SILVERSTREAM SOFTWARE INC, 424B4, 1999-08-17

SILVERSTREAM SOFTWARE INC
424B4, 1999-08-17
COMPUTER INTEGRATED SYSTEMS DESIGN

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<PAGE> 1
Filed pursuant to Rule 424(b)(4)
Registration No. 333-80553
PROSPECTUS

3,000,000 Shares

[SILVERSTREAM SOFTWARE, INC. CORPORATE LOGO]

COMMON STOCK

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

SILVERSTREAM SOFTWARE, INC. IS OFFERING 3,000,000 SHARES OF COMMON STOCK. THIS
IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR
SHARES.

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

OUR COMMON STOCK HAS BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "SSSW."

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

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 6.

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PRICE $16 A SHARE
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS SILVERSTREAM
-------- ------------- ------------
<S> <C> <C> <C>
Per Share........................ $16.00 $1.12 $14.88
Total............................ $48,000,000 $3,360,000 $44,640,000
</TABLE>

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

SilverStream has granted the underwriters the right to purchase up to an
additional 450,000 shares of common stock to cover over-allotments. Morgan
Stanley & Co. Incorporated expects to deliver the shares of common stock to
purchasers on August 20, 1999.

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

MORGAN STANLEY DEAN WITTER
BANCBOSTON ROBERTSON STEPHENS
SG COWEN
August 16, 1999
<PAGE> 2

[Narrative description of graphic material omitted in electronically filed
document:
The following text is at the top of the page and spans the front cover foldout:
SILVERSTREAM: ENABLING POWERFUL BUSINESS APPLICATIONS FOR THE WEB.
The following text appears on the inside front cover foldout:
Organizations around the world are focusing on how the Web will impact their
businesses, and are starting to develop A NEW GENERATION OF WEB-BASED
APPLICATIONS that allow them to take advantage of the power of the Web.
Application servers are the platform that allow organizations to deliver
this new generation of applications.
The inside front cover contains a graphic that consists of a large disk entitled
"Web." On the left side of the large disk are several groups of human figures
labeled "customers," "suppliers," "employees," "consumers" and "partners." Above
the human figures is the following text: Application servers allow organizations
to reach a much broader audience. On the right side of the disk are several
three-dimensional cylinders under the heading "Data Sources."
In the center of the large disk are two smaller disks, stacked one on top of the
other. The bottom disk is entitled "Customer-Written Applications" and includes
several icons labeled "E-commerce," "Transaction Processing," "Decision
Support," "Demand & Supply Chain Management," "Customer Support" and "Enterprise
Portals." To the right of the text Customer-Written Applications is the
following text: Organizations are building far-reaching strategic applications
with the Silverstream Application Server.
The top disk is entitled "SilverStream Application Server" and contains a
detailed graphic outlining the fundamental components of the SilverStream
Application Server architecture:
1. At the bottom is a horizontal three-dimensional rectangle entitled
"Enterprise Deployment Services," which rectangle includes four boxes
entitled "Scalability," "Reliability," "Security" and "Manageability."
2. On top of the rectangle are three vertical three-dimensional rectangles:
a. The vertical rectangle on the left is entitled "Presentation Layer,"
and includes two boxes entitled "HTML" and "Java"
b. The vertical rectangle in the middle is entitled "Business Logic
Layer"
c. The vertical rectangle on the right is entitled "Data Access Layer"
3. Above the three rectangles and connected to each by thin lines is a
horizontal three-dimensional rectangle entitled "Development Tools."
The following text appears below the graphic:
Application Servers integrate data from existing applications:
- relational databases
- enterprise resource planning systems
- legacy mainframe systems
- document management systems
- external data sources
<PAGE> 3

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 6
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS.......................... 14
USE OF PROCEEDS....................... 15
DIVIDEND POLICY....................... 15
CAPITALIZATION........................ 16
DILUTION.............................. 17
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 20
BUSINESS.............................. 31
MANAGEMENT............................ 45
CERTAIN TRANSACTIONS.................. 49
PRINCIPAL STOCKHOLDERS................ 51
DESCRIPTION OF CAPITAL STOCK.......... 53
SHARES ELIGIBLE FOR FUTURE SALE....... 55
UNDERWRITERS.......................... 57
LEGAL MATTERS......................... 59
EXPERTS............................... 59
WHERE YOU CAN FIND MORE INFORMATION... 59
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
</TABLE>

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UNTIL SEPTEMBER 10, 1999, ALL DEALERS THAT BUY, SELL OR TRADE THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

2
<PAGE> 4

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed
information regarding SilverStream and the common stock being sold in this
offering and our Consolidated Financial Statements and Notes thereto appearing
elsewhere in this prospectus.

SILVERSTREAM SOFTWARE, INC.

SilverStream is a global provider of software and services that enable
businesses and other large organizations to create, deploy and manage software
programs for intranets, extranets and the Internet. The advantages of Web-based
technology are driving the creation of a new generation of business-
transforming software programs. These powerful Web-based programs, or Web
applications, link a broad universe of customers, vendors, employees and
partners with multiple, diverse data sources. We believe our products and
services help our customers to rapidly develop Web applications that are
reliable, secure and able to handle increasing and variable volumes of user
traffic, commonly known as being scalable. Using our products and services,
organizations can create and deploy robust Web applications in diverse areas
such as e-commerce, employee self-service, supply chain management and customer
service.

Organizations are using Web applications to conduct "e-business," which
encompasses business-to-business, business-to-employee and business-to-consumer
transactions. These organizations recognize that if they are able to offer
easy-to-access, compelling, real-time applications as a means of transacting
business and interacting with business partners and customers, they can create
closer and more enduring business relationships, new efficiencies and
significant competitive and strategic advantages. To date, organizations have
been required to use many different development tools, programming languages and
technologies, often from different vendors, and have had to rely on custom
programming and complex integration activities to develop their Web
applications. These applications have often been difficult and expensive to
create, deploy and manage. In order to compete in this dynamic e-business
environment, organizations need expandable, reliable and secure solutions that
shorten the development time for powerful new Web applications.

SilverStream's products and services are designed to help our customers
meet the new challenges posed by Web-based technology and applications. Our
products consist of an application server, an integrated set of development
tools and enterprise data connectors. Our Application Server is a software
product that provides access to various forms of electronic information and
communicates, usually in the form of a Web application, with the computers of
users accessing the information. Our enterprise data connectors provide access
to various kinds of third-party data sources. We believe our products reduce the
complexity of developing Web applications and enable customers to extend the
reach of these applications, access multiple information sources and simplify
administration. We also offer comprehensive consulting, education and technical
support services to help ensure the successful development and implementation of
Web applications by our customers.

We market our products and services globally through our direct sales force
and a network of independent software vendors, value-added resellers and
consulting partners. To date, we have licensed the SilverStream Application
Server to over 500 customers in a wide variety of industries, including
communication, financial services, government, manufacturing, oil and gas,
pharmaceutical, technology and transportation.

We are a Delaware corporation. Our principal executive offices are located
at One Burlington Woods, Suite 200, Burlington, Massachusetts 01803 and our
telephone number is (781) 238-5400. Our World Wide Web site address is
www.silverstream.com. The information in the Web site is not incorporated by
reference into this prospectus.

SilverStream(R) is our registered trademark and SilverStream Application
Server and the SilverStream logo are our trademarks. This prospectus also
contains trademarks and trade names of other companies.

3
<PAGE> 5

- --------------------------------------------------------------------------------
THE OFFERING

<TABLE>
<S> <C>
Common stock offered........................ 3,000,000 shares
Common stock to be outstanding after this
offering.................................. 17,069,808 shares
Use of proceeds............................. For general corporate purposes, including
working capital and capital expenditures.
For more detailed information, see "Use of
Proceeds" on page 15.
Nasdaq National Market symbol............... SSSW
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
PERIOD FROM
MAY 8, 1996 YEARS ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, --------------------- ------------------------
1996 1997 1998 1998 1999
-------------- -------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue:
Software license................. $ -- $ 249 $ 5,983 $ 1,527 $ 5,515
Services......................... -- -- 825 217 2,267
-------- -------- ---------- ---------- -----------
Total revenue...................... -- 249 6,808 1,744 7,782
Cost of revenue:
Software license................. -- 90 767 234 685
Services......................... -- 282 1,414 519 3,167
-------- -------- ---------- ---------- -----------
Total cost of revenue.............. -- 372 2,181 753 3,852
-------- -------- ---------- ---------- -----------
Gross profit (loss)................ -- (123) 4,627 991 3,930
Total operating expenses........... 1,005 8,437 17,987 7,844 13,450
-------- -------- ---------- ---------- -----------
Loss from operations............... (1,005) (8,560) (13,360) (6,853) (9,520)
-------- -------- ---------- ---------- -----------
Net loss........................... $ (952) $ (8,335) $ (12,885) $ (6,601) $ (9,342)
======== ======== ========== ========== ===========
Net loss applicable to common
stockholders..................... $ (952) $ (8,335) $ (12,885) $ (6,601) $ (9,605)
======== ======== ========== ========== ===========
Basic and diluted net loss per
share applicable to common
stockholders..................... $ (5.12) $ (10.61) $ (4.89) $ (2.83) $ (2.70)
Weighted-average common shares used
in computing basic and diluted
net loss per share applicable to
common stockholders.............. 185,686 785,548 2,632,496 2,334,575 3,551,349
Pro forma basic and diluted net
loss per share applicable to
common stockholders.............. $ (1.33) $ (.83)
Weighted-average common shares used
in computing pro forma basic and
diluted net loss per share
applicable to common
stockholders..................... 9,691,693 11,618,248
</TABLE>

Weighted-average common shares shown above exclude unvested shares of
common stock subject to repurchase rights, which totalled 2,489,984 and
1,679,106 for the year ended December 31, 1998 and the six months ended June 30,
1999, respectively. Shares used in computing pro forma basic and diluted net
loss per share above include the 8,659,208 shares of common stock issuable upon
conversion of our outstanding preferred stock upon the closing of this offering.

- --------------------------------------------------------------------------------
4
<PAGE> 6
- --------------------------------------------------------------------------------

The pro forma as adjusted column in the consolidated balance sheet data
below gives effect to the conversion of our outstanding preferred stock into
common stock on a one-for-one basis upon the closing of this offering and the
sale of the 3,000,000 shares of common stock in this offering, after deducting
the underwriting discounts and commissions and estimated offering expenses
payable by us.

<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $10,778 $54,418
Working capital............................................. 10,439 54,079
Total assets................................................ 20,895 64,535
Long-term debt, less current portion........................ 682 682
Redeemable convertible preferred stock...................... 11,638 --
Total stockholders' equity.................................. 1,456 56,734
</TABLE>

Except as set forth in the Consolidated Financial Statements and Notes
thereto or as otherwise indicated, all information in this prospectus:

- Assumes no exercise of the underwriters' over-allotment option;

- Reflects the conversion of all outstanding shares of our convertible
preferred stock into shares of common stock on a one-for-one basis; and

- Reflects the filing, as of the closing of the offering, of our second
amended and restated certificate of incorporation and the adoption of our
amended and restated by-laws implementing provisions described below
under "Description of Capital Stock -- Delaware Law and Our Charter and
By-Law Provisions; Anti-Takeover Effects" on page 53.

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock and
seeking offers to buy shares of common stock only in jurisdictions where offers
and sales are permitted.

- --------------------------------------------------------------------------------
5
<PAGE> 7

RISK FACTORS

You should consider carefully the risks described below before you decide
to buy our common stock. The risks and uncertainties described below are not the
only ones facing us. If any of the following risks actually occur, our business,
financial condition or results of operations would likely suffer. In such case,
the trading price of our common stock could fall, and you may lose all or part
of the money you paid to buy our common stock.

RISKS RELATED TO OUR BUSINESS

WE HAVE INCURRED SUBSTANTIAL LOSSES, WE EXPECT CONTINUED LOSSES AND CONTINUED
LOSSES WILL HARM OUR BUSINESS.

We have never been profitable. Our failure to significantly increase our
revenue would seriously harm our business and operating results. We have
experienced operating losses in each quarterly and annual period since inception
and we expect to incur significant losses in the future. We incurred net losses
of $952,000 for the period ended December 31, 1996, $8.3 million for the year
ended December 31, 1997, $12.9 million for the year ended December 31, 1998 and
$9.3 million for the six months ended June 30, 1999. As of June 30, 1999, we had
an accumulated deficit of $31.5 million. We expect to significantly increase our
research and development, sales and marketing and general and administrative
expenses in future periods. As a result, we will need to significantly increase
our quarterly revenue to achieve and maintain profitability. If our revenue
grows more slowly than we anticipate or if our operating expenses increase more
than we expect or cannot be reduced in the event of lower revenue, our business
will be materially and adversely affected.

WE EXPECT TO DEPEND ON OUR APPLICATION SERVER AND RELATED SERVICES FOR
SUBSTANTIALLY ALL OF OUR REVENUE FOR THE FORESEEABLE FUTURE AND IF OUR
APPLICATION SERVER DOES NOT ACHIEVE WIDESPREAD MARKET ACCEPTANCE, OUR BUSINESS
AND RESULTS OF OPERATIONS WILL SUFFER.

We expect to continue to derive substantially all of our revenue from our
SilverStream Application Server and related products and services. Failure to
achieve broad market acceptance of the SilverStream Application Server, or a
decline in the price of, or demand for, our Application Server and related
products and services would seriously harm our business and operating results.
We cannot predict the level of market acceptance that will be achieved or
maintained by our products and services.

OUR BUSINESS WILL SUFFER IF WE DO NOT SUCCESSFULLY INTRODUCE ENHANCEMENTS TO
OUR APPLICATION SERVER.

Our future financial performance will depend significantly on revenue from
future enhancements to the SilverStream Application Server that we are currently
developing and plan to develop. Any delay or difficulties in completing these
enhancements would seriously harm our business and operating results. We are
currently developing Version 3.0 of our Application Server, which we expect will
include functionality that we do not currently have, including improvements to
the programming environment as well as support for computing standards, such as
Enterprise JavaBeans and Java2, and third-party development tools. Version 3.0
will require significant additional development and we cannot predict the time
required to complete development and testing or the date of commercial release.
In addition, we cannot be certain that enhanced versions of the SilverStream
Application Server will meet customer performance needs or expectations when
shipped or that new versions will be free of significant software defects or
bugs.

WE HAVE ONLY BEEN IN BUSINESS FOR A SHORT PERIOD OF TIME AND YOUR BASIS FOR
EVALUATING US IS LIMITED.

We began commercial shipments of our first software products in November
1997. You must consider the risks, expenses and uncertainties that an early
stage company like ours faces, particularly in the new and rapidly evolving
Internet market. Because we have only recently commenced commercial sales, our
past results and rates of growth may not be meaningful and you should not rely
on them as an indication of our future performance.

6
<PAGE> 8

OUR LIMITED OPERATING HISTORY MAKES FORECASTING DIFFICULT AND THE FAILURE TO
MEET EXPECTATIONS COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.

As a result of our limited operating history, it is difficult to forecast
accurately our revenues, and we have limited meaningful historical financial
data upon which to base planned operating expenses. If we do not achieve our
expected revenues, our operating results will be below our expectations and the
expectations of investors and market analysts, which could cause the price of
our common stock to decline. Specifically, we were founded in May 1996, and
began shipping our first products, the SilverStream Application Server 1.0 and
related software development tools, in November 1997. Our operating expenses are
largely based on anticipated revenue trends and a high percentage of our
expenses are and will continue to be fixed in the short-term. The revenue and
income potential of our products and business are unproven and the market that
we are addressing is rapidly evolving.

THE MARKET FOR OUR PRODUCTS IS EMERGING AND OUR BUSINESS WILL SUFFER IF IT
DOES NOT DEVELOP AS WE EXPECT.

The market for Web application server software has only recently begun to
develop, is rapidly evolving and will likely have an increasing number of
competitors. We cannot be certain that a viable market for our products will
emerge or be sustainable. If the application server market fails to develop, or
develops more slowly than expected, our business and operating results would be
seriously harmed.

THE UNPREDICTABILITY OF OUR QUARTERLY OPERATING RESULTS MAY ADVERSELY AFFECT
THE TRADING PRICE OF OUR COMMON STOCK.

Our quarterly operating results have varied significantly in the past and
will likely vary significantly in the future, making it difficult to predict
future performance. These variations result from a number of factors, many of
which are outside of our control. Because of this difficulty in predicting
future performance, our operating results will likely fall below the
expectations of securities analysts or investors in some future quarter or
quarters. Our failure to meet these expectations would likely adversely affect
the market price of our common stock.

Although we have limited historical financial data, we believe that our
quarterly operating results may experience seasonal fluctuations. For instance,
quarterly results may fluctuate based on our clients' calendar year budgeting
cycles, deferral of customer orders in anticipation of product enhancements or
new products, slow summer purchasing patterns in Europe and our compensation
policies that tend to compensate sales personnel, typically in the latter half
of the year, for achieving annual quotas.

