collaboration not only increase customer satisfaction, but also provide a
cost-effective way to offer products and services. The Gartner Group estimates
that by 2001 companies will receive 25% of all customer contacts and inquiries
over the Web and through e-mail messages and other Web-based forms.
 
     While customer interaction conducted over the Web has grown significantly,
it is not likely to completely replace more traditional means of handling
customer service and commerce. For instance, many companies continue to rely
heavily on telephone-based customer service representatives. Rather than
replacing the technology systems designed to support these representatives,
companies are actively seeking ways to integrate their various forms of customer
interaction, such as Web communications, e-mail and the telephone. Currently,
many telephone customer service representatives have very limited access to
records of customer questions, service requests or complaints received
electronically. Businesses are attempting to integrate these various media to
present a consistent interface to their customers.
 
     While the Web has the potential to enable individualized customer
self-service, collaboration and commerce, companies have been limited by early
electronic business software applications. These applications are often not
flexible, robust or scaleable enough to fully capitalize on the potential of the
Web. Many of these applications were designed using older technologies or first
generation Web technologies, which were limited in their ability to deliver
robust solutions over the Web. These applications typically restrict customer
self-service to a defined transaction available in a generic form to all
customers. They often fail to provide for real-time interaction with the
customer or access to other corporate data that would allow a company to tailor
a transaction to the needs of a specific customer. In addition, client/server
products were originally designed for an organization's internal
 
                                       31
<PAGE>   33
 
use, and fail to provide the flexibility, functionality and scalability required
for electronic business over the Web.
 
     Many companies have responded to these limitations by attempting to design
their own electronic business software applications. These "home-grown" systems
are often based on older technologies or first generation Web technologies. They
are typically focused on a solution only from the company's, and not the
customer's, point of view and are designed to address a limited, short-term need
of the company. As a result, these applications are often not flexible enough to
meet the rapidly evolving demands of the company and its customers, partners,
vendors and suppliers. In addition, the cost, time, effort and expertise
required to develop and maintain a scaleable, robust business software solution
is often beyond the capabilities of in-house information technology
organizations and their consultants.
 
     To realize the potential of the Web, companies must be able to offer
personalized marketing, sales, electronic commerce and customer support services
through a single, company-tailored Web site interface. Electronic business
software systems must provide comprehensive, adaptable and scaleable solutions
in a Web-based system architecture. This architecture must allow a company to
coordinate its interactions with customers by integrating a variety of
communications media, such as the Web, e-mail and the telephone. Moreover, these
software systems should capture and consolidate data derived from a number of
sources and enable real-time collaboration and sharing of information throughout
an organization and with its customers, partners, vendors and suppliers.
 
THE SILKNET SOLUTION
 
     Silknet provides software that allows companies to offer personalized
marketing, sales, electronic commerce and customer support services through a
single, company-tailored Web site interface. Using Silknet's products, companies
are able to:
 
     - provide customers with a self-service capability to obtain a full range
       of personalized services over the Web;
 
     - deliver interactive commerce solutions that not only allow the electronic
       sale of products, but also integrate the ongoing support and service of
       those products on-line;
 
     - coordinate interactions with customers by integrating a variety of
       communications media, such as the Web, e-mail and the telephone;
 
     - provide a customer with personalized information and services based on
       his or her preferences and prior interactions with that company;
 
     - customize a browser-based, graphical user interface to reflect their
       corporate image;
 
     - collaborate with customers, partners, vendors and suppliers to solve
       customer support problems, share information and conduct electronic
       commerce; and
 
     - capture, manage, publish and distribute real-time information throughout
       the organization, including the marketing, sales, customer service,
       billing, purchasing and product development departments.
 
SILKNET'S STRATEGY
 
     Silknet's goal is to continue to be a leading supplier of Web-based
electronic business and customer service software solutions. To achieve this
goal, key elements of Silknet's strategy include:
 
     Target Companies in Specific Industries.  Silknet will continue to focus on
providing solutions to the financial services, information technology and
telecommunications industries. These industries are characterized by the need to
provide customer service interaction among large numbers of
 
                                       32
<PAGE>   34
 
geographically dispersed customers, partners, vendors and suppliers. Silknet has
also identified other industries that have similar requirements, such as travel
services, manufacturing and retail distribution. Silknet plans to establish a
select number of reference accounts before expanding its marketing efforts in
those industries.
 
     Expand Relationships with Implementation Partners.  Silknet has established
relationships with large, international systems integrators and consulting
firms, such as Cambridge Technology Partners, Cap Gemini, Deloitte & Touche
Consulting Group/DRT Systems and KPMG Peat Marwick. Silknet plans to expand
these relationships to increase its capacity to both sell and implement its
products. Systems integrators and consulting firms have a strong influence on
software purchasing decisions within large companies, and they are seeking
interactive electronic business solutions that allow them to satisfy their
clients' needs more rapidly than they can through custom development. Silknet
believes that expanding its relationships with systems integrators and
consulting firms will enable Silknet to gain a greater share of emerging markets
more rapidly, while containing its sales, marketing and implementation costs.
 
     Increase Direct Sales and Indirect Distribution Channels.  Silknet's sales
and marketing strategy is to simultaneously expand its direct sales force and
expand relationships with technology vendors and resellers. As of January 31,
1999, Silknet had 14 quota-carrying sales representatives in 11 offices in North
America and the United Kingdom. Silknet plans to substantially increase the
number of direct field sales representatives by the end of calendar 1999.
Silknet also intends to expand its international direct sales force by
establishing sales and support operations in continental Europe and Japan and to
establish additional distribution partnerships throughout the world. In addition
to expanding its relationships with systems integrators and consulting firms,
Silknet plans to develop relationships with other third parties, including
leading software and hardware vendors that view Silknet's products as
complementary to their own product and service offerings.
 
     Continue Technology Leadership.  Silknet intends to continue to devote
substantial resources to the development of new and innovative products for
electronic business solutions and to continue to incorporate emerging Web
technologies. Silknet believes that the increasing demands for interactive
electronic business solutions will require an infrastructure that is adaptable,
extensible and interoperable. To meet these demands, Silknet has developed a
Web-based, n-tiered architecture that incorporates dynamic Hypertext Markup
Language, eXtensible Markup Language (XML), Java, Java Script and other leading
Internet technologies into its products. Silknet intends to continue its
leadership position in providing innovative products based on this architecture.
 
     Expand its Suite of Electronic Business Solutions.  Silknet plans to expand
its suite of products and services that enable companies to engage, integrate
and leverage their customers through self-service and interactive collaboration.
Many companies are seeking comprehensive electronic business solutions that meet
a broad range of needs, including providing marketing, sales, electronic
commerce and support services to their employees, customers, partners, vendors
and suppliers. Silknet intends to continue to develop additional applications
and features based on its existing Web-based architecture. For example, in the
second half of calendar 1999 Silknet plans to commercially release
SilkDataObjects, a product enhancement that will allow non-programmers to create
and integrate company-specific functionality with Silknet's products.
 
PRODUCTS
 
     Silknet provides software that allows companies to offer personalized
marketing, sales, electronic commerce and customer support services through a
single, company-tailored Web site interface. Silknet's products enable a company
to deliver these services to its customers over the Web through real-time
collaboration and customer self-service. Silknet's products allow a company to
coordinate its interactions with customers by integrating a variety of
communications media, such as the Web,
 
                                       33
<PAGE>   35
 
e-mail and the telephone. Silknet's software can capture and consolidate data
derived from all of these sources and distribute it throughout a company and to
its partners to provide a single view of a customer. Silknet's software products
include:
 
<TABLE>
<S>                              <C>
Silknet eBusiness System         A set of applications and a Web-based platform on which
                                 company-specific Web commerce applications can be created
                                 and deployed.
Silknet eService                 A comprehensive customer service application that enables a
                                 company to provide customer self-service and collaboration
                                 using the Web, e-mail, the telephone and other messaging
                                 media.
Silknet eCommerce                An application to create an electronic storefront using
                                 Microsoft's Site Server Commerce Edition engine combined
                                 with the Silknet eBusiness System.
Silknet eService Commerce        An application that integrates Silknet eService with Silknet
  Edition                        eCommerce or third-party electronic commerce products,
                                 enabling shopping, service and support through a single Web
                                 interface.
</TABLE>
 
     Silknet licenses its products on a per user basis. Silknet typically
charges a company from $500 to $2,500 for every private user (typically
employees of that company), and from $1 to $10 for every anticipated public user
(typically customers of that company). The per user charges generally increase
with the number of Silknet applications and functions utilized by a company. For
the first eight months of fiscal 1999, the average license fee per customer was
approximately $386,000.
 
                                       34
<PAGE>   36
 
     The following diagram illustrates the various components of the Silknet
product suite and how they interrelate:
 
                                    [Graph]
[Graphical depiction of the Silknet product suite, how it integrates other
software systems and how it integrates communications among a company's
employees, customers, partners and vendors over a variety of media.]
 
SILKNET EBUSINESS SYSTEM
 
     The Silknet eBusiness System is both a set of Web-based applications and a
scaleable, extensible platform for building, deploying and adapting software
applications. The Silknet eBusiness System integrates personalized interactions,
collaborations and transactions over the Web among a company and its customers,
partners, vendors and suppliers.
 
     With the Silknet eBusiness System, a customer can seamlessly access
information from a company's marketing, sales, customer service, billing,
purchasing and product development departments. By deploying the Silknet
eBusiness System, a company can integrate its customers into a
                                       35
<PAGE>   37
 
collaborative business environment, engaging them in an interactive,
personalized exchange. This allows a company to leverage the customer's
individual knowledge to provide a more efficient and effective experience for
both the company and its customers. The Silknet eBusiness System employs a
graphical user interface and features a set of browser-based components that
provide access to all Silknet applications and a company's other Web-based
solutions. The product integrates internal and external business processes
operating on both legacy and client/server systems with Silknet's Web-based
infrastructure.
 
     The Silknet eBusiness System includes the following applications and
features:
 
     Personalization
 
     The Personalization feature enables a company to provide a personalized Web
site interface for the customer to interact, collaborate and conduct business
over the Web. Using the Personalization feature, a company can:
 
     - notify customers of product improvements, promotions and case updates,
       and tailor information to the end-user's unique preferences;
 
     - provide customers with a personalized view of all of their activity with
       that company, including support requests, credit checking, sales
       questions and order tracking; and
 
     - make recommendations based on a customer's demographic profile,
       preferences and history of service incidents, inquiries and purchases.
 
     Knowledge Manager
 
     The Knowledge Manager application captures, manages, publishes and
distributes corporate knowledge about its products and services. A company can
use this application to organize its corporate knowledge base on a secure
platform that is quickly accessible and easily usable by employees, customers,
partners, vendors and suppliers. Knowledge Manager provides companies with a
real-time, interactive environment in which to process and publish solutions to
common customer problems. Features of the Knowledge Manager application include:
 
     - a multimedia platform supporting audio, video, graphics, diagrams, screen
       shots and internal and external hyperlinks to the Web;
 
     - the ability to render, publish and index multimedia solutions, in real
       time, as a direct result of solving customers' problems or inquiries; and
 
     - the storage of published solutions as business objects so they can be
       combined with other business objects, such as customer profiles and case
       histories.
 
     Extranet Workflow
 
     The Extranet Workflow application integrates internal and external business
processes with a Web interface, linking a company's legacy and client/server
systems within departments of a company to each other and to other employees,
customers, partners, vendors and suppliers. Once installed on the company's
server, this application allows these parties to participate in a cooperative
and efficient process to better service themselves. Unlike conventional workflow
systems, Extranet Workflow does not require a user agent to be installed on each
user's computer, thereby allowing the
 
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<PAGE>   38
 
workflow system to be accessible to a large user base. Features of the Extranet
Workflow application include:
 
     - a graphical user interface that enables users to establish business
       processes within the software;
 
     - automated and/or manual routing of tasks to the most appropriate groups
       or individuals, including skills-based or availability-based task
       assignment; and
 
     - notifications of workflow events through e-mail, pager, Web site and
       other channels.
 
     Business Rules and Business Events
 
     Combined with Extranet Workflow, the Business Rules and Business Events
features allow a company to modify the Silknet eBusiness System to fit its
needs, instead of modifying its business processes to fit the software.
Companies can define, categorize, assign and process business data, tasks and
events related to a specific customer relationship. After defining a business
event, a company can then communicate the appropriate response, or business
rule, to resolve the customer problem or inquiry. The Business Events feature
provides a mechanism for the Silknet eBusiness System to execute a Business Rule
when a customer operation is performed. For example, when a particular customer
request is received, if the system identifies the user as a very important
customer, the person responsible for the task might receive a page alerting him
to address the task.
 
     The Silknet eBusiness System is shipped to a customer with pre-defined
business events. A company can customize and define its own business events and
business rules to the specialized needs of that company's business processes and
the unique character of its customer relationships. Using the Business Rules and
Business Events features, a company can:
 
     - dynamically change business processes based on company or customer data;
 
     - assign workflow tasks to individuals or groups; and
 
     - notify individuals or groups of business events, using the Web, e-mail,
       the telephone, a pager or other messaging media.
 
     SilkDataObjects
 
     Silknet is currently developing SilkDataObjects, an application written in
XML that Silknet plans to include in the Silknet eBusiness System.
SilkDataObjects will enable companies to create customized business objects that
add company-specific functionality to the Silknet eBusiness System platform,
without the need for specialized programming skills. Companies will be able to
incorporate into the Silknet eBusiness System logic and data from other software
systems, allowing Silknet eBusiness System's applications, such as Business
Rules and Extranet Workflow, to respond automatically to changes in these other
software systems. This application is scheduled for release in the second half
of calendar 1999.
 
SILKNET ESERVICE
 
     Introduced as Silknet's first product in July 1997, Silknet eService is a
comprehensive customer service application that enables a company to offer its
customers both self-service and assisted service over the Web. Silknet eService
is a software application built upon the Silknet eBusiness System framework. It
includes many of the features and applications contained in the Silknet
eBusiness
 
                                       37
<PAGE>   39
 
System, such as Personalization, Knowledge Manager, Extranet Workflow and
Business Rules and Business Events, as well as the following:
 
     Case Management
 
     The Case Management application enables case creation and resolution,
workload management and user-defined workflows to support a company's internal
customer service process. Customer-specific profiles of cases allow customer
service representatives to view all information related to a specific customer.
With Case Management, cases can be organized by user-defined priorities for
purposes of assignment, workload management and reporting. Customer service
representatives can also vary customer interaction media, such as the Web,
e-mail and the telephone, to match customer response preferences. Features of
this application include:
 
     - automatic display of customer case data on the user interface for
       viewing, editing, tracking and routing;
 
     - single-screen displays of a workload summary and real-time selection of
       case views from a drop-down menu of choices;
 
     - case creation, organization and resolution, and definition of case views
       at the individual or system level;
 
     - Web hyperlinks, images, video, audio, screen shots and other data files
       to facilitate customer understanding; and
 
     - case history analysis, assistance and contribution, reassignment and
       escalation.
 
     Web Communications
 
     The Web Communications application enables multimedia collaboration over
the Web. This application allows a company to provide assisted service, in
addition to self-service, to its customers, partners, vendors and suppliers.
Features of the Web Communications application include:
 
     - real-time chat and electronic white boards to help solve customer
       problems;
 
     - the ability to share graphics, screen shots and diagrams; and
 
     - integration with Microsoft's NetMeeting to allow collaboration and video
       conferencing among a company's service representatives and its customers,
       partners, vendors and suppliers.
 
     Call Center Integration
 
     The Call Center Integration application provides customer service
representatives with a single interface to customer inquiries received over
various media, including the Web, e-mail and the telephone. This application
enables companies to capture and manage information from customer interactions
anywhere within the organization in a centralized case management system.
Customer service representatives can access customer information not only from
the call center, but also from their company's intranet to include data from
multiple departments, and from their company's extranet to include data from
customers, partners, vendors and suppliers. The Call Center Integration
application provides:
 
     - high-volume call processing and problem resolution;
 
     - single-screen displays of a customer's profile and case history;
 
     - automatic case routing, queuing and escalation; and
 
     - integration with third-party computer telephony software applications.
 
                                       38
<PAGE>   40
 
     e-Mail Response Management
 
     The e-Mail Response Management application provides a tracking and routing
system to respond to large volumes of incoming customer e-mail. This application
enables customer service and sales representatives to manage both e-mail
received from, and e-mail sent to, customers. The e-Mail Response Management
application manages the e-mail queuing process by urgency, premium service,
escalation level, guaranteed response time or other customer response
attributes. Features of this application include:
 
     - automatic, personalized acknowledgment of e-mail;
 
     - automatic routing and workflow regardless of method of communication (for
       example, inquiries and cases received by e-mail are handled in the same
       manner as those received over the Web or the telephone);
 
     - pop-up messages alerting service or sales representatives, containing
       customer name, case number, date and nature of customer inquiry;
 
     - automatic tracking, saving and logging of each e-mail so that all
       interaction becomes appended to the case history; and
 
     - dynamic, real-time reporting so managers can assess volume and
       performance.
 
     Other Features of Silknet eService
 
     Silknet eService also contains the following features that enable customer
self-service:
 
     - InfoPath, a Java- and XML-based problem resolution tool that provides a
       series of natural language questions that help customers identify
       symptoms and narrow the problem;
 
     - a tool that allows customers to search a multimedia knowledge base using
       simple English questions or commands; and
 
     - FAQs, a listing of frequently asked questions which offers solutions to
       common problems or answers to frequent inquiries and which allows
       postings to the Web or intranet that can be linked to the multimedia
       platform to provide graphical or audible solutions.
 
SILKNET ECOMMERCE
 
     The Silknet eCommerce application combines Silknet eBusiness System and
Microsoft's Site Server Commerce Edition engine and enables a company to create
and manage an electronic storefront over the Web. Through the Silknet eBusiness
System platform, Silknet adds extranet workflow, object definition and
adaptability to Microsoft's Site Server Commerce Edition. The product provides
personalized shopping and promotion for both business-to-consumer and
business-to-business commerce. Features of the Silknet eCommerce application
include:
 
     Site Builder Wizard
 
     Site Builder Wizard is a step-by-step, graphical user interface that
assists a company in creating electronic stores or catalogs quickly and easily.
Site Builder Wizard helps a company establish cross-selling information, price
promotions, stores with multi-level departments, and products with varied
attributes.
 
     Intelligent CrossSell
 
     Intelligent CrossSell is an application that allows a company to run
promotions for products and to create cross-selling opportunities through the
promotions. It uses shopper trends and transaction
 
                                       39
<PAGE>   41
 
information to recommend products of interest to other customers. For the
shopper, Intelligent CrossSell enables customers to navigate a company's Web
site to discover products of interest to them. For a company, Intelligent
CrossSell increases sales opportunities by efficiently guiding customers to
those products that they are most likely to purchase during their visit.
 
     Buy Now
 
     Buy Now is an on-line, direct marketing tool that enables a company to
present product information and order forms, or capture customer profile
information, within a variety of on-line contexts, such as an on-line
advertising banner. A company can customize Buy Now to meet the needs of its
on-line marketing campaign.
 
     Commerce Interchange Pipeline Manager
 
     The Commerce Interchange Pipeline Manager allows a company to automate and
manage electronic inventory and purchasing communications with distributors,
resellers and suppliers. With this feature, different document formats for
purchase orders, invoices, receipts and shipping notices can be managed easily
for multiple trading partners.
 
     Extranet Workflow
 
     Used with the Silknet eBusiness System foundation, Microsoft's Site Server
Commerce Edition engine can be extended to include Extranet Workflow. With
Extranet Workflow, information or questions regarding orders, and the orders
themselves, may be routed throughout the organization through a workflow
determined by the company. Different workflows can be attributed in real time to
different order situations through the application of Silknet eBusiness's
Business Rules feature.
 
SILKNET ESERVICE COMMERCE EDITION
 
     The Silknet eService Commerce Edition application integrates Silknet
eService with Silknet eCommerce or third-party electronic commerce products,
enabling shopping, service and support through a single Web site interface.
Silknet eService Commerce Edition creates a single, unified view of the customer
relationship and transactions, not only across departments, such as marketing,
sales, customer service, billing, purchasing and product development, but also
among partners, vendors and suppliers. Silknet eService Commerce Edition helps
companies and their customers manage the entire customer relationship, from
initial point of interest to shopping and buying, support and service, marketing
and follow-on purchases. Features of this application include:
 
     - One Log-in -- allows customers to browse, purchase or obtain service from
       a single Web site interface;
 
     - One View -- integrates the purchase and support history of the customer,
       allowing sales and service representatives to better respond to customer
       problems and inquiries;
 
     - Complete Contact -- allows sales and service representatives to include
       in any customer interaction commerce-and service-related Web hyperlinks,
       such as sales order, inquiry and trouble ticketing; and
 
     - Total Solution -- enables service representatives to provide multimedia
       service solutions in an electronic commerce transaction.
 
TECHNOLOGY AND PRODUCT DEVELOPMENT
 
     Silknet is a leader in the delivery of interactive, Web-based electronic
business solutions that use advanced, industry standard Web and distributed
object technologies. Silknet's applications are built
 
                                       40
<PAGE>   42
 
on Microsoft Windows Distributed InterNet Applications architecture, which
includes technologies such as Microsoft's Distributed Component Object Model
(DCOM) and Microsoft's Transaction Server. This architecture allows Silknet to
provide future upgrades of highly scaleable, multi-tier business applications
for deployment over the Web or any network, while preserving a company's
investment in existing applications and data. In addition, Silknet's products
incorporate a graphical user interface that allows a company to create tailored
applications for data model creation and display, data object creation, workflow
and business rules.
 
     Silknet's products employ a standard Web-designed, n-tiered architecture.
Unlike a client/server architecture, individual users simply need a browser to
perform any function available in the product. No software needs to be
distributed to any user, either within the organization or to customers,
partners, vendors or suppliers, making the software easier to implement,
maintain and upgrade than client/server solutions.
 
     The n-tiered architecture of Silknet's products allows a company to
distribute the server side of the software across many different systems for
increased scalability and reliability. The customer, or "public," side of the
application, which operates outside a company's firewall, and the employee, or
"private," side of the application, which is typically used within a company
behind its firewall, operate on both Windows NT and UNIX platforms. Silknet's
application server runs on Windows NT only and uses Microsoft's Transaction
Server and Message Queue. Silknet is currently designing a UNIX version of its
application server. The database server uses either Oracle or Microsoft's SQL
Server on a Windows NT platform, and Oracle on a UNIX platform.
 
     Silknet's products employ a component architecture to allow companies to
configure the solution to best fit their unique requirements without changing
the application's source code. This benefit reduces implementation time and
costs, and establishes a clear and consistent upgrade path for future releases
of Silknet software. It also enables Silknet to maintain and support a single
source code base for each application that addresses the varied needs of these
companies.
 
EXAMPLES OF SILKNET IMPLEMENTATIONS
 
     Sprint PCS
 
     Sprint PCS operates the largest 100% digital, 100% PCS wireless network in
the United States, serving more than 2.5 million customers in over 4,000 cities
and communities. Sprint PCS has built its entire Web site on the Silknet
eService Commerce Edition and has used it to integrate its Web site with its
back-end systems. Sprint PCS incorporated Silknet's solutions into two major
initiatives: eCare and eStore. As part of its eCare program, Sprint PCS is using
the Silknet eService application to enable customers to view and change their
account information, review wireless usage and invoice information, search
multimedia knowledge bases and interact with Sprint PCS service representatives
on-line. As part of its eStore program, Sprint PCS has deployed the Silknet
eCommerce application to enable the company to sell phones and services to new
customers. The application allows the customer to view various calling plan
offerings and allows Sprint PCS to make specific recommendations for purchasing
phones and plans based on personal preferences, profiles and customer history.
Customers can also order equipment and initiate service through the Web site,
and the Silknet eService application performs a credit check for Sprint PCS. The
Sprint PCS web site is located at http://www.sprintpcs.com.
 
     Microsoft
 
     Microsoft uses the Silknet eService application to provide on-line service
to its more than 7,000 sales and customer support employees around the world.
Silknet eService is integrated with Microsoft's Windows NT security and exchange
profiles to minimize administration requirements and allow Silknet eService to
be seamlessly accessed by all users. Sales and customer support employees
 
                                       41
<PAGE>   43
 
can obtain answers to many questions about Microsoft's products on their own
over the Web. If an answer is not available through self-service, the employee
can submit a case inquiry, which is automatically routed to the appropriate
product management team, based on topic and availability. The product management
team responds to the case inquiry via e-mail and the solution can be accessed on
Microsoft's intranet by other sales and customer support personnel. Microsoft
maintains strict standards of responsiveness by its product management teams.
The messaging and escalation features within Silknet eService are used to
monitor and manage compliance with these internal standards.
 
SALES AND MARKETING
 
     Silknet sells its products primarily through a direct sales force and
through relationships with systems integrators and resellers. The sale of
Silknet's products is often an enterprise-wide decision by prospective
customers. The sales process generally ranges from three to nine months
depending on the level of education prospective customers need regarding the use
and benefits of Silknet's products. As of January 31, 1999, Silknet's direct
sales organization consisted of 12 employees located in 10 offices throughout
North America and two employees in an office in the United Kingdom. In addition,
Silknet had five employees in North America and two employees in the United
Kingdom responsible for demonstrating its products and assisting the sales
organization.
 
     A key element of Silknet's market penetration strategy is the formation of
relationships with industry leaders in various complementary areas. Silknet
believes these relationships increase Silknet's market exposure and presence,
generate qualified opportunities for Silknet to sell its products and assist
Silknet in implementing its products.
 
     Silknet has established relationships with large, international systems
integrators and consulting firms, such as Cambridge Technology Partners, Cap
Gemini, Deloitte & Touche Consulting Group/ DRT Systems and KPMG Peat Marwick.
Silknet plans to expand these relationships to increase its capacity to both
sell and implement its products. Systems integrators and consulting firms have a
strong influence on software purchasing decisions within large companies, and
they are seeking interactive electronic business solutions that allow them to
satisfy their clients' needs more rapidly than they can through custom
development. Silknet believes that expanding its relationships with systems
integrators and consulting firms will enable Silknet to gain a greater share of
emerging markets more rapidly, while containing its sales, marketing and
implementation costs.
 
     Silknet also has relationships with software and hardware vendors, such as
Hewlett-Packard, Calico Technology and AnswerSoft (a subsidiary of Davox
Corporation), that generally view Silknet's products as complementary to their
product and service offerings. These relationships are intended to provide
Silknet opportunities to penetrate an emerging market where either additional
vertical products or services are needed to secure the sale, or an understanding
or expertise in a particular vertical market is needed to sell effectively. As
of January 31, 1999, Silknet had six employees devoted to developing corporate
partnerships and strategic alliances.
 
     Silknet's marketing organization utilizes a variety of programs to support
Silknet products. As of January 31, 1999, Silknet's marketing organization
consisted of six employees. Silknet's marketing programs include:
 
     - product and strategy updates with industry analysts;
 
     - public relations activities and speaking engagements;
 
     - direct mail and relationship marketing programs;
 
     - telemarketing, seminars and trade shows;
 
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<PAGE>   44
 
     - brochures, data sheets and white papers; and
 
     - Web site marketing.
 
CUSTOMERS
 
     Silknet has targeted and will continue to target the financial services,
information technology and telecommunications industries. Silknet also has
identified other industries, such as travel services, manufacturing and retail
distribution, which it plans to target. The following is a partial list of
Silknet's customers as of February 28, 1999:
 
     3Com
     Autodesk
     Bank of America
     Bell Advanced Communications
     Cigna
     Compaq
     GEAC Computer Corporation
     Inacom Corp.
     Insurance Holdings of America
     KPMG Peat Marwick
     MachOne Communications
     Microsoft
     PC Connection
     Planet Direct
     Policy Management Systems Corporation
     Provident Bank
     SBC Internet
     Sitara Networks
     Sprint PCS
     The Travel Company
     W.W. Grainger
 
SUPPORT AND PROFESSIONAL SERVICES
 
     Silknet offers a broad range of support and training services to its
customers. Silknet believes that providing a high level of customer service and
technical support is necessary to achieve rapid product implementation, customer
satisfaction and continued revenue growth.
 
     Silknet provides implementation services to assist companies in optimizing
the benefits of Silknet's solutions. In addition, systems integrators and
consulting firms often help companies to implement Silknet's products. As of
January 31, 1999, Silknet had 16 employees dedicated to providing implementation
services. These employees often work closely with the staffs of third-party
systems integrators to train their consultants in the implementation of Silknet
software. A typical implementation engagement lasts three to six months and
involves the planning, configuration, testing and implementation of the
products. These services are generally billed on a per day basis. Silknet
believes that these implementation projects not only help ensure a company's
success with Silknet's products, but also allow Silknet consultants and systems
engineers to gain industry-specific knowledge that can be leveraged in future
projects and products.
 
     Silknet's customers have a choice of support options depending on the level
of service desired. Silknet maintains a technical support hotline staffed by
engineers from 8:00 a.m. to 8:00 p.m., Eastern time, Monday through Friday, from
its corporate headquarters in Manchester, New Hampshire. Silknet uses the
Silknet eService application to track and manage its own customer service
inquiries and to provide 24-hour technical support. Silknet provides training in
the use of its products through classroom instruction at its Manchester, New
Hampshire corporate headquarters and at other training sites throughout North
America and in Europe. As of January 31, 1999, Silknet had three technical
support engineers.
 
RESEARCH AND DEVELOPMENT
 
     Silknet devotes a substantial portion of its resources to developing new
products and product features, extending and improving its products and
technology, and researching new technological initiatives in the market for
Web-based, interactive electronic business solutions. This new and
 
                                       43
<PAGE>   45
 
emerging market is characterized by rapid technological change, new product
introductions and enhancements, evolving industry standards and rapidly changing
customer requirements. The introduction of products incorporating new
technologies and the emergence of new industry standards could render existing
products obsolete and unmarketable. Silknet's future success will depend in part
on its ability to anticipate changes, enhance its current products, develop and
introduce new products that keep pace with technological advancements and
address the increasingly sophisticated needs of its customers. As an example of
its technology initiatives, Silknet is currently developing SilkDataObjects,
scheduled for release in the second half of calendar 1999. SilkDataObjects is an
application tool which enables a company, without the need of specialized
programming skills, to create customized business objects that add
company-specific functionality to the Silknet eBusiness System platform residing
on the company's Web site. Silknet is also working on a UNIX version of its
application server.
 
     As of January 31, 1999, Silknet had 44 employees engaged in research and
development activities. Silknet's research and development expenditures for
fiscal year 1997 and 1998 and for the six months ended December 31, 1998, were
approximately $961,000, $2.4 million and $2.3 million, respectively. Silknet
expects that it will continue to commit significant resources to research and
development in the future. To date, all research and development expenses have
been expensed as incurred. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
 
COMPETITION
 
     The market for Silknet's products is new and rapidly evolving, and is
expected to become increasingly competitive as current competitors expand their
product offerings and new companies enter the market. The principal competitive
factors in the Web-based, interactive electronic business solutions market
include:
 
     - adherence to emerging Web-based technology standards;
 
     - comprehensiveness of applications;
 
     - adaptability, flexibility and scalability;
 
     - real-time, interactive capability with customers, partners, vendors and
       suppliers;
 
     - integration with a variety of communications media;
 
     - ease of use;
 
     - ease of implementation;
 
     - customer service and support; and
 
     - price.
 
Although Silknet believes that it currently competes favorably with respect to
these factors, there can be no assurance that Silknet can maintain its
competitive position against current and potential competitors, especially those
with longer operating histories, greater name recognition and substantially
greater financial, technical, marketing, management, service, support and other
resources.
 
     Silknet currently faces competition primarily from in-house and third-party
custom development efforts. Silknet expects that these solutions will continue
to be a principal source of competition for the foreseeable future.
 
     Silknet's current competitors include a number of companies offering one or
more solutions for the electronic business solutions market, some of which are
directly competitive with Silknet's products. For example Silknet's competitors
include companies providing on-line customer manage-
 
                                       44
<PAGE>   46
 
ment solutions, such as BroadVision, Inc. and Smart Technologies, Inc., and
client/server-based, call-center customer service solutions, such as Siebel
Systems, Inc., Vantive Corporation, and Clarify, Inc. In addition, Silknet
competes with providers of stand-alone point solutions for e-mail response
capabilities, such as Mustang Software, Inc. and Kana Communications, Inc., and
providers of stand-alone point solutions for knowledge base applications, such
as Inference Corporation and Primus Knowledge Solutions, Inc.
 
     Silknet also may face competition from systems integrators and consulting
firms which design and develop custom systems and perform custom integration.
Some of these firms may possess industry-specific expertise or reputations among
potential customers for offering enterprise solutions to electronic business
application needs. These systems integrators and consulting firms can be
resellers of Silknet's products and may engage in joint marketing and sales
efforts with Silknet. Silknet relies upon these firms for recommendations of
Silknet's products during the evaluation stage of the purchase process, as well
as for implementation and customer support services. These systems integrators
and consulting firms may have similar, and often more established, relationships
with Silknet's competitors, and there can be no assurance that these firms will
not develop, market or recommend competing software applications.
 
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
 
     Silknet's success and competitiveness are dependent to a significant degree
on the protection of its proprietary technology. Silknet relies primarily on a
combination of copyrights, trademarks, licenses, trade secret laws and
restrictions on disclosure to protect its intellectual property and proprietary
rights. Silknet also enters into confidentiality agreements with its employees
and consultants, and generally controls access to and distribution of its
documentation and other proprietary information. Despite these precautions,
others may be able to copy or reverse engineer aspects of Silknet's products, to
obtain and use information that Silknet regards as proprietary or to
independently develop similar technology. Any such actions by competitors could
have a material adverse effect on Silknet's business, operating results and
financial condition.
 
     In addition, the laws of some foreign countries do not protect Silknet's
proprietary rights to the same extent as do the laws of the United States, and
effective patent, copyright, trademark and trade secret protection may not be
available in these jurisdictions.
 
     Litigation may be necessary in the future to enforce or defend Silknet's
intellectual property and proprietary rights, to protect Silknet's trade secrets
or to determine the validity and scope of the intellectual property and
proprietary rights of others. This litigation, whether successful or
unsuccessful, could result in substantial costs and diversion of management and
technical resources, either of which could have a material adverse effect on
Silknet's business, operating results and financial condition.
 
     Silknet attempts to avoid infringing known intellectual property and
proprietary rights of third parties in its product development efforts. However,
Silknet has not conducted and does not conduct comprehensive patent searches to
determine whether the technology used in its products infringes patents held by
third parties. In addition, product development is inherently uncertain in a
rapidly evolving technological environment in which there may be numerous patent
applications pending, many of them which are confidential when filed, with
regard to similar technologies. If Silknet were to discover that its products
violated third party proprietary rights, it may be liable for substantial
damages. In addition, Silknet may be required to reengineer its products or seek
to obtain licenses to continue offering such products, and there can be no
assurance that such efforts would be successful.
 
     Silknet pursues the registration of some of its trademarks in the United
States and in other countries, although it has not yet secured registration of
any marks. Silknet has applications pending
 
                                       45
<PAGE>   47
 
for trademark registrations for "Silknet" and "Silknet" combined with the
Silknet logo in the United States, Canada and the European Union. Silknet's
applications for the registration of "Silknet" and "Silknet" combined with the
Silknet logo were denied in Canada because a company filed an earlier
application for the use of "Silk" in connection with Internet information
resource services. Silknet has filed an appeal, but there can be no assurance
that it will be able to register the trademark "Silknet" in Canada.
 
     Other companies have filed trademark applications for marks similar to the
names of Silknet's products. For example, IBM has filed a trademark application
for "e-Business" for use in creating, implementing and maintaining Web sites and
integration of computer systems and networks. Silknet's use of Silknet eBusiness
System could infringe on the rights of IBM and other companies using a mark that
contains "eBusiness." Silknet's use of "eBusiness," as well as the use of other
names, may result in costly litigation, divert management's attention and
resources, cause product shipment delays or require Silknet to pay damages
and/or to enter into royalty or license agreements. There can be no assurance
that a license agreement would be available to Silknet on any commercially
reasonable terms, if at all, and Silknet may be required to stop using the name
"eBusiness" for its products. Further, because names such as eBusiness,
eCommerce and eService are becoming widely used and descriptive, Silknet does
not expect to be able to prevent third parties from using these names for
competing products.
 
     Silknet currently licenses technology from third parties that it
incorporates into its products. For example, Silknet licenses Web information
server, transaction server and related technologies from Microsoft. There can be
no assurance that technology from these providers or others will continue to be
available to Silknet on commercially reasonable terms, if at all. The loss or
inability to access such technology could result in delays in development and
introduction of new products or enhancements by Silknet until equivalent or
replacement technology could be accessed, if available, or developed, if
feasible, by Silknet, which could have a material adverse effect on Silknet's
business, operating results and financial condition. Moreover, although Silknet
is generally indemnified against claims that technology licensed from third
parties infringes the intellectual property and proprietary rights of others,
such indemnification is not always available for all types of intellectual
property and proprietary rights (for example, patents may be excluded) and in
some cases the scope of such indemnification is limited. Even if Silknet
receives broad indemnification, third party indemnitors are not always well
capitalized and may not be able to indemnify Silknet in the event of
infringement, resulting in substantial exposure to Silknet. There can be no
assurance that infringement or invalidity claims arising from the incorporation
of third party technology, and claims for indemnification from Silknet's
customers resulting from these claims, will not be asserted or prosecuted
against Silknet. These claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources in addition to
potential product redevelopment costs and delays, all of which could materially
adversely affect Silknet's business, operating results and financial condition.
 
EMPLOYEES
 
     As of January 31, 1999, Silknet had 121 employees, 96 of whom were based at
Silknet's headquarters in Manchester, New Hampshire. None of Silknet's employees
is subject to a collective bargaining agreement. Silknet believes that its
relations with its employees are good.
 
FACILITIES
 
     Silknet has one lease for approximately 44,092 square feet of space in an
office building in Manchester, New Hampshire, its headquarters. The lease
expires in December 2003, and Silknet has an option to extend the lease for an
additional five-year term. As of January 31, 1999, Silknet also leased office
space in 10 other cities for its sales and support personnel. Silknet believes
that these
 
                                       46
<PAGE>   48
 
existing facilities are adequate to meet its current, foreseeable requirements
or that suitable additional or substitute space will be available on
commercially reasonable terms.
 
LEGAL PROCEEDINGS
 
     Silknet is not a party to any material legal proceedings.
 
                                       47
<PAGE>   49
 
                                   MANAGEMENT
 
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
 
     The directors and executive officers of Silknet are as follows:
 
<TABLE>
<CAPTION>
             NAME               AGE                          POSITION
             ----               ---                          --------
<S>                             <C>   <C>
James C. Wood.................  42    Chairman of the Board, President and Chief Executive
                                      Officer
Nigel K. Donovan..............  43    Senior Vice President and Chief Operating Officer
Patrick J. Scannell, Jr. .....  45    Vice President, Chief Financial Officer, Treasurer and
                                      Secretary
Guy Bradley(1)................  34    Director
Joo Hock Chua(1)..............  42    Director
John Doggett..................  51    Director
Stanley Fung(2)...............  41    Director
Andrew Goldfarb(2)............  31    Director
</TABLE>
 
---------------
(1) Member of the Compensation Committee
 
(2) Member of the Audit Committee
 
  Directors and Executive Officers
 
     James C. Wood founded Silknet and has served as Chairman of the Board,
President and Chief Executive Officer since Silknet's inception in March 1995.
From January 1988 until November 1994, he served as President and Chief
Executive Officer of CODA Incorporated, a subsidiary of CODA Limited, a
financial accounting software company. Mr. Wood also served as a Director of
CODA Limited from November 1988 until November 1994.
 
     Nigel K. Donovan has served as Silknet's Senior Vice President and Chief
Operating Officer since February 1999. From November 1995 to February 1999 he
served as Vice President -- Professional Services. From November 1996 to October
1998, he also served as Silknet's Treasurer and from May 1997 to October 1998 as
Silknet's Chief Financial Officer. In addition, Mr. Donovan served as director
from October 1996 to February 1999. From March 1988 until October 1995, Mr.
Donovan served as Vice President -- Professional Services at CODA Incorporated.
During the period from March 1988 until June 1994, Mr. Donovan also served as
Chief Financial Officer for CODA Incorporated.
 
     Patrick J. Scannell, Jr. has served as Silknet's Chief Financial Officer
and Treasurer since November 1998 and was named Vice President and Secretary in
February 1999. From September 1992 until October 1998, Mr. Scannell served as
Executive Vice President, Chief Financial Officer and Treasurer of Applix, Inc.,
a customer interaction software company.
 
     Guy Bradley has served as a director of Silknet since October 1996. Mr.
Bradley has been affiliated with CMG @ Ventures since August 1994. He has been a
general partner or managing member of CMG @ Ventures since January 1995. He was
Director of International Sales and Marketing for Booklink, Inc., an affiliate
of CMG @ Ventures, from August 1994 to December 1996. From January 1994 to July
1994, Mr. Bradley was employed as a consultant by the Patricia Seybold Group.
 
     Joo Hock Chua has served as director of Silknet since October 1998. Mr.
Chua has been a Vice President/Assistant General Manager at Vertex Management
(II) Pte Ltd since July 1995, a Senior Manager from July 1991 to June 1995 and a
Manager from June 1988 to June 1991. Mr. Chua is a director of Ultro
Technologies Ltd and ASA Ceramic Ltd, both publicly-listed in Singapore, and
several privately held companies in the US, Singapore and the People's Republic
of China.
 
                                       48
<PAGE>   50
 
     John Doggett has served as a director of Silknet since June 1997. Since
October 1996, Mr. Doggett has been a Vice President at BancBoston Ventures Inc.
From 1992 to September 1996, Mr. Doggett served as Director of the Applied
Technology group at BankBoston, N.A.
 
     Stanley Fung has served as a director of Silknet since October 1996. Mr.
Fung has been with Zero Stage Capital V, L.P. since 1992, as Managing Partner
since December 1998, as General Partner from October 1994 to December 1998 and
as Vice President from April 1992 to October 1994. Mr. Fung is a director of
RoweCom Inc. and several privately-held companies.
 
     Andrew Goldfarb has served as a director of Silknet since February 1999.
Since March 1997, Mr. Goldfarb has been a Managing Principal at JAFCO America
Ventures, Inc. Mr. Goldfarb was employed by Trans National Group, as Vice
President from August 1996 to March 1997, as director of Trans National
Ventures, the venture capital division of Trans National Group, from September
1994 to July 1996 and as Assistant Vice President from June 1993 to August 1994.
 
  Other Key Employees
 
     Eric Carlson has served as Silknet's Vice President and Chief Technology
Officer since February 1999, Chief Technology Officer since September 1996 and
Senior Programmer/Analyst from June 1995 to September 1996. From June 1994 to
June 1995, he served as Client/Server Technology Analyst at PC Connection, a
reseller of personal computer hardware and software. From 1991 to June 1994, Mr.
Carlson served as Programmer/Analyst and Network Administrator with Yankee Book
Peddler.
 
     James P. Davis has served as Silknet's Vice President -- Business
Development since January 1997. From June 1990 to December 1996, Mr. Davis held
various senior management positions at CODA Incorporated, including Vice
President of Sales from January 1994 to December 1996 and acting President and
Chief Executive Officer from November 1994 to July 1995.
 
     V. Anthony Giannelli has served as Silknet's Vice
President -- International since October 1998, and from February 1998 to October
1998, he served as Silknet's Vice President -- Marketing. From November 1995 to
February 1998, Mr. Giannelli served as Vice President of Marketing and Business
Development of Applix, Inc. From May 1993 to October 1995, he served as Vice
President -- Marketing of Open Data Corporation, a software company.
 
     Mark H. Green has served as Silknet's Vice President -- Sales since
November 1996. From June 1996 to November 1996, Mr. Green served as Alliance
Manager for i2 Technologies, a software company. From November 1991 to June
1996, Mr. Green served as a sales representative with CODA Incorporated.
 
     Patricia D. Stimpson has served as Silknet's Vice President -- Research and
Development since June 1997. From October 1996 to March 1997, Ms. Stimpson held
a variety of senior development positions at Lotus Development Corporation,
including Senior Director of Development of the Extended Enterprise Group from
December 1994 to October 1996, and Senior Director of Shared Components from
October 1992 to December 1994.
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
     The Compensation Committee consists of Messrs. Bradley and Chua. It reviews
and evaluates the salaries and incentive compensation of management and key
employees of Silknet and makes recommendations concerning these matters to the
Board of Directors. The Compensation Committee also administers Silknet's stock
option and stock purchase plans.
 
     The Audit Committee consists of Messrs. Goldfarb and Fung. It reviews the
results and scope of audits and other services provided by Silknet's independent
public accountants and reviews Silknet's
 
                                       49
<PAGE>   51
 
system of internal accounting and financial controls. The Audit Committee also
reviews such other matters with respect to the accounting, auditing and
financial reporting practices and procedures of Silknet as it may find
appropriate or may be brought to its attention.
 
DIRECTOR COMPENSATION
 
     Following the consummation of this offering, non-employee directors will be
reimbursed for their reasonable out-of-pocket expenses incurred in attending
meetings of the Board of Directors. No director who is an employee of Silknet
will receive separate compensation for services rendered as a director.
Non-employee directors are also eligible for participation in Silknet's 1999
Non-Employee Director Stock Option Plan. See "Management -- Stock Plans."
 
EXECUTIVE COMPENSATION
 
     The following Summary Compensation Table sets forth the total compensation
paid or accrued for the year ended June 30, 1998 for Silknet's Chief Executive
Officer and the other most highly compensated executive officer who was employed
by Silknet at June 30, 1998 (collectively, the "named executive officers"). No
long-term compensation was paid to the named executive officers during the year
ended June 30, 1998.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                   ANNUAL
                                                                COMPENSATION
                                                              ----------------
NAME AND PRINCIPAL POSITION IN 1998                            SALARY    BONUS
-----------------------------------                           --------   -----
<S>                                                           <C>        <C>
James C. Wood, Chairman, President and Chief Executive
  Officer...................................................  $140,881    --
Nigel K. Donovan, Vice President -- Professional Services
  and Director..............................................  $120,750    --
</TABLE>
 
OPTION GRANTS
 
     No stock options or stock appreciation rights were granted during the year
ended June 30, 1998 to the named executive officers.
 
YEAR-END OPTION TABLE
 
     The following table sets forth information regarding exercisable and
unexercisable stock options held as of June 30, 1998 by each of the named
executive officers. No options were exercised by the named executive officers
during the year ended June 30, 1998. There was no public trading market for the
Common Stock as of June 30, 1998. Accordingly, as permitted by the rules of the
Securities and Exchange Commission, the value of unexercised in-the-money
options has been calculated by determining the difference between the exercise
price per share payable upon exercise of such options and an assumed initial
public offering price of $     .
 
                    AGGREGATED FISCAL YEAR-END OPTION VALUES
 
<TABLE>
<CAPTION>
                                               NUMBER OF SECURITIES          VALUE OF UNEXERCISED
                                              UNDERLYING UNEXERCISED         IN-THE-MONEY OPTIONS
                                            OPTIONS AT FISCAL YEAR-END        AT FISCAL YEAR-END
                                            ---------------------------   ---------------------------
NAME                                        EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
----                                        -----------   -------------   -----------   -------------
<S>                                         <C>           <C>             <C>           <C>
James C. Wood.............................         --             --          --             --
Nigel K. Donovan..........................    329,415        105,235
</TABLE>
 
                                       50
<PAGE>   52
 
STOCK PLANS
 
     Employee Stock Option Plan.  The Silknet Employee Stock Option Plan, or
1995 Option Plan, was adopted by the Board of Directors on August 8, 1995 and
received stockholder approval on September 25, 1995. A total of 2,391,900 shares
of common stock have been reserved for issuance under the 1995 Option Plan.
Under the 1995 Option Plan, Silknet was authorized to grant options to purchase
shares of common stock intended to qualify as incentive stock options as defined
under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
and non-qualified stock options to officers and other employees of Silknet.
Options granted pursuant to the 1995 Option Plan are exercisable within ten
years of the original grant date and become exercisable pro rata on a monthly
basis over a period of four years from the date of grant. An option is not
transferable by the recipient except by will or by the laws of descent and
distribution. As of February 28, 1999, options to purchase 2,085,042 shares had
been granted under the 1995 Option Plan.
 
     1999 Stock Option and Incentive Plan.  Silknet's 1999 Stock Option and
Incentive Plan, or 1999 Option Plan, was adopted by the Board of Directors and
received stockholder approval in February 1999. A total of 1,000,000 shares of
common stock have initially been reserved for issuance under the 1999 Option
Plan. The 1999 Option Plan provides that the number of shares authorized for
issuance will automatically increase by 5% of the outstanding number of shares
of common stock on December 31, 1999, 2000 and 2001 up to a maximum of an
additional 2,500,000 shares of common stock. Under the terms of the 1999 Option
Plan, Silknet is authorized to grant incentive stock options as defined under
the Code, non-qualified options, stock awards or opportunities to make direct
purchases of common stock to employees, officers, directors, consultants and
advisors of Silknet and its subsidiaries.
 
     The 1999 Option Plan is administered by the Compensation Committee. The
Compensation Committee selects the individuals to whom options will be granted
and determines the option exercise price and other terms of each award, subject
to the provisions of the 1999 Option Plan. The 1999 Option Plan provides that
upon an acquisition intended to be accounted for as a pooling of interests, the
vesting of all options to purchase common stock will accelerate by a period of
one year. In addition, upon the termination of an employee without cause or for
good reason prior to the first anniversary of the completion of such an
acquisition, all options then outstanding under the 1999 Option Plan held by
that employee will immediately become exercisable. Finally, on the first year
anniversary of the completion of such an acquisition all options then
outstanding under the 1999 Option Plan will immediately become exercisable. An
option is not transferable by the recipient except by will or by the laws of
descent and distribution, or in the case of non-qualified stock options, only to
the extent set forth in the agreement relating to the non-qualified stock option
or pursuant to a valid domestic relations order. No options may be exercised
following termination of employment for cause. The term of the 1999 Option Plan
is ten years, unless sooner terminated by vote of the Board of Directors. To
date, no options have been granted under to the 1999 Option Plan.
 
