CROSSWORLDS SOFTWARE INC
S-1/A, 2000-04-14
PREPACKAGED SOFTWARE
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<PAGE>


  As filed with the Securities and Exchange Commission on April 14, 2000
                                                     Registration No. 333-96055

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549

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

                             AMENDMENT NO. 4
                                      TO
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     Under
                          The Securities Act of 1933

                                ---------------
                          CROSSWORLDS SOFTWARE, INC.
            (Exact Name of Registrant as Specified in Its Charter)

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

<TABLE>
 <S>                              <C>                            <C>
            Delaware                           7372                        94-3240149
(State or Other Jurisdiction of    (Primary Standard Industrial         (I.R.S. Employer
 Incorporation or Organization)    Classification Code Number)       Identification Number)
</TABLE>

                       577 Airport Boulevard, Suite 800
                             Burlingame, CA 94010
                                (650) 685-9000
  (Address, Including Zip Code, and Telephone Number, Including Area Code, of
                   Registrant's Principal Executive Offices)

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

                                 Mark R. Kent
                            Chief Financial Officer
                       577 Airport Boulevard, Suite 800
                             Burlingame, CA 94010
                                (650) 685-9000
 (Name, Address Including Zip Code, and Telephone Number Including Area Code,
                             of Agent For Service)

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

                                  Copies to:
<TABLE>
<S>                                            <C>
               Jon E. Gavenman                                  Neil Wolff
              C. Howard Korrell                               John Y. Sasaki
              Venture Law Group                                Jon P. Layman
         A Professional Corporation                  Wilson Sonsini Goodrich & Rosati
             2800 Sand Hill Road                         Professional Corporation
            Menlo Park, CA 94025                            650 Page Mill Road
               (650) 854-4488                               Palo Alto, CA 94304
                                                              (650) 493-9300
</TABLE>

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

       Approximate date of commencement of proposed sale to the public:
     As soon as practicable after the effective date of this Registration
                                  Statement.

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

   If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), check the following box. [_]

   If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

   If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

   If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

   If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

                        CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                         Proposed    Proposed Maximum
                                                         Maximum        Aggregate
        Title Of Each Class Of          Amount To Be  Offering Price     Offering          Amount Of
     Securities To Be Registered       Registered(1)   Per Share(2)      Price(2)     Registration Fee (3)
- ----------------------------------------------------------------------------------------------------------
<S>                                    <C>            <C>            <C>              <C>
Common Stock, par value $0.001.......    4,600,000        $16.00       $73,600,000          $19,431
- ----------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Includes 600,000 shares of common stock issuable upon exercise of the
    underwriters' over-allotment option.
(2) Estimated solely for the purpose of computing the amount of the
    registration fee pursuant to Rule 457(a) under the Securities Act.
(3) Fees previously paid.

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

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary 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 becomes effective. This     +
+preliminary prospectus is not an offer to sell these securities and we are    +
+not soliciting offers to buy these securities in any state where the offer or +
+sale is not permitted.                                                        +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

                SUBJECT TO COMPLETION, DATED APRIL 14, 2000

PROSPECTUS

                                4,000,000 Shares

               [LOGO OF CROSSWORLDS SOFTWARE, INC. APPEARS HERE]

                                  Common Stock

  CrossWorlds Software, Inc. is offering 4,000,000 shares of its common stock.
This is our initial public offering. We anticipate that the initial public
offering price will be between $14.00 and $16.00 per share.

                                  -----------

  Before this offering, there has been no public market for our common stock.
We have applied to have our common stock approved for quotation on the Nasdaq
National Market under the symbol CWLD.

                                  -----------

<TABLE>
<CAPTION>
                                                              Per Share  Total
                                                              ---------  -----
<S>                                                           <C>       <C>
Initial public offering price................................  $        $
Underwriting discounts and commission........................  $        $
Proceeds, before expenses, to CrossWorlds....................  $        $
</TABLE>

  CrossWorlds has granted the underwriters on option for a period of 30 days to
purchase up to 600,000 additional shares of common stock.

                                  -----------


 Investing in our common stock involves risks. See "Risk Factors" beginning on
                                    page 7.


                                  -----------

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

Chase H&Q

            Dain Rauscher Wessels

                                                      Thomas Weisel Partners LLC

Prospectus dated       , 2000
<PAGE>

[DESCRIPTION OF COLOR ARTWORK]

  The inside front cover contains artwork showing CrossWorlds' e-Business
Infrastructure Software. Our eBusiness Infrastructure is represented by a
circle that is encompassing seven squares that represent business functions.
The seven squares are, from left to right, Manufacturing, Procurement, Sales
and Distribution, Finance and Billing, Supply Chain Management, Customer
Service, and e-Business.

  Above the circle are the words CrossWorlds eBusiness Infrastructure. A thin
line connects the phrase to the top of the CrossWorlds circle.

  Below the circle is text that has the phrase "The CrossWorlds e-business
infrastructure platform integrates applications and business processes within
the enterprise and over the Internet with customers, suppliers, service
providers and business-to-business exchanges."

  Outside of the circle are four graphics. In the upper left corner are three
boxes representing suppliers, identified by the word Suppliers. In the upper
right corner are three cylinders representing customers, identified by the word
Customers. In the lower left corner are three cylinders representing outsourced
service providers, identified by the words Outsourced Service Providers. In the
lower right corner are three boxes representing business-to-business exchanges,
identified by the words Business-to-Business Exchanges. Each group of three
boxes and cylinders is connected to an Internet cloud by three pipes. Each
Internet cloud is connected to the CrossWorlds circle by three pipes. Each
Internet cloud has the word Internet in the middle of the cloud.
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Prospectus Summary.......................................................   4
Risk Factors.............................................................   7
You Should Not Rely on Forward-Looking Statements Because They Are
 Inherently Uncertain....................................................  14
Use of Proceeds..........................................................  14
Dividend Policy..........................................................  14
Capitalization...........................................................  15
Dilution.................................................................  17
Selected Consolidated Financial Data.....................................  19
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  20
Business.................................................................  30
Management...............................................................  49
Related Party Transactions...............................................  60
Principal Stockholders...................................................  65
Description of Capital Stock.............................................  67
Shares Eligible for Future Sale..........................................  69
Underwriting.............................................................  71
Legal Matters............................................................  74
Experts..................................................................  74
Additional Information Available to You..................................  74
Index to Consolidated Financial Statements............................... F-1
</TABLE>

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

                                       3
<PAGE>

                               PROSPECTUS SUMMARY

  This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all the information you should consider before
buying shares in the offering. You should read the entire prospectus carefully.
Unless otherwise indicated, this prospectus assumes that 1) the underwriters
have not exercised their option to purchase additional shares, 2) all shares of
preferred stock have been automatically converted into shares of common stock
and 3) the sale of 788,438 shares of common stock in a private placement will
close at the same time as this offering at an assumed public offering price of
$15.00.

  As used in this prospectus, references to we, our, us and CrossWorlds refer
to CrossWorlds Software, Inc., its predecessors and its consolidated
subsidiaries and not to the underwriters.

                           CrossWorlds Software, Inc.

 Who We Are

  We provide e-business infrastructure software that enables the integration
and automation of business processes within companies and among their customers
and suppliers using the Internet. Our products help traditional and new
businesses use the Internet to reduce information technology costs, increase
productivity, improve responsiveness to customer demands and enhance overall
competitiveness.

 Our Market

  We believe that the market for e-business infrastructure software is
comprised of the market for e-business software and the related market for
enterprise application integration software. We believe that many of the
software products offered by participants in these markets lack key elements of
a complete e-business infrastructure solution. Examples of these missing
elements include: 1) business process support, 2) architectural flexibility and
3) the ability to support e-business strategies.

 Our Products

  We provide pre-built connectivity solutions for common technology
environments and leading e-business and enterprise applications. We offer pre-
built business process modules to support many of the common integration
requirements of companies in our target markets. Our products are based on a
scalable architecture that meets the integration requirements of large
companies and trading networks. We also provide a set of tools that allow our
customers to customize their integration solution to address their unique e-
business requirements.

 Our Strategy

  Our product strategy is to expand our support for e-business applications and
technologies, build connectivity for additional enterprise applications and
expand our set of pre-built business process integration modules. Our sales
strategy is to sell our products to companies in selected industries, including
technology, industrial manufacturing, process manufacturing and
telecommunications. We intend to expand our partnerships with IBM, SAP AG and
global systems integrators through technology sharing and cooperative marketing
and sales to support our strategies. We expect our systems integrator partners
to provide an increasing portion of the implementation services for our
products.

 Our Customers

  Since late 1997, when we shipped our first product, we have licensed our
products to 48 customers, including Applied Materials, Inc., Delphi Automotive
Systems, E.I. DuPont de Nemours and Company, Ingersoll-Rand Company, Nortel
Networks Corporation, Siemens AG, Solar Turbines, Inc., a wholly owned
subsidiary of Caterpillar Inc., and U S WEST.

 How to Contact Us

  CrossWorlds Software, Inc. was incorporated in Delaware in March 1996. Our
principal executive offices are located at 577 Airport Boulevard, Suite 800,
Burlingame, California 94010, and our telephone number is (650) 685-9000.

                                       4
<PAGE>

                                  The Offering

<TABLE>
<S>                              <C>
Common stock offered by
 CrossWorlds Software, Inc.....   4,000,000 shares
Common stock offered in a
 private placement to be closed
 at the same time as this
 offering......................     788,438 shares
Common stock outstanding after
 this offering.................  24,485,001 shares
Use of proceeds................  Working capital and general corporate purposes.
Proposed Nasdaq National Market
 symbol........................  CWLD
</TABLE>

  The number of shares of common stock to be outstanding after this offering is
based on the number of shares outstanding as of December 31, 1999, and
excludes:

  . 6,793,436 shares of common stock issuable upon exercise of stock options
    outstanding on December 31, 1999 at a weighted average exercise price of
    $5.78 per share;

  . 1,064,087 shares of common stock reserved for future issuance under our
    stock option plan and executive stock plan; and

  . 343,431 shares of common stock issuable upon exercise of warrants
    outstanding on December 31, 1999 at a weighted average exercise price of
    $6.32 per share.

  Our board of directors, after December 31, 1999, approved changes to our
stock option plan reserves. Effective on the date of completion of this
offering, the shares reserved for future issuance under our stock option plans
will equal:

  . 1997 stock plan: 3,000,000 shares.

  . 2000 employee stock purchase plan: 750,000 shares.

  . 2000 directors' stock option plan: 300,000 shares.

The share reserves listed above replace any stock option reserves existing
immediately before the date of completion of the offering, which totalled
1,064,087 shares on December 31, 1999.

  Additionally, after December 31, 1999, our board approved the issuance of
warrants to purchase 199,996 shares of common stock at a weighted average
exercise price of $11.00 per share.

                                       5
<PAGE>

                   Summary Consolidated Financial Information

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                  ----------------------------
                                                    1997      1998      1999
                                                  --------  --------  --------
                                                        (in thousands,
                                                    except per share data)
<S>                                               <C>       <C>       <C>
Consolidated Statement of Operations Data:
  Revenue........................................ $  1,108  $  7,706  $ 19,094
  Operating loss.................................  (14,118)  (41,853)  (36,274)
  Net loss.......................................  (13,952)  (41,374)  (38,186)
  Pro forma basic and diluted net loss per
   share......................................... $  (1.70) $  (3.55) $  (2.38)

  Weighted average shares used in pro forma per
   share computation.............................    8,201    11,641    16,062
</TABLE>

Revenue Recognition

<TABLE>
<CAPTION>
 Revenue Type                                 Method of Recognition
 ------------                                 ---------------------
 <C>                                          <S>
 Software license revenue.................... Percentage-of-completion method
                                              over the project implementation
                                              cycles, typically three to nine
                                              months.

 Consulting and service revenue.............. As services are performed.

 Maintenance revenue from customer support
  and product upgrades, including maintenance
  bundled with original software licenses.... Ratably over the term of the
                                              maintenance agreement.
</TABLE>

  Weighted average shares used in computing pro forma basic and diluted net
loss per share includes the shares used in computing basic and diluted net loss
per share adjusted for the conversion of preferred stock to common stock, as if
the conversion occurred at the date of original issuance.

<TABLE>
<CAPTION>
                                                            December 31, 1999
                                                           --------------------
                                                           Actual   As Adjusted
                                                           -------  -----------
                                                             (in thousands)
<S>                                                        <C>      <C>
Consolidated Balance Sheet Data:
  Cash and cash equivalents............................... $12,506    $78,105
  Working capital (deficit)...............................  (1,052)    64,547
  Total assets............................................  29,177     94,776
  Deferred revenue........................................  13,158     13,158
  Long-term debt and capital lease obligations, less
   current portion........................................   3,513      3,513
  Total stockholders' equity (deficit)....................    (726)    64,873
</TABLE>

  Deferred revenue consists primarily of the unrecognized portion of license
and maintenance sales contracts. Our deferred revenue balance or changes in
that balance may not be indicative of our total backlog or changes in the
ordering patterns of our customers.

  The consolidated balance sheet data as of December 31, 1999 is presented on
an actual basis and on an as adjusted basis to reflect: 1) the sale of 788,438
shares of common stock in a private placement that will close at the same time
as this offering and 2) the sale of 4,000,000 shares of common stock offered at
an assumed initial public offering price of $15.00 per share after deducting
the estimated underwriting discount and the estimated offering expenses.


                                       6
<PAGE>

                                  RISK FACTORS

  You should carefully consider the risks and uncertainties described below
before making an investment decision. Any of the risks described below could
seriously harm our business, financial condition or operating results. This
could cause the trading price of our common stock to decline, and you may lose
all or part of your investment.

                     Risks Related to CrossWorlds' Business

Because of our limited operating history, it is difficult for us to predict and
plan for challenges. As a result, our future performance may be harmed.

  We were incorporated in March 1996 and shipped our first products in November
1997. Because our operating history is limited, our future operating results
and our future stock price are difficult to predict. We may not foresee trends
that may emerge and harm our business, and we cannot forecast operating
expenses based on our historical results. It is also difficult to plan to meet
the challenges we face in the future, specifically:

  . expanding our customer base;

  . competing effectively with: 1) internal information technology
    departments of potential customers, 2) systems integrators that develop
    customized solutions and 3) other software vendors that offer e-business
    infrastructure products; and

  . managing expanding operations--specifically our ability to install
    management information and control systems in an efficient and timely
    manner.

Also, there is little financial data that you can use to evaluate our business.

We have a history of losses, we expect future losses, and we may never achieve
profitability.

  We have experienced operating losses in each quarterly and annual period
since March 1996. Despite our history of losses, we believe it is vital to our
future success that we increase our research and development and sales and
marketing expenses. These additional expenses contribute to our losses and
require that we increase our revenue to achieve profitability. We incurred a
net loss of $15.5 million from March 1996 through December 31, 1997 against
revenue of $1.1 million. We incurred a net loss of $41.4 million for the year
ended December 31, 1998 against revenue of $7.7 million. We incurred a net loss
of $38.2 million for the year ended December 31, 1999 against revenue of $19.1
million. At December 31, 1999, we had an accumulated deficit of approximately
$95.1 million. We may not be able to increase our revenue in the future. As a
result, we expect to incur significant losses in the future, and we may never
achieve profitability.

Because our quarterly revenue fluctuates significantly due to the nature of our
sales cycles, we may disappoint investors' expectations or may not fulfill the
expectations of the financial markets or financial analysts, which could cause
our stock price to decline.

  Our sales cycle causes unpredictable fluctuations in our revenue which could
adversely affect the value of your investment. Our sales cycle varies typically
from two to nine months because:

  .  our e-business infrastructure solutions are expensive, with a median
     selling price of approximately $530,000 comprised of licensing fees and
     service fees;

  .  our products are complex and to generate sales we must spend a
     significant amount of time educating our potential customers about the
     uses and benefits of our products; and

  .  some of our prospective customers evaluate our products on a trial basis
     before entering a sales contract.


                                       7
<PAGE>

This lengthy sales cycle makes it difficult to predict the quarter in which
expected orders will occur. Delays in the execution of orders could cause some
or all of the licensing fee revenue from those orders to be shifted from the
expected quarter to a subsequent quarter or quarters.

Because our quarterly revenue fluctuates significantly due to the nature of our
product implementations, we may disappoint investors, which could cause our
stock price to decline.

  We generally recognize license revenue from orders on a percentage-of-
completion basis as the customer reaches milestones in their implementation of
our products. We also recognize services revenue as we perform implementation
services. As a consequence, the timing of our revenue depends on the continued
progress of our customers' implementation cycles. Each customer has unique
integration requirements and, because our products are complex, we must
integrate a variety of enterprise applications in each implementation. Our
product implementation schedules can take three to nine months or more and span
multiple quarterly periods. We may fail to achieve continued progress on
anticipated implementation schedules. Our customers may delay, suspend or
terminate their implementation efforts. If either of the above happens, we may
not recognize the expected revenue on these orders until subsequent quarters,
if at all.

Because a substantial majority of our revenue has been derived from a small
number of selected industries, a decline in demand for our software in these
industries could hurt our operations.

  We derive a large majority of our revenue to date from sales of our software
and related services to customers in the telecommunications industry and the
manufacturing industry. Any significant decline in the demand for, and market
acceptance of, our software in these industries could hurt the results of our
operations. As of March 31, 2000, we had 48 customers. 22 customers are in the
manufacturing industry and 15 customers are in the telecommunications industry.
Sales of products to customers in the manufacturing and telecommunications
industries accounted for approximately 72% of our revenue in 1997,
approximately 96% of our revenue in 1998 and approximately 90% of our revenue
in 1999. We expect that sales of our software and related services to customers
in these industries will account for a majority of our revenue over the next
twelve months.

We derive our revenue from a small number of customers, and our revenue could
decline if we lose a major customer.

  We have generated a substantial portion of our revenue from a limited number
of customers. We expect that a small number of customers will continue to
account for a substantial portion of our revenue. Many of our current customers
will continue to provide a substantial portion of our revenue through
additional license, implementation services and maintenance fees. In 1999, one
customer accounted for more than 21% of our revenue and six customers
collectively accounted for more than 50% of our revenue. The loss of even one
customer could have a material adverse effect on our revenue.

If we are unable to increase software license revenue as a proportion of our
overall revenue, our gross margins and profitability could be harmed.

  We believe that increasing our software license revenue as a proportion of
overall revenue is essential to achieve and maintain profitability. To achieve
this goal, we plan to further develop our relationships with systems
integrators to have them perform a majority of the consulting services for our
products. If we are unable to adequately train systems integrators to provide
services for our products, or if systems integrators do not devote resources to
providing services for our products, it will be significantly more difficult
for us to increase software license revenue as a portion of overall revenue,
thus limiting our ability to increase gross margins and profitability.

                                       8
<PAGE>

Our revenue will likely decline or slow if we do not develop and maintain
successful relationships with systems integrators.

  We engage in joint sales, marketing and implementation efforts with a number
of systems integrators including Deloitte Consulting, PricewaterhouseCoopers
and CSC Consulting. In many cases, these parties have extensive relationships
with our existing and potential customers and influence the decisions of these
customers. We rely upon these firms to: 1) recommend our products during the
evaluation stage of the purchasing process, 2) to refer prospective customers
to us and 3) to provide access to customers' executive-level decision makers.
If systems integrators are not appropriately trained to implement our products,
our reputation with existing and prospective customers could be harmed. Our
failure to establish or maintain these relationships could significantly harm
our ability to license and successfully implement our e-business infrastructure
software products. Our competitors may have stronger relationships with some
systems integrators and as a result, those systems integrators may be more
likely to recommend competitors' products.

If we are unable to compete in the market for business integration solutions,
we may lose sales and may be forced to lower our prices, which would cause a
decline in our revenue.

  The market for our products is intensely competitive. It is expected to
become increasingly competitive as current competitors enhance and expand their
product offerings and new competitors enter the market. Competition could
result in: 1) price reductions, 2) reduced gross margins and 3) loss of market
share; any one of which could significantly reduce our future revenues. Our
current competitors include a number of companies offering alternative e-
business infrastructure solutions.

  To date, we have faced competition from:

  .  internal information technology departments of potential customers;

  .  systems integrators and other information technology service providers;
     and

  .  software vendors targeting one or more segments of our market including
     Vitria Technology, Inc., Software Technologies Corporation and TIBCO
     Software, Inc.

  It is also possible that alliances among competitors or new competitors,
including Oracle Corporation, Microsoft or IBM, may emerge and rapidly acquire
significant market share.

We depend on technology licensed to us by third parties. If we lose our right
to use licensed technology, our revenue could be harmed and our costs could
increase.

  Our software products incorporate technology licensed to us by third parties,
currently BEA Systems, IBM and Inprise/Borland Corporation, which provides
important messaging and other functionality. We depend on these third parties
to deliver and support reliable products, and to enhance their products in
response to industry trends and other technological changes. Any interruption
in the supply of our licensed software or increases in the pricing of these
licenses could harm our business by disrupting our operations, increasing our
costs, delaying our sales and hindering our ability to support our existing
customers.

                                 Industry Risks

The loss of, or inability to attract, senior management and other key personnel
could harm our business and decrease the value of your investment.

  Our future success depends on the skills, experience and performance of our
senior management team and other key personnel, and their ability to operate
effectively, both individually and as a group. The intense competition for
qualified personnel in our industry and geographic region could harm our
ability to replace any of the members of our senior management team if we were
to lose their services in the future. If we do not succeed in attracting new
management and key personnel, or retaining and motivating existing management
and key personnel, our business will be harmed. In particular, the services and
expertise of our senior management team could be difficult to replace.

                                       9
<PAGE>

Our success depends upon our sales, consulting, support and technical
personnel. If we fail to attract and retain these personnel, our business may
be unable to grow and revenues could decline.

  If we fail to retain and sufficiently expand our direct sales force, or our
consulting, customer support and technical staffs, we may not be able to
increase revenue or achieve increased market acceptance of our products. To
date, we have sold our products primarily through our direct sales force and
have supported our customers through our consulting and customer support staff.
Our technical personnel develop and maintain our new products and product
enhancements. We believe that attracting and retaining these personnel is
particularly difficult for us because: 1) the market for e-business
infrastructure software is still emerging, 2) market acceptance of our products
has not yet been achieved, 3) the sales cycles for our products are lengthy and
4) we must constantly produce new products and product enhancements to compete.
Also, the high demand for qualified technical personnel in the San Francisco
metropolitan area makes it difficult to attract and retain technical personnel.

Our recent growth has strained our existing resources. Any failure to manage
this growth may harm the value of your investment.

  Our recent growth has strained, and future growth may continue to strain, our
personnel, management systems and resources, which could harm our business. To
effectively manage and support our operations, we will be required to:

  . integrate, train, motivate and manage our work force;

  . continue to improve our operational, financial and management controls,
    reporting systems and procedures; and

  . maintain close coordination among our executive, engineering, accounting,
    finance, marketing, sales and operations organizations.

If we fail to manage and support our operations, our business would be harmed
and our operating losses could increase.

  We have grown from 111 employees as of December 31, 1997 to 202 employees as
of December 31, 1999. As of December 31, 1999, we have also opened 14 sales
offices and established five foreign subsidiaries. Three of our eight executive
officers, specifically: 1) our president and chief executive officer, 2) senior
vice president global services and 3) senior vice president worldwide sales,
joined us within the last 6 months. Thus, they have limited prior experience
working together, and may not be effective working together.

  If expenditures related to the expansion of our operations are not
accompanied or shortly followed by significantly increased revenue, our losses
could be even greater than expected until we are able to delay or reduce these
expenditures. For example, during 1998 we increased our operating expenses
significantly, particularly sales and marketing expenses, based on our
expectations of revenue growth that did not materialize as quickly as
anticipated. These increased expense levels harmed our operating results for
that period.

Our international operations are expensive and challenging. If our
international operations do not perform as projected, our operating losses may
increase.

  We have committed significant resources to the opening of international
offices and the expansion of international sales and support channels in
advance of revenue. We expect to incur expenses for localizing our software for
foreign markets. If our international expansion strategy does not generate
sufficient revenue to offset these expenditures, our operating losses may
increase. Revenues from international sales represented: 1) 20% of total 1997
revenue, 2) 28% of total 1998 revenue and 3) 22% of total 1999 revenue.

                                       10
<PAGE>

  We have limited experience in marketing, selling and distributing our
products and services internationally. In December 1998, we implemented
strategic decisions to cease our Asian and Australian operations because our
capital expenditures in those markets were not producing sufficient returns. As
we expand our international operations, we may allow payment in foreign
currencies and exposure to losses in foreign currency transactions would
increase as a result.

If we fail to adapt to the rapid technological change which characterizes our
market, we could lose market share or our products could become obsolete.

  The market for e-business infrastructure software is characterized by:

    . rapid technological change;

    . frequent new product introductions and enhancements;

    . uncertain product life cycles;

    . changing customer requirements; and

    . evolving industry standards including Extensible Markup Language, or
      XML, and Secure Sockets Layer, or SSL.

The introduction of products embodying new technologies and the emergence of
new industry standards could quickly make our existing products obsolete and
unmarketable, which could harm our revenue. Our future success depends upon our
ability to develop and introduce a variety of new products and product
enhancements to address the increasingly sophisticated needs of our customers.

If our products do not work with multiple hardware, software and networking
platforms, some customers will not buy our products, and our revenue will
decline.

  We currently serve a customer base with a wide variety of constantly changing
hardware, software and networking platforms. If we are unable to provide and
support our products on these multiple platforms, some customers will not buy
our products and our business would be hurt. We may have lost potential sales
due to our products' inability to support multiple hardware and software
platforms.

If we are unable to build and maintain relationships with application software
vendors, we could be unable to create and maintain our connectivity products
and our revenue could be harmed.

  We have relationships with a number of application software vendors including
SAP, Oracle Corporation, Siebel Systems, Clarify Inc., Portal Software, Inc.,
and MetaSolv Software, Inc. These vendors provide access to their software and
documentation which enables us to develop connectivity solutions that are
compatible with their products. If these relationships are terminated or
restricted, or we are unsuccessful in establishing relationships with other
vendors, our ability to develop connectivity solutions to integrate new and
existing versions of these vendors' packaged enterprise applications would be
harmed.

Defects in or slow performance of our software products could diminish demand
for our products and cause costly liability, which would adversely affect our
operating results.

  Our software products may contain undetected errors or defects, especially
when first introduced or when new versions are released. Any errors, defects or
slow performance that is discovered could result in:

    . loss of revenue;

    . delay in market acceptance;

    . diversion of development resources;

    . distraction of management;

                                       11
<PAGE>

    . damage to our customer relationships or reputation;

    . increased service and warranty cost; or

    . costly litigation defense.

We have previously discovered errors in our software after shipping the
software. These errors, when discovered by our customers, have impaired our
customer relationships. Any defects and errors found in our products could
cause customers to seek damages for loss of data, lost revenue, systems costs
or other harm they may suffer. These damages may be high because our software
products are critical to our customers' business operations. A successful
product liability claim brought against us could harm our business.

The cost and difficulties of implementing our products could significantly harm
our reputation, which may diminish our revenues.

  Our products are often implemented as part of complex, time consuming and
expensive projects. Some of our customers have experienced delays and
difficulties in implementing our products. Prolonged delays and difficulties
have impaired our customer relationships. In many cases, our customers must
interact with, modify or replace significant elements of their existing
computer systems. This complicates the implementation process. If our customers
are dissatisfied with the implementation process, our ability to license
further products to these customers could be harmed. Dissatisfied customers may
refuse to recommend our products to prospective customers.

Because our products could interfere with our customers' other software
applications and hardware, we may be subject to claims by these customers,
which may be costly and may not be adequately covered by insurance.

  Our e-business infrastructure products are integrated with our customers'
other software and their networks. Customers or others may bring product
liability or warranty claims based on damage to, or interference with, these
networks or applications. Any of these claims could result in costly litigation
or divert management's attention and resources. Our current insurance coverage
would likely be insufficient to protect us from all liability that may be
imposed under these types of claims.

Our failure to safeguard our intellectual property could reduce our revenues,
or cause us to incur costly litigation.

  The value of our software products arises from the intellectual property in
those products. We rely primarily on a combination of: 1) patents, 2)
copyrights, 3) trademarks, 4) trade secret laws and 5) contractual obligations
with employees and third parties to protect the proprietary aspects of our
technology. The legal protection is limited. Unauthorized parties may copy
aspects of our products and obtain and use information that we believe is
proprietary. Other parties may breach confidentiality agreements or other
protective contracts they have made with us. The laws of many foreign countries
do not protect our intellectual property rights to the same extent as the laws
of the United States. Litigation may be necessary to enforce our intellectual
property rights. Intellectual property litigation has an uncertain outcome and
could result in substantial costs and diversion of management's attention and
resources.

Because our market is new, competitive and dependent upon intellectual property
rights, we could face costly litigation brought by third parties for
infringement of their rights.

  We may be subject to legal proceedings and claims for alleged infringement of
third party proprietary rights, including patents, trademarks or copyrights.
Any litigation could result in substantial costs and diversion of management's
attention and resources. Parties making infringement claims against us may
obtain judgments against us, which could prevent us from selling our products
or require us to enter into royalty or license agreements which are not
advantageous to us.

                                       12
<PAGE>

                                 Offering Risks

Our stock price may be volatile because of the stock price volatility of other
companies in our industry and because our stock has not been publicly traded
before, and, as a result, you may lose all or part of your investment.

  The market price of our common stock is likely to be highly volatile. This
volatility could be caused by fluctuation of market valuations of significant
companies in our industry. The volatility could also be caused by the market
struggling to arrive at a valuation for our newly marketed stock. Equity
markets, particularly the market for high-technology companies, have recently
experienced significant price and volume fluctuations that are unrelated to the
operating performance of individual companies. Volatility in our stock price
may cause you to lose all or part of your investment.

The cost of possible securities class action litigation could increase our
expenses and damage our reputation with prospective and existing customers.

  Securities class action litigation has often been instituted against
companies following periods of volatility in the market price of their
securities. Litigation could result in substantial costs and a diversion of
management's attention and resources.

Our executive officers and directors own a large percentage of our voting stock
and could delay or prevent a change in our corporate control or other matters
requiring stockholder approval, even if favored by our other stockholders.

  Immediately after this offering, our executive officers and directors, and
their affiliates, will continue to own approximately 46.51% of our outstanding
common stock. These stockholders may be able to exert significant influence
over matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combinations. This
concentration of voting power could have the effect of delaying or preventing a
change in control that other stockholders view as favorable.

Investors in this offering will experience immediate and substantial dilution
and will pay a higher price for our common stock than our existing stockholders
paid.

  Purchasers of the common stock in the offering and private placement will
suffer an immediate and substantial dilution of $12.35 per share in the net
tangible book value of our common stock from an assumed initial public offering
price of $15.00 per share. The exercise of options with further dilute your
investment.

Approximately twenty million four hundred eighty five thousand, or 84%, of our
total outstanding shares are restricted from immediate resale but may be sold
into the market in the near future. This could cause the market price of our
common stock to drop significantly, even if our business is doing well.

  After this offering, we will have outstanding 24,485,001 shares of common
stock. This includes the 4,000,000 we are selling in this offering, which may
be resold in the public market immediately. The remaining 84%, or 20,485,001
shares, of our total outstanding shares will become available for resale in the
public market as shown in the chart below.

  As restrictions on resale end, the market price could drop significantly if
the holders of these restricted shares sell them or are perceived by the market
as intending to sell them.