WE DEPEND ON INCREASED BUSINESS FROM OUR CURRENT AND NEW CUSTOMERS AND IF WE
FAIL TO GROW OUR CUSTOMER BASE OR GENERATE REPEAT BUSINESS, OUR OPERATING
RESULTS COULD BE HARMED.

If we fail to grow our customer base or generate repeat and expanded
business from our current and new customers, our business and operating results
would be seriously harmed. Most of our customers initially make a limited
purchase of our products and services for pilot programs. Many of these
customers may not choose to purchase additional licenses to expand their use of
our products. Many of these customers have not yet developed or deployed initial
applications based on our products. If these customers do not successfully
develop and deploy such initial applications, they may not choose to purchase
deployment licenses or additional development licenses. Our business model
depends on the expanded use of our products within our customers' organizations.

In addition, as we introduce new versions of our products or new products,
our current customers may not require the functionality of our new products and
may not ultimately license these products. Because the total amount of
maintenance and support fees we receive in any period depends in large part on
the size and number of licenses that we have previously sold, any downturn in
our software license revenue would negatively impact our future services
revenue. In addition, if customers elect not to renew their maintenance
agreements, our services revenue could be significantly adversely affected.

7
<PAGE> 9

OUR MARKETS ARE HIGHLY COMPETITIVE AND OUR FAILURE TO COMPETE SUCCESSFULLY
WILL LIMIT OUR ABILITY TO RETAIN AND INCREASE OUR MARKET SHARE.

Our markets are new, rapidly evolving and highly competitive, and we expect
this competition to persist and intensify in the future. Our failure to maintain
and enhance our competitive position will limit our ability to retain and
increase our market share resulting in serious harm to our business and
operating results.

Some of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. Many of
these companies have more extensive customer bases, broader customer
relationships and broader industry alliances that they could leverage, including
relationships with many of our current and potential customers. These companies
also have significantly more established customer support and professional
services organizations. In addition, these companies may adopt aggressive
pricing policies, may bundle their competitive products with broader product
offerings or may introduce new products and enhancements. See
"Business--Competition" on page 42 for more information about our competition.

OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT TO PREDICT OUR QUARTERLY RESULTS.

A customer's decision to purchase our products typically involves a
significant decision by the prospective customer's senior information technology
managers, as the customer applications to be built and deployed using our
products are generally critical to the customer's business. In addition, we
generally need to educate potential customers on the use and benefits of an
application server and on the performance features of the SilverStream
Application Server. Our long sales cycle makes it difficult to predict the
quarter in which sales may occur. The sale of our products is also subject to
delays from the lengthy budgeting, approval and competitive evaluation processes
that typically accompany significant information technology purchasing
decisions. For example, customers frequently begin by evaluating our products on
a limited basis and devote time and resources to testing our products before
they decide whether or not to purchase a license for deployment. Customers may
also defer orders as a result of anticipated releases of new products or
enhancements by us or our competitors.

FAILURE TO DEVELOP AND EXPAND OUR SALES AND MARKETING CAPABILITIES WOULD HARM
OUR BUSINESS.

We need to expand our sales and marketing operations in order to increase
market awareness of our products, market the SilverStream Application Server to
a greater number of organizations and generate increased revenue. However,
competition for qualified sales personnel is intense and we may not be able to
hire enough qualified individuals in the future. If we are unable to attract or
retain such qualified sales personnel, our business and operating results would
be seriously harmed. Our products and services require a sophisticated sales
effort targeted at senior information technology management of our prospective
customers. New hires require extensive training and typically require at least
six months to achieve full productivity. We have limited experience managing a
large, expanding and geographically dispersed direct sales force. In addition,
we have limited experience marketing our products broadly to a large number of
potential customers.

FAILURE TO MAINTAIN EXISTING, OR INCREASE THE NUMBER OF, THIRD-PARTY
DISTRIBUTION RELATIONSHIPS MAY LIMIT OUR ABILITY TO PENETRATE THE MARKET.

We have a limited number of third-party distribution agreements and we may
not be able to increase the number of our distribution relationships or maintain
our existing relationships. Our failure to increase the number of our
distribution relationships or maintain our existing relationships may limit our
ability to penetrate the market. Our current agreements with our distribution
partners do not prevent these companies from selling products of other
companies, including products that may compete with our products, and do not
generally require these partners to purchase minimum quantities of our products.
These distributors could give higher priority to the products of other companies
or to their own products, than they give to our products. As a result, the loss
of, or a significant reduction in sales volume to our

8
<PAGE> 10

current or future distribution partners could seriously harm our revenue and
operating results. In addition, a significant increase in sales through these
channels could also negatively impact our gross margins, as sales through these
channels generally have lower revenue per unit than direct sales.

FAILURE TO EXPAND OUR SERVICES OFFERINGS WOULD HARM OUR BUSINESS.

We believe that growth in our product sales depends on our ability to
provide our customers with comprehensive services, including application
engineering, implementation, training and support, and to educate third-party
resellers, instructors and consultants on how to provide similar services. If we
fail to attract, train and retain the skilled persons who deliver these
services, our business and operating results would be harmed. We plan to
increase the number of our services personnel to meet these needs. However,
competition for qualified service personnel is intense and we may not be able to
attract, train or retain the number of highly qualified service personnel that
our business needs.

We expect our services revenue to increase in dollar amount as we continue
to provide consulting, education and technical support services that complement
our products and as our installed base of customers grows. To date, our cost of
services revenue has been significantly higher than our services revenue, and we
expect to continue to incur losses from our services business in the future.

WE FACE RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS THAT COULD HARM OUR
BUSINESS.

To be successful, we believe we must expand our international operations.
Therefore, we expect to commit significant resources to expand our international
sales and marketing activities. However, we may not be able to maintain or
increase market demand for our products which may harm our business. We are
increasingly subject to a number of risks associated with international business
activities which may increase our costs, lengthen our sales cycle and require
significant management attention. These risks generally include:

- Increased expenses associated with customizing products for foreign
countries;

- General economic conditions in our international markets;

- Currency exchange rate fluctuations;

- Unexpected changes in regulatory requirements resulting in unanticipated
costs and delays;

- Tariffs, export controls and other trade barriers;

- Longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;

- Potentially adverse tax consequences, including restrictions on the
repatriation of earnings; and

- The risks related to the recent global economic turbulence and adverse
economic circumstances in Asia.

OUR FUTURE SUCCESS DEPENDS ON CONTINUED USE OF THE INTERNET AND GROWTH OF
ELECTRONIC BUSINESS.

Our future success depends heavily on the acceptance and wide use of the
Internet for electronic business. If electronic business does not continue to
grow or grows more slowly than expected, demand for our products and services
will be reduced. Consumers and businesses may reject the Internet as a viable
commercial medium for a number of reasons, including potentially inadequate
network infrastructure, slow development of enabling technologies, insufficient
commercial support or privacy concerns. The Internet's infrastructure may not be
able to support the demands placed on it by increased usage. In addition, delays
in the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or increased governmental regulation,
could cause the Internet to lose its viability as a commercial medium. Even if
the required infrastructure, standards, protocols and complementary products,
services or facilities are developed, we may incur substantial expenses adapting
our solutions to changing or emerging technologies.

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<PAGE> 11

IF WE FAIL TO RESPOND TO RAPID TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY
STANDARDS, OUR PRODUCTS MAY BECOME OBSOLETE.

The markets for our products and services are marked by rapid technological
change, frequent new product introductions and enhancements, uncertain product
life cycles, changes in customer demands and evolving industry standards. New
products based on new technologies or new industry standards may quickly render
an existing product obsolete and unmarketable. Any delays in our ability to
develop and release enhanced or new products could seriously harm our business
and operating results. Our technology is complex, and new products and product
enhancements can require long development and testing periods. Our failure to
conform to prevailing standards could have a negative effect on our business and
operating results.

IN ORDER TO MANAGE OUR GROWTH AND EXPANSION, WE WILL NEED TO IMPROVE OUR
MANAGEMENT AND OPERATIONAL SYSTEMS ON A TIMELY BASIS.

We have expanded our operations rapidly since inception. We intend to
continue to expand in the foreseeable future to pursue existing and potential
market opportunities. This rapid growth places a significant demand on
management and operational resources. To be successful, we will need to
implement additional management information systems, improve our operating,
administrative, financial and accounting systems, procedures and controls, train
new employees and maintain close coordination among our executive, engineering,
professional services, accounting, finance, marketing, sales and operations
organizations. In addition, our growth has resulted, and any future growth will
result, in increased responsibilities for management personnel.

In addition, our principal executive office lease is due to expire in July
2000. We may move our headquarters to new office space or expand into additional
office space. We cannot be certain that office space will be available on
reasonable terms. We would likely experience significant costs, and we could
experience a disruption in the development or marketing of our products, in
connection with an expansion or move.

FAILURE TO RETAIN AND ATTRACT KEY PERSONNEL WOULD HARM OUR BUSINESS.

Our success depends largely on the skills, experience and performance of
the members of our senior management and other key personnel, including our
Chairman, David Skok, and our President and Chief Executive Officer, David
Litwack. If we lose one or more of the members of our senior management or other
key employees, our business and operating results could be seriously harmed. In
addition, our future success will depend largely on our ability to continue
attracting, training, motivating and retaining highly skilled personnel. None of
our senior management or other key personnel is bound by an employment
agreement. Like other software companies in the Boston, Massachusetts area, we
face intense competition for qualified personnel including software engineering,
service and support, and sales and marketing personnel.

WE INCLUDE THIRD-PARTY SOFTWARE AND TECHNOLOGY IN OUR PRODUCTS AND OUR
BUSINESS WOULD BE HARMED IF WE WERE NOT ABLE TO CONTINUE USING THIS THIRD-PARTY
SOFTWARE AND TECHNOLOGY.

Our products integrate third-party text search, object middleware,
compiler, encryption, transaction processing and monitoring, Java virtual
machine and database technology and products. There are inherent limitations in
the use and capabilities of much of the technology that we license from third
parties. Our business would be seriously harmed if the providers from whom we
license software and technology ceased to deliver and support reliable products,
enhance their current products in a timely fashion or respond to emerging
industry standards. In addition, the third-party software may not continue to be
available to us on commercially reasonable terms or at all. For example, we
license some of the components of our products from limited or sole source
suppliers, including encryption technology which we license from RSA Data
Security. Many of these licenses are subject to periodic renewal. The loss of,
or inability to maintain or obtain this software for any reason could result in
significant shipment delays or reductions.

10
<PAGE> 12

Furthermore, we might be forced to limit the features available in our current
or future product offerings. Either alternative could seriously harm our
business and operating results.

Almost all of our products are written in Java and require a Java virtual
machine made available by Sun Microsystems in order to operate. Sun may not
continue to make the Java virtual machines available at commercially reasonable
terms or at all. Furthermore, if Sun were to make significant changes to the
Java language or its Java virtual machines, or fail to correct defects and
limitations in these products, our ability to continue to improve and ship our
products could be impaired. In the future, our customers may also require the
ability to deploy our products on platforms for which technically acceptable
Java implementations either do not exist or are not available on commercially
reasonable terms.

OUR SOFTWARE PRODUCTS MAY CONTAIN ERRORS OR DEFECTS THAT COULD RESULT IN LOST
REVENUES, DELAYED OR LIMITED MARKET ACCEPTANCE OR PRODUCT LIABILITY CLAIMS WITH
SUBSTANTIAL LITIGATION COSTS.

Complex software products like ours can contain errors or defects,
particularly when first introduced or when new versions or enhancements are
released. Defects or errors in current or future products, including the planned
SilverStream Application Server Version 3.0, could result in lost revenue or a
delay in market acceptance, which would seriously harm our business and
operating results. We have in the past discovered software errors in our new
releases and new products after their introduction and expect that this will
continue. Despite internal testing and testing by current and potential
customers, our current and future products may contain serious defects,
including Year 2000 errors.

As many of our customers use our products for business-critical
applications, errors, defects or other performance problems could result in
financial or other damage to our customers and could significantly impair their
operations. Our customers could seek damages for losses related to any of these
issues. A product liability claim brought against us, even if not successful,
would likely be time consuming and costly to defend and could adversely affect
our marketing efforts.

OUR BUSINESS COULD BE ADVERSELY AFFECTED IF THE SYSTEMS WE USE ARE NOT YEAR
2000 COMPLIANT OR IF OUR CUSTOMERS OR POTENTIAL CUSTOMERS ALTER THEIR PURCHASING
PATTERNS AS A RESULT OF THE YEAR 2000.

We are in the process of assessing any Year 2000 issues with the computer,
communications and software systems that we use to deliver our products and to
manage our internal operations. We have not finalized our assessment or
formulated a final plan or budget to remedy our Year 2000 issues. If our systems
do not operate properly with respect to date calculations involving the Year
2000 and subsequent dates, we could incur unanticipated expenses to remedy any
problems, which could seriously harm our business. We may also experience
reduced sales of our products as current or potential customers reduce their
budgets for enterprise software and Internet products due to increased
expenditures on their own Year 2000 compliance efforts.

The risks posed by Year 2000 issues could adversely affect our business in
a number of significant ways. Although we believe that our internally developed
systems and technology are Year 2000 compliant, our information technology
systems nevertheless could be substantially impaired or cease to operate due to
Year 2000 problems. Additionally, we rely on information technology supplied by
third parties, and our other business partners, including third-party
distributors and consultants, also are heavily dependent on information
technology systems and on their own and third-party vendor systems. Year 2000
problems experienced by us or any of these third parties could materially
adversely affect our business. Prior versions of our products may contain
technology from third parties that is not Year 2000 compliant. Additionally, the
Internet could face serious disruptions arising from the Year 2000 problem.

Many of our customers and potential customers have implemented policies
that prohibit or strongly discourage making changes or additions to their
internal computer systems until after January 1, 2000. We will experience fewer
sales if potential customers delay the purchase and implementation of our
products until after January 1, 2000. Purchasing decisions may be delayed as
potential customers stabilize their internal computer systems or divert their
information technology budgets to address Year 2000 issues. If

11
<PAGE> 13

our potential customers delay purchasing or implementing our products in
preparation for the Year 2000 problem, our business would be seriously harmed.

Given the pervasive nature of the Year 2000 problem, we cannot guarantee
that disruptions in other industries and market segments will not adversely
affect our business. Moreover, our costs related to Year 2000 compliance, which
thus far have not been material, could ultimately be significant. In the event
that we experience disruptions as a result of the Year 2000 problem, our
business could be seriously harmed. Our efforts to address Year 2000 issues are
described in more detail in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Compliance" on page 28.

OUR BUSINESS MAY SUFFER IF WE CANNOT PROTECT OUR INTELLECTUAL PROPERTY.

We have no patents, and none may be issued from our existing patent
applications. We rely on a combination of contractual provisions,
confidentiality procedures, and patent, trademark, trade secret and copyright
laws to protect the proprietary aspects of our technology. These legal
protections afford only limited protection and competitors may gain access to
our intellectual property which may result in the loss of our customers. In
addition, despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use our
proprietary information. Litigation may be necessary to enforce our intellectual
property rights, to protect our trade secrets and to determine the validity and
scope of the proprietary rights of others. Any litigation could result in
substantial costs and diversion of resources with no assurance of success and
could seriously harm our business and operating results. In addition, we sell
our products internationally, and the laws of many countries do not protect our
proprietary rights as well as the laws of the United States. Our future patents,
if any, may be successfully challenged or may not provide us with any
competitive advantages.

We obtain a major portion of our software license revenue from licensing
our products under standardized "shrink wrap" agreements that our customers do
not sign. If any of these agreements were deemed unenforceable, those customers
may seek to use and copy our technology without appropriate limitations.

WE COULD INCUR SUBSTANTIAL COSTS DEFENDING OUR INTELLECTUAL PROPERTY FROM
INFRINGEMENT OR A CLAIM OF INFRINGEMENT.

Other companies, including our competitors, may obtain patents or other
proprietary rights that would prevent, limit or interfere with our ability to
make, use or sell our products. As a result, we may be found to infringe on the
proprietary rights of others. In the event of a successful claim of infringement
against us and our failure or inability to license the infringed technology, our
business and operating results would be significantly harmed. Companies in the
software market and the Internet market are increasingly bringing suits alleging
infringement of their proprietary rights, particularly patent rights. We have
been subject to such claims in the past. Any litigation or claims, whether or
not valid, could result in substantial costs and diversion of resources with no
assurance of success. Intellectual property litigation or claims could force us
to do one or more of the following:

- Cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;

- Obtain a license from the holder of the infringed intellectual property
right, which license may not be available on reasonable terms; and

- Redesign products or services.

ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND CONSEQUENTLY HARM OUR
FINANCIAL CONDITION.

In order to remain competitive, we may find it necessary to acquire
additional businesses, products or technologies. If we identify an appropriate
acquisition candidate, we may not be able to negotiate the terms of the
acquisition successfully, finance the acquisition, or integrate the acquired
business, products or
12
<PAGE> 14

technologies into our existing business and operations. Further, completing a
potential acquisition and integrating an acquired business will cause
significant diversions of management time and resources. If we consummate one or
more significant acquisitions in which the consideration consists of stock or
other securities, your equity could be significantly diluted. If we were to
proceed with one or more significant acquisitions in which the consideration
included cash, we could be required to use a substantial portion of our
available cash, including proceeds from this offering, to consummate an
acquisition. Acquisition financing may not be available on favorable terms, or
at all. In addition, we may be required to amortize significant amounts of
goodwill and other intangible assets in connection with future acquisitions,
which would seriously harm our operating results.