     1999 Non-Employee Director Stock Option Plan.  Silknet's 1999 Non-Employee
Director Stock Option Plan, or Director Plan, was adopted by the Board of
Directors and received stockholder approval in February 1999 and becomes
effective on the date on which Silknet's common stock is registered under the
Securities Exchange Act of 1934, as amended, or the Exchange Act. A total of
350,000 shares of common stock have been authorized for issuance under the
Director Plan.
 
     The Director Plan is administered by the Compensation Committee. Under the
Director Plan, each non-employee director who is or becomes a member of the
Board of Directors is automatically granted on the date of which the common
stock becomes registered under the Exchange Act or, if not a director on that
date, the date first elected to the Board of Directors (the "Initial Grant"), an
option to purchase 10,000 shares of common stock. In addition, provided that the
director continues to serve as a member of the Board of Directors, each
non-employee director will be automatically
 
                                       51
<PAGE>   53
 
granted on the third anniversary of his or her Initial Grant date and each three
years thereafter an option to purchase 10,000 shares of common stock. Provided
that the director continues to serve as a member of the Board of Directors,
one-third of the shares included in each grant will become exercisable on each
of the first, second and third anniversaries of the date of grant. If a director
fails to attend at least 75% of the Board meetings held in a fiscal year, that
director will forfeit his or her rights with respect to the option installment
which vested on the preceding vesting date, in proportion to the percentage of
Board meetings not attended. All options granted under the Director Plan will
have an exercise price equal to the fair market value of the common stock on the
date of grant and a term of ten years from the date of grant. Options may not be
transferred except by will or by the laws of descent and distribution or
pursuant to a domestic relations order. Unexercisable options terminate when the
director ceases to be a director. Exercisable options may be exercised at any
time during the option term. In the event that a director dies or is permanently
disabled, any options that are not exercisable will become exercisable and the
optionee (or his or her representative, heir or legatee) may exercise all
options for a period of three years. The term of the Director Plan is ten years,
unless sooner terminated by vote of the Board of Directors.
 
  1999 Employee Stock Purchase Plan
 
     The 1999 Employee Stock Purchase Plan, or Stock Purchase Plan, was adopted
by the Board of Directors and received stockholder approval in February 1999.
The Stock Purchase Plan provides for the issuance of up to an aggregate of
350,000 shares of common stock to participating employees.
 
     The Stock Purchase Plan is administered by the Compensation Committee. All
employees who have completed three months of employment with Silknet and whose
customary employment is more than part-time (i.e. more than 20 hours per week
and for more than five months in any calendar year) are eligible to participate
in the Stock Purchase Plan. The right to purchase common stock under the Stock
Purchase Plan will be made available through a series of offerings. On the first
day of an offering period, Silknet will grant to each eligible employee who has
elected in writing to participate in the Stock Purchase Plan an option to
purchase shares of common stock. The employee will be required to authorize an
amount (between 1% and 10% of the employee's compensation) to be deducted from
the employee's pay during the offering period. On the last day of the offering
period, the employee will be deemed to have exercised the option, at the option
exercise price, to the extent of accumulated payroll deductions. Under the terms
of the Stock Purchase Plan, the option exercise price is an amount equal to 85%
of the fair market value of one share of common stock on either the first or
last day of the offering period, whichever is lower. No employee may be granted
an option that would permit the employee's rights to purchase common stock to
accrue in excess of $25,000 in any calendar year. The first offering period
under the Stock Purchase Plan will commence upon the initial offering of the
common stock to the public and continues through December 31, 1999. Thereafter,
the offering periods will begin on each January 1 and July 1. Options granted
under the Stock Purchase Plan terminate upon an employee's voluntary withdrawal
from the plan at any time or upon termination of employment. No options have
been granted to date under the Stock Purchase Plan.
 
401(K) PLAN
 
     Silknet maintains a 401(k) plan qualified under Section 401(k) of the Code.
All Silknet employees who are at least 21 years of age are eligible to
participate in the 401(k) plan. Under the 401(k) plan, a participant may
contribute a maximum of 15% of his or her pre-tax salary, commissions and
bonuses through payroll deductions (up to the statutorily prescribed annual
limit of $10,000 in calendar year 1999) to the 401(k) plan. The percentage
elected by more highly compensated participants may be required to be lower. In
addition, at the discretion of the Board of Directors, Silknet may make
discretionary profit-sharing contributions into the 401(k) plan for all
 
                                       52
<PAGE>   54
 
eligible employees. During the year ended June 30, 1998, Silknet made no
profit-sharing contributions to the 401(k) plan.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     During the year ended June 30, 1998, the members of the Compensation
Committee were Messrs. Bradley, Doggett and Wood. Mr. Wood has served as
Silknet's Chairman of the Board and President since March 1995. The Compensation
Committee takes recommendations concerning salaries and incentive compensation
for employees of and consultants to Silknet and administers and grants stock
options pursuant to Silknet's stock option plans. No executive officer of
Silknet has served as a director or member of the compensation committee (or
other committee serving an equivalent function) of any other entity whose
executive officers served as a director or member of the Compensation Committee
of Silknet.
 
                              CERTAIN TRANSACTIONS
 
ORGANIZATION OF SILKNET
 
     In connection with its formation in 1995, Silknet issued and sold 2,500,000
shares of its common stock for an aggregate of $80,500 to its founder, James C.
Wood.
 
SALES OF STOCK
 
     In July 1995, Silknet sold 50,000 shares of its common stock for an
aggregate of $50,000 to Mr. Nigel K. Donnovan, currently Silknet's Senior Vice
President and Chief Operating Officer.
 
     In October 1996, Silknet issued an aggregate of 2,364,584 shares of its
Series A Preferred Stock at $0.96 per share, for aggregate consideration of
$2,270,000. In the Series A Preferred Stock financing, Silknet issued 1,302,084
shares of Series A Preferred Stock to CMG @ Ventures II LLC and 1,041,667 shares
of Series A Preferred Stock to Zero Stage Capital V, L.P. Mr. Guy Bradley, a
director of Silknet, is a member of CMG @ Ventures II LLC. Mr. Stanley Fung, a
director of Silknet, is a managing partner of Zero Stage Capital V, L.P.
 
     In June 1997, Silknet issued an aggregate of 2,500,000 shares of its Series
B Preferred Stock at a price of $2.00 per share, for aggregate consideration of
$5,000,000. In the Series B Preferred Stock financing, Silknet issued 371,700
shares of Series B Preferred Stock to CMG @ Ventures II LLC, 371,700 shares of
Series B Preferred Stock to Zero Stage Capital V, L.P., 1,250,000 shares of
Series B Preferred Stock to BancBoston Ventures Inc., 400,000 shares of Series B
Preferred Stock to Vertex Investment (II) Ltd. and 100,000 shares of Series B
Preferred Stock to HWH Investment Pte Ltd. Mr. John Doggett, a director of
Silknet, is Vice President of BancBoston Ventures Inc. Mr. Joo Hock Chua, a
director of Silknet, is Vice President/Assistant General Manager of Vertex
Management (II) Pte Ltd.
 
     In May 1998, Silknet issued an aggregate of 3,081,657 shares of its Series
C Preferred Stock at a price of $3.498117 per share, for aggregate consideration
of $10,779,990. In the Series C Preferred Stock financing, Silknet issued
857,604 shares of Series C Preferred Stock to CMG @ Ventures II LLC, 214,401
shares of Series C Preferred Stock to Zero Stage Capital V, L.P., 285,868 shares
of Series C Preferred Stock to BancBoston Ventures Inc., 428,802 shares of
Series C Preferred Stock to Vertex Technology Fund Pte Ltd. (together, with
Vertex Investment (II) Ltd. and HWH Investment Pte Ltd., the "Vertex Entities"),
and 571,736 shares of Series C Preferred Stock to Intel Corporation. Silknet
also issued 28,587 shares of Series C preferred stock to JAFCO Co., Ltd. ("JAFCO
Ltd"), 33,632 shares of Series C Preferred Stock to JAFCO R-3 Investment
Enterprise Partnership ("JAFCO R-3"), 20,179 shares of Series C Preferred Stock
to JAFCO JS-3 Investment
 
                                       53
<PAGE>   55
 
Enterprise Partnership ("JAFCO JS-3"), 30,269 shares of Series C Preferred Stock
to JAFCO G-6(A) Investment Enterprise Partnership ("JAFCO G-6(A)"), 30,269
shares of Series C Preferred Stock to JAFCO G-6(B) Investment Enterprise
Partnership ("JAFCO G-6(B)") and 571,736 shares of Series C Preferred Stock to
U.S. Information Technology No. 2 Investment Enterprise Partnership ("U.S.
Technology") (together, the "JAFCO Entities"). Mr. Andrew Goldfarb, a director
of Silknet, is a managing principal of JAFCO America Ventures, Inc. a co-general
partner of U.S. Technology. On June 26, 1998, Silknet issued an additional 7,500
shares of Series C Preferred Stock to the Zero Stage Individual Investor Group,
one of the members of which is Mr. Stanley Fung, a director of Silknet.
 
     On February 26, 1999, Silknet issued an aggregate of 1,205,913 shares of
Series D Preferred Stock at a price of $7.324109 per share, for aggregate
consideration of $8,832,238. In the Series D Preferred Stock financing, Silknet
issued 230,148 shares to CMG @ Ventures II LLC, 157,737 shares to BancBoston
Ventures Inc., 12,625 shares to JAFCO Co., Ltd., 50,498 shares to U.S.
Technology, and 157 shares to Stanley Fung, a director of Silknet.
 
     Pursuant to Silknet's Certificate of Incorporation, each share of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock will automatically convert into one share of common stock upon
the closing of this offering.
 
     Pursuant to the preferred stock financings, Silknet granted demand,
"piggy-back" and S-3 registration rights to preferred stockholders. See
"Description of Capital Stock -- Registration Rights."
 
     Silknet has two license agreements with Planet Direct Corporation and
SalesLink covering an aggregate amount of $83,800 in fees paid to Silknet.
Planet Direct is a majority-owned subsidiary and SalesLink is a wholly-owned
subsidiary of CMG Information Services, Inc., which through its venture capital
operation, CMG @ Ventures II LLC, owns 23.06% of the outstanding common stock of
Silknet. Mr. Guy Bradley, a managing member of CMG @ Ventures II LLC, is a
director of Silknet.
 
ISSUANCE OF NOTES AND WARRANTS
 
     In May 1996, Silknet issued one note in the principal amount of $125,000
and an additional warrant to purchase an aggregate of 125,000 shares of common
stock at an exercise price of $1.00 per share to Zero Stage Capital V, L.P. The
warrant may be exercised, in whole or in part, at any time or from time to time,
until May 17, 2002. In July 1996, Silknet issued one note in the principal
amount of $125,000 and an additional warrant to purchase an aggregate of 125,000
shares of Common Stock at an exercise price of $1.00 per share to Zero Stage
Capital V, L.P. This warrant may be exercised, in whole or in part, at any time
or from time to time until July 24, 2002. Each note was exchanged for shares of
Series A Preferred Stock in October 1996.
 
     In June 1997, in connection with Silknet's issuance and sale of its Series
B Preferred Stock, Silknet issued six warrants to purchase an aggregate of
500,000 shares of common stock at an exercise price of $1.10 per share. One
warrant to purchase 250,000 shares of common stock was issued BancBoston
Ventures Inc., one warrant to purchase 80,000 shares of common stock was issued
to Vertex Investment (II) Ltd., one warrant to purchase 20,000 shares of common
stock was issued to HWH Investment Pte Ltd., one warrant to purchase 74,340
shares of common stock was issued to CMG @ Ventures II LLC, and one warrant to
purchase 74,340 shares of common stock was issued to Zero Stage Capital V, L.P.
The six warrants may be exercised, in whole or in part, at any time or from time
to time, until June 11, 2003.
 
                                       54
<PAGE>   56
 
     Silknet believes that all transactions set forth above were made on terms
no less favorable to it than would have been obtained from unaffiliated third
parties. Silknet has adopted a policy whereby all future transactions between
Silknet and its officers, directors and affiliates will be on terms no less
favorable to Silknet than could be obtained from unaffiliated third parties and
will be approved by a majority of the disinterested members of Silknet's Board
of Directors.
 
                             PRINCIPAL STOCKHOLDERS
 
     The following table sets forth certain information regarding beneficial
ownership of Silknet's common stock as of February 28, 1999, and as adjusted to
reflect the sale of the shares of common stock offered hereby, by: (a) each
person known by Silknet to be the beneficial owner of more than 1% of its common
stock; (b) each named executive officer; (c) each of Silknet's directors; and
(d) all executive officers and directors as a group. Unless otherwise noted
below, the address of each person listed on the table is c/o Silknet Software,
Inc., 50 Phillipe Cote Street, Manchester, New Hampshire 03101, and each person
has sole voting and investment power over the shares shown as beneficially owned
except to the extent authority is shared by spouses under applicable law and
except as set forth in the footnotes to the table.
 
     Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. The following are deemed to be beneficially
owned and outstanding for purposes of calculating the number of shares and the
percentage beneficially owned by that person or entity:
 
     - shares of common stock issuable by Silknet to that person pursuant to
       options which may be exercised within 60 days after February 28, 1999;
       and
 
     - shares of common stock issuable by Silknet to that person pursuant to
       warrants which may be exercised within 60 days after February 28, 1999.
 
However, these shares are not deemed to be beneficially owned and outstanding
for purposes of computing the percentage beneficially owned by any other person
or entity.
 
     For purposes of calculating the percentage beneficially owned, the number
of shares deemed outstanding before the offering includes: (a) 2,816,121 shares
of common stock outstanding as of February 28, 1999; (b) 9,159,654 shares of
common stock issuable upon the conversion of preferred stock; and (c) the
presently exercisable options and presently exercisable warrants held by that
person. For purposes of calculating the percentage beneficially owned, the
number of shares deemed outstanding after the offering includes: (a) all shares
deemed to be outstanding before the offering and (b)           shares being sold
in this offering, assuming no exercise of the underwriters' over-allotment
option.
 
<TABLE>
<CAPTION>
                                                                               PERCENTAGE OF
                                                                                   COMMON
                                                                             STOCK OUTSTANDING
                                                          NUMBER OF         --------------------
                                                            SHARES           BEFORE      AFTER
NAME OF BENEFICIAL OWNER                              BENEFICIALLY OWNED    OFFERING    OFFERING
------------------------                              ------------------    --------    --------
<S>                                                   <C>                   <C>         <C>
James C. Wood(1)....................................       2,366,100         19.76%
Nigel K. Donovan....................................         427,593          3.46%
Guy Bradley(2)......................................       2,835,876         23.53%
Stanley Fung(3).....................................       1,954,047         15.89%
John Doggett(4).....................................       1,943,605         15.90%
Joo Hock Chua.......................................              --            --
Andrew Goldfarb.....................................              --            --
</TABLE>
 
                                       55
<PAGE>   57
 
<TABLE>
<CAPTION>
                                                                               PERCENTAGE OF
                                                                                   COMMON
                                                                             STOCK OUTSTANDING
                                                          NUMBER OF         --------------------
                                                            SHARES           BEFORE      AFTER
NAME OF BENEFICIAL OWNER                              BENEFICIALLY OWNED    OFFERING    OFFERING
------------------------                              ------------------    --------    --------
<S>                                                   <C>                   <C>         <C>
CMG @ Ventures II LLC...............................       2,835,876         23.53%
  c/o CMG Information Services, Inc.
  100 Brickstone Square, 5th Floor
  Andover, MA 01810
Zero Stage Capital V, L.P. .........................       1,952,108         15.87%
  101 Main Street
  Kendall Square
  Cambridge, MA
BancBoston Ventures Inc. ...........................       1,943,605         15.90%
  175 Federal Street
  10th Floor
  Boston, MA 02110
The Vertex Entities(5)..............................       1,028,802          8.52%
  Three Lagoon Drive, Ste. 220
  Redwood City, CA 94065
The JAFCO Entities(6)...............................         777,795          6.49%
  One Boston Place, Ste. 3320
  Boston, MA 02108
Intel Corporation...................................         571,736          4.77%
  2200 Mission College Blvd.
  Mail Stop SC4-210
  Santa Clara, CA 95052
The Goldman Group, L.P..............................         477,874          3.99%
  85 Broad Street
  New York, NY 10004
KPMG LLP............................................         136,536          1.14%
  3 Chestnut Ridge Road
  Montvale, NJ 07645
Cambridge Technology Capital Fund I, L.P............         136,536          1.14%
  11512 El Camino Real
  San Diego, CA 92130
All executive officers and directors as a group (8
  persons)(7).......................................       9,527,220         73.16%
</TABLE>
 
---------------
 
 (1) Includes (a) 200,000 shares held in trust for Mr. Wood, of which Mr. Wood
     is the sole trustee; (b) 20,000 shares held in trust for Mr. Donovan's two
     children, of which Mr. Wood is the sole trustee; (c) an aggregate of 7,500
     shares held in trust for the three children of Mr. James P. Davis, of which
     Mr. Wood is the sole trustee; and (d) 500,000 shares for which Mr. Wood has
     voting power pursuant to a Voting Trust Agreement. Mr. Wood disclaims
     beneficial ownership of all such shares.
 
 (2) Includes 2,761,536 shares held by CMG @ Ventures II LLC. Also includes
     74,340 shares of common stock issuable upon exercise of warrants held by
     CMG @ Ventures II LLC.
 
                                       56
<PAGE>   58
 
Mr. Bradley is a managing member of CMG @ Ventures II LLC and may be deemed to
share voting and investment power with respect to all shares held by CMG @
Ventures II LLC. Mr. Bradley disclaims beneficial ownership of such shares.
 
 (3) Includes 1,627,768 shares held by Zero Stage Capital V, L.P. Also includes
     324,340 shares of common stock issuable upon exercise of warrants held by
     Zero Stage Capital V, L.P. Mr. Fung is a managing partner of Zero Stage
     Capital V, L.P. and may be deemed to share voting and investment power with
     respect to all shares held by Zero Stage Capital V, L.P. Mr. Fung disclaims
     beneficial ownership of such shares.
 
 (4) Includes 1,693,605 shares held by BancBoston Ventures Inc. Also includes
     250,000 shares of common stock issuable upon exercise of warrants held by
     BancBoston Ventures Inc. Mr. Doggett is a Vice President of BancBoston
     Ventures Inc. and may be deemed to share voting and investment power with
     respect to all shares held by BancBoston Ventures Inc. and disclaims
     beneficial ownership of such shares.
 
 (5) Includes 400,000 shares held by Vertex Investment (II) Ltd., 100,000 shares
     held by HWH Investment Pte Ltd and 428,802 shares held by Vertex Technology
     Pte Ltd. Also includes 80,000 and 20,000 shares of common stock issuable
     upon exercise of warrants held by Vertex Investment (II) Ltd. and HWH
     Investment Pte Ltd.
 
 (6) Includes 41,212 shares held by JAFCO Ltd., 33,632 shares held by JAFCO R-3,
     20,179 shares held by JAFCO JS-3, 30,269 shares held by JAFCO G-6(A),
     30,269 shares held by JAFCO G-6(B) and 622,234 shares held by U.S.
     Technology. JAFCO Ltd. is the general partner of JAFCO R-3, JAFCO JS-3,
     JAFCO G6-A, JAFCO G6-B and U.S. Technology.
 
 (7) See Notes 1 through 4.
 
                          DESCRIPTION OF CAPITAL STOCK
 
     In accordance with Silknet's Certificate of Incorporation as currently in
effect, Silknet's authorized capital stock consists of 50,000,000 shares of
common stock, with a par value of $.01 per share, and 15,000,000 shares of
preferred stock, with a par value of $.01 per share.
 
COMMON STOCK
 
     As of February 28, 1999, there were 11,975,775 shares of common stock
outstanding and held of record by 76 stockholders, after giving effect to the
conversion of all outstanding shares of preferred stock upon the closing of this
offering. Based upon the number of shares outstanding as of February 28, 1999
and giving effect to the issuance of the shares of common stock offered by
Silknet hereby, there will be           shares of common stock outstanding upon
the closing of this offering. In addition, as of February 28, 1999, there were
outstanding stock options for the purchase of a total of 2,085,042 shares of
common stock, and outstanding warrants for the purchase of a total of 750,000
shares of common stock.
 
     Holders of common stock are entitled to one vote per share for each share
held of record on all matters submitted to a vote of stockholders. The holders
of common stock are entitled to receive ratable such lawful dividends as may be
declared by the Board of Directors. However, such dividends are subject to
preferences that may be applicable to the holders of any outstanding shares of
preferred stock. In the event of a liquidation, dissolution or winding up of the
affairs of Silknet, whether voluntary or involuntary, the holders of common
stock will be entitled to receive pro rata all of the remaining assets of
Silknet available for distribution to its stockholders. Any such pro rata
distribution would be subject to the rights of the holders of any outstanding
shares of preferred stock. The common stock has no preemptive, redemption,
conversion or subscription rights. All outstanding
 
                                       57
<PAGE>   59
 
shares of common stock are fully paid and non-assessable. The shares of common
stock to be issued by Silknet in this offering will be fully paid and
non-assessable. The rights, powers, preferences and privileges of holders of
common stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock which Silknet may designate
and issue in the future.
 
PREFERRED STOCK
 
     The Board of Directors is authorized, subject to any limitations prescribed
by Delaware law, without further stockholder approval, to issue from time to
time up to 15,000,000 shares of preferred stock, in one or more series. The
Board of Directors is also authorized, subject to the limitations prescribed by
Delaware law, to establish the number of shares to be included in each series
and to fix the voting powers, preferences, qualifications and special or
relative rights or privileges of each series. The Board of Directors is
authorized to issue preferred stock with voting, conversion and other rights and
preferences that could adversely affect the voting power or other rights of the
holders of common stock.
 
     Silknet has currently designated four series of preferred stock. These
consist of 2,364,584 shares of Series A Preferred Stock, 2,500,000 shares of
Series B Preferred Stock, 3,089,157 shares of Series C Preferred Stock and
1,205,913 shares of Series D Preferred Stock. All outstanding shares of
preferred stock will be automatically converted into an aggregate of 9,159,654
shares of common stock upon the closing of this offering.
 
     Silknet has no current plans to issue any preferred stock. However, the
issuance of preferred stock or of rights to purchase preferred stock could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, a majority of the
outstanding voting stock of Silknet.
 
WARRANTS
 
     As of February 28, 1999, Silknet had outstanding eight warrants to purchase
an aggregate of 750,000 shares of common stock. The first warrant is to purchase
an aggregate of 125,000 shares at an exercise price of $1.00 per share, and is
exercisable, in whole or in part, at any time or from time to time, until May
17, 2002. The second warrant is to purchase an aggregate of 125,000 shares at an
exercise price of $1.00 per share and is exercisable, in whole or in part, at
any time or from time to time, until July 24, 2002. The other six warrants are
to purchase an aggregate of 500,000 shares of common stock at an exercise price
of $2.20 per share. These six warrants are currently exercisable, in whole or in
part, at any time or from time to time, until June 11, 2003. All of the eight
outstanding warrants contain certain protections against dilution resulting from
stock splits, stock dividends and similar events.
 
REGISTRATION RIGHTS
 
     Pursuant to the terms of the Series C Preferred Stock Purchase Agreement
dated as of May 11, 1998 the holders of an aggregate of 7,953,741 shares of
preferred stock, which will automatically convert into an aggregate of 7,953,741
shares of common stock upon completion of this offering, and the holders of
warrants exercisable for 750,000 shares of common stock (together, the "Series C
Registration Rights Holders") are entitled to certain rights with respect to the
registration of such shares under the Securities Act.
 
     If Silknet proposes to register any of its securities under the Securities
Act, either for its own account or for the account of other security holders,
the Series C Registration Rights Holders are entitled to notice of such
registration. The Series C Registration Rights Holders are also entitled to
include their shares of common stock in such registration. However, in the event
of a registration
 
                                       58
<PAGE>   60
 
pursuant to an underwritten public offering of common stock, the underwriters
shall have the right, subject to certain conditions, to limit the number of
shares included in such registration.
 
     The holders of at least 25% of the then-outstanding shares of common stock
held by all of the Series C Registration Rights Holders are entitled, at any
time beginning at the earlier of 180 days after Silknet's initial underwritten
public offering or May 12, 2001, to request that Silknet file a registration
statement under the Securities Act covering the sale of some or all of the
shares held by the requesting holder or holders. Upon the receipt of such a
request, Silknet is required to use commercially reasonable efforts to effect
such registration. Silknet is not required to effect more than three such demand
registrations.
 
     Once Silknet has qualified to use Form S-3 to register securities under the
Securities Act, the Series C Registration Rights Holders have the right to
request that Silknet file a registration statement on Form S-3 or any successor
thereto for a public offering of all or any portion of their shares, provided
that the reasonably anticipated aggregate price to the public of such offering
would not be less than $1,000,000. Silknet shall not be required to effect a
registration in this manner more than once in any six-month period.
 
     In general, all fees, costs and expenses of such registrations (other than
insurance costs and fees and disbursements of counsel to the selling
stockholders) will be borne by Silknet. Silknet has agreed to indemnify the
Series C Registration Rights Holders against, and provide contribution with
respect to, certain liabilities relating to any registration in which any shares
of Series C Registration Rights Holders are sold under the Securities Act.
 
     Pursuant to the terms of the Series D Preferred Stock Purchase Agreement
dated as of February 26, 1999 the holders of an aggregate of 1,205,913 shares of
preferred stock, which will automatically convert into an aggregate of 1,205,913
shares of common stock upon completion of this offering (the "Series D
Registration Rights Holders"), are entitled to certain rights with respect to
the registration of such shares under the Securities Act.
 
     If, after 180 days have elapsed from the closing of this offering, Silknet
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of other security holders, the Series D
Registration Rights Holders are entitled to notice of such registration. The
Series D Registration Rights Holders are also entitled to include their shares
of common stock in such registration. However, in the event of a registration
pursuant to an underwritten public offering of common stock, the underwriters
shall have the right, subject to certain conditions, to limit the number of
shares included in such registration.
 
     The holders of at least 50% of the then-outstanding shares of common stock
held by all of the Series D Registration Rights Holders are entitled, at any
time after 180 days have elapsed from the closing of this offering, but in no
event within 180 days of any registration of Silknet's securities, to request
that Silknet file a registration statement under the Securities Act covering the
sale of some or all of the shares held by the requesting holder or holders. Upon
the receipt of such a request, Silknet is required to use commercially
reasonable efforts to effect such registration. Silknet is not required to
effect more than one such demand registration.
 
     Once Silknet has qualified to use Form S-3 to register securities under the
Securities Act, the Series D Registration Rights Holders have the right to
request that Silknet file a registration statement on Form S-3 or any successor
thereto for a public offering of all or any portion of their shares, provided
that the reasonably anticipated aggregate price to the public of such offering
would not be less than $5,000,000. Silknet shall not be required to effect a
registration in this manner more than three times.
 
                                       59
<PAGE>   61
 
     In general, all fees, costs and expenses of such registrations (other than
insurance costs and fees and disbursements of counsel to the selling
stockholders) will be borne by Silknet. Silknet has agreed to indemnify the
Series D Registration Rights Holders against, and provide contribution with
respect to, certain liabilities relating to any registration in which any shares
of Series D Registration Rights Holders are sold under the Securities Act.
 
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF SILKNET'S CERTIFICATE OF INCORPORATION
AND BY-LAWS AND DELAWARE GENERAL CORPORATION LAW
 
     Silknet's Certificate of Incorporation, Silknet's By-Laws and the Delaware
General Corporation Law contain certain provisions that could be deemed to have
anti-takeover effects. These provisions could discourage, delay or prevent a
change in control of Silknet or an acquisition of Silknet at a price which many
stockholders may find attractive. The existence of these provisions could limit
the price that investors might be willing to pay in the future for shares of
Silknet's common stock.
 
  Certificate of Incorporation and By-Laws
 
     The By-Laws provide that, except as otherwise provided by law or the
Certificate of Incorporation newly created directorships resulting from an
increase in the authorized number of directors or vacancies on the Board may be
filled only by:
 
     - by a majority of the directors then in office, though less than a quorum
       is then in office; or
 
     - by the sole remaining director.
 
These provisions prevent a stockholder from enlarging the Board and filling the
new directorships with such stockholder's own nominees without Board approval.
 
     These provisions of the By-Laws may have the effect of discouraging a third
party from initiating a proxy contest, making a tender offer or otherwise
attempting to gain control of Silknet, or of attempting to change the
composition or policies of the Board, even though such attempts might be
beneficial to Silknet or its stockholders.
 
     The By-Laws provide that, unless otherwise prescribed by law or the
Certificate of Incorporation, only a majority of the Board, the Chairman of the
Board or the President is able to call a special meeting of stockholders. The
Certificate of Incorporation and the By-Laws also provide that, unless otherwise
prescribed by law or the Certificate of Incorporation, stockholder action may be
taken only at a duly called and convened annual or special meeting of
stockholders and may not be taken by written consent. These provisions, taken
together, prevent stockholders from forcing consideration by the stockholders of
stockholder proposals over the opposition of the Board, except at an annual
meeting.
 
     The By-Laws also establish an advance notice procedure for stockholders to
make nominations of candidates for election as director, or to bring other
business before an annual meeting of stockholders of Silknet (the "Notice
Procedure"). Under the Notice Procedure, notice of stockholder nominations or
proposals to be made at an annual or special meeting in lieu of an annual
meeting generally must be received by Silknet not less than 120 days nor more
than 150 days prior to the first anniversary of the date of the proxy statement
delivered to the stockholders in connection with the preceeding year's annual
meeting. However, if the number of directors to be elected to the Board is
increased and there is no public announcement by Silknet naming all of the
nominees for director or specifying the size of the increased Board at least 70
days prior to the first anniversary of the preceding year's annual meeting, then
notice must be received not later than the 10th day following the earlier of the
day such notice was mailed or the day such public disclosure was made. The
notice will be timely only with respect to any director nominees for any
position caused by the increase in the Board. Notice of stockholder nominations
or proposals to be made at a special meeting called by
 
                                       60
<PAGE>   62
 
the Board for the purpose of electing one or more directors (other than a
special meeting in lieu of an annual meeting), must be received not later than
the 10th day following the earlier of the day such notice was mailed or the day
such public disclosure was made. These notices must contain certain prescribed
information.
 
     The Notice Procedure affords the Board an opportunity to consider the
qualifications of proposed director nominees or the merit of stockholder
proposals, and, to the extent deemed appropriate by the Board, to inform
stockholders about such matters. The Notice Procedure also provides a more
orderly procedure for conducting annual meetings of stockholders. The By-Laws do
not give the Board any power to approve or disapprove stockholder nominations
for the election of directors or proposals for action. However, the Notice
Procedure may prevent a contest for the election of directors or the
consideration of stockholder proposals. This could deter a third party from
conducting a solicitation of proxies to elect its own slate of directors or to
approve its own proposal if the proper advance notice procedures are not
followed, without regard to whether consideration of such nominees or proposals
might be harmful or beneficial to Silknet and its stockholders.
 
  Delaware General Corporation Law
 
     Silknet is subject to Section 203 of the Delaware General Corporation Law
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder.
 
     Section 203 does not apply if:
 
     - prior to such time, the board of directors of the corporation approved
       either the business combination or the transaction which resulted in the
       stockholder becoming an interested stockholder;
 
     - upon consummation of the transaction which resulted in the stockholder
       becoming an interested stockholder, the interested stockholder owned at
       least 85% of the voting stock of the corporation outstanding at the time
       the transaction commenced, excluding for purposes of determining the
       number of shares outstanding those shares owned by persons who are
       directors and also officers and by employee stock plans in which employee
       participants do not have the right to determine confidentially whether
       shares held subject to the plan will be tendered in a tender or exchange
       offer; or
 
     - at or subsequent to such time, the business combination is approved by
       the board of directors and authorized at an annual or special meeting of
       stockholders, and not by written consent, by the affirmative vote of at
       least two-thirds of the outstanding voting stock which is not owned by
       the interested stockholder.
 
The application of Section 203 may limit the ability of stockholders to approve
a transaction that they may deem to be in their best interests.
 
     Section 203 defines "business combination" to include:
 
     - any merger or consolidation involving the corporation and the interested
       stockholder;
 
     - any sale, transfer, pledge or other disposition of 10% or more of the
       assets of the corporation to or with the interested stockholder;
 
     - subject to certain exceptions, any transaction which results in the
       issuance or transfer by the corporation of any stock of the corporation
       to the interested stockholder;
 
                                       61
<PAGE>   63
 
     - any transaction involving the corporation which has the effect of
       increasing the proportionate share of the stock of any class or series of
       the corporation beneficially owned by the interested stockholder; or
 
     - the receipt by the interested stockholder of the benefit of any loans,
       advances, guarantees, pledges or other financial benefits provided by or
       through the corporation.
 
     In general, Section 203 defines an "interested stockholder" as any entity
or person beneficially owning 15% or more of the outstanding voting stock of the
corporation or is an affiliate or associate of the corporation and was the owner
of 15% or more of the outstanding voting stock of the corporation at any time
within the past three years, and any entity or person associated with,
affiliated with or controlling or controlled by such entity or person.
 
LIMITATION OF LIABILITY
 
     Silknet's Certificate of Incorporation provides that no director of Silknet
shall be personally liable to Silknet or to its stockholders for monetary
damages for breach of fiduciary duty as a director, except that the limitation
shall not eliminate or limit liability to the extent that the elimination or
limitation of such liability is not permitted by the Delaware General
Corporation Law as the same exists or may hereafter be amended.
 
     Silknet's Certificate of Incorporation further provides for the
indemnification of Silknet's directors and officers to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law, including
circumstances in which indemnification is otherwise discretionary. A principal
effect of these provisions is to limit or eliminate the potential liability of
Silknet's directors for monetary damages arising from breaches of their duty of
care, subject to certain exceptions. These provisions may also shield directors
from liability under federal and state securities laws.
 
STOCK TRANSFER AGENT
 
     The transfer agent and registrar for the common stock is                .
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Prior to this offering, there has been no market for Silknet's common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect prevailing market prices from time to time. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of certain contractual and legal restrictions on resale
(as described below), sales of substantial amounts of common stock of Silknet in
the public market after the restrictions lapse could adversely affect the
prevailing market price and the ability of Silknet to raise equity capital in
the future.
 
     Upon completion of this offering (based on shares outstanding at February
28, 1999), Silknet will have outstanding an aggregate of                shares
of common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options or warrants. Of these shares, the
               shares sold in this offering will be freely tradable without
restrictions or further registration under the Securities Act, unless such
shares are purchased by an existing "affiliate" of Silknet as that term is
defined in Rule 144 under the Securities Act (an "Affiliate").
 
     The remaining 11,975,775 shares of common stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act ("Restricted Shares") or are subject to the contractual
restrictions described below. Restricted Shares may be sold in the public market
only if registered or if they qualify for an exception from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. As a result of the
 
                                       62
<PAGE>   64
 
contractual restrictions described below, the provisions of Rules 144, 144(k)
and 701, and Silknet's intention to file registration statements covering shares
of common stock subject to outstanding stock options or issued pursuant to the
exercise of stock options, approximately                shares will be eligible
for sale in the public market during the 180 days after the date of this
prospectus. In addition, approximately                shares will become
eligible for sale in the public market upon expiration of the lock-up agreements
180 days after the date of this prospectus.
 
     All of the officers and directors and certain stockholders and
optionholders of Silknet have signed lock-up agreements in favor of the
underwriters. As a result, these individuals and entities are not permitted to
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock or publicly disclose the intention
to make any such offer, sale, pledge or disposal for a period of 180 days after
the date of this prospectus, without the prior written consent of Credit Suisse
First Boston. Credit Suisse First Boston currently has no plans to release any
portion of the securities subject to lock-up agreements. When determining
whether or not to release shares from the lock-up agreements, Credit Suisse
First Boston will consider, among other factors, the stockholder's reasons for
requesting the release, the number of shares for which the release is being
requested and market conditions at the time.
 
     In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled to
sell a certain number of shares within any three-month period. That certain
number of shares cannot 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 on the Nasdaq National Market during the four
calendar weeks preceding the filing of a notice on Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about Silknet. Rule 144 also provides that Affiliates of Silknet who
are selling shares of common stock that are not Restricted Shares must
nonetheless comply with the same restrictions applicable to Restricted Shares
with the exception of the holding period requirement.
 
     Under Rule 144(k), a person who is not deemed to have been an Affiliate of
Silknet at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an Affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Accordingly,
unless otherwise restricted, "144(k) shares" may therefore be sold immediately
upon the completion of this offering.
 
     Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from Silknet by its employees,
directors, officers, consultants or advisors prior to the date the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). To be eligible for resale under Rule 701,
shares must have been issued pursuant to written compensatory benefit plans or
written contracts relating to the compensation of such persons. In addition, the
Securities and Exchange Commission has indicated that Rule 701 will apply to
typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act, along with the shares acquired upon
exercise of such options (including exercises after the date of this offering).
Securities issued in reliance on Rule 701 are restricted securities and, subject
to the contractual restrictions described above, beginning 90 days after the
date of this prospectus, may be sold by persons other than Affiliates, subject
only to the
 
                                       63
<PAGE>   65
 
manner of sale provisions of Rule 144, and by Affiliates, under Rule 144 without
compliance with its one-year minimum holding period requirements.
 
     Silknet has agreed not to offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of common stock or any securities convertible into or exercisable
or exchangeable for common stock, or publicly disclose the intention to make any
such offer, sale, pledge, disposition or filing, for a period of 180 days after
the date of this prospectus, without the prior written consent of Credit Suisse
First Boston, subject to certain limited exceptions.
 
     Following this offering, Silknet intends to file registration statements
under the Securities Act covering approximately 4,091,900 shares of common stock
issued pursuant to the exercise of stock options, subject to outstanding options
or reserved for issuance under Silknet's 1995 Option Plan, 1999 Option Plan,
Director Plan and Stock Purchase Plan. Accordingly, shares registered under such
registration statements will, subject to Rule 144 provisions applicable to
Affiliates, be available for sale in the open market, except to the extent that
such shares are subject to Silknet's vesting restrictions or the contractual
restrictions described above. See "Management -- Stock Plans."
 
                                       64
<PAGE>   66
 
                                  UNDERWRITING
 
     Under the terms and subject to the conditions contained in an underwriting
agreement dated           , 1999, the underwriters named below, for whom Credit
Suisse First Boston, BancBoston Robertson Stephens Inc., NationsBanc Montgomery
Securities LLC and First Union Capital Markets Corp. are acting as
representatives, have severally but not jointly agreed to purchase from Silknet
the following respective number of shares of common stock:
 
<TABLE>
<CAPTION>
                                                              NUMBER OF
                        UNDERWRITERS                           SHARES
                        ------------                          ---------
<S>                                                           <C>
     Credit Suisse First Boston.............................
     BancBoston Robertson Stephens Inc. ....................
     NationsBanc Montgomery Securities LLC..................
     First Union Capital Markets Corp. .....................
               Total........................................
                                                              ========
</TABLE>
 
     The underwriting agreement provides that the obligations of the
underwriters are subject to approval of certain conditions precedent and that
the underwriters will be obligated to purchase all of the shares of the common
stock offered hereby (other than those shares covered by the over-allotment
option described below) if any are purchased. The underwriting agreement
provides that, in the event of a default by an underwriter, in certain
circumstances the purchase commitments of non-defaulting underwriters may be
increased or the underwriting agreement may be terminated.
 
     Silknet has granted to the underwriters an option expiring on the 30th day
after the date of this prospectus to purchase up to        additional shares of
common stock at the initial public offering price, less the underwriting
discounts and commissions, all as set forth on the cover page of this
prospectus. Such option may be exercised only to cover over-allotments in the
sale of shares of common stock. To the extent such option is exercised, each
underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of common stock as
it was obligated to purchase pursuant to the underwriting agreement.
 
     Silknet has been advised by the representatives that the underwriters
propose to offer the shares of common stock to the public initially at the
public offering price set forth on the cover page of this prospectus and,
through the representatives, to certain dealers (who may include the
underwriters) at such price less a concession of $     per share, and the
underwriters and such dealers may allow a discount of $     per share on sales
to certain other dealers. After the offering, the public offering price and
concession and discount to dealers may be changed by the representatives.
 
     The following table summarizes the compensation to be paid to the
underwriters by Silknet and the expenses payable by Silknet.
 
<TABLE>
<CAPTION>
                                                                            TOTAL
                                                               --------------------------------
                                                                  WITHOUT             WITH
                                                  PER SHARE    OVER-ALLOTMENT    OVER-ALLOTMENT
                                                  ---------    --------------    --------------
<S>                                               <C>          <C>               <C>
Underwriting discounts and commissions paid by
  Silknet.......................................
Expenses payable by Silknet.....................
</TABLE>
 
     The representatives have informed Silknet that they do not expect
discretionary sales by the underwriters to exceed 5% of the shares being offered
hereby.
 
                                       65
<PAGE>   67
 
     Silknet, its officers and directors, and certain other existing
stockholders and optionholders of Silknet have agreed that they will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly or indirectly,
or, in the case of Silknet, file with the Securities and Exchange Commission a
registration statement relating to, any shares of common stock or securities
exchangeable or exercisable for or convertible into shares of common stock or
publicly disclose the intention to do any of the foregoing without the prior
written consent of Credit Suisse First Boston for a period of 180 days after the
date of this prospectus, except under certain circumstances.
 
     The underwriters have reserved for sale, at the initial public offering
price, up to           shares of the common stock for employees, directors and
certain other persons associated with Silknet who have expressed an interest in
purchasing such shares of common stock in the offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased will
be offered by the underwriters to the general public on the same basis as other
shares offered hereby.
 
     Silknet has agreed to indemnify the underwriters against certain
liabilities, including civil liabilities under the Securities Act, or to
contribute to payments which the underwriters may be required to make in respect
thereof.
 
     Silknet has applied for listing on The Nasdaq Stock Market's National
Market under the symbol "SILK."
 
     Prior to the offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between Silknet and the representatives. The principal factors considered in
determining the public offering price will include:
 
     - the information set forth in this prospectus and otherwise available to
       the representatives;
 
     - the history of, and the prospects for, Silknet and the industry in which
       it competes;
 
     - an assessment of Silknet's management;
 
     - the prospects for, and the timing of, future earnings of Silknet;
 
     - the present state of Silknet's development and its current financial
       condition;
 
     - the general condition of the securities markets at the time of the
       offering;
 
     - the recent market prices of, and the demand for, publicly-traded common
       stock of companies in businesses similar to those of Silknet;
 
     - market conditions for initial public offerings; and
 
     - other relevant factors.
 
There can be no assurance that an active trading market will develop for the
common stock or that the common stock will trade in the market subsequent to the
offering at or above the initial public offering price.
 
     The representatives, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position. Stabilizing transactions permit bids
to purchase the underlying security so long as the stabilizing bids do not
exceed a specified maximum. Syndicate covering transactions involve purchases of
shares of the common stock in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
representatives to reclaim a selling concession from a syndicate when shares of
the common stock originally sold by such syndicate member are purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the common stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
 
                                       66
<PAGE>   68
 
                          NOTICE TO CANADIAN RESIDENTS
 
RESALE RESTRICTIONS
 
     The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that Silknet prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction, and which may require resales
to be made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
 
REPRESENTATIONS OF PURCHASERS
 
     Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to Silknet and the dealer from whom
such purchase confirmation is received that (1) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (2) where required
by law, that such purchaser is purchasing as principal and not as agent, and (3)
such purchaser has reviewed the text above under "Resale Restrictions."
 
RIGHTS OF ACTION (ONTARIO PURCHASERS)
 
     The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
 
ENFORCEMENT OF LEGAL RIGHTS
 
     All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
 
NOTICE TO BRITISH COLUMBIA RESIDENTS
 
     A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to the offering. Such a report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from Silknet. Only one such
report must be filed in respect of common stock acquired on the same date and
under the same prospectus exemption.
 
TAXATION AND ELIGIBILITY FOR INVESTMENT
 
     Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
Legislation.
 
                                       67
<PAGE>   69
 
                                 LEGAL MATTERS
 
     The validity of the shares of common stock offered hereby will be passed
upon for Silknet by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
Certain legal matters will be passed upon for the underwriters by Hale and Dorr
LLP, Boston, Massachusetts.
 
                                    EXPERTS
 
     The financial statements of Silknet as of June 30, 1997 and 1998 and for
each of the three years in the period ended June 30, 1998, all of which are
included in this prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
 
                       CHANGE IN INDEPENDENT ACCOUNTANTS
 
     In November 1998, Silknet engaged PricewaterhouseCoopers LLP as its
independent accountants, to replace KPMG Peat Marwick LLP. The decision was made
by Silknet's Board of Directors, upon the recommendation of management, and was
not due to any disagreement with KPMG Peat Marwick LLP. During the fiscal years
ended June 30, 1998 and 1997 and the subsequent interim period immediately
preceding the date of this change, Silknet had no disagreements with KPMG Peat
Marwick LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of KPMG Peat Marwick LLP, would have caused them to
make reference thereto in their report on Silknet's financial statements. The
reports of KPMG Peat Marwick LLP on Silknet's financial statements for fiscal
1996 and 1997 (the last fiscal year audited by KPMG Peat Marwick LLP) did not
contain any adverse opinion, disclaimer of opinion or qualification or
modification as to uncertainty, audit scope or accounting principles.
 
                             ADDITIONAL INFORMATION
 
     Silknet has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered hereby. This prospectus does not contain all
of the information set forth in the registration statement. For further
information with respect to Silknet and the common stock, reference is made to
the registration statement. Statements contained in this prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of the contract
or document filed as an exhibit to the registration statement, and each such
statement is qualified in all respects by reference to such exhibit. Copies of
the registration statement may be examined without charge at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661
and 7 World Trade Center, Thirteenth Floor, New York, New York 10048. Copies of
all or any portion of the registration statement may be obtained from the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, or by calling the Commission at
1-800-SEC-0330, at prescribed rates. The Commission also maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, such as Silknet, that make electronic
filings with the Commission.
 
     Silknet intends to furnish to its stockholders annual reports containing
financial statements audited by an independent public accounting firm.
 
                                       68
<PAGE>   70
 
                              SILKNET CORPORATION
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Accountants...........................  F-2
Consolidated Balance Sheets as of June 30, 1997, 1998 and
  December 31, 1998 (unaudited).............................  F-3
Consolidated Statements of Operations for the years ended
  June 30, 1996, 1997, 1998 and the six months ended
  December 31, 1997 (unaudited) and 1998 (unaudited)........  F-4
Consolidated Statements of Convertible Participating
  Preferred Stock and Stockholders' Equity (Deficit) for the
  years ended June 30, 1996, 1997 and 1998 and the six
  months ended December 31, 1998 (unaudited)................  F-5
Consolidated Statements of Cash Flows for the years ended
  June 30, 1996, 1997 and 1998 and the six months ended
  December 31, 1997 (unaudited) and December 31, 1998
  (unaudited)...............................................  F-6
Notes to Consolidated Financial Statements..................  F-7
</TABLE>
 
                                       F-1
<PAGE>   71
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and stockholders of
Silknet Software, Inc.
 
     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, convertible participating
preferred stock and stockholders' equity (deficit) and cash flows present
fairly, in all material respects, the consolidated financial position of Silknet
Software, Inc. ("Silknet") at June 30, 1997 and 1998 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of Silknet's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 18, 1998 except
for Note M for which the
date is March 2, 1999.
 