<TABLE>
<CAPTION>
 Number of shares/%
      of total
    outstanding     Date of availability for resale into public market
 ------------------ -----------------------------------------------------------
 <C>                <S>
 19,696,563 / 80%   180 days after the date of this prospectus due to an
                    agreement these shareholders have with the underwriters,
                    who may waive this restriction, and due to the requirements
                    of federal securities laws.
     788,438 / 3%   Between 180 and 365 days after the date of this prospectus
                    due to the requirements of the federal securities laws.
</TABLE>

                                       13
<PAGE>

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

  This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as anticipates, believes, plans, expects,
future, intends and similar expressions to identify forward-looking statements.
This prospectus also contains forward-looking statements attributed to third
parties relating to their estimates of the growth of various markets. You
should not place undue reliance on these forward-looking statements, which
apply only as of the date of this prospectus. Our actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including the risks to our business described in this prospectus.

  We are under no duty to update any of the forward-looking statements after
the date of this prospectus to conform these statements to actual results.

                                USE OF PROCEEDS

  We estimate that the net proceeds from the sale of the 4,000,000 shares of
common stock that we are selling in this offering and from a private placement
of 788,438 shares of common stock that will close at the same time as this
offering will be approximately $65.6 million. We estimate net proceeds of $74.0
million if the underwriters' option to purchase additional shares is exercised
in full. These figures are based upon an offering price of $15.00 per share and
deduct the underwriting discount and estimated offering expenses.

  We currently expect to use the net proceeds primarily for:

  .  working capital,

  .  general corporate purposes,

  .  increased sales and marketing expenditures,

  .  increased research and development expenditures, and

  .  capital expenditures made in the ordinary course of business.

We intend, if the opportunity arises, to use an unspecified portion of the net
proceeds to acquire or invest in complementary businesses, products and
technologies.

  Before these uses, we intend to invest the net proceeds from this offering in
short-term, interest-bearing, investment-grade securities.

                                DIVIDEND POLICY

  We have never declared or paid cash dividends on our capital stock. We
currently intend to retain any future earnings to fund the development and
growth of our business and consequently do not anticipate paying any cash
dividends. Our credit facility with Silicon Valley Bank prohibits us from
paying dividends without the bank's prior approval.

                                       14
<PAGE>

                                 CAPITALIZATION

  This table presents our long-term debt and capitalization as of December 31,
1999:

  . on an actual basis;

  . on a pro forma as adjusted basis to reflect: 1) the conversion of all
    outstanding shares of convertible preferred stock into 16,542,628 shares
    of common stock upon the closing of this offering, 2) our sale of
    4,000,000 shares of common stock in this offering at an assumed initial
    public offering price of $15.00 per share and 3) our sale of 788,438
    shares of common stock in a private placement that will close at the same
    time as this offering at the assumed initial public offering price of
    $15.00 per share less underwriters' discount and the application of the
    net proceeds we receive from that sale.


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

<TABLE>
<CAPTION>
                                                           December 31, 1999
                                                          ---------------------
                                                                     Pro Forma
                                                           Actual   As Adjusted
                                                          --------  -----------
                                                             (in thousands)
<S>                                                       <C>       <C>
Cash and cash equivalents................................ $ 12,506    $78,105
                                                          ========    =======
Long-term debt and capital lease obligations, less
 current portion.........................................    3,513      3,513
                                                          --------    -------
Stockholders' equity (deficit):
  Convertible preferred stock; actual--17,000,000 shares
   authorized; 16,126,003 shares issued and outstanding;
   pro forma as adjusted--no shares authorized, issued or
   outstanding ..........................................      161         --
  Common stock; actual--45,000,000 shares authorized,
   3,153,935 shares issued and outstanding; pro forma as
   adjusted--150,000,000 shares authorized; 24,485,001
   shares issued and outstanding, pro forma as adjusted
   ......................................................        3         24
  Additional paid-in capital.............................   96,757    162,496
  Deferred stock-based compensation......................   (2,540)    (2,540)
  Accumulated deficit....................................  (95,107)   (95,107)
                                                          --------    -------
    Total stockholders' equity (deficit).................     (726)    64,873
                                                          --------    -------
      Total capitalization............................... $  2,787    $68,386
                                                          ========    =======
</TABLE>

 Additional Share Information

  The outstanding share information in the table above is as of December 31,
1999 and excludes:

  . 6,793,436 shares of common stock issuable upon the exercise of
    outstanding options at a weighted average exercise price of $5.78 per
    share;

  . 343,431 shares of common stock issuable upon the exercise of outstanding
    warrants at a weighted average exercise price of $6.32 per share; and

  . 423,612 shares reserved for future issuance under our 1997 stock option
    plan and 640,475 shares reserved for future issuance under our 1999
    executive stock plan.

 Share Reserves

  Our board of directors, after December 31, 1999, approved changes to our
stock option plan reserves. On the effective date of this offering, the shares
reserved for future issuance under our stock option plans will be:

  . 1997 stock plan: 3,000,000 shares.

                                       15
<PAGE>

  . 2000 employee stock purchase plan: 750,000 shares.

  . 2000 directors' stock option plan: 300,000 shares.

The share reserves replace any stock option reserves existing immediately
before the effective date of the offering. These reserves totalled 1,064,087
shares on December 31, 1999.

 Warrants

  After December 31, 1999, our board approved the issuance of warrants to
purchase 199,996 shares of common stock at a weighted average exercise price of
$11.00 per share.

                                       16
<PAGE>

                                    DILUTION

  As of December 31, 1999, our pro forma net tangible book deficit was
approximately $(726,000) or $(0.04) per share of common stock after giving
effect for the conversion of all outstanding shares of convertible preferred
into 16,542,628 shares of common stock. Pro forma net tangible book deficit per
share is equal to the total amount of our tangible assets minus our total
liabilities divided by the number of shares of our common stock outstanding.
This formula can be represented by:

                   total tangible assets -- total liabilities
                   ------------------------------------------
                       shares of common stock outstanding

  After giving effect to the receipt of the estimated net proceeds from the
sale of 788,438 shares of common stock in a private placement that will close
at the same time as this offering and the sale of 4,000,000 shares of common
stock in this offering at an assumed initial public offering price of $15.00
per share, our pro forma, as adjusted net tangible book value at December 31,
1999 would have been approximately $64.9 million or $2.65 per share of common
stock. This represents an immediate increase in net tangible book value of
$2.69 per share to existing stockholders and an immediate dilution of $12.35
per share to new investors. This table illustrates this per share dilution:

<TABLE>
   <S>                                                            <C>     <C>
   Assumed initial public offering price per share..............          $15.00
     Pro forma net tangible book deficit per share as of
      December 31, 1999.........................................  $(0.04)
     Increase per share attributable to new investors...........    2.69
                                                                  ------
   Pro forma net tangible book value after the private placement
    and the offering............................................            2.65
                                                                          ------
   Dilution per share to new investors..........................          $12.35
                                                                          ======
</TABLE>

 Comparative Investment Information

  This following table summarizes on a pro forma basis, as of December 31,
1999, the differences between existing stockholders and new investors in the
number of shares of common stock purchased from us, the total consideration
paid and the average price per share paid.

<TABLE>
<CAPTION>
                                Shares Purchased  Total Consideration   Average
                               ------------------ --------------------   Price
                                 Number   Percent    Amount    Percent Per Share
                               ---------- ------- ------------ ------- ---------
   <S>                         <C>        <C>     <C>          <C>     <C>
   Existing stockholders...... 19,696,563   80.4%  $88,145,000   55.4%  $ 4.48
   New investors..............  4,788,438   19.6%   70,999,000   44.6%   14.83
                               ----------  -----  ------------  -----
     Totals................... 24,485,001  100.0% $159,144,000  100.0%
                               ==========  =====  ============  =====
</TABLE>

 Additional Share Information

  The existing stockholders' information presented above includes 16,126,003
shares of preferred stock which will be automatically converted into 16,542,628
shares of common stock upon the closing of this offering. This information is
as of December 31, 1999 and excludes:

  . 6,793,436 shares of common stock issuable upon the exercise of
    outstanding options at a weighted average exercise price of $5.78 per
    share;

  . 343,431 shares of common stock issuable upon the exercise of outstanding
    warrants at a weighted average exercise price of $6.32 per share; and

  . 423,612 shares reserved for future issuance under our 1997 stock option
    plan and 640,475 shares reserved for future issuance under our 1999
    executive stock plan.

                                       17
<PAGE>

 Share Reserves

  Our board of directors, after December 31, 1999, approved changes to our
stock option plan reserves. Effective on the effective date of this offering,
the shares reserved for future issuance under our stock option plans, will be:

  . 1997 stock plan: 3,000,000 shares.

  . 2000 employee stock purchase plan: 750,000 shares.

  . 2000 directors' stock option plan: 300,000 shares.

The share reserves replace any stock option reserves existing immediately
before the effective date of the offering. These reserves totalled 1,064,087
shares on December 31, 1999.

  Additionally, after December 31, 1999, our board approved the issuance of
warrants to purchase 199,996 shares of common stock at a weighted average
exercise price of $11.00 per share.

  The issuance of common stock for outstanding options and warrants or options
issued in the future will result in further dilution to new investors.


                                       18
<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA

  The selected consolidated financial data should be read with Management's
Discussion and Analysis of Financial Condition and Results of Operations, our
consolidated financial statements and related notes, and other financial
information included elsewhere in this prospectus.

  The consolidated statements of operations data for the years ended December
31, 1997, 1998 and 1999, and the selected consolidated balance sheet data at
December 31, 1998 and 1999 presented below are derived from consolidated
financial statements that have been audited by KPMG LLP, independent auditors,
which are included elsewhere in this prospectus.

  The selected historical consolidated financial data for the period from March
8, 1996, inception, to December 31, 1996 and as of December 31, 1996 and 1997
have been derived from audited financial statements. The audited financial
statements include, in the opinion of management, all adjustments, consisting
only of normal recurring adjustments, considered necessary for a fair
presentation of financial position and results of operations for that period
and as of that date. The historical results presented below are not necessarily
indicative of the results to be expected for any future fiscal period.

  Shares used in computing pro forma basic and diluted net loss per share
include the shares used in computing basic and diluted net loss per share
adjusted for the conversion of preferred stock to common stock, as if the
conversion occurred at the date of original issuance.

<TABLE>
<CAPTION>
                                     Period From
                                    March 8, 1996
                                     (Inception)   Year Ended December 31,
                                     to December  ----------------------------
                                      31, 1996      1997      1998      1999
                                    ------------- --------  --------  --------
                                     (in thousands, except per share data)
<S>                                 <C>           <C>       <C>       <C>
Consolidated Statements of
 Operations:
 Revenue:
   Software license................    $    --    $    748  $  3,973  $  8,194
   Service, maintenance and other..         --         360     3,733    10,900
                                       -------    --------  --------  --------
   Total revenue...................         --       1,108     7,706    19,094
 Cost of revenue:
   Software license and royalties..         --          36       438     1,599
   Service, maintenance and other,
    excludes stock-based
    compensation of $415,790 and
    $253,334 for 1998 and 1999.....         --       1,860     5,392    10,127
                                       -------    --------  --------  --------
   Total cost of revenue...........         --       1,896     5,830    11,726
                                       -------    --------  --------  --------
     Gross profit (loss)...........         --        (788)    1,876     7,368
                                       -------    --------  --------  --------
 Operating expenses:
   Research and development,
    excludes stock-based
    compensation of $1,622,857 and
    $89,175 for 1998 and 1999......        757       4,080    11,748    14,243
   Sales and marketing, excludes
    stock-based compensation at
    $2,051,890 and $897,216 for
    1998 and 1999..................        375       6,954    23,141    21,792
   General and administrative,
    excludes stock-based
    compensation at $683,390 and
    $221,927 for 1998 and 1999.....        503       2,296     4,066     6,145
   Amortization of deferred stock-
    based compensation.............         --          --     4,774     1,462
                                       -------    --------  --------  --------
   Total operating expenses........      1,635      13,330    43,729    43,642
                                       -------    --------  --------  --------
     Operating loss................     (1,635)    (14,118)  (41,853)  (36,274)
 Other income (expense), net.......         41         166       479    (1,912)
                                       -------    --------  --------  --------
     Net loss......................    $(1,594)   $(13,952) $(41,374) $(38,186)
                                       =======    ========  ========  ========
 Net loss per share:
   Basic and diluted...............    $ (2.83)   $ (11.88) $ (19.99) $ (13.40)
                                       =======    ========  ========  ========
   Weighted average shares used in
    computation....................        564       1,175     2,069     2,850
                                       =======    ========  ========  ========
 Pro forma net loss per share(1):
   Basic and diluted...............    $ (0.31)   $  (1.70) $  (3.55) $  (2.38)
                                       =======    ========  ========  ========
   Weighted average shares used in
    computation....................      5,162       8,201    11,641    16,062
                                       =======    ========  ========  ========
</TABLE>

<TABLE>
<CAPTION>
                                                        December 31,
                                               -------------------------------
                                                1996   1997    1998     1999
                                               ------ ------- -------  -------
                                                       (in thousands)
<S>                                            <C>    <C>     <C>      <C>
Consolidated Balance Sheet Data:
 Cash and cash equivalents...................  $1,273 $24,741 $ 5,415  $12,506
 Working capital (deficit)...................   1,074  21,938  (4,648)  (1,052)
 Total assets................................   1,606  28,085  15,757   29,177
 Long term debt and capital lease
  obligations, less current portion..........     --      986   6,254    3,513
 Stockholders' equity (deficit)..............   1,391  22,947  (6,670)    (726)
</TABLE>

                                       19
<PAGE>

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

Overview

 Business

  We provide e-business infrastructure software that enables the integration
and automation of business processes within enterprises and among their
customers and suppliers using the Internet. Our products help businesses use
the Internet to reduce information technology costs, increase productivity,
improve responsiveness to customer demands and enhance overall competitiveness.

 Historical spending

  We were incorporated in March 1996 and released our first product in November
1997. Since March 1996, we have incurred substantial research and development
costs, invested heavily in our sales, marketing and professional services
organizations and have expanded our global operations and corporate
infrastructure to support our long-term growth strategy. We have also made
substantial investments in marketing and in building strategic partnerships.
Our full-time employees increased from 111 as of December 31, 1997 to 202 as of
December 31, 1999. Because our expenditures have been much higher than our
revenue, we have incurred net losses in each fiscal quarter since March 1996.
At December 31, 1999, we had an accumulated deficit of $95.1 million. We
anticipate that our operating expenses will continue to increase as we expand
our product lines and sales and marketing efforts. We expect to incur net
losses at least through the end of 2001.

 Revenues

  Revenues to date have been derived from the sale of our e-business
infrastructure software and from maintenance and support, consulting and
training services. Customers who license our software generally purchase
maintenance contracts, typically covering a twelve month period. Customers may
also purchase consulting services, which are customarily billed by us at a
fixed daily rate plus out-of-pocket expenses. We also offer training services
that are billed on a per student or per class session basis. The initial total
orders from end-user customers, including licenses and services, have ranged
from just under $100,000 to over $6.0 million.

 Revenue recognition policy

  Our software arrangements typically involve significant customization or
implementation services. As a result, software license revenue is generally
recognized using the percentage-of-completion method over the project
implementation cycles, which typically range from three to nine months. In
circumstances where we are unable to estimate the amount of effort required to
customize or implement the software, software license revenue is recognized
using the completed contract method. To date, we have not encountered any
circumstances where we have been unable to estimate the amount of effort
required to customize or implement our software.

  In the future, we may recognize revenues for projects implemented by our
systems integrator partners upon shipment when our services are not essential
to the functionality of the software. Consulting and service revenue is
recognized as the services are performed. Maintenance revenue from customer
support and product upgrades, including maintenance bundled with original
software licenses, are deferred and recognized ratably over the term of the
maintenance agreement. When we enter into software arrangements with resellers,
we do not recognize revenue until the reseller demonstrates it has an
arrangement with the end user that satisfies our revenue recognition criteria.
Our revenue recognition policy complies with the American Institute of
Certified Public Accountants', AICPA, Statement of Position (SOP) 97-2,
Software Revenue Recognition.

                                       20
<PAGE>

 Revenue mix

  As a result of our revenue recognition policy, which requires us to defer
recognition of services revenue and other revenue not received for software
licenses, the mix of license, service and other revenue for the current quarter
does not necessarily reflect the mix in sales activities for the current
quarter. For example, revenues recognized during the quarter ended December 31,
1999 generally resulted from sales made during the first two quarters of fiscal
1999. We expect the future revenue mix to be more reflective of our current
period sales mix, which has been weighted more heavily towards software
licenses than previous quarters. Because our sales mix for the current quarter
has been weighted more heavily towards software license revenue, as opposed to
service and other revenue, than in previous quarters, we expect that in the
future our revenue mix for a particular quarter will more closely reflect our
sales mix in that quarter.

 Sales efforts and strategic relationships

  Our sales to date have been primarily generated by our direct sales force,
with a small percentage derived from indirect channels. In an effort to
increase sales and provide additional skilled implementation resources to our
customers, we have established relationships with third-party systems
integrators including Cap Gemini, CSC, Deloitte Consulting, EDS, Ernst & Young
and PricewaterhouseCoopers. In June 1999, CrossWorlds and IBM announced a
strategic relationship focused on joint marketing and cooperative sales of a
combined product offering.

 International operations

  We established an international presence in mid-1997 by opening a sales
office in Germany. We subsequently opened sales offices in the United Kingdom
and France in 1998. Revenues from international sales represented 20% of total
1997 revenue, 28% of total 1998 revenue and 22% of total 1999 revenue. The
percentage decrease during the year ended December 31, 1999 was due to
significant revenue contribution from five U.S.-based customers, collectively
accounting for greater than 48% of total revenue during the period.

 Accounts receivable days sales outstanding

  Because of our revenue recognition policy, we calculate accounts receivable
days sales outstanding, DSO, as the total amount of our accounts receivable at
the end of a quarter divided by our revenue for the quarter plus the net change
in our current deferred revenue at the end of a quarter, multiplied by 90. This
formula can be represented as:

                        quarter-end accounts receivable
                     ------------------------------------                   X 90
     quarterly revenue + net change in quarter-end current deferred revenue

We believe this calculation is appropriate because license fees are typically
billable regardless of whether revenue has been recognized or deferred. Under
this method, DSO was 102 days as of December 31, 1999. Since the terms of some
of our sales agreements spread our billings over the applicable project
implementation cycle and our sales activity is concentrated at the end of each
quarter, we anticipate that our DSO will continue to be substantial in future
periods. Although our DSO calculation may not be comparable to other similarly
titled information from other companies, we believe that it is an additional
meaningful measure of liquidity.

 Deferred compensation

  In 1998 and 1999, we issued stock options to employees at exercise prices
that were subsequently judged to have been below fair value. We recognized the
difference between the exercise prices and the later judged fair values as
deferred stock-based compensation. We amortize deferred stock-based
compensation over the vesting period of the related award as a non-cash expense
in compliance with Financial Accounting Standards Board Interpretation No. 28.
As of December 31, 1999, $2.5 million in deferred stock-based compensation
remained on our balance sheet which will be amortized to the consolidated
statements of operations through the first quarter of 2002.

                                       21
<PAGE>

 Danger of period-to-period comparisons of results

  In view of the rapidly changing nature of our business and our limited
operating history, we believe that period-to-period comparisons of revenue and
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance. Additionally, despite our revenue growth,
we do not believe that historical growth rates are necessarily sustainable or
indicative of future growth.

Results of Operations

  The results of operations table presents operating data as a percentage of
total revenue.

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                                  ---------------------------
                                                    1997      1998      1999
                                                  --------   -------   ------
<S>                                               <C>        <C>       <C>
Revenue:
  Software license...............................     67.5 %    51.6 %   42.9 %
  Service, maintenance and other.................     32.5      48.4     57.1
                                                  --------   -------   ------
  Total revenue..................................    100.0     100.0    100.0
Cost of revenue:
  Software license and royalties.................      3.2       5.7      8.4
  Service, maintenance and other.................    167.9      70.0     53.0
                                                  --------   -------   ------
  Total cost of revenue..........................    171.1      75.7     61.4
                                                  --------   -------   ------
    Gross margin.................................    (71.1)     24.3     38.6
Operating expenses:
  Research and development.......................    368.2     152.4     74.6
  Sales and marketing............................    627.6     300.3    114.1
  General and administrative.....................    207.2      52.8     32.2
  Amortization of deferred stock-based
   compensation..................................       --      62.0      7.7
                                                  --------   -------   ------
  Total operating expenses.......................  1,203.0     567.5    228.6
                                                  --------   -------   ------
    Operating loss............................... (1,274.1)   (543.2)  (190.0)
Other income (expense), net......................     15.0       6.2    (10.0)
                                                  --------   -------   ------
    Net loss..................................... (1,259.1)% (537.0)%  (200.0)%
                                                  ========   =======   ======
</TABLE>

Years Ended December 31, 1997, 1998 and 1999

  Software license revenue. Our total revenue increased from $1.1 million to
$7.7 million to $19.1 million in 1997, 1998 and 1999, representing growth of
595% and 148%. Our software license revenue increased from $748,000 to $4.0
million to $8.2 million in 1997, 1998 and 1999, representing growth of 431% and
106%. The increases were due to increased acceptance of our expanded product
offering in the marketplace resulting from a greater number of licenses sold
and a larger average transaction size. Total licenses sold increased from six
in 1997 to 26 in 1998 to 41 in 1999. License revenue transactions increased
from an average of $125,000 in 1997 to $153,000 in 1998 to $200,000 in 1999.

  Service, maintenance and other revenue. Service, maintenance and other
revenue increased from $360,000 to $3.7 million to $10.9 million in 1997, 1998
and 1999, representing growth of 937% and 192%. These increases were due to an
increase in consulting, training and maintenance fees associated with the
increased number of licenses sold and the increased average transaction size
and a larger installed license base. The value of service, maintenance and
other transactions increased from an average of $60,000 in 1997 to $144,000 in
1998 to $266,000 in 1999.

                                       22
<PAGE>

  Cost of software license revenue and royalties. Cost of software license
revenue and royalties revenue increased from $36,000 to $438,000 to
$1.6 million in 1997, 1998 and 1999, representing approximately 3%, 6% and 8%
of total revenue. The increase in absolute dollar amount was due to increases
in software license and royalties revenue which increased the related royalty
costs. The increase from 1997 to 1998 in cost of software license and royalties
revenue as a percentage of total revenue related to an increase in royalty fees
for technology licensed by CrossWorlds. The increase from 1998 to 1999 in cost
of software license and royalties revenue as a percentage of total revenue was
related to the amortization of guaranteed minimum royalty payments. We expect
this percentage to decrease in the future as a result of our replacing the
licensed technology with our own internally developed product during the fourth
quarter of 1999.

  Cost of service, maintenance and other revenue. Cost of service, maintenance
and other revenue increased from $1.9 million to $5.4 million to $10.1 million
in 1997, 1998 and 1999, representing 168%, 70% and 53% of total revenue. The
increase in cost of service, maintenance and other revenue in absolute dollars
across all periods was due to an increase in personnel costs. Cost of service,
maintenance and other revenue as a percentage of total revenue declined in 1998
and 1999 because of greater usage of our consulting staff to generate revenue.
We expect our cost of service, maintenance and other revenue to continue to
increase in absolute dollars in future periods.

  Research and development expenses. Research and development expenses
increased from $4.1 million to $11.7 million to $14.2 million in 1997, 1998 and
1999. The increase in each of these periods was due to an increase in personnel
dedicated to new product initiatives. Research and development expenses
represented 368%, 152% and 75% of total revenue in 1997, 1998 and 1999. The
decrease as a percentage of total revenue was the result of growth in our total
revenue. We expect our research and development expenses to continue to
increase in absolute dollars in future periods.

  Sales and marketing expenses. Sales and marketing expenses increased from
$7.0 million to $23.1 million from 1997 to 1998 and decreased to $21.8 million
in 1999. Sales and marketing personnel costs increased from $2.2 million in
1997 to $6.9 million in 1998, travel and entertainment costs increased from
$875,000 to $3.2 million, overhead costs increased from $1.0 million to $4.2
million and commissions and bonuses increased from $261,000 in 1997 to $3.3
million in 1998. In 1998, we also made significant expenditures on advertising
and marketing programs, which increased from $2.3 million in 1997 to
$4.3 million in 1998. We also invested in foreign operations in Australia and
Asia in 1998, resulting in $734,000 in expenses. The decrease from 1998 to 1999
reflects significant reductions in expenditures on advertising from $4.3
million to $2.3 million, and the closure of foreign operations in Australia and
Asia offset by increases in commissions and bonus expenses from $3.3 million in
1998 to $4.8 million in 1999. Sales and marketing expenses represented 628%,
300% and 114% of our total revenue in 1997, 1998 and 1999. The decrease as a
percentage of total revenue was the result of growth in total revenue during
both periods and reduced spending from 1998 to 1999. We expect our sales and
marketing expenses to continue to increase in absolute dollars in future
periods.

  General and administrative expenses. General and administrative expenses
increased from $2.3 million to $4.1 million to $6.1 million in 1997, 1998 and
1999, representing 207%, 53% and 32% of our total revenue in 1997, 1998 and
1999. Expenses increased in each period due to increased staffing necessary to
manage and support our growth. The decrease as a percentage of our total
revenue was due to the growth in our total revenue.

  Other income (expense). Other income increased from $166,000 in 1997 to
$479,000 in 1998, despite the lower year end cash balance in 1998. This
increase was due to our completion of a $23.0 million financing at the end of
1997, resulting in a higher average cash balance in 1998 than in 1997. In 1999,
other expense was $1.9 million. This expense in 1999 was due to the $1.0
million write-off of a prepaid royalty asset and approximately $1.0 million in
interest payments on outstanding debt.

                                       23
<PAGE>

  Amortization of deferred stock-based compensation. During 1998 and 1999, we
recorded total deferred stock-based compensation of $8.6 million and $225,000
for stock option grants. We are amortizing these amounts over the vesting
periods of the applicable options, resulting in amortization expense of
$4.8 million and $1.5 million in 1998 and 1999.

  Provision for income taxes. We incurred net operating losses in 1997, 1998
and 1999 and consequently paid no federal, state and foreign income taxes in
those years.

  As of December 31, 1999, we had federal and state net operating loss
carryforwards of approximately $85.1 million and $70.2 million. We also had
federal and state research and development tax credit carryforwards of
approximately $1.2 million and $852,000. Our federal net operating loss
carryforwards will expire at various dates beginning 2011 through 2019 if not
utilized and our state net operating loss carryforward expires beginning in the
year 2004.

  As of December 31, 1998 and 1999, we had deferred tax assets of approximately
$23.0 million and $39.7 million. Our net deferred tax assets have been fully
offset by a valuation allowance. Our net valuation allowance increased by $16.2
million and $16.8 million during 1998 and 1999. Deferred tax assets relate
primarily to net operating loss carryforwards, and capitalized research and
development costs.

                                       24
<PAGE>

 Eight Quarters Ended December 31, 1999

  The first table below shows CrossWorlds' consolidated statement of operations
data for each of the eight quarters ended December 31, 1999. The second table
shows those amounts as a percentage of total revenue for the same periods. This
unaudited quarterly information was prepared on the same basis as CrossWorlds'
audited consolidated financial statements and, in management's opinion,
reflects all adjustments for normal recurring entries that are necessary for a
fair presentation of the information for the periods presented. 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,
                           1998      1998      1998       1998      1999      1999      1999      1999
                         --------  --------  ---------  --------  --------  --------  --------- --------
                                                      (in thousands)
<S>                      <C>       <C>       <C>        <C>       <C>       <C>       <C>       <C>
Consolidated Statement
 of Operations Data:
Revenue:
  Software licenses..... $   977   $  1,155  $    545   $  1,296  $ 1,617   $ 1,811    $ 2,270  $  2,496
  Service, maintenance
  and other.............     990        818       964        961    2,019     2,353      3,012     3,516
                         -------   --------  --------   --------  -------   -------    -------  --------
  Total revenue.........   1,967      1,973     1,509      2,257    3,636     4,164      5,282     6,012
Cost of revenue:
  Software license and
  royalties.............      70         24        73        271      128       311        562       598
  Service, maintenance
  and other(1)..........   1,159        948     1,598      1,687    1,779     2,420      2,698     3,230
                         -------   --------  --------   --------  -------   -------    -------  --------
  Total cost of
   revenue..............   1,229        972     1,671      1,958    1,907     2,731      3,260     3,828
                         -------   --------  --------   --------  -------   -------    -------  --------
    Gross profit
     (loss).............     738      1,001      (162)       299    1,729     1,433      2,022     2,184
                         -------   --------  --------   --------  -------   -------    -------  --------
Operating expenses:
  Research and
   development(2).......   2,152      3,224     2,973      3,399    3,124     3,561      3,790     3,768
  Sales and
   marketing(3).........   3,545      6,234     6,173      7,189    4,647     5,103      5,439     6,603
  General and
   administrative(4)....     833      1,213       763      1,257      789     1,223      1,399     2,734
  Amortization of
  deferred stock-based
  compensation..........     659        940     1,587      1,588      140       782        823      (283)
                         -------   --------  --------   --------  -------   -------    -------  --------
  Total operating
   expenses.............   7,189     11,611    11,496     13,433    8,700    10,669     11,451    12,822
                         -------   --------  --------   --------  -------   -------    -------  --------
    Operating loss......  (6,451)   (10,610)  (11,658)   (13,134)  (6,971)   (9,236)    (9,429)  (10,638)
Other income (expense),
 net....................     299        192        10        (22)    (291)     (197)      (369)   (1,055)
                         -------   --------  --------   --------  -------   -------    -------  --------
    Net loss............ $(6,152)  $(10,418) $(11,648)  $(13,156) $(7,262)  $(9,433)   $(9,798) $(11,693)
                         =======   ========  ========   ========  =======   =======    =======  ========
</TABLE>
- --------
(1) Excludes stock-based compensation at $36,438, $92,805, $146,155, $140,392,
    $34,561, $141,946, $65,250 and $11,577 for each of the quarters ended
    December 31, 1999.

(2) Excludes stock-based compensation of $314,279, $450,250, $464,989,
    $393,339, $79,626, $(156,565), $122,940 and $43,174 for each of the
    quarters ended December 31, 1999.

(3) Excludes stock-based compensation of $238,605, $337,800, $782,540,
    $692,945, $69,165, $636,199, $321,389 and $(129,537) for each of the
    quarters ended December 31, 1999.

(4) Excludes stock-based compensation of $38,240, $59,099, $224,633, $361,428,
    $(42,188), $166,340, $71,060 and $26,715 for each of the quarters ended
    December 31, 1999.