RISKS RELATED TO THIS OFFERING

WE MAY NEED ADDITIONAL FINANCING WHICH COULD BE DIFFICULT TO OBTAIN.

We expect the net proceeds from this offering, together with cash generated
from operations will be sufficient to meet our working capital and capital
expenditure needs for at least the next 12 months. After that, we may need to
raise additional funds and we cannot be certain that we will be able to obtain
additional financing on favorable terms, if at all. Further, if we issue
additional equity securities, stockholders may experience additional dilution or
the new equity securities may have rights, preferences or privileges senior to
those of existing holders of common stock. If we cannot raise funds on
acceptable terms, if and when needed, we may not be able to develop or enhance
our products and services, take advantage of future opportunities, grow our
business or respond to competitive pressures or unanticipated requirements,
which could seriously harm our business.

OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
INVESTORS PURCHASING SHARES IN THIS OFFERING.

Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering. We negotiated and determined the initial public
offering price with the representatives of the underwriters based on several
factors. You may be unable to sell your shares of common stock at or above the
initial public offering price, which may result in substantial losses to you.
The market price of the common stock may fluctuate significantly in response to
the following factors, some of which are beyond our control:

- Variations in our quarterly operating results;

- Changes in securities analysts' estimates of our financial performance;

- Changes in market valuations of similar companies;

- Announcements by us or our competitors of new or enhanced products or
significant contracts, acquisitions or strategic partnerships;

- Additions or departures of key personnel; and

- Future sales of our common stock or other securities.

WE MAY INCUR SIGNIFICANT COSTS FROM CLASS ACTION LITIGATION DUE TO OUR
EXPECTED STOCK PRICE VOLATILITY.

In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.

13
<PAGE> 15

OUR STOCK PRICE COULD BE ADVERSELY AFFECTED BY SHARES BECOMING AVAILABLE FOR
SALE.

Sales of a substantial number of shares of our common stock in the public
market after this offering could depress the market price of our common stock
and could impair our ability to raise capital through the sale of additional
equity securities. For a more detailed description, see "Shares Eligible for
Future Sale" on page 55.

PURCHASERS IN THIS OFFERING WILL INCUR IMMEDIATE, SUBSTANTIAL DILUTION.

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

ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY.

Provisions of our certificate of incorporation and bylaws, as well as
provisions of Delaware law, could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders. For more
information regarding these provisions, see "Description of Capital Stock --
Delaware Law and Our Charter and By-Law Provisions; Anti-Takeover Effects" on
page 53.

INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER SILVERSTREAM AFTER
THIS OFFERING AND COULD DELAY OR PREVENT A CHANGE IN CORPORATE CONTROL.

Upon completion of this offering, our executive officers, directors and
principal stockholders will beneficially own, in the aggregate, approximately
55.2% of our outstanding common stock. As a result, these stockholders will be
able to exercise control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. This could have the effect of delaying or preventing a change of
control of SilverStream.

WE HAVE BROAD DISCRETION TO USE THE PROCEEDS FROM THIS OFFERING AND THE
FAILURE OF MANAGEMENT TO APPLY SUCH FUNDS EFFECTIVELY COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.

We plan to use the proceeds from this offering for general corporate
purposes. Therefore, we will have broad discretion as to how we will spend the
proceeds, and stockholders may not agree with the ways in which we use the
proceeds. We may not be successful in investing the proceeds from this offering,
in our operations or external investments, to yield a favorable return.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. In some cases you can identify these
statements by forward-looking words such as "anticipate," "believe," "could,"
"estimate," "expect," "intend," "may," "should," "will" and "would" or similar
words. You should read statements that contain these words carefully because
they discuss our future expectations, contain projections of our future results
of operations or of our financial position or state other "forward-looking"
information. We believe that it is important to communicate our future
expectations to our investors. However, there may be events in the future that
we are not able to accurately predict or control. The factors listed above in
the section captioned "Risk Factors," as well as any cautionary language in this
prospectus, provide examples of risks, uncertainties and events that may cause
our actual results to differ materially from the expectations we describe in our
forward-looking statements. Before you invest in our common stock, you should be
aware that the occurrence of the events described in these risk factors and
elsewhere in this prospectus could have a material adverse effect on our
business, results of operations and financial position.

14
<PAGE> 16

USE OF PROCEEDS

We estimate that our net proceeds from the sale of the 3,000,000 shares of
common stock will be approximately $43.6 million, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us. If the
over-allotment option is exercised in full, we estimate that our net proceeds
will be approximately $50.3 million.

The principal purposes of this offering are to establish a public market
for our common stock, to increase our visibility in the marketplace, to
facilitate future access to public capital markets, to provide liquidity to
existing stockholders and to obtain additional working capital.

We expect to use the net proceeds for working capital, capital expenditures
and general corporate purposes, including approximately $8.0 million for
expansion of sales and marketing operations, $4.0 million for research and
development activities, $5.0 million for expansion of professional services,
$1.0 million for expansion of facilities and $1.0 million for improvements to
operational and financial systems. The amount and timing of these expenditures
will vary depending on a number of factors, including the amount of cash
generated by our operations, competitive and technological developments, future
changes in our business objectives, and the rate of growth, if any, of our
business. Although we may use a portion of the net proceeds to acquire
businesses, products or technologies that are complementary to our business, we
have no specific acquisitions planned. Pending these uses, we plan to invest the
net proceeds in short-term, investment grade, interest-bearing securities.

DIVIDEND POLICY

We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all future earnings, if any, for use in
the operation of our business. Our existing equipment line of credit and term
loans prohibit the payment of dividends without the consent of the lender.

15
<PAGE> 17

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 1999. The
pro forma information gives effect to the conversion of all of our outstanding
preferred stock into common stock on a one-for-one basis upon the closing of
this offering and assumes the filing of our second amended and restated
certificate of incorporation after the closing of this offering authorizing
2,000,000 shares of preferred stock and 100,000,000 shares of common stock. The
pro forma as adjusted information gives effect to the foregoing as well as our
receipt of the net proceeds from the issuance and sale of the 3,000,000 shares
of common stock in this offering, after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us. The outstanding share
information excludes 1,401,192 shares of common stock issuable on exercise of
outstanding options as of June 30, 1999 with a weighted average exercise price
of $3.53 per share.

<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ --------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Long-term debt, less current portion...................... $ 682 $ 682 $ 682
Redeemable convertible preferred stock, $.001 par value,
5,283,050 shares authorized, 5,183,988 shares issued and
outstanding, actual; no shares authorized, issued and
outstanding, pro forma and pro forma as adjusted........ 11,638 -- --
Stockholders' equity:
Convertible preferred stock, $.001 par value, 3,600,000
shares authorized, 3,475,220 shares issued and
outstanding, actual; no shares authorized, issued and
outstanding, pro forma and pro forma as adjusted........ 31,584 -- --
Preferred stock, $.001 par value, no shares authorized,
issued and outstanding, actual; 2,000,000 shares
authorized, pro forma and pro forma as adjusted, no
shares issued and outstanding, pro forma and pro forma
as adjusted............................................. -- -- --
Common stock, $.001 par value; 21,000,000 shares
authorized, 5,320,208 shares issued and outstanding,
actual; 100,000,000 shares authorized, pro forma and pro
forma as adjusted, 13,979,416 shares issued and
outstanding, pro forma, 16,979,416 shares issued and
outstanding, pro forma as adjusted...................... 6 15 18
Additional paid-in capital................................ 3,405 46,618 90,255
Deferred compensation..................................... (1,848) (1,848) (1,848)
Accumulated deficit....................................... (31,514) (31,514) (31,514)
Other comprehensive loss.................................. (73) (73) (73)
Notes receivable from stockholders........................ (104) (104) (104)
-------- -------- --------
Total stockholders' equity...................... 1,456 13,094 56,734
-------- -------- --------
Total capitalization............................ $ 13,776 $ 13,776 $ 57,416
======== ======== ========
</TABLE>

16
<PAGE> 18

DILUTION

SilverStream's pro forma net tangible book value as of June 30, 1999, after
giving effect to the conversion of all outstanding shares of convertible
preferred stock into common stock on a one-for-one basis upon the closing of
this offering, was approximately $12.1 million, or $.86 per share of common
stock. Pro forma net tangible book value per share represents our total assets
less total liabilities and intangibles, divided by the 13,979,416 shares of
common stock outstanding after giving effect to the conversion of all
outstanding shares of convertible preferred stock into common stock on a
one-for-one basis. Net tangible book value dilution per share to new investors
is the difference between the amount per share paid by purchasers of common
stock in this offering and the pro forma net tangible book value per share
immediately following this offering. After giving effect to the issuance and
sale of the 3,000,000 shares of common stock in this offering, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us, SilverStream's pro forma net tangible book value as of June 30, 1999
would have been $55.7 million, or $3.28 per share. This represents an immediate
increase in pro forma net tangible book value to existing stockholders of $2.42
per share. The offering price of $16.00 per share substantially exceeds $3.28
per share, which is the per share value of our total assets less total
liabilities and intangibles after this offering. Accordingly, new investors who
purchase common stock in this offering will suffer an immediate dilution of
their investment of $12.72 per share. The following table illustrates this per
share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $16.00
Pro forma net tangible book value per share as of June 30,
1999................................................... $ .86
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 2.42
-----
Pro forma net tangible book value per share after this
offering.................................................. 3.28
------
Dilution per share to new investors......................... $12.72
======
</TABLE>

The following table summarizes on a pro forma basis, giving effect to the
conversion of all outstanding shares of convertible preferred stock into common
stock on a one-for-one basis upon the closing of this offering, as of June 30,
1999, the difference between the number of shares of common stock purchased from
SilverStream, the total consideration paid to SilverStream, and the average
price per share paid by existing stockholders and by new investors. In
accordance with the following table, new investors will contribute 51.8% of the
total consideration for, and own 17.7% of the outstanding shares of, the common
stock of SilverStream. The calculation below is based on the offering price of
$16.00 per share, before deduction of underwriting discounts and commissions and
estimated offering expenses payable by us.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 13,979,416 82.3% $44,594,224 48.2% $ 3.19
New investors......................... 3,000,000 17.7 48,000,000 51.8 16.00
---------- ----- ----------- ------
Total....................... 16,979,416 100.0% $92,594,224 100.0%
========== ===== =========== ======
</TABLE>

The table above assumes no exercise of stock options outstanding at June
30, 1999. As of June 30, 1999, there were options outstanding to purchase
1,401,192 shares of common stock with a weighted average exercise price of $3.53
per share. To the extent all of such outstanding options had been exercised as
of June 30, 1999, pro forma net tangible book value per share after this
offering would be $3.30 and total dilution per share to new investors would be
$12.70.

If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors will increase to 3,450,000 shares, or 19.8% of
the total number of shares of common stock outstanding after this offering.

17
<PAGE> 19

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with our Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statement of
operations data for the period ended December 31, 1996 and the years ended
December 31, 1997 and 1998 and the consolidated balance sheet data as of
December 31, 1997 and 1998 are derived from our Consolidated Financial
Statements that have been audited by Ernst & Young LLP, independent auditors,
and are included elsewhere in this prospectus. The consolidated balance sheet
data as of December 31, 1996 are derived from our audited consolidated financial
statements, and the consolidated balance sheet data as of June 30, 1998 are
derived from our unaudited consolidated financial statements not included in
this prospectus. The consolidated financial data as of June 30, 1999 and for the
six-month periods ended June 30, 1998 and 1999 are derived from our unaudited
Consolidated Financial Statements included elsewhere in this prospectus and
include all adjustments, consisting only of normal, recurring adjustments, that
SilverStream considers necessary for a fair presentation of our consolidated
financial position and our consolidated results of operations for those periods.
Operating results for the six-month period ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1999.

<TABLE>
<CAPTION>
PERIOD FROM
MAY 8, 1996 YEARS ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ----------------------- -----------------------
1996 1997 1998 1998 1999
-------------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue:
Software license.................. $ -- $ 249 $ 5,983 $ 1,527 $ 5,515
Services.......................... -- -- 825 217 2,267
---------- ---------- ---------- ---------- ----------
Total revenue............. -- 249 6,808 1,744 7,782
Cost of revenue:
Software license.................. -- 90 767 234 685
Services.......................... -- 282 1,414 519 3,167
---------- ---------- ---------- ---------- ----------
Total cost of revenue..... -- 372 2,181 753 3,852
---------- ---------- ---------- ---------- ----------
Gross profit (loss)................. -- (123) 4,627 991 3,930
Operating expenses:
Sales and marketing............... 35 3,854 10,776 4,422 8,258
Research and development.......... 850 2,622 5,070 2,429 3,342
General and administrative........ 120 1,961 2,141 993 1,660
Compensation charge for issuance
of stock options............... -- -- -- -- 190
---------- ---------- ---------- ---------- ----------
Total operating
expenses................ 1,005 8,437 17,987 7,844 13,450
---------- ---------- ---------- ---------- ----------
Loss from operations................ (1,005) (8,560) (13,360) (6,853) (9,520)
Other income, net................... 53 225 475 252 178
---------- ---------- ---------- ---------- ----------
Net loss............................ $ (952) $ (8,335) $ (12,885) $ (6,601) $ (9,342)
Beneficial conversion feature in
Series D preferred stock.......... -- -- -- -- (263)
---------- ---------- ---------- ---------- ----------
Net loss applicable to common
stockholders...................... $ (952) $ (8,335) $ (12,885) $ (6,601) $ (9,605)
========== ========== ========== ========== ==========
</TABLE>

18
<PAGE> 20

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------------- ------------------
1996 1997 1998 1998 1999
------ ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................. $2,734 $16,649 $ 1,199 $ 4,717 $10,778
Working capital........................... 2,591 16,349 5,119 11,507 10,439
Total assets.............................. 3,056 18,956 10,014 15,296 20,895
Long-term debt, less current portion...... 189 295 325 511 682
Redeemable convertible preferred stock.... 3,658 11,638 11,638 11,638 11,638
Total stockholders' equity (deficit)...... (947) 5,944 (5,048) 1,045 1,456
</TABLE>

<PAGE> 21

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

The following discussion should be read together with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this prospectus.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those indicated in such
forward-looking statements.

OVERVIEW

SilverStream is a global provider of software and services that enable
businesses and other large organizations to create, deploy and manage software
programs for intranets, extranets and the Internet. From our incorporation in
May 1996 through December 1997, we were considered a development stage
enterprise and our activities were primarily focused on raising capital,
conducting research and development, and establishing markets and distribution
channels for our products. In November 1997, we began commercial shipment of the
initial version of our Application Server. Today, we have licensed the
SilverStream Application Server to more than 500 customers around the world.

We derive our revenue from the sale of software product licenses and from
professional consulting, education and technical support services. We plan to
generate future revenue from both new and existing customers. As existing
customers create new software applications based on the SilverStream Application
Server, they may require more application servers to run these applications. We
plan to widen our customer base by selling licenses and services to new
customers. We anticipate that we will continue to sell annual update assurance
and support agreements to most customers. We recognize our software license
revenue in accordance with Statement of Position 97-2, "Software Revenue
Recognition." Statement of Position 97-2 generally requires revenue earned on
software arrangements involving multiple elements to be allocated to each
element based on the relative fair values of the elements. We generally
recognize revenue allocated to software licenses upon delivery of the software
products, provided that we have no remaining significant obligations with regard
to implementation, the license fee is fixed or determinable and collection of
the fee is probable. However, when we sell software product licenses to a
reseller, revenue is not recognized until the product is shipped to the
customer. This is because the reseller is functioning as a distributor and may
order products without a specific customer. Our customers often contract for
update assurance which provides them with new releases of software for a period
of typically one year. These agreements are separately negotiated and priced. We
recognize update assurance revenue ratably over this 12-month period. We license
our software to independent software vendors who use our products to create
their own software products for resale. Independent software vendors pay us a
prepayment at the beginning of their contract. We recognize this revenue ratably
over the period of the contract, typically one year, as the only undelivered
element under these agreements is service, for which no pattern of performance
is discernable. We also earn partner fees, which are deferred and recognized on
a straight-line basis as an offset to operating expenses over the life of the
agreement, typically one year. We consider such fees to be reimbursement for
costs incurred in connection with our partner program. We recognize revenue from
the sale of technical support services ratably over the maintenance term and
revenue from the sale of consulting and education services as the services are
performed.

We record cash receipts from customers and billed amounts due from
customers in excess of recognized revenue as deferred revenue. The timing and
amount of cash receipts from customers can vary significantly depending on
specific contract terms and can therefore have a significant impact on the
amount of deferred revenue in any given period.

Our cost of software license revenue includes royalties due to third
parties for technology included in our products, the cost of manuals and product
documentation, media used to deliver our products, shipping and fulfillment
costs and the costs associated with license revenues from independent software
vendors. Our cost of services revenue includes salaries and related expenses for
our consulting, education and technical support services organizations, costs of
third parties contracted to provide consulting services to customers and an
allocation of our facilities, communications and depreciation expenses.