                                       F-2
<PAGE>   72
 
                             SILKNET SOFTWARE, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                      JUNE 30,                            PRO FORMA
                                                              -------------------------   DECEMBER 31,   DECEMBER 31,
                                                                 1997          1998           1998           1998
                                                              -----------   -----------   ------------   ------------
                                                                                                           (NOTE B)
                                                                                          (UNAUDITED)    (UNAUDITED)
<S>                                                           <C>           <C>           <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 4,751,988   $ 9,045,094   $  4,584,502   $  4,584,502
  Accounts receivable, net of allowance for doubtful
    accounts of $200,000 at December 31, 1998 actual and pro
    forma...................................................       32,694     1,546,967      3,878,002      3,878,002
  Prepaid expenses and other current assets.................       59,746       265,692        604,163        604,163
                                                              -----------   -----------   ------------   ------------
        Total current assets................................    4,844,428    10,857,753      9,066,667      9,066,667
Property and equipment, net.................................      528,673     1,217,029      1,477,106      1,477,106
Other assets................................................       28,824        54,149         53,788         53,788
                                                              -----------   -----------   ------------   ------------
        Total assets........................................  $ 5,401,925   $12,128,931   $ 10,597,561   $ 10,597,561
                                                              ===========   ===========   ============   ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Note payable to bank, current portion.....................      153,855       248,725        171,797        171,797
  Accounts payable..........................................      264,107       207,256        686,102        686,102
  Accrued expenses..........................................      116,394       916,908      2,333,994      2,333,994
  Deferred revenue..........................................      154,586     1,013,183      1,397,315      1,397,315
                                                              -----------   -----------   ------------   ------------
        Total current liabilities...........................      688,942     2,386,072      4,589,208      4,589,208
Note payable to bank........................................      115,392       222,222        156,096        156,096
Convertible participating preferred stock, $.01 par value
  (Note M):
  Series A;
    Authorized: 2,364,584 shares
    Issued and outstanding: 2,364,584 shares (liquidation
    value $2,799,314 at December 31, 1998)..................    2,415,869     2,659,288      2,780,997             --
  Series B;
    Authorized: 2,500,000 shares
    Issued and outstanding: 2,500,000 shares (liquidation
    value $5,779,931 at December 31, 1998)..................    5,015,982     5,518,585      5,769,885             --
  Series C;
    Authorized: 3,089,157 shares
    Issued and outstanding: 3,089,157 shares (liquidation
    value $11,503,448 at December 31, 1998).................           --    10,929,494     11,469,806             --
                                                              -----------   -----------   ------------   ------------
        Total convertible participating preferred stock.....    7,431,851    19,107,367     20,020,688             --
                                                              -----------   -----------   ------------   ------------
Commitments and contingencies (Note J)
Stockholders' equity (deficit) (Note M):
  Common stock, $.01 par value;
    Authorized: 15,000,000 shares
    Issued and outstanding: 2,557,900, 2,627,625 and
    2,716,650 shares at June 30, 1997, 1998 and December 31,
    1998, respectively, and 10,670,391 shares on a pro forma
    basis...................................................       25,579        26,276         27,166        106,703
Additional paid-in capital..................................      818,462       887,489      1,297,881     19,232,564
Accumulated dividends on
  preferred stock...........................................     (190,214)   (1,093,147)    (2,006,468)            --
Deferred compensation.......................................     (209,016)     (125,409)      (397,758)      (397,758)
Other comprehensive income..................................           --            --          1,288          1,288
Accumulated deficit.........................................   (3,279,071)   (9,281,939)   (13,090,540)   (13,090,540)
                                                              -----------   -----------   ------------   ------------
      Total stockholders'
        equity (deficit)....................................   (2,834,260)   (9,586,730)   (14,168,431)     5,852,257
                                                              -----------   -----------   ------------   ------------
        Total liabilities and stockholders' equity
          (deficit).........................................  $ 5,401,925   $12,128,931   $ 10,597,561   $ 10,597,561
                                                              ===========   ===========   ============   ============
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       F-3
<PAGE>   73
 
                             SILKNET SOFTWARE, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                            SIX MONTHS ENDED
                                    FOR THE YEARS ENDED JUNE 30,              DECEMBER 31,
                                -------------------------------------   -------------------------
                                  1996         1997          1998          1997          1998
                                ---------   -----------   -----------   -----------   -----------
                                                                        (UNAUDITED)   (UNAUDITED)
<S>                             <C>         <C>           <C>           <C>           <C>
Revenue:
  License.....................         --   $    74,638   $ 2,976,938   $   508,541   $ 3,688,364
  Services....................  $ 266,266       119,071       670,517       127,797     1,855,206
                                ---------   -----------   -----------   -----------   -----------
          Total revenue.......    266,266       193,709     3,647,455       636,338     5,543,570
Cost of revenue:
  License.....................         --        28,940        32,480         5,549       183,709
  Services....................    140,992       311,626     1,353,603       574,030     1,518,830
                                ---------   -----------   -----------   -----------   -----------
          Total cost of
             revenue..........    140,992       340,566     1,386,083       579,579     1,702,539
                                ---------   -----------   -----------   -----------   -----------
Gross margin..................    125,274      (146,857)    2,261,372        56,759     3,841,031
Operating expenses:
  Sales and marketing.........     33,085       888,017     4,802,243     1,814,135     4,235,817
  Research and development....    119,721       960,845     2,408,723       944,126     2,274,377
  General and
     administrative...........    430,786       696,579     1,187,275       493,909     1,290,073
                                ---------   -----------   -----------   -----------   -----------
          Total operating
             expenses.........    583,592     2,545,441     8,398,241     3,252,170     7,800,267
                                ---------   -----------   -----------   -----------   -----------
Operating loss................   (458,318)   (2,692,298)   (6,136,869)   (3,195,411)   (3,959,236)
Interest income (expense),
  net.........................     (6,708)      (60,206)      134,001        65,862       150,635
Net loss......................   (465,026)   (2,752,504)   (6,002,868)    3,129,549    (3,808,601)
Accrued dividends for
  preferred stockholders......         --       190,214       902,933        51,478       913,321
                                ---------   -----------   -----------   -----------   -----------
Net loss attributable to
  common stockholders.........  $(465,026)  $(2,942,718)  $(6,905,801)  $(3,181,027)  $(4,721,922)
                                =========   ===========   ===========   ===========   ===========
Basic and diluted net loss per
  share.......................  $   (0.18)  $     (1.15)  $     (2.69)  $     (1.24)  $     (1.76)
Shares used in computing basic
  and diluted net loss
  per share...................  2,550,781     2,557,153     2,566,258     2,557,900     2,675,345
Unaudited pro forma basic and
  diluted net loss per
  share.......................      (0.18)        (0.63)        (0.76)        (0.42)        (0.36)
Shares used in computing
  unaudited pro forma basic
  and diluted net loss per
  share.......................  2,550,781     4,397,564     7,879,405     7,422,484    10,629,086
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                       F-4
<PAGE>   74
 
                             SILKNET SOFTWARE, INC.
 
              CONSOLIDATED STATEMENTS OF CONVERTIBLE PARTICIPATING
               PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
                  FOR THE YEARS ENDED JUNE 30, 1996, 1997 AND
          1998 AND THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
                                  CONVERTIBLE PARTICIPATING                                      ACCUMULATED
                                       PREFERRED STOCK           COMMON STOCK       ADDITIONAL   DIVIDENDS ON
                                  -------------------------   -------------------    PAID-IN      PREFERRED       DEFERRED
                                    SHARES        VALUE        SHARES      VALUE     CAPITAL        STOCK       COMPENSATION
                                  ----------   ------------   ---------   -------   ----------   ------------   ------------
<S>                               <C>          <C>            <C>         <C>       <C>          <C>            <C>
Balance at June 30, 1995........                              2,500,000   $25,000   $   55,500
 Issuance of common stock.......                                 55,000       550       54,450
 Capital contribution by
   founder......................                                                       124,500
 Issuance of common stock
   purchase warrants............                                                        46,967
 Deferred compensation related
   to grant of stock options....                                                       536,207                   $(536,207)
 Amortization of deferred
   compensation.................                                                                                   185,204
 Net loss.......................
                                  ---------    -----------    ---------   -------   ----------                   ---------
Balance at June 30, 1996........                              2,555,000    25,550      817,624                    (351,003)
 Issuance of common stock.......                                  2,900        29        2,871
 Issuance of Series A
   Convertible Participating
   Preferred Stock, net of
   offering costs...............  2,364,584    $ 2,251,683
 Issuance of Series B
   Convertible Participating
   Preferred Stock net of
   offering costs...............  2,500,000      4,989,954
 Issuance of common stock
   purchase warrants............                                                        46,967
 Stock options canceled.........                                                       (49,000)                     49,000
 Amortization of deferred
   compensation.................                                                                                    92,987
 Accrued dividends for preferred
   stockholders.................                   190,214                                       $  (190,214)
 Net loss.......................
                                  ---------    -----------    ---------   -------   ----------   -----------     ---------
Balance at June 30, 1997........  4,864,584      7,431,851    2,557,900    25,579      818,462      (190,214)     (209,016)
 Issuance of common stock.......                                 69,725       697       69,027
 Issuance of Series C
   Convertible Participating
   Preferred Stock, net of
   offering costs...............  3,089,157     10,772,583
 Amortization of deferred
   compensation.................                                                                                    83,607
 Accrued dividends for preferred
   stockholders.................                   902,933                                          (902,933)
 Net loss.......................
                                  ---------    -----------    ---------   -------   ----------   -----------     ---------
Balance at June 30, 1998........  7,953,741     19,107,367    2,627,625    26,276      887,489    (1,093,147)     (125,409)
 Issuance of common stock.......                                 89,025       890       87,123
 Deferred compensation related
   to grant of stock options....                                                       323,269                    (323,269)
 Amortization of deferred
   compensation.................                                                                                    50,920
 Accrued dividends for preferred
   stockholders.................                   913,321                                          (913,321)
 Net loss.......................
 Other comprehensive income.....
                                  ---------    -----------    ---------   -------   ----------   -----------     ---------
Balance at December 31, 1998....  7,953,741    $20,020,688    2,716,650   $27,166   $1,297,881   $(2,006,468)    $(397,758)
                                  =========    ===========    =========   =======   ==========   ===========     =========
 
<CAPTION>
 
                                      OTHER                           TOTAL
                                  COMPREHENSIVE   ACCUMULATED     STOCKHOLDERS'
                                     INCOME         DEFICIT      EQUITY (DEFICIT)
                                  -------------   ------------   ----------------
<S>                               <C>             <C>            <C>
Balance at June 30, 1995........                  $    (61,541)    $     18,959
 Issuance of common stock.......                                         55,000
 Capital contribution by
   founder......................                                        124,500
 Issuance of common stock
   purchase warrants............                                         46,967
 Deferred compensation related
   to grant of stock options....
 Amortization of deferred
   compensation.................                                        185,204
 Net loss.......................                      (465,026)        (465,026)
                                                  ------------     ------------
Balance at June 30, 1996........                      (526,567)         (34,396)
 Issuance of common stock.......                                          2,900
 Issuance of Series A
   Convertible Participating
   Preferred Stock, net of
   offering costs...............
 Issuance of Series B
   Convertible Participating
   Preferred Stock net of
   offering costs...............
 Issuance of common stock
   purchase warrants............                                         46,967
 Stock options canceled.........
 Amortization of deferred
   compensation.................                                         92,987
 Accrued dividends for preferred
   stockholders.................                                       (190,214)
 Net loss.......................                    (2,752,504)      (2,752,504)
                                                  ------------     ------------
Balance at June 30, 1997........                    (3,279,071)      (2,834,260)
 Issuance of common stock.......                                         69,724
 Issuance of Series C
   Convertible Participating
   Preferred Stock, net of
   offering costs...............
 Amortization of deferred
   compensation.................                                         83,607
 Accrued dividends for preferred
   stockholders.................                                       (902,933)
 Net loss.......................                    (6,002,868)      (6,002,868)
                                                  ------------     ------------
Balance at June 30, 1998........                    (9,281,939)      (9,586,730)
 Issuance of common stock.......                                         88,013
 Deferred compensation related
   to grant of stock options....
 Amortization of deferred
   compensation.................                                         50,920
 Accrued dividends for preferred
   stockholders.................                                       (913,321)
 Net loss.......................                    (3,808,601)      (3,808,601)
 Other comprehensive income.....     $1,288                               1,288
                                     ------       ------------     ------------
Balance at December 31, 1998....     $1,288       $(13,090,540)    $(14,168,431)
                                     ======       ============     ============
</TABLE>
 
-------------------------
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                       F-5
<PAGE>   75
 
                             SILKNET SOFTWARE, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                               SIX MONTHS ENDED
                                                       FOR THE YEARS ENDED JUNE 30,              DECEMBER 31,
                                                   -------------------------------------   -------------------------
                                                     1996         1997          1998          1997          1998
                                                   ---------   -----------   -----------   -----------   -----------
                                                                                                  (UNAUDITED)
<S>                                                <C>         <C>           <C>           <C>           <C>
Cash flows from operating activities:
  Net loss.......................................  $(465,026)  $(2,752,504)  $(6,002,868)  $(3,129,549)  $(3,808,601)
  Adjustments to reconcile net loss to net cash
    used in operating activities:
    Depreciation and amortization................     24,598       187,449       339,397       125,820       317,243
    Provision for doubtful accounts..............         --            --            --            --       200,000
    Loss on disposal of equipment................         --            --         4,318            --            --
    Amortization of deferred compensation........    185,204        92,987        83,607        41,802        50,920
    Stock issued for services....................      5,000         2,900            --            --            --
    Changes in operating assets and liabilities:
      Accounts receivable........................    (55,365)       22,671    (1,514,273)     (210,118)   (2,531,035)
      Prepaid and other current assets...........     (5,199)      (22,500)     (205,946)      (76,672)          361
      Other assets...............................         --       (59,746)      (25,325)       (7,489)     (338,471)
      Accounts payable...........................     (3,063)      231,647       (56,851)      (59,212)      478,845
      Accrued expenses...........................     12,347        94,546       800,514       282,233     1,417,087
      Deferred revenues..........................         --       154,586       858,597       (43,332)      384,132
                                                   ---------   -----------   -----------   -----------   -----------
         Net cash used in operating activities...   (301,504)   (2,047,964)   (5,718,830)   (3,076,517)   (3,829,519)
Cash flows from investing activities:
  Purchase of property and equipment.............    (46,162)     (554,844)   (1,058,671)     (220,123)     (577,320)
  Proceeds from dispositions of property and
    equipment....................................         --            --        26,600            --            --
                                                   ---------   -----------   -----------   -----------   -----------
         Net cash used in investing activities...    (46,162)     (554,844)   (1,032,071)     (220,123)     (577,320)
                                                   ---------   -----------   -----------   -----------   -----------
Cash flows from financing activities:
  Proceeds from issuance of common stock.........     50,000            --        69,724            --        88,013
  Proceeds from capital contributions............    124,500            --            --            --            --
  Proceeds from issuance of notes payable and
    warrants.....................................    261,117       510,000       400,000       290,491            --
  Payments on notes payable......................    (64,541)     (187,329)     (198,300)      (76,928)     (143,054)
  Proceeds from issuance of preferred stock, net
    of issuance costs............................         --     6,991,637    10,772,583            --            --
                                                   ---------   -----------   -----------   -----------   -----------
         Net cash provided by (used in) financing
           activities............................    371,076     7,314,308    11,044,007       213,563       (55,041)
                                                   ---------   -----------   -----------   -----------   -----------
Net increase (decrease) in cash and cash
  equivalents....................................     23,410     4,711,500     4,293,106    (3,083,077)   (4,461,880)
Effect of exchange rate changes on cash and cash
  equivalents....................................         --            --            --            --         1,288
                                                   ---------   -----------   -----------   -----------   -----------
Cash and cash equivalents at beginning of
  period.........................................     17,078        40,488     4,751,988     4,751,988     9,045,094
                                                   ---------   -----------   -----------   -----------   -----------
Cash and cash equivalents at end of period.......  $  40,488   $ 4,751,988   $ 9,045,094   $ 1,668,911   $ 4,584,502
                                                   =========   ===========   ===========   ===========   ===========
Supplemental schedule of cash flow information:
  Interest paid..................................  $   6,708   $    15,201   $    39,438   $    13,991   $    20,426
                                                   =========   ===========   ===========   ===========   ===========
Supplemental schedule of non-cash financing
  activity:
  Settlement of debt through issuance of Series A
    Convertible Participating Preferred Stock....         --   $   250,000            --            --            --
                                                   =========   ===========   ===========   ===========   ===========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       F-6
<PAGE>   76
 
                             SILKNET SOFTWARE, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
 
A.  NATURE OF THE BUSINESS:
 
     Silknet develops and sells software that allows companies to offer
personalized marketing, sales, electronic commerce and customer support services
through a single Web site interface. Silknet's products enable a company to
deliver these services to its customers over the Web through real-time
collaboration and customer self-service. Silknet's products allow a company to
coordinate its interactions with customers by integrating a variety of
communications media, such as the Web, e-mail and the telephone. Silknet's
software can capture and consolidate data derived from all these sources and
distribute it throughout a company and to its partners to provide a single view
of a customer. This solution is more efficient for a company and also more
efficient for its customers, creating a competitive advantage for that company.
 
     Silknet is subject to risks and uncertainties common to growing
technology-based companies, including rapid technological change, growth and
commercial acceptance of the Internet, dependence on principal products and
third party technology, new product development, new product introductions and
other activities of competitors, dependence on key personnel, reliance on a
limited number of distributors, international expansion, lengthening sales cycle
and limited operating history.
 
     Silknet has also experienced substantial net losses since its inception
and, as of December 31, 1998, had an accumulated deficit of $13,090,540. Such
losses and accumulated deficit resulted from Silknet's lack of substantial
revenue and significantly increased costs incurred in the development of
Silknet's products and in the preliminary establishment of Silknet's
infrastructure. For the foreseeable future, Silknet expects to continue to
experience significant growth in its operating expenses in order to execute its
current business plan, particularly research and development and sales and
marketing expenses. As a result, Silknet's business plan indicates that
additional financing would be required to support its planned expenditures. In
February 1999, Silknet issued Series D Convertible Participating Preferred Stock
for net proceeds of approximately $8.8 million. In the event that an initial
public offering is not completed on a timely basis, Silknet believes that these
additional funds, along with available bank lines of credit, would be sufficient
to fund operations through at least the next 12 months.
 
B.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
  Principles of Consolidation
 
     The consolidated financial statements include the accounts of Silknet and
its wholly-owned subsidiary. Intercompany balances and transactions have been
eliminated.
 
  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 revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include the valuation of deferred tax assets.
 
                                       F-7
<PAGE>   77
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Cash and Cash Equivalents
 
     Silknet considers money market mutual funds and all short-term investments
with original maturities of three months or less at the date of purchase to be
cash equivalents. Silknet invests its excess cash in money market funds and
short-term investments which management believes are subject to minimal market
and credit risk.
 
  Property and Equipment
 
     Property and equipment are stated at cost and are depreciated over their
estimated useful lives, generally three years, using the straight-line method.
Upon sale or retirement, the asset cost and related accumulated depreciation are
removed from the respective accounts, and any related gain or loss is reflected
in operations. Repair and maintenance costs are expensed as incurred.
 
  Income Taxes
 
     Silknet accounts for income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted rates in effect for the year in which those temporary differences
are expected to be recovered or settled.
 
  Fair Value of Financial Instruments
 
     The carrying amount of Silknet's financial instruments, which include cash
equivalents, accounts receivable, accounts payable, accrued expenses and notes
payable approximate their fair values at December 31, 1998.
 
  Revenue Recognition
 
     Silknet recognizes revenue from software licenses upon delivery to
customers provided no significant post-delivery obligations or uncertainties
remain and collection of the related receivable is probable. License or services
revenue subject to a significant acceptance clause is deferred until acceptance
is received from the customer. Revenue under arrangements where multiple
products or services are sold together under one contract is allocated to each
element based on their relative fair values, with these fair values being
determined using the price charged when that element is sold separately. For
agreements with specified upgrade rights, the revenue related to such upgrade
rights is deferred until the specified upgrade is delivered. Training and
consulting services revenue is recognized as services are provided and revenue
for maintenance services is recognized ratably over the term of the service
agreement.
 
  Concentrations of Credit Risk and Significant Customers
 
     A potential exposure to Silknet is a concentration of credit risk in trade
accounts receivable. To minimize this risk, ongoing credit evaluations of
customers' financial condition are performed, although collateral generally is
not required. As of June 30, 1997, four customers accounted for 44%, 29%, 17%
and 10% of accounts receivable, while three customers accounted for 34%, 25% and
11% of accounts receivable as of June 30, 1998, and one customer accounted for
76% of accounts receivable as of December 31, 1998. In addition, four customers
accounted for 34%, 27%, 16% and 14% of total revenue for the year ended June 30,
1997, while five customers accounted for 20%, 14%, 11%, 10%
 
                                       F-8
<PAGE>   78
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
and 10% of total revenue for the year ended June 30, 1998, and three customers
accounted for 45%, 15% and 10% of total revenue for the six months ended
December 31, 1998.
 
  Research and Development and Software Development Costs
 
     Costs incurred in the research and development of Silknet's products are
expensed as incurred, except for certain software development costs. Costs
associated with the development of computer software are expensed prior to the
establishment of technological feasibility (as defined by Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed") and capitalized thereafter.
Costs eligible for capitalization have been insignificant.
 
  Accounting for Stock-Based Compensation
 
     Silknet accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, no compensation expense is recorded for options issued to employees
in fixed amounts and with fixed exercise prices at least equal to the fair
market value of Silknet's common stock at the date of grant. Silknet has adopted
the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation,"
through disclosure only (Note I). All stock-based awards to non-employees are
accounted for at their fair value in accordance with SFAS No. 123.
 
  Unaudited Interim Financial Statements
 
     In the opinion of Silknet's management, the December 31, 1998 unaudited
interim financial statements include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations for that period. The results of operations
for the six month period ended December 31, 1998 are not necessarily indicative
of the results of operations for the full year ended June 30, 1999.
 
  Unaudited Pro Forma Balance Sheet
 
     Upon the closing of Silknet's anticipated initial public offering, all of
the outstanding shares of Series A Convertible Participating Preferred Stock,
Series B Convertible Participating Preferred Stock, and Series C Convertible
Participating Preferred Stock (collectively "Preferred Stock") will
automatically convert into 7,953,741 shares of common stock. These conversions
have been reflected in the unaudited pro forma balance sheet as of December 31,
1998, and exclude 1,205,913 shares of common stock issuable upon the conversion
of Series D Convertible Participating Preferred Stock issued after December 31,
1998 (Note M).
 
  Net Loss Per Share and Pro Forma Net Loss per Share
 
     Net loss per share is computed under SFAS No. 128, "Earnings Per Share."
Basic net loss per share is computed using the weighted average number of shares
of common stock outstanding. Net loss used in the calculation is increased by
the accrued dividends for the Preferred Stock outstanding in each year. Diluted
loss per share does not differ from basic loss per share since potential common
shares from conversion of preferred stock, stock options and warrants are
anti-dilutive for all periods presented and are therefore excluded from the
calculation. During the years ended June 30, 1996, 1997, and 1998 and the six
months ended December 31, 1998, options to purchase 670,400,
 
                                       F-9
<PAGE>   79
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
1,220,158, 1,506,092 and 2,179,962 shares of common stock, respectively,
Preferred Stock convertible into 0, 4,864,584, 7,953,741 and 7,953,741 shares of
common stock, respectively, and warrants for 125,000, 750,000, 750,000 and
750,000 shares of common stock, respectively, were not included in the
computation of diluted earnings per share since their inclusion would be
antidilutive. Pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding shares of Preferred Stock
into common stock, as if the shares had converted immediately upon their
issuance. Accordingly, net loss has not been increased for the accrued dividends
for Preferred Stock in the calculation of pro forma net loss per share.
 
  Comprehensive Income
 
     On July 1, 1998, Silknet adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes standards for the reporting and display of comprehensive income and
its components. SFAS No. 130 is effective for Silknet's fiscal year ending June
30, 1999 including interim periods for that year. Comprehensive income consists
of net income and foreign currency translation adjustments and is presented in
the consolidated statement of convertible participating preferred stock and
stockholders' equity (deficit). Prior year financial statements have been
reclassified to conform to the SFAS No. 130 requirements. The adoption of SFAS
130 has not affected and will not affect Silknet's financial position or results
of operations.
 
  Recently Issued Accounting Pronouncements
 
     In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." This statement changes the way that public business enterprises
report segment information, including financial and descriptive information
about their selected segment information. Under SFAS No. 131, operating segments
are defined as revenue-producing components of the enterprise which are
generally used internally for evaluating segment performance. SFAS No. 131 is
effective for Silknet's fiscal year ending June 30, 1999 and will not affect
Silknet's financial position or results of operations.
 
     In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits and is
effective for Silknet's fiscal year ending June 30, 1999. SFAS No. 132 relates
to disclosure only and will not affect Silknet's financial position or results
of operations.
 
     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. Silknet does not expect SFAS No. 133 to have a material effect on its
financial position or results of operations.
 
                                      F-10
<PAGE>   80
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SoP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SoP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. Silknet does not expect
SoP 98-1, which is effective for Silknet beginning July 1, 1999, to have a
material effect on its financial position or results of operations.
 
     In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of
Start-Up Activities." Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SoP 98-5, the cost of start-up activities should be expensed as incurred.
SoP 98-5 is effective for Silknet beginning July 1, 1999 and Silknet does not
expect its adoption to have a material effect on its financial position or
results of operations.
 
     In October 1997, the AcSEC of the American Institute of Certified Public
Accountants issued SoP 97-2, "Software Revenue Recognition," which provides
guidance on the timing and amount of revenue recognition when licensing,
selling, leasing or otherwise marketing computer software and related services.
Subsequently, in March 1998, the FASB approved SoP 98-4, "Deferral of the
Effective Date of a Provision of SoP 97-2, Software Revenue Recognition." SoP
98-4 provides for the one-year deferral of certain provisions of SoP 97-2
pertaining to its requirements for what constitutes vendor specific objective
evidence of the fair value of multiple elements included in an arrangement. In
December 1998, the FASB approved SoP 98-9, "Modification of SoP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions," which will retain
the limitations of SoP 97-2 on what constitutes vendor-specific objective
evidence of fair value. SoP 98-9 will be effective for transactions entered into
in fiscal years beginning after March 15, 1999. Silknet adopted SoP 97-2 for all
transactions entered into after June 30, 1998. Based upon its interpretation of
SoP 97-2, 98-4 and 98-9, Silknet believes that its current revenue recognition
policies and practices are consistent with the provisions of the new guidance.
Adoption of SoP 97-2 and SoP 98-4 did not have a material impact on Silknet's
financial position or results of operation. Silknet believes that the adoption
of SoP 98-9 will not have a material impact on Silknet's financial position or
results of operations.
 
C.  PROPERTY AND EQUIPMENT:
 
     Property and equipment consists of the following at:
 
<TABLE>
<CAPTION>
                                                     JUNE 30,
                                              ----------------------   DECEMBER 31,
                                                1997         1998          1998
                                              ---------   ----------   ------------
<S>                                           <C>         <C>          <C>
Computer....................................  $ 399,444   $1,032,015    $1,463,479
Furniture and fixtures......................    243,215      525,104       648,423
Leasehold improvements......................      6,833      102,650       125,187
                                              ---------   ----------    ----------
                                                649,492    1,659,769     2,237,089
Less accumulated depreciation and
  amortization..............................   (120,819)    (442,740)     (759,983)
                                              ---------   ----------    ----------
          Total.............................  $ 528,673   $1,217,029    $1,477,106
                                              =========   ==========    ==========
</TABLE>
 
                                      F-11
<PAGE>   81
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Depreciation and amortization expense for the years ended June 30, 1996, 1997
and 1998 and the six months ended December 31, 1998 was $24,598, $93,515,
$339,397 and $317,243, respectively.
 
D.  ACCRUED LIABILITIES:
 
     Accrued liabilities consist of:
 
<TABLE>
<CAPTION>
                                                    JUNE 30,
                                              --------------------    DECEMBER 31,
                                                1997        1998          1998
                                              --------    --------    ------------
<S>                                           <C>         <C>         <C>
Commissions, bonuses and other incentives...              $334,198     $  771,512
Vacation....................................  $ 33,190     196,037        282,780
Royalties...................................     7,480      15,420         47,500
Professional services.......................    14,000      72,000        152,485
Marketing...................................        --      74,041        320,268
Sales tax...................................    11,475     112,823        282,927
Other.......................................    50,249     112,389        476,522
                                              --------    --------     ----------
          Total.............................  $116,394    $916,908     $2,333,994
                                              ========    ========     ==========
</TABLE>
 
E.  INCOME TAXES:
 
     The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
 
<TABLE>
<CAPTION>
                                                  JUNE 30,
                                         --------------------------    DECEMBER 31,
                                            1997           1998            1998
                                         -----------    -----------    ------------
<S>                                      <C>            <C>            <C>
Deferred tax assets (liabilities):
  Organizational and start-up costs,
     capitalized for tax...............  $    12,157    $     8,318    $     6,398
  Fixed assets.........................      (11,340)       (36,711)       (46,778)
  Accrued expenses.....................       22,210         96,951        112,685
  Deferred compensation................      112,028        145,696        162,530
  Research and experimentation
     credit............................       36,902         36,902         36,902
  Net operating loss carryforwards.....    1,023,217      2,996,487      4,269,400
                                         -----------    -----------    -----------
                                           1,195,174      3,247,643      4,541,137
     Less valuation allowance..........   (1,195,174)    (3,247,643)    (4,541,137)
                                         -----------    -----------    -----------
          Net deferred tax assets......           --             --             --
                                         ===========    ===========    ===========
</TABLE>
 
     In assessing the realizability of deferred tax assets, Silknet considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Due to the fact that Silknet has incurred net
losses to date and expects to experience net losses in the near future, there is
substantial doubt about whether Silknet will have sufficient future taxable
income necessary to utilize the deferred tax assets over the periods which the
deferred tax assets are deductible for federal and
 
                                      F-12
<PAGE>   82
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
state income tax purposes. As a result, a 100% valuation allowance has been
applied against Silknet net deferred tax assets.
 
     The following reconciles the difference between the federal statutory rate
and Silknet's effective tax rate:
 
<TABLE>
<CAPTION>
                                         YEAR ENDED JUNE 30,          SIX MONTHS
                                       ------------------------         ENDING
                                         1997          1998        DECEMBER 31, 1998
                                       ---------    -----------    -----------------
<S>                                    <C>          <C>            <C>
U.S. federal statutory rate..........  $(935,851)   $(2,040,975)      $(1,291,825)
State income taxes, net..............    (22,034)       (28,006)          (18,880)
Research and experimentation tax
  credit.............................    (36,902)            --                --
Other................................      2,316         16,512            17,211
Change in valuation allowance........    992,471      2,052,469         1,293,494
                                       ---------    -----------       -----------
                                              --             --                --
                                       =========    ===========       ===========
</TABLE>
 
     At December 31, 1998, Silknet has net operating loss carryforwards of
approximately $12,372,648 for federal and state income tax purposes which expire
beginning in 2012. Under the provisions of the Internal Revenue Code, certain
substantial changes in Silknet's ownership may have limited, or may limit in the
future, the amount of net operating loss and research and experimentation credit
carryforwards which could be utilized annually to offset future taxable income
and income tax liabilities. The amount of any annual limitation is determined
based upon Silknet's value prior to an ownership change.
 
F.  LINES OF CREDIT AND NOTES PAYABLE:
 
  Lines of Credit
 
     During 1996, Silknet maintained a $125,000 line of credit with a bank.
Interest on the borrowings were at the bank's prime rate plus 2% (10.25% at June
30, 1996). Borrowings outstanding under the line totaled $71,576 at June 30,
1996. This line of credit was repaid and terminated in 1997.
 
     During March 1997, Silknet entered into an equipment loan line agreement
under which Silknet may borrow up to $300,000 to finance fixed asset purchases.
Advances under this facility are to be repaid over a 24-month period, commencing
on April 30, 1997. The facility bears interest at the bank's prime rate plus 2%
(9.75% at December 31, 1998). Borrowings under the facility are collateralized
by all assets of Silknet. Silknet is required to meet certain minimum financial
covenants for tangible net worth and liquidity of which Silknet has been in
compliance. At December 31, 1998, the balance outstanding totaled $39,004.
 
     During December 1997, Silknet entered into an equipment loan line agreement
under which Silknet may borrow up to $400,000 to finance fixed asset purchases.
Advances under this facility are to be repaid over a 36-month period, commencing
on March 31, 1998. The facility bears interest at the bank's prime rate plus 1%
(8.75% at December 31, 1998). Borrowings under the facility are collateralized
by all assets of Silknet. Silknet is required to meet certain minimum financial
covenants for tangible net worth and liquidity of which Silknet has been in
compliance. At December 31, 1998, the balance outstanding totaled $288,889.
 
                                      F-13
<PAGE>   83
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Payments of principal and interest on existing debt are due as follows:
 
<TABLE>
<S>                                                     <C>
Fiscal year ended June 30,
  1999................................................  $282,260
  2000................................................   148,914
  2001................................................    92,205
                                                        --------
  Total payments......................................   523,379
  Less amounts representing interest..................    52,432
                                                        --------
                                                        $470,947
                                                        ========
</TABLE>
 
  Notes Payable
 
     During May 1996, Silknet entered into a Note and Warrant Purchase Agreement
(the "Agreement") with a private investor. Under the Agreement, Silknet may
borrow up to $250,000 and must issue warrants to purchase 250,000 shares of
Silknet's common stock at $1.00 per share. In May 1996, Silknet issued a demand
subordinated note payable under the agreement in the amount of $125,000 in
exchange for cash and issued warrants to purchase 125,000 shares of Silknet's
common stock at $1.00 per share (Note G). The warrants expire in May 2002. The
fair value of the warrants at the time of issuance was estimated to be
approximately $47,000 which was recorded as additional paid-in capital and
reduced the carrying value of the debt. The fair value was estimated using the
Black-Scholes model with the following assumptions: dividend yield of 0%,
volatility of 0%, risk free interest rate of 6.5% and an expected life of 5
years. The discount on the note of $47,000 was amortized over the estimated life
of the note of six months.
 
     In July 1996, Silknet issued a demand subordinated note payable in the
amount of $125,000 in exchange for cash and issued additional warrants to
purchase 125,000 shares of Silknet's common stock at $1.00 per share (Note G).
The fair value of the warrants at the time of issuance was estimated to be
approximately $47,000 which was recorded as additional paid-in capital and
reduced the carrying value of the debt. The fair value was estimated using the
Black-Scholes model with the following assumptions: dividend yield of 0%,
volatility of 0%, risk free interest rate of 6.5% and an expected life of 5
years. The discount on the note of $47,000 was amortized over the estimated life
of the note of six months.
 
     In November 1996, Silknet repaid the full amount due under each demand
subordinated note by issuing 268,388 shares of Series A Convertible
Participating Preferred Stock (Note H). No gain or loss was recognized on the
exchange.
 
G.  COMMON STOCK WARRANTS:
 
     During May 1996, Silknet issued warrants to purchase 125,000 shares of
common stock at $1.00 per share in connection with a $125,000 bridge loan
agreement with Silknet (Note F). During 1997, Silknet issued additional warrants
to purchase 125,000 shares of common stock to a private investor in connection
with the second draw of $125,000 under the bridge loan agreement with Silknet
(Note F). The total consideration received under each issuance was allocated
between the note and the warrants based upon their relative fair values at the
date of issuance. The estimated fair value at the time of issuance assigned to
each issue of the warrants was approximately $47,000 and was recorded as
additional paid-in capital, thus reducing the carrying value of the debt. The
discount on
 
                                      F-14
<PAGE>   84
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
the note of $94,000 was amortized over the estimated life of the note of six
months. The warrants expire in May 2002.
 
     During 1997, in connection with the issuance of the Series B Convertible
Participating Preferred Stock, Silknet issued warrants to purchase 500,000
shares of common stock at $2.20 per share. The warrants expire in June 2003. The
estimated fair value of the warrants at the time of issuance using the
Black-Scholes model was insignificant.
 
H.  CONVERTIBLE PARTICIPATING PREFERRED STOCK:
 
     In October 1996, Silknet issued 2,364,584 shares of Series A Convertible
Participating Preferred Stock ("Series A Preferred Stock") at $0.96 per share to
private investors for total consideration of $2,251,683 (net of offering costs
of $18,317). Of the total consideration, $250,000 was paid by one investor
through the cancellation of demand subordinated notes payable issued by Silknet
(Note F).
 
     The Series A Preferred Stock is voting. Dividends accrue annually and are
cumulative at a rate of 10% of the original purchase price of $0.96 per share,
on a per share basis. Dividends must be paid before any other dividends can be
declared or paid on any other class of preferred stock or on any class of common
stock. The Series A Preferred Stock is convertible at any time by the holders,
at the then applicable conversion rate adjusted from time to time (one to one on
the date of issuance). The Series A Preferred Stock is redeemable at the option
of the holder beginning in May 2003 if Silknet has not made a qualified initial
public offering of its common stock, as defined. Upon liquidation, holders of
Series A Preferred Stock are entitled to receive, out of funds then generally
available, $0.96 per share, plus any accrued and unpaid dividends, thereon.
Following payment to holders of all other classes of preferred stock subordinate
to the Series A Preferred Stock, holders of Series A Preferred Stock are then
entitled to share in remaining available funds on an "as-if converted" basis
with holders of common stock.
 
     In June 1997, the Company issued 2,500,000 shares of Series B Convertible
Participating Preferred Stock ("Series B Preferred Stock") at $2.00 per share to
private investors for total consideration of $4,989,954 (net of offering costs
of $10,046).
 
     The Series B Preferred Stock is voting. Dividends accrue annually and are
cumulative at a rate of 10% of the original purchase price of $2.00 per share,
on a per share basis. Dividends must be paid before any other dividends can be
declared or paid on any class of common stock. The Series B Preferred Stock is
convertible at any time by the holders, at the then applicable conversion rate
as adjusted from time to time (one to one on the date of issuance). The Series B
Preferred Stock is redeemable at the option of the holder beginning in May 2003
if Silknet has not made a qualified initial public offering of its common stock,
as defined. Upon liquidation, holders of Series B Preferred Stock are entitled
to receive, out of funds then generally available, $2.00 per share, plus any
accrued and unpaid dividends, thereon. Following payment to holders of all other
classes of preferred stock subordinate to the Series B Preferred Stock, holders
of Series B Preferred Stock are then entitled to share in remaining available
funds on an "as if converted" basis with holders of common stock.
 
     In May 1998, Silknet issued 3,089,157 shares of Series C Convertible
Participating Preferred Stock ("Series C Preferred Stock") at $3.498117 per
share to private investors for total consideration of $10,772,583 (net of
offering costs of $33,642).
 
     The Series C Preferred Stock is voting. Dividends accrue annually and are
cumulative at a rate of 10% of the original purchase price of $3.498117 per
share, on a per share basis. Dividends must be paid before any other dividends
can be declared or paid on any class of common stock. The Series C
 
                                      F-15
<PAGE>   85
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Preferred Stock is convertible at any time by the holders, at the then
applicable conversion rate as adjusted from time to time (one to one on the date
of issuance). The Series C Preferred Stock is redeemable at the option of the
holder beginning in May 2003 if Silknet has not made a qualified initial public
offering of its common stock, as defined. Upon liquidation, holders of Series C
Preferred Stock are entitled to receive, out of funds then generally available,
$3.498117 per share, plus all accrued and unpaid dividends thereon. Following
payment to holders of all other classes of preferred stock subordinate to the
Series C Preferred Stock, holders of Series C Preferred Stock are then entitled
to share in remaining available funds on an "as if converted" basis with holders
of common stock.
 
     Upon the closing of the anticipated public offering, all outstanding shares
of Preferred Stock will automatically convert into shares of common stock as
follows:
 
<TABLE>
<CAPTION>
                                                     SHARES OF
SERIES                                              COMMON STOCK
------                                              ------------
<S>                                                 <C>
Series A Preferred Stock..........................   2,364,584
Series B Preferred Stock..........................   2,500,000
Series C Preferred Stock..........................   3,089,157
                                                     ---------
                                                     7,953,741
</TABLE>
 
I.  STOCK OPTIONS:
 
     On August 8, 1995, the Board of Directors authorized the Employee Stock
Option Plan (the "Plan"). The Plan provides for the issuance of options to
purchase up to 2,391,900 shares of Silknet's common stock to eligible employees,
officers, directors, consultants and advisors of Silknet. Under the Plan, the
Board of Directors may award incentive and non-qualified stock options. Stock
options entitle the holder to purchase common stock from Silknet for a specified
exercise price, during a period specified by the applicable option agreement.
Generally, the options vest over four years. Incentive stock options may not be
granted with an exercise price less than the fair market value of Silknet's
common stock at the date of grant or for a term exceeding ten years. The
exercise price of each non-qualified stock option shall be specified by the
Board of Directors.
 
                                      F-16
<PAGE>   86
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Stock option activity for the years ended June 30, 1996, 1997 and 1998 and
the six month period ended December 31, 1998 is as follows:
 
<TABLE>
<CAPTION>
                                 EXERCISE PRICE           EXERCISE PRICE
                                  EQUALS GRANT           LESS THAN GRANT
                             DATE STOCK FAIR VALUE    DATE STOCK FAIR VALUE           TOTAL
                             ----------------------   ----------------------   --------------------
                                          WEIGHTED                 WEIGHTED                WEIGHTED
                                           AVERAGE                  AVERAGE                AVERAGE
                               NUMBER     EXERCISE      NUMBER     EXERCISE     NUMBER     EXERCISE
                             OF SHARES      PRICE     OF SHARES      PRICE     OF SHARES    PRICE
                             ----------   ---------   ----------   ---------   ---------   --------
<S>                          <C>          <C>         <C>          <C>         <C>         <C>
Outstanding at June 30,
  1995.....................      6,250      $1.00       62,500       $0.02        68,750    $0.11
Granted....................    174,250       1.00      484,650        0.02       658,900     0.28
Canceled...................     (7,250)      1.00      (50,000)       0.02       (57,250)    0.14
                             ---------      -----      -------       -----     ---------    -----
Outstanding at June 30,
  1996.....................    173,250       1.00      497,150        0.02       670,400     0.27
Granted....................    634,500       1.00           --                   634,500     1.00
Canceled...................    (84,742)      1.00           --                   (84,742)    1.00
                             ---------      -----      -------       -----     ---------    -----
Outstanding at June 30,
  1997.....................    723,008       1.00      497,150        0.02     1,220,158     0.60
Granted....................    400,375       1.04           --                   400,375     1.04
Exercised..................    (69,725)      1.00           --                   (69,725)    1.00
Canceled...................    (44,716)      1.04           --                   (44,716)    1.04
                             ---------      -----      -------       -----     ---------    -----
Outstanding at June 30,
  1998.....................  1,008,942       1.01      497,150       $0.02     1,506,092     0.69
Granted....................    595,650       1.75      184,725        1.75       780,375     1.75
Exercised..................    (89,025)      1.00           --                   (89,025)    1.00
Canceled...................    (17,480)      1.08           --                   (17,480)    1.08
                             ---------      -----      -------       -----     ---------    -----
Outstanding at December 31,
  1998.....................  1,498,087       1.31      681,875        0.49     2,179,962     1.05
                             =========      =====      =======       =====     =========    =====
</TABLE>
 
As of December 31, 1998, 53,188 shares were available for grant under the Plan.
 
     The following table summarizes information about stock options outstanding
at December 31, 1998:
 
<TABLE>
<CAPTION>
                                                                    VESTED AND EXERCISABLE
                                                     WEIGHTED-      -----------------------
                                                      AVERAGE                    WEIGHTED-
                                                     REMAINING                    AVERAGE
                                      NUMBER        CONTRACTUAL       NUMBER      EXERCISE
EXERCISE PRICE                      OUTSTANDING   LIFE (IN YEARS)   OF SHARES      PRICE
--------------                      -----------   ---------------   ----------   ----------
<S>                                 <C>           <C>               <C>          <C>
$0.02.............................     497,150          6.7          425,195       $0.02
 1.00.............................     886,062          8.2          305,136        1.00
 1.75.............................     796,750          9.7            2,120        1.75
                                     ---------          ---          -------       -----
$0.02-1.75........................   2,179,962          8.4          732,451       $0.43
                                     =========          ===          =======       =====
</TABLE>
 
     Compensation expense of $185,204, $92,287, $83,607, and $50,920 was
recognized during the years ended June 30, 1996, 1997, and 1998 and the six
months ended December 31, 1998, respectively, related to the grant of stock
options at exercise prices below the fair market value of Silknet's common stock
on the date of the grant.
 
                                      F-17
<PAGE>   87
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Silknet applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its plans. Silknet has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly, no
compensation expense has been recognized for the stock option plans as
calculated under SFAS 123.
 
     Had compensation cost for Silknet's stock option plan been determined based
on the fair value at the grant date for awards in 1996, 1997 and 1998 and the
six month period ended December 31, 1998, consistent with the provisions of SFAS
123, Silknet's net loss and basic and diluted net loss per share would have been
increased to the pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                                             SIX MONTH
                                          YEAR ENDED JUNE 30,              PERIOD ENDED
                                 -------------------------------------     DECEMBER 31,
                                   1996         1997          1998             1998
                                 ---------   -----------   -----------   -----------------
<S>                              <C>         <C>           <C>           <C>
Net loss -- as reported........  $(465,026)  $(2,942,718)  $(6,905,820)     $(4,721,923)
Net loss -- pro forma..........   (748,254)   (3,119,757)   (7,090,377)      (4,898,331)
Basic and diluted net loss per
  share -- as reported.........  $   (0.18)  $     (1.15)  $     (2.69)     $     (1.76)
Basic and diluted net loss per
  share -- pro forma...........  $   (0.29)  $     (1.22)  $     (2.76)     $     (1.83)
</TABLE>
 
     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in each of the following periods:
 
<TABLE>
<CAPTION>
                                                                             SIX MONTH
                                            YEAR ENDED JUNE 30,            PERIOD ENDED
                                      -------------------------------      DECEMBER 31,
                                        1996        1997       1998            1998
                                      ---------    -------    -------    -----------------
<S>                                   <C>          <C>        <C>        <C>
Dividend yield......................  0%           0%         0%         0%
Expected volatility.................  0%           0%         0%         0%
Risk free interest rate.............  6.5%         6.0%       5.5%       5.5%
Expected lives......................  4.5 years    5 years    5 years    5 years
Weighted average grant date fair
  value of options granted..........  $1.00        $1.00      $1.04      $2.16
</TABLE>
 
     The effects of applying SFAS 123 in this disclosure are not indicative of
future amounts. Additional grants in future years are anticipated.
 
J.  COMMITMENTS AND CONTINGENCIES:
 
     Silknet leases office space and equipment under non-cancelable operating
leases extending through December 2003. Certain of these leases contain renewal
options and provisions that adjust the lease payment based upon change in the
consumer price index and require Silknet to pay operating costs, including
property taxes, insurance and maintenance. Rent expense under non-cancelable
operating leases totaled $13,523, $82,819, $291,733 and $223,806 for the years
ended June 30, 1996, 1997 and 1998 and the six month period ended December 31,
1998, respectively.
 
                                      F-18
<PAGE>   88
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following is a schedule of future minimum lease payments on
noncancelable operating leases:
 
     Fiscal Years ending June 30:
 
<TABLE>
<S>                                                 <C>
1999..............................................  $450,132
2000..............................................   611,312
2001..............................................   600,512
2002..............................................   568,609
2003..............................................   508,662
Thereafter........................................   254,331
</TABLE>
 
     Silknet is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position of Silknet.
 
K.  EMPLOYEE BENEFIT PLAN:
 
     Silknet maintains a 401(k) plan qualified under Section 401(k) of the
Internal Revenue Code. All Silknet employees who are at least 21 years of age
are eligible to participate in the 401(k) plan. Under the 401(k) plan, a
participant may contribute a maximum of 15% of his or her pre-tax salary,
commissions and bonuses through payroll deductions (up to the statutorily
prescribed annual limit of $10,000 in 1998) to the 401(k) plan. The percentage
elected by more highly compensated participants may be required to be lower. In
addition, at the discretion of the Board of Directors, Silknet may make
discretionary profit-sharing contributions into the 401(k) plan for all eligible
employees. During 1998, Silknet made no profit-sharing contributions to the
401(k) plan.
 
L.  RELATED PARTY TRANSACTIONS:
 
     During the years ended June 30, 1997 and 1998 and the six months ended
December 31, 1998, Silknet recognized license and services revenue from
transactions with affiliated companies of $30,725, $55,600 and $7,800,
respectively.
 
M.  SUBSEQUENT EVENTS:
 
     On February 26, 1999, Silknet issued 1,205,913 shares of Series D
Convertible Preferred Stock ("Series D Preferred Stock") at $7.324109 per share
to private investors for total consideration of approximately $8.8 million.
 
     In February 1999, Silknet reincorporated from New Hampshire to Delaware. In
connection with the reincorporation, Silknet effected a one-for-two exchange of
all common and preferred stock and assigned a par value of $.01 per share to the
common stock. Additionally, Silknet increased the number of shares of authorized
common stock to 50,000,000 and authorized preferred stock to 15,000,000. All
references to shares and per share amounts in the financial statements and
related footnotes have been adjusted to reflect the exchange and the new par
value for all periods presented.
 
     In February 1999, Silknet adopted the 1999 Stock Option and Incentive Plan,
the 1999 Non-Employee Director Stock Option Plan and the 1999 Employee Stock
Purchase Plan. A total of 1,000,000, 350,000 and 350,000, respectively, shares
of common stock have been reserved for issuance under the three plans.
 
     On March 2, 1999, Silknet entered into a new line of credit with a bank
which allows Silknet to borrow up to $3.0 million for working capital purposes
and for the issuance of letters of credit. The line of credit expires in March
2000. Amounts available under the line of credit are a function of eligible
accounts receivable and bear interest at the bank's prime rate (7.75% at March
2, 1999) plus 0.5%. At March 2, 1999, $3.0 million was available for borrowing.
 
                                      F-19
<PAGE>   89
 
                                 [SILKNET LOGO]
<PAGE>   90
 
                                    PART II
 
                   INFORMATION NOT REQUIRED IN THE PROSPECTUS
 
ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
 
     Estimated expenses (other than underwriting discounts and commissions)
payable in connection with the sale of the common stock offered hereby are as
follows:
 
<TABLE>
<S>                                                           <C>
SEC registration fee........................................  $  9,591
NASD filing fee.............................................     3,950
Nasdaq National Market listing fee..........................         *
Printing and engraving expenses.............................         *
Legal fees and expenses.....................................         *
Accounting fees and expenses................................         *
Blue Sky fees and expenses (including legal fees)...........         *
Transfer agent and registrar fees and expenses..............         *
Miscellaneous...............................................         *
                                                              --------
          Total.............................................  $      *
                                                              ========
</TABLE>
 
---------------
 
* To be filed by Amendment.
 
     The Company will bear all expenses shown above.
 
ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS.
 
     The Delaware General Corporation Law and Silknet's Certificate of
Incorporation and By-Laws provide for indemnification of Silknet's directors and
officers for liabilities and expenses that they may incur in such capacities. In
general, directors and officers are indemnified with respect to actions taken in
good faith in a manner reasonably believed to be in, or not opposed to, the best
interests of Silknet and, with respect to any criminal action or proceeding,
actions that the indemnitee had no reasonable cause to believe were unlawful.
Reference is made to Silknet's Certificate of Incorporation and By-Laws filed as
Exhibits 3.01 and 3.02 hereto, respectively.
 
     The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of Silknet against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). Reference is made to
the form of Underwriting Agreement filed as Exhibit 1.01 hereto.
 
     In addition, Silknet has an existing directors and officers liability
insurance policy.
 
ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES.
 
     In the three years preceding the filing of this registration statement,
Silknet has issued the following securities that were not registered under the
Securities Act:
 
          (a) Issuances of Capital Stock.
 
     In October 1996, Silknet issued and sold an aggregate of 2,900 shares of
common stock for services valued at $2,900.
 
     In October 1996, Silknet issued and sold an aggregate of 2,364,584 shares
of its Series A Preferred Stock for an aggregate of $2,270,000.
 
                                      II-1
<PAGE>   91
 
     In June 1997, Silknet issued and sold an aggregate of 2,500,000 shares of
its Series B Preferred Stock for an aggregate of $5,000,000.
 
     In May 1998, Silknet issued and sold an aggregate of 3,081,657 shares of
its Series C Preferred Stock for an aggregate of $10,779,989.74. In June 1998,
Silknet sold an additional 7,500 shares of Series C Preferred Stock for an
aggregate purchase price of $26,235.88.
 