                                       25
<PAGE>

<TABLE>
<CAPTION>
                                                       Quarter Ended
                         --------------------------------------------------------------------------------
                         Mar. 31,  June 30,  Sept. 30,  Dec. 31,  Mar. 31,  June 30,  Sept. 30,  Dec. 31,
                           1998      1998      1998       1998      1999      1999      1999       1999
                         --------  --------  ---------  --------  --------  --------  ---------  --------
<S>                      <C>       <C>       <C>        <C>       <C>       <C>       <C>        <C>
As a Percentage of
 Revenue:
Revenue:
  Software license......    49.7 %    58.5 %    36.1 %     57.4 %    44.5 %    43.5 %    43.0 %     41.5 %
  Service, maintenance
  and other.............    50.3      41.5      63.9       42.6      55.5      56.5      57.0       58.5
                          ------    ------    ------     ------    ------    ------    ------     ------
  Total revenue.........   100.0     100.0     100.0      100.0     100.0     100.0     100.0      100.0
Cost of revenue:
  Software license and
  royalties.............     3.6       1.2       4.8       12.1       3.5       7.5      10.6        9.9
  Service, maintenance
  and other.............    58.9      48.0     105.9       74.7      48.9      58.1      51.1       53.7
                          ------    ------    ------     ------    ------    ------    ------     ------
  Total cost of reve-
   nue..................    62.5      49.2     110.7       86.8      52.4      65.6      61.7       63.6
                          ------    ------    ------     ------    ------    ------    ------     ------
   Gross margin.........    37.5      50.8     (10.7)      13.2      47.6      34.4      38.3       36.4
                          ------    ------    ------     ------    ------    ------    ------     ------
Operating expenses:
  Research and develop-
   ment.................   109.4     163.4     197.0      150.6      85.9      85.5      71.7       62.7
  Sales and marketing...   180.2     316.0     409.0      318.5     127.8     122.6     103.0      109.8
  General and adminis-
   trative..............    42.3      61.5      50.6       55.7      21.7      29.4      26.5       45.5
  Amortization of
  deferred stock-based
  compensation..........    33.5      47.6     105.2       70.4       3.9      18.8      15.6       (4.7)
                          ------    ------    ------     ------    ------    ------    ------     ------
  Total operating ex-
   penses...............   365.4     588.5     761.8      595.2     239.3     256.3     216.8      213.3
                          ------    ------    ------     ------    ------    ------    ------     ------
   Operating loss.......  (327.9)   (537.7)   (772.5)    (582.0)   (191.7)   (221.9)   (178.5)    (176.9)
Other income (expense),
 net....................    15.2       9.7       0.7       (1.0)     (8.0)     (4.7)     (7.0)     (17.5)
                          ------    ------    ------     ------    ------    ------    ------     ------
   Net loss.............  (312.7)%  (528.0)%  (771.8)%   (583.0)%  (199.7)%  (226.6)%  (185.5)%   (194.4)%
                          ======    ======    ======     ======    ======    ======    ======     ======
</TABLE>

  Overall trends. The trends discussed previously in the annual comparisons of
operating results from 1997 through 1999, generally apply to the comparison of
results of operations for our eight most recent quarters ended December 31,
1999.

  Revenue mix. Our software license and service revenue mix fluctuated
significantly at various times during the last eight quarters because the
service components of our sales contracts fluctuated based on the customization
and installation needs of our customers.

  In the quarter ended September 30, 1998, software license revenue was lower
as a percentage of total revenue relative to the other seven quarters ended
December 31, 1999 because fewer sales were closed in the prior quarter and
three significant projects were completed in the prior quarter. We also started
and completed three limited implementation projects designed to allow customers
to evaluate our software, which resulted in a lower percentage of software
license revenue during the period. During the quarter ended June 30, 1998, 5
sales closed as compared to 8 sales closing in the immediately preceding
quarter ended March 31, 1998. Services, maintenance and other revenue increased
significantly from the quarter ended December 31, 1998 to the quarter ended
March 31, 1999 because of the implementation of two significant projects.

  Cost of software license and royalties revenue. During the quarter ended
December 31, 1998, cost of software license and royalties revenue increased as
a percentage of total revenue due to an increase in royalty fees paid by
CrossWorlds for third party technology licenses. The increase for the two
quarters ended December 31, 1999 in cost of software license and royalties
revenue as a percentage of total revenue related to the amortization of
$500,000 during each of the two quarters for guaranteed minimum royalty
payments for technology licensed by CrossWorlds. We expect this percentage to
decrease in the future as a result of our replacing the licensed technology
with our own internally developed product during the fourth quarter of 1999. In
anticipation of increased customer demand which did not materialize until later
periods, we expanded our professional services organization during the quarter
ended September 30, 1998, resulting in increased services costs as a percentage
of total revenue during that quarter.

                                       26
<PAGE>

  Research and development expenses. Research and development expenses
increased during the quarter ended June 30, 1998 due to increased staffing as
we accelerated our efforts to expand our product lines.

  Sales and marketing expenses.  Sales and marketing expenses increased during
the quarter ended June 30, 1998 as a result of 1) increased advertising, 2)
increased personnel costs and 3) expanded business development efforts as we
established our presence in the marketplace and built strategic partnerships.
Advertising costs during the quarter ended June 30, 1998 increased from
$690,000 during the quarter ended March 31, 1998 to $1.9 million, salary and
wage expense increased from $1.0 million to $1.9 million and expanded business
development efforts increased from $430,000 to $1.0 million.

  Sales and marketing expenses decreased during the quarter ended March 31,
1999 as the result of: 1) our reorganization, 2) the reduction in the size of
our marketing organization, 3) our election not to pursue advertising campaigns
similar to those we pursued in 1998, 4) a reduction in our travel expenses and
5) our strategic decisions in December 1998 to cease our Asian and Australian
operations. From the quarter ended December 31, 1998 to the quarter ended March
31, 1999, salary and wage related expenses decreased from $3.7 million to $2.4
million, advertising expenses decreased from $800,000 to $460,000, travel
expenses decreased from $1.2 million to $600,000 and Asian and Australia
related expenses decreased from $230,000 to $25,000.

  Sales and marketing expenses increased during the quarter ended December 31,
1999 due to increased commissions expense payable to sales and business
development personnel. Commission expense increases are generally not
comparable to revenue increases because we typically recognize revenues on a
percentage-of-completion basis while commissions are earned and expensed in the
quarter in which the sale is made.

  General and administrative expenses. General and administrative expenses
increased during the quarter ended December 31, 1999 as a result of expenses
related to our chief executive officer, and costs incurred employing him,
totalling $1.3 million.

  Total operating expenses. Total operating expenses increased during the
quarter ended June 30, 1999 from the prior quarter as we increased our
investment in research and development, expanded our direct sales force, and
built our finance infrastructure to support our growth. Total operating
expenses increased during the quarter ended December 31, 1999 from the prior
quarter as a result of the increase in sales commission expense and expenses
incurred employing our chief executive officer. Sales commission expense
increased from $970,000 during the quarter ended September 30, 1999 to $2.2
million during the quarter ended December 31, 1999 and expenses related to our
chief executive officer increased from $200,000 to $1.5 million during the same
period offset by a reduction in the amortization of deferred stock-based
compensation from $823,000 to ($283,000).

  Other expenses. Other expense increased during the quarter ended December 31,
1999 due to the write-off of a prepaid royalty asset. Our quarterly results
have varied widely in the past, and we expect that they may continue to
fluctuate in the future.

  Seasonality. We have experienced, and expect to continue to experience,
seasonality in software and service orders. In recent years, there has been a
relatively greater demand for our products in the fourth quarter than in each
of the first three quarters of the year, particularly the first quarter. As a
result, we have historically experienced relatively higher sales in the fourth
quarter than in other quarters. We believe that these fluctuations are caused,
in part, by customer buying patterns often influenced by year end budgetary
pressures and the efforts of our direct sales force to meet or exceed year-end
sales quotas. European sales may also tend to be lower during the summer months
than during other periods. We expect that seasonal trends will continue.

  Revenue recognition. We recognize software license revenue over the project
implementation cycle, which is typically from three to nine months. As a
result, we expect that software license revenue will only be partially affected
by seasonal trends.

                                       27
<PAGE>


  Recent operating results. The following table shows certain unaudited
consolidated financial data for the quarter ended March 31, 2000. The Company
believes that this information reflects all adjustments (consisting of only
normal recurring adjustments) necessary for a fair presentation of the
information for the period presented. The operating results for any quarter are
not necessarily indicative of results for any future period.

 Consolidated Statement of Operations Data (in thousands, except per share
 data):

<TABLE>
   <S>                                                                <C>
   Revenue:
     Software license................................................ $  3,183
     Service, maintenance and other..................................    4,515
                                                                      --------
   Total revenue.....................................................    7,698
   Cost of Revenue:
     Software license and royalties..................................      121
     Service, maintenance and other..................................    4,528
                                                                      --------
   Total cost of revenue.............................................    4,649
                                                                      --------
       Gross Profit..................................................    3,049
   Amortization of deferred stock-based compensation.................      708
   Operating loss....................................................  (10,475)
   Net loss.......................................................... $(10,602)
   Pro forma basic and diluted net loss per share.................... $  (0.54)
   Weighted average shares used in pro forma per share computation...   19,683
</TABLE>

 Consolidated Balance Sheet Data:

<TABLE>
   <S>                                                                   <C>
   Cash and cash equivalents............................................ $8,722
   Accounts receivable.................................................. 13,190
   Deferred revenue..................................................... 17,616
</TABLE>

Weighted average shares used in computing pro forma basic and diluted net loss
per share includes the shares used in computing basic and diluted net loss per
share adjusted for the conversion of preferred stock to common stock, as if the
conversion occurred at the date of original issuance.

                        Liquidity and Capital Resources

  Funding to date. We have funded our operations through December 31, 1999
through private sales of preferred equity securities, totaling $85.7 million
and commercial bank loans and equipment leases. As of December 31, 1999, we had
$12.5 million in cash and cash equivalents.

  Sources and uses of cash. Our operating activities resulted in net cash
outflows of $11.4 million, $32.0 million and $28.8 million in 1997, 1998 and
1999. The sources of cash were: 1) increases in accumulated liabilities, 2)
increases in accrued compensation and related expenses, and 3) increases in
deferred revenue in 1997, 1998 and 1999. Uses of cash in operating activities
were due to net operating losses and increases in accounts receivable for 1997,
1998 and 1999.

  Investing. Investing activities used cash of $1.8 million in 1997, $3.7
million in 1998 and $785,000 in 1999 because of purchases of capital equipment.
In April 1999, we began leasing equipment through a $1.5 million master lease
agreement with a lender.

  Financing. Financing activities provided:

  .  $36.7 million in 1997 through the issuance of preferred stock and
     proceeds from an equipment loan;

  .  $16.3 million in 1998, through the issuance of preferred stock, proceeds
     from an equipment loan and proceeds from the issuance of convertible
     subordinated notes and proceeds from a revolving line of credit; and

  .  $36.6 million in 1999, from the issuance of preferred stock and the
     issuance of a subordinated loan.

                                       28
<PAGE>

  Credit facilities. As of December 31, 1999, our principal commitments
consisted of:

  .  obligations to Silicon Valley Bank under:

    .  a revolving line of credit,

    .  equipment facility loans, and

    .  an irrevocable letter of credit, and

  .  obligations to Comdisco under:

    .  the master lease agreement and

    .  a subordinated loan and security agreement.

As of December 31, 1999, we had $6.5 million in outstanding borrowings which
are payable through 2002. Our revolving line of credit provides for borrowing
of up to $10.0 million based on 60% of eligible accounts receivable. Borrowings
under this line of credit accrue interest that is payable monthly at 0.10%
above prime rate. As of December 31, 1999, we had no borrowings against this
line of credit. Borrowings are secured by all of our assets. We have agreements
that require us to comply with financial covenants. These covenants are that we
maintain a 1.5 to 1.0 quick ratio, a $3.3 million tangible net worth and a 1.5
to 1.0 liquidity coverage ratio. As of December 31, 1999, we were in compliance
with each of these covenants.

  Deferred revenue. Deferred revenue consists of the unrecognized portion of
license and maintenance sales contracts. Our deferred revenue balance or
changes in that balance may not be indicative of our total backlog or changes
in the ordering patterns of our customers. Capital expenditures were for
computer workstations used for product development, product demonstrations and
customer support.

  Future funding requirements. We believe that the net proceeds from this
offering, together with our current cash balances and the cash flows generated
by operations and tax refunds, if any, will be sufficient to satisfy our
anticipated cash needs for working capital and capital expenditures for at
least the next twelve months. After that we may require additional funds to
support our working capital requirements, or for other purposes. We may also
seek to raise additional funds through public or private equity financings or
from other sources. We may not be able to obtain adequate or favorable
financing at that time. Any financing we obtain may dilute your ownership
interests.

  A portion of our cash may be used to acquire or invest in complementary
businesses or products, or to obtain the right to use complementary
technologies. We have no current plans, agreements or commitments of this
nature, and we are not currently engaged in any negotiations involving such a
transaction.

Qualitative and Quantitative Disclosures about Market Risk

  Because we market our products in the United States and in foreign countries,
our financial results could be affected by factors including changes in foreign
currency exchange rates or weak economic conditions in foreign markets. Our
interest income is sensitive to changes in the general level of U.S. interest
rates, particularly because the majority of our investments are in short-term
instruments. Due to the nature of our short-term investments, we believe that
there is no material interest rate risk exposure. Consequently, no quantitative
tabular disclosures are required.

Recent Accounting Pronouncements

  In December 1998, the governing body of the American Institute of Certified
Public Accountants, issued SOP 98-9, Software Revenue Recognition, with Respect
to Certain Arrangements. SOP 98-9 requires that revenue be recognized using the
residual method in a multiple-element arrangement when fair value does not
exist for one or more of the undelivered elements in the arrangement. Under the
residual method, the total fair value of the undelivered elements is deferred
and subsequently recognized in compliance with SOP 97-2. We adopted SOP 98-9 on
January 1, 2000, and do not expect this adoption to have a material effect on
our consolidated financial position or results of operations.

                                       29
<PAGE>

                                    BUSINESS

Overview

  We provide e-business infrastructure software that enables the integration
and automation of business processes within companies and among their customers
and suppliers using the Internet. Our products help traditional and new
businesses use the Internet to reduce information technology costs, increase
productivity, improve responsiveness to customer demands and enhance overall
competitiveness. Our products are based on a modular architecture that meets
the requirements of large enterprises, and combines standard Internet
technologies with proprietary innovations.

  We provide pre-built connectivity solutions for leading technology
environments and applications. We offer pre-built business process modules to
support many of the common integration requirements of companies in our target
markets. We also provide a set of tools that allow our customers to customize
their integration solution to address their unique e-business requirements.

  We sell and market our products primarily through a direct sales force that
targets companies in selected industries, including technology, industrial
manufacturing, process manufacturing and telecommunications. Additionally, we
utilize our relationships with IBM, SAP, global systems integrators and
software providers to support the sales and implementation of our products in
these and other markets. Our customers include companies such as Applied
Materials, Delphi Automotive, DuPont, Ingersoll-Rand, Nortel Networks, Siemens,
Solar Turbines/Caterpillar and U S WEST.

Industry Background

 The Need for Collaborative Business Strategies

  In recent years, many large companies have faced an increasingly competitive
business environment. This competitive environment has been further complicated
by changes in government regulation, mergers and acquisitions, and the
increasing adoption of e-business strategies. In response to this changing
environment, many companies are modifying their operations to increase
efficiency and become more responsive to customer and market demands.

  In pursuit of these goals, many companies are implementing collaborative
business strategies that improve coordination and communication among multiple
business functions, divisions and trading partners. Examples of these
strategies include:

  . using Internet-based marketplaces and trading exchanges;

  . collaborative supply and demand planning among trading partners;

  . outsourcing customer service and manufacturing activities to third
    parties; and

  . inventory management across multiple company divisions and distribution
    channels.

  Efforts to implement the above strategies, however, have been constrained by
various information technology and business issues, including:

  . companies have traditionally been managed on a functional basis with
    minimal coordination between functions including procurement,
    manufacturing, sales, logistics and administration;

  . companies have adopted disparate packaged and custom enterprise
    applications to automate each business function, including:

    (a) enterprise resource planning applications from vendors including SAP
        and Oracle,
    (b) customer relationship management applications from vendors including
        Siebel and Clarify,
    (c) supply chain management applications from vendors including i2
        Technologies, Manugistics Group, Inc. and Numetrix, a J.D. Edwards
        Company,
    (d) e-business applications from vendors including SAP, Ariba, Inc. and
        BroadVision, Inc., and
    (e) industry-specific applications from vendors including Portal and
        MetaSolv;

                                       30
<PAGE>

  . business processes typically span multiple functions and applications,
    requiring a significant level of integration within the enterprise;

  . extending internal and outsourced business processes outside the
    enterprise requires integration and coordination among customers' and
    suppliers' applications; and

  . technological incompatibilities and functional differences among
    disparate applications make it difficult for these systems to communicate
    in real time and to be integrated over the Internet.

  For example, a seemingly simple task such as receiving and fulfilling a
customer's order over the Internet may require interaction among the e-
business, order management, manufacturing, logistics and accounting systems
within one company, and the customer service, manufacturing and accounting
systems of multiple trading partners, each using its own enterprise
applications. The total dollar value of these business-to-business transactions
over the Internet is expected to grow to $1.3 trillion by 2003, according to
Forrester Research.

  As a result of this complexity, most large organizations face significant
integration challenges. To address these challenges, companies need a flexible
e-business infrastructure that automates internal and Internet-based business
processes while utilizing existing investments in enterprise applications. The
Yankee Group estimates that approximately 35% to 40% of total corporate
information technology spending is now consumed by systems integration costs.
This spending includes the cost of integration both within the enterprise and
among trading partners over the Internet.

 Current Business Integration Market

  Business integration solutions have traditionally been provided by numerous
parties, including:

  . systems integrators;

  . information technology departments within companies; and

  . software vendors.

According to International Data Corporation Research, the worldwide systems
integration services market is expected to grow from $41.0 billion in 1996 to
$90.0 billion by 2003.

  The market for e-business software, according to Forrester Research, is
expected to grow from $121.0 million in 1997 to $3.8 billion in 2002. The
related market for data integration tools and enterprise application
integration software, according to the Yankee Group, is expected to grow from
$1.6 billion in 1998 to $5.0 billion in 2001. The Yankee Group defines
enterprise application integration software as products that integrate business
applications both within an enterprise and among trading partners.

  To date, the business integration software market has been comprised of four
segments:

  . Messaging-Oriented Middleware is the underlying software that manages the
    movement of simple messages between applications. These products offer
    limited support for business logic that defines how, when and in what
    form data is transmitted between applications. Companies offering
    products in this segment include IBM, TIBCO and BEA.

  . Enterprise Application Integration Tools allow companies to build
    customized links between pairs of applications, known in the industry as
    point-to-point interfaces. These tools enable users to convert data from
    one application into a format that is able to be used by another
    application. Companies offering products in this segment include Active
    Software Inc., New Era of Networks Inc. and Mercator Software, formerly
    TSI Software International.

  . Electronic Data Interchange Software uses industry-specific data formats
    to enable point-to-point electronic links for the purpose of transmitting
    business documents. Companies offering products in this segment include
    Sterling Commerce and Harbinger.

                                       31
<PAGE>

  . XML Tools enable companies to build integration solutions based on the
    exchange of XML-formatted documents. These solutions typically do not
    address the integration requirements of applications within the
    enterprise. Companies offering products in this segment include
    OnDisplay, Inc. and webMethods, Inc.

 Shortcomings of Common Business Integration Approaches

  While the adoption of these products has driven substantial growth in the
business integration software market, we believe these products fail to provide
a complete business integration solution for a number of reasons:

  . Inability to Support e-Business. Many current business integration
    products lack support for standard Internet data formats and
    communication protocols. Furthermore, most solutions are not able to
    support complex, Internet-based processes between trading partners.

  . Lack of Business Process Support. Many tools-based or electronic data
    interchange solutions support the transmission of data or business
    documents rather than automating business processes between applications
    and enterprises. Many products do not provide pre-built support for the
    most common business process integration requirements.

  . Lack of Pre-built Application Connectivity. Many business integration
    solutions do not provide pre-built connectivity to the market's leading
    e-business and enterprise applications. Without this pre-built
    connectivity, companies may find it difficult to pursue e-business
    strategies using their existing information technology infrastructure.

  . Architectural Inflexibility. Most custom built interfaces cannot be
    easily applied to similar situations and require significant
    modifications or full-scale reprogramming when adding applications. Many
    business integration products are either based on out-dated technologies
    or do not provide an architecture that combines all required integration
    technologies into a unified product.

 New Approaches for Business Integration

  We believe that a large opportunity exists for software vendors to address
these limitations by delivering solutions that:

  . provide an e-business infrastructure for the integration and automation
    of business processes both within the enterprise and among customers and
    suppliers over the Internet;

  . provide an open platform that supports high volumes of business
    transactions and meets the system management requirements of large
    companies;

  . utilize the functionality of leading enterprise application packages;

  . reduce changes to existing information technology environments; and

  . operate in a variety of technical environments including those comprised
    of custom and packaged applications, various operating systems and the
    Internet.

  A comprehensive business integration solution with the above features would
improve operating efficiencies, enable organizations to adapt to changes in
business and information technology requirements and allow companies to realize
the benefits of e-business.

The CrossWorlds Solution

  Our e-business infrastructure software integrates and automates business
operations within companies and among their customers and suppliers over the
Internet. Our products are based on a modular architecture that meets the
requirements of large enterprises, and combines standard Internet technologies

                                       32
<PAGE>

with proprietary innovations. We offer a set of tools that customers can use to
build e-business integration solutions, and extend and customize our pre-built
components. Our pre-built components consist of connectivity solutions for
leading applications and business process modules for integrating common e-
business and enterprise processes.

  Our products are characterized by five elements:

 Flexible e-Business Infrastructure

  We believe our products provide a foundation for enabling e-business
transactions between companies and their trading partners. We support a number
of the leading packaged e-business applications and development environments.
Our architecture also supports multiple e-business and Internet data and
communication standards. When combined with our application integration and
business process automation products, customers can rapidly deploy e-business
solutions that take advantage of their existing information technology
infrastructure.

 Real-time Business Process Automation

  We believe our integration solutions allow customers to accelerate their
e-business initiatives by integrating disparate enterprise applications and
automating their underlying business processes. We believe our solution reduces
process redundancies and data inconsistencies between applications. We offer a
process modeling toolset for building custom business process integration
solutions and pre-built business process integration modules that utilize our
knowledge of industry specific business practices.

 Extensive Packaged Application Integration

  We offer pre-built connectivity products for many of the leading packaged e-
business and enterprise applications. These connectivity products use and
complement the standard interfaces provided by each application vendor. Where
required, we support multiple versions of applications to accommodate
functional and technological changes in their interfaces. This allows customers
to migrate between existing and new application releases with minimal changes
to their integration solution, reducing their long term cost of integration.

 Extensive Custom Application Integration

  We offer a suite of tools that enables customers to extend their integration
solutions to include custom applications. Our tools automate common integration
development tasks including transforming data among different formats and
establishing communications between applications and the CrossWorlds
environment. To accelerate development efforts, we also provide pre-built
connectivity to many common technology environments.

 Scalable Integration Architecture

  Our Java-based architecture supports relevant Internet and technology
standards and can be extended to support new standards as they emerge. This
architecture has been designed to allow customers to adapt to changes in
business and information technology environments, including the addition of new
applications or trading partners and the processing of increasingly large
volumes of information.

Strategy

  Our objective is to establish and maintain a leadership position in the e-
business infrastructure software market. To this end, our strategy includes
these elements:

 Provide Comprehensive e-Business Solutions

  As enterprises increasingly conduct business over the Internet, they will
face a growing number of integration challenges. Over the next twelve months,
we intend to enhance our current e-business product

                                       33
<PAGE>

offering by developing Internet-based business process integration modules and
pre-building connectivity solutions for additional e-business applications
including those used for Internet-based procurement and order management. We
also intend to enhance our architecture by providing support for additional
security and Internet standards as they emerge.

 Expand Business Process Automation and Application Integration Solutions

  We believe that the breadth and depth of our business process automation and
application integration solutions are a primary competitive differentiator in
our target markets. Within a single architecture, our solution addresses a
broad range of integration requirements faced by global enterprises. Over the
next two years we plan to build connectivity to additional packaged
applications and technology environments. We will expand our set of pre-built
business process integration modules to support additional customer
requirements.

 Maintain and Extend Technology Leadership

  Our Java-based, open architecture uses industry-leading messaging middleware
and proprietary innovations, providing an extensible, high-performance e-
business infrastructure. As new technologies evolve, we intend to continue to
improve this technology platform to ensure that our solutions meet the
demanding requirements of large enterprises. We have been granted a patent on
key elements of our technology and have additional patents pending on other
portions of our architecture.

 Penetrate Selected Industries

  We believe that sales to global companies in selected industries including
technology, industrial manufacturing, process manufacturing and
telecommunications represent our greatest immediate revenue opportunities. Many
companies in these industries have made significant investments in packaged and
custom applications and are pursuing strategies that require the integration of
these applications both internally and with trading partners over the Internet.
Over the next two years we intend to expand our offerings in these markets and
to target additional industries in the future where our solution can provide
significant strategic benefit.

 Promote Broad Acceptance of the CrossWorlds Platform

  We are planning initiatives to promote broader acceptance of the CrossWorlds
platform. One element of this plan is the CrossWorlds Exchange, an online,
subscription-based resource containing a repository of integration components
based on our open architecture. The CrossWorlds Exchange will also provide
access to methodologies and templates to facilitate product development and
implementation by customers, systems integration and other third parties. The
CrossWorlds Exchange will be implemented in phases over the next six months.
Another element of this plan is to work with partners to expand distribution of
our products into additional industries.

 Expand Strategic Partnerships

  We intend to continue to develop and extend our strategic partnerships to
promote adoption of our e-business infrastructure solutions. We believe that
these strategic partnerships provide us with a competitive advantage. Our
partnerships with enterprise application and other technology vendors and
systems integrators provide sales and marketing support and access to required
technology and expertise. Currently, our most significant strategic partners
are IBM, SAP and a number of global systems integrators. Over the next twelve
to twenty-four months we expect our systems integrator partners will
increasingly provide the resources needed to implement our products.

                                       34
<PAGE>

Products and Technology

  Our e-business infrastructure products include business process integration
software and application connectivity components. These products are supported
by a Java-based architecture and a toolset that can be used to develop and
deploy customized integration solutions. The table below provides a summary
view of our product offerings.

                       e-Business Infrastructure Products

<TABLE>
<CAPTION>
                Product                               Description
 -------------------------------------- --------------------------------------

 <C>                                    <S>
 Business Process Integration Products  Business process integration toolset
                                        .CrossWorlds Process Designer
                                        Pre-built business process integration
                                        modules
                                        .CrossWorlds eBusiness
                                        .CrossWorlds Customer Interaction
                                        .CrossWorlds Enterprise
                                        Pre-built application connectivity
 Application Integration Products       solutions
                                        .CrossWorlds Application Connectors
                                        .CrossWorlds Technology Connectors
                                        Custom application integration toolset
                                        .CrossWorlds Connector Development Kit
                                        .CrossWorlds Map Designer
                                        .CrossWorlds Relationship Designer
 Infrastructure Products                .CrossWorlds InterChange Server
                                        .CrossWorlds System Manager
</TABLE>

   A typical installation would include one or more CrossWorlds InterChange
Servers, and a set of pre-built business process integration modules and
connectors that support a customer's specific requirements. We also provide
software maintenance and support, training and associated implementation
services.

Business Process Integration Products

  Our business process integration solution is comprised of pre-built modules
and development tools that enable business process integration within the
enterprise and among trading partners over the Internet. Our solution allows
customers to:

  . extend the functionality of individual applications, which enables
    additional e-business capabilities;

  . reconcile differences and redundancies in the information managed by
    disparate applications; and

  . provide access to information not usually available to the user of a
    single application.

  The foundation for our business process integration solution is our common
object model. All business processes within our system operate using a data
model that is designed to be independent of the way any specific application
represents its data. This common object model is a superset of the models
employed by the most widely deployed packaged enterprise applications. We
believe that the use of a common object model for business process integration
reduces the maintenance burden of the integration.

                                       35
<PAGE>

 Business Process Integration Toolset

  Business process integration modules are created and extended using the
CrossWorlds Designer suite of tools. The CrossWorlds Process Designer is a
standards-based tool for creating CrossWorlds common objects, designing
business process flows and automatically generating the underlying Java
programming code to operate on the CrossWorlds InterChange Server. To simplify
development and customization, process components are presented to the user
visually, and are defined and configured through the CrossWorlds Process
Designer's graphical user interface.

 Pre-Built Business Process Integration Modules

  In addition to creating their own business process integration modules with
our tools, our customers can use our pre-built integration modules to integrate
many of the common business processes required for e-business and other
enterprise business functions. These pre-built components utilize our common
object model, allowing multiple processes to be combined into solutions that
address complex requirements. Our pre-built process integration modules are
grouped into three product lines that are detailed in these three tables.

  CrossWorlds eBusiness. Our eBusiness product line includes business process
integration modules for integrating e-business applications and enabling
companies to collaborate with their trading partners over the Internet.
CrossWorlds eBusiness is designed to allow enterprises to implement e-business
solutions that take advantage of their existing information technology
investments.

                             CrossWorlds eBusiness

<TABLE>
<CAPTION>
             Module                               Description
 ------------------------------- ---------------------------------------------


 <C>                             <S>
 CrossWorlds eSales              Integrates the various applications involved
                                 in the Internet-based sales and ordering
                                 process


 CrossWorlds eProcurement        Integrates self-service procurement
                                 applications with financial and inventory
                                 systems


 CrossWorlds eCustomer Service   Provides self-service information by
                                 integrating Internet-based customer
                                 relationship management applications with
                                 order management and financial systems

 CrossWorlds Demand Planning     Integrates forecasting applications with
                                 operational systems to enable effective
                                 demand planning within the enterprise and to
                                 support sales forecasting

 CrossWorlds Supply Planning     Enables effective planning by integrating
                                 supply planning applications with operational
                                 systems
</TABLE>

                                       36
<PAGE>

  CrossWorlds Customer Interaction. Our Customer Interaction product line
includes the business process integration modules that link customer
relationship management, including sales force automation and customer service,
order management, billing and enterprise resource planning applications. These
products enable our customers to provide their sales and customer service
staffs with real time access to enterprise information, improving customer
service effectiveness and enhancing sales efficiency.

                        CrossWorlds Customer Interaction

<TABLE>
<CAPTION>
             Module                               Description
 ------------------------------- --------------------------------------------


 <C>                             <S>
 CrossWorlds Sales Processing    Allows companies to seamlessly integrate
                                 sales force automation applications with
                                 order management and other applications

 CrossWorlds Service and Support Enables improved customer service by
                                 integrating customer relationship management
                                 applications with order management and
                                 financial systems
</TABLE>

  CrossWorlds Enterprise. Our Enterprise product line includes business process
integration modules that synchronize information about key corporate assets
including customers, products, inventory and employees. This enables companies
to maintain a single, current view of information that is often duplicated
across multiple systems, and simplifies the task of exchanging data among
trading partners.

                             CrossWorlds Enterprise

<TABLE>
<CAPTION>
             Module                               Description
 ------------------------------- --------------------------------------------


 <C>                             <S>
 CrossWorlds Human Resources     Synchronizes relevant human resources
                                 information across multiple human resources
                                 applications and with multiple enterprise
                                 resource planning applications

 CrossWorlds Procurement         Enables an enterprise to synchronize product
                                 and vendor databases and generate purchase
                                 requisitions and orders among multiple
                                 procurement and financial applications

 CrossWorlds Inventory           Synchronizes and tracks inventory movements
  Management                     between inventory management and order
                                 fulfillment applications, providing a
                                 consistent view of distributed inventory
                                 across multiple plants and disparate
                                 applications

 CrossWorlds Financial           Integrates various functional applications
  Transactions                   with financial applications by posting
                                 accounts receivable, accounts payable and
                                 general ledger transactions
</TABLE>

Application Integration Products

  Our application integration products include pre-built connectivity for many
of the leading packaged applications and common technology platforms as well as
a toolkit for building connectivity to custom applications.

  Many of our connectors support specific versions of enterprise applications
and are upgraded by CrossWorlds as new functionality and interfaces are
released by application vendors. We maintain a library of application and
technology connectivity solutions for less common environments, some of which
are included in the listings below. This library of connectivity solutions
enables CrossWorlds implementation staff, customers and our systems integrator
partners to more rapidly implement integration solutions.