20
<PAGE> 22

Our operating expenses are classified into four general categories: sales
and marketing, research and development, general and administrative and
compensation charge for issuance of stock options. Sales and marketing expenses
consist primarily of salaries and other related costs for sales and marketing
personnel, sales commissions, travel, public relations and marketing materials
and tradeshows. Research and development expenses consist primarily of personnel
costs to support product development. General and administrative expenses
consist primarily of salaries and other related costs for operations and finance
employees, legal and accounting services and facilities-related expenses.
Compensation charge for the issuance of stock options represents the difference
between the exercise price of options granted and the estimated fair market
value of the underlying common stock on the date of the grant.

We will amortize deferred compensation of approximately $2.0 million in the
aggregate relating to options granted in the six months ended June 30, 1999 that
will vest over the next five years, and which will be charged to operations
ratably over that period.

Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our engineering,
sales and marketing and professional services departments, and to establish an
administrative organization. As a result, we have incurred net losses in each
fiscal quarter since inception and had an accumulated deficit of $22.2 million
as of December 31, 1998 and $31.5 million as of June 30, 1999. We anticipate
that our operating expenses will increase substantially in future quarters as we
increase sales and marketing operations, expand distribution channels, increase
research and development, broaden professional services, expand facilities and
support, and improve operational and financial systems. Accordingly, we expect
to incur additional losses for the foreseeable future. In addition, our limited
operating history makes it difficult for us to predict future operating results
and, accordingly, there can be no assurance that we will achieve or sustain
revenue growth or profitability.

RESULTS OF OPERATIONS

The following table presents selected consolidated financial data for the
periods indicated as a percentage of total revenue. Data for the period from
inception through December 31, 1996 is not presented because we had no revenue
during that period.

<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------------
1997 1998 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Software license................................ 100.0% 87.9% 87.5% 70.9%
Services........................................ 0.0 12.1 12.5 29.1
-------- -------- -------- --------
Total revenue........................... 100.0 100.0 100.0 100.0
-------- -------- -------- --------
Cost of revenue:
Software license................................ 36.2 11.2 13.4 8.8
Services........................................ 113.4 20.8 29.8 40.7
-------- -------- -------- --------
Total cost of revenue................... 149.6 32.0 43.2 49.5
-------- -------- -------- --------
Gross profit (loss)............................... (49.6) 68.0 56.8 50.5
Operating expenses:
Sales and marketing............................. 1,550.7 158.3 253.5 106.1
Research and development........................ 1,055.1 74.5 139.3 43.0
General and administrative...................... 789.1 31.4 57.0 21.3
Compensation charge for issuance of stock
options...................................... 0.0 0.0 0.0 2.4
-------- -------- -------- --------
Total operating expenses................ 3,394.9 264.2 449.8 172.8
-------- -------- -------- --------
Loss from operations.............................. (3,444.5) (196.2) (393.0) (122.3)
Other income, net................................. 90.7 6.9 14.5 2.3
-------- -------- -------- --------
Net loss.......................................... (3,353.8)% (189.3)% (378.5)% (120.0)%
======== ======== ======== ========
</TABLE>

21
<PAGE> 23

SIX MONTHS ENDED JUNE 30, 1998 AND 1999

REVENUE

Total revenue increased by approximately $6.1 million from $1.7 million in
the six months ended June 30, 1998 to $7.8 million in the six months ended June
30, 1999. This increase was attributable to an increase in our customer base
resulting in substantial growth in software license and services revenue.
Revenue from international sales increased by approximately $1.9 million from
$721,000, or 41% of total revenue, in the six months ended June 30, 1998 to $2.6
million, or 33% of total revenue, in the six months ended June 30, 1999
primarily due to increased selling and related activities in Germany, Belgium,
The Netherlands, Singapore, Hong Kong and Taiwan.

Software License. Software license revenue increased by approximately $4.0
million from $1.5 million in the six months ended June 30, 1998 to $5.5 million
in the six months ended June 30, 1999. This increase is attributable to
increased unit sales of our products following the release of Version 2.0 in
October 1998 and higher prices realized for our products in 1999 as compared to
1998.

Services. Services revenue increased by approximately $2.1 million from
$217,000 in the six months ended June 30, 1998 to $2.3 million in the six months
ended June 30, 1999. Approximately 64% of this increase is attributable to the
creation and expansion of our professional consulting organization and the
provision of a wider range of consulting services to customers and the remainder
is primarily due to an increase in the number of our customers and support
contracts.

We believe that growth in our software license sales depends on our ability
to provide our customers with support, education, and consulting services and to
educate third-party consulting partners on how to use our products. As a result,
we intend to expand our services organizations in 1999 and we believe that
services revenue will continue to increase as a percentage of total revenue. We
expect that revenue from professional consulting services will increase in the
future to the extent that additional customers license our products and as we
expand both our capacity for the delivery of these services as well as the scope
of our services offerings. We expect that services revenue from support
agreements will increase in the future as a result of new and existing license
agreements.

COST OF REVENUE

Software License. Cost of software license revenue increased by
approximately $451,000 from $234,000 in the six months ended June 30, 1998 to
$685,000 in the six months ended June 30, 1999. Of this increase, approximately
58% is attributable to increased product, shipping and third party royalty costs
from a larger volume of sales orders and the remainder is primarily attributable
to costs associated with our independent software vendors. Cost of software
license revenue decreased as a percentage of software license revenue from 15%
to 12% for the six months ended June 30, 1998 as compared to the six months
ended June 30, 1999. This decrease reflects increased efficiencies associated
with larger sales volumes. We expect software license costs to increase in the
future due to additional customers licensing our products and the licensing of
additional third-party technology that we may choose to embed in our product
offerings.

Services. Cost of services revenue increased by approximately $2.7 million
from $519,000 in the six months ended June 30, 1998 to $3.2 million in the six
months ended June 30, 1999. Of this increase in cost of services revenue,
approximately 57% is due to an increase in the number of our education and
technical support personnel and the remainder is primarily attributable to the
creation and rapid expansion of our consulting services business in late 1998.
To date, our services costs have been higher than our services revenue, and we
expect that trend to continue for the next several quarters as we continue to
expand all of our services organizations in order to meet anticipated demand for
services. We expect services costs to increase in the future to the extent that
we continue to generate new customers and associated software license and
services revenue. Services costs as a percentage of services revenue can be
expected to vary significantly from period to period depending on the mix of
services we provide, whether such services are provided by us or third-party
contractors, and overall utilization rates. Approximately

22
<PAGE> 24

24% of our services revenue for the six months ended June 30, 1999 was derived
from third-party subcontractors providing consulting, educational and technical
support services on our behalf. We derived no services revenue from third-party
subcontractors for the six months ended June 30, 1998.

OPERATING EXPENSES

Sales and Marketing. Sales and marketing expenses increased by
approximately $3.9 million from $4.4 million in the six months ended June 30,
1998 to $8.3 million in the six months ended June 30, 1999. Of this increase in
sales and marketing expenses, approximately 54% is attributable to increases in
the number of sales employees in North America, and approximately 42% is
attributed to expanded international sales operations. We believe these expenses
will increase significantly in future periods as we expect to continue to expand
our sales and marketing efforts. We also anticipate that sales and marketing
expenses may fluctuate as a percentage of a total revenue from period to period
as new sales personnel are hired and begin to achieve productivity.

Research and Development. Research and development expenses increased by
approximately $900,000 from $2.4 million in the six months ended June 30, 1998
to $3.3 million in the six months ended June 30, 1999. The increase in research
and development expenses is primarily attributable to increases in the number of
research and development personnel to support SilverStream's product development
activities. We believe that continued investment in research and development is
critical to attaining our strategic objectives, and, as a result, we expect
research and development expenses to increase significantly in future periods.
To date, all software development costs have been expensed in the period
incurred.

General and Administrative. General and administrative expenses increased
by approximately $707,000 from $993,000 in the six months ended June 30, 1998 to
$1.7 million in the six months ended June 30, 1999. Of this increase,
approximately 61% is attributable to a growing number of administrative
employees and approximately 23% is attributable to an increase in the bad debt
reserve as our revenue and accounts receivable grew. We believe general and
administrative expenses will increase, as we expect to add personnel to support
our expanding operations, incur additional costs related to the growth of our
business, and assume the responsibilities of a public company.

Compensation Charge for Issuance of Stock Options. We incurred a charge of
$190,000 for the six months ended June 30, 1999 related to the issuance of stock
options with exercise prices below fair market value on the date of grant.
Additional unvested outstanding options will continue to vest over the next five
years, which will result in additional compensation expense of approximately
$1,848,000 in the aggregate in periods subsequent to June 30, 1999 which will be
charged to operations ratably over the next five years.

OTHER INCOME, NET

Other income, net decreased from $252,000 in the six months ended June 30,
1998 to $178,000 in the six months ended June 30, 1999. This decrease is
attributable to a decrease in interest income during the six months ended June
30, 1999 over the same period in the previous year. The interest expense results
from capital equipment loans used to purchase computer equipment.

YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

REVENUE

Total revenue increased by approximately $6.6 million from $249,000 in 1997
to $6.8 million in 1998 due to the release of our initial products in November
1997 and the ensuing increase in our customer base. Revenue from international
sales increased by approximately $1.7 million from $68,000, or 27% of total
revenue, in 1997 to $1.8 million, or 27% of total revenue, in 1998 due to the
same factors. We had no revenue during the period from inception until December
31, 1996.

Software License. Software license revenue increased by approximately $5.7
million from $249,000 in 1997 to $6.0 million in 1998. We first began shipping
our products in November 1997. The increase in software license revenue was due
primarily to an increase in the number of customers resulting from a full year
of selling in 1998 and the release of Version 2.0 of our products in October
1998.

23
<PAGE> 25

Services. We had no services revenue in 1997 and services revenue of
$825,000 in 1998. Approximately 71% of our services revenue in 1998 resulted
from education and support services delivered to an increasing customer base and
the remainder resulted primarily from the sale of professional consulting
services.

COST OF REVENUE

Software License. Cost of software license revenue increased by
approximately $677,000 from $90,000 in 1997 to $767,000 in 1998. The increase is
attributable to increases in software license revenue and the royalties we pay
on third-party software incorporated into Version 2.0 of our products which
began shipping in October 1998.

Services. Cost of services revenue increased by approximately $1.1 million
from $282,000 in 1997 to $1.4 million in 1998. Of this increase, approximately
68% was due to an increase in our support organization and the balance was
primarily due to the creation of our professional consulting services
organization in 1998.

OPERATING EXPENSES

Sales and Marketing. Sales and marketing expenses in 1996 amounted to
$35,000 and increased by approximately $6.9 million from $3.9 million in 1997 to
$10.8 million in 1998. The increase in these periods was due to increases in
sales and marketing personnel and marketing program expenditures. During 1998,
we expanded international sales and marketing operations in Germany, Belgium,
The Netherlands, Hong Kong, Singapore and Taiwan and we increased the number of
personnel and offices in North America.

Research and Development. Research and development expenses in 1996
amounted to $850,000 and increased by approximately $2.4 million from $2.6
million in 1997 to $5.1 million in 1998. The increase in these periods was
primarily due to the hiring of more engineering personnel.

General and Administrative. General and administrative expenses in 1996
amounted to $120,000 and increased by approximately $180,000 from $2.0 million
in 1997 to $2.1 million in 1998. The increase in these periods was primarily due
to the hiring of more personnel.

OTHER INCOME, NET

Other income, net in 1996 amounted to $53,000 and increased by
approximately $250,000 from $225,000 in 1997 to $475,000 in 1998. The increase
was due primarily to an increase in interest income earned from cash balances on
hand in 1998 compared to 1997. Proceeds from the private sale of equity
securities in 1997 and 1998 caused cash and short-term investment balances in
1998 to be higher than those in 1997.

QUARTERLY RESULTS

The following table presents our unaudited quarterly operating results for
each of the seven quarters ended June 30, 1999 both in absolute dollars and as a
percentage of our total revenue for each quarter. This information has been
derived from our unaudited consolidated financial statements. The unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements contained in this prospectus and
include all adjustments, consisting only of normal recurring adjustments, that
we consider necessary for a fair presentation of such information. You should
read this information in conjunction with our Consolidated Financial Statements
and Notes thereto appearing elsewhere in this prospectus. You should not draw
any conclusions about our future results from the results of operations for any
quarter.

24
<PAGE> 26

<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1997 1998 1998 1998 1998 1999 1999
--------- --------- --------- --------- --------- --------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue:
Software license............... $ 249 $ 579 $ 948 $ 1,916 $ 2,539 $ 2,607 $ 2,908
Services....................... -- 104 113 115 494 867 1,400
------- ------- ------- ------- ------- ------- -------
Total revenue........... 249 683 1,061 2,031 3,033 3,474 4,308
Cost of revenue:
Software license............... 90 118 116 158 375 303 383
Services....................... 282 252 267 361 534 1,330 1,836
------- ------- ------- ------- ------- ------- -------
Total cost of revenue... 372 370 383 519 909 1,633 2,219
------- ------- ------- ------- ------- ------- -------
Gross profit (loss).............. (123) 313 678 1,512 2,124 1,841 2,089
Operating expenses:
Sales and marketing............ 1,283 2,305 2,116 2,658 3,696 3,988 4,270
Research and development....... 647 1,240 1,190 1,336 1,304 1,503 1,839
General and administrative..... 1,123 532 462 489 659 697 963
Compensation charge for
issuance of stock options.... -- -- -- -- -- 15 175
------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 3,053 4,077 3,768 4,483 5,659 6,203 7,247
------- ------- ------- ------- ------- ------- -------
Loss from operations............. (3,176) (3,764) (3,090) (2,971) (3,535) (4,362) (5,158)
Other income, net................ 216 97 155 143 80 40 138
------- ------- ------- ------- ------- ------- -------
Net loss......................... $(2,960) $(3,667) $(2,935) $(2,828) $(3,455) $(4,322) $(5,020)
Beneficial conversion feature in
Series D preferred stock....... -- -- -- -- -- -- (263)
------- ------- ------- ------- ------- ------- -------
Net loss applicable to common
stockholders................... $(2,960) $(3,667) $(2,935) $(2,828) $(3,455) $(4,322) $(5,283)
======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL REVENUE:
Revenue:
Software license............... 100% 85% 89% 94% 84% 75% 68%
Services....................... -- 15 11 6 16 25 32
------- ------- ------- ------- ------- ------- -------
Total revenue........... 100 100 100 100 100 100 100
Cost of revenue:
Software license............... 36 17 11 7 12 9 9
Services....................... 113 37 25 18 18 38 42
------- ------- ------- ------- ------- ------- -------
Total cost of revenue... 149 54 36 25 30 47 51
------- ------- ------- ------- ------- ------- -------
Gross profit (loss).............. (49) 46 64 75 70 53 49
Operating expenses:
Sales and marketing............ 516 337 200 132 122 115 99
Research and development....... 260 182 112 65 43 43 43
General and administrative..... 451 78 43 24 22 20 22
Compensation charge for
issuance of stock options.... -- -- -- -- -- -- 4
------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 1,227 597 355 221 187 178 168
------- ------- ------- ------- ------- ------- -------
Loss from operations............. (1,276) (551) (291) (146) (117) (125) (119)
Other income, net................ 87 14 15 7 3 1 3
------- ------- ------- ------- ------- ------- -------
Net loss......................... (1,189)% (537)% (276)% (139)% (114)% (124)% (116)%
Beneficial conversion feature in
Series D preferred stock....... -- -- -- -- -- -- (6)
------- ------- ------- ------- ------- ------- -------
Net loss applicable to common
stockholders................... (1,189)% (537)% (276)% (139)% (114)% (124)% (122)%
======= ======= ======= ======= ======= ======= =======
</TABLE>

25
<PAGE> 27

Our total revenue has increased in each quarter following the commercial
release of our products in November 1997. The increase in each quarter is due to
the increase in the number of our customers resulting from increased market
awareness and acceptance of our software, expansion of our sales organization
and increased services revenue reflecting the growth in the installed base of
product licenses. Growth in software license revenue accelerated in the last two
quarters of 1998 as we increased our direct sales force in North America and
expanded direct European operations in Germany, Belgium and The Netherlands.
Services revenue increased in the fourth quarter of 1998 and the first two
quarters of 1999 following the release of Version 2.0 of our Application Server
and the expansion of our professional consulting services organization and our
services offerings.

Cost of software license revenue has increased in conjunction with our
increases in software license revenue. Software license costs were higher in the
quarter ended March 31, 1998 due to the increased number of releases following
the release of Version 1.0 of our Application Server in November 1997 and in the
quarter ended December 31, 1998 following the release of Version 2.0 in October
1998.

Cost of services revenue has increased as we have increased the size of our
support, education and professional consulting organizations. Cost of services
revenue increased during the quarters ended December 31, 1998, March 31, 1999
and June 30, 1999 due to increased usage of third-party consultants as well as
salaries and related costs for increased professional services personnel as a
result of the expansion of our professional consulting services organization.