     In February 1999, Silknet issued and sold an aggregate of 1,205,913 shares
of its Series D Preferred Stock for an aggregate purchase price of
$8,832,238.26.
 
     Each share of Silknet's Series A, Series B, Series C and Series D Preferred
Stock will automatically convert into one share of common stock upon the closing
of this offering.
 
          (b) Issuances of Notes and Warrants
 
     In May 1996, Silknet issued one note in the principal amount of $125,000
and a warrant to purchase an aggregate of 125,000 shares of common stock at an
exercise price of $1.00 per share. In July 1996, Silknet issued an additional
note in the principal amount of $125,000 and a warrant to purchase an aggregate
of 125,000 shares of common stock at an exercise price of $1.00 per share.
 
     In June 1997 Silknet issued six warrants to purchase an aggregate of
500,000 shares of common stock at an exercise price of $2.20 per share.
 
          (c) Exercises of Stock Options
 
     From January 1996 to January 1999, Silknet issued 178,795 shares of common
stock at exercise prices ranging from $1.00 to $1.75 for an aggregate purchase
price of $179,467 pursuant to exercise of employee options.
 
     No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of the exercise of options to purchase common stock,
Rule 701 under the Securities Act. All of the foregoing securities are deemed
restricted securities for purposes of the Securities Act.
 
                                      II-2
<PAGE>   92
 
ITEM 16.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
     (A) EXHIBITS.
 
<TABLE>
<CAPTION>
EXHIBIT NO.                             EXHIBIT
-----------                             -------
<C>           <S>
    1.01*     Form of Underwriting Agreement.
    3.01      Certificate of Incorporation of Silknet.
    3.02      By-laws of Silknet.
    4.01*     Specimen Certificate for shares of Silknet's Common Stock.
    4.02      Description of Capital Stock (contained in the Certificate
              of Incorporation filed as Exhibit 3.01).
    4.03      Form of Warrant Agreement dated as of May 17, 1996 between
              Silknet and Zero Stage Capital V, L.P.
    4.04      Form of Warrant Agreement dated as of June 11, 1997 between
              Silknet and certain investors.
    5.01*     Legal Opinion of Testa, Hurwitz & Thibeault, LLP.
   10.01**    Employee Stock Option Plan.
   10.02**    1999 Stock Option and Incentive Plan.
   10.03**    1999 Non-Employee Director Stock Option Plan.
   10.04**    1999 Employee Stock Purchase Plan.
   10.05      Registration Rights Provisions contained in the Series C
              Preferred Stock Purchase Agreement dated as of May 12, 1998
              between Silknet and the purchasers named therein.
   10.06      Registration Rights Provisions contained in the Series D
              Preferred Stock Purchase Agreement dated as of February 26,
              1999 between Silknet and the purchasers named therein.
   10.07*     Lease Agreement between Silknet and 1848 Associates dated
              December 30, 1996, as amended December 15, 1997, November 1,
              1998 and January 1, 1999.
   10.08      Loan and Modification Agreement dated March 2, 1999 by and
              between Silknet and Silicon Valley Bank.
   10.09      Loan and Security Agreement dated March 5, 1997 by and
              between Silknet and Silicon Valley Bank, as amended pursuant
              to a Loan Modification Agreement dated December 1, 1997.
   16.01*     Letter from KPMG Peat Marwick dated March   , 1999.
   21.01      Subsidiaries.
   23.01*     Consent of Testa, Hurwitz & Thibeault, LLP (contained in
              Exhibit 5.01).
   23.02      Consent of PricewaterhouseCoopers LLP.
   24.01      Power of Attorney (contained on page II-5).
   27.01      Financial Data Schedule.
</TABLE>
 
---------------
 
 * To be filed by amendment.
 
** Indicates a management contract or any compensatory plan, contract or
   arrangement.
 
                                      II-3
<PAGE>   93
 
     (b) FINANCIAL STATEMENT SCHEDULES.
 
     All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
 
ITEM 17.  UNDERTAKINGS.
 
     Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 above, 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 Securities 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 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
Securities Act and will be governed by the final adjudication of such issue.
 
     The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Securities Act, 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; and (3) that for the purpose of determining any liability
under the Securities Act, 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-4
<PAGE>   94
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Manchester, New
Hampshire on March 3, 1999.
 
                                          SILKNET SOFTWARE, INC.
 
                                          By:       /s/ JAMES C. WOOD
                                            ------------------------------------
                                              James C. Wood
                                              President, Chief Executive Officer
                                              and
                                              Chairman of the Board
 
                        POWER OF ATTORNEY AND SIGNATURES
 
     We, the undersigned officers and directors of Silknet Software, Inc.,
hereby severally constitute and appoint James C. Wood and Patrick J. Scannell,
Jr., and each of them singly, our true and lawful attorneys, with full power to
them and each of them singly, to sign for us in our names in the capacities
indicated below, any registration statement related to the offering that is to
be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933 (a "462(b) Registration Statement"), any and all amendments and exhibits to
this registration statement or any 462(b) Registration Statement, and any and
all applications and other documents to be filed with the Securities and
Exchange Commission pertaining to the registration of the securities covered
hereby or thereby, and generally to do all things in our names and on our behalf
in such capacities to enable Silknet Software, Inc. to comply with the
provisions of the Securities Act of 1933 and all requirements of the Securities
and Exchange Commission.
 
     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(S)                      DATE
                ---------                                  --------                      ----
<S>                                         <C>                                     <C>
 
/s/ JAMES C. WOOD                           President, Chief Executive Officer and  March 3, 1999
------------------------------------------  Chairman of the Board (Principal
James C. Wood                               Executive Officer)
 
/s/ PATRICK J. SCANNELL, JR.                Vice President, Chief Financial         March 3, 1999
------------------------------------------  Officer, Treasurer and Secretary
Patrick J. Scannell, Jr.                    (Principal Financial and Accounting
                                            Officer)
 
/s/ STANLEY FUNG                            Director                                March 3, 1999
------------------------------------------
Stanley Fung
 
/s/ GUY BRADLEY                             Director                                March 3, 1999
------------------------------------------
Guy Bradley
 
/s/ JOHN DOGGETT                            Director                                March 3, 1999
------------------------------------------
John Doggett
</TABLE>
 
                                      II-5
<PAGE>   95
 
<TABLE>
<CAPTION>
                SIGNATURE                                  TITLE(S)                      DATE
                ---------                                  --------                      ----
<S>                                         <C>                                     <C>
/s/ JOO HOCK CHUA                           Director                                March 3, 1999
------------------------------------------
Joo Hock Chua
 
/s/ ANDREW GOLDFARB                         Director                                March 3, 1999
------------------------------------------
Andrew Goldfarb
</TABLE>
 
                                      II-6
<PAGE>   96
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT NO.                             EXHIBIT
-----------                             -------
<C>           <S>
    1.01*     Form of Underwriting Agreement.
    3.01      Certificate of Incorporation of Silknet.
    3.02      By-laws of Silknet.
    4.01*     Specimen Certificate for shares of Silknet's Common Stock.
    4.02      Description of Capital Stock (contained in the Certificate
              of Incorporation filed as Exhibit 3.01).
    4.03      Form of Warrant Agreement dated as of May 17, 1996 between
              Silknet and Zero Stage Capital V, L.P.
    4.04      Form of Warrant Agreement dated as of June 11, 1997 between
              Silknet and certain investors.
    5.01*     Legal Opinion of Testa, Hurwitz & Thibeault, LLP.
   10.01**    Employee Stock Option Plan.
   10.02**    1999 Stock Option and Incentive Plan.
   10.03**    1999 Non-Employee Director Stock Option Plan.
   10.04**    1999 Employee Stock Purchase Plan.
   10.05      Registration Rights Provisions contained in the Series C
              Preferred Stock Purchase Agreement dated as of May 12, 1998
              between the Company and the purchasers named therein.
   10.06      Registration Rights Provisions contained in the Series D
              Preferred Stock Purchase Agreement dated as of February 26,
              1999 between Silknet and the purchasers named therein.
   10.07*     Lease Agreement between Silknet and 1848 Associates dated
              December 30, 1996, as amended December 15, 1997, November 1,
              1998 and January 1, 1999.
   10.08      Loan and Modification Agreement dated March 2, 1999 by and
              between Silknet and Silicon Valley Bank.
   10.09      Loan and Security Agreement dated March 5, 1997 by and
              between Silknet and Silicon Valley Bank, as amended pursuant
              to a Loan Modification Agreement dated December 1, 1997.
   16.01*     Letter from KPMG Peat Marwick dated March   , 1999.
   21.01      Subsidiaries
   23.01*     Consent of Testa, Hurwitz & Thibeault, LLP (contained in
              Exhibit 5.01).
   23.02      Consent of PricewaterhouseCoopers LLP.
   24.01      Power of Attorney (contained on page II-5).
   27.01      Financial Data Schedule.
</TABLE>
 
---------------
 
 * To be filed by amendment.
 
** Indicates a management contract or any compensatory plan, contract or
   arrangement.
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1
 
     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 1999
 
                                                     REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                           -------------------------
 
                                    FORM S-1
            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
                           -------------------------
 
                             SILKNET SOFTWARE, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE                             7372                            02-0478949
 (STATE OR OTHER JURISDICTION OF      (PRIMARY STANDARD INDUSTRIAL             (I.R.S. EMPLOYER
  INCORPORATION OR ORGANIZATION)      CLASSIFICATION CODE NUMBER)           IDENTIFICATION NUMBER)
-------------------------
 
                             SILKNET SOFTWARE, INC.
 
                            50 PHILLIPPE COTE STREET
                 MANCHESTER, NEW HAMPSHIRE 03101 (603) 625-0070
         (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
            AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                           -------------------------
 
              JAMES C. WOOD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
 
                             SILKNET SOFTWARE, INC.
                            50 PHILLIPPE COTE STREET
                        MANCHESTER, NEW HAMPSHIRE 03101
                                 (603) 625-0070
           (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
                   INCLUDING AREA CODE, OF AGENT FOR SERVICE)
 
                                   COPIES TO:
JOHN HESSION, ESQ.                                    PATRICK J. RONDEAU, ESQ.
                BRIAN D. GOLDSTEIN, ESQ.                                    HALE AND DORR LLP
            TESTA, HURWITZ & THIBEAULT, LLP                                  60 STATE STREET
                    125 HIGH STREET                                    BOSTON, MASSACHUSETTS 02109
              BOSTON, MASSACHUSETTS 02110                                     (617) 526-6000
                     (617) 248-7000
-------------------------
 
        APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
  As soon as practicable after this registration statement becomes effective.
 
    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, 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,
check the following box.  [ ]
                           -------------------------
 
                        CALCULATION OF REGISTRATION FEE
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
                                                          PROPOSED MAXIMUM
             TITLE OF EACH CLASS OF                           AGGREGATE                           AMOUNT OF
          SECURITIES TO BE REGISTERED                     OFFERING PRICE(1)                   REGISTRATION FEE
------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value                                 $34,500,000                          $9,591.00
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
(1) In accordance with Rule 457(o) under the Securities Act of 1933, the number
    of shares of common stock being registered and the proposed maximum offering
    price per share are not included in this table. Estimated solely for the
    purpose of calculating the registration fee in accordance with Rule 457(a)
    under the Securities Act of 1933.
                           -------------------------
     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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
2
 
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 IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
 
                   SUBJECT TO COMPLETION, DATED MARCH 3, 1999
 
                                               SHARES
 
                                 [SILKNET LOGO]
 
                                  COMMON STOCK
 
                               ------------------
 
All of the shares of common stock being sold are being offered by Silknet. Prior
 to this offering, there has been no public market for the common stock. The
    initial public offering price is expected to be between $          and
      $          per share. Application has been made to list the common
      stock on The Nasdaq Stock Market's National Market under the symbol
                                    "SILK."
 
    Silknet has granted the underwriters an option to purchase a maximum of
 
     additional shares of common stock to cover over-allotments of shares.
 
             INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS.
                    SEE "RISK FACTORS" BEGINNING ON PAGE 5.
UNDERWRITING
                                              PRICE TO       DISCOUNTS AND     PROCEEDS TO
                                               PUBLIC         COMMISSIONS        SILKNET
                                            -------------    -------------    -------------
Per Share.................................   $                $                $
Total.....................................   $                $                $
Delivery of the shares of common stock will be made on or about
             , 1999, against payment in immediately available funds.
 
     Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
 
CREDIT SUISSE FIRST BOSTON
             BANCBOSTON ROBERTSON STEPHENS
 
                           NATIONSBANC MONTGOMERY SECURITIES LLC
 
                                       FIRST UNION CAPITAL MARKETS CORP.
 
                      Prospectus dated              , 1999
3
 
                               TABLE OF CONTENTS
PAGE
                                                              ----
PROSPECTUS SUMMARY..........................................    3
RISK FACTORS................................................    5
USE OF PROCEEDS.............................................   16
DIVIDEND POLICY.............................................   16
CAPITALIZATION..............................................   17
DILUTION....................................................   18
SELECTED CONSOLIDATED FINANCIAL DATA........................   19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
  AND RESULTS OF OPERATIONS.................................   20
BUSINESS....................................................   31
MANAGEMENT..................................................   48
CERTAIN TRANSACTIONS........................................   53
PRINCIPAL STOCKHOLDERS......................................   55
DESCRIPTION OF CAPITAL STOCK................................   57
SHARES ELIGIBLE FOR FUTURE SALE.............................   62
UNDERWRITING................................................   65
NOTICE TO CANADIAN RESIDENTS................................   67
LEGAL MATTERS...............................................   68
EXPERTS.....................................................   68
CHANGE IN INDEPENDENT ACCOUNTANTS...........................   68
ADDITIONAL INFORMATION......................................   68
INDEX TO FINANCIAL STATEMENTS...............................  F-1
------------------------
 
     YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
 
                            ------------------------
 
     Until                (25 days after the commencement of this offering), 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 obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
 
                            ------------------------
 
     Silknet has applied for federal registration of the trademarks "Silknet"
and "Silknet" combined with the Silknet logo. Other trademarks or service marks
appearing in this prospectus are the property of their respective holders.
 
                                        2
4
 
                               PROSPECTUS SUMMARY
 
     This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in the common stock. You should read the entire prospectus
carefully. Unless otherwise specified, all information in this prospectus
assumes no exercise of the underwriters' over-allotment option, reflects the
1-for-2 exchange of common stock and preferred stock pursuant to the
reincorporation of Silknet from New Hampshire to Delaware and reflects the
mandatory conversion into common stock of all outstanding shares of preferred
stock upon the closing of this offering.
 
                                    SILKNET
 
     We provide software that allows companies to offer personalized marketing,
sales, electronic commerce and customer support services through a single,
company-tailored Web site interface. Our products enable a company to deliver
these services to its customers over the Web through real-time collaboration and
customer self-service. Our products allow a company to coordinate its
interactions with customers by integrating a variety of communications media,
such as the Web, e-mail and the telephone. Our software can capture and
consolidate data derived from all these sources and distribute it throughout a
company and to its partners to provide a single view of a customer. This
solution is more efficient for a company and also more efficient for its
customers, creating a competitive advantage for that company.
 
     Accompanying the growth in the use of the Web has been a trend toward
customer self-service. Just as consumers have extensively used automated teller
machines rather than using the services of a bank teller, the Web now allows a
wide range of businesses the ability to offer electronic self-service to their
customers. For example, consumers are now shopping for goods and services and
seeking answers to customer service questions on their own from their computers
at any hour of the day. The Gartner Group estimates that by 2001 companies will
receive 25% of all customer contacts and inquiries over the Web and through
e-mail messages and other Web-based forms. Companies are using this Web-based
customer interaction to augment more traditional means of handling customer
service and commerce, such as telephone-based customer service. Rather than
replacing the technology systems designed to support telephone-based customer
service, companies are actively seeking ways to integrate their various forms of
customer interaction, such as Web communications, e-mail and the telephone.
Businesses are seeking solutions such as our products to coordinate these
various media and present a consistent interface to their customers for service
and commerce.
 
     Our customers include:
 
          - 3Com
          - Bank of America
          - Bell Advanced Communications
          - Cigna
          - Compaq
          - Inacom
          - KPMG Peat Marwick
          - Microsoft
          - Provident Bank
          - Sprint PCS
 
     Silknet was incorporated in New Hampshire on March 6, 1995 and was
reincorporated in Delaware on February 25, 1999. Our principal executive offices
are located at 50 Phillippe Cote Street, Manchester, New Hampshire 03101, and
our telephone number is (603) 625-0070.
 
                                        3
5
 
                                  THE OFFERING
Common Stock offered........................................    shares
Common Stock to be outstanding after the offering...........    shares
Use of proceeds.............................................    For general corporate purposes,
                                                                including working capital.
Proposed Nasdaq National Market symbol......................    SILK
SUMMARY FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding preferred stock into
common stock, as if the shares had converted immediately upon their issuance.
Accordingly, accrued dividends on preferred stock are not included in the
calculation of pro forma basic and diluted net loss per share.
SIX MONTHS ENDED
                                                     YEAR ENDED JUNE 30,            DECEMBER 31,
                                                 ----------------------------    ------------------
                                                  1996      1997       1998       1997       1998
                                                 ------    -------    -------    -------    -------
                                                                                    (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Total revenue..................................  $  266    $   194    $ 3,647    $   636    $ 5,544
Total cost of revenue..........................     141        341      1,386        579      1,703
Gross margin...................................     125       (147)     2,261         57      3,841
Total operating expenses.......................     583      2,545      8,398      3,252      7,800
Operating loss.................................    (458)    (2,692)    (6,137)    (3,195)    (3,959)
Net loss.......................................    (465)    (2,753)    (6,003)    (3,130)    (3,809)
Net loss attributable to common stockholders...    (465)    (2,943)    (6,906)    (3,181)    (4,722)
Basic and diluted net loss per share...........  $(0.18)   $ (1.15)   $ (2.69)   $ (1.24)   $ (1.76)
Shares used in computing basic and diluted net
  loss per share...............................   2,551      2,557      2,566      2,558      2,675
Unaudited pro forma basic and diluted net loss
  per share....................................  $(0.18)   $ (0.63)   $ (0.76)   $ (0.42)   $ (0.36)
Shares used in computing unaudited pro forma
  basic and diluted net loss per share.........   2,551      4,398      7,879      7,422     10,629
The pro forma as adjusted balance sheet data as of December 31, 1998 gives
effect to the conversion of all outstanding preferred stock into common stock
and has been adjusted to give effect to the sale of                shares of
common stock offered hereby at an assumed initial public offering price of
$     per share, after deducting estimated underwriting discounts and
commissions and offering expenses.
DECEMBER 31, 1998
                                                           JUNE 30,         ------------------------
                                                      ------------------                 PRO FORMA
                                                       1997       1998       ACTUAL     AS ADJUSTED
                                                      -------    -------    --------    ------------
                                                                                  (UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents...........................  $ 4,752    $ 9,045    $  4,585        $
Working capital.....................................    4,155      8,472       4,477
Total assets........................................    5,402     12,129      10,598
Note payable to bank................................      115        222         156         156
Total convertible participating preferred stock.....    7,432     19,107      20,021          --
Total stockholders' equity (deficit)................   (2,834)    (9,587)    (14,168)
4
6
 
                                  RISK FACTORS
 
     This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus before
deciding to invest in shares of our common stock.
 
RISKS RELATED TO OUR BUSINESS
 
WE HAVE A LIMITED OPERATING
HISTORY ON WHICH TO
EVALUATE
OUR PROSPECTS                    We commenced operations in March 1995 and we
                                 recorded our first license revenue upon
                                 delivery of Silknet eService in beta version to
                                 customers in January 1997. Accordingly, we have
                                 only a limited operating history on which you
                                 can base your evaluation of our business and
                                 prospects. In addition, because we are in an
                                 early stage of development in a new and rapidly
                                 evolving market, our prospects are difficult to
                                 predict and may change rapidly and without
                                 warning.
 
WE HAVE INCURRED
SUBSTANTIAL
OPERATING LOSSES AND WE MAY
NOT BE PROFITABLE IN THE
FUTURE                           Since we began operations, we have incurred
                                 substantial operating losses in every fiscal
                                 period. We cannot be certain if or when we will
                                 become profitable. Failure to achieve
                                 profitability within the timeframe expected by
                                 investors may adversely affect the market price
                                 of our common stock. As a result of accumulated
                                 operating losses, at December 31, 1998, we had
                                 an accumulated deficit of $13.1 million. We
                                 have generated relatively small amounts of
                                 revenue, while increasing expenditures in all
                                 areas, particularly in research and development
                                 and sales and marketing, in order to execute
                                 our business plan. Although we have experienced
                                 revenue growth in recent periods, the growth
                                 has been from a limited base of historical
                                 revenue, and it is unlikely that such growth
                                 rates are sustainable.
 
OUR QUARTERLY OPERATING
RESULTS
DEPEND ON A SMALL NUMBER OF
LARGE ORDERS                     We derive a significant portion of our software
                                 license revenue in each quarter from a small
                                 number of relatively large orders. Our
                                 operating results for a particular fiscal
                                 period could be materially adversely affected
                                 if we are unable to complete one or more
                                 substantial license sales planned for that
                                 period. In each of the last eight quarters, we
                                 had at least one customer that accounted for
                                 more than 30% of total revenue in that quarter.
                                 In addition, the purchase and implementation of
                                 our products typically involve a significant
                                 cost to our customers (including the purchase
                                 of related hardware and software, as well as
                                 training and integration costs) and a
                                 substantial commitment of resources by our
                                 customers or their consultants over an extended
                                 period of time. As a result, our sales cycle is
                                 relatively long.
 
                                 In addition, our services revenue increased
                                 significantly between the quarter ended
                                 September 30, 1998 and the quarter ended
                                 December 31, 1998, primarily due to significant
                                 consulting and implementation services
                                 performed for one customer. Investors should
                                 not expect a commensurate increase in services
                                 revenue between future quarters. See
 
                                        5
7
 
                                 "Management's Discussion and Analysis of
                                 Financial Condition and Results of Operations."
 
OUR QUARTERLY OPERATING
RESULTS
MAY FAIL TO MEET
EXPECTATIONS
OF INVESTORS OR SECURITIES
ANALYSTS                         Our quarterly revenue and operating results are
                                 difficult to predict and may fluctuate
                                 significantly from quarter to quarter. If our
                                 quarterly revenue or operating results fall
                                 below the expectations of investors or
                                 securities analysts, the price of our common
                                 stock could fall substantially.
 
                                 Our quarterly revenue may fluctuate as a result
                                 of a variety of factors, many of which are
                                 outside our control, including the following:
 
                                      - the market for interactive, Web-based
                                        electronic business solutions is in an
                                        early stage of development and it is
                                        therefore difficult to accurately
                                        predict customer demand; and
 
                                      - the sales cycle for our products and
                                        services varies substantially from
                                        customer to customer, and we expect the
                                        sales cycle to be long. As a result, we
                                        have difficulty determining whether and
                                        when we will receive license revenue
                                        from a particular customer.
 
                                 In addition, because our revenue from
                                 implementation, maintenance and training
                                 services is largely correlated with our license
                                 revenue, a decline in license revenue could
                                 also cause a decline in our services revenue in
                                 the same quarter or in subsequent quarters.
 
                                 Most of our expenses, such as employee
                                 compensation and rent, are relatively fixed in
                                 the short term. Moreover, our expense levels
                                 are based, in part, on our expectations
                                 regarding future revenue levels. As a result,
                                 if revenue for a particular quarter is below
                                 our expectations, we could not proportionately
                                 reduce operating expenses for that quarter, and
                                 therefore this revenue shortfall would have a
                                 disproportionate effect on our expected
                                 operating results for that quarter.
 
OUR BUSINESS DEPENDS ON THE
DEVELOPMENT OF A NEW MARKET
AND THE CONTINUED GROWTH
AND COMMERCIAL ACCEPTANCE
OF THE WEB                       Our products address a new and emerging market
                                 for Web-based, interactive electronic business
                                 solutions. The failure of this market to
                                 develop, or a delay in the development of this
                                 market, would have a material adverse effect on
                                 our business, financial condition and operating
                                 results. Our future success also depends
                                 substantially upon the widespread adoption of
                                 the Web as a primary medium for commerce and
                                 business applications. If the Web does not
                                 continue to increase in importance as a
                                 commercial medium, our business, operating
                                 results and financial condition would be
                                 materially adversely affected. The Web has
                                 experienced, and is expected to continue to
                                 experience, significant user and traffic
                                 growth, which has, at times, caused user
                                 frustration with slow access and download
                                 times. The Web infrastructure may not be able
                                 to support the demands placed on it by the
                                 continued growth upon which our success
                                 depends. Moreover, critical issues
 
                                        6
8
 
                                 concerning the commercial use of the Web, such
                                 as security, reliability, cost, accessibility
                                 and quality of service, remain unresolved and
                                 may negatively affect the growth of Web use or
                                 the attractiveness of commerce and business
                                 communication over the Web. In addition, the
                                 Web could lose its viability due to delays in
                                 the development or adoption of new standards
                                 and protocols to handle increased activity or
                                 due to increased government regulation and
                                 taxation of Internet commerce.
 
GOVERNMENT LAWS AND
REGULATIONS COULD LIMIT THE
MARKET FOR OUR PRODUCTS AND
SERVICES                         Federal, state or foreign agencies may adopt
                                 laws or regulations affecting the use of the
                                 Web as a commercial medium. If enacted, these
                                 laws or regulations could limit the market for
                                 our products, which could materially adversely
                                 affect our business, financial condition and
                                 operating results. Although many of these laws
                                 or regulations may not apply to our business
                                 directly, we expect that laws and regulations
                                 relating to user privacy, pricing, content and
                                 quality of products and services could
                                 indirectly affect our business. It is possible
                                 that these laws or regulations could expose
                                 companies involved in Web commerce to
                                 liability, which could limit the growth of Web
                                 commerce generally.
 
WE FACE SIGNIFICANT
COMPETITION
FROM OTHER TECHNOLOGY
COMPANIES                        The market for interactive, Web-based
                                 electronic business solutions is intensely
                                 competitive. If we are unable to compete
                                 effectively, our business, financial condition
                                 and operating results would be materially
                                 adversely affected. Many of our current and
                                 potential competitors have longer operating
                                 histories, greater name recognition and
                                 substantially greater financial, technical,
                                 marketing, management, service, support and
                                 other resources than we do. Therefore, they may
                                 be able to respond more quickly than we can to
                                 new or changing opportunities, technologies,
                                 standards or customer requirements.
 
                                 We expect that additional competitors will
                                 enter the market with competing products as the
                                 size and visibility of the market opportunity
                                 increases. We also expect that competition will
                                 increase as a result of software industry
                                 consolidations and formations of alliances
                                 among industry participants. Increased
                                 competition could result in pricing pressures,
                                 reduced margins or the failure of our products
                                 to achieve or maintain market acceptance.
 
                                 New technologies will likely increase the
                                 competitive pressures that we face. The
                                 development of competing technologies by market
                                 participants or the emergence of new industry
                                 standards may adversely affect our competitive
                                 position. As a result of these and other
                                 factors, we may not be able to compete
                                 effectively with current or future competitors,
                                 which would have a material adverse effect on
                                 our business, operating results and financial
                                 condition. See "Business -- Competition."
 
                                        7
9
 
OUR SUCCESS DEPENDS ON OUR
ABILITY TO EXPAND
RELATIONSHIPS
WITH SYSTEMS INTEGRATORS
AND
CONSULTING FIRMS                 To increase our revenue and implementation
                                 capabilities, we must develop and expand
                                 relationships with systems integrators and
                                 consulting firms. A failure to do so could have
                                 a material adverse effect on our business,
                                 operating results and financial condition. We
                                 rely on systems integrators and consulting
                                 firms to recommend our products to their
                                 clients and to install and support our products
                                 for their clients. Systems integrators and
                                 consulting firms may develop, market or
                                 recommend software applications that compete
                                 with our products. Moreover, if these firms
                                 fail to implement our products successfully for
                                 their clients, we may not have the resources to
                                 implement our products on the schedule required
                                 by the client, which could have a material
                                 adverse effect on our business, operating
                                 results and financial condition.
 
OUR SUCCESS DEPENDS ON OUR
ABILITY TO EXPAND OUR
DIRECT
SALES FORCE AND THIRD-PARTY
DISTRIBUTION CHANNELS            To increase our revenue, we must increase the
                                 size of our direct sales force and the number
                                 of our indirect marketing and distribution
                                 partners, including software and hardware
                                 vendors and resellers. A failure to do so could
                                 have a material adverse effect on our business,
                                 operating results and financial condition.
                                 There is intense competition for sales
                                 personnel in our business, and we may not be
                                 successful in attracting, integrating,
                                 motivating or retaining new personnel for these
                                 positions. Our existing or future marketing and
                                 distribution partners may choose to devote
                                 greater resources to marketing and supporting
                                 the products of competitors.
 
OUR SUCCESS DEPENDS ON OUR
ABILITY TO ACHIEVE
PROFITABILITY
WITHIN OUR PROFESSIONAL
SERVICES
ORGANIZATION                     To date, our annual services costs have been
                                 significantly higher than our services revenue,
                                 and we expect that trend to continue for the
                                 foreseeable future. We cannot be certain that
                                 our professional services business will ever
                                 achieve or sustain profitability, and a failure
                                 to do so could have a material adverse effect
                                 on our business, operating results and
                                 financial condition. To gain initial acceptance
                                 of our products by customers in our targeted
                                 industries, we have assisted, and plan to
                                 continue to assist, customers with the
                                 implementation of our products, sometimes
                                 without compensation for some services on
                                 particular implementations.
 
WE MAY NOT BE ABLE TO
DEVELOP
NEW PRODUCTS OR ENHANCE
EXISTING PRODUCTS ON A
TIMELY
BASIS                            To be competitive, we must develop and
                                 introduce on a timely basis new products and
                                 product enhancements which meet the needs of
                                 companies seeking to deploy and manage
                                 electronic business applications over the Web.
                                 We have in the past failed to ship certain new
                                 products or product enhancements by our planned
                                 shipment date. If we fail to develop and
                                 introduce new products and enhancements
                                 successfully and on a timely basis, it could
                                 have a material adverse effect on our business,
                                 operating results and financial condition.
 
FAILURE TO PROPERLY MANAGE
GROWTH COULD ADVERSELY
AFFECT
OUR BUSINESS                     We have been experiencing a period of rapid
                                 growth that has been placing a significant
                                 strain on all of our resources. Our revenue
                                 increased 587% in the quarter ended December
                                 31,
 
                                        8
10
 
                                 1998 from the same period the year earlier.
                                 From January 1, 1998 to December 31, 1998, the
                                 number of our employees increased from 55 to
                                 108. Additional growth may further strain our
                                 management, financial and other resources. To
                                 manage future growth effectively we must
                                 maintain and enhance our financial and
                                 accounting systems and controls, integrate new
                                 personnel and manage expanded operations. Any
                                 failure to do so could have a material adverse
                                 effect on the quality of our products, our
                                 ability to retain key personnel and our
                                 business, operating results and financial
                                 condition.
 
LOSS OF KEY PERSONNEL COULD
ADVERSELY AFFECT OUR
BUSINESS                         Our future success depends to a significant
                                 degree on the skills, experience and efforts of
                                 James C. Wood, our founder, Chairman of the
                                 Board, President and Chief Executive Officer.
                                 The loss of the services of Mr. Wood could have
                                 a material adverse effect on our business,
                                 operating results and financial condition. We
                                 also depend on the ability of our executive
                                 officers and other members of senior management
                                 to work effectively as a team. We do not have
                                 employment agreements with any of our executive
                                 officers, and the loss of one or more of our
                                 executive officers and other members of senior
                                 management could have a material adverse effect
                                 on our business, operating results and
                                 financial condition.
 
WE MUST HIRE AND RETAIN
SKILLED PERSONNEL IN A
TIGHT
LABOR MARKET                     Qualified personnel are in great demand
                                 throughout the software industry. The demand
                                 for qualified personnel is particularly acute
                                 in the New England area, due to the large
                                 number of software companies and the low
                                 unemployment in the region. Our success depends
                                 in large part upon our ability to attract,
                                 train, motivate and retain highly skilled
                                 employees, particularly sales and marketing
                                 personnel, software engineers and other senior
                                 personnel. Our failure to attract and retain
                                 the highly-trained technical personnel that are
                                 integral to our direct sales, product
                                 development, professional services and support
                                 teams may limit the rate at which we can
                                 generate sales and develop new products or
                                 product enhancements. This could have a
                                 material adverse effect on our business,
                                 operating results and financial condition.
 
OUR SUCCESS DEPENDS ON OUR
ABILITY TO PROTECT OUR
PROPRIETARY TECHNOLOGY
RIGHTS                           Our success depends to a significant degree
                                 upon the protection of our software and other
                                 proprietary technology rights. We rely on trade
                                 secret, copyright and trademark laws and
                                 confidentiality agreements with employees and
                                 third-parties, all of which offer only limited
                                 protection. Moreover, the laws of other
                                 countries in which we market our products may
                                 afford little or no effective protection of our
                                 proprietary technology. The reverse
                                 engineering, unauthorized copying or other
                                 misappropriation of our proprietary technology
                                 could enable third parties to benefit from our
                                 technology without paying us for it. This could
                                 have a material adverse effect on our business,
                                 operating results and financial condition. If
                                 we resort to legal proceedings to enforce our
                                 intellectual property rights, the proceedings
                                 could be burdensome and expensive
 
                                        9
11
 
                                 and could involve a high degree of risk.
                                 Further, names such as eBusiness, eCommerce and
                                 eService are becoming widely used and
                                 descriptive. As a result, we do not expect to
                                 be able to prevent third parties from using
                                 these names for competing products. See
                                 "Business -- Intellectual Property and
                                 Proprietary Rights."
 
OTHER COMPANIES MAY CLAIM
THAT WE INFRINGE THEIR
INTELLECTUAL PROPERTY OR
PROPRIETARY RIGHTS               If any of our products violate third party
                                 proprietary rights, we may be required to
                                 reengineer our products or seek to obtain
                                 licenses from third parties to continue
                                 offering our products without substantial
                                 reengineering, and such efforts may not be
                                 successful. We do not conduct comprehensive
                                 patent searches to determine whether the
                                 technology used in our products infringes
                                 patents held by third parties. In addition,
                                 product development is inherently uncertain in
                                 a rapidly evolving technological environment in
                                 which there may be numerous patent applications
                                 pending, many of which are confidential when
                                 filed, with regard to similar technologies.
 
                                 We have applied for registration of some of our
                                 trademarks in the United States, Canada and the
                                 European Community. None of these applications
                                 has been approved. Our applications for the
                                 registration of "Silknet" and "Silknet"
                                 combined with the Silknet logo were denied in
                                 Canada because a company filed an earlier
                                 application for the use of "Silk" in connection
                                 with Internet information resource services. We
                                 have filed an appeal, but there can be no
                                 assurance that we will be able to register the
                                 trademark "Silknet" in Canada.
 
                                 Other companies have filed trademark
                                 applications for marks similar to the names of
                                 Silknet's products. For example, IBM has filed
                                 a trademark application for "e-Business" for
                                 use in creating, implementing and maintaining
                                 Web sites and integration of computer systems
                                 and networks. Silknet's use of "Silknet
                                 eBusiness System" could infringe the rights of
                                 IBM and other companies using a mark that
                                 contains "eBusiness." Silknet's use of
                                 "eBusiness," as well as the use of other names,
                                 may result in costly litigation, divert
                                 management's attention and resources, cause
                                 product shipment delays or require Silknet to
                                 pay damages and/or to enter into royalty or
                                 license agreements. There can be no assurance
                                 that a license agreement would be available to
                                 Silknet on any commercially reasonable terms,
                                 if at all, and Silknet may be required to stop
                                 using the name "eBusiness" or other names
                                 currently used for its products. Any of these
                                 events could have a material adverse effect on
                                 our business, operating results and financial
                                 condition. See "Business -- Intellectual
                                 Property and Proprietary Rights."
 
OUR BUSINESS COULD BE
ADVERSELY
AFFECTED IF OUR PRODUCTS
FAIL TO
PERFORM PROPERLY                 Software products as complex as ours may
                                 contain undetected errors or "bugs," which
                                 result in product failures, or otherwise fail
                                 to perform in accordance with customer
                                 expectations. Our products may be particularly
                                 susceptible to bugs or perform-
 
                                       10
12
 
                                 ance degradation because of the emerging nature
                                 of Web technologies and the stress that may be
                                 placed on our products by the full deployment
                                 of our products over the Web to thousands of
                                 end-users. The Web has experienced, and is
                                 expected to continue to experience, significant
                                 user and traffic growth, which has, at times,
                                 caused user frustration with slow access and
                                 download times. Product performance problems
                                 could result in loss of or delay in revenue,
                                 loss of market share, failure to achieve market
                                 acceptance, diversion of development resources
                                 or injury to our reputation, any of which could
                                 have a material adverse effect on our business,
                                 operating results and financial condition.
                                 Prior to November 1998, we warranted some of
                                 our products for five years, providing
                                 customers a right to refund a portion of the
                                 license fee if we are unable to correct an
                                 error in the product. To date, no customer has
                                 requested a refund under the warranty
                                 provisions. However, if we are required to
                                 refund significant portions of license fees,
                                 our business, operating results and financial
                                 condition could be materially adversely
                                 affected.
 
WE COULD BE SUBJECT TO
PRODUCT
LIABILITY CLAIMS RELATING
TO OUR
CUSTOMERS' CRITICAL
BUSINESS
OPERATIONS                       Our products are critical to the operations of
                                 our customers' businesses. If one of our
                                 products fails, a customer may assert a claim
                                 for substantial damages against us, regardless
                                 of our responsibility for such failure.
                                 Although we maintain general liability
                                 insurance, including coverage for errors and
                                 omissions, there can be no assurance that such
                                 coverage will continue to be available on
                                 reasonable terms or will be available in
                                 amounts sufficient to cover one or more large
                                 claims, or that the insurer will not disclaim
                                 coverage as to any future claim.
 
WE MAY LOSE ACCESS TO
THIRD-PARTY TECHNOLOGY USED
IN
OUR PRODUCTS                     We incorporate into our products technology
                                 licensed from third parties, such as Microsoft
                                 Corporation. The loss of access to this
                                 technology could result in delays in the
                                 development and introduction of new products or
                                 enhancements until equivalent or replacement
                                 technology could be accessed, if available, or
                                 developed internally, if feasible. These delays
                                 could have a material adverse effect on our
                                 business, operating results and financial
                                 condition. It is possible that technology from
                                 others will not be available to us on
                                 commercially reasonable terms, if at all.
 
OUR SUCCESS DEPENDS ON OUR
ABILITY TO EXPAND AND
MANAGE
OUR INTERNATIONAL
OPERATIONS                       We expect international revenue to account for
                                 a significant percentage of total revenue in
                                 the future and we believe that we must continue
                                 to expand our international sales activities in
                                 order to be successful. Our international sales
                                 growth will be limited if we are unable to:
 
                                      - establish additional foreign operations;
 
                                      - expand international sales channel
                                        management and support organizations;
 
                                      - hire additional personnel;
 
                                      - customize products for local markets;
 
                                       11
13
 
                                      - develop relationships with international
                                        service providers; or
 
                                      - establish relationships with additional
                                        distributors and systems integrators.
 
                                 Even if we are able to successfully expand our
                                 international operations, we cannot be certain
                                 that we will be able to maintain or increase
                                 international market demand for our products.
                                 International operations are generally subject
                                 to a number of risks, including:
 
                                      - expenses associated with customizing
                                        products for foreign countries;
 
                                      - challenges inherent in managing
                                        geographically dispersed operations;
 
                                      - protectionist laws and business
                                        practices that favor local competitors;
 
                                      - dependence on local vendors;
 
                                      - multiple, conflicting and changing
                                        governmental laws and regulations;
 
                                      - foreign currency exchange rate
                                        fluctuations; and
 
                                      - political and economic instability.
 
WE MAY BE SUBJECT TO RISKS
ASSOCIATED WITH FUTURE
ACQUISITIONS                     In the future, we may pursue acquisitions to
                                 obtain products, services and technologies that
                                 we believe will complement or enhance our
                                 current product or services offerings. At
                                 present, we have no agreements or other
                                 arrangements with respect to any acquisition.
                                 An acquisition may not produce the revenue,
                                 earnings or business synergies that we
                                 anticipated, and an acquired product, service
                                 or technology might not perform as we expected.
                                 If we pursue any acquisition, our management
                                 could spend a significant amount of time and
                                 effort in identifying and completing the
                                 acquisition and may be distracted from the
                                 operations of our business. If we complete an
                                 acquisition, we would probably have to devote a
                                 significant amount of management resources to
                                 integrating the acquired business with our
                                 existing business, and that integration may not
                                 be successful.
 
                                 To pay for an acquisition, we might use capital
                                 stock or cash, including proceeds of this
                                 offering. Alternatively, we might borrow money
                                 from a bank or other lender. If we use capital
                                 stock, our stockholders would experience
                                 dilution of their ownership interests. If we
                                 use cash or debt financing, our financial
                                 liquidity will be reduced.
 
WE MAY BE AFFECTED BY
UNEXPECTED YEAR 2000
TECHNOLOGY PROBLEMS              Many existing computer systems and software
                                 products do not properly recognize dates after
                                 December 31, 1999. This "Year 2000" problem
                                 could result in miscalculations, data
                                 corruption,
 
                                       12
14
 
                                 system failures or disruptions of operations.
                                 We are subject to potential Year 2000 problems
                                 affecting our products, our customers' systems,
                                 our internal systems and the systems of our
                                 vendors, any of which could have a material
                                 adverse effect on our business, operating
                                 results and financial condition.
 
                                 Changing purchasing patterns of customers
                                 impacted by Year 2000 issues may result in
                                 reduced resources available for purchases of
                                 interactive electronic business solutions. In
                                 addition, there can be no assurance that Year
                                 2000 errors or defects will not be discovered
                                 in our internal software systems and, if such
                                 errors or defects are discovered, there can be
                                 no assurance that the costs of making such
                                 systems Year 2000 compliant will not be
                                 material.
 
                                 Year 2000 errors or defects in the internal
                                 systems maintained by our vendors could require
                                 us to incur significant unanticipated expenses
                                 to remedy any problems or replace affected
                                 vendors. See "Management's Discussion and
                                 Analysis and Results of Operations -- Year 2000
                                 Readiness Disclosure."
 
RISKS ASSOCIATED WITH THIS OFFERING OF OUR COMMON STOCK
 
THE PRICE OF OUR COMMON
STOCK
AFTER THIS OFFERING MAY BE
LOWER
THAN THE PRICE YOU PAY           Prior to this offering, there has been no
                                 public market for our common stock. After this
                                 offering, an active trading market in our stock
                                 might not develop or continue. If you purchase
                                 shares of our common stock in this offering,
                                 you will pay a price that was not established
                                 in a competitive market. Rather, you will pay a
                                 price that we negotiated with the
                                 representatives of the underwriters based upon
                                 several factors. See "Underwriting." The price
                                 of our common stock that will prevail in the
                                 market after this offering may be higher or
                                 lower than the price you pay.
 
                                 The stock market in general has recently
                                 experienced extreme price and volume
                                 fluctuations. In addition, the market prices of
                                 securities of technology companies,
                                 particularly Web-related companies, have been
                                 extremely volatile, and have experienced
                                 fluctuations that have often been unrelated or
                                 disproportionate to the operating performance
                                 of such companies. These broad market
                                 fluctuations could adversely affect the market
                                 price of our common stock.
 
                                 Recently, when the market price of a stock has
                                 been volatile, holders of that stock have
                                 occasionally instituted securities class action
                                 litigation against the company that issued the
                                 stock. If any of our stockholders brought such
                                 a lawsuit against us, even if the lawsuit is
                                 without merit, we could incur substantial costs
                                 defending the lawsuit. The lawsuit could also
                                 divert the time and attention of our
                                 management.
 
                                       13
15
 
OUR EXECUTIVE OFFICERS AND
DIRECTORS WILL EXERCISE
SIGNIFICANT CONTROL OVER
SILKNET                          After this offering, our executive officers and
                                 directors and their affiliates will together
                                 control approximately      % of the outstanding
                                 common stock. As a result, these stockholders,
                                 if they act together, will be able to control
                                 all matters requiring stockholder approval,
                                 including the election of directors and
                                 approval of significant corporate transactions.
                                 This concentration of ownership may have the
                                 effect of delaying, preventing or deterring a
                                 change in control of Silknet, could deprive our
                                 stockholders of an opportunity to receive a
                                 premium for their common stock as part of a
                                 sale of Silknet and might affect the market
                                 price of our common stock.
 
CERTAIN PROVISIONS OF OUR
CHARTER AND OF DELAWARE LAW
MAKE A TAKEOVER OF SILKNET
MORE DIFFICULT                   Our corporate documents and Delaware law
                                 contain provisions that might enable our
                                 management to resist a takeover of Silknet.
                                 These provisions might discourage, delay or
                                 prevent a change in the control of Silknet or a
                                 change in our management. These provisions
                                 could also discourage proxy contests and make
                                 it more difficult for you and other
                                 stockholders to elect directors and take other
                                 corporate actions. The existence of these
                                 provisions could limit the price that investors
                                 might be willing to pay in the future for
                                 shares of common stock and could deprive our
                                 stockholders of an opportunity to receive a
                                 premium for their common stock as part of a
                                 sale of Silknet. See "Description of Capital
                                 Stock-Anti-Takeover Effects of Provisions of
                                 Silknet's Certificate of Incorporation and
                                 By-laws and Delaware Law."
 
FUTURE SALES BY EXISTING
SECURITY HOLDERS COULD
DEPRESS
THE MARKET PRICE OF THE
COMMON STOCK                     If our existing stockholders sell a large
                                 number of shares of our common stock, the
                                 market price of the common stock could decline
                                 significantly. Moreover, the perception in the
                                 public market that our existing stockholders
                                 might sell shares of common stock could depress
                                 the market price of the common stock.
                                 Immediately after this offering, approximately
                                      shares (including the      shares being
                                 sold in this offering) will be outstanding. Of
                                 these shares,      shares will be available for
                                 resale in the public market without restriction
                                 immediately following this offering. Of the
                                 additional           shares of our common stock
                                 which will be outstanding, approximately
                                 shares will become eligible for sale in the
                                 public market (subject to compliance with Rule
                                 144 in certain cases) upon the expiration of
                                 "lock-up" agreements with the Underwriters 180
                                 days after the date of this prospectus.
 
                                 Some of our existing stockholders have the
                                 right to require us to register their shares of
                                 common stock with the Securities and Exchange
                                 Commission. If we register their shares of
                                 common stock, they can freely sell those shares
                                 in the public market.
 
                                 After this offering, we intend to register
                                 approximately 4,091,900 shares of our common
                                 stock that we have issued or
 
                                       14
16
 
                                 may issue under our stock plans. Once we
                                 register these shares, they can be freely sold
                                 in the public market upon issuance, subject to
                                 the "lock-up" agreements described above.
 
WE WILL HAVE BROAD
DISCRETION
IN USING THE PROCEEDS FROM
THIS
OFFERING                         We have not identified specific uses for the
                                 proceeds from this offering, and we will have
                                 broad discretion in how we use them. You will
                                 not have the opportunity to evaluate the
                                 economic, financial or other information on
                                 which we base our decisions on how to use the
                                 proceeds.
 
INVESTORS WILL EXPERIENCE
IMMEDIATE AND SUBSTANTIAL
DILUTION IN THE BOOK VALUE
OF
THEIR INVESTMENT                 If you purchase shares of our common stock in
                                 this offering, you will experience immediate
                                 and substantial dilution, in that the price you
                                 pay will be substantially greater than the net
                                 tangible book value per share of the shares you
                                 acquire. This dilution is due in large part to
                                 the fact that earlier investors in Silknet paid
                                 substantially less than the public offering
                                 price when they purchased their shares of
                                 common stock. You will experience additional
                                 dilution upon the exercise of outstanding stock
                                 options or warrants to purchase common stock.
 
               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
     Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this prospectus constitute
forward-looking statements. These statements relate to future events or our
future financial performance, and are identified by terminology such as "may,"
"will," "should," "expects," "scheduled," "plans," "intends," "anticipates,"
"believes," "estimates," "potential," or "continue" or the negative of such
terms or other comparable terminology. These statements are only predictions.
Actual events or results may differ materially. In evaluating these statements,
you should specifically consider various factors, including the risks outlined
under "Risk Factors." These factors may cause our actual results to differ
materially from any forward-looking statement.
 
     Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform such statements to actual results.
 
                                       15
17
 
                                USE OF PROCEEDS
 
     The net proceeds to Silknet from the issuance and sale of the
          shares of common stock offered hereby are estimated to be
approximately $          million (approximately $          million if the
underwriters' over-allotment option is exercised in full), at an assumed initial
public offering price of $     per share, after deducting estimated underwriting
discounts and commissions and offering expenses. Silknet intends to use the
proceeds for general corporate purposes, including working capital, product
development and expansion of its international operations and sales and
marketing capabilities. A portion of the proceeds may also be used to acquire or
invest in complementary businesses or products or to obtain the right to use
complementary technologies. Silknet has no specific understandings, commitments
or agreements with respect to any such acquisition or investment. Pending such
uses, the proceeds of this offering will be invested in short-term,
interest-bearing, investment-grade securities, certificates of deposit or direct
or guaranteed obligations of the United States.
 
                                DIVIDEND POLICY
 
     Silknet has never declared or paid any cash dividends on its capital stock
and does not anticipate paying cash dividends in the foreseeable future. Silknet
currently intends to retain future earnings, if any, to fund the expansion and
growth of its business. Payment of future dividends, if any, will be at the
discretion of Silknet's Board of Directors after taking into account various
factors, including Silknet's financial condition, operating results, current and
anticipated cash needs and plans for expansion. Under the terms of Silknet's
line of credit, there are certain restrictions on Silknet's ability to declare
and pay dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
 
                                       16
18
 
                                 CAPITALIZATION
 
     The following table sets forth the capitalization of Silknet as of December
31, 1998:
 
     - on an actual basis;
 
     - on a pro forma basis giving effect to the conversion of all outstanding
       shares of preferred stock into common stock; and
 
     - on a pro forma as adjusted basis to reflect the sale by Silknet of
                      shares of common stock offered hereby at an assumed
       initial public offering price of $     per share, after deducting
       estimated underwriting discounts and commissions and offering expenses.
 