                                       37
<PAGE>

 Pre-built Application Connectivity Solutions

  CrossWorlds Application Connectors. Our Application Connectors understand the
means by which an application communicates with its external environment. Our
Application Connectors monitor the events occurring within an application and
use published interfaces to make them available to the CrossWorlds environment
in real-time. Many of our Application Connectors include pre-built components
that enable our customers to deploy e-business infrastructure solutions more
rapidly.

  We offer Application Connectors for a number of the leading e-business and
enterprise applications used by manufacturing and telecommunications companies,
including those offered by BroadVision, Clarify, J.D. Edwards & Company, Kenan
Systems, a subsidiary of Lucent Technologies, Inc., Manugistics, MetaSolv,
Oracle, PeopleSoft Inc., Portal, SAP, and Siebel.

  CrossWorlds Technology Connectors. Our Technology Connectors provide
connectivity to leading enterprise and e-business technology environments for
integrating custom applications and applications that lack well-defined
interfaces. Our Technology Connectors use widely adopted, standard technologies
including:

     .  Open Database Connectivity, or ODBC;

     .  Java Database Connectivity, or JDBC;

     .  Hypertext Markup Language, or HTML;

     .  Common Object Request Broker Architecture, or CORBA;

     .  Extensible Markup Language, or XML;

     .  Electronic Data Interchange, or EDI;

     .  Customer Information Control System; or CICS;

     .  IBM MQ Series Integrator, or MQSI; and

     .  Oracle Relational Database Management System, or Oracle RDBMS.

 Custom Application Integration Toolset

  Three tools are used to build connectivity solutions involving custom
applications.

  CrossWorlds Connector Development Kit. Our customers can use our Connector
Development Kit to:

  .  build connectors to custom applications;

  .  extend the connectivity provided by our pre-built connectors; and

  .  reuse previously built components to minimize the amount of programming
     required.

  CrossWorlds Map Designer. Our Map Designer tool is used to build and extend
transformation maps that convert data from application specific formats into
our common object model. The CrossWorlds Map Designer is a visual tool and is
tightly integrated with the CrossWorlds environment to support high volumes of
transformations.

  CrossWorlds Relationship Designer. Our Relationship Designer is a graphical
tool that maintains references between data residing in disparate applications.
Our customers can use the CrossWorlds Relationship Designer to define data
relationships for maintaining a single view of information across multiple
applications.

                                       38
<PAGE>

Infrastructure Products

  Our process automation and application integration solutions are deployed on
the CrossWorlds InterChange Server, a Java-based, software product that scales
to meet the requirements of global organizations and trading networks with
large volumes of transactions.

  We believe that CrossWorlds' infrastructure products exhibit the key
characteristics of software solutions used by large global organizations:

  Technology Infrastructure. Our InterChange Server utilizes a combination of
proprietary technologies and industry-standard messaging middleware from IBM.
The CrossWorlds InterChange Server is Java-based and modular allowing us to
support the most widely-accepted operating systems and technology standards. We
have been granted a patent on key elements of our architecture.

  e-Business Foundation. Our open platform supports a variety of Internet
standards, including Extensible Markup Language, or XML, RosettaNet, Hypertext
Markup Language, or HTML, Hypertext Transfer Protocol, or HTTP, File Transfer
Protocol, or ftp, and Electronic Data Interchange, or EDI. The CrossWorlds
InterChange Server:

  .  provides interfaces for multiple data formats;

  .  supports communications over multiple protocols; and

  .  allows us to support new and emerging e-business standards. Integrated
     security ensures the integrity and confidentiality of exchanges between
     trading partners.

  Scalability. Our e-business infrastructure is designed to meet the growing
integration needs of organizations with multiple packaged and custom
applications. The CrossWorlds InterChange Server is capable of executing
multiple business processes simultaneously in a distributed environment. Our
modular architecture gives customers flexibility in deploying our solution, and
allows them to improve performance of individual components to enable the
overall solution to grow with their needs.

  Manageability. Our System Manager tool is used to manage the CrossWorlds
environment. The CrossWorlds System Manager is a visual tool and is tightly
integrated with the CrossWorlds InterChange Server, enabling users to monitor
and control the execution of our business process integration modules and
connectivity solutions from a single user interface.

  Adaptability. Our architecture allows business process modules and connectors
to be implemented independent of each other. This separation enables our
customers to mix and match business process modules and connectors, which makes
the integration solution more adaptable to changing business requirements.

                                       39
<PAGE>

Customers and Markets

  We have licensed our software to large global organizations in four
industries: technology, industrial manufacturing, process manufacturing and
telecommunications. Customers in other industries also have licensed our
software to support specific functional integration projects. For our four
targeted industries, we have developed industry initiatives to increase our
market penetration, including:

  . industry-specific product development;

  . support for industry-specific applications;

  . dedicated sales and pre-sales teams; and

  . focused marketing initiatives.

  This list shows all of our license customers, excluding eight customers who
are not currently using our software and five customers who are currently using
our software but do not allow us to use their names publicly:

             Technology                            Telecommunications
- -------------------------------------     -------------------------------------

 . Applied Materials                       . Avantel S.A./MCIWorldCom
 . Nortel Networks                         . Axtel
 . Royal Philips N.V.                      . Citykom Munster GmbH
 . Siemens                                 . CodeNet
 . Sony Corporation                        . EWE TEL AG
                                          . Excel Communications, Inc.
      Industrial Manufacturing            . HighwayOne
- -------------------------------------     . KPNQwest
                                          . Orange Plc.
 . Andersen Corporation                    . Orbitel
 . Delphi Automotive                       . U S WEST
 . Ingersoll-Rand

 . Solar Turbines/Caterpillar                        Other Industries
 . Vorwerk AG                              -------------------------------------
 . Whirlpool Corporation


                                          . Baxter Healthcare, Health Care
        Process Manufacturing             . diCarta, Inc., Software
- -------------------------------------     . EnBW International GmbH, Utilities
                                          . LodgeNet Entertainment
 . The Dow Chemical Company                  Corporation, Entertainment
 . DuPont                                  . Neoforma.com, Inc., Health Care
 . Farmland Industries                     . Premier, Inc., Health Care
 . Hercules, Inc.                          . SourceAlliance.com, Electrical
                                            Supply

 . Roche Group
  A small number of customers accounted for a significant portion of our
revenues during the periods 1997, 1998 and 1999. In 1997, Farmland Industries
accounted for $248,000, Orange Plc. accounted for $220,000 and two former
customers accounted for $275,000 and $240,000 of our revenue. In 1998, US West
accounted for $1.1 million, Siemens accounted for $1.0 million and Hercules,
Inc. accounted for $871,000 of our revenue. In 1999, DuPont accounted for $4.1
million of our revenue.

                                       40
<PAGE>

Customer Case Studies

  These case studies are intended to show the uses of CrossWorlds products in
real world applications. These case studies are not intended to be an
endorsement of CrossWorlds or its products.

  Customer: Neoforma.com, healthcare e-business network provider

  Problem: Neoforma.com is building an online healthcare marketplace over the
  Internet that will serve as a global network to bring together healthcare
  providers and medical suppliers to exchange information and buy and sell
  medical products, supplies and equipment. To accomplish this, Neoforma.com
  is integrating mySAP.com Marketplace with its internal applications and
  plans to integrate its online marketplace with the exchange participants'
  order management and purchasing applications.

  Solution: Neoforma.com is implementing CrossWorlds as the core integration
  solution to provide healthcare providers and suppliers a conduit to connect
  with the mySAP.com Marketplace. CrossWorlds eBusiness will be used to
  automate the exchange by recording order information from healthcare
  providers and product information from medical suppliers and formatting it
  for the mySAP.com Marketplace. CrossWorlds will standardize and maintain
  the core business logic and master data definitions involved in the
  transactions including item, master customer, master vendor, master orders,
  account status and inventory level. The purpose of this standardization is
  to ensure consistent, accurate exchange of information and to facilitate
  the buying and selling of medical products, supplies and equipment.
  Neoforma.com will also use CrossWorlds to integrate mySAP.com and
  Neoforma.com's internal ERP system.

  Customer: Delphi Automotive, automotive technologies, systems and
  components

  Problem: Delphi needed a standardized integration solution that could tie
  together numerous packaged and custom applications to support the company's
  complex business processes. These applications operate within multiple
  business units, and Delphi wanted a solution that would improve the
  efficiency of data sharing across the company. Delphi currently has a large
  SAP ERP implementation along with a myriad of custom applications that
  manage production, purchasing and fulfillment.

  Solution: Delphi is implementing CrossWorlds to integrate the company's
  complex application environment across the enterprise. From CrossWorlds,
  Delphi purchased the CrossWorlds SAP Connector, multiple CrossWorlds
  Technical Connectors, the CrossWorlds InterChange Server, the CrossWorlds
  Connector Development Kit and multiple pre-built CrossWorlds Business
  Process Integration Modules to integrate key information and automate the
  processes across business units.

  Customer: U S WEST, telecommunications service provider

  Problem: U S WEST !NTERPRISE, U S WEST's data networking and new product
  development division, needed to integrate the common business processes for
  customer relationship management, order history and service contracts
  across three customer service and back-office applications.

  Solution: U S WEST implemented CrossWorlds Customer Interaction solution to
  enable a bi-directional flow of information between these applications,
  ensuring a consistent and accurate picture of its customers, products and
  contracts. As a part of U S WEST's new systems architecture, CrossWorlds'
  solution helped U S WEST achieve a five-fold increase in the number of
  quotes for contracts and renewals processed within the first month of
  implementation. U S WEST estimates they have achieved a 35% cost savings in
  this first phase of the CrossWorlds implementation, simply because of the
  ease of making changes to customer contracts.

                                       41
<PAGE>

Partners

 Strategic Partners

  We will continue to enhance and expand our strategic partnerships with
industry leaders to increase market awareness and acceptance of our e-business
infrastructure solutions. These relationships include a variety of joint
development, cooperative sales and marketing efforts that are more significant
than our efforts with other partners. Our strategic partners include:

     IBM. CrossWorlds and IBM have a strategic relationship focused on joint
  sales and marketing of a combined product offering. We and IBM have
  established a joint design council to identify areas of potential
  cooperation such as joint product development and technology transfer. We
  have agreed to incorporate technology from IBM as part of our
  infrastructure. We plan to expand our relationship to include a sales,
  marketing and implementation partnership with IBM Global Services, IBM's
  systems integration organization.

     SAP. SAP made equity investments in CrossWorlds in 1997 and 1999. We and
  SAP have committed resources towards joint development, marketing and
  sales. We support SAP's Business Framework architecture and are a certified
  partner in SAP's Complementary Software Program. SAP has certified the
  CrossWorlds Connector for R/3 for the SAP Business Application Programming
  Interface. An executive from SAP sits on our technical advisory board.

 Strategic Investors

  We have received equity investments of at least $1 million from a variety of
leading companies in the technology industry besides SAP. Some of these
investors also provide marketing and sales assistance. Strategic investors
include:

<TABLE>
<CAPTION>
           Strategic Investor                   Description of Investor
 -------------------------------------- --------------------------------------


 <C>                                    <S>
 Axon Solutions                         Axon is a United Kingdom-based systems
                                        integrator.


 Compaq Computer Corporation            Compaq is a supplier of computer
                                        equipment and related services.


 Industri-Matematik International       IMI is a provider of order management
  Corp., IMI                            applications for manufacturers and
                                        wholesale distributors.


 Intel Corporation                      Intel is a manufacturer of computer,
                                        networking and communications
                                        products.


 J.D. Edwards                           J.D. Edwards is a provider of
                                        enterprise resource planning
                                        applications.


 Manugistics                            Manugistics is a provider of supply
                                        chain planning and management
                                        applications.


 Omron Corporation                      Omron is a Japan-based supplier of
                                        industrial automation, service
                                        automation, healthcare automation and
                                        information processing.
</TABLE>

                                       42
<PAGE>

 Systems Integrators/Consulting Firms

  Systems integrators and consulting firms provide sales, marketing and product
development support. Partnerships with systems integrator and consulting firms
help shorten the sales cycle for prospective customers and enable access to
executives at potential prospects. These partnerships may also include joint
product development efforts. Our systems integrator and consulting firm
partners include:

<TABLE>
<CAPTION>
       Systems Integrator Partner             Description of Relationship
 -------------------------------------- --------------------------------------


 <C>                                    <S>
 Cap Gemini                             Cap Gemini and CrossWorlds have a
                                        joint sales, implementation, marketing
                                        and development partnership focused on
                                        the telecommunications industry and
                                        the United Kingdom market.

 CSC                                    CSC Consulting and CrossWorlds have a
                                        joint sales and implementation
                                        partnership focused on large
                                        enterprises in the United States and
                                        Europe.


 Deloitte Consulting                    Deloitte Consulting and CrossWorlds
                                        have a joint sales, implementation and
                                        marketing partnership focused on the
                                        telecommunications and enterprise
                                        resource planning markets.

 EDS                                    EDS and CrossWorlds have a joint
                                        sales, implementation and marketing
                                        partnership focused on providing
                                        e-business integration solutions to
                                        selected industries.


 Ernst & Young                          Ernst & Young and CrossWorlds have a
                                        joint sales, implementation, marketing
                                        and development partnership focused on
                                        selected industries, including
                                        manufacturing and telecommunications.

 PricewaterhouseCoopers                 PricewaterhouseCoopers and CrossWorlds
                                        have a joint sales, implementation and
                                        marketing alliance focused on
                                        providing e-business integration
                                        solutions for selected industries.
</TABLE>

  CrossWorlds has worked cooperatively with other systems integrators and
consulting firms including Andersen Consulting and Cambridge Technology
Partners, although we have no formal partnerships with these companies.

                                       43
<PAGE>

 Application Partners

  We have established business relationships with a number of enterprise
application software providers. These relationships typically include technical
cooperation, joint marketing, cooperative development or joint sales.
CrossWorlds has access to each company's software and documentation. Our
application partners include:

<TABLE>
<CAPTION>
          Application Partner                   Description of Partner
 -------------------------------------- --------------------------------------


 <C>                                    <S>
 Baan                                   Baan is a provider of enterprise
                                        resource planning applications.


 BroadVision                            BroadVision is a provider of
                                        electronic commerce applications.


 Clarify                                Clarify is a provider of customer
                                        relationship management applications.


 MetaSolv                               MetaSolv is a provider of operating
                                        support system applications for the
                                        telecommunications industry.


 Oracle                                 Oracle is a provider of enterprise
                                        resource planning applications.


 PeopleSoft/Vantive                     PeopleSoft is a provider of enterprise
                                        resource planning and customer
                                        relationship management applications.

 Portal                                 Portal is a supplier of customer
                                        relationship management and billing
                                        software for Internet service
                                        providers.


 Siebel                                 Siebel is a provider of customer
                                        relationship management applications.
</TABLE>

  CrossWorlds provides connectivity solutions for products from other vendors
with whom we have no formal relationship including those provided by Kenan,
Mannesmann, Numetrix and Trilogy.

Sales

  We sell our software primarily through our direct sales organization. As of
December 31, 1999 our direct sales force consisted of 24 sales professionals
located in offices in North America and Europe. We have domestic offices
located in California, Illinois, Maryland, Massachusetts, Michigan, Minnesota,
New Jersey, New York, North Carolina and Texas. Our European headquarters is
based in Munich, Germany and we have also established subsidiaries and local
offices in France and the United Kingdom. Technical sales support is provided
by 15 pre-sales representatives located in the corporate and field offices. The
field sales force is complemented by four telebusiness staff based in our U. S.
headquarters and two telebusiness and marketing staff based in our Munich
office.

  We deploy sales teams consisting of both sales and technical sales support
professionals to create industry-specific proposals, presentations and
demonstrations that address the specific requirements of the customer. Our
typical customer is a Fortune 1000 company in the technology, industrial
manufacturing, process manufacturing or telecommunications industry. The
initial sale cycle varies significantly from customer to customer. To date, it
has ranged from two to nine months.

                                       44
<PAGE>

Marketing

  Our marketing efforts are directed at establishing a market leadership
position for our software in the e-business infrastructure software market. Our
marketing programs are focused on creating awareness and generating interest in
our solution to increase sales and are targeted at information technology
managers, chief information officers, chief financial officers and other senior
executives within global Fortune 1000 companies. Our marketing plan includes
these elements:

  Brand Awareness and Public Relations. We believe that our brand identity has
improved our sales effectiveness by providing access to executives at target
accounts and contributed to our ability to attract partners. To build brand
awareness, we engage in a range of public relations activities including
industry analyst relations, press releases, media relations and media tours.

  Lead Generation. We have developed lead-generation programs, including direct
mail campaigns, seminar series and audioseminars, targeted at specific
audiences and account profiles. We participate in selected trade shows and
partner user group events with the goal of identifying prospective customers.
These efforts are complemented by our own internal telebusiness organization,
which provides support for lead-generation activities.

  Joint Marketing. With our application, technology and systems integrators
partners, we have planned and executed a variety of marketing programs
including trade shows and user groups, joint speaking opportunities, seminar
tours, public relations and advertising campaigns. To date, we have executed
joint marketing activities with Clarify, Compaq, Deloitte Consulting, Ernst &
Young, IBM, MetaSolv, Oracle, PeopleSoft, Portal, PricewaterhouseCoopers, SAP
and Siebel.

Customer Support, Implementation and Training

 Customer Support

  We have implemented a customer support strategy to promote successful
implementation and customer satisfaction. This multi-tiered approach includes
on-line support through the Internet, toll-free telephone technical support and
on-site support from our client services team when required. Our Internet
service programs provide links to selected CrossWorlds systems, including
product documentation, technical notes and a frequently asked questions
database. Customers can directly check the status of their technical support
requests over the Internet. A toll-free phone number also provides customers
with access to technical service professionals on a 24-hour a day, 7-day a week
basis. Our staff also provides on-site support to resolve more complex issues,
typically on a fee-for-service basis.

  We measure the satisfaction level of each customer annually using a customer
satisfaction research firm to help us identify, analyze and solve customer
service problems.

 Client Services

  To install and configure our products, we maintain an internal client
services implementation team with expertise at installing and configuring our
products at client sites. While most customer implementations to date have been
performed by our internal staff, our long term implementation strategy is to
support the efforts of our third-party systems integrator partners with a small
number of CrossWorlds' client services resources on each client project. We
believe the presence of our client service staff has helped maintain the
consistency and quality of our product implementation.

 Training

  We offer a range of training courses in the installation, configuration,
customization and administration of our products. Typically, these courses are
attended by the relevant members of a customer's information

                                       45
<PAGE>

technology team. We also train third-party implementation personnel on the
installation, customization and configuration of our products. Training is
available at our training facility in Burlingame, California and at various
locations around the world through a third-party training provider. Customers
and implementation partners can arrange for dedicated classes to be provided at
their own facilities.

Research and Development

  We have made substantial investments in research and development. When we
think it makes sense, we license technology from leading third-party providers
and engage in cooperative development with systems integrator partners to
reduce our own research and development expenditures. Through December 31,
1999, we have invested approximately $30.8 million in research and development.

  We believe that high levels of research and development spending continue to
be vital to our success because of:

  . the complexity of developing a comprehensive integration solution for e-
    business and the enterprise;

  . the need to support an increasing number of packaged enterprise
    applications, particularly in the e-business and telecommunications
    markets;

  . the ongoing expansion of functionality in each of our product lines; and

  . the increasing functional depth of our industry solutions for
    manufacturing and telecommunications.

  We focus our research and development efforts on the development of
collaboration modules and connectivity solutions, the supporting infrastructure
and tools, quality assurance and technical publications that support all facets
of product usage. We are also engaged in the development of advanced
technologies and the evaluation of emerging third-party products that can be
utilized in future releases of our products.

  On December 31, 1999, there were 75 employees in our research and development
organization. Approximately half of these employees are dedicated to developing
collaboration modules and connectivity solutions. The rest of these employees
are focused on infrastructure development, quality assurance, documentation and
technical support.

   We have a technical advisory board. The board is made up of senior
executives from Compaq, McKinsey & Company, Ernst & Young and SAP. The board
provides feedback on existing product plans and guidance for future research
and development activities.

Intellectual Property and Other Proprietary Rights and Limited Protection of
These Rights

 Legal Protections

  We rely on patent, copyright, trademark and trade secret laws and
restrictions on disclosure to protect our intellectual property rights. We have
been granted one patent relating to our architecture. We have four pending U.S.
patent applications relating to the architecture of our products. These
applications may not be approved. Patents we may be issued may not protect our
intellectual property and may be challenged by third parties. Other people may
independently develop similar or competing technology or design around any
patents that may be issued to us. We have three pending U.S. and international
trademark applications.

 Confidentiality and License Agreements

  We enter into confidentiality or license agreements with our employees,
consultants and corporate partners to protect our proprietary information. We
also control access to and distribution of our software, documentation and
other proprietary information. We provide our products to end-users primarily
under non-exclusive license agreements that impose restrictions on customers'
use of the software.

                                       46
<PAGE>

 Limited Protection of Our Rights

  Despite our efforts to protect our proprietary rights, existing laws afford
only limited protection. People may try to copy or reverse engineer aspects of
our products or to obtain and use information that we believe is proprietary.
We may not be able to protect our proprietary rights against unauthorized
copying or use. That kind of misuse of our proprietary rights could hurt our
business. It is hard to monitor unauthorized use of our products, and the steps
we have taken to prevent misappropriation of our technology may not work,
particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States.

 Claims

  The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and
the violation of other intellectual property rights. We attempt to avoid
infringing known proprietary rights of third parties in our product development
efforts. Nevertheless, we expect that we may be subject to legal proceedings
and claims for alleged infringement by us or our licensees of third party
proprietary rights, such as patents, trademarks or copyrights. Any claims
relating to the infringement of third party proprietary rights, even if not
meritorious, could:

  .  result in costly litigation,

  .  divert management's attention and resources, and

  .  require us to enter into royalty or license agreements which are not
     advantageous to us.

  Parties making these claims may be able to obtain an injunction, which could
prevent us from selling our products in the United States and abroad. Any of
these results could harm our business. We may increasingly be subject to
infringement claims as the number of products and competitors in our industry
grow and product functionalities overlap. Furthermore, former employers of our
current and future employees may assert that our employees have improperly
disclosed confidential or proprietary information to us.

Competition

  The market for our products is intensely competitive, and is expected to
become increasingly competitive as current competitors expand their product
offerings and new competitors enter the market. Our current competitors include
a number of companies offering one or more solutions to the application
integration problem, some of which are directly competitive with our products.

 Internal Information Technology Departments

  To date, the majority of the competition we have faced has been from the
internal information technology departments of potential customers that have
developed or may develop in-house integration solutions that may substitute for
those offered by us. We expect that these internal development initiatives will
continue to be a principal source of competition. The competitive factors in
this area require that we produce a product that conforms to the prospective
customer's information technology standards, scales to meet the needs of large
enterprises and costs less than their internal development efforts.

 Systems Integrators

  A second source of competition results from systems integrators and other
information technology service providers that customers engage to build
customized integration solutions across multiple customer applications. The
competitive factors in this area require that we demonstrate to our prospective
customers, systems integrators and other service providers the cost savings,
risk reduction and other advantages of an integration solution based on
commercially-supported software.

                                       47
<PAGE>

 Integration Software Providers

  Our competitors also include a large number of software vendors targeting one
or more segments of the business integration software market through various
technological solutions. Most of the competitors offer components of a complete
solution. Some competitors' solutions are centered on messaging and data
transport technologies, including BEA, Microsoft Corporation, and TIBCO. Other
competitors' solutions are focused on e-business and integration tools. These
competitors include Active Software, Extricity Software, Inc., Mercator
Software, New Era of Networks, OnDisplay, Software Technologies Corporation,
Vitria Technology Inc. and webMethods.

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

  In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address customer needs. It is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. Potential competition could emerge
from companies such as Hewlett-Packard, IBM, Microsoft and Oracle. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share.

Employees

  As of December 31, 1999, we had a total of 202 employees, 178 were based in
North America, and 24 were based in Europe, principally in the United Kingdom
and Germany. Of the 202 employees, 65 were engaged in sales and marketing, 75
were in product development and customer support, 40 were in implementation
services and 22 were in finance, administration and operations. None of our
employees is represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be good.

Facilities

  Our headquarters are located in approximately 40,000 square feet in
Burlingame, California. The lease on this office space expires in April 2008.
We currently lease other domestic sales and support offices in California,
Colorado, Connecticut, Illinois, Maryland, Massachusetts, Michigan, New Jersey,
New York, North Carolina; and Texas. We also maintain international offices in
leased facilities located in the United Kingdom, France and Germany. The German
office also serves as our European headquarters.

                                       48
<PAGE>

                                   MANAGEMENT

Executive Officers and Directors

  The executive officers and directors of CrossWorlds as of February 2, 2000
are:

<TABLE>
<CAPTION>
Name                     Age Position(s)
- ----                     --- -----------
<S>                      <C> <C>
Alfred J. Amoroso.......  49 Chief Executive Officer, President and Director
Katrina A. Garnett......  38 Founder and Chairman of the Board of Directors
Mark Bishof.............  40 Senior Vice President, Global Services
Barton S. Foster .......  35 Senior Vice President, Marketing and Business Development
Prashant Gupta..........  39 Chief Technical Officer and Senior Vice President
Mark R. Kent............  40 Chief Financial Officer and Senior Vice President Finance
Arthur R. Matin.........  43 Senior Vice President, Worldwide Sales
James G. Rowley.........  34 Senior Vice President, Engineering
Terence J. Garnett......  42 Director
Frederick W. Gluck......  64 Director
Andrew K. Ludwick.......  54 Director
Albert A. Pimentel......  44 Director
Colin F. Raymond........  29 Director
</TABLE>
- ---------------------
  Mr Gluck and Mr. Ludwick are members of the compensation committee. Mr.
Ludwick, Mr. Pimentel, and Mr. Raymond are members of the audit committee.

  Alfred J. Amoroso has served as president, chief executive officer and a
director of CrossWorlds since October 1999. Mr. Amoroso served as general
manager of IBM global services Asia Pacific from May 1997 to October 1999. From
1993 to 1997, Mr. Amoroso held various other management positions at IBM,
including general manager of the worldwide insurance business unit, general
manager of the North American insurance business unit and vice president of the
insurance consulting practice. Before joining IBM, Mr. Amoroso held various
positions at Price Waterhouse, now PricewaterhouseCoopers, from 1985 to 1993
including lead technology partner and partner in charge of the worldwide
insurance consulting practice. Before joining Price Waterhouse, Mr. Amoroso
founded Computech Corporation, an information technology consulting and
development firm, in 1977 and served as chief executive officer. Computech was
purchased by Price Waterhouse in 1985. Mr. Amoroso has a B.S. degree in systems
engineering and a M.S. in operations research from the Polytechnic Institute of
Brooklyn.

  Katrina A. Garnett founded CrossWorlds in March 1996, and has served as
chairman of CrossWorlds since October 1999 and a director since March 1996. Ms.
Garnett served as president and chief executive officer from March 1996 until
October 1999. Before founding CrossWorlds, Ms. Garnett served as vice president
and general manager of the distributed objects and connectivity division at
Sybase, Inc., a database software company, from October 1990 to April 1996.
From 1986 to 1990, Ms. Garnett served in various technical management positions
in the areas of workflow and workgroup applications at Oracle Corporation. Ms.
Garnett has a B.S. degree in industrial engineering from State University of
New York and a M.B.A. from Webster/IMEDE.

  Mark C. Bishof has served as senior vice president, global services for
CrossWorlds since March 2000. Before joining CrossWorlds, Mr. Bishof held
various positions at Deloitte Consulting including partner, communications
industry practice, and senior manager from December 1993 to February 2000. From
February 1988 to December 1993, Mr. Bishof served as an associate at Booz Allen
& Hamilton, Inc. Mr. Bishof holds a B.S. degree in computer science from the
University of Maryland.

  Barton S. Foster has served as senior vice president, marketing and business
development for CrossWorlds since November 1998, and served as vice president,
corporate marketing from June 1998 to November 1998. Before CrossWorlds, Mr.
Foster held management positions at Connect, Inc., an electronic commerce
software company, where he served as executive vice president, sales and
marketing and vice president, Marketing and Business Development, from March
1996 to June 1998. From November 1993 to

                                       49
<PAGE>

March 1996, Mr. Foster held various management positions at Oracle Corporation,
including vice president, applications and industry marketing, and senior
director, applications and industry marketing. Mr. Foster holds a B.A. degree
from Stanford University and a M.B.A. degree from Harvard University Graduate
School of Business Administration.

  Prashant Gupta has served as chief technology officer at CrossWorlds since
April 1996. Before joining CrossWorlds, Mr. Gupta served as chief architect at
Illustra/Informix from October 1995 until April 1996. From July 1992 to October
1995, Mr. Gupta held a variety of positions at Sybase, Inc., where he served as
the chief technical architect for several key middleware and connectivity
programs. Mr. Gupta holds a B.S. degree, with honors, in electrical and
computer engineering from BITS, Pilani, in India. Mr. Gupta is also a director
and consultant to several private companies.

  Mark R. Kent has served as senior vice president, finance and chief financial
officer for CrossWorlds since March 1999. Before CrossWorlds, Mr. Kent held
financial management positions at LSI Logic Corporation, a supplier of
semiconductors, where he served as treasurer from November 1997 to March 1999,
and as assistant treasurer from December 1995 to November 1997. From April 1991
to December 1995, Mr. Kent was a proprietor in the financial management
consulting firm Feldmann, Kent and Associates. From November 1987 to April
1991, he served as a senior officer of the high technology group of Bank of the
West. Mr. Kent holds a B.S. degree in business administration from Colorado
State University.

  Arthur R. Matin has served as senior vice president, worldwide sales and
consulting for CrossWorlds since January 2000. Before CrossWorlds, Mr. Matin
served as vice president of the industrial sector at IBM from January 1999 to
January 2000. From 1980 to 1999, Mr. Matin held various other management
positions at IBM, including general manager, industries, Asia Pacific, general
manager, product management, Asia Pacific and vice president of sales,
manufacturing industry. Mr. Matin holds a B.A. in biology from the University
of Rochester and a M.B.A. from the University of Chicago.

  James G. Rowley has served as senior vice president of engineering at
CrossWorlds since May 1999, and served as vice president, content engineering
from November 1998 to May 1999 and vice president, worldwide sales consulting
from January 1998 to November 1998. Before CrossWorlds, Mr. Rowley served as
vice president, worldwide field application engineering at Scopus Corporation,
a software company, from January 1997 to January 1998. From January 1995 to
January 1997, Mr. Rowley established a worldwide sales consulting group at
Siebel Systems, a software company. From 1986 to January 1995, Mr. Rowley
served in several management positions at Oracle Corporation. Mr. Rowley holds
a B.A. degree and a M.B.A. from New York University.

  Terence J. Garnett has served as a director of CrossWorlds since March 1996.
Mr. Garnett has been a managing director of Garnett Capital since January 2000.
Before starting Garnett Capital, Mr. Garnett was a venture partner with Venrock
Associates, a venture capital firm, from April 1995 to December 1999. From
October 1990 to August 1994, Mr. Garnett held a variety of management positions
with Oracle Corporation, where he served as senior vice president, worldwide
marketing and business development, senior vice president, new media group and
was a member of the executive committee. Mr. Garnett holds a B.S. degree from
the University of California Berkeley and a M.B.A. from the Stanford Graduate
School of Business. Mr. Garnett is also a director of Neoforma.com and Niku
Corporation and several other private companies.