Operating expenses have generally increased in absolute dollars each
quarter as we have increased staffing in sales and marketing, product
development and general and administrative functions. Sales and marketing
expenses increased in the quarters ended September 30, 1998 and December 31,
1998 due to an increase in the number of direct sales staff in North America and
the expansion of sales operations in Germany, Belgium and The Netherlands. Sales
and marketing expenses further increased in the quarter ended December 31, 1998
with the expansion of sales operations in Hong Kong, Singapore and Taiwan. Sales
and marketing expenses increased in the quarters ended March 31, 1999 and June
30, 1999 due to increases in salaries, the number of direct sales personnel and
sales commissions and incentives paid in the quarter. Research and development
expenses increased in the quarters ended March 31, 1999 and June 30, 1999 due to
an increase in personnel and the creation of a performance and tuning laboratory
which resulted in increased depreciation and equipment lease costs.

General and administrative expenses decreased during the quarter ended
March 31, 1998 as employees were assigned to other departments as marketing,
sales and research and development activities increased. General and
administrative expenses decreased further in the quarter ended June 30, 1998 due
to a decrease in the provision for doubtful accounts and decreases in travel
expenses. General and administrative expenses increased in the quarter ended
December 31, 1998 due to increases in personnel and contracting fees and an
increase in the provision for doubtful accounts.

Subsequent to the completion of SilverStream's equity financing in late
1997, other income, net generally decreased as cash balances declined until the
quarter following an additional equity financing in March 1999. Interest expense
has generally decreased since the quarter ended June 30, 1998 as equipment term
loans were paid down. In the quarter ended June 30, 1999, interest expense has
increased along with an increase in equipment loan borrowings.

As a result of our limited operating history, we cannot forecast operating
expenses based on historical results. Accordingly, we base our expenses in part
on future revenue projections. Most of these expenses are fixed in the short
term, and we may not be able to quickly reduce spending if revenue is lower than
we have projected. Our ability to forecast accurately our quarterly revenue is
limited due to the long sales and deployment cycle of our software products,
which makes it difficult to predict the quarter in which license sales will
occur, and the early nature of the market for application servers. If our
revenue does not meet projections, our business, operating results and financial
condition could be materially adversely affected and net losses in a given
quarter would be even greater than expected.

We plan to increase our operating expenses to expand sales and marketing
operations, develop new distribution channels, fund greater levels of research
and development, broaden professional services, expand our facilities and
support and improve operational and financial systems. If our revenue does not

26
<PAGE> 28

increase along with these expenses, our business, operating results and
financial condition could be materially adversely affected and net losses in a
given quarter would be even greater than expected.

Although we have a limited operating history, we believe that quarterly
operating results may experience seasonal fluctuations. For instance, quarterly
results may fluctuate based on customer calendar year budgeting cycles and slow
summer purchasing patterns in Europe.

NET OPERATING LOSSES AND TAX CREDIT CARRYFORWARDS

As of December 31, 1998, we had net operating losses and research and
development carryforwards of approximately $22.3 million and $350,000,
respectively. The net operating loss and credit carryforwards will expire at
various dates, beginning 2012, if not utilized. Under the provisions of the
Internal Revenue Code, substantial changes in our ownership may limit the amount
of net operating loss carry-forwards that could be utilized annually in the
future to offset taxable income. A valuation allowance has been established in
our financial statements to reflect the uncertainty of future taxable income
required to utilize available tax loss carryforwards and other deferred tax
assets.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have funded our operations primarily through the
private sale of our equity securities, resulting in net proceeds of
approximately $44.6 million. We have also funded our operations through
equipment financings. As of December 31, 1998, we had $4.5 million in cash, cash
equivalents and marketable securities, and $5.1 million in working capital. As
of June 30, 1999, we had $11.0 million in cash, cash equivalents and marketable
securities, and $10.4 million in working capital. We have three term loans for
amounts borrowed to finance equipment. These term loans are from the same bank
and bear interest at the bank's prime rate plus 0.5%. At June 30, 1999, we had a
total of approximately $511,000 outstanding under these term loans. We also have
a $750,000 equipment line of credit with a bank that bears interest at the
bank's prime rate plus 0.5%. At June 30, 1999, approximately $673,000 was
outstanding under this line of credit. Borrowings under these term loans and the
line of credit are secured by substantially all of our tangible assets.

Net cash used in operating activities was $8.0 million in 1997, $13.0
million in 1998 and $8.2 million in the six months ended June 30, 1999. Net cash
flows from operating activities in each period reflect increasing net losses
and, to a lesser extent, accounts receivable offset in part by increases in
accounts payable, accrued expenses and deferred revenue.

Net cash used in investing activities was $1.6 million in 1997 and $4.3
million in 1998 and net cash provided by investing activities was $2.0 million
in the six months ended June 30, 1999. Investing activities reflects purchases
of property and equipment in each period, purchases of short-term investments in
1998, and proceeds from the sale of short-term investments in the six months
ended June 30, 1999.

Net cash provided by financing activities was $23.4 million in 1997, $1.9
million in 1998 and $15.9 million in the six months ended June 30, 1999. Cash
provided by financing activities includes proceeds from the issuance of
preferred and common stock, offset by the payments on long-term debt in each
period, as well as proceeds from equipment financings in 1997, 1998 and the six
months ended June 30, 1999.

Capital expenditures were $1.6 million in 1997, $1.0 million in 1998 and
$1.1 million in the six months ended June 30, 1999. Our capital expenditures
consisted of purchases of operating resources to manage our operations,
including computer hardware and software, office furniture and equipment and
leasehold improvements. Purchases of computer equipment represent the largest
component of our capital expenditures. We expect this trend to continue as we
increase the number of employees, increase the size of our development and
quality assurance testing facilities and improve and expand our information
systems. We expect that our capital expenditures will continue to increase in
the future. Since inception, we have generally funded capital expenditures
either through the use of working capital or with equipment bank loans.

27
<PAGE> 29

We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute our business plan. As a result, we
anticipate that such operating expenses, as well as planned capital expenditures
and the expansion of our professional services organization, will constitute a
material use of our cash resources. In addition, we may utilize cash resources
to fund acquisitions of, or investments in, complementary businesses,
technologies or product lines. We believe that the net proceeds from the sale of
the common stock in this offering, together with funds generated from
operations, will be sufficient to meet our working capital requirements for at
least the next 12 months. Thereafter, we may find it necessary to obtain
additional equity or debt financing. In the event additional financing is
required, we may not be able to raise it on acceptable terms or at all.

YEAR 2000 COMPLIANCE

The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century for the year. For example, software
with date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000. This could result in failures or
the creation of erroneous results.

We have defined Year 2000 compliant as the ability to:

- Correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;

- Function according to the product documentation provided for this date
change, without changes in operation, assuming correct configuration;

- Where appropriate, respond to two-digit date input in a way that resolves
the ambiguity as to century in a disclosed, defined and predetermined
manner;

- Store and provide output of date information in ways that are unambiguous
as to century if the date elements in interfaces and data storage specify
the century; and

- Recognize year 2000 as a leap year.

The risks posed by Year 2000 issues could adversely affect our business in
a number of significant ways. Although we believe that our internally developed
systems and technology are Year 2000 compliant, our information and
non-information technology systems nevertheless could be substantially impaired
or cease to operate due to Year 2000 problems. Additionally, we rely on
information technology supplied by third parties and the resellers of our
products are heavily dependent on information technology systems and on their
own and third-party vendor systems. Year 2000 problems experienced by us or any
of these third parties could materially adversely affect our business.

We have conducted a Year 2000 readiness review for the current versions of
our products. This review included assessment, validation, testing and, where
necessary, remediation, upgrading and replacement of product versions, as well
as contingency planning. We continue to respond to customer questions about
prior versions of our products on a case-by-case basis.

Based on our review, we believe the current versions of our products are
Year 2000 compliant, when configured and used in accordance with the related
documentation, so long as the underlying operating system of the host machine
and any other software used with or in the host machine or with our products are
also Year 2000 compliant. We do not believe that versions of our products prior
to Version 2.5 are Year 2000 compliant, and we encourage users of these versions
to upgrade to the latest version. We do not provide software patches or remedial
software programs for versions of our products prior to Version 2.5. Our
customers who have update assurance agreements with us each have the right to
receive the latest version of our product. Our customers who do not have update
assurance agreements with us may purchase the latest version of our product from
us.

We have not separately tested software obtained from third parties that is
incorporated into our products. We have tested this third-party software as
incorporated in our products as part of our product

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<PAGE> 30

review. We are also seeking assurances from these third parties that this
software is Year 2000 compliant. While we believe that this third-party software
incorporated in the current versions of our products is Year 2000 compliant, we
have not been able to obtain assurances from all vendors. We plan to upgrade or
replace by year end any third-party software incorporated in our products for
which we cannot obtain adequate assurances of Year 2000 compliance from the
vendors. If we are unable to upgrade or replace this software by year end, our
products or portions of our products could fail to operate correctly. As a
result, our business and results of operations could be materially adversely
affected.

Despite testing by us and by current and potential clients, and assurances
from developers of products incorporated into our products, our products may
contain undetected errors or defects associated with Year 2000 date functions. A
third-party assurance consists of a letter to us, or a public notice, from the
third party asserting Year 2000 compliance. Errors or defects in our products
could result in delay or loss of revenue, diversion of development resources,
damage to our reputation, increased service and warranty costs, or liability to
our customers, any of which could materially adversely affect our business,
operating results, or financial condition. Some commentators have predicted
significant litigation regarding Year 2000 compliance issues. Because of the
unprecedented nature of such litigation, it is uncertain whether or to what
extent we may be affected by it.

We have initiated an assessment of our material internal information
technology systems, including both our own software products and third-party
software and hardware technology, including our accounting system, customer
service and support system and phone system. We have also initiated an
assessment of our non-information technology systems. We expect to complete
testing of our information and non-information technology systems in 1999. To
the extent that we are not able to test the technology provided by third-party
vendors, we are seeking assurances from these vendors that their systems are
Year 2000 compliant. We are not currently aware of any material operational
issues associated with preparing our internal information technology and
non-information technology systems for the Year 2000. However, we may experience
material unanticipated problems and costs caused by undetected errors or defects
in the technology used in our internal information technology and
non-information technology systems.

We do not currently have any information concerning the Year 2000
compliance status of our customers. Our current or future customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, Year 2000 issues could reduce or
eliminate the budgets that current or potential customers could have for
purchases of our products and services, or delay those purchases. As a result,
our business, results of operations or financial condition could be materially
adversely affected.

Costs related to the Year 2000 issue have been immaterial to date and we
expect total future costs to remain below $350,000, of which $100,000 has been
accrued as of June 30, 1999. We have funded our Year 2000 plan from operating
cash flows and have not separately accounted for these costs in the past. To
date, these costs have not been material. We will incur additional costs related
to the Year 2000 plan for administrative personnel to manage the project,
outside contractor assistance, technical support for our products, product
engineering and customer satisfaction. We may experience material problems and
costs with Year 2000 compliance that could adversely affect our business,
results of operations and financial condition.

While we have almost completed the process, we have not yet fully developed
a contingency plan to address all situations that may result if we are unable to
achieve Year 2000 readiness of our critical operations. We expect to complete
this contingency plan later this year. The cost of implementing such a plan may
be material. Finally, we are also subject to external forces that might
generally affect industry and commerce, such as utility or transportation
company Year 2000 compliance failure interruptions. If any of our operations
experience Year 2000 problems and we either do not have a contingency plan or
our contingency plan is inadequate to address the problems, then our business,
results of operations or financial condition could be materially adversely
affected.

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<PAGE> 31

CONVERSION TO EURO

Eleven of the 15 common member countries of the European Union have agreed
to adopt the Euro as their legal currency. We have arranged for the necessary
modifications of our internal information technology and other systems to
accommodate Euro-denominated transactions. We expect to be able to process
Euro-denominated transactions later this year. In addition, our products support
the Euro currency symbol. We are also assessing the business implications of the
conversion to the Euro, including long-term competitive implications and the
effect of market risk with respect to financial instruments. Based on the
foregoing, we do not believe the Euro will have a significant effect on our
business, financial position, cash flows or results of operations. We will
continue to assess the impact of Euro conversion issues as the applicable
accounting, tax, legal and regulatory guidance evolves.

MARKET RISK

SilverStream does not currently use derivative financial instruments. We
generally place our marketable security investments in high credit quality
instruments, primarily U.S. Government and Federal Agency obligations,
tax-exempt municipal obligations and corporate obligations with contractual
maturities of ten years or less. We do not expect any material loss from our
marketable security investments and therefore believe that our potential
interest rate exposure is not material.

Internationally, SilverStream invoices customers primarily in local
currency. We are exposed to foreign exchange rate fluctuations from when
customers are invoiced in local currency until collection occurs. We do not
currently enter into foreign currency hedge transactions. Through June 30, 1999,
foreign currency fluctuations have not had a material impact on our financial
position or results of operations.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance for accounting for costs of software products developed or
purchased for internal use, including when costs should be capitalized. The
adoption of this standard did not have a material effect on our financial
condition or results of operations.

In April 1998, AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start up
activities and organization costs to be expensed as incurred. The adoption of
this standard did not have a material effect on our financial condition or
results of operations.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"), which
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
We are presently analyzing the impact, if any, that the adoption of SFAS No. 133
will have on our financial condition or results of operations.

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<PAGE> 32

BUSINESS

OVERVIEW

SilverStream is a global provider of software and services that enable
businesses and other large organizations to create, deploy and manage software
programs for intranets, extranets and the Internet. The advantages of Web-based
technology are driving the creation of a new generation of business-transforming
software programs. These powerful Web-based programs, or Web applications, link
a broad universe of customers, vendors, employees and partners with multiple,
diverse data sources. In addition, organizations can design their applications
to include the rules that govern the operation of these applications in a manner
consistent with their business policies. These rules are known as business
logic. We believe our products and services help our customers to rapidly
develop Web applications that are scalable, reliable and secure. Using our
products and services, organizations can create and deploy robust Web
applications in diverse areas such as e-commerce, employee self-service, supply
chain management and customer service.

Our products consist of an application server, an integrated set of
development tools and enterprise data connectors. An application server is a
software product that provides access to various forms of electronic information
and communicates, usually in the form of a Web application, with the computers
of users accessing the information. The SilverStream Application Server tightly
integrates data sources, business logic and presentation of content to the user.
Using our Application Server, our customers can seamlessly access information
and data from diverse sources. Our products allow the business logic to be
maintained centrally and therefore easily changed and instantly implemented. The
SilverStream Application Server maintains the presentation, or look and feel, of
the application centrally and presents content to the user locally, without the
need to install application software on the user's remote computer. We believe
our development tools shorten the development time and simplify the development
process required to build complex Web applications. Our enterprise data
connectors facilitate access to data sources associated with some third-party
business applications, such as inventory or employee information systems. We
also offer comprehensive application engineering, implementation, training and
support services to help ensure the successful development and implementation of
Web applications by our customers.

INDUSTRY BACKGROUND

During the last 40 years, computer-based business applications have evolved
through three fundamental architectures: mainframe, client/server, and, now,
Web-based computing. The introduction of each of these architectures has created
opportunities to develop new applications for businesses. Business application
computing began with the mainframe, which enabled centralized control of these
applications, but gave limited access to users. The development of personal
computers and the widespread adoption of local area networks provided the
foundation for client/server computing, which gave more users greater access to
information and applications, but sacrificed centralized control.

Web-based computing combines the benefits of prior computing architectures
with far greater accessibility for networked, mobile and remote users. Today,
organizations are extending their enterprises by using the Internet to connect
their customers, vendors, employees and partners. To link their constituencies
across these extended enterprises, organizations are creating Web applications
that enable the dynamic delivery of information and transactional capabilities.
The increasing use of Web-based computing by organizations reflects the ability
of these powerful Web applications to fundamentally transform the way these
organizations operate. Application servers enable organizations to create,
deploy and manage these Web applications. Based on information provided to
SilverStream, we believe that the market for application server software will
grow from $412 million in 1998 to $2.2 billion by 2002.
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<PAGE> 33

Organizations often employ Web applications to conduct "e-business," which
refers to business-to-business, business-to-employee and business-to-consumer
transactions and communications conducted through the use of Internet
technology. These organizations recognize that if they are able to offer
easy-to-access, compelling, real-time applications as a means of transacting
business, they can create closer and more enduring business relationships, new
efficiencies and significant competitive and strategic advantages. As a result
of these benefits, the e-business market is large and growing rapidly. Based on
information provided to SilverStream, we believe that Internet-based
business-to-business trade, the subset of e-business that encompasses the trade
of goods and services in which the final order is placed over the Internet, will
grow from $43 billion in 1998 to over $1 trillion by 2003.