This information should be read in conjunction with Silknet's consolidated
financial statements and notes thereto appearing elsewhere in this prospectus.
DECEMBER 31, 1998
                                                              -----------------------------------------
                                                                                            PRO FORMA
                                                               ACTUAL       PRO FORMA      AS ADJUSTED
                                                              ---------     ----------     ------------
                                                              (IN THOUSANDS, EXCEPT SHARE AND PER SHARE
                                                                                DATA)
                                                                                    (UNAUDITED)
Note payable to bank, excluding current portion.............  $    156       $    156          $156
Convertible participating preferred stock, $.01 par value
  (1):
  Series A -- 2,364,584 shares authorized, issued and
    outstanding actual; none authorized, issued and
    outstanding pro forma and pro forma as adjusted.........     2,781             --            --
  Series B -- 2,500,000 shares authorized, issued and
    outstanding actual; none authorized, issued and
    outstanding pro forma and pro forma as adjusted.........     5,770             --            --
  Series C -- 3,089,157 shares authorized, issued and
    outstanding actual; none authorized, issued and
    outstanding pro forma and pro forma as adjusted.........    11,470             --            --
                                                              --------       --------          ----
         Total convertible participating preferred
           stock(2).........................................    20,021             --            --
                                                              --------       --------          ----
Stockholders' equity (deficit):
  Common stock, $.01 par value; 15,000,000 shares
    authorized, 2,716,650 shares issued outstanding actual;
    10,670,391 shares issued and outstanding pro forma;
    10,670,391 shares issued and outstanding pro forma as
    adjusted(1).............................................        27            107
  Additional paid-in capital................................     1,298         19,233
  Accumulated dividends on preferred stock(3)...............    (2,006)            --            --
  Deferred compensation.....................................      (398)          (398)         (398)
  Other comprehensive income................................         1              1             1
  Accumulated deficit.......................................   (13,091)       (13,091)
                                                              --------       --------          ----
Total stockholders' equity (deficit)........................  $(14,169)         5,852
                                                              --------       --------          ----
Total capitalization........................................  $  6,008       $  6,008          $
                                                              ========       ========          ====
---------------
(1) On February 25, 1999, Silknet increased its authorized capital stock to
    50,000,000 shares of common stock and 15,000,000 shares of preferred stock.
 
(2) On February 26, 1999, Silknet issued 1,205,913 shares of Series D
    Convertible Preferred Stock at $7.324109 per share for total consideration
    of approximately $8.8 million. These shares will convert to 1,205,913 shares
    of common stock upon the closing of this offering. The Series D Convertible
    Preferred Stock has not been included in the above capitalization table.
 
(3) Upon conversion of the convertible participating preferred stock, all
    accrued dividends will be eliminated.
 
                                       17
19
 
                                    DILUTION
 
     The pro forma net tangible book value of Silknet at December 31, 1998 was
$5,852,000, or $.55 per share of common stock. Pro forma net tangible book value
per share represents the amount of total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding after giving effect
to the conversion of all shares of preferred stock. After giving effect to the
sale of           shares of common stock offered hereby by Silknet at an assumed
initial public offering price of $     per share and after deducting estimated
underwriting discounts and commissions and offering expenses, Silknet's pro
forma net tangible book value as of December 31, 1998 would have been
approximately $     , or $     per share. This represents an immediate increase
in pro forma net tangible book value of $     per share to existing stockholders
and an immediate dilution of $     per share to new investors purchasing shares
of common stock in this offering. The following table illustrates this dilution:
Assumed initial public offering price per share.....................   $
  Pro forma net tangible book value per share at December
     31, 1998...............................................  $  .55
  Increase attributable to this offering....................
                                                              ------
Pro forma net tangible book value per share after this offering.....   $
                                                                       ------
Net tangible book value dilution per share to new investors in this
  offering..........................................................   $
                                                                       ======
The following table summarizes, as of December 31, 1998, on the pro forma
basis described above, the total number of shares purchased, the consideration
paid to Silknet and the average price per share paid by the existing
stockholders and by new investors purchasing shares of common stock in this
offering at an assumed initial public offering price of $     per share (before
deducting the estimated underwriting discounts and commissions and offering
expenses):
SHARES PURCHASED      TOTAL CONSIDERATION
                                       --------------------   ---------------------   AVERAGE PRICE
                                         NUMBER     PERCENT     AMOUNT      PERCENT     PER SHARE
                                       ----------   -------   -----------   -------   -------------
Existing stockholders................  10,670,391        %    $18,372,363        %        $1.72
New investors........................                    %    $                  %        $
                                       ----------     ---     -----------    ----
          Totals.....................                 100%                    100%
                                       ==========     ===     ===========    ====
As of December 31, 1998, there were (a) 732,451 shares of common stock
issuable upon exercise of outstanding stock options, at a weighted average
exercise price of $.43 per share; (b) 53,188 shares of common stock reserved for
issuance under Silknet's Employee Stock Option Plan; and (c) 750,000 shares of
common stock issuable under exercise of outstanding warrants, at a weighted
average exercise price of $1.80. In addition, in February 1999 Silknet adopted
the 1999 Stock Option and Incentive Plan, pursuant to which 1,000,000 shares of
common stock were initially reserved for issuance, the 1999 Employee Stock
Purchase Plan, pursuant to which 350,000 shares of common stock were reserved
for issuance, and the 1999 Non-Employee Director Stock Option Plan, pursuant to
which 350,000 shares of common stock were reserved for issuance. To the extent
that these options or warrants are exercised, there will be further dilution to
new investors. See "Management -- Stock Plans" and Note M to consolidated
financial statements.
 
                                       18
20
 
                      SELECTED CONSOLIDATED FINANCIAL DATA
 
    The selected financial data set forth below should be read in conjunction
with Silknet's consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing elsewhere in this prospectus. The statement of operations
data for the years ended June 30, 1996, 1997 and 1998, and the balance sheet
data as of June 30, 1997 and 1998, are derived from, and are qualified by
reference to, audited consolidated financial statements included elsewhere in
this prospectus. The statement of operations data for the six months ended
December 31, 1997 and 1998 and the balance sheet data as of December 31, 1998
are derived from unaudited financial statements of Silknet appearing elsewhere
in this prospectus. The statement of operations data for the period from March
6, 1995 (date of inception) to June 30, 1995 and the balance sheet data as of
June 30, 1995 and 1996 are derived from unaudited consolidated financial
statements not included in this prospectus. The unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of Silknet's management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information set forth therein. The historical results
are not necessarily indicative of the operating results to be expected in the
future.
 
    Accrued dividends of convertible participating preferred stock are not
included in the calculation of pro forma basic and diluted net loss per share.
PERIOD FROM                                   SIX MONTHS ENDED
                                                              MARCH 6, 1995        YEAR ENDED JUNE 30,         DECEMBER 31,
                                                              (INCEPTION) TO   ---------------------------   -----------------
                                                              JUNE 30, 1995     1996      1997      1998      1997      1998
                                                              --------------   ------   --------   -------   -------   -------
                                                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                               (UNAUDITED)                                      (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenue:
  License...................................................          --           --   $    75    $ 2,977   $   508   $ 3,689
  Services..................................................          --       $  266       119        670       128     1,855
                                                                  ------       ------   -------    -------   -------   -------
        Total revenue.......................................          --          266       194      3,647       636     5,544
                                                                  ------       ------   -------    -------   -------   -------
Cost of revenue:
  License...................................................          --           --        29         32         5       184
  Services..................................................          --          141       312      1,354       574     1,519
                                                                  ------       ------   -------    -------   -------   -------
        Total cost of revenue...............................          --          141       341      1,386       579     1,703
                                                                  ------       ------   -------    -------   -------   -------
Gross margin................................................          --          125      (147)     2,261        57     3,841
                                                                  ------       ------   -------    -------   -------   -------
Operating expenses:
  Sales and marketing.......................................          --           33       888      4,802     1,814     4,236
  Research and development..................................      $   26          120       961      2,409       944     2,274
  General and administrative................................          35          430       696      1,187       494     1,290
                                                                  ------       ------   -------    -------   -------   -------
        Total operating expenses............................          61          583     2,545      8,398     3,252     7,800
                                                                  ------       ------   -------    -------   -------   -------
Operating loss..............................................         (61)        (458)   (2,692)    (6,137)   (3,195)   (3,959)
Interest income (expense), net..............................          --           (7)      (61)       134        65       150
                                                                  ------       ------   -------    -------   -------   -------
Net loss....................................................         (61)        (465)   (2,753)    (6,003)   (3,130)   (3,809)
Accrued dividends for preferred stockholders................          --           --       190        903        51       913
                                                                  ------       ------   -------    -------   -------   -------
Net loss attributable to common stockholders................      $  (61)      $ (465)  $(2,943)   $(6,906)  $(3,181)  $(4,722)
                                                                  ======       ======   =======    =======   =======   =======
Basic and diluted net loss per share attributable to common
  stockholders..............................................      $(0.02)      $(0.18)  $ (1.15)   $ (2.69)  $ (1.24)  $ (1.76)
Shares used in computing basic and diluted net loss per
  share attributable to common stockholders.................       2,478        2,551     2,557      2,566     2,558     2,675
Unaudited pro forma basic and diluted net loss per share....       (0.02)       (0.18)    (0.63)     (0.76)    (0.42)    (0.36)
Shares used in computing unaudited pro forma basic and
  diluted net loss per share................................       2,478        2,551     4,398      7,879     7,422    10,629
The pro forma as adjusted balance sheet data as of December 31, 1998 gives
effect to the conversion of all outstanding preferred stock into common stock
upon the closing of this offering and has been adjusted to give effect to the
sale of               shares of common stock offered hereby at an assumed
initial public offering price of $    per share, after deducting estimated
underwriting discounts and commissions and offering expenses.
DECEMBER 31, 1998
                                                                          JUNE 30,               -------------------------
                                                              --------------------------------                  PRO FORMA
                                                              1995   1996     1997      1998       ACTUAL      AS ADJUSTED
                                                              ----   -----   -------   -------   -----------   -----------
                                                                                     (IN THOUSANDS)
                                                              (UNAUDITED)                               (UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents...................................  $ 17   $  40   $ 4,752   $ 9,045    $  4,585        $
Working capital (deficit)...................................   (28)   (102)    4,155     8,472       4,477
Total assets................................................    64     170     5,402    12,129      10,598
Note payable to bank........................................    --      --       115       222         156         156
Total convertible participating preferred stock.............    --      --     7,432    19,107      20,021          --
Total stockholders' equity (deficit)........................    19     (34)   (2,834)   (9,587)    (14,168)
19
21
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
     The following discussion and analysis of the financial condition and
results of operations of Silknet should be read in conjunction with "Selected
Consolidated Financial Data" and Silknet's consolidated financial statements and
notes thereto appearing elsewhere in this prospectus. This discussion and
analysis contains forward-looking statements that involve risks and
uncertainties. Silknet's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this prospectus.
 
OVERVIEW
 
     Silknet provides software that allows companies to offer personalized
marketing, sales, electronic commerce and customer support services through a
single, company-tailored Web site interface. Silknet's products enable a company
to deliver these services to its customers over the Web through real-time
collaboration and customer self-service. In January 1997, Silknet recorded its
first license revenue upon delivery of the beta version of its initial product,
Silknet eService, to customers. Silknet commercially released Silknet eService
in July 1997, and since that time has introduced Silknet eBusiness, Silknet
eCommerce, and Silknet eService Commerce Edition.
 
     In the fiscal years ended June 30, 1998 and 1997, Silknet's revenue was
derived principally from licenses for software products and from professional
services including consulting, training, implementation, technical support and
maintenance. Revenue from sales of licenses to use Silknet's software products
is recognized upon delivery of products to customers, provided no significant
post-delivery obligations or uncertainties remain and collection of the related
receivable is probable. License or services revenue subject to a significant
acceptance clause is deferred until acceptance is received from the customer.
Revenue under arrangements where multiple products or services are sold together
under one contract is allocated to each element based on its relative fair
value, with these fair values being determined using the price charged when that
element is sold separately. For agreements with specified upgrade rights, the
revenue related to those upgrade rights is deferred until the specified upgrade
is delivered. Revenue for consulting and training services is recognized as
services are provided, and revenue for maintenance services is recognized
ratably over the term of the service agreement.
 
     Silknet generates its license revenue through direct sales to its customers
and sales through its relationships with systems integrators and consulting
firms. International revenue generated to date has been insignificant.
 
     Silknet has only a limited operating history on which to base an evaluation
of its business and prospects. Silknet's prospects must be considered in light
of the risks and uncertainties encountered by companies in an early stage of
development in new and rapidly evolving markets. To address these risks, Silknet
must, among other things:
 
     - develop new products and product enhancements more rapidly than its
       competitors;
 
     - attract, integrate, motivate and train qualified personnel;
 
     - successfully implement its sales and marketing strategy; and
 
     - expand relationships with implementation partners and grow its internal
       services staff.
 
There can be no assurance that Silknet will succeed in addressing any or all of
these risks, and the failure to do so would have a material adverse effect on
Silknet's business, operating results and financial condition.
 
                                       20
22
 
     Silknet has experienced substantial net losses since its inception, and as
of December 31, 1998, it had an accumulated deficit of $13.1 million. These net
losses and accumulated deficit resulted from Silknet's lack of substantial
revenue and the significant costs incurred in the development of its products
and in the establishment of its sales and marketing organization. Silknet
expects to increase its expenditures in all areas in order to execute its
business plan, particularly in research and development and sales and marketing.
The planned increase in sales and marketing expense will primarily result from
the hiring of additional sales force personnel and expansion of marketing
programs.
 
     Although Silknet has experienced revenue growth in recent periods, there
can be no assurance that such growth rates are sustainable, and therefore such
growth rates should not be considered indicative of future operating results.
There can also be no assurance that Silknet will be able to continue to increase
its revenue or attain profitability or, if increases in revenue and
profitability are achieved, that they can be sustained. Silknet believes that
period-to-period comparisons of its historical operating results are not
meaningful and should not be relied upon as an indication of future performance.
 
RESULTS OF OPERATIONS
 
     The following table sets forth for the periods indicated the percentage of
total revenue of certain line items included in Silknet's statements of
operations.
YEAR ENDED             SIX MONTHS ENDED
                                                     JUNE 30,                DECEMBER 31,
                                           ----------------------------    -----------------
                                            1996       1997       1998      1997       1998
                                           ------    --------    ------    -------    ------
Revenue:
  License................................      --        38.5%     81.6%     79.9%     66.5%
  Services...............................   100.0%       61.5      18.4      20.1      33.5
                                           ------    --------    ------    ------     -----
     Total revenue.......................   100.0       100.0     100.0     100.0     100.0
                                           ------    --------    ------    ------     -----
Cost of revenue:
  License................................      --        14.9       0.9       0.9       3.3
  Services...............................    53.0       160.9      37.1      90.2      27.4
                                           ------    --------    ------    ------     -----
     Total cost of revenue...............    53.0       175.8      38.0      91.1      30.7
                                           ------    --------    ------    ------     -----
Gross margin.............................    47.0       (75.8)     62.0       8.9      69.3
                                           ------    --------    ------    ------     -----
Operating expenses:
  Sales and marketing....................    12.4       458.4     131.7     285.1      76.4
  Research and development...............    45.0       496.0      66.0     148.4      41.0
  General and administrative.............   161.8       359.6      32.6      77.6      23.3
                                           ------    --------    ------    ------     -----
     Total operating expenses............   219.2     1,314.1     230.2     511.1     140.7
                                           ------    --------    ------    ------     -----
Operating loss...........................  (172.1)   (1,389.7)   (168.3)   (502.2)    (71.4)
Interest income (expense), net...........    (2.5)      (31.1)      3.7      10.4       2.7
                                           ------    --------    ------    ------     -----
Net loss.................................  (174.6)%  (1,420.9)%  (164.6)%  (491.8)%   (68.7)%
                                           ======    ========    ======    ======     =====
21
23
 
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
 
  REVENUE
 
     Total revenue increased to $5.5 million for the six-month period ended
December 31, 1998 from $636,000 for the six-month period ended December 31,
1997.
 
     License Revenue.  License revenue increased to $3.7 million for the
six-month period ended December 31, 1998 from $508,000 for the six-month period
ended December 31, 1997. The increase was primarily due to an increase in the
number of licenses sold for Silknet eService, and other new products introduced
and shipped during the six months ended December 31, 1998. These new products
included a new version of Silknet eService and Silknet eBusiness System, which
was released in November 1998.
 
     Services Revenue.  Services revenue increased to $1.9 million for the
six-month period ended December 31, 1998 from $128,000 for the six-month period
ended December 31, 1997. Of this increase, $850,000 was attributable to a
consulting services project which was eventually completed in January 1999 and
$523,000 was related to maintenance contracts sold to Silknet's new customers.
The remaining increase was related to additional training and consulting
services sold to both new and existing customers. The total number of customers
increased to 24 as of December 31, 1998 from eight as of December 31, 1997.
 
  COST OF REVENUE
 
     Cost of License Revenue.  Cost of license revenue includes royalties paid
to third parties under technology license arrangements. Cost of license revenue
increased to $184,000, or 5.0% of license revenue, for the six-month period
ended December 31, 1998 from $5,000, or 1.1% of license revenue, for the
six-month period ended December 31, 1997. Silknet anticipates that the cost of
license revenue will continue to increase in absolute dollars. Cost of license
revenue as a percent of license revenue has varied in the past due to the timing
and volume of product sales and the nature of royalty agreements in place at the
time.
 
     Cost of Services Revenue.  Cost of services revenue consists primarily of
personnel costs. Cost of services revenue increased to $1.5 million, or 81.9% of
services revenue, for the six-month period ended December 31, 1998 from
$574,000, or 449.2% of services revenue, for the six-month period ended December
31, 1997. The dollar increase resulted primarily from the hiring of additional
employees and the use of contractors to support increased customer demand for
maintenance and consulting services. The number of customer services employees
increased to 18 as of December 31, 1998 from 10 as of December 31, 1997, and
Silknet anticipates that it will continue to increase the number of customer
service employees in 1999. The improvement in services gross margins to 18.1%
for the six-month period ended December 31, 1998 from a negative margin of
349.2% for the six-month period ended December 31, 1997 was primarily
attributable to the substantial growth in consulting and maintenance revenue
from Silknet's increased installed base. Silknet realized negative margin on
services revenue for several quarters prior to the six-month period ended
December 31, 1998 due to insufficient revenue to cover the cost of a growing
service department. The continued improvement in services gross margins is
contingent upon the future demand for the services offered by Silknet.
 
     Overall gross margins are primarily affected by the mix of license revenue
and services revenue. Silknet historically has realized higher gross margins on
license revenue than on services revenue. If services revenue increases as a
percentage of total revenue, Silknet's overall gross margins may be adversely
affected.
 
                                       22
24
 
  OPERATING EXPENSES
 
     Sales and Marketing.  Sales and marketing expenses consist primarily of
employee salaries, commissions and costs associated with marketing programs,
such as trade shows, seminars, public relations and new product launches. Sales
and marketing expenses increased to $4.2 million, or 76.4% of total revenue, for
the six-month period ended December 31, 1998 from $1.8 million, or 285.1% of
total revenue, for the six-month period ended December 31, 1997. The increase
was primarily attributable to an increase in the number of direct sales,
pre-sales support and marketing employees to 31 as of December 31, 1998 from 12
as of December 31, 1997. To a lesser extent, the increase was related to an
increase in marketing programs, including trade shows and public relations
related to product launch activities. Sales and marketing expenses may continue
to increase in absolute dollars as Silknet continues to expand its marketing
programs and its sales force to support product launches and international
expansion.
 
     Research and Development.  Research and development expenses consist
primarily of employee salaries, fees for outside consultants and related costs
associated with the development of new products, the enhancement of existing
products, quality assurance, testing and documentation. Research and development
expenses increased to $2.3 million, or 41.0% of total revenue, for the six-
month period ended December 31, 1998 from $944,000, or 148.4% of total revenue,
for the six-month period ended December 31, 1997. The increase primarily
resulted from salaries associated with newly hired development personnel. The
number of research and development employees increased to 42 as of December 31,
1998 from 20 as of December 31, 1997 to support the development of new products.
Silknet anticipates that research and development expenses will continue to
increase in absolute dollars.
 
     General and Administrative.  General and administrative expenses consist
primarily of employee salaries and other personnel related costs for executive
and financial personnel, as well as legal, accounting and insurance costs.
General and administrative expenses increased to $1.3 million, or 23.3% of total
revenue, for the six-month period ended December 31, 1998 from $494,000, or
77.6% of total revenue, for the six-month period ended December 31, 1997.
Substantially all of the increase was due to salaries associated with newly
hired personnel and related costs required to manage Silknet's growth and
facilities expansion. The number of general and administrative employees
increased to 15 as of December 31, 1998 from six as of December 31, 1997.
Silknet expects that its general and administrative expenses will increase in
absolute dollars as it continues to expand its staffing to support expanded
operations and facilities and incurs expenses relating to its new
responsibilities as a public company.
 
     Interest Income (Expense), Net.  Interest income, net of interest expense,
increased to $151,000, or 2.7% of total revenue, for the six-month period ended
December 31, 1998 from $66,000, or 10.4% of total revenue, for the six-month
period ended December 31, 1997. The increase was primarily due to an increase in
Silknet's average cash balances related to capital financing activities.
 
     Provision for Income Taxes.  Silknet incurred aggregate operating losses of
$13.1 million from inception through December 31, 1998. Silknet has recorded a
valuation allowance for the full amount of its net deferred tax assets as the
future realization of the tax benefit is not sufficiently assured.
 
YEARS ENDED JUNE 30, 1998 AND 1997
 
  REVENUE
 
     Silknet's total revenue increased to $3.6 million for the period ended June
30, 1998 from $194,000 for the period ended June 30, 1997.
 
     License Revenue.  License revenue increased to $3.0 million for the year
ended June 30, 1998 from $75,000 for the year ended June 30, 1997. The increase
was primarily due to an increase in the
 
                                       23
25
 
number of licenses sold for Silknet's first product, Silknet eService, which was
commercially released in July 1997, and new versions of products introduced and
shipped during the year ended June 30, 1998.
 
     Services Revenue.  Services revenue increased to $671,000 for the year
ended June 30, 1998 from $119,000 for the year ended June 30, 1997. The increase
related primarily to an increase in maintenance contracts and consulting
services sold to Silknet's new customers. The total number of customers
increased to 17 as of June 30, 1998 from two as of June 30, 1997.
 
  COST OF REVENUE
 
     Cost of License Revenue.  Cost of license revenue increased to $32,000, or
1.1% of license revenue, for the year ended June 30, 1998 from $29,000, or 38.8%
of license revenue, for the year ended June 30, 1997. The improvement in license
gross margin to 98.9% for the year ended June 30, 1998 from 61.2% for the year
ended June 30, 1997 was primarily attributable to increased license revenue.
 
     Cost of Services Revenue.  Cost of services revenue increased to $1.4
million, or 201.9% of services revenue, for the year ended June 30, 1998 from
$312,000, or 261.7% of services revenue, for the year ended June 30, 1997. The
dollar increase resulted primarily from an increase in the numbers of services
employees to 12 as of June 30, 1998 from six as of June 30, 1997, as well as
hiring consultants to supplement Silknet's internal workforce. During the years
ended June 30, 1998 and 1997, Silknet realized negative margins on services
revenue as a result of Silknet increasing the number of services employees.
 
  OPERATING EXPENSES
 
     Sales and Marketing.  Sales and marketing expenses increased to $4.8
million, or 131.7% of total revenue, for the year ended June 30, 1998 from
$888,000, or 458.4% of total revenue, for the year ended June 30, 1997. The
increase was primarily attributable to costs associated with an increase in
direct sales, pre-sales support and marketing employees to 25 as of June 30,
1998 from 10 as of June 30, 1997. Approximately $1.0 million of the remaining
increase was related to marketing programs, including trade shows and seminars
related to product launch activity during the year ended June 30, 1998.
 
     Research and Development.  Research and development expenses increased to
$2.4 million, or 66.0% of total revenue, for the year ended June 30, 1998 from
$961,000, or 496.0% of total revenue, for the year ended June 30, 1997. The
increase primarily resulted from an increase in the number of research and
development employees to 32 as of June 30, 1998 from 13 as of June 30, 1997 to
support the development of new products.
 
     General and Administrative.  General and administrative expenses increased
to $1.2 million, or 32.6% of total revenue, for the year ended June 30, 1998
from $697,000, or 359.6% of total revenue, for the year ended June 30, 1997.
Substantially all of the increase was due to salaries associated with an
increase in the number of general and administrative employees to 11 as of June
30, 1998 from six as of June 30, 1997, and the related costs required to manage
Silknet's growth.
 
     Interest Income (Expense), Net.  Interest income, net of interest expense,
increased to $134,000, or 3.7% of total revenue, for the year ended June 30,
1998 from a net expense of $60,000, or 31.1% of total revenue, for the year
ended June 30, 1997. The increase was primarily due to an increase in Silknet's
average cash balances resulting from capital financing activities combined with
a decrease in Silknet's debt obligations.
 
                                       24
26
 
YEARS ENDED JUNE 30, 1997 AND 1996
 
  REVENUE
 
     License Revenue.  License revenue was $75,000 for the year ended June 30,
1997. The license revenue in fiscal 1997 was due to the introduction of
Silknet's first product, Silknet eService, which Silknet began shipping in beta
version in January 1997.
 
     Services Revenue.  Services revenue decreased to $119,000 for the year
ended June 30, 1997 from $266,000 for the year ended June 30, 1996. This
decrease was due to Silknet shifting its efforts from providing custom
development Web-related consulting services to providing services related to its
new Silknet eService product.
 
  COST OF REVENUE
 
     Cost of License Revenue.  Cost of license revenue was $29,000, or 38.8% of
license revenue, for the year ended June 30, 1997. For the year ended June 30,
1996, Silknet incurred no cost of license revenue.
 
     Cost of Services Revenue.  Cost of services revenue increased to $312,000,
or 261.7% of services revenue, for the year ended June 30, 1997 from $141,000,
or 53.0% of services revenue, for the year ended June 30, 1996. The increase
resulted primarily from an increase in the number of services employees to six
as of June 30, 1997 from one as of June 30, 1996.
 
  OPERATING EXPENSES
 
     Sales and Marketing.  Sales and marketing expenses increased to $888,000,
or 458.4% of total revenue, for the year ended June 30, 1997 from $33,000, or
12.4% of total revenue, for the year ended June 30, 1996. The increase was
primarily attributable to costs associated with an increase in the number of
direct sales, pre-sales support and marketing employees to 10 as of June 30,
1997 from zero as of June 30, 1996. The remaining increase was related to a
substantial expansion in marketing programs, including trade shows and seminars
related to product launch activities.
 
     Research and Development.  Research and development expenses increased to
$961,000, or 496.0% of total revenue, for the year ended June 30, 1997 from
$120,000, or 45.0% of total revenue, for the year ended June 30, 1996. The
increase primarily resulted from an increase in the number of research and
development employees to 13 as of June 30, 1997 from four as of June 30, 1996.
 
     General and Administrative.  General and administrative expenses increased
to $697,000, or 359.6% of total revenue, for the year ended June 30, 1997 from
$431,000, or 161.8% of total revenue, for the year ended June 30, 1996.
Substantially all of the increase was due to salaries associated with an
increase in the number of general and administrative employees to six as of June
30, 1997 from two as of June 30, 1996, and the related costs required to manage
Silknet's growth.
 
     Interest Income (Expense), Net.  Interest expense, net of interest income,
increased to $60,000, or 31.1% of total revenue, for the year ended June 30,
1997 from $7,000, or 2.5% of total revenue, for the year ended June 30, 1996.
The increase was primarily due to an increase in Silknet's average outstanding
debt obligations.
 
QUARTERLY RESULTS OF OPERATIONS
 
     The following tables set forth a summary of Silknet's unaudited quarterly
operating results for each of the eight quarters in the period ended December
31, 1998. This information has been derived from unaudited interim financial
statements that, in the opinion of management, have been prepared on a basis
consistent with the financial statements contained elsewhere in this prospectus
and include all adjustments, consisting of only normal recurring adjustments,
necessary for a fair statement of
 
                                       25
27
 
such information when read in conjunction with Silknet's financial statements
and notes thereto. The operating results for any quarter are not necessarily
indicative of results for any future period.
QUARTER ENDED
                                   -----------------------------------------------------------------------------------------
                                   MAR. 31,    JUNE 30,    SEPT. 30,   DEC. 31,   MAR. 31,   JUNE 30,   SEPT. 30,   DEC. 31,
                                     1997        1997        1997        1997       1998       1998       1998        1998
                                   ---------   ---------   ---------   --------   --------   --------   ---------   --------
                                                                        (IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenue:
  License........................  $      25   $      50    $   142    $   366    $ 1,218    $ 1,250     $ 1,648    $ 2,040
  Services.......................         14          14         17        111        240        303         621      1,234
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
    Total revenue................         39          64        159        477      1,458      1,553       2,269      3,274
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Cost of revenue:
  License........................         10          19          1          4         13         14          92         91
  Services.......................         95         152        237        337        327        453         538        981
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
    Total cost of revenue........        105         171        238        341        340        467         630      1,072
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Gross margin.....................        (66)       (107)       (79)       136      1,118      1,086       1,639      2,202
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Operating expenses:
  Sales and marketing............        313         503        832        982      1,209      1,779       1,892      2,343
  Research and development.......        322         345        443        501        651        813       1,005      1,270
  General and administrative.....        195         259        172        322        306        388         630        660
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
    Total operating expenses.....        830       1,107      1,447      1,805      2,166      2,980       3,527      4,273
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Operating loss...................       (896)     (1,214)    (1,526)    (1,669)    (1,048)    (1,894)     (1,888)    (2,071)
Interest income, net.............         12          11         45         21          4         64          91         59
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Net loss.........................  $    (884)  $  (1,203)   $(1,481)   $(1,648)   $(1,044)   $(1,830)    $(1,797)   $(2,012)
                                   =========   =========    =======    =======    =======    =======     =======    =======
AS A PERCENTAGE OF TOTAL REVENUE:
Revenue:
  License........................       64.1%       78.1%      89.3%      76.7%      83.5%      80.5%       72.6%      62.3%
  Services.......................       35.9        21.9       10.7       23.3       16.5       19.5        27.4       37.7
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
    Total revenue................      100.0       100.0      100.0      100.0      100.0      100.0       100.0      100.0
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Cost of Revenue:
  License........................       25.6        29.7        0.6        0.8        0.9        0.9         4.1        2.8
  Services.......................      243.6       237.5      149.1       70.7       22.4       29.2        23.7       29.9
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
    Total cost of revenue........      269.2       267.2      149.7       71.5       23.3       30.1        27.8       32.7
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Gross margin.....................     (169.2)     (167.2)     (49.7)      28.5       76.7       69.9        72.2       67.3
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Operating expenses:
  Sales and marketing............      802.6       785.9      523.3      205.9       82.9      114.6        83.4       71.6
  Research and development.......      825.6       539.1      278.6      105.0       44.7       52.4        44.3       38.8
  General and administrative.....      500.0       404.7      108.2       67.5       21.0       25.0        27.7       20.2
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
    Total operating expenses.....    2,128.2     1,729.7      910.1      378.4      148.6      192.0       155.4      130.6
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Operating loss...................   (2,297.4)   (1,896.9)    (959.8)    (349.9)     (71.9)    (122.1)      (83.2)     (63.3)
Interest income, net.............       30.7        17.2       28.3        4.4        0.3        4.1         4.0        1.8
                                   ---------   ---------    -------    -------    -------    -------     -------    -------
Net loss.........................   (2,266.7)%  (1,897.7)%   (931.5)%   (345.5)%    (71.6)%   (118.0)%     (79.2)%    (61.5)%
                                   =========   =========    =======    =======    =======    =======     =======    =======
Silknet has experienced significant fluctuations in revenues, expenses and
results of operations from quarter to quarter, and such fluctuations are likely
to continue. A significant portion of Silknet's revenue has been generated from
a limited number of customers and it is difficult to predict the timing of
future orders and shipment to these and other customers. Silknet anticipates
that its results of operations in any given period will continue to depend to a
significant extent upon sales to a small number of customers.
 
     Silknet has also experienced significant variations in its quarterly gross
margins. These fluctuations were caused by several factors. Silknet's gross
margins for license revenue have varied
 
                                       26
28
 
due to the volume of revenue, the timing of recognition and the nature of
related royalty arrangements. Silknet's gross margins for services revenue have
varied due to the volume of services revenue, which is related to the changes in
the installed customer base, and the timing and number of additions in
professional services personnel and compensation and related costs.
 
     Silknet's expenditures for research and development have varied from
quarter to quarter primarily as a result of the timing and number of additions
of personnel and related compensation costs. Silknet's sales and marketing and
general and administrative expenses have generally increased on a quarterly
basis primarily as a result of the timing and number of additions in personnel
and compensation and related costs and the timing, number and significance of
specific marketing and sales activities, such as trade shows and other
promotional activities.
 
     In addition, a variety of factors, many of which are outside of Silknet's
control, may affect Silknet's quarterly operating results. These factors
include:
 
     - the evolution of the market for interactive Web-based electronic business
       solutions;
 
     - market acceptance of Silknet's products;
 
     - Silknet's success and timing in developing and introducing new products
       and enhancements to existing products;
 
     - market acceptance of products developed by competitors;
 
     - changes in pricing policies by Silknet or its competitors;
 
     - length of sales cycle;
 
     - changes in customer buying patterns;
 
     - market entry by new competitors;
 
     - general economic conditions; and
 
     - economic conditions specific to Internet-related industries.
 
     Silknet's limited operating history and the undeveloped nature of the
market for interactive, Web-based electronic business solutions make predicting
future revenue difficult. Silknet's expense levels are based, in part, on its
expectations regarding future revenue increases, and to a large extent such
expenses are fixed, particularly in the short term. There can be no assurance
that Silknet's expectations regarding future revenue are accurate. Moreover,
Silknet may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant shortfall of
revenue in relation to Silknet's expectations would likely cause significant
declines in Silknet's net income for that period.
 
     Due to the foregoing factors, Silknet's operating results are difficult to
forecast. Silknet believes that period-to-period comparisons of its historical
operating results are not meaningful and should not be relied upon as an
indication of future performance. Also, Silknet's operating results may fall
below its expectations or the expectations of securities analysts or investors
in some future quarter. In such event, the market price of Silknet's common
stock would likely be materially adversely affected.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Since its inception, Silknet has funded operations primarily through net
cash proceeds from private placements of preferred stock totaling $17.8 million
through December 31, 1998. As of December 31, 1998, Silknet had cash and cash
equivalents totaling $4.6 million. In February 1999, Silknet received gross
proceeds of approximately $8.8 million from the sale of 1,205,913 shares of
Series D Preferred Stock.
 
                                       27
29
 
     Cash used for operating activities for the six-month period ended December
31, 1998 was $3.8 million, primarily due to a net loss of $3.8 million and an
increase in accounts receivable, partially offset by increases in accounts
payable, accrued expenses and deferred revenue. As of December 31, 1998,
accounts receivable included $2.5 million from one significant customer which
has since been collected. Cash used for operating activities for the year ended
June 30, 1998 was $5.7 million, primarily due to a net loss of $6.0 million and
an increase in accounts receivable, partially offset by increases in accounts
payable, accrued expenses and deferred revenue.
 
     Cash used for investing activities for the six-month period ended December
31, 1998 and the year ended June 30, 1998 was $577,000 and $1.0 million,
respectively. Investing activities for the periods were primarily purchases of
equipment, consisting largely of computer servers, workstations and networking
equipment.
 
     Cash used in financing activities for the six-months ended December 31,
1998 was $55,000 as a result of payments made on notes payable, partially offset
by proceeds received from the exercise of stock options. Cash provided by
financing activities for the year ended June 30, 1998 was $11.0 million,
primarily due to the issuance of preferred stock for net proceeds totaling $10.8
million.
 
     As of December 31, 1998 and June 30, 1998, Silknet's primary financial
commitments consisted of obligations outstanding under operating leases, and
notes payable under the equipment loan line of $328,000 and $471,000,
respectively.
 
     In March 1999, Silknet entered into a new line of credit with a bank which
allows Silknet to borrow up to $3.0 million for working capital purposes and for
the issuance of letters of credit. The line of credit expires in March 2000.
Amounts available under the line of credit are a function of eligible accounts
receivable and bear interest at the bank's prime rate (7.75% as of March 2,
1999) plus 0.5%. As of March 2, 1999, $3.0 million was available for borrowing.
 
     As of December 31, 1998, Silknet had net operating loss carryforwards of
approximately $12.4 million available for federal purposes to reduce future
taxable income expiring on various dates beginning in 2012. Under the provisions
of the Internal Revenue Code, certain substantial changes in Silknet's ownership
may have limited, or may limit in the future, the amount of net operating loss
carryforwards which could be utilized annually to offset future taxable income.
 
     Since its inception, Silknet has significantly increased its operating
expenses. Silknet anticipates that it will continue to experience significant
growth in its operating expenses for the foreseeable future and that its
operating expenses and capital expenditures will constitute a material use of
Silknet's cash resources. In addition, Silknet may utilize cash resources to
fund acquisitions or investments in businesses, technologies, products or
services that are complementary to Silknet's business. Silknet believes that the
net proceeds of this offering will be sufficient to meet its anticipated cash
requirements for working capital and capital expenditures for at least 12
months. Thereafter, if cash generated from operations is insufficient to satisfy
Silknet's liquidity requirements, Silknet may seek to sell additional equity or
debt securities, or obtain additional credit facilities. The issuance of
additional equity or convertible debt securities could result in additional
dilution to Silknet's stockholders. See "Risk Factors -- We may be subject to
risks associated with future acquisitions" and "-- We will have broad discretion
in using the proceeds from this offering."
 
YEAR 2000 READINESS DISCLOSURE
 
     Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to 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. The use of software and computer systems that are not Year 2000
ready could result in
 
                                       28
30
 
system failures or miscalculations causing disruptions of operations including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities.
 
     The purchasing patterns of customers or potential customers may be affected
by Year 2000 issues as companies expend significant resources to make their
current systems Year 2000 ready. These expenditures may result in reduced funds
available for purchases of interactive, Web-based electronic business solutions,
which could have a material adverse effect on Silknet's business, operating
results and financial condition. Year 2000 complications may disrupt the
operations, viability or commercial acceptance of the Internet, which also could
have a material adverse impact on Silknet's business, operating results and
financial condition.
 
     Silknet has conducted a review of its products, including the third-party
products embedded into the products, and believes that they are substantially
Year 2000 ready. Silknet expects that modifications with respect to any
remaining Year 2000 issues will be made by the end of calendar year 1999.
Nevertheless, there can be no assurances that the implementation of
modifications to any embedded products will not be delayed or that Silknet will
not experience unexpected Year 2000 problems with its products.
 
     There is no assurance that other Web applications, database software or
computer hardware of Silknet's customers which interface with Silknet's products
(and which may be necessary in order to use Silknet's products) are Year 2000
ready. Therefore, there can also be no assurance that implementations of
Silknet's products on its customers' systems are, or will be, Year 2000 ready.
 
     Silknet installed new internal software systems in July 1998, and it has
received written confirmations from software vendors that the software they
installed is Year 2000 ready. Based on the foregoing, Silknet currently has no
reason to believe that its internal software systems are not Year 2000 ready.
Silknet is in the process of obtaining written certifications from suppliers of
hardware systems to the effect that the hardware they provide are Year 2000
ready. These vendors are under no contractual obligation to provide written
certifications to Silknet. Failure of the internal hardware or software systems
to operate properly with regard to the Year 2000 and thereafter could require
Silknet to incur significant unanticipated expenses to remedy any problems or
replace affected vendors, and could have a material adverse effect on Silknet's
business, operating results and financial condition.
 
     To date, Silknet has not incurred significant incremental costs in order to
comply with Year 2000 requirements for its products or internal systems, and
Silknet does not believe it will incur significant incremental costs in the
foreseeable future. However, there can be no assurance that Year 2000 issues
will not be discovered in Silknet's products or internal software systems and,
if such issues are discovered, there can also be no assurance that the costs of
making such products and systems Year 2000 ready will not have a material
adverse effect on Silknet's business, operating results and financial condition.
 
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income." This statement establishes standards for the reporting
and display of comprehensive income and its components. SFAS No. 130 is
effective for Silknet's fiscal year ending June 30, 1999 including interim
periods for that year. Comprehensive income consists of net income and foreign
currency translation adjustments as presented in the consolidated statements of
convertible participating preferred stock and stockholders' equity (deficit).
Prior year financial statements have been reclassified to conform to the SFAS
No. 130 requirements. The adoption of SFAS No. 130 has not affected and will not
affect Silknet's financial position or results of operations.
 
                                       29
31
 
     In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise. This statement changes the way
that public business enterprises report segment information, including financial
and descriptive information about their selected segment information. Under SFAS
No. 131, operating segments are defined as revenue-producing components of the
enterprise which are generally used internally for evaluating segment
performance. SFAS No. 131 is effective for Silknet's fiscal year ending June 30,
1999 and will not affect Silknet's financial position or results of operations.
 
     In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post retirement Benefits." SFAS No. 132 standardizes
the disclosure requirements for pensions and other post retirement benefits and
is effective for Silknet's fiscal year ending June 30, 1999. SFAS No. 132
relates to disclosure only and will not affect Silknet's financial position or
results of operations.
 
     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. Silknet does not expect SFAS No. 133 to have a material effect on its
financial position or results of operations.
 
     In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SoP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SoP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. Silknet does not expect
SoP 98-1, which is effective for Silknet beginning July 1, 1999, to have a
material effect on its financial position or results of operations.
 
     In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of
Start-Up Activities." Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SoP 98-5, the cost of start-up activities should be expensed as incurred.
SoP 98-5 is effective for Silknet beginning July 1, 1999 and Silknet does not
expect its adoption to have a material effect on its financial position or
results of operations.
 
     In October 1997, the AcSEC of the American Institute of Certified Public
Accountants issued SoP 97-2, "Software Revenue Recognition," which provides
guidance on the timing and amount of revenue recognition when licensing,
selling, leasing or otherwise marketing computer software and related services.
Subsequently, in March 1998, the FASB approved SoP 98-4, "Deferral of the
Effective Date of a Provision of SoP 97-2, Software Revenue Recognition." SoP
98-4 provides for the one-year deferral of certain provisions of SoP 97-2
pertaining to its requirements for what constitutes vendor specific objective
evidence of the fair value of multiple elements included in an arrangement. In
December 1998, the FASB approved SoP 98-9, "Modification of SoP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions," which will retain
the limitations of SoP 97-2 on what constitutes vendor-specific objective
evidence of fair value. SoP 98-9 will be effective for transactions entered into
in fiscal years beginning after March 15, 1999. Silknet adopted SoP 97-2 for all
transactions entered into after June 30, 1998. Based upon its interpretation of
SoP 97-2, 98-4 and 98-9, Silknet believes that its current revenue recognition
policies and practices are consistent with the provisions of the new guidance.
Adoption of SoP 97-2 and SoP 98-4 did not have a material impact on Silknet's
financial position or results of operation. Silknet believes that the adoption
of SoP 98-9 will not have a material impact on Silknet's financial position or
results of operations.
 
                                       30
32
 
                                    BUSINESS
 
SILKNET
 
     Silknet provides software that allows companies to offer personalized
marketing, sales, electronic commerce and customer support services through a
single, company-tailored Web site interface. Silknet's products enable a company
to deliver these services to its customers over the Web through real-time
collaboration and customer self-service. Silknet's products allow a company to
coordinate its interactions with customers by integrating a variety of
communications media, such as the Web, e-mail and the telephone. Silknet's
software can capture and consolidate data derived from all these sources and
distribute it throughout a company and to its partners to provide a single view
of a customer. This solution is more efficient for a company and also more
efficient for its customers, creating a competitive advantage for that company.
 
INDUSTRY BACKGROUND
 
     The Web has experienced dramatic growth in recent years, both in the number
of users and as a means of conducting commercial transactions, and is expected
to continue to grow rapidly. According to a report by Forrester Research, the
value of goods bought and sold over the Web is expected to increase from $43
billion in 1998 to $1.3 trillion in 2003. The growth and accessibility of the
Web has created significant new opportunities for marketing, sales, electronic
commerce and customer support services for businesses.
 
     Accompanying the growth in the use of the Web has been a trend toward
customer self-service. Just as consumers have extensively used automated teller
machines rather than using the services of a bank teller, the Web now allows a
wide range of businesses the ability to offer electronic self-service to their
customers. For example, consumers are now shopping for goods and services and
seeking answers to customer service questions on their own from their computers
at any hour of the day. Businesses have found that self-service and electronic
collaboration not only increase customer satisfaction, but also provide a
cost-effective way to offer products and services. The Gartner Group estimates
that by 2001 companies will receive 25% of all customer contacts and inquiries
over the Web and through e-mail messages and other Web-based forms.
 
     While customer interaction conducted over the Web has grown significantly,
it is not likely to completely replace more traditional means of handling
customer service and commerce. For instance, many companies continue to rely
heavily on telephone-based customer service representatives. Rather than
replacing the technology systems designed to support these representatives,
companies are actively seeking ways to integrate their various forms of customer
interaction, such as Web communications, e-mail and the telephone. Currently,
many telephone customer service representatives have very limited access to
records of customer questions, service requests or complaints received
electronically. Businesses are attempting to integrate these various media to
present a consistent interface to their customers.
 
     While the Web has the potential to enable individualized customer
self-service, collaboration and commerce, companies have been limited by early
electronic business software applications. These applications are often not
flexible, robust or scaleable enough to fully capitalize on the potential of the
Web. Many of these applications were designed using older technologies or first
generation Web technologies, which were limited in their ability to deliver
robust solutions over the Web. These applications typically restrict customer
self-service to a defined transaction available in a generic form to all
customers. They often fail to provide for real-time interaction with the
customer or access to other corporate data that would allow a company to tailor
a transaction to the needs of a specific customer. In addition, client/server
products were originally designed for an organization's internal
 
                                       31
33
 
use, and fail to provide the flexibility, functionality and scalability required
for electronic business over the Web.
 
     Many companies have responded to these limitations by attempting to design
their own electronic business software applications. These "home-grown" systems
are often based on older technologies or first generation Web technologies. They
are typically focused on a solution only from the company's, and not the
customer's, point of view and are designed to address a limited, short-term need
of the company. As a result, these applications are often not flexible enough to
meet the rapidly evolving demands of the company and its customers, partners,
vendors and suppliers. In addition, the cost, time, effort and expertise
required to develop and maintain a scaleable, robust business software solution
is often beyond the capabilities of in-house information technology
organizations and their consultants.
 
     To realize the potential of the Web, companies must be able to offer
personalized marketing, sales, electronic commerce and customer support services
through a single, company-tailored Web site interface. Electronic business
software systems must provide comprehensive, adaptable and scaleable solutions
in a Web-based system architecture. This architecture must allow a company to
coordinate its interactions with customers by integrating a variety of
communications media, such as the Web, e-mail and the telephone. Moreover, these
software systems should capture and consolidate data derived from a number of
sources and enable real-time collaboration and sharing of information throughout
an organization and with its customers, partners, vendors and suppliers.
 
THE SILKNET SOLUTION
 
     Silknet provides software that allows companies to offer personalized
marketing, sales, electronic commerce and customer support services through a
single, company-tailored Web site interface. Using Silknet's products, companies
are able to:
 
     - provide customers with a self-service capability to obtain a full range
       of personalized services over the Web;
 
     - deliver interactive commerce solutions that not only allow the electronic
       sale of products, but also integrate the ongoing support and service of
       those products on-line;
 
     - coordinate interactions with customers by integrating a variety of
       communications media, such as the Web, e-mail and the telephone;
 
     - provide a customer with personalized information and services based on
       his or her preferences and prior interactions with that company;
 
     - customize a browser-based, graphical user interface to reflect their
       corporate image;
 
     - collaborate with customers, partners, vendors and suppliers to solve
       customer support problems, share information and conduct electronic
       commerce; and
 
     - capture, manage, publish and distribute real-time information throughout
       the organization, including the marketing, sales, customer service,
       billing, purchasing and product development departments.
 
SILKNET'S STRATEGY
 
     Silknet's goal is to continue to be a leading supplier of Web-based
electronic business and customer service software solutions. To achieve this
goal, key elements of Silknet's strategy include:
 
     Target Companies in Specific Industries.  Silknet will continue to focus on
providing solutions to the financial services, information technology and
telecommunications industries. These industries are characterized by the need to
provide customer service interaction among large numbers of
 
                                       32
34
 
geographically dispersed customers, partners, vendors and suppliers. Silknet has
also identified other industries that have similar requirements, such as travel
services, manufacturing and retail distribution. Silknet plans to establish a
select number of reference accounts before expanding its marketing efforts in
those industries.
 
     Expand Relationships with Implementation Partners.  Silknet has established
relationships with large, international systems integrators and consulting
firms, such as Cambridge Technology Partners, Cap Gemini, Deloitte & Touche
Consulting Group/DRT Systems and KPMG Peat Marwick. Silknet plans to expand
these relationships to increase its capacity to both sell and implement its
products. Systems integrators and consulting firms have a strong influence on
software purchasing decisions within large companies, and they are seeking
interactive electronic business solutions that allow them to satisfy their
clients' needs more rapidly than they can through custom development. Silknet
believes that expanding its relationships with systems integrators and
consulting firms will enable Silknet to gain a greater share of emerging markets
more rapidly, while containing its sales, marketing and implementation costs.
 