  Frederick W. Gluck has served as a director of CrossWorlds since January
1998. Mr. Gluck is presently serving as a consultant to McKinsey & Company,
Inc., an international management consulting firm. From 1995 to July 1998, Mr.
Gluck served as vice-chairman and director of the Bechtel Group. Mr. Gluck
retired from Bechtel in July 1998. From 1967 to 1995, Mr. Gluck held various
positions with McKinsey including managing director of the firm from 1988 to
1994. Mr. Gluck serves as a director for AMGEN, ACT Networks, Columbia/HCA,
SCIENT and several private companies.

                                       50
<PAGE>

  Andrew K. Ludwick has served as a director of CrossWorlds since June 1997.
From 1995 to 1997, Mr. Ludwick served as chief executive officer of Bay
Networks, a networking company. Mr. Ludwick co-founded SynOptics
Communications, a networking company, in 1985 and served as chief executive
officer from 1985 to 1995. Mr. Ludwick also serves as a director of several
private companies.

  Albert A. Pimentel has been a director of CrossWorlds since March 1999. Mr.
Pimentel has been senior vice president of WebTV Networks, Inc., a provider of
consumer Internet services and designer of internet access appliances and a
subsidiary of Microsoft Corporation, since November 1996. From June 1992 to
October 1996, Mr. Pimentel served as senior vice president and chief financial
officer of LSI Logic Corporation, a leading provider of semiconductors. Mr.
Pimentel serves as a director of ConXion Corporation, everSearch.com and
NetCell Corporation.

  Colin F. Raymond has been a director of CrossWorlds since October 1999. Mr.
Raymond has been a partner with Soros Private Equity Partners, a private
investment management firm, since May 1999. From 1996 to 1999, Mr. Raymond was
with Morgan Stanley Capital Partners, most recently as vice president. Before
that, Mr. Raymond was employed by Wolfensohn & Co. and J.P. Morgan & Co.
working in corporate finance and mergers and acquisitions. Mr. Raymond serves
as a director of ARM Financial Group, Day International and a number of
privately-held companies.

Board Composition

  CrossWorlds currently has authorized seven directors. Each director is
elected for a period of one year at CrossWorlds' annual meeting of stockholders
and serves until the next annual meeting or until his successor is duly elected
and qualified. The executive officers serve at the discretion of the board of
directors. Katrina A. Garnett, CrossWorlds founder and chairman of the board of
directors, is married to Terence J. Garnett, a member of CrossWorlds' board of
directors.

Board Compensation

  Directors are not compensated for their services as directors except for
reimbursement for reasonable travel expenses relating to attendance at board
meetings and the grant of stock options. As of the offering, directors who are
employees of CrossWorlds are eligible to participate in CrossWorlds' 1997 stock
plan and 1999 executive stock plan. Directors who are not employees of
CrossWorlds will be eligible to participate in CrossWorlds' 2000 director stock
option plan. Outside directors have received the following option grants:

<TABLE>
<CAPTION>
                                                                 Exercise No. of
   Name                                            Date of Grant  Price   Shares
   ----                                            ------------- -------- ------
   <S>                                             <C>           <C>      <C>
   Albert A. Pimentel............................. February 1999  $3.00   53,333
   Andrew K. Ludwick..............................     June 1997  $0.75   33,333
                                                    January 1999  $3.00   41,666
   Frederick W. Gluck.............................  January 1998  $2.25   20,000
                                                    January 1999  $3.00   33,333
</TABLE>

All of these options vest over three years from the date of grant.

Board Committees

  In January 1999, the board established the audit committee. The audit
committee reviews CrossWorlds' annual audit and meets with CrossWorlds'
independent auditors to review CrossWorlds' internal controls and financial
management practices.

  In January 1999, the board established the compensation committee. The
compensation committee recommends compensation for executive officers to the
board, and administers CrossWorlds' stock plans.

                                       51
<PAGE>

Executive Compensation

  This table provides information concerning compensation for services provided
to CrossWorlds during the year ended December 31, 1999. Information is provided
for everyone who served as our chief executive officer during the year, for
each of the other four most highly compensated executive officers whose total
cash compensation exceeded $100,000 during the year ended December 31, 1999,
and for one other person who was not an executive officer at year end, Kevin
Fitzgerald.

  The amounts in the column entitled all other annual compensation are
insurance premiums paid by CrossWorlds, with the exception of $40,271 paid to
Alfred J. Amoroso for moving expenses.

  Mr. Amoroso joined CrossWorlds in October 1999. Mr. Kent joined CrossWorlds
in March 1999. Mr. Fitzgerald resigned as senior vice president, sales in
October 1999. Ms. Garnett resigned as chief executive officer in October 1999.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                     Long-Term
                                                    Compensation
                                                       Awards
                                                    ------------
                                       Annual
                                    Compensation
                                  -----------------  Securities
                                   Salary   Bonus    Underlying  All Other Annual
Name and Principal Position  Year   ($)      ($)    Options (#)  Compensation ($)
- ---------------------------  ---- -------- -------- ------------ ----------------
<S>                          <C>  <C>      <C>      <C>          <C>
Alfred J. Amoroso
 President and Chief
  Executive Officer........  1999 $115,530 $     --  2,125,192       $40,346
Barton S. Foster
 Senior Vice President,
  Marketing................  1999  175,000   76,112    216,666           357
Prashant Gupta
 Chief Technology Officer..  1999  175,000  106,112    333,332         2,304
Mark R. Kent
 Senior Vice President and
  Chief Financial Officer..  1999  136,719   36,509    399,999           351
James G. Rowley
 Senior Vice President,
  Engineering..............  1999  164,583   84,798    204,999           319
Kevin Fitzgerald
 Former Senior Vice
  President, Sales.........  1999  149,965  248,606    166,666         1,338
Katrina A. Garnett
 Chairman..................  1999  175,000  106,112         --           360
</TABLE>

                                       52
<PAGE>

Option Grants

  This table provides summary information on stock options granted to the
officers in the table below during the year ended December 31, 1999.

  The percentage of total options granted to employees is based on an aggregate
of 6,968,975 shares granted by CrossWorlds under the 1997 stock plan and the
1999 executive stock plan during the year ended December 31, 1999. Potential
realizable values are net of exercise price, but before taxes for exercise. The
5% and 10% assumed annual rates of compounded stock price appreciation are set
by the Securities and Exchange Commission. The actual stock price appreciation
over the 10-year term is almost certainly not going to be at the assumed 5% and
10% levels or at any other defined level. No value will be realized from the
option grants unless the market price of the common stock appreciates.

                       Option Grants in Last Fiscal Year

<TABLE>
<CAPTION>
                                     Individual Grants
                         -----------------------------------------
                                                                    Potential Realizable
                                                                      Value at Assumed
                                    % of Total                        Annual Rates of
                         Number of   Options                            Stock Price
                           Shares   Granted to                        Appreciation For
                         Underlying Employees  Exercise                 Option Term
                          Options   in Fiscal   Price   Expiration ----------------------
Name                     Granted(#)    Year     ($/Sh)     Date      5%($)      10%($)
- ----                     ---------- ---------- -------- ---------- ---------- -----------
<S>                      <C>        <C>        <C>      <C>        <C>        <C>
Alfred J. Amoroso....... 2,125,192    30.50%    $6.60    10/11/09  $8,821,044 $22,354,258
Barton S. Foster........   116,666     1.67      3.00     2/18/09     220,112     557,807
                           100,000     1.43      6.60    10/11/09     415,070   1,051,870
Prashant Gupta..........   249,999     3.58      5.25     3/11/09     825,421   2,091,779
                            83,333     1.19      6.60    10/11/09     345,891     876,555
Mark R. Kent............   249,999     3.58      5.25     3/22/09     825,421   2,091,779
                            83,333     1.19      6.60     8/12/09     345,891     876,555
                            66,667     0.96      6.60    10/11/09     276,715     701,250
James G. Rowley.........    33,333     0.48      5.25     3/11/09     110,055     278,902
                            71,666     1.03      6.60     7/21/09     297,464     753,833
                           100,000     1.43      6.60    10/11/09     415,070   1,051,870
Kevin Fitzgerald........    83,333     1.19      5.25     3/11/09     275,140     697,260
                            83,333     1.19      6.60     7/21/09     345,891     876,555
Katrina A. Garnett......        --       --        --          --          --          --
</TABLE>

                                       53
<PAGE>

Option Exercises and Holdings

  This table provides summary information concerning the shares of common stock
represented by outstanding stock options held by each of these officers as of
December 31, 1999.

  The values of unexercised in-the-money options are based on a fair market
value of $9.00 per share as of December 31, 1999, as determined by the board of
directors, minus the exercise price, multiplied by the number of shares
underlying the option.

                         Fiscal Year-End Option Values

<TABLE>
<CAPTION>
                               Number of Securities      Value of Unexercised
                               Underlying Unexercised    In-the-Money Options
                               Options at FY-End (#)         at FY-End ($)
                             ------------------------- -------------------------
Name                         Exercisable Unexercisable Exercisable Unexercisable
- ----                         ----------- ------------- ----------- -------------
<S>                          <C>         <C>           <C>         <C>
Alfred J. Amoroso...........    88,549     2,036,643    $212,518    $4,887,943
Barton S. Foster............    50,696       215,969     274,177       965,813
Prashant Gupta..............   100,695       315,970     579,169     1,245,823
Mark R. Kent................    69,793       330,206     230,785     1,066,710
James G. Rowley.............    79,886       158,446     232,665       504,330
Kevin Fitzgerald............        --            --          --            --
Katrina A. Garnett..........        --            --          --            --
</TABLE>

Stock Plans

 1997 Stock Plan.

  Adoption and Initial Reserve. Our board of directors originally adopted and
our stockholders originally approved our 1997 stock plan in January 1997. As of
December 31, 1999, we had reserved a total of 4,992,638 shares for issuance
under the 1997 plan. As of December 31, 1999, options to purchase 753,425
shares of common stock had been exercised, options to purchase a total of
3,845,091 shares at a weighted average exercise price of $5.26 per share were
outstanding and 423,612 shares remained available for future option grants. The
1997 plan will terminate in 2007 if not terminated earlier by our board of
directors.

  Reserved Shares Following this Offering. We amended the 1997 plan to provide
for a total of 3,000,000 shares to be available for grant at the effective time
of this offering, plus an automatic annual increase on the first day of each of
our fiscal years beginning in 2001 and ending in 2005 in an amount equal to the
lesser of:

  .  3,000,000 shares,

  .  5% of our outstanding common stock on the last day of the immediately
     preceding fiscal year, or

  .  a lesser number of shares as our board determines.

  We will submit this amendment to the 1997 plan to our stockholders for
approval before the completion of this offering.

  Purposes of the 1997 Plan. The purposes of the 1997 plan are to attract and
retain the best available personnel to CrossWorlds, to provide additional
incentives to CrossWorlds' employees and consultants, and to promote the
success of CrossWorlds' business.

  Eligible Persons and Types of Options. The 1997 plan provides for granting to
employees, including officers and directors, incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986. The 1997 plan also
provides for granting to employees and consultants, including nonemployee
directors, nonstatutory stock options and stock purchase rights. If an option
holder would have

                                       54
<PAGE>

the right in any calendar year to exercise one or more incentive stock options
for shares having a total fair market value in excess of $100,000, any of these
excess options shall be treated as nonstatutory stock options.

  Administration. The board of directors or a committee of the board, each
known as the administrator, may administer the 1997 plan. The compensation
committee currently administers the plan. The administrator determines the
terms of options and stock purchase rights granted under the 1997 plan,
including: 1) the number of shares subject to the award; 2) the exercise or
purchase price; 3) the term, vesting and exercisability of the award; 4) and
other conditions to which the award is subject. An individual employee may not
receive awards for more than 1,000,000 shares under the 1997 plan in any fiscal
year.

  Exercise Price. The exercise price of all incentive stock options granted
under the 1997 plan must be at least equal to the fair market value of our
common stock on the date of grant. The exercise price of any incentive stock
option granted to a person who owns stock representing more than 10% of the
total combined voting power of all classes of outstanding capital stock, or the
stock of any parent or subsidiary corporation of CrossWorlds, must equal at
least 110% of the fair market value of the common stock on the date of grant.

  Before this offering, the exercise price of all nonstatutory stock options
and stock purchase rights were required to have an exercise or purchase price
of at least 85% of the fair market value of the common stock on the date of
grant. After the date of this offering, the exercise price of nonstatutory
stock options and the purchase price of stock purchase rights will no longer be
subject to these limitations. However, nonstatutory stock options and stock
purchase rights granted to our chief executive officer and our four other most
highly compensated officers will be at least 100% of the fair market value of
the common stock on the date of grant if the award is intended to qualify as
performance based compensation under Section 162(m) of the Internal Revenue
Code. Payment of the exercise price may be made in cash or other consideration
as determined by the administrator.

  Other Option Terms. The administrator determines the term of options, which
may not exceed 10 years, or 5 years in the case of an incentive stock option
granted to an employee who owns stock representing more than 10% of the total
voting power of our stock or a parent or subsidiary's stock. Generally, an
option holder may not transfer an option other than by will or the laws of
descent or distribution and only the option holder may exercise the option
during the lifetime of the option holder. However, the administrator may in its
discretion provide for the limited transferability of nonstatutory stock
options granted under the 1997 plan under specified circumstances.

  The administrator determines when options become exercisable. Options granted
under the 1997 plan generally become exercisable at the rate of 1/8th of the
total number of shares subject to the options six months after the date of
grant, and 1/48th of the total number of shares subject to the options each
month from then on.

  Stock purchased under stock purchase rights granted under the 1997 plan is
generally subject to a repurchase right at the purchaser's original purchase
price. CrossWorlds may exercise this repurchase right upon termination of the
purchaser's employment or consulting relationship with us. This repurchase
right lapses according to the terms of the stock purchase right determined by
the administrator at the time of grant.

  Change of Control. If there is a sale of all or substantially all of the
assets of CrossWorlds, or a merger of CrossWorlds with another corporation,
then the successor corporation may assume each option and stock purchase right
or substitute an equivalent award. If the successor corporation refuses to
assume or substitute for an outstanding award, each award shall become fully
vested and exercisable before the effective date of the transaction.

  If the successor corporation assumes or substitutes outstanding awards, and
an option holder's employment with CrossWorlds is involuntarily terminated for
reasons other than cause, as defined below,

                                       55
<PAGE>

within one year following a merger or sale of assets, the option holder will
receive limited accelerated vesting. The accelerated vesting is limited as
described in the 1997 plan. The option holder's outstanding awards shall become
immediately vested and exercisable in an amount equal to 12 months of further
vesting of each award at the rate specified in the applicable stock option or
stock purchase agreement. Outstanding options will adjust if there is a stock
split, stock dividend or other similar change in capital structure.

  Cause shall mean:

  .  gross negligence or willful misconduct in the performance of an
     employee's duties to CrossWorlds;

  .  repeated unexplained or unjustified absence;

  .  a material and willful violation of any federal or state law;

  .  refusal or failure to act in accordance with any specific direction or
     order of, or contractual obligation with, CrossWorlds;

  .  commission of any act of fraud with respect to CrossWorlds; or

  .  conviction of or plea of no contest to a felony or a crime involving
     moral turpitude causing material harm to the standing and reputation of
     CrossWorlds.

  Amendment and Termination. The administrator has the authority to amend or
terminate the 1997 plan as long as this action does not adversely affect any
outstanding option and provided that stockholder approval shall be obtained as
required by applicable law.

 2000 Directors' Stock Option Plan.

  Adoption and Initial Reserve. The board of directors adopted the 2000
directors' stock option plan in January 2000 and we will submit the directors'
stock option plan to our stockholders for approval before completion of this
offering. We have reserved total of 300,000 shares of common stock for issuance
under the directors' plan. No shares have been issued under the directors'
plan. The directors' plan becomes effective on the date of this offering.

  Eligible Persons and Administration. The directors' plan provides for the
grant of nonstatutory stock options to nonemployee directors of CrossWorlds.
The directors' plan is designed to work automatically without administration.
However, the board of directors will administer the plan when necessary. When
conflicts of interest arise, it is expected that they will be addressed by
abstention of any interested director from both deliberations and voting on
matters in which that director has a personal interest.

  Option Terms. The directors' plan provides that each person who becomes a
nonemployee director of CrossWorlds after the effective date of this offering
will be granted a nonstatutory stock option to purchase 25,000 shares of common
stock on the date on which the person first becomes a nonemployee director of
CrossWorlds. On the date of CrossWorlds' annual stockholders meeting each year,
each nonemployee director of CrossWorlds will be granted an option to purchase
5,000 shares of common stock if, on the annual stockholders meeting date, the
director has served on CrossWorlds' board of directors for at least six months.

  The directors' plan sets neither a maximum nor a minimum number of shares for
which options may be granted to any one nonemployee director. The directors'
plan does specify the number of shares that may be included in any grant and
the method of making a grant.

  Non-Transferability of Options. No option granted under the directors' plan
is transferable by the option holder other than by will or the laws of descent
or distribution or under a qualified domestic relations order, and each option
is exercisable, during the lifetime of the option holder, only by that option
holder.

  Exercise Price and Other Option Terms. The directors' plan provides that each
option shall vest at the rate of 1/12 of the total number of shares subject to
the option per month. If a nonemployee director ceases

                                       56
<PAGE>

to serve as a director for reasons other than death or disability, the director
may, but only within 90 days after the date the director ceases to be a
director of CrossWorlds, exercise options granted under the directors' plan. If
the director does not exercise the option that the director was entitled to
exercise within the 90 day period, the option shall terminate.

  The exercise price of all stock options granted under the directors' plan
shall be equal to the fair market value of a share of CrossWorlds' common stock
on the date of grant of the option. Options granted under the directors' plan
have a term of ten years.

  Outstanding options will adjust if there is a stock split, stock dividend or
other similar change in capital structure.

  Change of Control. If we sell all or substantially all of our assets or merge
with another company or conduct another similar transaction, the successor
corporation will assume the options or substitute equivalent options. If the
acquiror does not assume or substitute the options, the options will terminate
upon completion of the acquisition if the options were not previously
exercised.

  Amendment and Termination. The board of directors may amend or terminate the
directors' plan. However, no action may adversely affect any outstanding option
and we must obtain stockholder approval for any amendment when required by
applicable law. If not terminated earlier, the directors' plan will have a term
of ten years.

  2000 Employee Stock Purchase Plan.

  Adoption and Reserved Shares. The board of directors adopted our 2000
employee stock purchase plan in January 2000 and we will submit the 2000
employee stock purchase plan to our stockholders for approval before completion
of this offering. We have reserved total of 750,000 shares of common stock for
issuance under the purchase plan, none of which has been issued as of the date
of this offering. The number of shares reserved for issuance under the purchase
plan will be subject to an automatic annual increase on the first day of each
of our fiscal years beginning in 2001 and ending in 2005 in an amount equal to
the lesser of:

  .  500,000 shares,

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

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

  The purchase plan becomes effective on the date of this offering. Unless
terminated earlier by our board of directors, the purchase plan will terminate
in 2010.

  Offering Periods. The purchase plan, which is intended to qualify under
Section 423 of the Code, will be implemented in a series of overlapping
offering periods of approximately 24 months' duration. New offering periods,
other than the first offering period, will begin on May 1 and November 1 of
each year. Each offering period will consist of four consecutive purchase
periods of approximately six months' duration. The initial offering period is
expected to begin on the date of this offering and end on April 30, 2002. The
initial purchase period is expected to end on October 31, 2000.

  Administration. The board of directors or a committee appointed by the board
will administer the purchase plan. Employees of CrossWorlds, or of any
majority-owned subsidiary designated by the board, who work at least 20 hours a
week for a minimum of five months per year are eligible to participate in the
purchase plan.

  Plan Terms. The purchase plan permits eligible employees to purchase common
stock through payroll deductions, which may not exceed 15% of an employee's
compensation, at a price equal to the lower of 85%

                                       57
<PAGE>

of the fair market value of CrossWorlds' common stock at the beginning of each
offering period or at the end of each purchase period. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with CrossWorlds.

  An employee cannot be granted an option under the purchase plan if
immediately after the grant the employee would own stock or hold outstanding
options to purchase stock equaling 5% or more of the total voting power or
value of all classes of our stock or stock of our subsidiaries. An employee
cannot be granted an option under the purchase plan if the option would permit
an employee's rights to purchase stock under the purchase plan to grow at a
rate that exceeds $25,000 of the fair market value of the stock for each year
in which an option is outstanding. No employee may purchase more than 1,500
shares of common stock under the purchase plan in any one purchase period.

  In a merger of CrossWorlds with another corporation or a sale of
substantially all of CrossWorlds' assets, the purchase plan provides that the
successor corporation must assume or substitute an equivalent right for each
right to purchase stock under the purchase plan. However, our board of
directors will shorten any ongoing offering period so that employees' rights to
purchase stock under the purchase plan are able to be exercised before to the
transaction if the successor corporation refuses to assume each purchase right
or to substitute an equivalent right. Outstanding options will adjust if there
is a stock split, stock dividend or other similar change in capital structure.
The board of directors has the power to amend or terminate the purchase plan as
long as the action does not adversely affect any outstanding rights to purchase
stock under the plan. However, our board of directors may amend or terminate
the purchase plan or an offering period even if it would adversely affect
outstanding options to avoid our incurring adverse accounting charges.

1996 Stock Plan.

  Adoption and Initial Reserve. Our board of directors originally adopted and
our stockholders originally approved our 1996 stock plan in March 1996. The
1996 stock plan provides for the grant of incentive stock options to employees
and nonstatutory stock options to employees and consultants. As of December 31,
1999, 980,555 shares were reserved for issuance under the 1996 plan, but the
board of directors has determined that no future grants will be made under the
1996 plan.

  Option Terms. The terms of the options under the 1996 plan are generally the
same as those that may be issued under the 1997 plan, except for the following:

  .  only options may be granted out of the 1996 plan; and

  .  nonstatutory stock options granted under the 1996 plan are
     nontransferable in all cases and must generally be granted with an
     exercise price equal to at least 85% of the fair market value of our
     common stock on the date of grant.

  In a merger, reorganization or similar transaction involving CrossWorlds, the
successor corporation shall assume each outstanding option or shall substitute
an equivalent option, with appropriate adjustments made to both the price and
number of shares subject to each option. If the successor corporation does not
assume the options, then the outstanding options will be fully vested and
exercisable for a period of fifteen days following notice provided to the
option holder. Outstanding options will be adjusted for stock splits, stock
dividends or other similar changes in capital structure.

  The term of options granted under the 1996 plan is ten years from the date of
grant. Options granted under the 1996 plan must be exercised within three
months after the end of the option holder's status as an employee of
CrossWorlds, or within twelve months after the option holder's termination by
death or disability. Options granted under the 1996 plan will remain
outstanding in compliance with their terms.

1999 Executive Stock Plan.

  Adoption and Initial Reserve. Our board of directors adopted the 1999
executive stock plan and our stockholders approved the 1999 executive stock
plan in October 1999. We have reserved total of 3,500,000 shares

                                       58
<PAGE>

of common stock for issuance under the 1999 plan. As of December 31, 1999,
2,859,525 options were issued and outstanding or committed for issuance and
640,475 shares remained available for future option or stock purchase right
grants. We do not intend to grant any additional options or stock purchase
rights under the 1999 plan after the date of this offering. Unless terminated
earlier, the 1999 plan will terminate in October 2009.

  Other Terms. The terms of options and stock purchase rights under the 1999
plan are generally the same as those that may be issued under the 1997 plan,
except for the following:

  .  the 1999 plan does not impose a limitation on the number of shares
     subject to options and stock purchase rights that may be issued to any
     individual employee,

  .  nonstatutory stock options and stock purchase rights may not be granted
     to non-employee directors under the 1999 plan after the date of this
     offering, and

  .  nonstatutory stock options and stock purchase rights granted under the
     1999 plan are nontransferable in all cases and must generally be granted
     with an exercise price or purchase price equal to at least 85% of the
     fair market value of our common stock on the date of grant.

  If we sell all or substantially all of our assets or merge with or into
another corporation, then the successor corporation may assume each option and
stock purchase right or substitute an equivalent option or stock purchase
right. However, if the successor corporation does not agree to this assumption
or substitution, the option or stock purchase right shall become fully vested
and exercisable for a period of fifteen days from the date the option holder
received notice and will terminate following the fifteen day period. Upon the
closing of the transaction, outstanding repurchase rights will terminate unless
assigned to the successor corporation. The board of directors may amend, modify
or terminate the 1999 plan at any time as long as any amendment, modification
or termination does not impair vesting rights of plan participants and provided
that stockholder approval shall be required for an amendment to the extent
required by applicable law.

Limitation of Liability and Indemnification Matters

  As permitted by Delaware law, CrossWorlds has included in its certificate of
incorporation a provision to eliminate the personal liability of its officers
and directors for money damages for breach or alleged breach of their fiduciary
duties as officers or directors, subject to specified exceptions. CrossWorlds'
bylaws provide that CrossWorlds is required to indemnify its officers and
directors under circumstances in which indemnification would otherwise be
discretionary. CrossWorlds is required to advance expenses to its officers and
directors as they incur them in proceedings in which they may be indemnified.

  CrossWorlds has entered into indemnification agreements with its officers and
directors containing provisions that are broader than the specific
indemnification provisions provided by Delaware law. The indemnification
agreements require CrossWorlds to:

  .  indemnify its officers and directors against liabilities that may arise
     because of their status or service as officers and directors, other than
     liabilities arising from willful misconduct of a culpable nature;

  .  to advance their expenses incurred as a result of any proceeding against
     them for which they could be indemnified; and

  .  to obtain directors' and officers' insurance if available on reasonable
     terms.

  At present, CrossWorlds is not aware of any pending or threatened litigation
or proceeding involving a director, officer, employee or agent of CrossWorlds
in which indemnification would be required or permitted. CrossWorlds is not
aware of any threatened litigation or proceeding that might result in a claim
for indemnification. CrossWorlds believes that its charter provisions and
indemnification agreements are necessary to attract and retain qualified
persons as directors and officers.

                                       59
<PAGE>

                           RELATED PARTY TRANSACTIONS

  Since January 1997, we have issued and sold shares of our capital stock
equalling:

  .  a total of 2,104,144 shares of series C preferred stock at a price of
     $6.00 per share in March and April, 1997,

  .  a total of 2,063,307 shares of series D preferred stock at a price of
     $15.00 per share in December 1997 and March 1998,

  .  a total of 2,883,326 shares of series E preferred stock at a price of
     $6.00 per share in January, March and April, 1999, and

  .  a total of 3,671,071 shares of series F preferred stock at a price of
     $6.81 per share in October, 1999.

This table summarizes the shares of capital stock purchased by executive
officers, directors and five-percent stockholders and their affiliates in these
transactions.

Shares held by affiliated persons and entities have been added together for the
purposes of this chart.

<TABLE>
<CAPTION>
                          Series C  Series D  Series E    Series F
Entities Affiliated with  Preferred Preferred Preferred   Preferred
Directors                   Stock     Stock     Stock       Stock
- ------------------------  --------- --------- ---------   ---------
<S>                       <C>       <C>       <C>         <C>
Katrina A. Garnett(1)...   333,333   133,333   775,000(2)   734,224(3)
Andrew K. Ludwick.......   166,666    33,333    41,666(2)        --
Frederick W. Gluck......        --    16,666    16,666(2)    44,052
Albert A. Pimentel(4)...        --     6,666        --        3,670
Prashant Gupta..........     8,333        --        --           --

<CAPTION>
Other 5% Stockholders
- ---------------------
<S>                                                       <C>
Entities affiliated with Soros Private Equity
 Partners(5)..........................................    1,468,429

</TABLE>
- --------
(1) Includes shares held by Katrina A. Garnett and Terence J. Garnett in a
    family trust.
(2) Shares were issued in exchange for convertible promissory notes issued by
    CrossWorlds in December 1998.
(3) Includes 100,000 shares sold to Alfred J. Amoroso, CrossWorlds' president
    and chief executive officer.
(4) Includes shares held by trusts for the benefit of Mr. Pimentel's children.
    Mr. Pimentel disclaims beneficial ownership of shares held by these
    entities except for of his pecuniary interest in these entities.
(5) Includes shares held by Quantum Industrial Partners LDC and SFM Domestic
    Investments LLC.

  On February 2, 2000, CrossWorlds issued warrants to purchase 199,996 shares
of its common stock at an exercise price of $11.00 per share. These warrants
were issued in consideration of their commitment to provide funding to
CrossWorlds if this offering is not completed of up to $10,000,000, if
necessary, on mutually agreed terms and conditions. The warrants were issued in
the following amounts in the following quarter.

<TABLE>
<CAPTION>
                                     Name                               Warrants
                                     ----                               --------
       <S>                                                              <C>
       . Alfred J. Amoroso.............................................  16,528
       . Frederick W. Gluck............................................   8,264
       . Andrew K. Ludwick.............................................  82,644
       . Albert A. Pimentel............................................  82,644
       . Entities affiliates with Soros Private Equity Partners........   9,916
</TABLE>

 Change of Control Agreements

  On January 27, 2000, CrossWorlds' board of directors approved a change of
control agreement with CrossWorlds' executive officers. Under the terms of the
agreement, 25% of each officer's remaining unvested options or shares of
restricted stock shall vest upon a change of control of CrossWorlds.

                                       60
<PAGE>

  When options or restricted shares are assumed by a successor corporation,
officers will receive the following accelerated vesting and severance payments:

  .  if the officer is involuntarily terminated within one year of the change
     of control, vesting of her shares may occur, under the terms of the
     change of control agreement. The vesting is subject to the restrictions
     described in the change of control agreement or applicable stock option
     plan;

  .  outstanding awards under the 1996 and 1997 stock plans or the 1999
     executive stock plan shall become immediately vested and exercisable.
     The amount exercisable shall be equal to twelve months of further
     vesting of each award at the rate specified in the applicable stock
     option or stock purchase agreement;

  .  if involuntarily terminated under the terms of the change of control
     agreement within one year of the change of control, the officer may be
     entitled to six months of regular monthly salary plus target bonus, and
     six months of consolidated omnibus budget reconciliation act payments.

 Agreements with Employees

  Arthur R. Matin Employment Agreement -- Basic Compensation

  On January 1, 2000, CrossWorlds and Arthur R. Matin entered into an
employment agreement which provides that Mr. Matin became CrossWorlds' senior
vice president of worldwide sales. This employment agreement established Mr.
Matin's base salary at $20,833.33 per month and provides for the payment of a
sign-on bonus of $300,000 to be paid on or before March 1, 2000. Mr. Matin will
also be eligible to earn a target bonus of up to $225,000.

  Arthur R. Matin Employment Agreement -- Options

  Under the terms of the employment agreement, Mr. Matin was granted options to
purchase 400,000 shares of CrossWorlds' common stock, 50,000 of which vested
immediately when Mr. Matin began working for us and 350,000 of which vest in
equal monthly installments over forty-eight months from the date of Mr. Matin's
employment. If Mr. Matin's employment is terminated by CrossWorlds without a
determination by CrossWorlds' board of directors that Mr. Matin has engaged in:

  . willful misconduct which damages CrossWorlds;

  . misappropriation of CrossWorlds' assets; or

  . has been convicted of, or entered a plea of guilty or no contest to a
    felony; or

if he resigns within sixty days of:

  . any reduction in his base salary or target bonus;

  . any material reduction in his benefits;

  . a change in his position with CrossWorlds or a successor company which
    materially reduces his duties or level of responsibility; or

  . any requirement, without his consent, that he relocate his place of
    employment by more than 35 miles from his then current office;

then the number of shares that would have vested over the next twelve months,
shall vest immediately.