In order to compete in this dynamic e-business environment, organizations
need comprehensive, integrated solutions that enable the creation of powerful
Web-based applications, shorten the development time for initial deployment and
allow rapid updates and changes. To capitalize on the new opportunities afforded
by Web applications, organizations must overcome several challenges:

<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
CHALLENGE CUSTOMER NEED
- --------------------------------------------------------------------------------------------------------
Data stored in multiple diverse data - Ability to aggregate and manipulate data from
sources multiple diverse sources
- Ability to present seamless, easy-to-use interface
to data
Heterogeneous, incompatible legacy - Web development programs based on generally
software applications and computer accepted industry standards
platforms - Interoperability of Web applications among legacy
applications and platforms
- Preservation of investment in pre-existing, or
legacy, resources
Availability of business-critical Web - Rapid response time for users
applications - Secure, controlled access
- Reliable performance and up time
Accessibility by unknown and unpredictable - Scalability
user community - Compatibility with various popular user interfaces
Ability to manage and update Web - Centralized business logic
applications - Centralized command and control functionality
Development time in an environment with - Integrated, powerful and easy-to-use development
limited information technology resources environment
- Rapid development, deployment and modification of
Web applications
- --------------------------------------------------------------------------------------------------------
</TABLE>

To meet these challenges, organizations have been required to use multiple
development tools, programming languages and applications from different
vendors. As a result, organizations have typically had to rely on custom
programming and complex integration activities to develop their Web
applications, which have often been difficult and expensive to create, deploy
and manage.

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<PAGE> 34

THE SILVERSTREAM SOLUTION

SilverStream is a global provider of software and services that enable
businesses and other large organizations to create, deploy and manage software
programs for intranets, extranets and the Internet. Organizations use our
products for such diverse Web applications as e-commerce, employee self-service,
supply chain management and customer service. We believe our products and
services provide the following benefits:

Enable Creation and Deployment of Business-Focused Web
Applications. Business-focused Web applications enable the dynamic delivery of
information and transactional capabilities to a broad group of users. Our
products enable large organizations to manage scalable, reliable and secure Web
applications and address the unpredictable traffic volumes and patterns and
other challenges faced by Web applications. By addressing performance,
connectivity and security issues, our products allow customers to focus their
resources on the business elements of their Web applications such as reaching
new customers, developing new businesses, providing superior customer service,
shortening supply cycles and improving the flow of information.

Extend Reach of Applications and Simplify Administration. The SilverStream
Application Server allows organizations to leverage the advantages of thin
client computing, which eliminates the need for application software to be
installed on the user's computer. Our Application Server allows users to access
Web applications through common, easy-to-use Web browsers and other graphical
interfaces. The central location of Web applications permits organizations to
rapidly modify and deploy applications, enabling organizations to respond
quickly to evolving business requirements. These benefits allow organizations to
extend Web applications to a broader audience and assist these organizations in
reducing their administrative and maintenance costs.

Enable Creation of Applications that Access Multiple Information
Sources. The existence of diverse systems, information and data sources often
results in stand-alone applications that are unable to interact with one
another. SilverStream's products allow Web applications to access information
and data seamlessly from various sources, such as databases, software
applications that run on mainframe computers, and manufacturing, accounting,
inventory, purchasing and document management systems. By using our products,
customers can focus on the design and functionality of strategic Web
applications to create comprehensive solutions while preserving their
investments in legacy systems.

Reduce the Complexity of Developing Web Applications. SilverStream's
integrated set of development tools provide a common development environment and
a consistent look and feel that span multiple, diverse technologies, such as the
language used to describe Web pages known as Hyper-Text Markup Language and
commonly referred to as HTML, a widely used programming language known as Java,
and reusable software objects. We provide a consistent development interface
that is familiar to application developers and we offer powerful development
functionality. Our products and related consulting, education and support
services enhance the productivity of Web application developers, allowing our
customers to leverage the existing capabilities of their development staff in an
environment where skilled Web application developers are in short supply.

STRATEGY

Our objective is to enhance our position as a global provider of
application server software and related products and services. To achieve this
goal, we are pursuing the following strategies:

Capture Emerging Market Opportunity. The market for Web-based application
servers is relatively new. We believe that it is important to reach customers at
an early stage of their adoption of Web technology. We intend to expand our
customer base by seeding a large number of accounts with our products and
offering a range of services to help ensure that initial implementations are
successful. We plan to leverage these initial successes by selling additional
application servers as customers expand their initial deployments and develop
new Web applications.

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<PAGE> 35

Extend Technology Leadership. We intend to enhance our leadership position
by increasing the performance, functionality and ease of use of our Application
Server and by integrating new technologies into our products. We will continue
to devote substantial resources to the enhancement of our application server
software. The next release of our Application Server, Version 3.0, is expected
to include improvements to the programming environment as well as support for
computing standards such as Enterprise JavaBeans (EJB) and Java2, and
third-party development tools such as Inprise's JBuilder and Symantec's Visual
Cafe. We intend to leverage our core technology by developing and selling
additional complementary products. In early 1999, we introduced our Enterprise
Data Connectors, which facilitate connections to popular business applications
such as SAP, Lotus Notes and PeopleSoft.

Maintain Commitment to Generally Accepted Industry Standards and
Interoperability. We plan to continue to support generally accepted industry
standards in our Application Server to facilitate interoperability with major
databases, operating systems, network protocols and hardware platforms. Our
Application Server currently supports standards for programming languages such
as Hyper-Text Markup Language and Java, as well as standards for communication
protocols, security mechanisms, and directory and database access. By supporting
generally accepted standards, we are able to market our products to a broad
range of customers who can then choose among the hardware, software and
networking technologies that best serve their needs without sacrificing
performance, functionality or flexibility.

Leverage Professional Services Capabilities. As Web-based technologies
have become increasingly important to our customers, there has been increased
demand for comprehensive service offerings. By offering our clients a full range
of professional services on a global basis, we promote the rapid success of
customer projects, creating significant opportunities to sell additional
software licenses to our customers. We intend to increase the size of our
service organization worldwide. In addition, we intend to augment our service
offerings by developing and strengthening our strategic relationships with
systems integrators and consultants.

Expand Worldwide Sales Efforts. To expand our sales to both new and
existing customers, we plan to continue to pursue a multi-channel distribution
strategy that includes both our direct sales force and relationships with
independent software vendors, value-added resellers and consulting partners. We
currently have ten offices throughout North America and plan to continue to
expand our North American sales staff. We also plan to continue expansion of our
international presence by establishing additional overseas offices, adding
direct sales personnel and increasing our indirect sales and services channels.
We currently have seven sales offices in Europe and three in Asia. Our
international sales accounted for approximately 27% and 33% of our total revenue
in 1998 and the first six months of 1999, respectively.

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<PAGE> 36

PRODUCTS AND SERVICES

PRODUCTS

Our product offerings are summarized below:

<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION SHIPMENT DATES
- --------------------------------------------------------------------------------------------------------

Application Server Application server for the creation, deployment and Version 2.5 shipped in
management of Web applications. May 1999. First
version shipped in
Available for Windows NT, Solaris or HP-UX November 1997.
operating systems.
Licensed on a per processor basis for unlimited
users with no per seat or per connection charges.

Single Developer A complete set of development and testing software Version 2.5 shipped in
Pack products for creating Web applications integrated May 1999. First
Group Developer Pack with the SilverStream Application Server. version shipped in
(5 or 10 Developers) November 1997.
The Single Developer Pack is for standalone
development on a single Windows NT machine.
The Group Developer Packs are for teams of up to 5
or 10 developers to work both independently on
their own computers and as a group. Includes 5 or
10 Single Developer Packs and a 5- or 10-user
SilverStream Application Server for group testing
on Windows NT, Solaris or HP-UX operating
systems.
Each of the Developer Packs is priced and sold
separately.

Enterprise Data Products that provide connections to SAP, Lotus First shipped in April
Connectors Notes and PeopleSoft applications. 1999.
Each Enterprise Data Connector is priced and sold
separately.
- --------------------------------------------------------------------------------------------------------
</TABLE>

SERVICES

As part of our ongoing commitment to provide a complete solution for our
customers, we offer comprehensive consulting, education and technical support
services that complement our product offerings. As of July 31, 1999, our
services organization comprised 73 professionals.

To complement our service organization, we train and promote a broad
network of SilverStream partners, ranging from international consulting firms to
local consultants that offer consulting, education and technical support
services. Our customers are encouraged to engage consultants, instructors and
developers whose proficiency with our products has been certified by us and who
have been designated Certified SilverStream Developers or Certified SilverStream
Field Application Engineers.

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<PAGE> 37

Consulting Services. We provide application engineering and implementation
services to assist our customers in developing and implementing Web applications
using our products. Consulting services include advisory, prototyping, design,
test and configuration, deployment and tuning services, and technical account
management services. We generally provide our consulting services on a time and
materials basis.

Education Services. We offer our customers and partners introductory and
advanced training in the use of our software products. Our employees as well as
Certified SilverStream Trainers offer our training classes around the world. We
price these services by course.

Technical Support Services. We believe that a high level of technical
support services is critical to our customers' success and an important
competitive advantage. We offer technical support to our customers, ranging from
dedicated on-site support personnel, to telephone support from our Burlington
and Belgium offices during normal business hours, to 24-hour on-line support
available through our Website. The pricing of our technical support services
varies according to the level of support required.

PRODUCT ARCHITECTURE

The SilverStream Application Server incorporates components and features
required to create, deploy and manage scalable and sophisticated Web
applications. The fundamental components of the architecture are shown below:

[Narrative description of graphic material omitted in electronically filed
document]
This is a detailed graphic outlining the fundamental components of the
SilverStream Application Server architecture:
1. At the bottom is a horizontal three-dimensional rectangle entitled
"Enterprise Deployment Services," which rectangle includes four boxes
entitled "Scalability," "Reliability," "Security" and "Manageability."
2. On top of the rectangle are three vertical three-dimensional rectangles:
a. The vertical rectangle on the left is entitled "Presentation Layer," and
includes two boxes entitled "HTML" and "Java"
b. The vertical rectangle in the middle is entitled "Business Logic Layer,"
and includes three boxes entitled "Distributed Objects," "Transactions"
and "Content Management"
c. The vertical rectangle on the right is entitled "Data Access Layer," and
includes two boxes entitled "Data Access Objects" and "Enterprise Data
Connectors"
3. Above the three rectangles and connected to each by thin lines is a
horizontal three-dimensional rectangle entitled "Development Tools."
4. To the left of the rectangle entitled "Presentation Layer" are two computer
icons under the title "Users." There is a two-way arrow between the rectangle
and the icons.
5. To the right of the rectangle entitled "Data Access Layer" are three
three-dimensional cylinders under the title "Data." There is a two-way arrow
between the rectangle and the cylinders.]

PRESENTATION LAYER

Presentation refers to the user interface layer of an application. This is
where the user interacts with the application by entering data, using menus and
hyperlinks, and viewing dynamically generated pages containing data and rich
content. Our products allow developers to support both Hyper-Text Markup
Language and Java graphical user interfaces. Hyper-Text Markup Language has the
advantage of quickly running in any Web browser. Java has the advantage of
providing a much richer interactive user interface that is similar to that of a
Microsoft Windows application, but requires an initial download of some
software. Typically, our customers choose to mix both technologies in a single
application, using Hyper-Text Markup Language for Internet users and Java for
intranet users who interact heavily with the application.

Hyper-Text Markup Language. The SilverStream Application Server
incorporates a powerful engine for generating dynamic Hyper-Text Markup
Language pages that contain data and rich

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<PAGE> 38

content. Developers can design their Hyper-Text Markup Language pages
either by writing industry standard Java Servlets, or using a graphical
page designer which generates Servlets automatically.

Java. The SilverStream Application Server enables the secure
development, downloading and running of graphic Java applications. Java
applications are stored centrally in the SilverStream Application Server
and are downloaded on demand to browsers on remote user computers via the
Web. Our Application Server also provides a Java application runtime called
JRunner which allows the same Java applications to run without a browser,
behaving more like a full Windows application. Our JRunner feature also
provides for the download of applications on demand, providing the feel of
a client/server application, but without requiring the application to be
installed or maintained on each remote computer.

BUSINESS LOGIC LAYER

Business logic is the set of rules that a Web-based application follows,
based on the customer's business policies. For example, in a supply-chain Web
application, business logic defines how items such as discounts, freight and
state tax are calculated, how products are re-ordered and how a customer's
credit limit is checked. In a Web-based application, it is usually desirable to
separate the business logic from the user interface. This makes it easier to
change the business logic and maintain the application.

Distributed Objects and Transactions. The SilverStream Application
Server provides a complete set of tools that allows developers to create
re-usable business objects that encapsulate their business logic. We also
provide powerful capabilities for managing transactions involving multiple
tables. In our next version of the SilverStream Application Server, Version
3.0, we intend to provide support for the industry standard Enterprise
JavaBeans version 1.1. This is intended to allow customers to distribute
objects across the network and control transactions across objects.

Content Management. In addition to its primary focus on structured
data, our Application Server also provides a set of features to manage rich
content such as product catalogs, news articles, financial research,
documents, Adobe Acrobat PDF files, graphics, and photographs. These
features include full text retrieval, file upload/download, version control
and a powerful Hyper-Text Markup Language edit control written in Java.
These features allow developers to create Web applications such as
e-commerce sites and corporate portals that combine rich content with
transactions.

DATA ACCESS LAYER

The data access layer provides connectivity to multiple disparate data
sources. The SilverStream Application Server provides high performance drivers,
using industry standard Java Database Connectivity (JDBC), for relational
databases, including Oracle, DB/2, Sybase, Microsoft SQL Server, Informix and
others. For non-relational data sources, our Application Server provides an
architecture known as data source objects. Customers, partners and consultants
can write data source objects to connect to a wide range of data sources. To
simplify the creation of data source objects, we offer our Enterprise Data
Connectors that allow customers to easily create data source objects for SAP,
Lotus Notes and PeopleSoft. Our partners offer a wide range of additional
enterprise data connectors for data sources such as CICS, MQ Series, Tuxedo, Top
End and Encina.

ENTERPRISE DEPLOYMENT SERVICES

Enterprise-class Web applications, which consist of connectivity, business
logic and presentation, require the following attributes:

Scalability. The SilverStream Application Server utilizes a number of
techniques for improving the performance of a large computer system to
deliver very high performance and throughput across multiple processors in
a single server machine. Our Application Server also offers scalability
using load-balanced clusters of servers, which allows our customers to
handle increased load simply by adding more machines to the cluster.

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<PAGE> 39

Reliability. SilverStream's advanced failover capabilities are
designed to ensure that customers' applications remain operational even
when a server fails. SilverStream's session-level failover feature enables
users to continue operations uninterrupted with seamless recovery of their
transactional data even when the server to which they were previously
connected fails.

Manageability. The SilverStream management console provides a full
interface to monitor server performance, manage clusters, database
connections, security, and other settings. SilverStream provides a standard
network management protocol to interoperate with existing enterprise
systems management software such as Tivoli's TME, Computer Associates'
Unicenter, or Hewlett-Packard's OpenView. SilverStream's Application Server
allows an application to be updated without taking the server or cluster
down.

Security. Our product provides a complete set of features for
encryption, authentication and access control that are required to create
highly secure applications. In addition to providing its own directory, our
Application Server is also able to interface to directories such as Windows
NT, NIS+ and those that are standard Lightweight Directory Access Protocol
(LDAP) compliant.

INTEGRATED DEVELOPMENT TOOLS

SilverStream provides a rich set of development tools that are tightly
integrated with the functionality provided by the SilverStream Application
Server. These include several visual designers for Hyper-Text Markup Language
pages, Java applications, business objects and content management. Also included
are a programming editor, context sensitive help, a repository, a debugger and
facilities for integrating with popular source control products. SilverStream's
integrated development tools consist of the following graphical designers:

Page Designer. SilverStream development tools allow developers to
design their Hyper-Text Markup Language pages by writing either industry
standard Java Servlets, or using SilverStream's Page Designer which creates
Servlets graphically. SilverStream's Page Designer offers a visual, object-
oriented, event-driven programming model that makes the development of
data-driven dynamic pages far easier and faster than coding them manually.
Developers drag and drop elements onto a page from a tool palette, set
properties using a property sheet, and then define the behavior of the
elements by writing Java code that is executed at the server whenever an
event is generated (for example, when a user clicks a button). Unlike
competing alternatives that embed scripts inside Hyper-Text Markup Language
pages, this technique leverages the existing skills of developers who have
worked with products such as PowerBuilder or Visual Basic.

Form and View Designers. SilverStream provides a development
environment for generating graphic Java applications. The development
environment is similar to the Page Designer, with a common look and feel.
The Form Designer allows developers to build graphical forms, typically
displaying data. The View Designer is frequently used in conjunction with
the Form Designer to display data in a multi-row presentation.

Object Designer. The Object Designer allows developers to create
business logic written in Java, that will typically reside on the
application server and may be reused by other applications. These objects
may use any of the services offered by the SilverStream Application Server,
including connecting to data sources. They may also be triggered by events
like the receipt of an e-mail or a request to modify a specific piece of
data.

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<PAGE> 40

CUSTOMERS

Our customer base spans multiple industry segments. The following is a
representative list of our customers who have purchased a SilverStream
Application Server license. We do not intend the identification of these
customers to imply that these customers are actively endorsing or promoting our
products.