     Increase Direct Sales and Indirect Distribution Channels.  Silknet's sales
and marketing strategy is to simultaneously expand its direct sales force and
expand relationships with technology vendors and resellers. As of January 31,
1999, Silknet had 14 quota-carrying sales representatives in 11 offices in North
America and the United Kingdom. Silknet plans to substantially increase the
number of direct field sales representatives by the end of calendar 1999.
Silknet also intends to expand its international direct sales force by
establishing sales and support operations in continental Europe and Japan and to
establish additional distribution partnerships throughout the world. In addition
to expanding its relationships with systems integrators and consulting firms,
Silknet plans to develop relationships with other third parties, including
leading software and hardware vendors that view Silknet's products as
complementary to their own product and service offerings.
 
     Continue Technology Leadership.  Silknet intends to continue to devote
substantial resources to the development of new and innovative products for
electronic business solutions and to continue to incorporate emerging Web
technologies. Silknet believes that the increasing demands for interactive
electronic business solutions will require an infrastructure that is adaptable,
extensible and interoperable. To meet these demands, Silknet has developed a
Web-based, n-tiered architecture that incorporates dynamic Hypertext Markup
Language, eXtensible Markup Language (XML), Java, Java Script and other leading
Internet technologies into its products. Silknet intends to continue its
leadership position in providing innovative products based on this architecture.
 
     Expand its Suite of Electronic Business Solutions.  Silknet plans to expand
its suite of products and services that enable companies to engage, integrate
and leverage their customers through self-service and interactive collaboration.
Many companies are seeking comprehensive electronic business solutions that meet
a broad range of needs, including providing marketing, sales, electronic
commerce and support services to their employees, customers, partners, vendors
and suppliers. Silknet intends to continue to develop additional applications
and features based on its existing Web-based architecture. For example, in the
second half of calendar 1999 Silknet plans to commercially release
SilkDataObjects, a product enhancement that will allow non-programmers to create
and integrate company-specific functionality with Silknet's products.
 
PRODUCTS
 
     Silknet provides software that allows companies to offer personalized
marketing, sales, electronic commerce and customer support services through a
single, company-tailored Web site interface. Silknet's products enable a company
to deliver these services to its customers over the Web through real-time
collaboration and customer self-service. Silknet's products allow a company to
coordinate its interactions with customers by integrating a variety of
communications media, such as the Web,
 
                                       33
35
 
e-mail and the telephone. Silknet's software can capture and consolidate data
derived from all of these sources and distribute it throughout a company and to
its partners to provide a single view of a customer. Silknet's software products
include:
Silknet eBusiness System         A set of applications and a Web-based platform on which
                                 company-specific Web commerce applications can be created
                                 and deployed.
Silknet eService                 A comprehensive customer service application that enables a
                                 company to provide customer self-service and collaboration
                                 using the Web, e-mail, the telephone and other messaging
                                 media.
Silknet eCommerce                An application to create an electronic storefront using
                                 Microsoft's Site Server Commerce Edition engine combined
                                 with the Silknet eBusiness System.
Silknet eService Commerce        An application that integrates Silknet eService with Silknet
  Edition                        eCommerce or third-party electronic commerce products,
                                 enabling shopping, service and support through a single Web
                                 interface.
Silknet licenses its products on a per user basis. Silknet typically
charges a company from $500 to $2,500 for every private user (typically
employees of that company), and from $1 to $10 for every anticipated public user
(typically customers of that company). The per user charges generally increase
with the number of Silknet applications and functions utilized by a company. For
the first eight months of fiscal 1999, the average license fee per customer was
approximately $386,000.
 
                                       34
36
 
     The following diagram illustrates the various components of the Silknet
product suite and how they interrelate:
 
                                    [Graph]
[Graphical depiction of the Silknet product suite, how it integrates other
software systems and how it integrates communications among a company's
employees, customers, partners and vendors over a variety of media.]
 
SILKNET EBUSINESS SYSTEM
 
     The Silknet eBusiness System is both a set of Web-based applications and a
scaleable, extensible platform for building, deploying and adapting software
applications. The Silknet eBusiness System integrates personalized interactions,
collaborations and transactions over the Web among a company and its customers,
partners, vendors and suppliers.
 
     With the Silknet eBusiness System, a customer can seamlessly access
information from a company's marketing, sales, customer service, billing,
purchasing and product development departments. By deploying the Silknet
eBusiness System, a company can integrate its customers into a
                                       35
37
 
collaborative business environment, engaging them in an interactive,
personalized exchange. This allows a company to leverage the customer's
individual knowledge to provide a more efficient and effective experience for
both the company and its customers. The Silknet eBusiness System employs a
graphical user interface and features a set of browser-based components that
provide access to all Silknet applications and a company's other Web-based
solutions. The product integrates internal and external business processes
operating on both legacy and client/server systems with Silknet's Web-based
infrastructure.
 
     The Silknet eBusiness System includes the following applications and
features:
 
     Personalization
 
     The Personalization feature enables a company to provide a personalized Web
site interface for the customer to interact, collaborate and conduct business
over the Web. Using the Personalization feature, a company can:
 
     - notify customers of product improvements, promotions and case updates,
       and tailor information to the end-user's unique preferences;
 
     - provide customers with a personalized view of all of their activity with
       that company, including support requests, credit checking, sales
       questions and order tracking; and
 
     - make recommendations based on a customer's demographic profile,
       preferences and history of service incidents, inquiries and purchases.
 
     Knowledge Manager
 
     The Knowledge Manager application captures, manages, publishes and
distributes corporate knowledge about its products and services. A company can
use this application to organize its corporate knowledge base on a secure
platform that is quickly accessible and easily usable by employees, customers,
partners, vendors and suppliers. Knowledge Manager provides companies with a
real-time, interactive environment in which to process and publish solutions to
common customer problems. Features of the Knowledge Manager application include:
 
     - a multimedia platform supporting audio, video, graphics, diagrams, screen
       shots and internal and external hyperlinks to the Web;
 
     - the ability to render, publish and index multimedia solutions, in real
       time, as a direct result of solving customers' problems or inquiries; and
 
     - the storage of published solutions as business objects so they can be
       combined with other business objects, such as customer profiles and case
       histories.
 
     Extranet Workflow
 
     The Extranet Workflow application integrates internal and external business
processes with a Web interface, linking a company's legacy and client/server
systems within departments of a company to each other and to other employees,
customers, partners, vendors and suppliers. Once installed on the company's
server, this application allows these parties to participate in a cooperative
and efficient process to better service themselves. Unlike conventional workflow
systems, Extranet Workflow does not require a user agent to be installed on each
user's computer, thereby allowing the
 
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38
 
workflow system to be accessible to a large user base. Features of the Extranet
Workflow application include:
 
     - a graphical user interface that enables users to establish business
       processes within the software;
 
     - automated and/or manual routing of tasks to the most appropriate groups
       or individuals, including skills-based or availability-based task
       assignment; and
 
     - notifications of workflow events through e-mail, pager, Web site and
       other channels.
 
     Business Rules and Business Events
 
     Combined with Extranet Workflow, the Business Rules and Business Events
features allow a company to modify the Silknet eBusiness System to fit its
needs, instead of modifying its business processes to fit the software.
Companies can define, categorize, assign and process business data, tasks and
events related to a specific customer relationship. After defining a business
event, a company can then communicate the appropriate response, or business
rule, to resolve the customer problem or inquiry. The Business Events feature
provides a mechanism for the Silknet eBusiness System to execute a Business Rule
when a customer operation is performed. For example, when a particular customer
request is received, if the system identifies the user as a very important
customer, the person responsible for the task might receive a page alerting him
to address the task.
 
     The Silknet eBusiness System is shipped to a customer with pre-defined
business events. A company can customize and define its own business events and
business rules to the specialized needs of that company's business processes and
the unique character of its customer relationships. Using the Business Rules and
Business Events features, a company can:
 
     - dynamically change business processes based on company or customer data;
 
     - assign workflow tasks to individuals or groups; and
 
     - notify individuals or groups of business events, using the Web, e-mail,
       the telephone, a pager or other messaging media.
 
     SilkDataObjects
 
     Silknet is currently developing SilkDataObjects, an application written in
XML that Silknet plans to include in the Silknet eBusiness System.
SilkDataObjects will enable companies to create customized business objects that
add company-specific functionality to the Silknet eBusiness System platform,
without the need for specialized programming skills. Companies will be able to
incorporate into the Silknet eBusiness System logic and data from other software
systems, allowing Silknet eBusiness System's applications, such as Business
Rules and Extranet Workflow, to respond automatically to changes in these other
software systems. This application is scheduled for release in the second half
of calendar 1999.
 
SILKNET ESERVICE
 
     Introduced as Silknet's first product in July 1997, Silknet eService is a
comprehensive customer service application that enables a company to offer its
customers both self-service and assisted service over the Web. Silknet eService
is a software application built upon the Silknet eBusiness System framework. It
includes many of the features and applications contained in the Silknet
eBusiness
 
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39
 
System, such as Personalization, Knowledge Manager, Extranet Workflow and
Business Rules and Business Events, as well as the following:
 
     Case Management
 
     The Case Management application enables case creation and resolution,
workload management and user-defined workflows to support a company's internal
customer service process. Customer-specific profiles of cases allow customer
service representatives to view all information related to a specific customer.
With Case Management, cases can be organized by user-defined priorities for
purposes of assignment, workload management and reporting. Customer service
representatives can also vary customer interaction media, such as the Web,
e-mail and the telephone, to match customer response preferences. Features of
this application include:
 
     - automatic display of customer case data on the user interface for
       viewing, editing, tracking and routing;
 
     - single-screen displays of a workload summary and real-time selection of
       case views from a drop-down menu of choices;
 
     - case creation, organization and resolution, and definition of case views
       at the individual or system level;
 
     - Web hyperlinks, images, video, audio, screen shots and other data files
       to facilitate customer understanding; and
 
     - case history analysis, assistance and contribution, reassignment and
       escalation.
 
     Web Communications
 
     The Web Communications application enables multimedia collaboration over
the Web. This application allows a company to provide assisted service, in
addition to self-service, to its customers, partners, vendors and suppliers.
Features of the Web Communications application include:
 
     - real-time chat and electronic white boards to help solve customer
       problems;
 
     - the ability to share graphics, screen shots and diagrams; and
 
     - integration with Microsoft's NetMeeting to allow collaboration and video
       conferencing among a company's service representatives and its customers,
       partners, vendors and suppliers.
 
     Call Center Integration
 
     The Call Center Integration application provides customer service
representatives with a single interface to customer inquiries received over
various media, including the Web, e-mail and the telephone. This application
enables companies to capture and manage information from customer interactions
anywhere within the organization in a centralized case management system.
Customer service representatives can access customer information not only from
the call center, but also from their company's intranet to include data from
multiple departments, and from their company's extranet to include data from
customers, partners, vendors and suppliers. The Call Center Integration
application provides:
 
     - high-volume call processing and problem resolution;
 
     - single-screen displays of a customer's profile and case history;
 
     - automatic case routing, queuing and escalation; and
 
     - integration with third-party computer telephony software applications.
 
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40
 
     e-Mail Response Management
 
     The e-Mail Response Management application provides a tracking and routing
system to respond to large volumes of incoming customer e-mail. This application
enables customer service and sales representatives to manage both e-mail
received from, and e-mail sent to, customers. The e-Mail Response Management
application manages the e-mail queuing process by urgency, premium service,
escalation level, guaranteed response time or other customer response
attributes. Features of this application include:
 
     - automatic, personalized acknowledgment of e-mail;
 
     - automatic routing and workflow regardless of method of communication (for
       example, inquiries and cases received by e-mail are handled in the same
       manner as those received over the Web or the telephone);
 
     - pop-up messages alerting service or sales representatives, containing
       customer name, case number, date and nature of customer inquiry;
 
     - automatic tracking, saving and logging of each e-mail so that all
       interaction becomes appended to the case history; and
 
     - dynamic, real-time reporting so managers can assess volume and
       performance.
 
     Other Features of Silknet eService
 
     Silknet eService also contains the following features that enable customer
self-service:
 
     - InfoPath, a Java- and XML-based problem resolution tool that provides a
       series of natural language questions that help customers identify
       symptoms and narrow the problem;
 
     - a tool that allows customers to search a multimedia knowledge base using
       simple English questions or commands; and
 
     - FAQs, a listing of frequently asked questions which offers solutions to
       common problems or answers to frequent inquiries and which allows
       postings to the Web or intranet that can be linked to the multimedia
       platform to provide graphical or audible solutions.
 
SILKNET ECOMMERCE
 
     The Silknet eCommerce application combines Silknet eBusiness System and
Microsoft's Site Server Commerce Edition engine and enables a company to create
and manage an electronic storefront over the Web. Through the Silknet eBusiness
System platform, Silknet adds extranet workflow, object definition and
adaptability to Microsoft's Site Server Commerce Edition. The product provides
personalized shopping and promotion for both business-to-consumer and
business-to-business commerce. Features of the Silknet eCommerce application
include:
 
     Site Builder Wizard
 
     Site Builder Wizard is a step-by-step, graphical user interface that
assists a company in creating electronic stores or catalogs quickly and easily.
Site Builder Wizard helps a company establish cross-selling information, price
promotions, stores with multi-level departments, and products with varied
attributes.
 
     Intelligent CrossSell
 
     Intelligent CrossSell is an application that allows a company to run
promotions for products and to create cross-selling opportunities through the
promotions. It uses shopper trends and transaction
 
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41
 
information to recommend products of interest to other customers. For the
shopper, Intelligent CrossSell enables customers to navigate a company's Web
site to discover products of interest to them. For a company, Intelligent
CrossSell increases sales opportunities by efficiently guiding customers to
those products that they are most likely to purchase during their visit.
 
     Buy Now
 
     Buy Now is an on-line, direct marketing tool that enables a company to
present product information and order forms, or capture customer profile
information, within a variety of on-line contexts, such as an on-line
advertising banner. A company can customize Buy Now to meet the needs of its
on-line marketing campaign.
 
     Commerce Interchange Pipeline Manager
 
     The Commerce Interchange Pipeline Manager allows a company to automate and
manage electronic inventory and purchasing communications with distributors,
resellers and suppliers. With this feature, different document formats for
purchase orders, invoices, receipts and shipping notices can be managed easily
for multiple trading partners.
 
     Extranet Workflow
 
     Used with the Silknet eBusiness System foundation, Microsoft's Site Server
Commerce Edition engine can be extended to include Extranet Workflow. With
Extranet Workflow, information or questions regarding orders, and the orders
themselves, may be routed throughout the organization through a workflow
determined by the company. Different workflows can be attributed in real time to
different order situations through the application of Silknet eBusiness's
Business Rules feature.
 
SILKNET ESERVICE COMMERCE EDITION
 
     The Silknet eService Commerce Edition application integrates Silknet
eService with Silknet eCommerce or third-party electronic commerce products,
enabling shopping, service and support through a single Web site interface.
Silknet eService Commerce Edition creates a single, unified view of the customer
relationship and transactions, not only across departments, such as marketing,
sales, customer service, billing, purchasing and product development, but also
among partners, vendors and suppliers. Silknet eService Commerce Edition helps
companies and their customers manage the entire customer relationship, from
initial point of interest to shopping and buying, support and service, marketing
and follow-on purchases. Features of this application include:
 
     - One Log-in -- allows customers to browse, purchase or obtain service from
       a single Web site interface;
 
     - One View -- integrates the purchase and support history of the customer,
       allowing sales and service representatives to better respond to customer
       problems and inquiries;
 
     - Complete Contact -- allows sales and service representatives to include
       in any customer interaction commerce-and service-related Web hyperlinks,
       such as sales order, inquiry and trouble ticketing; and
 
     - Total Solution -- enables service representatives to provide multimedia
       service solutions in an electronic commerce transaction.
 
TECHNOLOGY AND PRODUCT DEVELOPMENT
 
     Silknet is a leader in the delivery of interactive, Web-based electronic
business solutions that use advanced, industry standard Web and distributed
object technologies. Silknet's applications are built
 
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on Microsoft Windows Distributed InterNet Applications architecture, which
includes technologies such as Microsoft's Distributed Component Object Model
(DCOM) and Microsoft's Transaction Server. This architecture allows Silknet to
provide future upgrades of highly scaleable, multi-tier business applications
for deployment over the Web or any network, while preserving a company's
investment in existing applications and data. In addition, Silknet's products
incorporate a graphical user interface that allows a company to create tailored
applications for data model creation and display, data object creation, workflow
and business rules.
 
     Silknet's products employ a standard Web-designed, n-tiered architecture.
Unlike a client/server architecture, individual users simply need a browser to
perform any function available in the product. No software needs to be
distributed to any user, either within the organization or to customers,
partners, vendors or suppliers, making the software easier to implement,
maintain and upgrade than client/server solutions.
 
     The n-tiered architecture of Silknet's products allows a company to
distribute the server side of the software across many different systems for
increased scalability and reliability. The customer, or "public," side of the
application, which operates outside a company's firewall, and the employee, or
"private," side of the application, which is typically used within a company
behind its firewall, operate on both Windows NT and UNIX platforms. Silknet's
application server runs on Windows NT only and uses Microsoft's Transaction
Server and Message Queue. Silknet is currently designing a UNIX version of its
application server. The database server uses either Oracle or Microsoft's SQL
Server on a Windows NT platform, and Oracle on a UNIX platform.
 
     Silknet's products employ a component architecture to allow companies to
configure the solution to best fit their unique requirements without changing
the application's source code. This benefit reduces implementation time and
costs, and establishes a clear and consistent upgrade path for future releases
of Silknet software. It also enables Silknet to maintain and support a single
source code base for each application that addresses the varied needs of these
companies.
 
EXAMPLES OF SILKNET IMPLEMENTATIONS
 
     Sprint PCS
 
     Sprint PCS operates the largest 100% digital, 100% PCS wireless network in
the United States, serving more than 2.5 million customers in over 4,000 cities
and communities. Sprint PCS has built its entire Web site on the Silknet
eService Commerce Edition and has used it to integrate its Web site with its
back-end systems. Sprint PCS incorporated Silknet's solutions into two major
initiatives: eCare and eStore. As part of its eCare program, Sprint PCS is using
the Silknet eService application to enable customers to view and change their
account information, review wireless usage and invoice information, search
multimedia knowledge bases and interact with Sprint PCS service representatives
on-line. As part of its eStore program, Sprint PCS has deployed the Silknet
eCommerce application to enable the company to sell phones and services to new
customers. The application allows the customer to view various calling plan
offerings and allows Sprint PCS to make specific recommendations for purchasing
phones and plans based on personal preferences, profiles and customer history.
Customers can also order equipment and initiate service through the Web site,
and the Silknet eService application performs a credit check for Sprint PCS. The
Sprint PCS web site is located at http://www.sprintpcs.com.
 
     Microsoft
 
     Microsoft uses the Silknet eService application to provide on-line service
to its more than 7,000 sales and customer support employees around the world.
Silknet eService is integrated with Microsoft's Windows NT security and exchange
profiles to minimize administration requirements and allow Silknet eService to
be seamlessly accessed by all users. Sales and customer support employees
 
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43
 
can obtain answers to many questions about Microsoft's products on their own
over the Web. If an answer is not available through self-service, the employee
can submit a case inquiry, which is automatically routed to the appropriate
product management team, based on topic and availability. The product management
team responds to the case inquiry via e-mail and the solution can be accessed on
Microsoft's intranet by other sales and customer support personnel. Microsoft
maintains strict standards of responsiveness by its product management teams.
The messaging and escalation features within Silknet eService are used to
monitor and manage compliance with these internal standards.
 
SALES AND MARKETING
 
     Silknet sells its products primarily through a direct sales force and
through relationships with systems integrators and resellers. The sale of
Silknet's products is often an enterprise-wide decision by prospective
customers. The sales process generally ranges from three to nine months
depending on the level of education prospective customers need regarding the use
and benefits of Silknet's products. As of January 31, 1999, Silknet's direct
sales organization consisted of 12 employees located in 10 offices throughout
North America and two employees in an office in the United Kingdom. In addition,
Silknet had five employees in North America and two employees in the United
Kingdom responsible for demonstrating its products and assisting the sales
organization.
 
     A key element of Silknet's market penetration strategy is the formation of
relationships with industry leaders in various complementary areas. Silknet
believes these relationships increase Silknet's market exposure and presence,
generate qualified opportunities for Silknet to sell its products and assist
Silknet in implementing its products.
 
     Silknet has established relationships with large, international systems
integrators and consulting firms, such as Cambridge Technology Partners, Cap
Gemini, Deloitte & Touche Consulting Group/ DRT Systems and KPMG Peat Marwick.
Silknet plans to expand these relationships to increase its capacity to both
sell and implement its products. Systems integrators and consulting firms have a
strong influence on software purchasing decisions within large companies, and
they are seeking interactive electronic business solutions that allow them to
satisfy their clients' needs more rapidly than they can through custom
development. Silknet believes that expanding its relationships with systems
integrators and consulting firms will enable Silknet to gain a greater share of
emerging markets more rapidly, while containing its sales, marketing and
implementation costs.
 
     Silknet also has relationships with software and hardware vendors, such as
Hewlett-Packard, Calico Technology and AnswerSoft (a subsidiary of Davox
Corporation), that generally view Silknet's products as complementary to their
product and service offerings. These relationships are intended to provide
Silknet opportunities to penetrate an emerging market where either additional
vertical products or services are needed to secure the sale, or an understanding
or expertise in a particular vertical market is needed to sell effectively. As
of January 31, 1999, Silknet had six employees devoted to developing corporate
partnerships and strategic alliances.
 
     Silknet's marketing organization utilizes a variety of programs to support
Silknet products. As of January 31, 1999, Silknet's marketing organization
consisted of six employees. Silknet's marketing programs include:
 
     - product and strategy updates with industry analysts;
 
     - public relations activities and speaking engagements;
 
     - direct mail and relationship marketing programs;
 
     - telemarketing, seminars and trade shows;
 
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44
 
     - brochures, data sheets and white papers; and
 
     - Web site marketing.
 
CUSTOMERS
 
     Silknet has targeted and will continue to target the financial services,
information technology and telecommunications industries. Silknet also has
identified other industries, such as travel services, manufacturing and retail
distribution, which it plans to target. The following is a partial list of
Silknet's customers as of February 28, 1999:
 
     3Com
     Autodesk
     Bank of America
     Bell Advanced Communications
     Cigna
     Compaq
     GEAC Computer Corporation
     Inacom Corp.
     Insurance Holdings of America
     KPMG Peat Marwick
     MachOne Communications
     Microsoft
     PC Connection
     Planet Direct
     Policy Management Systems Corporation
     Provident Bank
     SBC Internet
     Sitara Networks
     Sprint PCS
     The Travel Company
     W.W. Grainger
 
SUPPORT AND PROFESSIONAL SERVICES
 
     Silknet offers a broad range of support and training services to its
customers. Silknet believes that providing a high level of customer service and
technical support is necessary to achieve rapid product implementation, customer
satisfaction and continued revenue growth.
 
     Silknet provides implementation services to assist companies in optimizing
the benefits of Silknet's solutions. In addition, systems integrators and
consulting firms often help companies to implement Silknet's products. As of
January 31, 1999, Silknet had 16 employees dedicated to providing implementation
services. These employees often work closely with the staffs of third-party
systems integrators to train their consultants in the implementation of Silknet
software. A typical implementation engagement lasts three to six months and
involves the planning, configuration, testing and implementation of the
products. These services are generally billed on a per day basis. Silknet
believes that these implementation projects not only help ensure a company's
success with Silknet's products, but also allow Silknet consultants and systems
engineers to gain industry-specific knowledge that can be leveraged in future
projects and products.
 
     Silknet's customers have a choice of support options depending on the level
of service desired. Silknet maintains a technical support hotline staffed by
engineers from 8:00 a.m. to 8:00 p.m., Eastern time, Monday through Friday, from
its corporate headquarters in Manchester, New Hampshire. Silknet uses the
Silknet eService application to track and manage its own customer service
inquiries and to provide 24-hour technical support. Silknet provides training in
the use of its products through classroom instruction at its Manchester, New
Hampshire corporate headquarters and at other training sites throughout North
America and in Europe. As of January 31, 1999, Silknet had three technical
support engineers.
 
RESEARCH AND DEVELOPMENT
 
     Silknet devotes a substantial portion of its resources to developing new
products and product features, extending and improving its products and
technology, and researching new technological initiatives in the market for
Web-based, interactive electronic business solutions. This new and
 
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emerging market is characterized by rapid technological change, new product
introductions and enhancements, evolving industry standards and rapidly changing
customer requirements. The introduction of products incorporating new
technologies and the emergence of new industry standards could render existing
products obsolete and unmarketable. Silknet's future success will depend in part
on its ability to anticipate changes, enhance its current products, develop and
introduce new products that keep pace with technological advancements and
address the increasingly sophisticated needs of its customers. As an example of
its technology initiatives, Silknet is currently developing SilkDataObjects,
scheduled for release in the second half of calendar 1999. SilkDataObjects is an
application tool which enables a company, without the need of specialized
programming skills, to create customized business objects that add
company-specific functionality to the Silknet eBusiness System platform residing
on the company's Web site. Silknet is also working on a UNIX version of its
application server.
 
     As of January 31, 1999, Silknet had 44 employees engaged in research and
development activities. Silknet's research and development expenditures for
fiscal year 1997 and 1998 and for the six months ended December 31, 1998, were
approximately $961,000, $2.4 million and $2.3 million, respectively. Silknet
expects that it will continue to commit significant resources to research and
development in the future. To date, all research and development expenses have
been expensed as incurred. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
 
COMPETITION
 
     The market for Silknet's products is new and rapidly evolving, and is
expected to become increasingly competitive as current competitors expand their
product offerings and new companies enter the market. The principal competitive
factors in the Web-based, interactive electronic business solutions market
include:
 
     - adherence to emerging Web-based technology standards;
 
     - comprehensiveness of applications;
 
     - adaptability, flexibility and scalability;
 
     - real-time, interactive capability with customers, partners, vendors and
       suppliers;
 
     - integration with a variety of communications media;
 
     - ease of use;
 
     - ease of implementation;
 
     - customer service and support; and
 
     - price.
 
Although Silknet believes that it currently competes favorably with respect to
these factors, there can be no assurance that Silknet can maintain its
competitive position against current and potential competitors, especially those
with longer operating histories, greater name recognition and substantially
greater financial, technical, marketing, management, service, support and other
resources.
 
     Silknet currently faces competition primarily from in-house and third-party
custom development efforts. Silknet expects that these solutions will continue
to be a principal source of competition for the foreseeable future.
 
     Silknet's current competitors include a number of companies offering one or
more solutions for the electronic business solutions market, some of which are
directly competitive with Silknet's products. For example Silknet's competitors
include companies providing on-line customer manage-
 
                                       44
46
 
ment solutions, such as BroadVision, Inc. and Smart Technologies, Inc., and
client/server-based, call-center customer service solutions, such as Siebel
Systems, Inc., Vantive Corporation, and Clarify, Inc. In addition, Silknet
competes with providers of stand-alone point solutions for e-mail response
capabilities, such as Mustang Software, Inc. and Kana Communications, Inc., and
providers of stand-alone point solutions for knowledge base applications, such
as Inference Corporation and Primus Knowledge Solutions, Inc.
 
     Silknet also may face competition from systems integrators and consulting
firms which design and develop custom systems and perform custom integration.
Some of these firms may possess industry-specific expertise or reputations among
potential customers for offering enterprise solutions to electronic business
application needs. These systems integrators and consulting firms can be
resellers of Silknet's products and may engage in joint marketing and sales
efforts with Silknet. Silknet relies upon these firms for recommendations of
Silknet's products during the evaluation stage of the purchase process, as well
as for implementation and customer support services. These systems integrators
and consulting firms may have similar, and often more established, relationships
with Silknet's competitors, and there can be no assurance that these firms will
not develop, market or recommend competing software applications.
 
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
 
     Silknet's success and competitiveness are dependent to a significant degree
on the protection of its proprietary technology. Silknet relies primarily on a
combination of copyrights, trademarks, licenses, trade secret laws and
restrictions on disclosure to protect its intellectual property and proprietary
rights. Silknet also enters into confidentiality agreements with its employees
and consultants, and generally controls access to and distribution of its
documentation and other proprietary information. Despite these precautions,
others may be able to copy or reverse engineer aspects of Silknet's products, to
obtain and use information that Silknet regards as proprietary or to
independently develop similar technology. Any such actions by competitors could
have a material adverse effect on Silknet's business, operating results and
financial condition.
 
     In addition, the laws of some foreign countries do not protect Silknet's
proprietary rights to the same extent as do the laws of the United States, and
effective patent, copyright, trademark and trade secret protection may not be
available in these jurisdictions.
 
     Litigation may be necessary in the future to enforce or defend Silknet's
intellectual property and proprietary rights, to protect Silknet's trade secrets
or to determine the validity and scope of the intellectual property and
proprietary rights of others. This litigation, whether successful or
unsuccessful, could result in substantial costs and diversion of management and
technical resources, either of which could have a material adverse effect on
Silknet's business, operating results and financial condition.
 
     Silknet attempts to avoid infringing known intellectual property and
proprietary rights of third parties in its product development efforts. However,
Silknet has not conducted and does not conduct comprehensive patent searches to
determine whether the technology used in its products infringes patents held by
third parties. In addition, product development is inherently uncertain in a
rapidly evolving technological environment in which there may be numerous patent
applications pending, many of them which are confidential when filed, with
regard to similar technologies. If Silknet were to discover that its products
violated third party proprietary rights, it may be liable for substantial
damages. In addition, Silknet may be required to reengineer its products or seek
to obtain licenses to continue offering such products, and there can be no
assurance that such efforts would be successful.
 
     Silknet pursues the registration of some of its trademarks in the United
States and in other countries, although it has not yet secured registration of
any marks. Silknet has applications pending
 
                                       45
47
 
for trademark registrations for "Silknet" and "Silknet" combined with the
Silknet logo in the United States, Canada and the European Union. Silknet's
applications for the registration of "Silknet" and "Silknet" combined with the
Silknet logo were denied in Canada because a company filed an earlier
application for the use of "Silk" in connection with Internet information
resource services. Silknet has filed an appeal, but there can be no assurance
that it will be able to register the trademark "Silknet" in Canada.
 
     Other companies have filed trademark applications for marks similar to the
names of Silknet's products. For example, IBM has filed a trademark application
for "e-Business" for use in creating, implementing and maintaining Web sites and
integration of computer systems and networks. Silknet's use of Silknet eBusiness
System could infringe on the rights of IBM and other companies using a mark that
contains "eBusiness." Silknet's use of "eBusiness," as well as the use of other
names, may result in costly litigation, divert management's attention and
resources, cause product shipment delays or require Silknet to pay damages
and/or to enter into royalty or license agreements. There can be no assurance
that a license agreement would be available to Silknet on any commercially
reasonable terms, if at all, and Silknet may be required to stop using the name
"eBusiness" for its products. Further, because names such as eBusiness,
eCommerce and eService are becoming widely used and descriptive, Silknet does
not expect to be able to prevent third parties from using these names for
competing products.
 
     Silknet currently licenses technology from third parties that it
incorporates into its products. For example, Silknet licenses Web information
server, transaction server and related technologies from Microsoft. There can be
no assurance that technology from these providers or others will continue to be
available to Silknet on commercially reasonable terms, if at all. The loss or
inability to access such technology could result in delays in development and
introduction of new products or enhancements by Silknet until equivalent or
replacement technology could be accessed, if available, or developed, if
feasible, by Silknet, which could have a material adverse effect on Silknet's
business, operating results and financial condition. Moreover, although Silknet
is generally indemnified against claims that technology licensed from third
parties infringes the intellectual property and proprietary rights of others,
such indemnification is not always available for all types of intellectual
property and proprietary rights (for example, patents may be excluded) and in
some cases the scope of such indemnification is limited. Even if Silknet
receives broad indemnification, third party indemnitors are not always well
capitalized and may not be able to indemnify Silknet in the event of
infringement, resulting in substantial exposure to Silknet. There can be no
assurance that infringement or invalidity claims arising from the incorporation
of third party technology, and claims for indemnification from Silknet's
customers resulting from these claims, will not be asserted or prosecuted
against Silknet. These claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources in addition to
potential product redevelopment costs and delays, all of which could materially
adversely affect Silknet's business, operating results and financial condition.
 
EMPLOYEES
 
     As of January 31, 1999, Silknet had 121 employees, 96 of whom were based at
Silknet's headquarters in Manchester, New Hampshire. None of Silknet's employees
is subject to a collective bargaining agreement. Silknet believes that its
relations with its employees are good.
 
FACILITIES
 
     Silknet has one lease for approximately 44,092 square feet of space in an
office building in Manchester, New Hampshire, its headquarters. The lease
expires in December 2003, and Silknet has an option to extend the lease for an
additional five-year term. As of January 31, 1999, Silknet also leased office
space in 10 other cities for its sales and support personnel. Silknet believes
that these
 
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existing facilities are adequate to meet its current, foreseeable requirements
or that suitable additional or substitute space will be available on
commercially reasonable terms.
 
LEGAL PROCEEDINGS
 
     Silknet is not a party to any material legal proceedings.
 
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                                   MANAGEMENT
 
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
 
     The directors and executive officers of Silknet are as follows:
NAME               AGE                          POSITION
             ----               ---                          --------
James C. Wood.................  42    Chairman of the Board, President and Chief Executive
                                      Officer
Nigel K. Donovan..............  43    Senior Vice President and Chief Operating Officer
Patrick J. Scannell, Jr. .....  45    Vice President, Chief Financial Officer, Treasurer and
                                      Secretary
Guy Bradley(1)................  34    Director
Joo Hock Chua(1)..............  42    Director
John Doggett..................  51    Director
Stanley Fung(2)...............  41    Director
Andrew Goldfarb(2)............  31    Director
---------------
(1) Member of the Compensation Committee
 
(2) Member of the Audit Committee
 
  Directors and Executive Officers
 
     James C. Wood founded Silknet and has served as Chairman of the Board,
President and Chief Executive Officer since Silknet's inception in March 1995.
From January 1988 until November 1994, he served as President and Chief
Executive Officer of CODA Incorporated, a subsidiary of CODA Limited, a
financial accounting software company. Mr. Wood also served as a Director of
CODA Limited from November 1988 until November 1994.
 
     Nigel K. Donovan has served as Silknet's Senior Vice President and Chief
Operating Officer since February 1999. From November 1995 to February 1999 he
served as Vice President -- Professional Services. From November 1996 to October
1998, he also served as Silknet's Treasurer and from May 1997 to October 1998 as
Silknet's Chief Financial Officer. In addition, Mr. Donovan served as director
from October 1996 to February 1999. From March 1988 until October 1995, Mr.
Donovan served as Vice President -- Professional Services at CODA Incorporated.
During the period from March 1988 until June 1994, Mr. Donovan also served as
Chief Financial Officer for CODA Incorporated.
 
     Patrick J. Scannell, Jr. has served as Silknet's Chief Financial Officer
and Treasurer since November 1998 and was named Vice President and Secretary in
February 1999. From September 1992 until October 1998, Mr. Scannell served as
Executive Vice President, Chief Financial Officer and Treasurer of Applix, Inc.,
a customer interaction software company.
 
     Guy Bradley has served as a director of Silknet since October 1996. Mr.
Bradley has been affiliated with CMG @ Ventures since August 1994. He has been a
general partner or managing member of CMG @ Ventures since January 1995. He was
Director of International Sales and Marketing for Booklink, Inc., an affiliate
of CMG @ Ventures, from August 1994 to December 1996. From January 1994 to July
1994, Mr. Bradley was employed as a consultant by the Patricia Seybold Group.
 
     Joo Hock Chua has served as director of Silknet since October 1998. Mr.
Chua has been a Vice President/Assistant General Manager at Vertex Management
(II) Pte Ltd since July 1995, a Senior Manager from July 1991 to June 1995 and a
Manager from June 1988 to June 1991. Mr. Chua is a director of Ultro
Technologies Ltd and ASA Ceramic Ltd, both publicly-listed in Singapore, and
several privately held companies in the US, Singapore and the People's Republic
of China.
 
                                       48
50
 
     John Doggett has served as a director of Silknet since June 1997. Since
October 1996, Mr. Doggett has been a Vice President at BancBoston Ventures Inc.
From 1992 to September 1996, Mr. Doggett served as Director of the Applied
Technology group at BankBoston, N.A.
 
     Stanley Fung has served as a director of Silknet since October 1996. Mr.
Fung has been with Zero Stage Capital V, L.P. since 1992, as Managing Partner
since December 1998, as General Partner from October 1994 to December 1998 and
as Vice President from April 1992 to October 1994. Mr. Fung is a director of
RoweCom Inc. and several privately-held companies.
 
     Andrew Goldfarb has served as a director of Silknet since February 1999.
Since March 1997, Mr. Goldfarb has been a Managing Principal at JAFCO America
Ventures, Inc. Mr. Goldfarb was employed by Trans National Group, as Vice
President from August 1996 to March 1997, as director of Trans National
Ventures, the venture capital division of Trans National Group, from September
1994 to July 1996 and as Assistant Vice President from June 1993 to August 1994.
 
  Other Key Employees
 
     Eric Carlson has served as Silknet's Vice President and Chief Technology
Officer since February 1999, Chief Technology Officer since September 1996 and
Senior Programmer/Analyst from June 1995 to September 1996. From June 1994 to
June 1995, he served as Client/Server Technology Analyst at PC Connection, a
reseller of personal computer hardware and software. From 1991 to June 1994, Mr.
Carlson served as Programmer/Analyst and Network Administrator with Yankee Book
Peddler.
 
     James P. Davis has served as Silknet's Vice President -- Business
Development since January 1997. From June 1990 to December 1996, Mr. Davis held
various senior management positions at CODA Incorporated, including Vice
President of Sales from January 1994 to December 1996 and acting President and
Chief Executive Officer from November 1994 to July 1995.
 
     V. Anthony Giannelli has served as Silknet's Vice
President -- International since October 1998, and from February 1998 to October
1998, he served as Silknet's Vice President -- Marketing. From November 1995 to
February 1998, Mr. Giannelli served as Vice President of Marketing and Business
Development of Applix, Inc. From May 1993 to October 1995, he served as Vice
President -- Marketing of Open Data Corporation, a software company.
 
     Mark H. Green has served as Silknet's Vice President -- Sales since
November 1996. From June 1996 to November 1996, Mr. Green served as Alliance
Manager for i2 Technologies, a software company. From November 1991 to June
1996, Mr. Green served as a sales representative with CODA Incorporated.
 
     Patricia D. Stimpson has served as Silknet's Vice President -- Research and
Development since June 1997. From October 1996 to March 1997, Ms. Stimpson held
a variety of senior development positions at Lotus Development Corporation,
including Senior Director of Development of the Extended Enterprise Group from
December 1994 to October 1996, and Senior Director of Shared Components from
October 1992 to December 1994.
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
     The Compensation Committee consists of Messrs. Bradley and Chua. It reviews
and evaluates the salaries and incentive compensation of management and key
employees of Silknet and makes recommendations concerning these matters to the
Board of Directors. The Compensation Committee also administers Silknet's stock
option and stock purchase plans.
 
     The Audit Committee consists of Messrs. Goldfarb and Fung. It reviews the
results and scope of audits and other services provided by Silknet's independent
public accountants and reviews Silknet's
 
                                       49
51
 
system of internal accounting and financial controls. The Audit Committee also
reviews such other matters with respect to the accounting, auditing and
financial reporting practices and procedures of Silknet as it may find
appropriate or may be brought to its attention.
 
DIRECTOR COMPENSATION
 
     Following the consummation of this offering, non-employee directors will be
reimbursed for their reasonable out-of-pocket expenses incurred in attending
meetings of the Board of Directors. No director who is an employee of Silknet
will receive separate compensation for services rendered as a director.
Non-employee directors are also eligible for participation in Silknet's 1999
Non-Employee Director Stock Option Plan. See "Management -- Stock Plans."
 
EXECUTIVE COMPENSATION
 
     The following Summary Compensation Table sets forth the total compensation
paid or accrued for the year ended June 30, 1998 for Silknet's Chief Executive
Officer and the other most highly compensated executive officer who was employed
by Silknet at June 30, 1998 (collectively, the "named executive officers"). No
long-term compensation was paid to the named executive officers during the year
ended June 30, 1998.
 
                           SUMMARY COMPENSATION TABLE
ANNUAL
                                                                COMPENSATION
                                                              ----------------
NAME AND PRINCIPAL POSITION IN 1998                            SALARY    BONUS
-----------------------------------                           --------   -----
James C. Wood, Chairman, President and Chief Executive
  Officer...................................................  $140,881    --
Nigel K. Donovan, Vice President -- Professional Services
  and Director..............................................  $120,750    --
OPTION GRANTS
 
     No stock options or stock appreciation rights were granted during the year
ended June 30, 1998 to the named executive officers.
 
YEAR-END OPTION TABLE
 
     The following table sets forth information regarding exercisable and
unexercisable stock options held as of June 30, 1998 by each of the named
executive officers. No options were exercised by the named executive officers
during the year ended June 30, 1998. There was no public trading market for the
Common Stock as of June 30, 1998. Accordingly, as permitted by the rules of the
Securities and Exchange Commission, the value of unexercised in-the-money
options has been calculated by determining the difference between the exercise
price per share payable upon exercise of such options and an assumed initial
public offering price of $     .
 
                    AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES          VALUE OF UNEXERCISED
                                              UNDERLYING UNEXERCISED         IN-THE-MONEY OPTIONS
                                            OPTIONS AT FISCAL YEAR-END        AT FISCAL YEAR-END
                                            ---------------------------   ---------------------------
NAME                                        EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
----                                        -----------   -------------   -----------   -------------
James C. Wood.............................         --             --          --             --
Nigel K. Donovan..........................    329,415        105,235
50
52
 
STOCK PLANS
 
     Employee Stock Option Plan.  The Silknet Employee Stock Option Plan, or
1995 Option Plan, was adopted by the Board of Directors on August 8, 1995 and
received stockholder approval on September 25, 1995. A total of 2,391,900 shares
of common stock have been reserved for issuance under the 1995 Option Plan.
Under the 1995 Option Plan, Silknet was authorized to grant options to purchase
shares of common stock intended to qualify as incentive stock options as defined
under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
and non-qualified stock options to officers and other employees of Silknet.
Options granted pursuant to the 1995 Option Plan are exercisable within ten
years of the original grant date and become exercisable pro rata on a monthly
basis over a period of four years from the date of grant. An option is not
transferable by the recipient except by will or by the laws of descent and
distribution. As of February 28, 1999, options to purchase 2,085,042 shares had
been granted under the 1995 Option Plan.
 
     1999 Stock Option and Incentive Plan.  Silknet's 1999 Stock Option and
Incentive Plan, or 1999 Option Plan, was adopted by the Board of Directors and
received stockholder approval in February 1999. A total of 1,000,000 shares of
common stock have initially been reserved for issuance under the 1999 Option
Plan. The 1999 Option Plan provides that the number of shares authorized for
issuance will automatically increase by 5% of the outstanding number of shares
of common stock on December 31, 1999, 2000 and 2001 up to a maximum of an
additional 2,500,000 shares of common stock. Under the terms of the 1999 Option
Plan, Silknet is authorized to grant incentive stock options as defined under
the Code, non-qualified options, stock awards or opportunities to make direct
purchases of common stock to employees, officers, directors, consultants and
advisors of Silknet and its subsidiaries.
 
     The 1999 Option Plan is administered by the Compensation Committee. The
Compensation Committee selects the individuals to whom options will be granted
and determines the option exercise price and other terms of each award, subject
to the provisions of the 1999 Option Plan. The 1999 Option Plan provides that
upon an acquisition intended to be accounted for as a pooling of interests, the
vesting of all options to purchase common stock will accelerate by a period of
one year. In addition, upon the termination of an employee without cause or for
good reason prior to the first anniversary of the completion of such an
acquisition, all options then outstanding under the 1999 Option Plan held by
that employee will immediately become exercisable. Finally, on the first year
anniversary of the completion of such an acquisition all options then
outstanding under the 1999 Option Plan will immediately become exercisable. An
option is not transferable by the recipient except by will or by the laws of
descent and distribution, or in the case of non-qualified stock options, only to
the extent set forth in the agreement relating to the non-qualified stock option
or pursuant to a valid domestic relations order. No options may be exercised
following termination of employment for cause. The term of the 1999 Option Plan
is ten years, unless sooner terminated by vote of the Board of Directors. To
date, no options have been granted under to the 1999 Option Plan.
 
     1999 Non-Employee Director Stock Option Plan.  Silknet's 1999 Non-Employee
Director Stock Option Plan, or Director Plan, was adopted by the Board of
Directors and received stockholder approval in February 1999 and becomes
effective on the date on which Silknet's common stock is registered under the
Securities Exchange Act of 1934, as amended, or the Exchange Act. A total of
350,000 shares of common stock have been authorized for issuance under the
Director Plan.
 
     The Director Plan is administered by the Compensation Committee. Under the
Director Plan, each non-employee director who is or becomes a member of the
Board of Directors is automatically granted on the date of which the common
stock becomes registered under the Exchange Act or, if not a director on that
date, the date first elected to the Board of Directors (the "Initial Grant"), an
option to purchase 10,000 shares of common stock. In addition, provided that the
director continues to serve as a member of the Board of Directors, each
non-employee director will be automatically
 
                                       51
53
 
granted on the third anniversary of his or her Initial Grant date and each three
years thereafter an option to purchase 10,000 shares of common stock. Provided
that the director continues to serve as a member of the Board of Directors,
one-third of the shares included in each grant will become exercisable on each
of the first, second and third anniversaries of the date of grant. If a director
fails to attend at least 75% of the Board meetings held in a fiscal year, that
director will forfeit his or her rights with respect to the option installment
which vested on the preceding vesting date, in proportion to the percentage of
Board meetings not attended. All options granted under the Director Plan will
have an exercise price equal to the fair market value of the common stock on the
date of grant and a term of ten years from the date of grant. Options may not be
transferred except by will or by the laws of descent and distribution or
pursuant to a domestic relations order. Unexercisable options terminate when the
director ceases to be a director. Exercisable options may be exercised at any
time during the option term. In the event that a director dies or is permanently
disabled, any options that are not exercisable will become exercisable and the
optionee (or his or her representative, heir or legatee) may exercise all
options for a period of three years. The term of the Director Plan is ten years,
unless sooner terminated by vote of the Board of Directors.
 
  1999 Employee Stock Purchase Plan
 
     The 1999 Employee Stock Purchase Plan, or Stock Purchase Plan, was adopted
by the Board of Directors and received stockholder approval in February 1999.
The Stock Purchase Plan provides for the issuance of up to an aggregate of
350,000 shares of common stock to participating employees.
 
     The Stock Purchase Plan is administered by the Compensation Committee. All
employees who have completed three months of employment with Silknet and whose
customary employment is more than part-time (i.e. more than 20 hours per week
and for more than five months in any calendar year) are eligible to participate
in the Stock Purchase Plan. The right to purchase common stock under the Stock
Purchase Plan will be made available through a series of offerings. On the first
day of an offering period, Silknet will grant to each eligible employee who has
elected in writing to participate in the Stock Purchase Plan an option to
purchase shares of common stock. The employee will be required to authorize an
amount (between 1% and 10% of the employee's compensation) to be deducted from
the employee's pay during the offering period. On the last day of the offering
period, the employee will be deemed to have exercised the option, at the option
exercise price, to the extent of accumulated payroll deductions. Under the terms
of the Stock Purchase Plan, the option exercise price is an amount equal to 85%
of the fair market value of one share of common stock on either the first or
last day of the offering period, whichever is lower. No employee may be granted
an option that would permit the employee's rights to purchase common stock to
accrue in excess of $25,000 in any calendar year. The first offering period
under the Stock Purchase Plan will commence upon the initial offering of the
common stock to the public and continues through December 31, 1999. Thereafter,
the offering periods will begin on each January 1 and July 1. Options granted
under the Stock Purchase Plan terminate upon an employee's voluntary withdrawal
from the plan at any time or upon termination of employment. No options have
been granted to date under the Stock Purchase Plan.
 
401(K) PLAN
 
     Silknet maintains a 401(k) plan qualified under Section 401(k) of the Code.
All Silknet employees who are at least 21 years of age are eligible to
participate in the 401(k) plan. Under the 401(k) plan, a participant may
contribute a maximum of 15% of his or her pre-tax salary, commissions and
bonuses through payroll deductions (up to the statutorily prescribed annual
limit of $10,000 in calendar year 1999) to the 401(k) plan. The percentage
elected by more highly compensated participants may be required to be lower. In
addition, at the discretion of the Board of Directors, Silknet may make
discretionary profit-sharing contributions into the 401(k) plan for all
 
                                       52
54
 
eligible employees. During the year ended June 30, 1998, Silknet made no
profit-sharing contributions to the 401(k) plan.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     During the year ended June 30, 1998, the members of the Compensation
Committee were Messrs. Bradley, Doggett and Wood. Mr. Wood has served as
Silknet's Chairman of the Board and President since March 1995. The Compensation
Committee takes recommendations concerning salaries and incentive compensation
for employees of and consultants to Silknet and administers and grants stock
options pursuant to Silknet's stock option plans. No executive officer of
Silknet has served as a director or member of the compensation committee (or
other committee serving an equivalent function) of any other entity whose
executive officers served as a director or member of the Compensation Committee
of Silknet.
 
                              CERTAIN TRANSACTIONS
 
ORGANIZATION OF SILKNET
 
     In connection with its formation in 1995, Silknet issued and sold 2,500,000
shares of its common stock for an aggregate of $80,500 to its founder, James C.
Wood.
 
SALES OF STOCK
 
     In July 1995, Silknet sold 50,000 shares of its common stock for an
aggregate of $50,000 to Mr. Nigel K. Donnovan, currently Silknet's Senior Vice
President and Chief Operating Officer.
 
     In October 1996, Silknet issued an aggregate of 2,364,584 shares of its
Series A Preferred Stock at $0.96 per share, for aggregate consideration of
$2,270,000. In the Series A Preferred Stock financing, Silknet issued 1,302,084
shares of Series A Preferred Stock to CMG @ Ventures II LLC and 1,041,667 shares
of Series A Preferred Stock to Zero Stage Capital V, L.P. Mr. Guy Bradley, a
director of Silknet, is a member of CMG @ Ventures II LLC. Mr. Stanley Fung, a
director of Silknet, is a managing partner of Zero Stage Capital V, L.P.
 