  Arthur R. Matin Employment Agreement -- Severance Benefits

  Mr. Matin is also entitled to severance payments of six months' base salary
plus one-half of his annual target bonus, together with six months of medical
insurance payments for him and his eligible dependents, if he is terminated or
if he resigns under the conditions listed above.

                                       61
<PAGE>

  Arthur R. Matin Employment Agreement -- Change of Control Benefits

  Following a change in control of CrossWorlds, all of Mr. Matin's options vest
immediately. If Mr. Matin is terminated or if he resigns under the conditions
listed above within one year after a change of control, then he shall be
entitled to nine months' base salary plus three quarters of his annual target
bonus, together with nine months of medical insurance payments for him and his
eligible dependents.

  Mark R. Kent -- Change of Control Benefits

  On October 11, 1999, CrossWorlds amended its option agreement with Mark Kent,
CrossWorlds' chief financial officer and senior vice president, finance to
provide that all of Mr. Kent's options vest upon a change of control of
CrossWorlds.

  Alfred J. Amoroso Employment Agreement -- Basic Compensation

  On October 5, 1999, CrossWorlds and Alfred J. Amoroso entered into an
employment agreement under which Mr. Amoroso became CrossWorlds' president and
chief executive officer. This employment agreement established:

  . Mr. Amoroso's base salary at $41,666.66 per month, and

  . provides for a sign-on bonus of $400,000 to be paid on or before March 1,
    2000.

Mr. Amoroso became eligible for a pro rata target bonus of $250,000 based on
the number of weeks of actual employment in 1999 and a full annual target bonus
of $250,000 for the year 2000. Mr. Amoroso will be eligible to receive an
annual bonus equal to at least 50% of his base salary beginning in 2001.

  CrossWorlds will also provide Mr. Amoroso with relocation expenses and
temporary living costs:

  . temporary living costs are currently anticipated to total $200,000 to
    $300,000, and

  . a moving assistance loan of $1,500,000.

The loan is a non-recourse secured promissory note. The principal and interest
will be forgiven in equal monthly installments over a period of 48 months,
beginning the date of his employment and continuing for the term of his
employment. CrossWorlds will also make periodic bonus payments to Mr. Amoroso.
These bonus payments, after taxes, are intended to pay for Mr. Amoroso's tax
payments and interest on the loan, relocation expenses and temporary living
costs. If Mr. Amoroso is terminated, or if he resigns under the conditions
listed below, CrossWorlds will forgive an additional 12 months of loan and
accumulated interest payments.

  Alfred J. Amoroso Employment Agreement -- Options

  Under the terms of his employment agreement, Mr. Amoroso was granted an
option to purchase 1,328,245 shares of CrossWorlds' common stock which vest
monthly in equal installments over forty-eight months. Mr. Amoroso was granted
an additional option to purchase 796,947 shares of CrossWorlds' common stock
which vest monthly in equal installments over 48 months. Upon the effectiveness
of this offering, the vesting of these shares shall accelerate and CrossWorlds'
repurchase right will lapse.

  Alfred J. Amoroso Employment Agreement -- Severance Benefits

  If Mr. Amoroso's employment is terminated, or if he resigns under the
conditions listed below, in the first year of employment, then 50% of the
shares will vest on the date of termination.

  Following the first year of Mr. Amoroso's employment, if Mr. Amoroso's
employment is terminated without a determination by CrossWorlds' board of
directors that Mr. Amoroso has engaged in:

  . willful misconduct which damages CrossWorlds;

                                       62
<PAGE>

  . misappropriation of CrossWorlds' assets; or

  . has been convicted of, or entered a plea of guilty or no contest to, a
    felony; or

If he resigns within sixty days of:

  . any reduction in his base salary or target bonus;

  . any material reduction in his benefits;

  . a change in his position with CrossWorlds or a successor company which
    materially reduces his duties or level of responsibility; or

  . any requirement, without his consent, that he relocate his place of
    employment by more than 35 miles from his then current office;

then Mr. Amoroso shall vest in that number of shares that would have vested
over the next 12 months from the date of termination. If Mr. Amoroso's
employment with CrossWorlds is terminated, or if he resigns under the
conditions listed above, then CrossWorlds shall pay Mr. Amoroso a lump sum
severance equal to the sum of (a) twelve months of his base salary plus (b) his
annual target bonus, together with one year of medical insurance premium
payments for him and his eligible dependents. CrossWorlds will also forgive
Mr. Amoroso's repayment of the moving assistance loan for twelve months.
Finally, if there is a change of control during the period of Mr. Amoroso's
employment, then each of his outstanding options will become fully vested and
CrossWorlds' repurchase right will lapse.

  James G. Rowley Loan

  In January 2000, CrossWorlds approved a loan of $100,000 to CrossWorlds'
senior vice president, engineering, James G. Rowley, which CrossWorlds will
forgive at the rate of 1/24th per month over 24 months based on his continued
employment with us.

  Barton S. Foster Loan

  In November 1999, CrossWorlds loaned $150,000 to CrossWorlds' senior vice
president, marketing and business development, Barton S. Foster. In exchange,
CrossWorlds received a secured promissory note, secured by real property. In
January 2000, CrossWorlds approved the forgiveness of Mr. Foster's loan at the
rate of 1/24th per month over 24 months based on his continued employment with
us.

  Prashant Gupta Loan

  In March 2000, CrossWorlds approved a loan of $100,000 to CrossWorlds' chief
technology officer, Prashant Gupta, which CrossWorlds will forgive at the rate
of 1/24th per month over 24 months based on his continued employment with us.

  Mark Bishof Loan

  In March 2000, CrossWorlds approved a loan of $50,000 to CrossWorlds' senior
vice president, global services, Mark Bishof, which CrossWorlds will forgive at
the rate of 1/24th per month over 24 months based on his continued employment
with us.

  Other Officer Severance Agreements

  CrossWorlds and two terminated executive officers entered into severance
agreements under which each officer received $66,000 and four and one half
months of health insurance premiums.

 Agreements with Directors

  In December 1998, CrossWorlds entered into a convertible note purchase
agreement with Katrina A. Garnett, Andrew K. Ludwick and Frederick W. Gluck.
Under this agreement we issued convertible

                                       63
<PAGE>

promissory notes bearing interest at 8% each year, the principal amount of
which was convertible into shares of series E preferred stock.

  Under the agreement, Ms. Garnett loaned to CrossWorlds $4,650,000; Mr.
Ludwick loaned to CrossWorlds $250,000; and Mr. Gluck loaned to CrossWorlds
$100,000. In January 1999, the interest due under the notes was paid in cash
and the principal amount of the notes was converted into shares of series E
preferred stock.

  Since March 1996, we have issued and sold shares of our common stock and
granted options to purchase common stock to our employees, directors and
consultants.

                                       64
<PAGE>

                             PRINCIPAL STOCKHOLDERS

  This table presents information about the beneficial ownership of our common
stock as of December 31, 1999. The table also contains information regarding
beneficial ownership, as adjusted to reflect the sale of common stock in this
offering and the conversion of all outstanding shares of preferred stock into
shares of common stock. Specifically, the table reflects beneficial ownership
information regarding:

  . each of our directors;

  . our chief executive officer;

  . the other most highly compensated executive officers and Kevin
    Fitzgerald;

  . all directors and executive officers of CrossWorlds as a group; and

  . each person who is known by us to own beneficially more than 5% of
    CrossWorlds' common stock.

  Except as otherwise noted, the executive officers, directors and stockholders
identified in the table can be reached at the principal offices of CrossWorlds.

  This table assumes no exercise of the underwriters' over-allotment option.
Except under applicable community property laws or as indicated in the
footnotes to this table, each stockholder in the table has sole voting and
investment power over all shares of common stock identified in the table as
beneficially owned by that stockholder.

  Beneficial ownership is determined under the rules of the Securities and
Exchange Commission, based on factors including voting and investment power
over shares. Shares of common stock subject to options that are currently
exercisable or exercisable within 60 days of December 31, 1999 are considered
to be outstanding and to be beneficially owned by the person holding those
options for the purpose of computing the percentage ownership of that person.
These shares are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.

<TABLE>
<CAPTION>
                                                                  Percent
                                                               Beneficially
                                                                   Owned
                                                   Shares    -----------------
                                                Beneficially  Before   After
Name and Address                                   Owned     Offering Offering
- ----------------                                ------------ -------- --------
<S>                                             <C>          <C>      <C>
Entities affiliated with Soros Private Equity
 Partners(1)...................................   1,478,345     7.50%    6.04%
 c/o Soros Fund Management LLC
 ATTN: Michael C. Neus, Esq.
 888 Seventh Avenue
 New York, NY 10106
Alfred J. Amoroso(2)...........................   2,241,720    11.37     8.42
Barton S. Foster...............................     149,307     0.76     0.61
Prashant Gupta.................................     382,638     1.94     1.55
Mark R. Kent...................................     148,265     0.75     0.60
James G. Rowley................................     232,331     1.18     0.94
Terence J. Garnett(3)..........................   6,069,478    30.81    24.79
Frederick W. Gluck(4)..........................     142,346     0.72     0.58
Andrew K. Ludwick(5)...........................     406,039     2.05     1.65
Albert A. Pimentel(6)..........................     147,657     0.75     0.60
Colin F. Raymond(1)............................   1,478,345     7.50     6.04
Katrina A. Garnett(3)..........................  7,402,810    37.58    30.23
Kevin Fitzgerald...............................          --       --       --
All directors and executive officers of
 CrossWorlds as a group, 13 persons............  13,131,458    66.67    47.19
</TABLE>
- --------

(1) The stock held by the entities affiliated with Soros Private Equity
    Partners includes 1,321,586 shares held by Quantum Industrial Partners,
    LDC; 146,843 shares held by SFM Domestic Investments LLC.; 8,925 shares
    issuable upon exercise of a warrant issued to Quantum Industrial Partners,
    LDC; and 991 shares issuable upon exercise of a warrant issued to SFM
    Domestic Investments LLC. Mr. Raymond disclaims beneficial ownership of
    these shares except for his pecuniary interest in Quantum Industrial
    Partners, LDC and SFM Domestic Investments LLC.
(2) Includes 16,528 shares issuable upon exercise of a warrant issued to Mr.
    Amoroso on February 2, 2000.

                                       65
<PAGE>

(3) The common stock held by both Mr. Garnett and Ms. Garnett includes
    6,069,478 shares held by a family trust. The 1,333,332 shares of common
    stock held directly by Ms. Garnett is included in her shares beneficially
    owned and is excluded from Mr. Garnett's shares beneficially owned. The
    common stock held by Mr. Garnett and Ms. Garnett does not include 333,332
    shares held in trust for the benefit of Mr. and Ms. Garnett's children. Mr.
    and Ms. Garnett do not possess voting or dispositive power over those
    shares.
(4) Includes 8,264 shares issuable upon exercise of a warrant issued to Mr.
    Gluck on February 2, 2000.
(5) Includes 82,644 shares issuable upon exercise of a warrant issued to Mr.
    Ludwick on February 2, 2000.
(6) Includes 82,644 shares issuable upon exercise of a warrant issued to Mr.
    Pimentel on February 2, 2000.

                               PRIVATE PLACEMENT

  CrossWorlds has entered into a stock purchase agreement with The Dow Chemical
Company in which CrossWorlds agreed to sell shares of common stock equal to
$2,000,000 divided by the initial public offering price less the underwriting
discount, for a per share price equal to the initial public offering price less
the underwriting discount. CrossWorlds also entered into a stock purchase
agreement with Delphi Automotive in which CrossWorlds agreed to sell shares of
common stock equal to $2,000,000 divided by the initial public offering price
less the underwriting discount, for a per share price equal to the initial
public offering price less the underwriting discount. In addition, CrossWorlds
entered into a stock purchase agreement with Electronic Data Systems
Corporation in which CrossWorlds agreed to sell shares of common stock equal to
the lower of:

 . two percent of the outstanding capital stock of CrossWorlds after this
   offering, or

 . the number of shares of common stock equal to $10,000,000 divided by the
   initial public offering minus the underwriting discount.

  At an assumed initial public offering price of $15.00, we will sell 143,369
shares of common stock to The Dow Chemical Company, 143,369 shares of common
stock to Delphi Automotive and 501,700 shares of common stock to Electronic
Data Systems Corporation at a per share price of 13.95. The private placement
of a total of 788,438 shares of our common stock to The Dow Chemical Company,
Delphi Automotive and Electronic Data Systems Corporation would occur at the
same time as this offering.

                                       66
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

  Upon the completion of this offering, CrossWorlds will be authorized to issue
150,000,000 shares of common stock. Upon the closing of the offering, all
outstanding shares of preferred stock except for series D preferred stock will
be converted into one share of common stock and automatically retired. Upon the
closing of the offering, each share of series D will be converted into
approximately 1.2 shares of common stock and automatically retired.

Common Stock

  As of December 31, 1999, there were 19,696,563 shares of common stock
outstanding, adjusted to reflect the conversion of all outstanding shares of
preferred stock. This calculation excludes the exercise of any outstanding
options or warrants into common stock, which are held of record by 332
stockholders.

  Options to purchase an aggregate of 6,793,436 shares of common stock were
also outstanding as of December 31, 1999. Assuming no exercise of the
underwriters' overallotment option and no exercise of outstanding options under
CrossWorlds' stock plans, there will be 24,485,001 shares of stock outstanding,
after giving effect to the sale of the shares offered under the prospectus and
the shares sold in a private placement that will close at the same time as this
offering.

  The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of common stock are entitled to receive dividends in proportion to their
ownership as may be declared by the board of directors out of funds legally
available for that purpose. In a liquidation, dissolution or winding up of
CrossWorlds, the holders of common stock are entitled to share in proportion to
their ownership in all assets remaining after payment of liabilities, subject
to the prior distribution rights of any outstanding preferred stock. The common
stock has no preemptive or conversion rights or other subscription rights. The
outstanding shares of common stock are, and the shares of common stock to be
issued upon completion of this offering will be, fully paid and non-assessable.

Warrants

  As of December 31, 1999, there were warrants outstanding to purchase an
aggregate of 343,431 shares of common stock. Generally, each warrant contains
provisions for adjustment of the exercise price and of the aggregate number of
shares issuable upon the exercise of the warrant for stock dividends, stock
splits, reorganizations, reclassifications and consolidations.

  Additionally, after December 31, 1999, our board approved the issuance of
warrants to purchase 199,996 shares of common stock at a weighted average
exercise price of $11.00 per share. Generally, each warrant contains provisions
for the adjustment of the exercise price and of the aggregate number of shares
issuable upon the exercise of the warrant for stock dividends, stock splits,
reorganizations, reclassifications and consolidations.

Registration Rights

   Assuming the conversion of all outstanding preferred stock after this
offering, and including warrants to purchase 337,097 shares of common stock,
the holders of 18,220,000 shares of common stock are entitled to rights to
register their shares under the Securities Act. These rights are provided under
the terms of an agreement between CrossWorlds and the holders of the
registrable securities.

  Subject to the limitations in the agreement, the holders of at least 30% of
the registrable securities, or Quantum Industrial Partners LDC or SFM Domestic
Investments LLC may require, on two occasions, that CrossWorlds use its best
efforts to register the securities for public resale.

  If CrossWorlds registers any of its common stock, either for its own account
or for the account of other security holders, the holders of registrable
securities are entitled to include their shares of common stock in the
registration, subject to the ability of the underwriters to limit the number of
shares included in the

                                       67
<PAGE>

offering. The holders of registrable securities may also require, on no more
than two occasions in a twelve-month period, that CrossWorlds register their
shares for resale on Form S-3 so long as the value of the securities to be
registered is at least $1,000,000. CrossWorlds will be responsible for paying
all registration expenses, and the holders of registrable securities selling
their shares will be responsible for paying all selling expenses.

Delaware Anti-Takeover Law and Charter and Bylaw Provisions

  Provisions of Delaware law and CrossWorlds' charter documents could make the
acquisition of CrossWorlds and the removal of incumbent officers and directors
more difficult. These provisions are expected to discourage coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of CrossWorlds to negotiate with us first. CrossWorlds believes
that the benefits of this increased protection outweigh the disadvantages
because negotiation of these proposals could result in an improvement of their
terms.

  CrossWorlds is subject to the provisions of Section 203 of the Delaware law.
In general, the statute prohibits a publicly-held Delaware corporation from
engaging in a business combination with an interested stockholder for a period
of three years after the date that the person became an interested stockholder.
This prohibition does not apply to a business combination or a transaction
which is approved in advance. Generally, a business combination with an
interested stockholder would include a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the stockholder. Generally, an
interested stockholder is a person who, together with affiliates and
associates, owns, or within three years prior, did own, 15% or more of the
corporation's voting stock. These provisions may have the effect of delaying,
deferring or preventing a change in control of CrossWorlds without further
action by the stockholders.

  Our certificate of incorporation forces shareholders to take actions at
meetings rather than by written consent. The certificate of incorporation also
provides that directors are elected by the vote of the shareholders, and limits
minority stockholders' ability to elect their nominees to the board. Our bylaws
provide that special meetings of stockholders can be called only by the board
of directors, by the chairman of the board of directors or by the president.
Moreover, the business permitted to be conducted at any special meeting of
stockholders is limited by Delaware Law to the business described in the notice
of the meeting. Our bylaws also establish rules for stockholder submission of
candidates for election to the board of directors, and establish rules for
business to be raised at stockholder meetings. The rules include advance notice
procedures for director nominations. These provisions would make it difficult
for stockholders to call a special meeting to take corporate action, and may
have the effect of delaying, deferring or preventing a change in control of
CrossWorlds.

Transfer Agent and Registrar

  The transfer agent and registrar for our common stock is Boston Equiserve.

                                       68
<PAGE>

                        SHARES ELIGIBLE FOR FUTURE SALE

Sales in the Public Market Could Hurt the Market Price of CrossWorlds' Stock

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

What Shares are Outstanding and What Shares are Freely Tradeable

  Upon completion of the offering, we will have 24,485,001 shares of common
stock outstanding. This assumes no exercise of the underwriters' over allotment
option, and no exercise of outstanding options or warrants to purchase common
stock after December 31, 1999. The 4,000,000 shares sold in the offering, plus
any shares issued upon exercise of the underwriters' overallotment option, will
be freely tradable without restriction under the Securities Act, unless
purchased by affiliates of CrossWorlds as affiliates is defined in Rule 144
under the Securities Act.

What Shares are Restricted and Not Freely Tradeable

  The remaining 20,485,001 shares outstanding are restricted securities within
the meaning of Rule 144 under the Securities Act. Restricted securities may be
sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 of the Securities
Act, which are summarized below. Sales of the restricted securities in the
public market, or the availability of these shares for sale, could adversely
affect the market price of the common stock.

Effects of the 180-day Lockup Agreement on Sales of Stock

  Stockholders of CrossWorlds holding an aggregate of 20,485,001 shares of
common stock are subject to lock-up agreements. These agreements generally
provide that, without the prior written consent of Chase Securities Inc.,
stockholders will not transfer or dispose of, directly or indirectly, any
shares of our common stock or any securities convertible into our shares. This
restriction will be applicable for a period of 180 days after the effective
date of this registration statement. As a result of these contractual
restrictions, shares subject to lock-up agreements will not be saleable until
these agreements expire or are waived by the designated underwriters'
representative, despite possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701. Taking into account the lock-up
agreements, and assuming Chase Securities Inc. does not release stockholders
from these agreements, these shares will be eligible for sale in the public
market:

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

  .  beginning 180 days after the effective date, approximately 19,696,563
     shares will be eligible for sale under federal securities laws, of which
     all but 10,111,168 shares are held by affiliates; and

  .  beginning one year after the effective date, approximately 788,438
     shares will be eligible for sale under federal securities laws.

Effects of Rule 144 on Sales of Restricted Shares

  Under Rule 144, a person who has beneficially owned restricted securities for
at least one year generally is entitled to sell, within any three-month period,
a number of shares that does not exceed the greater of:

  .  one percent of the number of shares of common stock then outstanding,
     which will equal approximately 244,850 shares immediately after the
     offering; or

                                       69
<PAGE>

  .  the average weekly trading volume of the common stock during the four
     calendar weeks preceding the sale.

  Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about
CrossWorlds. Under Rule 144(k), a person who is not considered to have been an
affiliate of CrossWorlds at any time during the three months preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least two
years, is entitled to sell these shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.

 Effects of Rule 701 on Rules of Restricted Shares

  CrossWorlds employees holding common stock or stock options may not sell
shares acquired upon exercise until 180 days after the effective date.
Beginning 180 days after the effective date, any employee, officer or director
of or consultant to CrossWorlds who purchased shares under a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell these shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144.

 Registration of Shares Issued Under CrossWorlds' Employee Benefits Plans

  CrossWorlds intends to file registration statements under the Securities Act
as promptly as possible after the effective date to register shares to be
issued under CrossWorlds' employee benefit plans. As a result, any options
exercised under the 1997 stock plan or any other benefit plan after the
effectiveness of these registration statements will also be freely tradable in
the public market, except that shares held by affiliates will still be subject
to the volume limitation, manner of sale, notice and public information
requirements of Rule 144 unless otherwise resalable under Rule 701.

 Outstanding Options at December 31, 1999

  As of December 31, 1999, there were outstanding options for the purchase of
6,793,436 shares, of which 3,310,545 options were exercisable. No shares have
been issued to date under our purchase plan or directors plan.

                                       70
<PAGE>

                                  UNDERWRITING

Purchasers of Our Common Stock

  The underwriters, Chase Securities Inc., Dain Rauscher Incorporated, and
Thomas Weisel Partners LLC have each agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase our common stock in the
amount listed here:

<TABLE>
<CAPTION>
                                                                          Number
                                                                            of
     Name                                                                 Shares
     ----                                                                 ------
     <S>                                                                  <C>
     Chase Securities Inc................................................
     Dain Rauscher Incorporated..........................................
     Thomas Weisel Partners LLC..........................................
                                                                           ----
     Total...............................................................
                                                                           ====
</TABLE>

Conditions to the Underwriters' Obligations

  The underwriting agreement provides that the obligations of the underwriters
are subject to conditions precedent, including the absence of any material
adverse change in our business and the receipt of certificates, opinions and
letters from us, our counsel and independent auditors. The underwriters are
committed to purchase all shares of common stock offered in this prospectus if
any shares are purchased.

Pricing of the Stock

  The underwriters propose to offer the shares of common stock directly to the
public at the public offering price on the cover page of this prospectus and to
dealers at that price less a concession not in excess of $      per share. The
underwriters may allow and the dealers may reallow a concession not in excess
of $      per share to other dealers. After the public offering of the shares,
the underwriters may change the offering price, concession and reallowance to
dealers.

The Underwriters' Option to Purchase More Shares

  We have granted to the underwriters an option, exercisable during the 30-day
period after the date of this prospectus, to purchase up to 600,000 additional
shares of common stock at the same price per share as we will receive for the
4,000,000 shares that the underwriters have agreed to purchase. If the
underwriters exercise this option, each underwriter will have a commitment to
purchase approximately the same percentage of additional shares that the number
of shares of common stock to be purchased by it shown in the above table
represents as a percentage of the 4,000,000 shares offered by this prospectus.
We will be obligated to sell shares to the underwriters to the extent the
option is exercised. The underwriters may exercise this option only to cover
over-allotments of common stock offered in this prospectus.

Underwriting Discounts and Commissions

  This table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters:

<TABLE>
<CAPTION>
                                                                    Total
                                                             -------------------
                                                              Without    With
                                                               Over-     Over-
                                                             allotment allotment
                                                             --------- ---------
     <S>                                                     <C>       <C>
     Per share..............................................    $         $
     Total..................................................    $         $
</TABLE>


                                       71
<PAGE>

Other Conditions to the Underwriters' Obligations

  The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

Stockholder Lockup Agreements

  Stockholders, including all executive officers and directors, who own in the
aggregate 19,696,563 shares of common stock have agreed that they will not,
without the prior written consent of Chase Securities Inc., for a period of 180
days after the date of this prospectus offer, sell, contract to sell or
transfer any:

  .  shares of common stock;

  .  options or warrants to purchase any shares of common stock; or

  .  any securities convertible into or exchangeable for shares of common
     stock.

Company Lockup Agreement

  We have agreed that we will not, without the prior written consent of Chase
Securities Inc., offer, sell or dispose of any shares of common stock or
securities exercisable for or convertible into shares of common stock until the
date 180 days following the date of this prospectus. However, we may issue
shares upon the exercise of options granted before the date of this prospectus,
and may grant additional options under our stock option plans, provided that,
without the prior written consent of Chase Securities Inc., these additional
options shall not be exercisable during the 180-day period.

Factors in Pricing Our Stock in the Offering

  Before this offering, there has been no public market for our common stock.
The initial public offering price for the common stock will be determined
through negotiation between us and the representatives of the underwriters.
Factors to be considered in the negotiation include:

  .  prevailing market conditions,

  .  our financial information,

  .  market valuations of other companies that we and the representatives of
     the underwriters believe to be comparable to us,

  .  estimates of our business potential and

  .  the present state of our development.

Market Stabilization Activities

  Persons participating in this offering may over-allot or engage in
transactions which stabilize or maintain the market price of the common stock
at levels above those which might otherwise prevail in the open market. These
persons may enter stabilizing bids or engage in syndicate covering
transactions. A stabilizing bid is a bid for or the purchase of common stock
for the purpose of fixing or maintaining the price of the common stock. A
syndicate covering transaction is a bid for or the purchase of stock on behalf
of the underwriters to reduce a short position incurred by the underwriters in
connection with this offering; a short position results when an underwriter
sells more shares than it has committed to purchase. These transactions may
occur on the Nasdaq National Market, in the over-the-counter market. These
transactions, if commenced, may be discontinued at any time.

  Underwriters and selling group members, if any, who are qualified market
makers on the Nasdaq National Market may engage in passive market making
transactions in our common stock on the Nasdaq National Market in compliance
with Rule 103 of Regulation M under the Securities Exchange Act of 1934. During
the business day before the pricing of the offering before the beginning of
offers or sales of our

                                       72
<PAGE>

common stock, passive market makers must comply with applicable volume and
price limitations and must be identified. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid of
that security; if all independent bids are lowered below the passive market
maker's bid, however, the bid must then be lowered when purchase limits are
exceeded.

Thomas Weisel Partners LLC

  Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has been named as a lead or co-manager on
110 filed public offerings of equity securities, of which 79 have been
completed, and has acted as a syndicate member in an additional 54 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, with the exception of its contractual relationship with us
under the underwriting agreement entered into for this offering.

Offering Expenses

  We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $1,200,000.

Directed Shares Program and Rights to Purchase Shares in the Offering

  At our request, the underwriters have reserved for sale, at the initial
public offering price, up to (1) 200,000 shares for persons that are affiliated
with companies with whom we have a business relationship, such as executives of
companies that market, sell or promote our products and (2) up to approximately
135,000 additional shares for five current stockholders under their pre-
existing contractual rights to purchase shares in this offering. The shares
sold by exercise of the contractual rights will be subject to a 180-day lock-up
agreement. The sales of these shares will only be made under this prospectus.
The stockholders who hold these pre-existing contractual rights are ATGF II,
Litton Master Trust, James Stableford, Emeric McDonald and Anthony Ciulla. The
number of shares of our common stock available for sale to the public will be
reduced if these individuals and entities purchase these reserved shares. Any
reserved shares that are not purchased by these persons will be offered by the
underwriters to the public on the same basis as the other shares in this
offering.

                                       73
<PAGE>

                                 LEGAL MATTERS

  The validity of the common stock offered in this offering will be passed upon
for us by Venture Law Group, A Professional Corporation, Menlo Park,
California. Other legal matters will be passed upon for the underwriters by
Wilson Sonsini Goodrich & Rosati. As of December 31, 1999, an investment
partnership and members of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, beneficially owned an aggregate of 29,165 shares of our common
stock.

                                    EXPERTS

  The consolidated financial statements and schedule of CrossWorlds Software,
Inc. and subsidiaries as of December 31, 1998 and 1999, and for each of the
years in the three-year period ended December 31, 1999, have been included in
this prospectus and in the registration statement in reliance upon the report
of KPMG LLP, independent auditors, appearing elsewhere in the prospectus, and
upon the authority of said firm as experts in accounting and auditing.

                    ADDITIONAL INFORMATION AVAILABLE TO YOU

  We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act covering the common stock
offered in this offering. This prospectus constitutes a part of the
registration statement but does not contain all of the information in the
registration statement, which contains several exhibits as permitted by the
rules and regulations of the commission. For further information about us and
our common stock, you should refer to the registration statement.

  The registration statement, including the exhibits and the financial
statement schedule, may be inspected without charge at the public reference
facilities maintained by the commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the commission located at Seven
World Trade Center, 13th Floor, New York, NY 10048, and the Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
all or any part of the registration statement may be obtained from the SEC's
offices upon payment of fees to the commission. The reports and other
information may also be inspected without charge at a web site maintained by
the commission. The address of this web site is http://www.sec.gov.

                                       74
<PAGE>

                           CROSSWORLDS SOFTWARE, INC.
                                AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999............. F-3
Consolidated Statements of Operations for the three years ended December
 31, 1999................................................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the three
 years ended December 31, 1999........................................... F-5
Consolidated Statements of Cash Flows for the three years ended December
 31, 1999................................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>

                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
CrossWorlds Software, Inc.:

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

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CrossWorlds
Software, Inc. and subsidiaries for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.