<TABLE>
<S> <C> <C>
COMMUNICATION MANUFACTURING TECHNOLOGY
Ameritech Fuji Photo Advanced Micro
MCI WorldCom Owens Illinois Devices
Raytheon Hewlett-Packard
Samsung Siebel Systems
StorageTek

MEDIA ENERGY TRANSPORTATION
TCI Communications ARCO Federal Express
The Walt Disney Conoco Southwest Airlines
Company Enron UPS

FINANCIAL SERVICES GOVERNMENT OTHER
Bankers Trust Federal Home Loan Bank AAA
Bank One of Atlanta Dupont
Citicorp Federal Reserve Bank InterContinental Hotels
J.P. Morgan of New York Polaroid
The Chicago Stock Internal Revenue Red Herring
Exchange Service Sears, Roebuck
Transamerica The United States Army

PHARMACEUTICAL
Johnson & Johnson
Pfizer
</TABLE>

Software license revenue from the customers listed above represented
approximately 23% of SilverStream's total software license revenue for the year
ended December 31, 1998 and approximately 10% of SilverStream's total software
license revenue for the six-month period ended June 30, 1999. We derive our
software license revenue from the sale of software product licenses. We do not
charge our customers based on frequency of use of our products.

The following case studies illustrate the challenges faced by
representative customers in deploying business applications and the benefits
derived from developing and deploying these applications using our Application
Server.

GLOBAL TRAVEL COMPANY

The travel agency industry has recently undergone changes due to reduced
commissions from airlines, hotels and rental car companies. To remain
competitive, a global travel company needed to be able to create rapidly many
travel product offerings while providing superior service through travel
agencies and via direct, self-service over the Internet. The company's
requirements included the maintenance of customer profiles in a relational
database, as well as access to a diverse set of airline, hotel and other
reservation systems. Travel agent experts needed to be able to perform the
complex transactions required to plan multi-leg trips, including air travel,
hotel, car rental and dinner and theater reservations.

The travel company selected the SilverStream Application Server and
deployed its Web-based application in two phases. In the first phase, the
company rolled out the application to its affiliated travel agencies.
SilverStream's connectivity features were used to maintain customer profiles and
access travel services. In the second phase, the company used SilverStream's
Hyper-Text Markup Language capability

39
<PAGE> 41

to provide a browser-based interface to customers via the Internet. Because the
company is able to provide access to a diverse set of reservation systems and
offer self-service to customers, we believe the SilverStream Application Server
enabled the company to provide more efficient processing by travel agents and
better customer service. Because the company is able to rapidly create travel
product offerings by using the SilverStream Application Server, we believe the
company is able to meet changing market demands and to serve its customers more
efficiently.

NATIONAL INSURANCE PROVIDER

An insurance company provides coverage through a network of thousands of
geographically dispersed independent agents. A claim goes through a complex
process inside the company, during which critical information is available to
agents only on a limited basis by telephone inquiry. The customer wanted to
streamline its claims-handling process by providing its agents direct access to
data and information, including daily claim status, claims adjusters' notes and
monthly account activity. However, the claim and account information was stored
in separate relational databases and agents had widely differing hardware and
software packages and platforms.

The customer used the SilverStream Application Server to build and deploy
an application in approximately five months. Agents now have broad access to
relevant, up-to-date information about individual claims and accounts, including
powerful search capabilities. The insurance company is enhancing the application
to give each agent access to all information and services relevant to such
agent's relationship with the company. Because the customer is able to allow its
nationwide network of agents to access relevant data and information easily and
securely, regardless of the user's computer and networking system and without
local administration, we believe the SilverStream Application Server enabled the
customer to reduce inefficiencies in its claims-handling process.

GLOBAL SUPPLIER OF COMPUTER STORAGE DEVICES

A supplier of computer storage devices provides a constantly changing
selection of thousands of sophisticated technology products. These products are
sold by hundreds of direct employees and thousands of distributors worldwide.
The answers to the distributors' many detailed questions were typically hard to
find or unavailable when needed. As part of a strategic growth initiative, the
customer needed to build a repository of support and marketing information that
could be easily accessed across the globe. The source of this information was
hundreds of sales and service employees, who created information about the
products in a broad variety of ways, ranging from data sheets to video clips.
The customer needed an application that would let employee "content creators"
easily place information in a repository in whatever form they wished and then
have that information easily accessible by distributors worldwide. These
distributors had a variety of abilities and had a diverse set of platforms.

The solution was to use SilverStream's products to build a content-rich,
intranet/extranet application. Employees can use an intranet application to
create and manage content. Using a thin Java client, that requires no local
administration, employees are able to find and select "documents," annotate
them, associate them with products and attach any kind of file, including
Microsoft Word or PowerPoint files or even video clips. Documents can be
prioritized, versioned and secured to limit access. The intranet application
also provides usage reports and allows for the specification of expiration
dates. Distributors, using a standard browser, can log in and search for desired
topics. Search requests can be extremely complex, using a variety of criteria,
and may return multiple, prioritized answers. The attached files may then be
viewed or downloaded. Because of these features, we believe this new repository
efficiently links a community of information providers and distributors with a
database that is expected to grow beyond a terabyte in the near future.

40
<PAGE> 42

SALES, MARKETING AND DISTRIBUTION

We market our products through a worldwide combination of a direct sales
force, partners and distributors. As of July 31, 1999, our sales and marketing
organization consisted of 104 employees, of which:

- 32 are located in our headquarters in Burlington, Massachusetts,

- 30 are located in sales offices in North America, and

- 42 are located in sales offices in the United Kingdom, The Netherlands,
Belgium, Germany, Norway, the Czech Republic, France, Hong Kong,
Singapore and Taiwan.

We have three types of partners that either sell, or help us sell, our
products:

- Value added reseller partners, or VAR partners, resell our products to
customers;

- Consulting partners introduce new potential customers to us and provide
consulting services to our customers; and

- Independent software vendor partners, or ISV partners, use our products
to create their own software products.

We enter into partnership agreements with our partners which include some
or all of the following terms and conditions:

- Term of agreement is generally one year with subsequent one-year
renewals;

- Grant of license to demonstrate, use and resell SilverStream products;

- Grant of license to include SilverStream products in partner products;

- Grant of license to use SilverStream trademarks;

- Payment to SilverStream of initial and annual partnership fees; and

- SilverStream product discounts for value added resellers and independent
software vendors.

We derive revenue from our partners as follows:

<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE APPROXIMATE
PERCENTAGE OF AGGREGATE PERCENTAGE OF
APPROXIMATE AGGREGATE TOTAL REVENUE REVENUE FOR TOTAL REVENUE FOR
TOTAL NUMBER REVENUE FOR FOR YEAR ENDED SIX MONTHS SIX MONTHS
AS OF YEAR ENDED DECEMBER 31, ENDED ENDED
TYPE OF PARTNER JUNE 30, 1999 DECEMBER 31, 1998 1998 JUNE 30, 1999 JUNE 30, 1999
--------------- ------------- --------------------- -------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
VAR partners.......... 86 $1,858,000 27% $1,552,000 20%
Consulting partners... 186 666,000 10 362,000 5
ISV partners.......... 27 123,000 2 502,000 6
</TABLE>

As of June 30, 1999, we had approximately 300 partners.

Our products are also sold in Japan, South Africa, South America and Spain
through distributors who sell our products and provide consulting, training and
educational courses to customers in those countries. In Japan, our distributor
has translated our products into Kanji. Our products allow customers to create
applications in different languages.

We also have marketing relationships with other companies who have products
that work well with our products. Our SilverNet technology partners are
comprised of companies who have created commercial products which complement our
products or who market and sell these complementary products. As of June 30,
1999, we had 62 SilverNet technology partners, including Actuate, IBM,
PeopleSoft, Rational and SAP. We work with SilverNet partners to help make it
easier for customers to use our products with the SilverNet partners' products.

41
<PAGE> 43

Our marketing programs are designed to attract potential customers so that
we, or one of our partners, can demonstrate our products directly to potential
customers. We hold many seminars, some with our partners, send out direct mail
and attend trade shows, and provide information about our company and our
products on our Web site. We also conduct public relations activities, including
interviews and demonstrations for industry analysts and product reviewers.

RESEARCH AND DEVELOPMENT

As of July 31, 1999, we had 52 employees responsible for product
development, quality assurance and documentation. Our research and development
organization is divided into five teams: server, client, application
development, quality assurance and documentation.

We are very focused on enhancing the scalability, performance and
reliability of our Application Server. Our quality assurance department has a
dedicated performance and tuning laboratory designed to improve the performance
of customers' Web-based applications. This laboratory has the ability to
simulate up to 12,000 simultaneous users communicating with SilverStream
Application Servers running on as many as 24 processors on a dedicated 100
megabits per second network.

We have made, and will continue to make, a substantial investment in
research and development. Research and development expenses were $2.6 million in
1997, $5.1 million in 1998 and $3.3 million in the first six months of 1999. All
of our software development costs have been expensed as incurred.

While we have developed, and expect to continue to develop, most new
products and enhancements to existing products internally, we have licensed
software technology from third parties.

COMPETITION

The market for application server software products is intensely
competitive, subject to rapid technological change and significantly affected by
new product introductions and other market activities of industry participants.
We expect competition to persist and intensify in the future. We encounter
current or potential competition from a number of sources, including:

- Vendors of application server products and services;

- Internally developed applications; and

- Companies that market business application software.

Our Application Server competes with application server products from other
vendors, including: IBM's WebSphere and Domino server solutions; Sun
Microsystems' NetDynamics and Netscape Application Server; Microsoft's Internet
Information Server, Active Server pages, Transaction Server and COM technology;
BEA Systems' Weblogic and Oracle's Application Server. In addition, we compete
with various methods of application distribution and management, including the
web browser, and with application server vendors and others that have introduced
software distribution capabilities into their products.

Potential competitors may bundle their products or incorporate an
application server component into existing products in a manner that discourages
users from purchasing our products. Furthermore, new competitors or alliances
among competitors may emerge and rapidly acquire significant market share. Our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements than we can.

We believe the primary factors upon which we compete with vendors of
application server software and services are:

- Product performance and functionality;

- Ease of use of our products;

- Ability of our products to handle large volumes of users and
transactions;
42
<PAGE> 44

- The extent to which our products adhere to industry standards;

- The ability of our products to run on computer hardware from various
manufacturers;

- The ability of our products to connect to various data sources;

- Price; and

- Customer service.

In addition, we believe our products and services provide shorter
development time and lower cost of ownership in comparison to in-house
development efforts.

PROPRIETARY RIGHTS AND LICENSING

Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely on a combination of
patent, trademark, trade secret and copyright laws and contractual restrictions
to protect the proprietary aspects of our technology. These legal protections
afford only limited protection for our technology. We presently have five patent
applications pending in the United States. We cannot predict whether any of
these applications will result in any issued patents or, if patents are issued,
any meaningful protection. We seek to protect our source code for our software,
documentation and other written materials under trade secret and copyright laws.
We license our software pursuant to "shrinkwrap" and, in some cases, signed
license agreements, which impose restrictions on the licensee's ability to
utilize the software. Finally, we seek to limit disclosure of our intellectual
property by requiring employees and consultants with access to our proprietary
information to execute confidentiality agreements with us and by restricting
access to our source code. Due to rapid technological change, we believe that
factors such as the technological and creative skills of our personnel, new
product developments and enhancements to existing products are more important
than the various legal protections of our technology to establishing and
maintaining a technology leadership position.

Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and while we are unable to determine the extent to which piracy of our
software exists, software piracy can be expected to be a persistent problem. In
addition, the laws of many countries do not protect our proprietary rights to as
great an extent as do the laws of the United States. Litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of others
or to defend against claims of infringement or invalidity. Any such resulting
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our business, operating results and
financial condition. There can be no assurance that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop similar technology. Any failure by us to meaningfully
protect our property could have a material adverse effect on our business,
operating results and financial condition.

There can be no assurance that third parties will not claim infringement
with respect to our current or future products. We expect that developers of
Web-based application software products will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and as the functionality of products in different segments of the
software industry increasingly overlaps. Any such claims, with or without merit,
could be time-consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
us to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to us or at
all. A successful infringement claim against us and our failure or inability to
license the infringed rights or develop or license technology with comparable
functionality could have a material adverse effect on our business, financial
condition and operating results.

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<PAGE> 45

We integrate third-party software into our products. This third-party
software may not continue to be available on commercially reasonable terms. The
third-party software that we license includes text search software, a database,
a Java compiler, a Java runtime environment, an internet browser and an object
request broker. These licensed components enhance features in our products but
are not critical to the operation of our products. Some of these components are
available, at no charge, to our customers from the supplier but are included in
our products for customer convenience. In cases where the licensed component
provides an operating feature, we believe there are alternative suppliers for
the technology who may license their software to us. We also license encryption
technology from RSA Data Security under a perpetual agreement that is terminable
by either party upon default by the other. RSA is the sole source of this
technology and therefore the loss of this license would seriously harm our
business. In addition, if we cannot maintain licenses to the other third-party
software included in our products, distribution of our products could be delayed
until equivalent software could be developed or licensed and integrated into our
products, which could materially adversely affect our business, operating
results and financial condition.

EMPLOYEES

As of July 31, 1999, we had a total of 252 employees of whom:

- 52 were in research and development;

- 104 were in sales and marketing;

- 73 were in customer service and support; and

- 23 were in finance and administration.

Our future success will depend in part on our ability to attract, retain
and motivate highly qualified technical and management personnel, for whom
competition is intense. Our employees are not represented by any collective
bargaining unit. We believe our relations with our employees are good.

PROPERTIES

Our headquarters are currently located in a leased facility in Burlington,
Massachusetts, consisting of approximately 40,000 square feet under a sublease
that expires in July 2000. We have also leased offices for sales and support
personnel in North America, Europe and Asia.

LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.

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<PAGE> 46

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of SilverStream and their ages and
positions as of May 31, 1999 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
David R. Skok............................. 43 Chairman of the Board of Directors
David A. Litwack.......................... 52 President, Chief Executive Officer and Director
Peter E. Brumme........................... 49 Executive Vice President, Sales and Marketing
Craig A. Dynes............................ Vice President, Chief Financial Officer and
44 Treasurer
Arnold S. Epstein......................... 49 Vice President and Chief Technology Officer
Diane Gordon.............................. 40 Vice President, Customer Services
John W. Pearce............................ 45 Vice President, International Operations
Kim A. Sheffield.......................... 43 Vice President, Research and Development
Timothy Barrows........................... 42 Director
Richard A. D'Amore........................ 45 Director
Paul J. Severino.......................... 52 Director
</TABLE>

David R. Skok founded SilverStream and has served as our Chairman of the
Board of Directors since our inception and as our President and Chief Executive
Officer from May 1996 to November 1996. He also served as our Treasurer from May
1996 to June 1999. Before founding SilverStream, Mr. Skok founded Watermark
Software, a document management and imaging company, and served as its President
and Chief Executive Officer from January 1993 until June 1996, following its
acquisition by FileNet. From September 1990 to December 1994, Mr. Skok also
served as Chief Executive Officer of Xionics Document Technologies, Inc., a
document imaging company. Mr. Skok also currently serves as a director of
Xionics.

David A. Litwack has served as our President and Chief Executive Officer
since May 1997, and as a member of our Board of Directors since November 1996.
Before joining SilverStream, Mr. Litwack served as Executive Vice President of
Sybase Inc., an enterprise software company, from February 1995 to May 1997 and
as President of Powersoft Corporation, a client server development tools
company, from June 1991 to its acquisition by Sybase in February 1995. In
addition, Mr. Litwack is a director of Object Design, Inc., a data management
company.

Peter E. Brumme has served as our Executive Vice President, Sales and
Marketing since January 1999 and was our Chief Operating Officer from January
1997 to December 1998. Prior to joining SilverStream, Mr. Brumme served as Chief
Operating Officer of Watermark from July 1995 to December 1996 and as Senior
Vice President, Sales and Marketing from April 1993 to June 1995.

Craig A. Dynes has served as our Vice President and Chief Financial Officer
since July 1997 and as our Treasurer since June 1999. Prior to joining
SilverStream, Mr. Dynes served as Vice President of Finance, Products Group, of
Sybase from October 1996 to June 1997. Mr. Dynes served as Vice President of
Finance and Operations and Chief Financial Officer of Powersoft from August 1995
to October 1996, and as Chief Financial Officer of Watcom, a compiler software
company, from 1992 until July 1995, following its acquisition by Powersoft.

Arnold S. Epstein has served as our Vice President and Chief Technology
Officer since July 1996. Prior to joining SilverStream, Mr. Epstein served as
Chief Technical Officer of Watermark from March 1993 to June 1996.

Diane Gordon has served as our Vice President, Customer Services since
January 1999. Prior to joining SilverStream, Ms. Gordon served as Vice President
of Operations of Gartner Learning, an independent research company, from March
1997 to September 1998. From March 1991 to February 1997, Ms. Gordon served as
Director of Professional Services of Progress Software, a software company.

45
<PAGE> 47

John W. Pearce has served as our Vice President, International Sales since
January 1997. He also served as our Chief Financial Officer from July 1996 to
July 1997. Prior to joining SilverStream, Mr. Pearce served as Vice President,
International Sales and Chief Financial Officer of Watermark from January 1993
to June 1996.