     In June 1997, Silknet issued an aggregate of 2,500,000 shares of its Series
B Preferred Stock at a price of $2.00 per share, for aggregate consideration of
$5,000,000. In the Series B Preferred Stock financing, Silknet issued 371,700
shares of Series B Preferred Stock to CMG @ Ventures II LLC, 371,700 shares of
Series B Preferred Stock to Zero Stage Capital V, L.P., 1,250,000 shares of
Series B Preferred Stock to BancBoston Ventures Inc., 400,000 shares of Series B
Preferred Stock to Vertex Investment (II) Ltd. and 100,000 shares of Series B
Preferred Stock to HWH Investment Pte Ltd. Mr. John Doggett, a director of
Silknet, is Vice President of BancBoston Ventures Inc. Mr. Joo Hock Chua, a
director of Silknet, is Vice President/Assistant General Manager of Vertex
Management (II) Pte Ltd.
 
     In May 1998, Silknet issued an aggregate of 3,081,657 shares of its Series
C Preferred Stock at a price of $3.498117 per share, for aggregate consideration
of $10,779,990. In the Series C Preferred Stock financing, Silknet issued
857,604 shares of Series C Preferred Stock to CMG @ Ventures II LLC, 214,401
shares of Series C Preferred Stock to Zero Stage Capital V, L.P., 285,868 shares
of Series C Preferred Stock to BancBoston Ventures Inc., 428,802 shares of
Series C Preferred Stock to Vertex Technology Fund Pte Ltd. (together, with
Vertex Investment (II) Ltd. and HWH Investment Pte Ltd., the "Vertex Entities"),
and 571,736 shares of Series C Preferred Stock to Intel Corporation. Silknet
also issued 28,587 shares of Series C preferred stock to JAFCO Co., Ltd. ("JAFCO
Ltd"), 33,632 shares of Series C Preferred Stock to JAFCO R-3 Investment
Enterprise Partnership ("JAFCO R-3"), 20,179 shares of Series C Preferred Stock
to JAFCO JS-3 Investment
 
                                       53
55
 
Enterprise Partnership ("JAFCO JS-3"), 30,269 shares of Series C Preferred Stock
to JAFCO G-6(A) Investment Enterprise Partnership ("JAFCO G-6(A)"), 30,269
shares of Series C Preferred Stock to JAFCO G-6(B) Investment Enterprise
Partnership ("JAFCO G-6(B)") and 571,736 shares of Series C Preferred Stock to
U.S. Information Technology No. 2 Investment Enterprise Partnership ("U.S.
Technology") (together, the "JAFCO Entities"). Mr. Andrew Goldfarb, a director
of Silknet, is a managing principal of JAFCO America Ventures, Inc. a co-general
partner of U.S. Technology. On June 26, 1998, Silknet issued an additional 7,500
shares of Series C Preferred Stock to the Zero Stage Individual Investor Group,
one of the members of which is Mr. Stanley Fung, a director of Silknet.
 
     On February 26, 1999, Silknet issued an aggregate of 1,205,913 shares of
Series D Preferred Stock at a price of $7.324109 per share, for aggregate
consideration of $8,832,238. In the Series D Preferred Stock financing, Silknet
issued 230,148 shares to CMG @ Ventures II LLC, 157,737 shares to BancBoston
Ventures Inc., 12,625 shares to JAFCO Co., Ltd., 50,498 shares to U.S.
Technology, and 157 shares to Stanley Fung, a director of Silknet.
 
     Pursuant to Silknet's Certificate of Incorporation, each share of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock will automatically convert into one share of common stock upon
the closing of this offering.
 
     Pursuant to the preferred stock financings, Silknet granted demand,
"piggy-back" and S-3 registration rights to preferred stockholders. See
"Description of Capital Stock -- Registration Rights."
 
     Silknet has two license agreements with Planet Direct Corporation and
SalesLink covering an aggregate amount of $83,800 in fees paid to Silknet.
Planet Direct is a majority-owned subsidiary and SalesLink is a wholly-owned
subsidiary of CMG Information Services, Inc., which through its venture capital
operation, CMG @ Ventures II LLC, owns 23.06% of the outstanding common stock of
Silknet. Mr. Guy Bradley, a managing member of CMG @ Ventures II LLC, is a
director of Silknet.
 
ISSUANCE OF NOTES AND WARRANTS
 
     In May 1996, Silknet issued one note in the principal amount of $125,000
and an additional warrant to purchase an aggregate of 125,000 shares of common
stock at an exercise price of $1.00 per share to Zero Stage Capital V, L.P. The
warrant may be exercised, in whole or in part, at any time or from time to time,
until May 17, 2002. In July 1996, Silknet issued one note in the principal
amount of $125,000 and an additional warrant to purchase an aggregate of 125,000
shares of Common Stock at an exercise price of $1.00 per share to Zero Stage
Capital V, L.P. This warrant may be exercised, in whole or in part, at any time
or from time to time until July 24, 2002. Each note was exchanged for shares of
Series A Preferred Stock in October 1996.
 
     In June 1997, in connection with Silknet's issuance and sale of its Series
B Preferred Stock, Silknet issued six warrants to purchase an aggregate of
500,000 shares of common stock at an exercise price of $1.10 per share. One
warrant to purchase 250,000 shares of common stock was issued BancBoston
Ventures Inc., one warrant to purchase 80,000 shares of common stock was issued
to Vertex Investment (II) Ltd., one warrant to purchase 20,000 shares of common
stock was issued to HWH Investment Pte Ltd., one warrant to purchase 74,340
shares of common stock was issued to CMG @ Ventures II LLC, and one warrant to
purchase 74,340 shares of common stock was issued to Zero Stage Capital V, L.P.
The six warrants may be exercised, in whole or in part, at any time or from time
to time, until June 11, 2003.
 
                                       54
56
 
     Silknet believes that all transactions set forth above were made on terms
no less favorable to it than would have been obtained from unaffiliated third
parties. Silknet has adopted a policy whereby all future transactions between
Silknet and its officers, directors and affiliates will be on terms no less
favorable to Silknet than could be obtained from unaffiliated third parties and
will be approved by a majority of the disinterested members of Silknet's Board
of Directors.
 
                             PRINCIPAL STOCKHOLDERS
 
     The following table sets forth certain information regarding beneficial
ownership of Silknet's common stock as of February 28, 1999, and as adjusted to
reflect the sale of the shares of common stock offered hereby, by: (a) each
person known by Silknet to be the beneficial owner of more than 1% of its common
stock; (b) each named executive officer; (c) each of Silknet's directors; and
(d) all executive officers and directors as a group. Unless otherwise noted
below, the address of each person listed on the table is c/o Silknet Software,
Inc., 50 Phillipe Cote Street, Manchester, New Hampshire 03101, and each person
has sole voting and investment power over the shares shown as beneficially owned
except to the extent authority is shared by spouses under applicable law and
except as set forth in the footnotes to the table.
 
     Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. The following are deemed to be beneficially
owned and outstanding for purposes of calculating the number of shares and the
percentage beneficially owned by that person or entity:
 
     - shares of common stock issuable by Silknet to that person pursuant to
       options which may be exercised within 60 days after February 28, 1999;
       and
 
     - shares of common stock issuable by Silknet to that person pursuant to
       warrants which may be exercised within 60 days after February 28, 1999.
 
However, these shares are not deemed to be beneficially owned and outstanding
for purposes of computing the percentage beneficially owned by any other person
or entity.
 
     For purposes of calculating the percentage beneficially owned, the number
of shares deemed outstanding before the offering includes: (a) 2,816,121 shares
of common stock outstanding as of February 28, 1999; (b) 9,159,654 shares of
common stock issuable upon the conversion of preferred stock; and (c) the
presently exercisable options and presently exercisable warrants held by that
person. For purposes of calculating the percentage beneficially owned, the
number of shares deemed outstanding after the offering includes: (a) all shares
deemed to be outstanding before the offering and (b)           shares being sold
in this offering, assuming no exercise of the underwriters' over-allotment
option.
PERCENTAGE OF
                                                                                   COMMON
                                                                             STOCK OUTSTANDING
                                                          NUMBER OF         --------------------
                                                            SHARES           BEFORE      AFTER
NAME OF BENEFICIAL OWNER                              BENEFICIALLY OWNED    OFFERING    OFFERING
------------------------                              ------------------    --------    --------
James C. Wood(1)....................................       2,366,100         19.76%
Nigel K. Donovan....................................         427,593          3.46%
Guy Bradley(2)......................................       2,835,876         23.53%
Stanley Fung(3).....................................       1,954,047         15.89%
John Doggett(4).....................................       1,943,605         15.90%
Joo Hock Chua.......................................              --            --
Andrew Goldfarb.....................................              --            --
55
57
PERCENTAGE OF
                                                                                   COMMON
                                                                             STOCK OUTSTANDING
                                                          NUMBER OF         --------------------
                                                            SHARES           BEFORE      AFTER
NAME OF BENEFICIAL OWNER                              BENEFICIALLY OWNED    OFFERING    OFFERING
------------------------                              ------------------    --------    --------
CMG @ Ventures II LLC...............................       2,835,876         23.53%
  c/o CMG Information Services, Inc.
  100 Brickstone Square, 5th Floor
  Andover, MA 01810
Zero Stage Capital V, L.P. .........................       1,952,108         15.87%
  101 Main Street
  Kendall Square
  Cambridge, MA
BancBoston Ventures Inc. ...........................       1,943,605         15.90%
  175 Federal Street
  10th Floor
  Boston, MA 02110
The Vertex Entities(5)..............................       1,028,802          8.52%
  Three Lagoon Drive, Ste. 220
  Redwood City, CA 94065
The JAFCO Entities(6)...............................         777,795          6.49%
  One Boston Place, Ste. 3320
  Boston, MA 02108
Intel Corporation...................................         571,736          4.77%
  2200 Mission College Blvd.
  Mail Stop SC4-210
  Santa Clara, CA 95052
The Goldman Group, L.P..............................         477,874          3.99%
  85 Broad Street
  New York, NY 10004
KPMG LLP............................................         136,536          1.14%
  3 Chestnut Ridge Road
  Montvale, NJ 07645
Cambridge Technology Capital Fund I, L.P............         136,536          1.14%
  11512 El Camino Real
  San Diego, CA 92130
All executive officers and directors as a group (8
  persons)(7).......................................       9,527,220         73.16%
---------------
 
 (1) Includes (a) 200,000 shares held in trust for Mr. Wood, of which Mr. Wood
     is the sole trustee; (b) 20,000 shares held in trust for Mr. Donovan's two
     children, of which Mr. Wood is the sole trustee; (c) an aggregate of 7,500
     shares held in trust for the three children of Mr. James P. Davis, of which
     Mr. Wood is the sole trustee; and (d) 500,000 shares for which Mr. Wood has
     voting power pursuant to a Voting Trust Agreement. Mr. Wood disclaims
     beneficial ownership of all such shares.
 
 (2) Includes 2,761,536 shares held by CMG @ Ventures II LLC. Also includes
     74,340 shares of common stock issuable upon exercise of warrants held by
     CMG @ Ventures II LLC.
 
                                       56
58
 
Mr. Bradley is a managing member of CMG @ Ventures II LLC and may be deemed to
share voting and investment power with respect to all shares held by CMG @
Ventures II LLC. Mr. Bradley disclaims beneficial ownership of such shares.
 
 (3) Includes 1,627,768 shares held by Zero Stage Capital V, L.P. Also includes
     324,340 shares of common stock issuable upon exercise of warrants held by
     Zero Stage Capital V, L.P. Mr. Fung is a managing partner of Zero Stage
     Capital V, L.P. and may be deemed to share voting and investment power with
     respect to all shares held by Zero Stage Capital V, L.P. Mr. Fung disclaims
     beneficial ownership of such shares.
 
 (4) Includes 1,693,605 shares held by BancBoston Ventures Inc. Also includes
     250,000 shares of common stock issuable upon exercise of warrants held by
     BancBoston Ventures Inc. Mr. Doggett is a Vice President of BancBoston
     Ventures Inc. and may be deemed to share voting and investment power with
     respect to all shares held by BancBoston Ventures Inc. and disclaims
     beneficial ownership of such shares.
 
 (5) Includes 400,000 shares held by Vertex Investment (II) Ltd., 100,000 shares
     held by HWH Investment Pte Ltd and 428,802 shares held by Vertex Technology
     Pte Ltd. Also includes 80,000 and 20,000 shares of common stock issuable
     upon exercise of warrants held by Vertex Investment (II) Ltd. and HWH
     Investment Pte Ltd.
 
 (6) Includes 41,212 shares held by JAFCO Ltd., 33,632 shares held by JAFCO R-3,
     20,179 shares held by JAFCO JS-3, 30,269 shares held by JAFCO G-6(A),
     30,269 shares held by JAFCO G-6(B) and 622,234 shares held by U.S.
     Technology. JAFCO Ltd. is the general partner of JAFCO R-3, JAFCO JS-3,
     JAFCO G6-A, JAFCO G6-B and U.S. Technology.
 
 (7) See Notes 1 through 4.
 
                          DESCRIPTION OF CAPITAL STOCK
 
     In accordance with Silknet's Certificate of Incorporation as currently in
effect, Silknet's authorized capital stock consists of 50,000,000 shares of
common stock, with a par value of $.01 per share, and 15,000,000 shares of
preferred stock, with a par value of $.01 per share.
 
COMMON STOCK
 
     As of February 28, 1999, there were 11,975,775 shares of common stock
outstanding and held of record by 76 stockholders, after giving effect to the
conversion of all outstanding shares of preferred stock upon the closing of this
offering. Based upon the number of shares outstanding as of February 28, 1999
and giving effect to the issuance of the shares of common stock offered by
Silknet hereby, there will be           shares of common stock outstanding upon
the closing of this offering. In addition, as of February 28, 1999, there were
outstanding stock options for the purchase of a total of 2,085,042 shares of
common stock, and outstanding warrants for the purchase of a total of 750,000
shares of common stock.
 
     Holders of common stock are entitled to one vote per share for each share
held of record on all matters submitted to a vote of stockholders. The holders
of common stock are entitled to receive ratable such lawful dividends as may be
declared by the Board of Directors. However, such dividends are subject to
preferences that may be applicable to the holders of any outstanding shares of
preferred stock. In the event of a liquidation, dissolution or winding up of the
affairs of Silknet, whether voluntary or involuntary, the holders of common
stock will be entitled to receive pro rata all of the remaining assets of
Silknet available for distribution to its stockholders. Any such pro rata
distribution would be subject to the rights of the holders of any outstanding
shares of preferred stock. The common stock has no preemptive, redemption,
conversion or subscription rights. All outstanding
 
                                       57
59
 
shares of common stock are fully paid and non-assessable. The shares of common
stock to be issued by Silknet in this offering will be fully paid and
non-assessable. The rights, powers, preferences and privileges of holders of
common stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock which Silknet may designate
and issue in the future.
 
PREFERRED STOCK
 
     The Board of Directors is authorized, subject to any limitations prescribed
by Delaware law, without further stockholder approval, to issue from time to
time up to 15,000,000 shares of preferred stock, in one or more series. The
Board of Directors is also authorized, subject to the limitations prescribed by
Delaware law, to establish the number of shares to be included in each series
and to fix the voting powers, preferences, qualifications and special or
relative rights or privileges of each series. The Board of Directors is
authorized to issue preferred stock with voting, conversion and other rights and
preferences that could adversely affect the voting power or other rights of the
holders of common stock.
 
     Silknet has currently designated four series of preferred stock. These
consist of 2,364,584 shares of Series A Preferred Stock, 2,500,000 shares of
Series B Preferred Stock, 3,089,157 shares of Series C Preferred Stock and
1,205,913 shares of Series D Preferred Stock. All outstanding shares of
preferred stock will be automatically converted into an aggregate of 9,159,654
shares of common stock upon the closing of this offering.
 
     Silknet has no current plans to issue any preferred stock. However, the
issuance of preferred stock or of rights to purchase preferred stock could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, a majority of the
outstanding voting stock of Silknet.
 
WARRANTS
 
     As of February 28, 1999, Silknet had outstanding eight warrants to purchase
an aggregate of 750,000 shares of common stock. The first warrant is to purchase
an aggregate of 125,000 shares at an exercise price of $1.00 per share, and is
exercisable, in whole or in part, at any time or from time to time, until May
17, 2002. The second warrant is to purchase an aggregate of 125,000 shares at an
exercise price of $1.00 per share and is exercisable, in whole or in part, at
any time or from time to time, until July 24, 2002. The other six warrants are
to purchase an aggregate of 500,000 shares of common stock at an exercise price
of $2.20 per share. These six warrants are currently exercisable, in whole or in
part, at any time or from time to time, until June 11, 2003. All of the eight
outstanding warrants contain certain protections against dilution resulting from
stock splits, stock dividends and similar events.
 
REGISTRATION RIGHTS
 
     Pursuant to the terms of the Series C Preferred Stock Purchase Agreement
dated as of May 11, 1998 the holders of an aggregate of 7,953,741 shares of
preferred stock, which will automatically convert into an aggregate of 7,953,741
shares of common stock upon completion of this offering, and the holders of
warrants exercisable for 750,000 shares of common stock (together, the "Series C
Registration Rights Holders") are entitled to certain rights with respect to the
registration of such shares under the Securities Act.
 
     If Silknet proposes to register any of its securities under the Securities
Act, either for its own account or for the account of other security holders,
the Series C Registration Rights Holders are entitled to notice of such
registration. The Series C Registration Rights Holders are also entitled to
include their shares of common stock in such registration. However, in the event
of a registration
 
                                       58
60
 
pursuant to an underwritten public offering of common stock, the underwriters
shall have the right, subject to certain conditions, to limit the number of
shares included in such registration.
 
     The holders of at least 25% of the then-outstanding shares of common stock
held by all of the Series C Registration Rights Holders are entitled, at any
time beginning at the earlier of 180 days after Silknet's initial underwritten
public offering or May 12, 2001, to request that Silknet file a registration
statement under the Securities Act covering the sale of some or all of the
shares held by the requesting holder or holders. Upon the receipt of such a
request, Silknet is required to use commercially reasonable efforts to effect
such registration. Silknet is not required to effect more than three such demand
registrations.
 
     Once Silknet has qualified to use Form S-3 to register securities under the
Securities Act, the Series C Registration Rights Holders have the right to
request that Silknet file a registration statement on Form S-3 or any successor
thereto for a public offering of all or any portion of their shares, provided
that the reasonably anticipated aggregate price to the public of such offering
would not be less than $1,000,000. Silknet shall not be required to effect a
registration in this manner more than once in any six-month period.
 
     In general, all fees, costs and expenses of such registrations (other than
insurance costs and fees and disbursements of counsel to the selling
stockholders) will be borne by Silknet. Silknet has agreed to indemnify the
Series C Registration Rights Holders against, and provide contribution with
respect to, certain liabilities relating to any registration in which any shares
of Series C Registration Rights Holders are sold under the Securities Act.
 
     Pursuant to the terms of the Series D Preferred Stock Purchase Agreement
dated as of February 26, 1999 the holders of an aggregate of 1,205,913 shares of
preferred stock, which will automatically convert into an aggregate of 1,205,913
shares of common stock upon completion of this offering (the "Series D
Registration Rights Holders"), are entitled to certain rights with respect to
the registration of such shares under the Securities Act.
 
     If, after 180 days have elapsed from the closing of this offering, Silknet
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of other security holders, the Series D
Registration Rights Holders are entitled to notice of such registration. The
Series D Registration Rights Holders are also entitled to include their shares
of common stock in such registration. However, in the event of a registration
pursuant to an underwritten public offering of common stock, the underwriters
shall have the right, subject to certain conditions, to limit the number of
shares included in such registration.
 
     The holders of at least 50% of the then-outstanding shares of common stock
held by all of the Series D Registration Rights Holders are entitled, at any
time after 180 days have elapsed from the closing of this offering, but in no
event within 180 days of any registration of Silknet's securities, to request
that Silknet file a registration statement under the Securities Act covering the
sale of some or all of the shares held by the requesting holder or holders. Upon
the receipt of such a request, Silknet is required to use commercially
reasonable efforts to effect such registration. Silknet is not required to
effect more than one such demand registration.
 
     Once Silknet has qualified to use Form S-3 to register securities under the
Securities Act, the Series D Registration Rights Holders have the right to
request that Silknet file a registration statement on Form S-3 or any successor
thereto for a public offering of all or any portion of their shares, provided
that the reasonably anticipated aggregate price to the public of such offering
would not be less than $5,000,000. Silknet shall not be required to effect a
registration in this manner more than three times.
 
                                       59
61
 
     In general, all fees, costs and expenses of such registrations (other than
insurance costs and fees and disbursements of counsel to the selling
stockholders) will be borne by Silknet. Silknet has agreed to indemnify the
Series D Registration Rights Holders against, and provide contribution with
respect to, certain liabilities relating to any registration in which any shares
of Series D Registration Rights Holders are sold under the Securities Act.
 
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF SILKNET'S CERTIFICATE OF INCORPORATION
AND BY-LAWS AND DELAWARE GENERAL CORPORATION LAW
 
     Silknet's Certificate of Incorporation, Silknet's By-Laws and the Delaware
General Corporation Law contain certain provisions that could be deemed to have
anti-takeover effects. These provisions could discourage, delay or prevent a
change in control of Silknet or an acquisition of Silknet at a price which many
stockholders may find attractive. The existence of these provisions could limit
the price that investors might be willing to pay in the future for shares of
Silknet's common stock.
 
  Certificate of Incorporation and By-Laws
 
     The By-Laws provide that, except as otherwise provided by law or the
Certificate of Incorporation newly created directorships resulting from an
increase in the authorized number of directors or vacancies on the Board may be
filled only by:
 
     - by a majority of the directors then in office, though less than a quorum
       is then in office; or
 
     - by the sole remaining director.
 
These provisions prevent a stockholder from enlarging the Board and filling the
new directorships with such stockholder's own nominees without Board approval.
 
     These provisions of the By-Laws may have the effect of discouraging a third
party from initiating a proxy contest, making a tender offer or otherwise
attempting to gain control of Silknet, or of attempting to change the
composition or policies of the Board, even though such attempts might be
beneficial to Silknet or its stockholders.
 
     The By-Laws provide that, unless otherwise prescribed by law or the
Certificate of Incorporation, only a majority of the Board, the Chairman of the
Board or the President is able to call a special meeting of stockholders. The
Certificate of Incorporation and the By-Laws also provide that, unless otherwise
prescribed by law or the Certificate of Incorporation, stockholder action may be
taken only at a duly called and convened annual or special meeting of
stockholders and may not be taken by written consent. These provisions, taken
together, prevent stockholders from forcing consideration by the stockholders of
stockholder proposals over the opposition of the Board, except at an annual
meeting.
 
     The By-Laws also establish an advance notice procedure for stockholders to
make nominations of candidates for election as director, or to bring other
business before an annual meeting of stockholders of Silknet (the "Notice
Procedure"). Under the Notice Procedure, notice of stockholder nominations or
proposals to be made at an annual or special meeting in lieu of an annual
meeting generally must be received by Silknet not less than 120 days nor more
than 150 days prior to the first anniversary of the date of the proxy statement
delivered to the stockholders in connection with the preceeding year's annual
meeting. However, if the number of directors to be elected to the Board is
increased and there is no public announcement by Silknet naming all of the
nominees for director or specifying the size of the increased Board at least 70
days prior to the first anniversary of the preceding year's annual meeting, then
notice must be received not later than the 10th day following the earlier of the
day such notice was mailed or the day such public disclosure was made. The
notice will be timely only with respect to any director nominees for any
position caused by the increase in the Board. Notice of stockholder nominations
or proposals to be made at a special meeting called by
 
                                       60
62
 
the Board for the purpose of electing one or more directors (other than a
special meeting in lieu of an annual meeting), must be received not later than
the 10th day following the earlier of the day such notice was mailed or the day
such public disclosure was made. These notices must contain certain prescribed
information.
 
     The Notice Procedure affords the Board an opportunity to consider the
qualifications of proposed director nominees or the merit of stockholder
proposals, and, to the extent deemed appropriate by the Board, to inform
stockholders about such matters. The Notice Procedure also provides a more
orderly procedure for conducting annual meetings of stockholders. The By-Laws do
not give the Board any power to approve or disapprove stockholder nominations
for the election of directors or proposals for action. However, the Notice
Procedure may prevent a contest for the election of directors or the
consideration of stockholder proposals. This could deter a third party from
conducting a solicitation of proxies to elect its own slate of directors or to
approve its own proposal if the proper advance notice procedures are not
followed, without regard to whether consideration of such nominees or proposals
might be harmful or beneficial to Silknet and its stockholders.
 
  Delaware General Corporation Law
 
     Silknet is subject to Section 203 of the Delaware General Corporation Law
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder.
 
     Section 203 does not apply if:
 
     - prior to such time, the board of directors of the corporation approved
       either the business combination or the transaction which resulted in the
       stockholder becoming an interested stockholder;
 
     - upon consummation of the transaction which resulted in the stockholder
       becoming an interested stockholder, the interested stockholder owned at
       least 85% of the voting stock of the corporation outstanding at the time
       the transaction commenced, excluding for purposes of determining the
       number of shares outstanding those shares owned by persons who are
       directors and also officers and by employee stock plans in which employee
       participants do not have the right to determine confidentially whether
       shares held subject to the plan will be tendered in a tender or exchange
       offer; or
 
     - at or subsequent to such time, the business combination is approved by
       the board of directors and authorized at an annual or special meeting of
       stockholders, and not by written consent, by the affirmative vote of at
       least two-thirds of the outstanding voting stock which is not owned by
       the interested stockholder.
 
The application of Section 203 may limit the ability of stockholders to approve
a transaction that they may deem to be in their best interests.
 
     Section 203 defines "business combination" to include:
 
     - any merger or consolidation involving the corporation and the interested
       stockholder;
 
     - any sale, transfer, pledge or other disposition of 10% or more of the
       assets of the corporation to or with the interested stockholder;
 
     - subject to certain exceptions, any transaction which results in the
       issuance or transfer by the corporation of any stock of the corporation
       to the interested stockholder;
 
                                       61
63
 
     - any transaction involving the corporation which has the effect of
       increasing the proportionate share of the stock of any class or series of
       the corporation beneficially owned by the interested stockholder; or
 
     - the receipt by the interested stockholder of the benefit of any loans,
       advances, guarantees, pledges or other financial benefits provided by or
       through the corporation.
 
     In general, Section 203 defines an "interested stockholder" as any entity
or person beneficially owning 15% or more of the outstanding voting stock of the
corporation or is an affiliate or associate of the corporation and was the owner
of 15% or more of the outstanding voting stock of the corporation at any time
within the past three years, and any entity or person associated with,
affiliated with or controlling or controlled by such entity or person.
 
LIMITATION OF LIABILITY
 
     Silknet's Certificate of Incorporation provides that no director of Silknet
shall be personally liable to Silknet or to its stockholders for monetary
damages for breach of fiduciary duty as a director, except that the limitation
shall not eliminate or limit liability to the extent that the elimination or
limitation of such liability is not permitted by the Delaware General
Corporation Law as the same exists or may hereafter be amended.
 
     Silknet's Certificate of Incorporation further provides for the
indemnification of Silknet's directors and officers to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law, including
circumstances in which indemnification is otherwise discretionary. A principal
effect of these provisions is to limit or eliminate the potential liability of
Silknet's directors for monetary damages arising from breaches of their duty of
care, subject to certain exceptions. These provisions may also shield directors
from liability under federal and state securities laws.
 
STOCK TRANSFER AGENT
 
     The transfer agent and registrar for the common stock is                .
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Prior to this offering, there has been no market for Silknet's common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect prevailing market prices from time to time. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of certain contractual and legal restrictions on resale
(as described below), sales of substantial amounts of common stock of Silknet in
the public market after the restrictions lapse could adversely affect the
prevailing market price and the ability of Silknet to raise equity capital in
the future.
 
     Upon completion of this offering (based on shares outstanding at February
28, 1999), Silknet will have outstanding an aggregate of                shares
of common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options or warrants. Of these shares, the
               shares sold in this offering will be freely tradable without
restrictions or further registration under the Securities Act, unless such
shares are purchased by an existing "affiliate" of Silknet as that term is
defined in Rule 144 under the Securities Act (an "Affiliate").
 
     The remaining 11,975,775 shares of common stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act ("Restricted Shares") or are subject to the contractual
restrictions described below. Restricted Shares may be sold in the public market
only if registered or if they qualify for an exception from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. As a result of the
 
                                       62
64
 
contractual restrictions described below, the provisions of Rules 144, 144(k)
and 701, and Silknet's intention to file registration statements covering shares
of common stock subject to outstanding stock options or issued pursuant to the
exercise of stock options, approximately                shares will be eligible
for sale in the public market during the 180 days after the date of this
prospectus. In addition, approximately                shares will become
eligible for sale in the public market upon expiration of the lock-up agreements
180 days after the date of this prospectus.
 
     All of the officers and directors and certain stockholders and
optionholders of Silknet have signed lock-up agreements in favor of the
underwriters. As a result, these individuals and entities are not permitted to
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock or publicly disclose the intention
to make any such offer, sale, pledge or disposal for a period of 180 days after
the date of this prospectus, without the prior written consent of Credit Suisse
First Boston. Credit Suisse First Boston currently has no plans to release any
portion of the securities subject to lock-up agreements. When determining
whether or not to release shares from the lock-up agreements, Credit Suisse
First Boston will consider, among other factors, the stockholder's reasons for
requesting the release, the number of shares for which the release is being
requested and market conditions at the time.
 
     In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled to
sell a certain number of shares within any three-month period. That certain
number of shares cannot 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 on the Nasdaq National Market during the four
calendar weeks preceding the filing of a notice on Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about Silknet. Rule 144 also provides that Affiliates of Silknet who
are selling shares of common stock that are not Restricted Shares must
nonetheless comply with the same restrictions applicable to Restricted Shares
with the exception of the holding period requirement.
 
     Under Rule 144(k), a person who is not deemed to have been an Affiliate of
Silknet at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an Affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Accordingly,
unless otherwise restricted, "144(k) shares" may therefore be sold immediately
upon the completion of this offering.
 
     Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from Silknet by its employees,
directors, officers, consultants or advisors prior to the date the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). To be eligible for resale under Rule 701,
shares must have been issued pursuant to written compensatory benefit plans or
written contracts relating to the compensation of such persons. In addition, the
Securities and Exchange Commission has indicated that Rule 701 will apply to
typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act, along with the shares acquired upon
exercise of such options (including exercises after the date of this offering).
Securities issued in reliance on Rule 701 are restricted securities and, subject
to the contractual restrictions described above, beginning 90 days after the
date of this prospectus, may be sold by persons other than Affiliates, subject
only to the
 
                                       63
65
 
manner of sale provisions of Rule 144, and by Affiliates, under Rule 144 without
compliance with its one-year minimum holding period requirements.
 
     Silknet has agreed not to offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of common stock or any securities convertible into or exercisable
or exchangeable for common stock, or publicly disclose the intention to make any
such offer, sale, pledge, disposition or filing, for a period of 180 days after
the date of this prospectus, without the prior written consent of Credit Suisse
First Boston, subject to certain limited exceptions.
 
     Following this offering, Silknet intends to file registration statements
under the Securities Act covering approximately 4,091,900 shares of common stock
issued pursuant to the exercise of stock options, subject to outstanding options
or reserved for issuance under Silknet's 1995 Option Plan, 1999 Option Plan,
Director Plan and Stock Purchase Plan. Accordingly, shares registered under such
registration statements will, subject to Rule 144 provisions applicable to
Affiliates, be available for sale in the open market, except to the extent that
such shares are subject to Silknet's vesting restrictions or the contractual
restrictions described above. See "Management -- Stock Plans."
 
                                       64
66
 
                                  UNDERWRITING
 
     Under the terms and subject to the conditions contained in an underwriting
agreement dated           , 1999, the underwriters named below, for whom Credit
Suisse First Boston, BancBoston Robertson Stephens Inc., NationsBanc Montgomery
Securities LLC and First Union Capital Markets Corp. are acting as
representatives, have severally but not jointly agreed to purchase from Silknet
the following respective number of shares of common stock:
NUMBER OF
                        UNDERWRITERS                           SHARES
                        ------------                          ---------
Credit Suisse First Boston.............................
     BancBoston Robertson Stephens Inc. ....................
     NationsBanc Montgomery Securities LLC..................
     First Union Capital Markets Corp. .....................
               Total........................................
                                                              ========
The underwriting agreement provides that the obligations of the
underwriters are subject to approval of certain conditions precedent and that
the underwriters will be obligated to purchase all of the shares of the common
stock offered hereby (other than those shares covered by the over-allotment
option described below) if any are purchased. The underwriting agreement
provides that, in the event of a default by an underwriter, in certain
circumstances the purchase commitments of non-defaulting underwriters may be
increased or the underwriting agreement may be terminated.
 
     Silknet has granted to the underwriters an option expiring on the 30th day
after the date of this prospectus to purchase up to        additional shares of
common stock at the initial public offering price, less the underwriting
discounts and commissions, all as set forth on the cover page of this
prospectus. Such option may be exercised only to cover over-allotments in the
sale of shares of common stock. To the extent such option is exercised, each
underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of common stock as
it was obligated to purchase pursuant to the underwriting agreement.
 
     Silknet has been advised by the representatives that the underwriters
propose to offer the shares of common stock to the public initially at the
public offering price set forth on the cover page of this prospectus and,
through the representatives, to certain dealers (who may include the
underwriters) at such price less a concession of $     per share, and the
underwriters and such dealers may allow a discount of $     per share on sales
to certain other dealers. After the offering, the public offering price and
concession and discount to dealers may be changed by the representatives.
 
     The following table summarizes the compensation to be paid to the
underwriters by Silknet and the expenses payable by Silknet.
TOTAL
                                                               --------------------------------
                                                                  WITHOUT             WITH
                                                  PER SHARE    OVER-ALLOTMENT    OVER-ALLOTMENT
                                                  ---------    --------------    --------------
Underwriting discounts and commissions paid by
  Silknet.......................................
Expenses payable by Silknet.....................
The representatives have informed Silknet that they do not expect
discretionary sales by the underwriters to exceed 5% of the shares being offered
hereby.
 
                                       65
67
 
     Silknet, its officers and directors, and certain other existing
stockholders and optionholders of Silknet have agreed that they will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly or indirectly,
or, in the case of Silknet, file with the Securities and Exchange Commission a
registration statement relating to, any shares of common stock or securities
exchangeable or exercisable for or convertible into shares of common stock or
publicly disclose the intention to do any of the foregoing without the prior
written consent of Credit Suisse First Boston for a period of 180 days after the
date of this prospectus, except under certain circumstances.
 
     The underwriters have reserved for sale, at the initial public offering
price, up to           shares of the common stock for employees, directors and
certain other persons associated with Silknet who have expressed an interest in
purchasing such shares of common stock in the offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased will
be offered by the underwriters to the general public on the same basis as other
shares offered hereby.
 
     Silknet has agreed to indemnify the underwriters against certain
liabilities, including civil liabilities under the Securities Act, or to
contribute to payments which the underwriters may be required to make in respect
thereof.
 
     Silknet has applied for listing on The Nasdaq Stock Market's National
Market under the symbol "SILK."
 
     Prior to the offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between Silknet and the representatives. The principal factors considered in
determining the public offering price will include:
 
     - the information set forth in this prospectus and otherwise available to
       the representatives;
 
     - the history of, and the prospects for, Silknet and the industry in which
       it competes;
 
     - an assessment of Silknet's management;
 
     - the prospects for, and the timing of, future earnings of Silknet;
 
     - the present state of Silknet's development and its current financial
       condition;
 
     - the general condition of the securities markets at the time of the
       offering;
 
     - the recent market prices of, and the demand for, publicly-traded common
       stock of companies in businesses similar to those of Silknet;
 
     - market conditions for initial public offerings; and
 
     - other relevant factors.
 
There can be no assurance that an active trading market will develop for the
common stock or that the common stock will trade in the market subsequent to the
offering at or above the initial public offering price.
 
     The representatives, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position. Stabilizing transactions permit bids
to purchase the underlying security so long as the stabilizing bids do not
exceed a specified maximum. Syndicate covering transactions involve purchases of
shares of the common stock in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
representatives to reclaim a selling concession from a syndicate when shares of
the common stock originally sold by such syndicate member are purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the common stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
 
                                       66
68
 
                          NOTICE TO CANADIAN RESIDENTS
 
RESALE RESTRICTIONS
 
     The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that Silknet prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction, and which may require resales
to be made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
 
REPRESENTATIONS OF PURCHASERS
 
     Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to Silknet and the dealer from whom
such purchase confirmation is received that (1) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (2) where required
by law, that such purchaser is purchasing as principal and not as agent, and (3)
such purchaser has reviewed the text above under "Resale Restrictions."
 
RIGHTS OF ACTION (ONTARIO PURCHASERS)
 
     The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
 
ENFORCEMENT OF LEGAL RIGHTS
 
     All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
 
NOTICE TO BRITISH COLUMBIA RESIDENTS
 
     A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to the offering. Such a report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from Silknet. Only one such
report must be filed in respect of common stock acquired on the same date and
under the same prospectus exemption.
 
TAXATION AND ELIGIBILITY FOR INVESTMENT
 
     Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
Legislation.
 
                                       67
69
 
                                 LEGAL MATTERS
 
     The validity of the shares of common stock offered hereby will be passed
upon for Silknet by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
Certain legal matters will be passed upon for the underwriters by Hale and Dorr
LLP, Boston, Massachusetts.
 
                                    EXPERTS
 
     The financial statements of Silknet as of June 30, 1997 and 1998 and for
each of the three years in the period ended June 30, 1998, all of which are
included in this prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
 
                       CHANGE IN INDEPENDENT ACCOUNTANTS
 
     In November 1998, Silknet engaged PricewaterhouseCoopers LLP as its
independent accountants, to replace KPMG Peat Marwick LLP. The decision was made
by Silknet's Board of Directors, upon the recommendation of management, and was
not due to any disagreement with KPMG Peat Marwick LLP. During the fiscal years
ended June 30, 1998 and 1997 and the subsequent interim period immediately
preceding the date of this change, Silknet had no disagreements with KPMG Peat
Marwick LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of KPMG Peat Marwick LLP, would have caused them to
make reference thereto in their report on Silknet's financial statements. The
reports of KPMG Peat Marwick LLP on Silknet's financial statements for fiscal
1996 and 1997 (the last fiscal year audited by KPMG Peat Marwick LLP) did not
contain any adverse opinion, disclaimer of opinion or qualification or
modification as to uncertainty, audit scope or accounting principles.
 
                             ADDITIONAL INFORMATION
 
     Silknet has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered hereby. This prospectus does not contain all
of the information set forth in the registration statement. For further
information with respect to Silknet and the common stock, reference is made to
the registration statement. Statements contained in this prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of the contract
or document filed as an exhibit to the registration statement, and each such
statement is qualified in all respects by reference to such exhibit. Copies of
the registration statement may be examined without charge at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661
and 7 World Trade Center, Thirteenth Floor, New York, New York 10048. Copies of
all or any portion of the registration statement may be obtained from the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, or by calling the Commission at
1-800-SEC-0330, at prescribed rates. The Commission also maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, such as Silknet, that make electronic
filings with the Commission.
 
     Silknet intends to furnish to its stockholders annual reports containing
financial statements audited by an independent public accounting firm.
 
                                       68
70
 
                              SILKNET CORPORATION
 
                         INDEX TO FINANCIAL STATEMENTS
PAGE
                                                              ----
Report of Independent Accountants...........................  F-2
Consolidated Balance Sheets as of June 30, 1997, 1998 and
  December 31, 1998 (unaudited).............................  F-3
Consolidated Statements of Operations for the years ended
  June 30, 1996, 1997, 1998 and the six months ended
  December 31, 1997 (unaudited) and 1998 (unaudited)........  F-4
Consolidated Statements of Convertible Participating
  Preferred Stock and Stockholders' Equity (Deficit) for the
  years ended June 30, 1996, 1997 and 1998 and the six
  months ended December 31, 1998 (unaudited)................  F-5
Consolidated Statements of Cash Flows for the years ended
  June 30, 1996, 1997 and 1998 and the six months ended
  December 31, 1997 (unaudited) and December 31, 1998
  (unaudited)...............................................  F-6
Notes to Consolidated Financial Statements..................  F-7
F-1
71
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and stockholders of
Silknet Software, Inc.
 
     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, convertible participating
preferred stock and stockholders' equity (deficit) and cash flows present
fairly, in all material respects, the consolidated financial position of Silknet
Software, Inc. ("Silknet") at June 30, 1997 and 1998 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of Silknet's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 18, 1998 except
for Note M for which the
date is March 2, 1999.
 
                                       F-2
72
 
                             SILKNET SOFTWARE, INC.
 
                          CONSOLIDATED BALANCE SHEETS
JUNE 30,                            PRO FORMA
                                                              -------------------------   DECEMBER 31,   DECEMBER 31,
                                                                 1997          1998           1998           1998
                                                              -----------   -----------   ------------   ------------
                                                                                                           (NOTE B)
                                                                                          (UNAUDITED)    (UNAUDITED)
ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 4,751,988   $ 9,045,094   $  4,584,502   $  4,584,502
  Accounts receivable, net of allowance for doubtful
    accounts of $200,000 at December 31, 1998 actual and pro
    forma...................................................       32,694     1,546,967      3,878,002      3,878,002
  Prepaid expenses and other current assets.................       59,746       265,692        604,163        604,163
                                                              -----------   -----------   ------------   ------------
        Total current assets................................    4,844,428    10,857,753      9,066,667      9,066,667
Property and equipment, net.................................      528,673     1,217,029      1,477,106      1,477,106
Other assets................................................       28,824        54,149         53,788         53,788
                                                              -----------   -----------   ------------   ------------
        Total assets........................................  $ 5,401,925   $12,128,931   $ 10,597,561   $ 10,597,561
                                                              ===========   ===========   ============   ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Note payable to bank, current portion.....................      153,855       248,725        171,797        171,797
  Accounts payable..........................................      264,107       207,256        686,102        686,102
  Accrued expenses..........................................      116,394       916,908      2,333,994      2,333,994
  Deferred revenue..........................................      154,586     1,013,183      1,397,315      1,397,315
                                                              -----------   -----------   ------------   ------------
        Total current liabilities...........................      688,942     2,386,072      4,589,208      4,589,208
Note payable to bank........................................      115,392       222,222        156,096        156,096
Convertible participating preferred stock, $.01 par value
  (Note M):
  Series A;
    Authorized: 2,364,584 shares
    Issued and outstanding: 2,364,584 shares (liquidation
    value $2,799,314 at December 31, 1998)..................    2,415,869     2,659,288      2,780,997             --
  Series B;
    Authorized: 2,500,000 shares
    Issued and outstanding: 2,500,000 shares (liquidation
    value $5,779,931 at December 31, 1998)..................    5,015,982     5,518,585      5,769,885             --
  Series C;
    Authorized: 3,089,157 shares
    Issued and outstanding: 3,089,157 shares (liquidation
    value $11,503,448 at December 31, 1998).................           --    10,929,494     11,469,806             --
                                                              -----------   -----------   ------------   ------------
        Total convertible participating preferred stock.....    7,431,851    19,107,367     20,020,688             --
                                                              -----------   -----------   ------------   ------------
Commitments and contingencies (Note J)
Stockholders' equity (deficit) (Note M):
  Common stock, $.01 par value;
    Authorized: 15,000,000 shares
    Issued and outstanding: 2,557,900, 2,627,625 and
    2,716,650 shares at June 30, 1997, 1998 and December 31,
    1998, respectively, and 10,670,391 shares on a pro forma
    basis...................................................       25,579        26,276         27,166        106,703
Additional paid-in capital..................................      818,462       887,489      1,297,881     19,232,564
Accumulated dividends on
  preferred stock...........................................     (190,214)   (1,093,147)    (2,006,468)            --
Deferred compensation.......................................     (209,016)     (125,409)      (397,758)      (397,758)
Other comprehensive income..................................           --            --          1,288          1,288
Accumulated deficit.........................................   (3,279,071)   (9,281,939)   (13,090,540)   (13,090,540)
                                                              -----------   -----------   ------------   ------------
      Total stockholders'
        equity (deficit)....................................   (2,834,260)   (9,586,730)   (14,168,431)     5,852,257
                                                              -----------   -----------   ------------   ------------
        Total liabilities and stockholders' equity
          (deficit).........................................  $ 5,401,925   $12,128,931   $ 10,597,561   $ 10,597,561
                                                              ===========   ===========   ============   ============
The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       F-3
73
 
                             SILKNET SOFTWARE, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
                                    FOR THE YEARS ENDED JUNE 30,              DECEMBER 31,
                                -------------------------------------   -------------------------
                                  1996         1997          1998          1997          1998
                                ---------   -----------   -----------   -----------   -----------
                                                                        (UNAUDITED)   (UNAUDITED)
Revenue:
  License.....................         --   $    74,638   $ 2,976,938   $   508,541   $ 3,688,364
  Services....................  $ 266,266       119,071       670,517       127,797     1,855,206
                                ---------   -----------   -----------   -----------   -----------
          Total revenue.......    266,266       193,709     3,647,455       636,338     5,543,570
Cost of revenue:
  License.....................         --        28,940        32,480         5,549       183,709
  Services....................    140,992       311,626     1,353,603       574,030     1,518,830
                                ---------   -----------   -----------   -----------   -----------
          Total cost of
             revenue..........    140,992       340,566     1,386,083       579,579     1,702,539
                                ---------   -----------   -----------   -----------   -----------
Gross margin..................    125,274      (146,857)    2,261,372        56,759     3,841,031
Operating expenses:
  Sales and marketing.........     33,085       888,017     4,802,243     1,814,135     4,235,817
  Research and development....    119,721       960,845     2,408,723       944,126     2,274,377
  General and
     administrative...........    430,786       696,579     1,187,275       493,909     1,290,073
                                ---------   -----------   -----------   -----------   -----------
          Total operating
             expenses.........    583,592     2,545,441     8,398,241     3,252,170     7,800,267
                                ---------   -----------   -----------   -----------   -----------
Operating loss................   (458,318)   (2,692,298)   (6,136,869)   (3,195,411)   (3,959,236)
Interest income (expense),
  net.........................     (6,708)      (60,206)      134,001        65,862       150,635
Net loss......................   (465,026)   (2,752,504)   (6,002,868)    3,129,549    (3,808,601)
Accrued dividends for
  preferred stockholders......         --       190,214       902,933        51,478       913,321
                                ---------   -----------   -----------   -----------   -----------
Net loss attributable to
  common stockholders.........  $(465,026)  $(2,942,718)  $(6,905,801)  $(3,181,027)  $(4,721,922)
                                =========   ===========   ===========   ===========   ===========
Basic and diluted net loss per
  share.......................  $   (0.18)  $     (1.15)  $     (2.69)  $     (1.24)  $     (1.76)
Shares used in computing basic
  and diluted net loss
  per share...................  2,550,781     2,557,153     2,566,258     2,557,900     2,675,345
Unaudited pro forma basic and
  diluted net loss per
  share.......................      (0.18)        (0.63)        (0.76)        (0.42)        (0.36)
Shares used in computing
  unaudited pro forma basic
  and diluted net loss per
  share.......................  2,550,781     4,397,564     7,879,405     7,422,484    10,629,086
The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                       F-4
74
 
                             SILKNET SOFTWARE, INC.
 