                                          /s/ KPMG LLP

Mountain View, California
January 24, 2000

                                      F-2
<PAGE>

                           CROSSWORLDS SOFTWARE, INC.
                                AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                     December 31,
                                        ----------------------------------------
                                                                1999
                                                      --------------------------
                                            1998         Actual      Pro Forma
                                        ------------  ------------  ------------
                ASSETS                                              (unaudited)
 <S>                                    <C>           <C>           <C>
 Current assets:
   Cash and cash equivalents..........  $  5,415,154  $ 12,506,119  $ 12,506,119
   Accounts receivable, net of
    allowance of $306,130 and $296,675
    as of December 31, 1998 and 1999,
    respectively......................     5,198,351    11,688,430    11,688,430
   Prepaids and other current assets..       820,115     1,019,036     1,019,036
                                        ------------  ------------  ------------
   Total current assets...............    11,433,620    25,213,585    25,213,585
 Property and equipment, net..........     4,156,515     3,846,379     3,846,379
 Deposits and other assets............       166,610       116,610       116,610
                                        ------------  ------------  ------------
   Total assets.......................  $ 15,756,745  $ 29,176,574  $ 29,176,574
                                        ============  ============  ============
 LIABILITIES AND STOCKHOLDERS' EQUITY
               (DEFICIT)
 Current liabilities:
   Accounts payable...................  $    862,408  $    796,798  $    796,798
   Accrued payroll and related
    expenses..........................     1,166,372     2,597,501     2,597,501
   Accrued commissions................     1,966,503     2,741,629     2,741,629
   Accrued royalties..................            --     1,438,929     1,438,929
   Other accrued liabilities..........     1,268,104     2,563,065     2,563,065
   Current portion of capital lease
    obligations.......................            --       347,216       347,216
   Current portion of long-term debt..     4,262,552     2,622,482     2,622,482
   Deferred revenue...................     6,555,892    13,157,747    13,157,747
                                        ------------  ------------  ------------
   Total current liabilities..........    16,081,831    26,265,367    26,265,367
 Other long-term liabilities..........        91,090       123,913       123,913
 Capital lease obligations, less
  current portion.....................            --       576,711       576,711
 Long-term debt, less current
  portion.............................     6,254,166     2,936,118     2,936,118
                                        ------------  ------------  ------------
   Total liabilities..................    22,427,087    29,902,109    29,902,109
                                        ------------  ------------  ------------
 Commitments
 Stockholders' equity (deficit):
   Convertible preferred stock, $0.01
    par value; actual--17,000,000
    shares authorized; 9,571,606 and
    16,126,003 shares issued and
    outstanding; and aggregate
    liquidation preference of
    $88,859,405 as of December 31,
    1999; pro forma--none authorized;
    none issued or outstanding .......        95,716       161,260            --
   Common stock, $0.001 par value;
    actual--45,000,000 shares
    authorized; 2,810,464 and
    3,153,935 shares issued and
    outstanding; pro forma--
    150,000,000 shares authorized;
    19,696,563 shares issued and
    outstanding ......................         2,810         3,154        19,697
   Additional paid-in capital.........    53,929,214    96,757,116    96,901,833
   Deferred stock-based compensation..    (3,777,293)   (2,540,474)   (2,540,474)
   Accumulated deficit................   (56,920,789)  (95,106,591)  (95,106,591)
                                        ------------  ------------  ------------
   Total stockholders' equity
    (deficit).........................    (6,670,342)     (725,535)     (725,535)
                                        ------------  ------------  ------------
   Total liabilities and stockholders'
    equity (deficit)..................  $ 15,756,745  $ 29,176,574  $ 29,176,574
                                        ============  ============  ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>

                           CROSSWORLDS SOFTWARE, INC.
                                AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                             Year Ended December 31,
                                      ----------------------------------------
                                          1997          1998          1999
                                      ------------  ------------  ------------
<S>                                   <C>           <C>           <C>
Revenue:
  Software license................... $    748,336  $  3,972,741  $  8,193,907
  Service, maintenance and other.....      360,019     3,733,694    10,899,886
                                      ------------  ------------  ------------
  Total revenue......................    1,108,355     7,706,435    19,093,793
                                      ------------  ------------  ------------
Cost of revenue:
  Software license and royalties.....       36,503       437,813     1,599,047
  Service, maintenance and other,
   excludes stock-based compensation
   of $415,790 and $253,334 for 1998
   and 1999, respectively............    1,859,536     5,392,589    10,127,418
                                      ------------  ------------  ------------
  Total cost of revenue..............    1,896,039     5,830,402    11,726,465
                                      ------------  ------------  ------------
    Gross profit (loss)..............     (787,684)    1,876,033     7,367,328
                                      ------------  ------------  ------------
Operating expenses:
  Research and development, excludes
   stock-based compensation of
   $1,622,857 and $89,175 for 1998
   and 1999, respectively............    4,080,461    11,747,877    14,242,556
  Sales and marketing, excludes
   stock-based compensation of
   $2,051,890 and $897,216 for 1998
   and 1999, respectively............    6,954,034    23,141,104    21,791,524
  General and administrative,
   excludes stock-based compensation
   of $683,390 and $221,927 for 1998
   and 1999, respectively............    2,296,426     4,065,794     6,144,879
  Amortization of deferred stock-
   based compensation................           --     4,773,927     1,461,652
                                      ------------  ------------  ------------
  Total operating expenses...........   13,330,921    43,728,702    43,640,611
                                      ------------  ------------  ------------
    Operating loss...................  (14,118,605)  (41,852,669)  (36,273,283)
Other income (expense), net..........      166,138       478,584    (1,912,519)
                                      ------------  ------------  ------------
    Net loss......................... $(13,952,467) $(41,374,085) $(38,185,802)
                                      ============  ============  ============
Net loss per share:
  Basic and diluted.................. $     (11.88) $     (19.99) $    (13.40)
                                      ============  ============  ============
  Weighted average shares used in
   computation (in thousands)........        1,175         2,069         2,850
                                      ============  ============  ============
Pro forma net loss per share
 (unaudited):
  Basic and diluted.................. $      (1.70) $      (3.55) $     (2.38)
                                      ============  ============  ============
  Weighted average shares used in
   computation (in thousands)........        8,201        11,641        16,062
                                      ============  ============  ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>

                          CROSSWORLDS SOFTWARE, INC.
                               AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                      Convertible
                    preferred stock     Common stock     Additional   Stockholder   Deferred                        Total
                  ------------------- -----------------    paid-in       note     stock-based    Accumulated    stockholders'
                    Shares    Amount   Shares    Amount    capital    receivable  compensation     deficit     equity (deficit)
                  ---------- -------- ---------  ------  -----------  ----------- ------------  -------------  ----------------
<S>               <C>        <C>      <C>        <C>     <C>          <C>         <C>           <C>            <C>
Balance as of
 December 31,
 1996...........   5,404,155 $ 54,041 2,240,000  $2,240  $ 2,944,380   $(15,000)  $        --   $  (1,594,237)   $  1,391,424
Issuance of
 Series C
 preferred
 stock, net.....   2,104,144   21,041        --      --   12,560,302         --            --              --      12,581,343
Issuance of
 Series D
 preferred
 stock, net.....   1,601,307   16,013        --      --   22,805,259         --            --              --      22,821,272
Exercise of
 options and
 restricted
 stock purchase
 agreements.....          --       --   406,250     406      104,282        937            --              --         105,625
Repurchase of
 restricted
 stock..........          --       --   (93,750)    (94)     (13,969)    14,063            --              --              --
Net loss........          --                 --      --           --         --            --     (13,952,467)    (13,952,467)
                  ---------- -------- ---------  ------  -----------   --------   -----------   -------------    ------------
Balance as of
 December 31,
 1997...........   9,109,606   91,095 2,552,500   2,552   38,400,254         --            --     (15,546,704)     22,947,197
Issuance of
 Series D
 preferred
 stock, net.....     462,000    4,621        --      --    6,540,062         --            --              --       6,544,683
Exercise of
 options and
 restricted
 stock purchase
 agreements.....          --       --   446,297     446      455,813         --            --              --         456,259
Repurchase of
 restricted
 stock..........          --       --  (188,333)   (188)     (18,135)        --            --              --         (18,323)
Deferred stock-
 based
 compensation
 related to
 option grants..          --       --        --      --    8,551,220         --    (8,551,220)             --              --
Amortization of
 deferred stock-
 based
 compensation...          --       --        --      --           --         --     4,773,927              --       4,773,927
Net loss........          --       --        --      --           --         --            --     (41,374,085)    (41,374,085)
                  ---------- -------- ---------  ------  -----------   --------   -----------   -------------    ------------
Balance as of
 December 31,
 1998...........   9,571,606   95,716 2,810,464   2,810   53,929,214         --    (3,777,293)    (56,920,789)     (6,670,342)
Issuance of
 Series E
 preferred
 stock, net.....   2,883,326   28,833        --      --   17,221,535         --            --              --      17,250,368
Issuance of
 Series F
 preferred
 stock, net.....   3,671,071   36,711        --      --   23,517,594         --            --              --      23,554,305
Issuance of
 preferred stock
 warrants.......          --       --        --      --    1,256,449         --            --              --       1,256,449
Exercise of
 options........          --       --   437,352     438      641,991         --            --              --         642,429
Repurchase of
 restricted
 stock..........          --       --   (93,881)    (94)     (34,500)        --            --              --         (34,594)
Deferred stock-
 based
 compensation
 related to
 option grants..          --       --        --      --      224,833         --      (224,833)             --              --
Amortization of
 deferred stock-
 based
 compensation...          --       --        --      --           --         --     1,461,652              --       1,461,652
Net loss........          --       --        --      --           --         --            --     (38,185,802)    (38,185,802)
                  ---------- -------- ---------  ------  -----------   --------   -----------   -------------    ------------
Balance as of
 December 31,
 1999...........  16,126,003 $161,260 3,153,935  $3,154  $96,757,116     $ ----   $(2,540,474)  $ (95,106,591)   $   (725,535)
                  ========== ======== =========  ======  ===========   ========   ===========   =============    ============
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>

                           CROSSWORLDS SOFTWARE, INC.
                                AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                          ----------------------------------------
                                              1997          1998          1999
                                          ------------  ------------  ------------
<S>                                       <C>           <C>           <C>
Cash flows from operating activities:
 Net loss...............................  $(13,952,467) $(41,374,085) $(38,185,802)
 Adjustments to reconcile net loss to
  net cash used in operating activities:
   Depreciation and amortization........       361,390     1,403,938     2,389,305
   Amortization of deferred stock-based
    compensation........................            --     4,773,927     1,461,652
   Issuance of warrants for services....            --            --       756,449
   Software licenses exchanged for
    property and equipment and prepaid
    assets..............................      (346,658)           --            --
   Changes in operating assets and
    liabilities:
    Accounts receivable.................      (907,200)   (4,291,151)   (6,490,079)
    Prepaids and other current assets...      (334,548)     (417,572)     (198,921)
    Accounts payable....................     1,842,219    (1,045,161)      (65,610)
    Accrued payroll and related
     expenses...........................       713,165       367,630     1,431,129
    Accrued commissions.................            --     1,966,503       775,126
    Other accrued liabilities...........       367,066       837,773     2,733,890
    Deferred revenue....................       788,413     5,767,479     6,601,855
    Other long-term liabilities.........        39,439        51,651        32,823
                                          ------------  ------------  ------------
Net cash used in operating activities...   (11,429,181)  (31,959,068)  (28,758,183)
                                          ------------  ------------  ------------
Cash flows from investing activities:
 Purchases of property and equipment....    (1,784,420)   (3,572,632)     (834,517)
 Other assets...........................            --      (120,000)       50,000
                                          ------------  ------------  ------------
Net cash used in investing activities...    (1,784,420)   (3,692,632)     (784,517)
                                          ------------  ------------  ------------
Cash flows from financing activities:
 Proceeds from convertible subordinated
  notes payable to stockholder..........            --     5,000,000            --
 Proceeds from equipment facilities.....     1,173,720     1,147,113            --
 Proceeds from subordinated debt........            --            --     5,000,000
 Proceeds from revolving working capital
  facility..............................            --     3,479,219            --
 Repayments of equipment facilities.....            --            --      (783,333)
 Repayments of subordinated debt........            --            --      (516,291)
 Repayments of working capital
  facility..............................            --      (283,334)   (3,479,219)
 Proceeds from exercise of stock
  options...............................       105,625       456,259       642,429
 Proceeds from issuance of preferred
  stock.................................    35,402,615     6,544,683    35,804,673
 Repurchase of restricted stock.........            --       (18,323)      (34,594)
                                          ------------  ------------  ------------
Net cash provided by financing
 activities.............................    36,681,960    16,325,617    36,633,665
                                          ------------  ------------  ------------
Net increase (decrease) in cash and cash
 equivalents............................    23,468,359   (19,326,083)    7,090,965
Cash and cash equivalents at beginning
 of year................................     1,272,878    24,741,237     5,415,154
                                          ------------  ------------  ------------
Cash and cash equivalents at end of
 year...................................  $ 24,741,237  $  5,415,154  $ 12,506,119
                                          ============  ============  ============
Supplemental disclosures of cash flow
 information:
 Cash paid during the period for
  interest..............................  $     55,372  $    208,259  $    995,393
                                          ============  ============  ============
Noncash investing and financial
 activities:
 Return of restricted stock in
  satisfaction of note receivable.......  $     14,063  $         --  $         --
 Issuance of preferred stock for
  conversion convertible notes..........            --            --     5,000,000
 Issuance of preferred stock warrants in
  connection with long-term debt........            --            --       500,000
 Issuance of preferred stock warrants in
  connection with services..............            --            --       756,449
 Equipment acquired through equipment
  lease facility........................            --            --     1,077,985
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>

                           CROSSWORLDS SOFTWARE, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Organization and Significant Accounting Policies

 (a) Description of Business

  CrossWorlds Software, Inc. (the Company) develops, produces, markets and
implements e-business infrastructure software. The Company is headquartered in
Burlingame, California and operates foreign subsidiaries in Germany, the United
Kingdom and France. The majority of the Company's revenues are derived from
domestic sales which were 80%, 77% and 86% for 1997, 1998 and 1999 of total
revenues, respectively. Substantially all of the Company's sales are made in
U.S. dollars.

 (b) Principles of Consolidation

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

 (c) Foreign Currency

  The Company considers the functional currency of its foreign subsidiaries to
be the U.S. dollar. Accordingly, the foreign subsidiaries' financial statements
are remeasured into U.S. dollars using the historical exchange rate for
nonmonetary items and the current exchange rate for monetary items.
Remeasurement gains and losses, as well as transaction gains and losses, are
included in the determination of net loss and have been immaterial to date.

 (d) Cash and Cash Equivalents

  The Company considers all highly liquid instruments with a remaining maturity
on the date of purchase of three months or less to be cash equivalents, which
consist primarily of money market funds and overnight deposits.

 (e) Property and Equipment

  Property and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the respective assets, generally two to five years. Leasehold
improvements are amortized over the lesser of the asset's useful life or the
remaining lease term.

  The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If such assets are considered to be impaired, the impairment to
be recognized is measured as the difference between the carrying amount of the
property and equipment and its fair value. To date, the Company has made no
adjustments to the carrying values of its long-lived assets.

 (f) Software Development Costs

  Software development costs associated with new products and enhancements to
existing products are expensed as incurred until technological feasibility is
established upon completion of a working model. To date, the Company's software
development has been completed concurrent with the establishment of
technological feasibility, and, accordingly, no costs have been capitalized.


                                      F-7
<PAGE>

                           CROSSWORLDS SOFTWARE, INC.
                                AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 (g) Concentrations of Credit Risk and Major Customers

  The Company's cash and cash equivalents are principally on deposit in a
short-term asset management account at a large bank. Accounts receivable
potentially subject the Company to concentrations of credit risk. The Company's
customer base is comprised primarily of large companies. The Company generally
does not require collateral for accounts receivable. When required, the Company
maintains allowances for credit losses, and to date such losses have been
within management's expectations. Information regarding sales to major
customers follows (items with an * indicate percentage was less than 10%):

<TABLE>
<CAPTION>
                                                                      Percentage of
                                                    Percentage of       Accounts
                                                    Total Revenue     Receivable at
                                                    ----------------  December 31,
   Customer                                         1997  1998  1999      1999
   --------                                         ----  ----  ----  -------------
   <S>                                              <C>   <C>   <C>   <C>
   A...............................................  22%    *     *          *
   B...............................................  20%    *     *          *
   C...............................................  25%    *     *          *
   D...............................................  22%    *     *          *
   E...............................................   *    14%    *          *
   F...............................................   *    13%    *          *
   G...............................................   *    11%    *          *
   H...............................................   *     *    21%         *
   I...............................................   *     *     *         44%
</TABLE>

 (h) Fair Value of Financial Instruments

  The fair value of the Company's cash, accounts receivable, accounts payable,
and borrowings approximate their carrying values due to their short maturity or
variable-rate structure.

 (i) Use of Estimates

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

 (j) Revenue Recognition

  The Company's software arrangements typically involve significant production,
customization, or modification of the software, or services that are essential
to the functionality of the software and, as a result, software license revenue
for the entire arrangement is recognized using the percentage-of-completion
method. Progress toward completion is generally measured by achieving certain
standard and objectively verifiable milestones present in each project. These
milestones typically require customer acceptance of a deliverable. In certain
instances, the Company may recognize software license revenue upon delivery and
when persuasive evidence of an arrangement exists, provided the fee is fixed
and determinable, acceptance is certain, collection is probable, and the
arrangement does not involve significant production, customization, or
modification of the software or services that are essential to the
functionality of the software; however, software license revenue recognized in
this manner has been immaterial to date. In the event costs to complete a
contract are expected to exceed anticipated revenue, a loss is accrued. In
certain circumstances where the Company is unable to estimate the amount of
effort required to customize or implement the software license, revenue is
recognized using the completed contract method. To date, no amounts have

                                      F-8
<PAGE>

                           CROSSWORLDS SOFTWARE, INC.
                                AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
been recognized under the completed contract method. Other consulting and
service revenue is recognized as the services are performed. Maintenance
revenue from customer support and product upgrades, including maintenance
bundled with original software licenses, are deferred and recognized ratably
over the term of the maintenance agreement, typically 12 months. When the
Company enters into software arrangements with resellers, the Company does not
recognize revenue until the reseller demonstrates it has entered into an
arrangement with an end user that satisfies the Company's revenue recognition
criteria. When our services are essential to the implementation of the
reseller's software, the software license revenue for the arrangement is
recognized using the percentage-of-completion method. The Company recognizes
revenue in accordance with the American Institute of Certified Public
Accountants' (AICPA) Statement of Position (SOP) 97-2, Software Revenue
Recognition.

  In December 1998, the AcSEC issued SOP 98-9, Software Revenue Recognition,
with Respect to Certain Arrangements, which requires recognition of revenue
using the "residual method" in a multiple-element arrangement when fair value
does not exist for one or more of the undelivered elements in the arrangement.
Under the residual method, the total fair value of the undelivered elements is
deferred and subsequently recognized in accordance with SOP 97-2. The Company
adopted SOP 98-9 on January 1, 2000, and does not expect adoption to have a
material effect on its consolidated financial position or results of
operations.

 (k) Accounts receivable

  The Company bills for software licenses and maintenance fees at the inception
of the contract. These arrangements typically allow the Company to bill amounts
in excess of revenue recognized. Amounts billed in excess of revenue recognized
are recorded as deferred revenue. Consulting and service fees are billed
monthly based on time and expenses incurred. Service revenue recognized in
excess of amounts billed was $393,731 at December 31, 1999. The Company's
contracts typically do not contain retainage provisions and all amounts due
under the contracts are anticipated to be collected within 12 months. At
December 31, 1999, there are no accounts receivable that are subject to
contract claims or uncertainties.

 (l) Stock-Based Compensation

  The Company accounts for its stock-based compensation plans using the
intrinsic value method. Deferred stock-based compensation expense is recorded
if, on the date of grant, the current market value of the underlying stock
exceeds the exercise price. The Company amortizes deferred stock-based
compensation in accordance with Financial Accounting Standards Board (FASB)
Interpretation No. 28.

  The Company uses the fair value method to account for stock options and other
equity instruments issued to nonemployees.

 (m) Income Taxes

  The Company accounts for income taxes using the asset and liability method.
Deferred income taxes are recognized by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. The measurement of deferred tax
assets is reduced, if necessary, by a valuation allowance for any tax benefits
for which future realization is uncertain.

                                      F-9
<PAGE>

                           CROSSWORLDS SOFTWARE, INC.
                                AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 (n) Comprehensive Loss

  The Company does not have any components of comprehensive income,
consequently comprehensive loss consists entirely of net loss for all periods
presented.

 (o) Net Loss Per Share

  Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock, excluding common stock subject to
repurchase. Diluted net loss per share is computed using the weighted-average
number of outstanding shares of common stock and, when dilutive, potential
common shares from options and warrants to purchase common stock and common
stock subject to repurchase using the treasury stock method, and from
convertible securities using the as-if converted basis. All potential common
shares have been excluded from the computation of diluted net loss per share
for all periods presented because the effect would have been antidilutive.


  Diluted net loss per share does not include the effect of the following
antidilutive common equivalent shares:

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                --------------------------------
                                                   1997       1998       1999
                                                ---------- ---------- ----------
   <S>                                          <C>        <C>        <C>
   Stock options and warrants..................  1,676,039  2,117,220  7,136,867
   Common stock subject to repurchase..........  1,321,104    681,312    155,245
   Convertible preferred stock.................  9,109,606  9,571,606 16,538,664
                                                ---------- ---------- ----------
                                                12,106,749 12,370,138 23,830,776
                                                ========== ========== ==========
</TABLE>

 (p) Segment Reporting

  The Company is organized in a single operating segment for purposes of making
operating decisions and assessing performance. The chief operating decision
maker evaluates performance, makes operating decisions and allocates resources
based on financial data consistent with the presentation in the accompanying
consolidated financial statements.

  The following table presents information about the Company's geographical
sales (in thousands):

<TABLE>
<CAPTION>
                                                  1997       1998       1999
                                               ---------- ---------- -----------
     <S>                                       <C>        <C>        <C>
     United States............................ $  887,944 $5,951,397 $16,360,434
     Europe...................................    220,411  1,755,038   2,733,359
                                               ---------- ---------- -----------
                                               $1,108,355 $7,706,435 $19,093,793
                                               ========== ========== ===========
</TABLE>

 (q) Accounting for Derivative Instruments and Hedging Activities

  In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. For a derivative not
designated as a hedging instrument, changes in the fair value of the derivative
are recognized in earnings in the period

                                      F-10
<PAGE>

                           CROSSWORLDS SOFTWARE, INC.
                                AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

of change. This statement will be effective for all annual and interim periods
beginning after January 1, 2001. Management does not believe the adoption of
SFAS No. 133 will have a material effect on the Company's consolidated
financial position or results of operations.

 (r) Advertising Costs

  The Company expenses advertising costs as incurred. Advertising expense was
approximately $394,000, $2,004,000 and $46,000 for the years ended December 31,
1997, 1998 and 1999, respectively.

 (s) Initial Public Offering, Private Placement, Unaudited Pro Forma Balance
Sheet and Net Loss Per Share

  The Board of Directors of the Company authorized the filing of a registration
statement with the Securities and Exchange Commission (SEC) that would permit
the Company to sell shares of the Company's common stock in connection with a
proposed initial public offering (IPO). The Company has also entered into
agreements to sell common shares in a private placement concurrent with the
IPO. If the IPO is consummated under the terms presently anticipated, all
outstanding shares of the Company's convertible preferred stock will
automatically convert on a one-for-one basis, subject to certain antidilution
provisions, upon the closing of the IPO. The pro forma balance sheet
information reflects the conversion of all of the convertible preferred stock
as if it had occurred on December 31, 1999.

  Pro forma net loss per share for the years ended December 31, 1997, 1998 and
1999, is computed using the weighted average number of common shares
outstanding, including the pro forma effects of the automatic conversion of the
Company's convertible preferred stock into shares of the Company's common stock
effective upon the closing of the Company's IPO as if the conversion occurred
on January 1, 1997, or at the date of issuance, if later. Pro forma common
equivalent shares, comprised of incremental common shares issuable upon the
exercise of stock options and warrants as well as shares subject to repurchase
agreements are not included in pro forma diluted net loss per share because
they would be anti-dilutive.

(2) Property and Equipment

  Property and equipment as of December 31, 1998 and 1999 consisted of the
following:

<TABLE>
<CAPTION>
                                                          1998         1999
                                                       -----------  -----------
      <S>                                              <C>          <C>
      Computer equipment and software................. $ 4,672,705  $ 6,476,877
      Furniture and fixtures..........................     689,778      767,615
      Leasehold improvements..........................     569,118      599,611
                                                       -----------  -----------
                                                         5,931,601    7,844,103
      Accumulated depreciation........................  (1,775,086)  (3,997,724)
                                                       -----------  -----------
                                                       $ 4,156,515  $ 3,846,379
                                                       ===========  ===========
</TABLE>

  Equipment under the capital lease aggregated $1,132,726 as of December 31,
1999. Accumulated amortization on the assets under the capital lease aggregated
$179,565 as of December 31, 1999.

(3) Long Term Debt

  On December 23, 1998 the Company entered into a Convertible Subordinated
Promissory Note Agreement (the Promissory Note Agreement) with certain
stockholders of the Company in the amount of $5,000,000. In accordance with the
terms of the Promissory Note Agreement, the entire amount plus accrued
interest, was converted into shares of convertible preferred stock in the
Company's Series E round of financing in January 1999.

                                      F-11
<PAGE>

                           CROSSWORLDS SOFTWARE, INC.
                                AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  During the year ended December 31, 1998 and 1999 the Company had available
two Equipment Facilities Agreements (the Equipment Facilities) which provided
for $350,000 and $2,000,000 and a $10,000,000 working capital facilities with a
bank. In January 1999, the Company had entered into a $5,000,000 credit
facility as a Subordinated Loan and Security Agreement (the Subordinated Loan
Agreement). The following amounts of debt are outstanding as of December 31,
1998 and 1999 (in order of subordination):

<TABLE>
<CAPTION>
                                                               December 31,
                                                          ----------------------
                                                             1998        1999
                                                          ----------- ----------
<S>                                                       <C>         <C>
$350,000 equipment facility with bank, payable in 36
 equal monthly installments of principal plus interest
 at the bank's prime rate plus 0.75% per annum (8.50%
 and 9.25% as of December 31, 1998 and 1999
 respectively)..........................................  $   204,166 $   87,500
$2,000,000 equipment facility with bank, payable in 36
 equal monthly installments of principal plus interest
 at the bank's prime rate per annum (7.75% and 8.50% as
 of December 31, 1998 and 1999 respectively)............    1,833,333  1,166,667
$10,000,000 working capital facility with a bank
 expiring in April 2000, payable in 36 equal monthly
 installments of principal plus interest at the bank's
 prime rate plus 0.10% per annum (7.85% as of December
 31, 1998)..............................................    3,479,219         --
$5,000,000 Subordinated Loan and Security Agreement with
 a lender. Note bearing interest at 12% per annum, with
 interest payments beginning from April 1, 1999 through
 September, 1999 followed by 30 equal monthly payments
 of principal plus interest through March, 2002.........           --  4,304,433
$5,000,000 Promissory Note Agreement with stockholders,
 bearing interest at 8% per annum, which was converted
 into Series E convertible preferred stock in January
 1999...................................................    5,000,000         --
                                                          ----------- ----------
Total...................................................   10,516,718  5,558,600
Less, current portion...................................    4,262,552  2,622,482
                                                          ----------- ----------
Long term debt..........................................  $ 6,254,166 $2,936,118
                                                          =========== ==========
</TABLE>

  The aggregate future payments of long-term debt are as follows:

<TABLE>
   <S>                                                                <C>
   2000.............................................................. $2,622,482
   2001..............................................................  2,460,351
   2002..............................................................    475,767
                                                                      ----------
                                                                      $5,558,600
                                                                      ==========
</TABLE>

  Outstanding borrowings under the equipment facilities agreements are secured
by all of the Company's assets. The working capital facility agreement
contained affirmative and negative covenants requiring, among other things, the
Company to maintain minimum levels of liquid assets, limit the Company's
ability to incur additional debt, pay cash dividends, or to purchase certain
assets. These covenants require the Company to restrict certain acquisitions,
mergers, consolidations, or similar transactions. In 1999, the Company issued
warrants to purchase 6,334 shares of common stock to the bank in exchange for
waivers of noncompliance with these covenants. The fair value of the warrants
are not material to the Company's consolidated operating results. As of
December 31, 1999, all amounts drawn under the working capital facility were
repaid.

  In connection with the Subordinated Loan Agreement, the Company issued a
warrant to the lender to purchase up to 126,666 shares of Series E preferred
stock at an exercise price of $6.00 per share. The warrant is exercisable on
the earlier of seven years after the date of issuance or three years after the
Company's initial public offering. Accordingly, the Company has reserved
126,666 shares of Series E preferred stock for issuance

                                      F-12
<PAGE>

                           CROSSWORLDS SOFTWARE, INC.
                                AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

upon the exercise of the warrant. The warrant had a fair value of $500,000 on
the date of grant, computed using the Black-Scholes pricing model with the
following assumptions: 60% volatility, zero dividends, a risk-free rate of 6.1%
and a contractual life of 7 years. The fair value of the warrant has been
recorded in equity and as a reduction of the carrying amount of the related
debt and will be amortized into interest expense over the debt term. Total
amortization expense for the year ended December 31, 1999 was $166,667.

(4) Commitments

 (a) Lease Commitment

  The Company leases its primary facility under a noncancelable operating lease
expiring in 2008. The Company also leases various facilities which serve as
sales offices in the United States, and subsidiary offices in France, Germany,
and the United Kingdom under noncancelable operating leases with expiration
dates ranging from February 1999 to February 2000. In addition, the Company
leases equipment under noncancelable operating leases expiring in December
2001. In conjunction with the facility lease, the Company issued a warrant for
the purchase of 33,333 shares of Series C preferred stock at an exercise price
equal to $6.00 per share. The warrant shall expire and no longer be exercisable
at the earlier of: (a) December 31, 2002; or (b) the merger or consolidation of
the Company with a third party or the sale of all or substantially all of the
Company's assets to a third party; or (c) the closing of an underwritten public
offering of shares of common stock of the Company. The fair value of the
warrant was not material to the Company's 1998 consolidated operating results.

  Future minimum lease payments as of December 31, 1999, are as follows:

<TABLE>
<CAPTION>
      Year ending                                        Capital     Operating
      December 31,                                        leases      leases
      ------------                                      ----------  -----------
      <S>                                               <C>         <C>
      2000............................................. $  399,846  $ 1,583,400
      2001.............................................    399,846    1,418,392
      2002.............................................    208,563    1,424,690
      2003.............................................         --    1,468,236
      2004.............................................         --    1,468,236
      Thereafter.......................................         --    4,890,940
                                                        ----------  -----------
        Total minimum payments.........................  1,008,255  $12,253,894
                                                                    ===========
      Less amounts representing imputed interest.......    (84,328)
                                                        ----------
      Present value of minimum lease payments..........    923,927
        Less current portion...........................   (347,216)
                                                        ----------
      Capital lease obligation, less current portion... $  576,711
                                                        ==========
</TABLE>

  Rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $619,000, $1,536,000 and $2,000,000, respectively.

 (b) Royalty Commitments

  During 1999, the Company entered into royalty agreements with two third party
vendors for certain licensed technology. The agreements include minimum royalty
payments of approximately $2.8 million and $2.0 million, respectively due
through June 2001 and June 2000, respectively.

  The Company expects to earn out its remaining minimum royalty obligations
associated with the technology with minimum royalty payments of approximately
$2.8 million due by June 2001 and has recognized the associated cost of license
commensurate with usage.

                                      F-13
<PAGE>

                           CROSSWORLDS SOFTWARE, INC.
                                AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  During the fourth quarter of 1999, the Company developed and began shipping
products which replaced the technology provided under the agreement associated
with the minimum royalty payments of $2.0 million due by June 2000. As a
result, the Company discontinued use of this licensed technology and recorded a
one-time charge to other expense for the remaining $1 million of unamortized
minimum royalties.

 (c) Employment Agreements

  In October 1999, the Company entered into an employment agreement with its
President and Chief Executive Officer. The agreement provided for a sign-on
bonus of $400,000 to be paid by March 1, 2000. The sign-on bonus was accrued
and charged to general expense in the fourth quarter of 1999. In addition, the
individual is eligible for a pro rata target bonus of $250,000 based on the
number of weeks of actual employment in 1999 and a full annual target bonus of
$250,000 for the year 2000. In addition, the Company will provide the
individual a moving assistance loan of $1.5 million pursuant to a secured
nonrecourse promissory note, which will be forgiven in equal monthly
installments over a period of 48 months as long as the individual remains
employed by the Company. No amounts have been borrowed through December 31,
1999.

  In January 2000, the Company entered into an employment agreement with its
Senior Vice President of Worldwide Sales. The agreement provides for a sign-on
bonus of $300,000 to be paid by March 1, 2000.

(5) Stockholders' Equity

 (a) Reverse Stock Split

  On October 1, 1999, the Company's Board of Directors authorized a 1 for 3
reverse stock split. The accompanying consolidated financial statements and
related notes have been retroactively restated to give effect to the reverse
stock split.

 (b) Convertible Preferred Stock

  In 1999, the Company sold 2,883,326 shares of Series E convertible preferred
stock at $6.00 per share for gross proceeds of $17,300,000. Included in the
issuance were 833,333 shares for the conversion of $5,000,000 in convertible
debt pursuant to the Convertible Subordinated Promissory Note Purchase
Agreement dated December 23, 1998.

  In October, 1999, the Company sold 3,671,071 of Series F convertible
preferred stock at $6.81 per share for gross proceeds of $25,000,000.

  Convertible preferred stock consisted of the following as of December 31,
1999:

<TABLE>
<CAPTION>
                                                                  Shares
                                                          ----------------------
                                                                     Issued and
      Series                                              Designated outstanding
      ------                                              ---------- -----------
      <S>                                                 <C>        <C>
      A.................................................. 3,333,333   3,333,333
      B.................................................. 2,070,822   2,070,822
      C.................................................. 2,137,500   2,104,144
      D.................................................. 2,066,667   2,063,307
      E.................................................. 3,333,333   2,883,326
      F.................................................. 3,671,072   3,671,071
                                                                     ----------
                                                                     16,126,003
                                                                     ==========
</TABLE>

                                      F-14
<PAGE>

                           CROSSWORLDS SOFTWARE, INC.
                                AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The rights, preferences, and privileges of the holders of Series A, B, C, D,
E and F convertible preferred stock are as follows:

  . Dividends are noncumulative and payable only upon declaration by the
    Company's Board of Directors at a rate of $0.0075, $0.06, $0.30, $0.75,
    $0.30 and $0.34 per share for Series A, B, C, D, E and F preferred stock,
    respectively.

  . Holders of Series A, B, C, D, E and F preferred stock have a liquidation
    preference of $0.15, $1.20, $6.00, $15.00, $6.00 and $6.81 per share,
    respectively, plus any declared but unpaid dividends.

  . Each share of Series A, B, C, D, E and F preferred stock is convertible
    at any time into one share of common stock at the option of the holder,
    subject to certain antidilution provisions. Each share of preferred stock
    automatically converts upon the earlier of the public offering of the
    Company's common stock with gross proceeds in excess of $25,000,000 or
    affirmative election of the holders of at least 66 2/3% of the
    outstanding shares. The Company has fully reserved shares of common stock
    for issuance upon the conversion of Series A, B, C, D, E and F preferred
    stock.

  . Each holder of preferred stock has voting rights equal to the number of
    shares of common stock into which such shares could be converted. In
    addition, the holders of Series A, B, C, D, E and F preferred stock vote
    as a single class.

 (c) Common Stock

  The Company has issued 2,417,798 shares of common stock to founders and
employees under restricted stock purchase agreements. Pursuant to the
agreements, the Company has the right to repurchase the unvested common stock
at its original purchase price in the event of voluntary or involuntary
termination of the stockholder for any reason. The repurchase rights expire
through the year 2001. Shares subject to repurchase totaled approximately
1,321,104, 681,312 and 155,245 as of December 31, 1997, 1998 and 1999 ,
respectively.

 (d) Common Stock Reserved

  The Company has reserved 36,443,583 shares of common stock for issuance under
its stock option plan, for warrants, and upon the conversion of outstanding
convertible preferred stock.

 (e) Stock Option Plan

  The Company is authorized to issue up to 9,473,193 shares in connection with
its 1996, 1997 and 1999 stock option plans (the Plans) to directors, employees,
and consultants. The Plans provide for the issuance of stock purchase rights,
incentive stock options, or nonstatutory stock options.

  Stock purchase rights are subject to a restricted stock purchase agreement
whereby the Company has the right to repurchase the stock at the original issue
price upon the voluntary or involuntary termination of the purchaser's
employment with the Company. The repurchase rights will lapse at a rate
determined by the stock plan administrator, but at a minimum rate of 20% per
year.

  Under the 1997 plan, the exercise price for incentive stock options is at
least 100% of the stock's fair market value on the date of grant for employees
owning less than 10% of the voting power of all classes of stock, and at least
110% of the fair market value on the date of grant for employees owning more
than 10% of the voting power of all classes of stock. For nonstatutory stock
options, the exercise price is also at least

                                      F-15
<PAGE>

                           CROSSWORLDS SOFTWARE, INC.
                                AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

110% of the fair market value on the date of grant for service providers owning
more than 10% of the voting power of all classes of stock and no less than 85%
of the fair market value on the date of grant for service providers owning less
than 10% of the voting power of all classes of stock.

  Options generally expire in 10 years; however, they may be limited to 5 years
if the optionee owns stock representing more than 10% of the Company. Vesting
periods are determined by the stock plan administrator and generally provide
for shares to vest over a 4-year period, with 12.5% of the award vesting after
6 months from the date of grant and then ratably vesting each month thereafter.

  The Company uses the intrinsic value method to account for its fixed option
plans issued to employees. Deferred stock-based compensation cost has been
recognized for its stock option plan for grants to employees when the fair
value of the underlying common stock on the grant date exceeds the exercise
price for each stock option. Deferred stock-based compensation is amortized
using the accelerated method set forth in Financial Accounting Standards Board
Interpretation No. 28. Had compensation cost for the Company's stock-based
compensation plan been determined consistent with SFAS No. 123 for all of the
Company's stock-based compensation plans, net loss (in thousands) and basic and
diluted net loss per share would have been as follows:

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                  ----------------------------
                                                    1997      1998      1999
                                                  --------  --------  --------
   <S>                                            <C>       <C>       <C>
   Net loss:
     As reported................................. $(13,952) $(41,374) $(38,186)
     Pro forma...................................  (13,973)  (41,459)  (39,873)
   Basic and diluted net loss per share:
     As reported.................................   (11.88)   (19.99)   (13.40)
     Pro forma...................................   (11.89)   (20.04)   (13.99)
</TABLE>

The fair value of each option was estimated on the date of grant using the
minimum value method with the following weighted-average assumptions: no
dividend yield; risk-free interest rate of 6.2%, 5.0% and 4.7% for fiscal 1997,
1998 and 1999 respectively; and expected life of four years for all periods.

                                      F-16
<PAGE>

                           CROSSWORLDS SOFTWARE, INC.
                                AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  A summary of the status of the Company's options for the years ended December
31, 1997, 1998 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                      Options Outstanding
                                                  ----------------------------
                                 Shares available   Number    Weighted-average
                                    for grant     of shares    exercise price
                                 ---------------- ----------  ----------------
<S>                              <C>              <C>         <C>
Balances as of December 31,
 1996...........................       525,008       581,661       $0.14
Authorized......................     1,612,083            --          --
Granted.........................    (1,386,624)    1,386,624        0.78
Exercised.......................            --      (312,914)       0.15
Canceled........................        12,665       (12,665)       0.99
                                    ----------    ----------
Balances as of December 31,
 1997...........................       763,132     1,642,706        0.69
Authorized......................       861,111            --          --
Granted.........................    (1,381,005)    1,381,005        2.93
Exercised.......................            --      (426,467)       0.96
Returned to Plans...............         6,875            --        0.96
Canceled........................       513,357      (513,357)       1.12
                                    ----------    ----------
Balances as of December 31,
 1998...........................       763,470     2,083,887        2.00
Authorized......................     5,386,665
Granted.........................    (7,022,308)    7,022,308        6.08
Exercised.......................           --       (436,394)       1.46
Returned to Plans...............        59,895            --          --
Canceled........................     1,876,365    (1,876,365)       3.72
                                    ----------    ----------
Balances as of December 31,
 1999...........................     1,064,087     6,793,436       $5.78
                                    ==========    ==========

Options exercisable at:
  December 31, 1997..............................    773,148       $0.12
  December 31, 1998..............................    448,497        1.48
  December 31, 1999..............................  3,310,545        5.89
</TABLE>

  The weighted-average fair value of options granted in fiscal 1997, 1998 and
1999 was $.15, $.51 and $1.03, respectively.

  As of December 31, 1999, the range of exercise prices and weighted-average
remaining contractual life of outstanding options were as follows:

<TABLE>
<CAPTION>
                                             Weighted-average
                                                remaining
                            Number of        contractual life     Number of shares
      Exercise prices     options shares         (years)            exercisable
      ---------------     --------------     ----------------     ----------------
     <S>                  <C>                <C>                  <C>
          $ 0.15               56,840              6.92                 25,278
            0.45               27,189              7.29                 12,121
            0.75              172,689              7.64                 84,462
            1.50               19,583              7.83                  9,065
            1.80               53,736              7.94                 22,658
            2.25                9,791              8.05                  2,272
            3.00              703,992              8.83                347,119
            5.25              698,589              9.20                135,152
            5.40              137,596              9.32                 23,157
            6.60            4,913,431              9.75              2,649,261
                            ---------                                ---------
                            6,793,436                                3,310,545
                            =========                                =========
</TABLE>

                                      F-17
<PAGE>

                           CROSSWORLDS SOFTWARE, INC.
                                AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 (f) Warrants

  In October 1999, the Company issued 177,098 warrants, at $6.60 a share, to an
executive search firm for the recruitment of its Chief Executive Officer. The
warrants are immediately exercisable up to seven years from the date of
issuance. The warrants had a fair value of $750,000 on the date of the grant
using the Black-Scholes pricing model with the following assumptions: 60%
volatility, zero dividends, a risk-free rate of 5.21% and a contractual life of
7 years. The amount was recorded as operating expense during 1999.

(6) Income Taxes

  The Company has incurred significant losses since inception and has not
incurred any income tax expense to date. The 1999 income tax differed from the
amounts computed by applying the U.S. federal income tax rate of 34% to pretax
income as a result of the following:

<TABLE>
<CAPTION>
                                           1997          1998          1999
                                        -----------  ------------  ------------
<S>                                     <C>          <C>           <C>
Expected tax at U.S. Federal statutory
 rate of 34% .........................  $(4,730,000) $(11,793,000) $(12,981,100)
Current year net operating losses and
 temporary differences for which no
 tax benefit is recognized............    4,714,000    11,672,000    12,550,300
Other.................................       16,000       121,000       430,800
                                        -----------  ------------  ------------
  Total...............................  $        --  $         --  $         --
                                        ===========  ============  ============
</TABLE>

The tax effects of temporary differences that give rise to significant portions
of the Company's deferred tax assets and liabilities are presented below.

<TABLE>
<CAPTION>
                                                         1998          1999
                                                     ------------  ------------
<S>                                                  <C>           <C>
Deferred tax assets
  Net operating loss carryforward .................. $ 17,039,000  $ 28,919,000
  Reserves and accrued expenses.....................      476,000     1,151,000
  Deferred stock compensation.......................      184,000       547,000
  Research credit carryforward......................    1,228,000     2,099,000
  State taxes and net operating loss carryforward...    3,842,000     6,209,000
  Fixed assets and intangibles......................      220,000       824,000
                                                     ------------  ------------
    Total gross deferred tax assets.................   22,989,000    39,749,000
  Valuation allowance...............................  (22,989,000)  (39,749,000)
                                                     ------------  ------------
Total deferred tax assets........................... $         --  $         --
                                                     ============  ============
</TABLE>

The net change in the total valuation allowance for the period ended December
31, 1999 was a net increase of $16,760,000.

  At December 31, 1999, the Company had net operating loss carryforwards for
federal and California income tax purposes of approximately $85,055,000 and
$70,233,000 respectively, available to reduce future income subject to income
taxes. The federal net operating loss carryforwards expire beginning 2011
through 2019. The California net operating loss carryforwards expire in 2004.

  At December 31, 1999, the Company also had research credit carryforwards for
federal and California income tax return purposes of approximately $1,247,000
and $852,000 respectively, available to reduce

                                      F-18
<PAGE>

                           CROSSWORLDS SOFTWARE, INC.
                                AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

future income subject to income taxes. The federal research credit carryforward
expires beginning in 2011 through 2014. The California research credit carries
forward indefinitely.

  The Tax Reform Act of 1986 and the California Conformity Act of 1987 impose
restrictions on the utilization of net operating loss and credit carryforwards
in the event of an "ownership change" as defined by the Internal Revenue Code.
Should an ownership change occur in the future, the Company's ability to
utilize its net operating loss and tax credit carryforwards may be subject to
restriction pursuant to these provisions.

                                      F-19
<PAGE>

[INSIDE BACK COVER]

Graphic depicting CrossWorlds e-business integration architecture. The graphic
is circular. At the center of the circle, are three hexagonal cylinders
labeled as CrossWorlds Integration Modules. The three hexagons sit on top of a
central disk labeled CrossWorlds InterChange Server.

The central disk is connected to a smaller disk by a dotted line. The smaller
disk is labeled CrossWorlds System Manager. Another dotted line connects one of
the hexagons to two smaller disks. The two smaller disks are labeled CrossWorlds
Process Designer/CrossWorlds Relationship Designer.

Coming out of the upper right of the central disk are four pipes. The uppermost
pipe is labeled CrossWorlds Connectors. The lowest pipe is connected to two
small disks by a dotted line. The two small disks are labeled CrossWorlds Map
Designer/CrossWorlds Connectment Development Kit.

The five smaller disks are labeled Infrastructure Tools.

At the end of the four pipes are four blocks labeled Enterprise Applications.
The four blocks are labeled individually as follows: Enterprise Resource
Planning, Customer Relationship Management, Supply Chain Management, and
Custom/Applications.

Coming out of the upper left of the central disk are four more pipes. The four
pipes intersect a cloud labeled Internet. On the other side of the internet
cloud the four pipes end in four blocks. The four blocks are labeled e-Business.
The four boxes are labeled individually as follows: Supplier Applications,
e-Sales/e-Procurement Applications, Customer Applications, and Outsourced
Applications.

Below the graphic are four paragraphs describing the features of the
CrossWorlds architecture.

The first paragraph text is: Realtime Process Automation: CrossWorlds'
Designer tools allow enterprises to create and deploy business process
integration logic that ties together multiple trading partners' and enterprise
applications.

The second paragraph text: Application integration: CrossWorlds' Connectors
integrate leading enterprise and e-business applications. CrossWorlds'
Connector Development Kit extends connectivity to custom applications.

The third paragraph text is: Scalable Integrations Architecture: CrossWorlds'
Interchange Server provides a comprehensive set of integration technologies
that meet the growing requirements of global organizations.

The fourth paragraph text is: e-Business Standards Support: CrossWorlds' open
platform implements a variety of Internet Standards and provides a flexible
environment that supports emerging e-business requirements.
<PAGE>

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

                               4,000,000 Shares

               [LOGO OF CROSSWORLDS SOFTWARE, INC. APPEARS HERE]

                                 Common Stock

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

                                  PROSPECTUS
                                 ------------

                                   Chase H&Q

                             Dain Rauscher Wessels

                          Thomas Weisel Partners LLC

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

                                       , 2000
                                 ------------

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

  No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to
inform themselves about and to observe any restrictions of this offering and
the distribution of this prospectus applicable to that jurisdiction.

  Until     , 2000, all dealers that participate in transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealer's obligation to
deliver a prospectus when acting as an underwriter and relating to unsold
allotments or subscriptions.

  We have applied for federal registration of the marks CrossWorlds,
CrossWorlds Software, and our logo. Each logo, product name, tradename or
service mark of any other company appearing in this prospectus belongs to its
holder.


- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

                                    PART II

                    INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

  The following table presents the costs and expenses, other than underwriting
discounts and commissions, payable by CrossWorlds for the sale of common stock
being registered. All amounts are estimates except the SEC registration fee
and the NASD filing fee and the Nasdaq National Market listing fee.

<TABLE>
<CAPTION>
                                                                        Amount
                                                                      to be Paid
                                                                      ----------
      <S>                                                             <C>
      SEC registration fee........................................... $  19,431
      NASD filing fee................................................     7,860
      Nasdaq National Market listing fee.............................    90,000
      Printing and engraving expenses................................   200,000
      Legal fees and expenses........................................   400,000
      Accounting fees and expenses...................................   400,000
      Blue Sky qualification fees and expenses.......................     5,000
      Transfer Agent and Registrar fees..............................    25,000
      Miscellaneous fees and expenses................................    52,709
        Total........................................................ 1,200,000
</TABLE>

Item 14. Indemnification of Directors and Officers

  Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
specified circumstances for liabilities including reimbursement for expenses
incurred arising under the Securities Act of 1933, as amended the Securities
Act. Article X of CrossWorlds' amended and restated certificate of
incorporation, Exhibit 3.1 hereto, and Article VI of CrossWorlds' bylaws,
Exhibit 3.2 hereto, provide for indemnification of CrossWorlds' directors,
officers, employees and other agents to the maximum extent permitted by the
Delaware General Corporation Law. In addition, CrossWorlds has entered into
indemnification agreements, Exhibit 10.1 hereto, with its officers and
directors. The underwriting agreement, Exhibit 1.1 hereto, also provides for
cross-indemnification among CrossWorlds and the underwriters relating to
several matters, including matters arising under the Securities Act.

Item 15. Recent Sales of Unregistered Securities

  Since January 1, 1997, CrossWorlds has sold and issued the following
securities:

    1. On March 28, 1997, April 8, 1997 and April 15, 1997, CrossWorlds
  issued a total of 2,104,144 shares of its series C preferred stock to
  private investors for an aggregate cash consideration of $12,625,000. At
  various times between December 23, 1997 and April 6, 1998, CrossWorlds
  issued 2,063,307 shares of its series D preferred stock to private
  investors for an aggregate cash consideration of $30,950,000. On January 7,
  1999, March 26, 1999, and April 20, 1999, CrossWorlds issued a total of
  2,883,326 shares of its series E preferred stock to private investors for
  an aggregate cash consideration of $17,300,000. On October 1, 1999,
  CrossWorlds issued 3,671,071 shares of its series F preferred stock to
  private investors for an aggregate cash consideration of $25,000,000.

    2. Since March 1996, CrossWorlds has issued 6,793,436 options to purchase
  common stock of CrossWorlds with a weighted average price of $5.78 to a
  number of employees and directors of and consultants to CrossWorlds.

    3. On June 26, 1998, CrossWorlds issued warrants to purchase 33,333
  shares of its series C preferred stock with an exercise price of $6.00 per
  share to Bay Park Plaza Associates LP for a rental agreement. On January
  27, 1999, CrossWorlds issued warrants to purchase a total of 126,666 shares
  of its series E

                                     II-1
<PAGE>

  preferred stock with an exercise price of $6.00 per share to Comdisco, Inc.
  in consideration for a subordinated loan and security agreement and master
  lease agreement. On August 9, 1999, CrossWorlds issued warrants to purchase
  6,334 shares of its common stock with an exercise price of $6.60 per share
  to Silicon Valley Bank for the agreed upon value of $1.00 and for a bank
  loan. On October 7, 1999, CrossWorlds issued warrants to purchase a total
  of 177,098 shares of its common stock with an exercise price of $6.60 per
  share to Heidrick and Struggles for executive search services. On February
  2, 2000, CrossWorlds issued warrants to purchase 199,996 shares of its
  common stock at an exercise price of $11.00 per share to private investors.

  The issuances of the above securities were determined to be exempt from
registration under the Securities Act in reliance on Section 4(2) or
Regulation D, or other applicable exemption of such Securities Act as
transactions by an issuer not involving any public offering. In addition,
issuances described in Item 2 were determined to be exempt from registration
under the Securities Act in reliance upon Rule 701 of under the Securities
Act. The recipients of securities in each of these transactions represented
their intentions to acquire the securities for investment only and not with a
view to or for sale with any distribution thereof and appropriate legends were
affixed to the share certificates and warrants issued in these transactions.
All recipients had adequate access, through their relationships with
CrossWorlds, to information about CrossWorlds.

                                     II-2
<PAGE>

Item 16. Exhibits and Financial Statement Schedules

     (a) Exhibits

<TABLE>
<CAPTION>
 Number  Description
 ------  -----------
 <C>     <S>
  1.1*   Form of Underwriting Agreement.
  3.1*   Form of Proposed Amended and Restated Certificate of Incorporation of
         CrossWorlds.
  3.2*   Form of Proposed Amended and Restated Bylaws of CrossWorlds.
  4.1*   Specimen Stock Certificate.
  4.2*   Warrant dated January 7, 1999 issued by CrossWorlds to Comdisco, Inc.
  4.3*   Warrant dated August 9, 1999 issued by CrossWorlds to Silicon Valley
         Bank.
  4.4*   Warrant dated October 11, 1999 issued by CrossWorlds to Heidrick &
         Struggles, Inc.
  4.5*   Form of Warrant dated February 2, 2000 issued by CrossWorlds to
         private investors.
  5.1*   Opinion of Venture Law Group regarding the legality of the common
         stock being registered.
 10.1*   Fifth Amended and Restated Investor Rights Agreement dated October 1,
         1999 among CrossWorlds and investors.
 10.2*   Form of Indemnification Agreement between CrossWorlds and each of its
         officers and directors.
 10.3*   1996 Stock Plan, as amended.
 10.4*   1997 Stock Plan, as amended.
 10.5*   1999 Executive Stock Plan.
 10.6*   2000 Employee Stock Purchase Plan.
 10.7*   2000 Directors' Stock Option Plan.
 10.8*   Employment Agreement dated October 5, 1999 with Alfred J. Amoroso.
 10.9*   Employment Agreement dated January 1, 2000 with Arthur R. Matin.
 10.10*  Promissory Note issued to CrossWorlds by James G. Rowley.
 10.11*  Secured Loan Agreement, Promissory Note and Security Agreement dated
         November 15, 1999, with addendum dated January 27, 2000 between
         CrossWorlds and Barton S. Foster.
 10.12*  Form of Change of Control Agreement to be entered into between
         CrossWorlds and each of its executive officers.
 10.13*+ IBM/OEM Distribution Agreement dated July 11, 1997, with exhibits,
         including IBM/OEM Program Agreement dated June 3, 1999 and Amendment
         01 to OEM Distribution Agreement dated February 9, 2000.
 10.14*+ Software License and Support Agreement with Delphi Automotive System
         LLC dated December 21, 1999.
 10.15*  Lease Agreement, as amended, dated February 1, 1999 between
         CrossWorlds and Bay Park Plaza Associates, L.P.
 10.16*  Loan and Security Agreement dated December 10, 1996 between Silicon
         Valley Bank and CrossWorlds.
 10.17*  First Amendment to Loan and Security Agreement dated September 29,
         1997 between Silicon Valley Bank and CrossWorlds.
 10.18*  Second Amendment to Loan and Security Agreements dated October 28,
         1998 between Silicon Valley Bank and CrossWorlds.
 10.19*  Loan Modification Agreement dated September 21, 1999 between Silicon
         Valley Bank and CrossWorlds.
 10.20*  Loan Modification Agreement dated October 18, 1999 between Silicon
         Valley Bank and CrossWorlds.
 10.21*  Loan Modification Agreement dated October 22, 1999 between Silicon
         Valley Bank and CrossWorlds.
 10.22*  Loan Modification Agreement dated January 26, 2000 between Silicon
         Valley Bank and CrossWorlds.
 10.23*  Contractual rights agreement among CrossWorlds and five investors
         dated March 26, 1999.
 10.24*  Proposed form of Stock Purchase Agreement between CrossWorlds and
         Electronic Data Systems Corporation.
 10.25*  Proposed form of Stock Purchase Agreement between CrossWorlds and The
         Dow Chemical Company.
 10.26*  Proposed form of Stock Purchase Agreement between CrossWorlds and
         Delphi Automotive.
</TABLE>

                                      II-3
<PAGE>

<TABLE>
<CAPTION>
 Number Description
 ------ -----------
 <C>    <S>
 10.27* Proposed form of Supplemental Letter from CrossWorlds to Electronic
        Data Systems Corporation related to Exhibit 10.24.
 10.28* Proposed form of Supplemental Letter from CrossWorlds to The Dow
        Chemical Company related to Exhibit 10.25.
 10.29* Proposed form of Supplemental Letter from CrossWorlds to Delphi
        Automotive related to Exhibit 10.26.
 21.1*  List of Subsidiaries.
 23.1   Consent of KPMG LLP.
 23.2*  Consent of Venture Law Group (contained in Exhibit 5.1).
 23.3*  Consent of Neoforma.com Inc.
 23.4*  Consent of Delphi Automotive
 23.5*  Consent of US WEST
 24.1*  Power of Attorney (see page II-5).
 27.1*  Financial Data Schedule.
</TABLE>
- --------
 * Previously filed.
 + Confidential treatment requested.

(b) Financial Statement Schedules

  Schedules not listed above have been omitted because the information
required to be set forth in those schedules is not applicable or is shown in
the financial statements or notes to the financial statements.

Item 17. Undertakings

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

  Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
indemnification is against public policy as expressed in the Act, and is, as a
result, unenforceable. If a claim for indemnification against these
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 a
director, officer or controlling person for the securities being registered,
the registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the act and will be governed by the final adjudication
of this issue.

  The undersigned registrant hereby undertakes that:

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

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

                                     II-4
<PAGE>

                                  SIGNATURES

  Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Burlingame, State of California on April 14, 2000.

                                          CROSSWORLDS SOFTWARE, INC.

                                          By:        /s/ Mark R. Kent
                                             ----------------------------------
                                                        Mark R. Kent
                                                  Chief Financial Officer
                                                  (Principal Financial and
                                                     Accounting Officer)

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

<TABLE>
 <S>                                       <C>                        <C>
              Signature                      Title
                                                                     Date


                 *                   President, Chief          April 14, 2000
- -----------------------------------   Executive Officer and
         Alfred J. Amoroso            Director (Principal
                                      Executive Officer)

         /s/ Mark R. Kent            Chief Financial Officer   April 14, 2000
- -----------------------------------   (Principal Financial and
           Mark R. Kent               Accounting Officer)

                 *                   Chairman of the           April 14, 2000
- -----------------------------------   Board
        Katrina A. Garnett

                 *                   Director                  April 14, 2000
- -----------------------------------
        Terence J. Garnett

                 *                   Director                  April 14, 2000
- -----------------------------------
        Frederick W. Gluck

                 *                   Director                  April 14, 2000
- -----------------------------------
         Andrew K. Ludwick

                 *                   Director                  April 14, 2000
- -----------------------------------
        Albert A. Pimentel

                 *                   Director                  April 14, 2000
- -----------------------------------
         Colin F. Raymond

             /s/ Mark R. Kent
 *By: ___________________________________
       Mark R. Kent, attorney-in-fact
</TABLE>

                                     II-5
<PAGE>

                                  SCHEDULE II

                  CROSSWORLDS SOFTWARE, INC. AND SUBSIDIARIES

                       VALUATION AND QUALIFYING ACCOUNTS

                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                        Balance  Charged               Balance
                                          at     to Costs               at End
                                       Beginning   and                    of
                                       of Period Expenses Deductions    Period
                                       --------- -------- ----------   --------
<S>                                    <C>       <C>      <C>          <C>
1999
Allowance for doubtful accounts....... $306,130  $15,886   $25,341(1)  $296,675


1998
Allowance for doubtful accounts.......       --  333,250    27,120(1)   306,130


1997
Allowance for doubtful accounts.......       --       --        --           --
</TABLE>
- --------
(1) Accounts written off.

                                      S-1
<PAGE>

                                 EXHIBIT INDEX
<TABLE>
<CAPTION>
 Number  Description
 ------  -----------
 <C>     <S>
  1.1*   Form of Underwriting Agreement.
  3.1*   Form of Proposed Amended and Restated Certificate of Incorporation of
         CrossWorlds.
  3.2*   Form of Proposed Amended and Restated Bylaws of CrossWorlds.
  4.1*   Specimen Stock Certificate.
  4.2*   Warrant dated January 7, 1999 issued by CrossWorlds to Comdisco, Inc.
  4.3*   Warrant dated August 9, 1999 issued by CrossWorlds to Silicon Valley
         Bank.
  4.4*   Warrant dated October 11, 1999 issued by CrossWorlds to Heidrick &
         Struggles, Inc.
  4.5*   Form of Warrant dated February 2, 2000 issued by CrossWorlds to
         private investors.
  5.1*   Opinion of Venture Law Group regarding the legality of the common
         stock being registered.
 10.1*   Fifth Amended and Restated Investor Rights Agreement dated October 1,
         1999 among CrossWorlds and investors.
 10.2*   Form of Indemnification Agreement between CrossWorlds and each of its
         officers and directors.
 10.3*   1996 Stock Plan, as amended.
 10.4*   1997 Stock Plan, as amended.
 10.5*   1999 Executive Stock Plan.
 10.6*   2000 Employee Stock Purchase Plan.
 10.7*   2000 Directors' Stock Option Plan.
 10.8*   Employment Agreement dated October 5, 1999 with Alfred J. Amoroso.
 10.9*   Employment Agreement dated January 1, 2000 with Arthur R. Matin.
 10.10*  Promissory Note issued to CrossWorlds by James G. Rowley.
 10.11*  Secured Loan Agreement, Promissory Note and Security Agreement dated
         November 15, 1999, with addendum dated January 27, 2000 between
         CrossWorlds and Barton S. Foster.
 10.12*  Form of Change of Control Agreement to be entered into between
         CrossWorlds and each of its executive officers.
 10.13*+ IBM/OEM Distribution Agreement dated July 11, 1997, with exhibits,
         including IBM/OEM Program Agreement dated June 3, 1999 and Amendment
         01 to OEM Distribution Agreement dated February 9, 2000.
 10.14*+ Software License and Support Agreement with Delphi Automotive System
         LLC dated December 21, 1999.
 10.15*  Lease Agreement, as amended, dated February 1, 1999 between
         CrossWorlds and Bay Park Plaza Associates, L.P.
 10.16*  Loan and Security Agreement dated December 10, 1996 between Silicon
         Valley Bank and CrossWorlds.
 10.17*  First Amendment to Loan and Security Agreement dated September 29,
         1997 between Silicon Valley Bank and CrossWorlds.
 10.18*  Second Amendment to Loan and Security Agreements dated October 28,
         1998 between Silicon Valley Bank and CrossWorlds.
 10.19*  Loan Modification Agreement dated September 21, 1999 between Silicon
         Valley Bank and CrossWorlds.
 10.20*  Loan Modification Agreement dated October 18, 1999 between Silicon
         Valley Bank and CrossWorlds.
 10.21*  Loan Modification Agreement dated October 22, 1999 between Silicon
         Valley Bank and CrossWorlds.
 10.22*  Loan Modification Agreement dated January 26, 2000 between Silicon
         Valley Bank and CrossWorlds.
 10.23*  Contractual rights agreement among CrossWorlds and five investors
         dated March 26, 1999.
 10.24*  Proposed form of Stock Purchase Agreement between CrossWorlds and
         Electronic Data Systems Corporation.
 10.25*  Proposed form of Stock Purchase Agreement between CrossWorlds and The
         Dow Chemical Company.
 10.26*  Proposed form of Stock Purchase Agreement between CrossWorlds and
         Delphi Automotive.
 10.27*  Proposed form of Supplemental Letter from CrossWorlds to Electronic
         Data Systems Corporation related to Exhibit 10.24.
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
 Number Description
 ------ -----------
 <C>    <S>
 10.28* Proposed form of Supplemental Letter from CrossWorlds to The Dow
        Chemical Company related to Exhibit 10.25.
 10.29* Proposed form of Supplemental Letter from CrossWorlds to Delphi
        Automotive related to Exhibit 10.26.
 21.1*  List of Subsidiaries.
 23.1   Consent of KPMG LLP.
 23.2*  Consent of Venture Law Group (contained in Exhibit 5.1).
 23.3*  Consent of Neoforma.com Inc.
 23.4*  Consent of Delphi Automotive.
 23.5*  Consent of US WEST.
 24.1*  Power of Attorney (see page II-5).
 27.1*  Financial Data Schedule.
</TABLE>
- --------
 * Previously filed.
 + Confidential treatment requested.

<PAGE>

                          INDEPENDENT AUDITORS' REPORT
                            ON SCHEDULE AND CONSENT

The Board of Directors
Crossworlds Software, Inc. and Subsidiaries

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

  We consent to the use of our reports included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Data" and
"Experts" in the prospectus.

                                          /s/ KPMG LLP

Mountain View, California

April 14, 2000


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