              CONSOLIDATED STATEMENTS OF CONVERTIBLE PARTICIPATING
               PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
                  FOR THE YEARS ENDED JUNE 30, 1996, 1997 AND
          1998 AND THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
CONVERTIBLE PARTICIPATING                                      ACCUMULATED
                                       PREFERRED STOCK           COMMON STOCK       ADDITIONAL   DIVIDENDS ON
                                  -------------------------   -------------------    PAID-IN      PREFERRED       DEFERRED
                                    SHARES        VALUE        SHARES      VALUE     CAPITAL        STOCK       COMPENSATION
                                  ----------   ------------   ---------   -------   ----------   ------------   ------------
Balance at June 30, 1995........                              2,500,000   $25,000   $   55,500
 Issuance of common stock.......                                 55,000       550       54,450
 Capital contribution by
   founder......................                                                       124,500
 Issuance of common stock
   purchase warrants............                                                        46,967
 Deferred compensation related
   to grant of stock options....                                                       536,207                   $(536,207)
 Amortization of deferred
   compensation.................                                                                                   185,204
 Net loss.......................
                                  ---------    -----------    ---------   -------   ----------                   ---------
Balance at June 30, 1996........                              2,555,000    25,550      817,624                    (351,003)
 Issuance of common stock.......                                  2,900        29        2,871
 Issuance of Series A
   Convertible Participating
   Preferred Stock, net of
   offering costs...............  2,364,584    $ 2,251,683
 Issuance of Series B
   Convertible Participating
   Preferred Stock net of
   offering costs...............  2,500,000      4,989,954
 Issuance of common stock
   purchase warrants............                                                        46,967
 Stock options canceled.........                                                       (49,000)                     49,000
 Amortization of deferred
   compensation.................                                                                                    92,987
 Accrued dividends for preferred
   stockholders.................                   190,214                                       $  (190,214)
 Net loss.......................
                                  ---------    -----------    ---------   -------   ----------   -----------     ---------
Balance at June 30, 1997........  4,864,584      7,431,851    2,557,900    25,579      818,462      (190,214)     (209,016)
 Issuance of common stock.......                                 69,725       697       69,027
 Issuance of Series C
   Convertible Participating
   Preferred Stock, net of
   offering costs...............  3,089,157     10,772,583
 Amortization of deferred
   compensation.................                                                                                    83,607
 Accrued dividends for preferred
   stockholders.................                   902,933                                          (902,933)
 Net loss.......................
                                  ---------    -----------    ---------   -------   ----------   -----------     ---------
Balance at June 30, 1998........  7,953,741     19,107,367    2,627,625    26,276      887,489    (1,093,147)     (125,409)
 Issuance of common stock.......                                 89,025       890       87,123
 Deferred compensation related
   to grant of stock options....                                                       323,269                    (323,269)
 Amortization of deferred
   compensation.................                                                                                    50,920
 Accrued dividends for preferred
   stockholders.................                   913,321                                          (913,321)
 Net loss.......................
 Other comprehensive income.....
                                  ---------    -----------    ---------   -------   ----------   -----------     ---------
Balance at December 31, 1998....  7,953,741    $20,020,688    2,716,650   $27,166   $1,297,881   $(2,006,468)    $(397,758)
                                  =========    ===========    =========   =======   ==========   ===========     =========
OTHER                           TOTAL
                                  COMPREHENSIVE   ACCUMULATED     STOCKHOLDERS'
                                     INCOME         DEFICIT      EQUITY (DEFICIT)
                                  -------------   ------------   ----------------
Balance at June 30, 1995........                  $    (61,541)    $     18,959
 Issuance of common stock.......                                         55,000
 Capital contribution by
   founder......................                                        124,500
 Issuance of common stock
   purchase warrants............                                         46,967
 Deferred compensation related
   to grant of stock options....
 Amortization of deferred
   compensation.................                                        185,204
 Net loss.......................                      (465,026)        (465,026)
                                                  ------------     ------------
Balance at June 30, 1996........                      (526,567)         (34,396)
 Issuance of common stock.......                                          2,900
 Issuance of Series A
   Convertible Participating
   Preferred Stock, net of
   offering costs...............
 Issuance of Series B
   Convertible Participating
   Preferred Stock net of
   offering costs...............
 Issuance of common stock
   purchase warrants............                                         46,967
 Stock options canceled.........
 Amortization of deferred
   compensation.................                                         92,987
 Accrued dividends for preferred
   stockholders.................                                       (190,214)
 Net loss.......................                    (2,752,504)      (2,752,504)
                                                  ------------     ------------
Balance at June 30, 1997........                    (3,279,071)      (2,834,260)
 Issuance of common stock.......                                         69,724
 Issuance of Series C
   Convertible Participating
   Preferred Stock, net of
   offering costs...............
 Amortization of deferred
   compensation.................                                         83,607
 Accrued dividends for preferred
   stockholders.................                                       (902,933)
 Net loss.......................                    (6,002,868)      (6,002,868)
                                                  ------------     ------------
Balance at June 30, 1998........                    (9,281,939)      (9,586,730)
 Issuance of common stock.......                                         88,013
 Deferred compensation related
   to grant of stock options....
 Amortization of deferred
   compensation.................                                         50,920
 Accrued dividends for preferred
   stockholders.................                                       (913,321)
 Net loss.......................                    (3,808,601)      (3,808,601)
 Other comprehensive income.....     $1,288                               1,288
                                     ------       ------------     ------------
Balance at December 31, 1998....     $1,288       $(13,090,540)    $(14,168,431)
                                     ======       ============     ============
-------------------------
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                       F-5
75
 
                             SILKNET SOFTWARE, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
                                                       FOR THE YEARS ENDED JUNE 30,              DECEMBER 31,
                                                   -------------------------------------   -------------------------
                                                     1996         1997          1998          1997          1998
                                                   ---------   -----------   -----------   -----------   -----------
                                                                                                  (UNAUDITED)
Cash flows from operating activities:
  Net loss.......................................  $(465,026)  $(2,752,504)  $(6,002,868)  $(3,129,549)  $(3,808,601)
  Adjustments to reconcile net loss to net cash
    used in operating activities:
    Depreciation and amortization................     24,598       187,449       339,397       125,820       317,243
    Provision for doubtful accounts..............         --            --            --            --       200,000
    Loss on disposal of equipment................         --            --         4,318            --            --
    Amortization of deferred compensation........    185,204        92,987        83,607        41,802        50,920
    Stock issued for services....................      5,000         2,900            --            --            --
    Changes in operating assets and liabilities:
      Accounts receivable........................    (55,365)       22,671    (1,514,273)     (210,118)   (2,531,035)
      Prepaid and other current assets...........     (5,199)      (22,500)     (205,946)      (76,672)          361
      Other assets...............................         --       (59,746)      (25,325)       (7,489)     (338,471)
      Accounts payable...........................     (3,063)      231,647       (56,851)      (59,212)      478,845
      Accrued expenses...........................     12,347        94,546       800,514       282,233     1,417,087
      Deferred revenues..........................         --       154,586       858,597       (43,332)      384,132
                                                   ---------   -----------   -----------   -----------   -----------
         Net cash used in operating activities...   (301,504)   (2,047,964)   (5,718,830)   (3,076,517)   (3,829,519)
Cash flows from investing activities:
  Purchase of property and equipment.............    (46,162)     (554,844)   (1,058,671)     (220,123)     (577,320)
  Proceeds from dispositions of property and
    equipment....................................         --            --        26,600            --            --
                                                   ---------   -----------   -----------   -----------   -----------
         Net cash used in investing activities...    (46,162)     (554,844)   (1,032,071)     (220,123)     (577,320)
                                                   ---------   -----------   -----------   -----------   -----------
Cash flows from financing activities:
  Proceeds from issuance of common stock.........     50,000            --        69,724            --        88,013
  Proceeds from capital contributions............    124,500            --            --            --            --
  Proceeds from issuance of notes payable and
    warrants.....................................    261,117       510,000       400,000       290,491            --
  Payments on notes payable......................    (64,541)     (187,329)     (198,300)      (76,928)     (143,054)
  Proceeds from issuance of preferred stock, net
    of issuance costs............................         --     6,991,637    10,772,583            --            --
                                                   ---------   -----------   -----------   -----------   -----------
         Net cash provided by (used in) financing
           activities............................    371,076     7,314,308    11,044,007       213,563       (55,041)
                                                   ---------   -----------   -----------   -----------   -----------
Net increase (decrease) in cash and cash
  equivalents....................................     23,410     4,711,500     4,293,106    (3,083,077)   (4,461,880)
Effect of exchange rate changes on cash and cash
  equivalents....................................         --            --            --            --         1,288
                                                   ---------   -----------   -----------   -----------   -----------
Cash and cash equivalents at beginning of
  period.........................................     17,078        40,488     4,751,988     4,751,988     9,045,094
                                                   ---------   -----------   -----------   -----------   -----------
Cash and cash equivalents at end of period.......  $  40,488   $ 4,751,988   $ 9,045,094   $ 1,668,911   $ 4,584,502
                                                   =========   ===========   ===========   ===========   ===========
Supplemental schedule of cash flow information:
  Interest paid..................................  $   6,708   $    15,201   $    39,438   $    13,991   $    20,426
                                                   =========   ===========   ===========   ===========   ===========
Supplemental schedule of non-cash financing
  activity:
  Settlement of debt through issuance of Series A
    Convertible Participating Preferred Stock....         --   $   250,000            --            --            --
                                                   =========   ===========   ===========   ===========   ===========
The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       F-6
76
 
                             SILKNET SOFTWARE, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
 
A.  NATURE OF THE BUSINESS:
 
     Silknet develops and sells software that allows companies to offer
personalized marketing, sales, electronic commerce and customer support services
through a single Web site interface. Silknet's products enable a company to
deliver these services to its customers over the Web through real-time
collaboration and customer self-service. Silknet's products allow a company to
coordinate its interactions with customers by integrating a variety of
communications media, such as the Web, e-mail and the telephone. Silknet's
software can capture and consolidate data derived from all these sources and
distribute it throughout a company and to its partners to provide a single view
of a customer. This solution is more efficient for a company and also more
efficient for its customers, creating a competitive advantage for that company.
 
     Silknet is subject to risks and uncertainties common to growing
technology-based companies, including rapid technological change, growth and
commercial acceptance of the Internet, dependence on principal products and
third party technology, new product development, new product introductions and
other activities of competitors, dependence on key personnel, reliance on a
limited number of distributors, international expansion, lengthening sales cycle
and limited operating history.
 
     Silknet has also experienced substantial net losses since its inception
and, as of December 31, 1998, had an accumulated deficit of $13,090,540. Such
losses and accumulated deficit resulted from Silknet's lack of substantial
revenue and significantly increased costs incurred in the development of
Silknet's products and in the preliminary establishment of Silknet's
infrastructure. For the foreseeable future, Silknet expects to continue to
experience significant growth in its operating expenses in order to execute its
current business plan, particularly research and development and sales and
marketing expenses. As a result, Silknet's business plan indicates that
additional financing would be required to support its planned expenditures. In
February 1999, Silknet issued Series D Convertible Participating Preferred Stock
for net proceeds of approximately $8.8 million. In the event that an initial
public offering is not completed on a timely basis, Silknet believes that these
additional funds, along with available bank lines of credit, would be sufficient
to fund operations through at least the next 12 months.
 
B.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
  Principles of Consolidation
 
     The consolidated financial statements include the accounts of Silknet and
its wholly-owned subsidiary. Intercompany balances and transactions have been
eliminated.
 
  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 revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include the valuation of deferred tax assets.
 
                                       F-7
77
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Cash and Cash Equivalents
 
     Silknet considers money market mutual funds and all short-term investments
with original maturities of three months or less at the date of purchase to be
cash equivalents. Silknet invests its excess cash in money market funds and
short-term investments which management believes are subject to minimal market
and credit risk.
 
  Property and Equipment
 
     Property and equipment are stated at cost and are depreciated over their
estimated useful lives, generally three years, using the straight-line method.
Upon sale or retirement, the asset cost and related accumulated depreciation are
removed from the respective accounts, and any related gain or loss is reflected
in operations. Repair and maintenance costs are expensed as incurred.
 
  Income Taxes
 
     Silknet accounts for income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted rates in effect for the year in which those temporary differences
are expected to be recovered or settled.
 
  Fair Value of Financial Instruments
 
     The carrying amount of Silknet's financial instruments, which include cash
equivalents, accounts receivable, accounts payable, accrued expenses and notes
payable approximate their fair values at December 31, 1998.
 
  Revenue Recognition
 
     Silknet recognizes revenue from software licenses upon delivery to
customers provided no significant post-delivery obligations or uncertainties
remain and collection of the related receivable is probable. License or services
revenue subject to a significant acceptance clause is deferred until acceptance
is received from the customer. Revenue under arrangements where multiple
products or services are sold together under one contract is allocated to each
element based on their relative fair values, with these fair values being
determined using the price charged when that element is sold separately. For
agreements with specified upgrade rights, the revenue related to such upgrade
rights is deferred until the specified upgrade is delivered. Training and
consulting services revenue is recognized as services are provided and revenue
for maintenance services is recognized ratably over the term of the service
agreement.
 
  Concentrations of Credit Risk and Significant Customers
 
     A potential exposure to Silknet is a concentration of credit risk in trade
accounts receivable. To minimize this risk, ongoing credit evaluations of
customers' financial condition are performed, although collateral generally is
not required. As of June 30, 1997, four customers accounted for 44%, 29%, 17%
and 10% of accounts receivable, while three customers accounted for 34%, 25% and
11% of accounts receivable as of June 30, 1998, and one customer accounted for
76% of accounts receivable as of December 31, 1998. In addition, four customers
accounted for 34%, 27%, 16% and 14% of total revenue for the year ended June 30,
1997, while five customers accounted for 20%, 14%, 11%, 10%
 
                                       F-8
78
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
and 10% of total revenue for the year ended June 30, 1998, and three customers
accounted for 45%, 15% and 10% of total revenue for the six months ended
December 31, 1998.
 
  Research and Development and Software Development Costs
 
     Costs incurred in the research and development of Silknet's products are
expensed as incurred, except for certain software development costs. Costs
associated with the development of computer software are expensed prior to the
establishment of technological feasibility (as defined by Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed") and capitalized thereafter.
Costs eligible for capitalization have been insignificant.
 
  Accounting for Stock-Based Compensation
 
     Silknet accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, no compensation expense is recorded for options issued to employees
in fixed amounts and with fixed exercise prices at least equal to the fair
market value of Silknet's common stock at the date of grant. Silknet has adopted
the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation,"
through disclosure only (Note I). All stock-based awards to non-employees are
accounted for at their fair value in accordance with SFAS No. 123.
 
  Unaudited Interim Financial Statements
 
     In the opinion of Silknet's management, the December 31, 1998 unaudited
interim financial statements include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations for that period. The results of operations
for the six month period ended December 31, 1998 are not necessarily indicative
of the results of operations for the full year ended June 30, 1999.
 
  Unaudited Pro Forma Balance Sheet
 
     Upon the closing of Silknet's anticipated initial public offering, all of
the outstanding shares of Series A Convertible Participating Preferred Stock,
Series B Convertible Participating Preferred Stock, and Series C Convertible
Participating Preferred Stock (collectively "Preferred Stock") will
automatically convert into 7,953,741 shares of common stock. These conversions
have been reflected in the unaudited pro forma balance sheet as of December 31,
1998, and exclude 1,205,913 shares of common stock issuable upon the conversion
of Series D Convertible Participating Preferred Stock issued after December 31,
1998 (Note M).
 
  Net Loss Per Share and Pro Forma Net Loss per Share
 
     Net loss per share is computed under SFAS No. 128, "Earnings Per Share."
Basic net loss per share is computed using the weighted average number of shares
of common stock outstanding. Net loss used in the calculation is increased by
the accrued dividends for the Preferred Stock outstanding in each year. Diluted
loss per share does not differ from basic loss per share since potential common
shares from conversion of preferred stock, stock options and warrants are
anti-dilutive for all periods presented and are therefore excluded from the
calculation. During the years ended June 30, 1996, 1997, and 1998 and the six
months ended December 31, 1998, options to purchase 670,400,
 
                                       F-9
79
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
1,220,158, 1,506,092 and 2,179,962 shares of common stock, respectively,
Preferred Stock convertible into 0, 4,864,584, 7,953,741 and 7,953,741 shares of
common stock, respectively, and warrants for 125,000, 750,000, 750,000 and
750,000 shares of common stock, respectively, were not included in the
computation of diluted earnings per share since their inclusion would be
antidilutive. Pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding shares of Preferred Stock
into common stock, as if the shares had converted immediately upon their
issuance. Accordingly, net loss has not been increased for the accrued dividends
for Preferred Stock in the calculation of pro forma net loss per share.
 
  Comprehensive Income
 
     On July 1, 1998, Silknet adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes standards for the reporting and display of comprehensive income and
its components. SFAS No. 130 is effective for Silknet's fiscal year ending June
30, 1999 including interim periods for that year. Comprehensive income consists
of net income and foreign currency translation adjustments and is presented in
the consolidated statement of convertible participating preferred stock and
stockholders' equity (deficit). Prior year financial statements have been
reclassified to conform to the SFAS No. 130 requirements. The adoption of SFAS
130 has not affected and will not affect Silknet's financial position or results
of operations.
 
  Recently Issued Accounting Pronouncements
 
     In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." This statement changes the way that public business enterprises
report segment information, including financial and descriptive information
about their selected segment information. Under SFAS No. 131, operating segments
are defined as revenue-producing components of the enterprise which are
generally used internally for evaluating segment performance. SFAS No. 131 is
effective for Silknet's fiscal year ending June 30, 1999 and will not affect
Silknet's financial position or results of operations.
 
     In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits and is
effective for Silknet's fiscal year ending June 30, 1999. SFAS No. 132 relates
to disclosure only and will not affect Silknet's financial position or results
of operations.
 
     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. Silknet does not expect SFAS No. 133 to have a material effect on its
financial position or results of operations.
 
                                      F-10
80
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SoP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SoP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. Silknet does not expect
SoP 98-1, which is effective for Silknet beginning July 1, 1999, to have a
material effect on its financial position or results of operations.
 
     In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of
Start-Up Activities." Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SoP 98-5, the cost of start-up activities should be expensed as incurred.
SoP 98-5 is effective for Silknet beginning July 1, 1999 and Silknet does not
expect its adoption to have a material effect on its financial position or
results of operations.
 
     In October 1997, the AcSEC of the American Institute of Certified Public
Accountants issued SoP 97-2, "Software Revenue Recognition," which provides
guidance on the timing and amount of revenue recognition when licensing,
selling, leasing or otherwise marketing computer software and related services.
Subsequently, in March 1998, the FASB approved SoP 98-4, "Deferral of the
Effective Date of a Provision of SoP 97-2, Software Revenue Recognition." SoP
98-4 provides for the one-year deferral of certain provisions of SoP 97-2
pertaining to its requirements for what constitutes vendor specific objective
evidence of the fair value of multiple elements included in an arrangement. In
December 1998, the FASB approved SoP 98-9, "Modification of SoP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions," which will retain
the limitations of SoP 97-2 on what constitutes vendor-specific objective
evidence of fair value. SoP 98-9 will be effective for transactions entered into
in fiscal years beginning after March 15, 1999. Silknet adopted SoP 97-2 for all
transactions entered into after June 30, 1998. Based upon its interpretation of
SoP 97-2, 98-4 and 98-9, Silknet believes that its current revenue recognition
policies and practices are consistent with the provisions of the new guidance.
Adoption of SoP 97-2 and SoP 98-4 did not have a material impact on Silknet's
financial position or results of operation. Silknet believes that the adoption
of SoP 98-9 will not have a material impact on Silknet's financial position or
results of operations.
 
C.  PROPERTY AND EQUIPMENT:
 
     Property and equipment consists of the following at:
JUNE 30,
                                              ----------------------   DECEMBER 31,
                                                1997         1998          1998
                                              ---------   ----------   ------------
Computer....................................  $ 399,444   $1,032,015    $1,463,479
Furniture and fixtures......................    243,215      525,104       648,423
Leasehold improvements......................      6,833      102,650       125,187
                                              ---------   ----------    ----------
                                                649,492    1,659,769     2,237,089
Less accumulated depreciation and
  amortization..............................   (120,819)    (442,740)     (759,983)
                                              ---------   ----------    ----------
          Total.............................  $ 528,673   $1,217,029    $1,477,106
                                              =========   ==========    ==========
F-11
81
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Depreciation and amortization expense for the years ended June 30, 1996, 1997
and 1998 and the six months ended December 31, 1998 was $24,598, $93,515,
$339,397 and $317,243, respectively.
 
D.  ACCRUED LIABILITIES:
 
     Accrued liabilities consist of:
JUNE 30,
                                              --------------------    DECEMBER 31,
                                                1997        1998          1998
                                              --------    --------    ------------
Commissions, bonuses and other incentives...              $334,198     $  771,512
Vacation....................................  $ 33,190     196,037        282,780
Royalties...................................     7,480      15,420         47,500
Professional services.......................    14,000      72,000        152,485
Marketing...................................        --      74,041        320,268
Sales tax...................................    11,475     112,823        282,927
Other.......................................    50,249     112,389        476,522
                                              --------    --------     ----------
          Total.............................  $116,394    $916,908     $2,333,994
                                              ========    ========     ==========
E.  INCOME TAXES:
 
     The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
JUNE 30,
                                         --------------------------    DECEMBER 31,
                                            1997           1998            1998
                                         -----------    -----------    ------------
Deferred tax assets (liabilities):
  Organizational and start-up costs,
     capitalized for tax...............  $    12,157    $     8,318    $     6,398
  Fixed assets.........................      (11,340)       (36,711)       (46,778)
  Accrued expenses.....................       22,210         96,951        112,685
  Deferred compensation................      112,028        145,696        162,530
  Research and experimentation
     credit............................       36,902         36,902         36,902
  Net operating loss carryforwards.....    1,023,217      2,996,487      4,269,400
                                         -----------    -----------    -----------
                                           1,195,174      3,247,643      4,541,137
     Less valuation allowance..........   (1,195,174)    (3,247,643)    (4,541,137)
                                         -----------    -----------    -----------
          Net deferred tax assets......           --             --             --
                                         ===========    ===========    ===========
In assessing the realizability of deferred tax assets, Silknet considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Due to the fact that Silknet has incurred net
losses to date and expects to experience net losses in the near future, there is
substantial doubt about whether Silknet will have sufficient future taxable
income necessary to utilize the deferred tax assets over the periods which the
deferred tax assets are deductible for federal and
 
                                      F-12
82
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
state income tax purposes. As a result, a 100% valuation allowance has been
applied against Silknet net deferred tax assets.
 
     The following reconciles the difference between the federal statutory rate
and Silknet's effective tax rate:
YEAR ENDED JUNE 30,          SIX MONTHS
                                       ------------------------         ENDING
                                         1997          1998        DECEMBER 31, 1998
                                       ---------    -----------    -----------------
U.S. federal statutory rate..........  $(935,851)   $(2,040,975)      $(1,291,825)
State income taxes, net..............    (22,034)       (28,006)          (18,880)
Research and experimentation tax
  credit.............................    (36,902)            --                --
Other................................      2,316         16,512            17,211
Change in valuation allowance........    992,471      2,052,469         1,293,494
                                       ---------    -----------       -----------
                                              --             --                --
                                       =========    ===========       ===========
At December 31, 1998, Silknet has net operating loss carryforwards of
approximately $12,372,648 for federal and state income tax purposes which expire
beginning in 2012. Under the provisions of the Internal Revenue Code, certain
substantial changes in Silknet's ownership may have limited, or may limit in the
future, the amount of net operating loss and research and experimentation credit
carryforwards which could be utilized annually to offset future taxable income
and income tax liabilities. The amount of any annual limitation is determined
based upon Silknet's value prior to an ownership change.
 
F.  LINES OF CREDIT AND NOTES PAYABLE:
 
  Lines of Credit
 
     During 1996, Silknet maintained a $125,000 line of credit with a bank.
Interest on the borrowings were at the bank's prime rate plus 2% (10.25% at June
30, 1996). Borrowings outstanding under the line totaled $71,576 at June 30,
1996. This line of credit was repaid and terminated in 1997.
 
     During March 1997, Silknet entered into an equipment loan line agreement
under which Silknet may borrow up to $300,000 to finance fixed asset purchases.
Advances under this facility are to be repaid over a 24-month period, commencing
on April 30, 1997. The facility bears interest at the bank's prime rate plus 2%
(9.75% at December 31, 1998). Borrowings under the facility are collateralized
by all assets of Silknet. Silknet is required to meet certain minimum financial
covenants for tangible net worth and liquidity of which Silknet has been in
compliance. At December 31, 1998, the balance outstanding totaled $39,004.
 
     During December 1997, Silknet entered into an equipment loan line agreement
under which Silknet may borrow up to $400,000 to finance fixed asset purchases.
Advances under this facility are to be repaid over a 36-month period, commencing
on March 31, 1998. The facility bears interest at the bank's prime rate plus 1%
(8.75% at December 31, 1998). Borrowings under the facility are collateralized
by all assets of Silknet. Silknet is required to meet certain minimum financial
covenants for tangible net worth and liquidity of which Silknet has been in
compliance. At December 31, 1998, the balance outstanding totaled $288,889.
 
                                      F-13
83
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Payments of principal and interest on existing debt are due as follows:
Fiscal year ended June 30,
  1999................................................  $282,260
  2000................................................   148,914
  2001................................................    92,205
                                                        --------
  Total payments......................................   523,379
  Less amounts representing interest..................    52,432
                                                        --------
                                                        $470,947
                                                        ========
Notes Payable
 
     During May 1996, Silknet entered into a Note and Warrant Purchase Agreement
(the "Agreement") with a private investor. Under the Agreement, Silknet may
borrow up to $250,000 and must issue warrants to purchase 250,000 shares of
Silknet's common stock at $1.00 per share. In May 1996, Silknet issued a demand
subordinated note payable under the agreement in the amount of $125,000 in
exchange for cash and issued warrants to purchase 125,000 shares of Silknet's
common stock at $1.00 per share (Note G). The warrants expire in May 2002. The
fair value of the warrants at the time of issuance was estimated to be
approximately $47,000 which was recorded as additional paid-in capital and
reduced the carrying value of the debt. The fair value was estimated using the
Black-Scholes model with the following assumptions: dividend yield of 0%,
volatility of 0%, risk free interest rate of 6.5% and an expected life of 5
years. The discount on the note of $47,000 was amortized over the estimated life
of the note of six months.
 
     In July 1996, Silknet issued a demand subordinated note payable in the
amount of $125,000 in exchange for cash and issued additional warrants to
purchase 125,000 shares of Silknet's common stock at $1.00 per share (Note G).
The fair value of the warrants at the time of issuance was estimated to be
approximately $47,000 which was recorded as additional paid-in capital and
reduced the carrying value of the debt. The fair value was estimated using the
Black-Scholes model with the following assumptions: dividend yield of 0%,
volatility of 0%, risk free interest rate of 6.5% and an expected life of 5
years. The discount on the note of $47,000 was amortized over the estimated life
of the note of six months.
 
     In November 1996, Silknet repaid the full amount due under each demand
subordinated note by issuing 268,388 shares of Series A Convertible
Participating Preferred Stock (Note H). No gain or loss was recognized on the
exchange.
 
G.  COMMON STOCK WARRANTS:
 
     During May 1996, Silknet issued warrants to purchase 125,000 shares of
common stock at $1.00 per share in connection with a $125,000 bridge loan
agreement with Silknet (Note F). During 1997, Silknet issued additional warrants
to purchase 125,000 shares of common stock to a private investor in connection
with the second draw of $125,000 under the bridge loan agreement with Silknet
(Note F). The total consideration received under each issuance was allocated
between the note and the warrants based upon their relative fair values at the
date of issuance. The estimated fair value at the time of issuance assigned to
each issue of the warrants was approximately $47,000 and was recorded as
additional paid-in capital, thus reducing the carrying value of the debt. The
discount on
 
                                      F-14
84
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
the note of $94,000 was amortized over the estimated life of the note of six
months. The warrants expire in May 2002.
 
     During 1997, in connection with the issuance of the Series B Convertible
Participating Preferred Stock, Silknet issued warrants to purchase 500,000
shares of common stock at $2.20 per share. The warrants expire in June 2003. The
estimated fair value of the warrants at the time of issuance using the
Black-Scholes model was insignificant.
 
H.  CONVERTIBLE PARTICIPATING PREFERRED STOCK:
 
     In October 1996, Silknet issued 2,364,584 shares of Series A Convertible
Participating Preferred Stock ("Series A Preferred Stock") at $0.96 per share to
private investors for total consideration of $2,251,683 (net of offering costs
of $18,317). Of the total consideration, $250,000 was paid by one investor
through the cancellation of demand subordinated notes payable issued by Silknet
(Note F).
 
     The Series A Preferred Stock is voting. Dividends accrue annually and are
cumulative at a rate of 10% of the original purchase price of $0.96 per share,
on a per share basis. Dividends must be paid before any other dividends can be
declared or paid on any other class of preferred stock or on any class of common
stock. The Series A Preferred Stock is convertible at any time by the holders,
at the then applicable conversion rate adjusted from time to time (one to one on
the date of issuance). The Series A Preferred Stock is redeemable at the option
of the holder beginning in May 2003 if Silknet has not made a qualified initial
public offering of its common stock, as defined. Upon liquidation, holders of
Series A Preferred Stock are entitled to receive, out of funds then generally
available, $0.96 per share, plus any accrued and unpaid dividends, thereon.
Following payment to holders of all other classes of preferred stock subordinate
to the Series A Preferred Stock, holders of Series A Preferred Stock are then
entitled to share in remaining available funds on an "as-if converted" basis
with holders of common stock.
 
     In June 1997, the Company issued 2,500,000 shares of Series B Convertible
Participating Preferred Stock ("Series B Preferred Stock") at $2.00 per share to
private investors for total consideration of $4,989,954 (net of offering costs
of $10,046).
 
     The Series B Preferred Stock is voting. Dividends accrue annually and are
cumulative at a rate of 10% of the original purchase price of $2.00 per share,
on a per share basis. Dividends must be paid before any other dividends can be
declared or paid on any class of common stock. The Series B Preferred Stock is
convertible at any time by the holders, at the then applicable conversion rate
as adjusted from time to time (one to one on the date of issuance). The Series B
Preferred Stock is redeemable at the option of the holder beginning in May 2003
if Silknet has not made a qualified initial public offering of its common stock,
as defined. Upon liquidation, holders of Series B Preferred Stock are entitled
to receive, out of funds then generally available, $2.00 per share, plus any
accrued and unpaid dividends, thereon. Following payment to holders of all other
classes of preferred stock subordinate to the Series B Preferred Stock, holders
of Series B Preferred Stock are then entitled to share in remaining available
funds on an "as if converted" basis with holders of common stock.
 
     In May 1998, Silknet issued 3,089,157 shares of Series C Convertible
Participating Preferred Stock ("Series C Preferred Stock") at $3.498117 per
share to private investors for total consideration of $10,772,583 (net of
offering costs of $33,642).
 
     The Series C Preferred Stock is voting. Dividends accrue annually and are
cumulative at a rate of 10% of the original purchase price of $3.498117 per
share, on a per share basis. Dividends must be paid before any other dividends
can be declared or paid on any class of common stock. The Series C
 
                                      F-15
85
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Preferred Stock is convertible at any time by the holders, at the then
applicable conversion rate as adjusted from time to time (one to one on the date
of issuance). The Series C Preferred Stock is redeemable at the option of the
holder beginning in May 2003 if Silknet has not made a qualified initial public
offering of its common stock, as defined. Upon liquidation, holders of Series C
Preferred Stock are entitled to receive, out of funds then generally available,
$3.498117 per share, plus all accrued and unpaid dividends thereon. Following
payment to holders of all other classes of preferred stock subordinate to the
Series C Preferred Stock, holders of Series C Preferred Stock are then entitled
to share in remaining available funds on an "as if converted" basis with holders
of common stock.
 
     Upon the closing of the anticipated public offering, all outstanding shares
of Preferred Stock will automatically convert into shares of common stock as
follows:
SHARES OF
SERIES                                              COMMON STOCK
------                                              ------------
Series A Preferred Stock..........................   2,364,584
Series B Preferred Stock..........................   2,500,000
Series C Preferred Stock..........................   3,089,157
                                                     ---------
                                                     7,953,741
I.  STOCK OPTIONS:
 
     On August 8, 1995, the Board of Directors authorized the Employee Stock
Option Plan (the "Plan"). The Plan provides for the issuance of options to
purchase up to 2,391,900 shares of Silknet's common stock to eligible employees,
officers, directors, consultants and advisors of Silknet. Under the Plan, the
Board of Directors may award incentive and non-qualified stock options. Stock
options entitle the holder to purchase common stock from Silknet for a specified
exercise price, during a period specified by the applicable option agreement.
Generally, the options vest over four years. Incentive stock options may not be
granted with an exercise price less than the fair market value of Silknet's
common stock at the date of grant or for a term exceeding ten years. The
exercise price of each non-qualified stock option shall be specified by the
Board of Directors.
 
                                      F-16
86
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Stock option activity for the years ended June 30, 1996, 1997 and 1998 and
the six month period ended December 31, 1998 is as follows:
EXERCISE PRICE           EXERCISE PRICE
                                  EQUALS GRANT           LESS THAN GRANT
                             DATE STOCK FAIR VALUE    DATE STOCK FAIR VALUE           TOTAL
                             ----------------------   ----------------------   --------------------
                                          WEIGHTED                 WEIGHTED                WEIGHTED
                                           AVERAGE                  AVERAGE                AVERAGE
                               NUMBER     EXERCISE      NUMBER     EXERCISE     NUMBER     EXERCISE
                             OF SHARES      PRICE     OF SHARES      PRICE     OF SHARES    PRICE
                             ----------   ---------   ----------   ---------   ---------   --------
Outstanding at June 30,
  1995.....................      6,250      $1.00       62,500       $0.02        68,750    $0.11
Granted....................    174,250       1.00      484,650        0.02       658,900     0.28
Canceled...................     (7,250)      1.00      (50,000)       0.02       (57,250)    0.14
                             ---------      -----      -------       -----     ---------    -----
Outstanding at June 30,
  1996.....................    173,250       1.00      497,150        0.02       670,400     0.27
Granted....................    634,500       1.00           --                   634,500     1.00
Canceled...................    (84,742)      1.00           --                   (84,742)    1.00
                             ---------      -----      -------       -----     ---------    -----
Outstanding at June 30,
  1997.....................    723,008       1.00      497,150        0.02     1,220,158     0.60
Granted....................    400,375       1.04           --                   400,375     1.04
Exercised..................    (69,725)      1.00           --                   (69,725)    1.00
Canceled...................    (44,716)      1.04           --                   (44,716)    1.04
                             ---------      -----      -------       -----     ---------    -----
Outstanding at June 30,
  1998.....................  1,008,942       1.01      497,150       $0.02     1,506,092     0.69
Granted....................    595,650       1.75      184,725        1.75       780,375     1.75
Exercised..................    (89,025)      1.00           --                   (89,025)    1.00
Canceled...................    (17,480)      1.08           --                   (17,480)    1.08
                             ---------      -----      -------       -----     ---------    -----
Outstanding at December 31,
  1998.....................  1,498,087       1.31      681,875        0.49     2,179,962     1.05
                             =========      =====      =======       =====     =========    =====
As of December 31, 1998, 53,188 shares were available for grant under the Plan.
 
     The following table summarizes information about stock options outstanding
at December 31, 1998:
VESTED AND EXERCISABLE
                                                     WEIGHTED-      -----------------------
                                                      AVERAGE                    WEIGHTED-
                                                     REMAINING                    AVERAGE
                                      NUMBER        CONTRACTUAL       NUMBER      EXERCISE
EXERCISE PRICE                      OUTSTANDING   LIFE (IN YEARS)   OF SHARES      PRICE
--------------                      -----------   ---------------   ----------   ----------
$0.02.............................     497,150          6.7          425,195       $0.02
 1.00.............................     886,062          8.2          305,136        1.00
 1.75.............................     796,750          9.7            2,120        1.75
                                     ---------          ---          -------       -----
$0.02-1.75........................   2,179,962          8.4          732,451       $0.43
                                     =========          ===          =======       =====
Compensation expense of $185,204, $92,287, $83,607, and $50,920 was
recognized during the years ended June 30, 1996, 1997, and 1998 and the six
months ended December 31, 1998, respectively, related to the grant of stock
options at exercise prices below the fair market value of Silknet's common stock
on the date of the grant.
 
                                      F-17
87
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Silknet applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its plans. Silknet has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly, no
compensation expense has been recognized for the stock option plans as
calculated under SFAS 123.
 
     Had compensation cost for Silknet's stock option plan been determined based
on the fair value at the grant date for awards in 1996, 1997 and 1998 and the
six month period ended December 31, 1998, consistent with the provisions of SFAS
123, Silknet's net loss and basic and diluted net loss per share would have been
increased to the pro forma amounts indicated below:
SIX MONTH
                                          YEAR ENDED JUNE 30,              PERIOD ENDED
                                 -------------------------------------     DECEMBER 31,
                                   1996         1997          1998             1998
                                 ---------   -----------   -----------   -----------------
Net loss -- as reported........  $(465,026)  $(2,942,718)  $(6,905,820)     $(4,721,923)
Net loss -- pro forma..........   (748,254)   (3,119,757)   (7,090,377)      (4,898,331)
Basic and diluted net loss per
  share -- as reported.........  $   (0.18)  $     (1.15)  $     (2.69)     $     (1.76)
Basic and diluted net loss per
  share -- pro forma...........  $   (0.29)  $     (1.22)  $     (2.76)     $     (1.83)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in each of the following periods:
SIX MONTH
                                            YEAR ENDED JUNE 30,            PERIOD ENDED
                                      -------------------------------      DECEMBER 31,
                                        1996        1997       1998            1998
                                      ---------    -------    -------    -----------------
Dividend yield......................  0%           0%         0%         0%
Expected volatility.................  0%           0%         0%         0%
Risk free interest rate.............  6.5%         6.0%       5.5%       5.5%
Expected lives......................  4.5 years    5 years    5 years    5 years
Weighted average grant date fair
  value of options granted..........  $1.00        $1.00      $1.04      $2.16
The effects of applying SFAS 123 in this disclosure are not indicative of
future amounts. Additional grants in future years are anticipated.
 
J.  COMMITMENTS AND CONTINGENCIES:
 
     Silknet leases office space and equipment under non-cancelable operating
leases extending through December 2003. Certain of these leases contain renewal
options and provisions that adjust the lease payment based upon change in the
consumer price index and require Silknet to pay operating costs, including
property taxes, insurance and maintenance. Rent expense under non-cancelable
operating leases totaled $13,523, $82,819, $291,733 and $223,806 for the years
ended June 30, 1996, 1997 and 1998 and the six month period ended December 31,
1998, respectively.
 
                                      F-18
88
                             SILKNET SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following is a schedule of future minimum lease payments on
noncancelable operating leases:
 
     Fiscal Years ending June 30:
1999..............................................  $450,132
2000..............................................   611,312
2001..............................................   600,512
2002..............................................   568,609
2003..............................................   508,662
Thereafter........................................   254,331
Silknet is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position of Silknet.
 
K.  EMPLOYEE BENEFIT PLAN:
 
     Silknet maintains a 401(k) plan qualified under Section 401(k) of the
Internal Revenue Code. All Silknet employees who are at least 21 years of age
are eligible to participate in the 401(k) plan. Under the 401(k) plan, a
participant may contribute a maximum of 15% of his or her pre-tax salary,
commissions and bonuses through payroll deductions (up to the statutorily
prescribed annual limit of $10,000 in 1998) to the 401(k) plan. The percentage
elected by more highly compensated participants may be required to be lower. In
addition, at the discretion of the Board of Directors, Silknet may make
discretionary profit-sharing contributions into the 401(k) plan for all eligible
employees. During 1998, Silknet made no profit-sharing contributions to the
401(k) plan.
 
L.  RELATED PARTY TRANSACTIONS:
 
     During the years ended June 30, 1997 and 1998 and the six months ended
December 31, 1998, Silknet recognized license and services revenue from
transactions with affiliated companies of $30,725, $55,600 and $7,800,
respectively.
 
M.  SUBSEQUENT EVENTS:
 
     On February 26, 1999, Silknet issued 1,205,913 shares of Series D
Convertible Preferred Stock ("Series D Preferred Stock") at $7.324109 per share
to private investors for total consideration of approximately $8.8 million.
 
     In February 1999, Silknet reincorporated from New Hampshire to Delaware. In
connection with the reincorporation, Silknet effected a one-for-two exchange of
all common and preferred stock and assigned a par value of $.01 per share to the
common stock. Additionally, Silknet increased the number of shares of authorized
common stock to 50,000,000 and authorized preferred stock to 15,000,000. All
references to shares and per share amounts in the financial statements and
related footnotes have been adjusted to reflect the exchange and the new par
value for all periods presented.
 
     In February 1999, Silknet adopted the 1999 Stock Option and Incentive Plan,
the 1999 Non-Employee Director Stock Option Plan and the 1999 Employee Stock
Purchase Plan. A total of 1,000,000, 350,000 and 350,000, respectively, shares
of common stock have been reserved for issuance under the three plans.
 
     On March 2, 1999, Silknet entered into a new line of credit with a bank
which allows Silknet to borrow up to $3.0 million for working capital purposes
and for the issuance of letters of credit. The line of credit expires in March
2000. Amounts available under the line of credit are a function of eligible
accounts receivable and bear interest at the bank's prime rate (7.75% at March
2, 1999) plus 0.5%. At March 2, 1999, $3.0 million was available for borrowing.
 
                                      F-19
89
 
                                 [SILKNET LOGO]
90
 
                                    PART II
 
                   INFORMATION NOT REQUIRED IN THE PROSPECTUS
 
ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
 
     Estimated expenses (other than underwriting discounts and commissions)
payable in connection with the sale of the common stock offered hereby are as
follows:
SEC registration fee........................................  $  9,591
NASD filing fee.............................................     3,950
Nasdaq National Market listing fee..........................         *
Printing and engraving expenses.............................         *
Legal fees and expenses.....................................         *
Accounting fees and expenses................................         *
Blue Sky fees and expenses (including legal fees)...........         *
Transfer agent and registrar fees and expenses..............         *
Miscellaneous...............................................         *
                                                              --------
          Total.............................................  $      *
                                                              ========
---------------
 
* To be filed by Amendment.
 
     The Company will bear all expenses shown above.
 
ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS.
 
     The Delaware General Corporation Law and Silknet's Certificate of
Incorporation and By-Laws provide for indemnification of Silknet's directors and
officers for liabilities and expenses that they may incur in such capacities. In
general, directors and officers are indemnified with respect to actions taken in
good faith in a manner reasonably believed to be in, or not opposed to, the best
interests of Silknet and, with respect to any criminal action or proceeding,
actions that the indemnitee had no reasonable cause to believe were unlawful.
Reference is made to Silknet's Certificate of Incorporation and By-Laws filed as
Exhibits 3.01 and 3.02 hereto, respectively.
 
     The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of Silknet against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). Reference is made to
the form of Underwriting Agreement filed as Exhibit 1.01 hereto.
 
     In addition, Silknet has an existing directors and officers liability
insurance policy.
 
ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES.
 
     In the three years preceding the filing of this registration statement,
Silknet has issued the following securities that were not registered under the
Securities Act:
 
          (a) Issuances of Capital Stock.
 
     In October 1996, Silknet issued and sold an aggregate of 2,900 shares of
common stock for services valued at $2,900.
 
     In October 1996, Silknet issued and sold an aggregate of 2,364,584 shares
of its Series A Preferred Stock for an aggregate of $2,270,000.
 
                                      II-1
91
 
     In June 1997, Silknet issued and sold an aggregate of 2,500,000 shares of
its Series B Preferred Stock for an aggregate of $5,000,000.
 
     In May 1998, Silknet issued and sold an aggregate of 3,081,657 shares of
its Series C Preferred Stock for an aggregate of $10,779,989.74. In June 1998,
Silknet sold an additional 7,500 shares of Series C Preferred Stock for an
aggregate purchase price of $26,235.88.
 
     In February 1999, Silknet issued and sold an aggregate of 1,205,913 shares
of its Series D Preferred Stock for an aggregate purchase price of
$8,832,238.26.
 
     Each share of Silknet's Series A, Series B, Series C and Series D Preferred
Stock will automatically convert into one share of common stock upon the closing
of this offering.
 
          (b) Issuances of Notes and Warrants
 
     In May 1996, Silknet issued one note in the principal amount of $125,000
and a warrant to purchase an aggregate of 125,000 shares of common stock at an
exercise price of $1.00 per share. In July 1996, Silknet issued an additional
note in the principal amount of $125,000 and a warrant to purchase an aggregate
of 125,000 shares of common stock at an exercise price of $1.00 per share.
 
     In June 1997 Silknet issued six warrants to purchase an aggregate of
500,000 shares of common stock at an exercise price of $2.20 per share.
 
          (c) Exercises of Stock Options
 
     From January 1996 to January 1999, Silknet issued 178,795 shares of common
stock at exercise prices ranging from $1.00 to $1.75 for an aggregate purchase
price of $179,467 pursuant to exercise of employee options.
 
     No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of the exercise of options to purchase common stock,
Rule 701 under the Securities Act. All of the foregoing securities are deemed
restricted securities for purposes of the Securities Act.
 
                                      II-2
92
 
ITEM 16.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
     (A) EXHIBITS.
EXHIBIT NO.                             EXHIBIT
-----------                             -------
1.01*     Form of Underwriting Agreement.
    3.01      Certificate of Incorporation of Silknet.
    3.02      By-laws of Silknet.
    4.01*     Specimen Certificate for shares of Silknet's Common Stock.
    4.02      Description of Capital Stock (contained in the Certificate
              of Incorporation filed as Exhibit 3.01).
    4.03      Form of Warrant Agreement dated as of May 17, 1996 between
              Silknet and Zero Stage Capital V, L.P.
    4.04      Form of Warrant Agreement dated as of June 11, 1997 between
              Silknet and certain investors.
    5.01*     Legal Opinion of Testa, Hurwitz & Thibeault, LLP.
   10.01**    Employee Stock Option Plan.
   10.02**    1999 Stock Option and Incentive Plan.
   10.03**    1999 Non-Employee Director Stock Option Plan.
   10.04**    1999 Employee Stock Purchase Plan.
   10.05      Registration Rights Provisions contained in the Series C
              Preferred Stock Purchase Agreement dated as of May 12, 1998
              between Silknet and the purchasers named therein.
   10.06      Registration Rights Provisions contained in the Series D
              Preferred Stock Purchase Agreement dated as of February 26,
              1999 between Silknet and the purchasers named therein.
   10.07*     Lease Agreement between Silknet and 1848 Associates dated
              December 30, 1996, as amended December 15, 1997, November 1,
              1998 and January 1, 1999.
   10.08      Loan and Modification Agreement dated March 2, 1999 by and
              between Silknet and Silicon Valley Bank.
   10.09      Loan and Security Agreement dated March 5, 1997 by and
              between Silknet and Silicon Valley Bank, as amended pursuant
              to a Loan Modification Agreement dated December 1, 1997.
   16.01*     Letter from KPMG Peat Marwick dated March   , 1999.
   21.01      Subsidiaries.
   23.01*     Consent of Testa, Hurwitz & Thibeault, LLP (contained in
              Exhibit 5.01).
   23.02      Consent of PricewaterhouseCoopers LLP.
   24.01      Power of Attorney (contained on page II-5).
   27.01      Financial Data Schedule.
---------------
 
 * To be filed by amendment.
 
** Indicates a management contract or any compensatory plan, contract or
   arrangement.
 
                                      II-3
93
 
     (b) FINANCIAL STATEMENT SCHEDULES.
 
     All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
 
ITEM 17.  UNDERTAKINGS.
 
     Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 above, 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 Securities 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 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
Securities Act and will be governed by the final adjudication of such issue.
 
     The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Securities Act, 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; and (3) that for the purpose of determining any liability
under the Securities Act, 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-4
94
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Manchester, New
Hampshire on March 3, 1999.
 
                                          SILKNET SOFTWARE, INC.
 
                                          By:       /s/ JAMES C. WOOD
                                            ------------------------------------
                                              James C. Wood
                                              President, Chief Executive Officer
                                              and
                                              Chairman of the Board
 
                        POWER OF ATTORNEY AND SIGNATURES
 
     We, the undersigned officers and directors of Silknet Software, Inc.,
hereby severally constitute and appoint James C. Wood and Patrick J. Scannell,
Jr., and each of them singly, our true and lawful attorneys, with full power to
them and each of them singly, to sign for us in our names in the capacities
indicated below, any registration statement related to the offering that is to
be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933 (a "462(b) Registration Statement"), any and all amendments and exhibits to
this registration statement or any 462(b) Registration Statement, and any and
all applications and other documents to be filed with the Securities and
Exchange Commission pertaining to the registration of the securities covered
hereby or thereby, and generally to do all things in our names and on our behalf
in such capacities to enable Silknet Software, Inc. to comply with the
provisions of the Securities Act of 1933 and all requirements of the Securities
and Exchange Commission.
 
     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(S)                      DATE
                ---------                                  --------                      ----
/s/ JAMES C. WOOD                           President, Chief Executive Officer and  March 3, 1999
------------------------------------------  Chairman of the Board (Principal
James C. Wood                               Executive Officer)
 
/s/ PATRICK J. SCANNELL, JR.                Vice President, Chief Financial         March 3, 1999
------------------------------------------  Officer, Treasurer and Secretary
Patrick J. Scannell, Jr.                    (Principal Financial and Accounting
                                            Officer)
 
/s/ STANLEY FUNG                            Director                                March 3, 1999
------------------------------------------
Stanley Fung
 
/s/ GUY BRADLEY                             Director                                March 3, 1999
------------------------------------------
Guy Bradley
 
/s/ JOHN DOGGETT                            Director                                March 3, 1999
------------------------------------------
John Doggett
II-5
95
SIGNATURE                                  TITLE(S)                      DATE
                ---------                                  --------                      ----
/s/ JOO HOCK CHUA                           Director                                March 3, 1999
------------------------------------------
Joo Hock Chua
 
/s/ ANDREW GOLDFARB                         Director                                March 3, 1999
------------------------------------------
Andrew Goldfarb
II-6
96
 
                                 EXHIBIT INDEX
EXHIBIT NO.                             EXHIBIT
-----------                             -------
1.01*     Form of Underwriting Agreement.
    3.01      Certificate of Incorporation of Silknet.
    3.02      By-laws of Silknet.
    4.01*     Specimen Certificate for shares of Silknet's Common Stock.
    4.02      Description of Capital Stock (contained in the Certificate
              of Incorporation filed as Exhibit 3.01).
    4.03      Form of Warrant Agreement dated as of May 17, 1996 between
              Silknet and Zero Stage Capital V, L.P.
    4.04      Form of Warrant Agreement dated as of June 11, 1997 between
              Silknet and certain investors.
    5.01*     Legal Opinion of Testa, Hurwitz & Thibeault, LLP.
   10.01**    Employee Stock Option Plan.
   10.02**    1999 Stock Option and Incentive Plan.
   10.03**    1999 Non-Employee Director Stock Option Plan.
   10.04**    1999 Employee Stock Purchase Plan.
   10.05      Registration Rights Provisions contained in the Series C
              Preferred Stock Purchase Agreement dated as of May 12, 1998
              between the Company and the purchasers named therein.
   10.06      Registration Rights Provisions contained in the Series D
              Preferred Stock Purchase Agreement dated as of February 26,
              1999 between Silknet and the purchasers named therein.
   10.07*     Lease Agreement between Silknet and 1848 Associates dated
              December 30, 1996, as amended December 15, 1997, November 1,
              1998 and January 1, 1999.
   10.08      Loan and Modification Agreement dated March 2, 1999 by and
              between Silknet and Silicon Valley Bank.
   10.09      Loan and Security Agreement dated March 5, 1997 by and
              between Silknet and Silicon Valley Bank, as amended pursuant
              to a Loan Modification Agreement dated December 1, 1997.
   16.01*     Letter from KPMG Peat Marwick dated March   , 1999.
   21.01      Subsidiaries
   23.01*     Consent of Testa, Hurwitz & Thibeault, LLP (contained in
              Exhibit 5.01).
   23.02      Consent of PricewaterhouseCoopers LLP.
   24.01      Power of Attorney (contained on page II-5).
   27.01      Financial Data Schedule.
---------------
 
 * To be filed by amendment.
 
** Indicates a management contract or any compensatory plan, contract or
   arrangement.