Kim A. Sheffield has served as our Vice President, Research and Development
since July 1996. Prior to joining SilverStream, Mr. Sheffield served as Vice
President of Research & Development, Powersoft Division of Sybase from February
1995 to June 1996. From 1988 to February 1995, Mr. Sheffield served in various
capacities with Powersoft including as Vice President of Engineering from July
1994 to February 1995.

Timothy Barrows has served as a director of SilverStream since July 1996.
Mr. Barrows has been a General Partner of Matrix Partners since 1985.

Richard A. D'Amore has served as a director of SilverStream since July
1996. Mr. D'Amore has been a General Partner of North Bridge Venture Partners
since 1994. He is a director of Solectron Corporation, Veeco Instruments Inc.
and Xionics.

Paul J. Severino has served as a director of SilverStream since May 1999.
Mr. Severino has served as the Chairman of NetCentric Corporation, a provider of
Internet protocol telephony applications, since August 1997 and Chief Executive
Officer since February 1998. Prior to that, he served as NetCentric's Acting
Chief Executive Officer from August 1997 to February 1998. He is a founder of
Wellfleet Communications, Inc., a supplier of internetworking communication
products, where he served as Chairman of the Board from October 1986 to October
1994. From October 1994 to October 1996, he served as Chairman of BayNetworks
after its formation from the merger of Wellfleet and Synoptics. Mr. Severino is
also a director of Media 100 Inc. and MTDC (Massachusetts Telecommunications
Development Corporation).

Each executive officer serves at the discretion of the Board of Directors
and holds office until his or her successor is elected and qualified or until
his or her earlier resignation or removal. There are no family relationships
among any of the directors or executive officers of SilverStream. Each of the
directors serves on the Board of Directors pursuant to the terms of an agreement
that will terminate upon the closing of this offering.

ELECTION OF DIRECTORS

Following this offering, the Board of Directors will be divided into three
classes, each of whose members will serve for a staggered three-year term.
Messrs. Skok and Barrows will serve in the class whose term expires in 2000;
Messrs. Litwack and D'Amore will serve in the class whose term expires in 2001;
and Mr. Severino will serve in the class whose term expires in 2002. Upon the
expiration of the term of a class of directors, directors in such class will be
elected for three-year terms at the annual meeting of stockholders in the year
in which such term expires. This classification of the Board of Directors may
have the effect of delaying or preventing changes in control or management of
SilverStream.

COMPENSATION OF DIRECTORS

We reimburse directors for reasonable out-of-pocket expenses incurred in
attending meetings of the Board of Directors. We may, in our discretion, grant
stock options and other equity awards to our non-employee directors from time to
time pursuant to our 1997 Stock Incentive Plan. On April 30, 1999, we granted to
Paul J. Severino an option to purchase 25,000 shares of common stock at a per
share exercise price of $8.00 under our 1997 Stock Incentive Plan in connection
with his joining our Board. Mr. Severino's option was fully vested upon grant.

BOARD COMMITTEES

The Board of Directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee, which consists of Messrs. Barrows,
D'Amore and Severino, reviews executive
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<PAGE> 48

salaries, administers our bonus, incentive compensation and stock plans, and
approves the salaries and other benefits of our executive officers. In addition,
the Compensation Committee consults with our management regarding our benefit
plans and compensation policies and practices.

The Audit Committee, which consists of Messrs. Barrows, D'Amore and
Severino, reviews the professional services provided by our independent
accountants, the independence of such accountants from our management, our
annual financial statements and our system of internal accounting controls. The
Audit Committee also reviews such other matters with respect to our accounting,
auditing and financial reporting practices and procedures as it may find
appropriate or may be brought to its attention.

EXECUTIVE COMPENSATION

The table below sets forth, for the year ended December 31, 1998, the cash
compensation earned by (1) our Chairman of the Board, (2) our Chief Executive
Officer and (3) each of the four most highly compensated other executive
officers who received annual compensation in excess of $100,000, collectively
referred to below as the Named Executive Officers. In accordance with the rules
of the Securities and Exchange Commission the compensation set forth in the
table below does not include medical, group life or other benefits which are
available to all of our salaried employees, and perquisites and other benefits,
securities or property which do not exceed the lesser of $50,000 or 10% of the
person's salary and bonus shown in the table. In the table below, columns
required by the regulations of the Securities and Exchange Commission have been
omitted where no information was required to be disclosed under those columns.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)
- --------------------------- --------- --------
<S> <C> <C>
David R. Skok............................................... $120,000 $ 0
Chairman of the Board of Directors
David A. Litwack............................................ 120,000 0
President and Chief Executive Officer
Peter E. Brumme............................................. 125,000 20,000
Executive Vice President, Sales and Marketing
John W. Pearce.............................................. 125,000 20,000
Vice President, International Operations
Kim A. Sheffield............................................ 120,000 20,000
Vice President, Research and Development
Arnold S. Epstein........................................... 120,000 20,000
Vice President and Chief Technology Officer
</TABLE>

The Board of Directors awarded the cash bonuses to the members of senior
management as identified above in recognition of individual performance and the
achievement of company goals in 1998.

STOCK OPTIONS

We have not granted any stock options to our Named Executive Officers.

BENEFIT PLANS

1997 Stock Incentive Plan. Our 1997 Stock Incentive Plan provides for the
issuance of up to 3,500,000 shares of our common stock. The 1997 Stock Incentive
Plan provides for the grant of incentive stock options intended to qualify under
Section 422 of the Internal Revenue Code, nonstatutory stock options, restricted
stock awards and other stock-based awards to our officers, employees, directors,
consultants and advisors.

47
<PAGE> 49

Our Board of Directors has authorized the Compensation Committee to
administer the 1997 Stock Incentive Plan. The Compensation Committee selects the
recipients of awards and determines:

- The number of shares of common stock covered by options and the dates
upon which such options become exercisable;

- The exercise price of options;

- The duration of options; and

- The number of shares of common stock subject to any restricted stock or
other stock-based awards and the terms and conditions of such awards,
including the conditions for repurchase, issue price and repurchase
price.

In the event of a merger, liquidation or other acquisition event, our Board
of Directors is authorized to provide for outstanding awards to be assumed or
substituted for by the acquiror. If the acquiror refuses to assume or substitute
for outstanding awards, they will accelerate and become fully exercisable and
free of restrictions, prior to consummation of the acquisition event.

1996 Founders Stock Incentive Plan. Our 1996 Founders Stock Incentive Plan
authorized the issuance of up to 3,877,000 shares of our common stock. From May
1996 to April 1997, an aggregate of 3,775,031 shares of common stock was issued
under the plan pursuant to founders stock restriction agreements. As of July 31,
1999, an aggregate of 145,394 shares of common stock had been repurchased by
SilverStream pursuant to the terms of such agreements. No additional awards may
be made under the 1996 Founders Stock Incentive Plan.

1999 Employee Stock Purchase Plan. Our 1999 Employee Stock Purchase Plan
provides for the issuance of up to 300,000 shares of our common stock to
participating employees.

All of our employees, including directors who are employees, and all
employees of any participating subsidiaries:

- Whose customary employment is more than 20 hours per week for more than
five months in a calendar year;

- Who were employed by us prior to July 1, 1999 for the first offering
period or for subsequent offering periods, who have been employed by us
for at least three months prior to enrolling; and

- Who are employed on the first day of a designated payroll deduction
offering period

are eligible to participate in the 1999 Employee Stock Purchase Plan. Employees
who would immediately after the grant own five percent or more of the total
combined voting power or value of our stock or any subsidiary are not eligible
to participate.

To participate in the 1999 Employee Stock Purchase Plan, an employee must
authorize us to deduct from one to ten percent of his or her base pay during the
offering period. The first offering period will commence on the first date of
trading of our common stock on the Nasdaq National Market. The purchase price of
the shares for the first offering period is 85% of the initial public offering
price or the closing price per share of the common stock on the last day of the
offering period, whichever is lower. The purchase price of the shares for the
subsequent offering periods is 85% of the closing price per share of the common
stock on either the first or last day of the offering period, whichever is
lower.

401(k) Plan. Our employee savings and retirement plan is qualified under
Section 401 of the Internal Revenue Code. Our employees may elect to reduce
their current compensation by up to the statutorily prescribed annual limit and
have the amount of such reduction contributed to the 401(k) plan. We may make
matching or additional contributions to the 401(k) plan in amounts to be
determined annually by our Board of Directors.

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<PAGE> 50

CERTAIN TRANSACTIONS

PREFERRED STOCK ISSUANCES

Since our incorporation in May 1996, we have issued and sold shares of
preferred stock to the following persons and entities who are our executive
officers, directors or principal stockholders. For more detail on shares held by
these purchasers, see "Principal Stockholders" on page 51.

<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D AGGREGATE
PREFERRED PREFERRED PREFERRED PREFERRED PURCHASE
INVESTOR STOCK STOCK STOCK STOCK PRICE
- -------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
David R. Skok.............................. 930,000 159,475 56,948 52,632 $2,780,009
David A. Litwack........................... 930,000 178,238 38,185 52,632 2,715,277
Peter E. Brumme............................ -- 11,257 -- -- 60,000
John W. Pearce............................. -- 9,381 -- -- 50,001
Kim A. Sheffield........................... -- 9,381 -- -- 50,001
Arnold S. Epstein.......................... -- 11,257 -- -- 60,000
Craig A. Dynes............................. -- 9,381 -- -- 50,001
Matrix Partners IV, L.P.(1)................ 870,000 375,235 113,896 134,210 5,145,004
North Bridge Venture Partners, L.P.(2)..... 870,000 375,235 113,896 105,263 4,870,008
Funds affiliated with Essex Investment
Management Co., LLC (3).................. -- -- 455,581 342,105 7,249,999
</TABLE>

- ------------
(1) Composed of Matrix Partners IV, L.P. and Matrix IV Entrepreneurs Fund, L.P.
Matrix IV Management Co., L.P. is the general partner of each of Matrix
Partners IV, L.P. and Matrix IV Entrepreneurs Fund, L.P. Timothy Barrows, a
director of SilverStream, is a general partner of Matrix IV Management Co.,
L.P.

(2) Richard A. D'Amore, a director of SilverStream, is a general partner of
North Bridge Venture Management L.P., which is the general partner of North
Bridge Venture Partners, L.P.

(3) Composed of Essex Performance Fund, L.P., Essex High Technology Fund, L.P.,
The New Discovery Fund Limited Ltd., Robertson Foundation and Essex Private
Placement Fund, Limited Partnership.

Series A Financing. On July 9, 1996, August 15, 1996 and November 4, 1996
we issued an aggregate of 3,683,050 shares of Series A preferred stock to six
investors, including David R. Skok, David A. Litwack, Matrix and North Bridge.
The per share purchase price for our Series A preferred stock was $1.00.

Series B Financing. On June 16, 1997 and September 12, 1997, we issued an
aggregate of 1,500,938 shares of Series B preferred stock to 21 investors,
including David R. Skok, David A. Litwack, Peter E. Brumme, John W. Pearce, Kim
A. Sheffield, Arnold E. Epstein, Craig A. Dynes, Matrix and North Bridge. The
per share purchase price for our Series B preferred stock was $5.33.

Series C Financing. On November 6, 1997, December 24, 1997 and March 30,
1998, we issued an aggregate of 1,922,588 shares of Series C preferred stock to
35 investors, including David R. Skok, David A. Litwack, Matrix, North Bridge
and Essex. The per share purchase price for our Series C preferred stock was
$8.78.

Series D Financing. On March 1, 1999, April 9, 1999, April 14, 1999 and
May 27, 1999, we issued an aggregate of 1,552,632 shares of Series D preferred
stock to 23 investors, including David R. Skok, David A. Litwack, Matrix, North
Bridge and Essex. The per share purchase price for our Series D preferred stock
was $9.50.

<PAGE> 51

COMMON STOCK ISSUANCES

The following table presents selected information regarding our issuances
of common stock to our executive officers. On May 8, 1996, in connection with
our incorporation, we issued an aggregate of 1,000 shares of common stock to
David R. Skok at a purchase price of $.01 per share. We issued the remaining
shares of common stock pursuant to founders stock restriction agreements with
each of the executive officers which give us rights to repurchase all or a
portion of the shares at their purchase price in the event that the executive
officer ceases to be employed by us. Each of the remaining shares issued in 1996
had a purchase price of $.001 per share. Each of the shares issued in 1997 had a
purchase price of $.50 per share.

<TABLE>
<CAPTION>
EXECUTIVE OFFICER DATE OF ISSUANCE NUMBER OF SHARES
- ----------------- ---------------- ----------------
<S> <C> <C>
David R. Skok............................................... 05/08/96 1,000
07/09/96 1,122,000
David A. Litwack............................................ 11/04/96 1,123,000
Peter E. Brumme............................................. 11/12/96 564,850
John W. Pearce.............................................. 08/16/96 347,600
Kim A. Sheffield............................................ 08/16/96 347,600
Arnold S. Epstein........................................... 08/16/96 451,880
Craig A. Dynes.............................................. 11/02/97 70,000
</TABLE>

STOCK OPTION GRANTS

On March 1, 1999, we granted to Diane Gordon, our Vice President, Customer
Services, an option to purchase 40,000 shares of common stock at a per share
exercise price of $4.00 under our 1997 Stock Incentive Plan. Ms. Gordon's option
shall vest 25% on January 4, 2000 and then quarterly for three years.

On April 30, 1999, we granted to Craig A. Dynes, our Vice President, Chief
Financial Officer and Treasurer, an option to purchase 10,000 shares of common
stock at a per share exercise price of $8.00 under our 1997 Stock Incentive
Plan. Mr. Dynes' option shall vest 20% on April 30, 2000 and then quarterly for
four years.

On April 30, 1999, we granted to Diane Gordon an option to purchase 5,000
shares of common stock at a per share exercise price of $8.00 under our 1997
Stock Incentive Plan. Ms. Gordon's option shall vest 20% on April 30, 2000 and
then quarterly for four years.

On April 30, 1999, we granted to Paul J. Severino an option to purchase
25,000 shares of common stock at a per share exercise price of $8.00 under our
1997 Stock Incentive Plan in connection with his joining our Board. Mr.
Severino's options were fully vested upon grant.

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

We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. SilverStream agreed to the material terms of each of the preferred
stock issuances set forth above after arms'-length negotiations with previously
unaffiliated persons. All future transactions, including loans between us and
our officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested directors on the Board of Directors, and will
continue to be on terms no less favorable to us than could be obtained from
unaffiliated third parties.

50
<PAGE> 52

PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding beneficial ownership
of our common stock as of June 30, 1999, and as adjusted to reflect the sale of
the shares of common stock in this offering, by:

- Each person who owns beneficially more than 5% of the outstanding shares
of our common stock;

- Each of our directors and the Named Executive Officers; and

- All of our directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting or investment power with
respect to shares. Shares of common stock issuable under stock options that are
exercisable within 60 days after June 30, 1999 are deemed outstanding for
computing the percentage ownership of the person holding the options but are not
deemed outstanding for computing the percentage ownership of any other person.
Unless otherwise indicated below, to our knowledge, all persons named in the
table have sole voting and investment power with respect to their shares of
common stock, except to the extent authority is shared by spouses under
applicable law. Unless otherwise indicated, the address of each person owning
more than 5% of the outstanding shares of common stock is c/o SilverStream
Software, Inc., One Burlington Woods, Suite 200, Burlington, Massachusetts
01803.

<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON
STOCK OUTSTANDING
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Matrix Partners IV, L.P.(1)............................... 1,493,341 10.7% 8.8%
1000 Winter Street, Suite 4500
Waltham, MA 02154
North Bridge Venture Partners, L.P........................ 1,464,394 10.5 8.6
950 Winter Street, Suite 4600
Waltham, MA 02154
Funds affiliated with Essex Investment Management Co.,
LLC(2).................................................. 797,686 5.7 4.7
125 High Street
Boston, MA 02110-2702
David R. Skok(3).......................................... 2,322,055 16.6 13.7
David A. Litwack(4)....................................... 2,312,055 16.5 13.6
Peter E. Brumme........................................... 576,107 4.1 3.4
John W. Pearce............................................ 356,981 2.6 2.1
Kim A. Sheffield.......................................... 356,981 2.6 2.1
Arnold S. Epstein......................................... 453,757 3.2 2.7
Timothy Barrows(1)........................................ 1,493,341 10.7 8.8
c/o Matrix Partners IV, L.P.
1000 Winter Street, Suite 4500
Waltham, MA 02154
Richard A. D'Amore(5)..................................... 1,464,394 10.5 8.6
c/o North Bridge Venture Partners, L.P.
950 Winter Street, Suite 4600
Waltham, MA 02154
Paul J. Severino(6)....................................... 25,000 * *
All executive officers and directors as a group (11
persons)(7)............................................. 9,440,052 67.4 55.5
</TABLE>

- ------------
* Less than 1% of the outstanding common stock.

(1) Composed of 1,418,674 shares held by Matrix Partners IV, L.P. and 74,667
shares held by Matrix IV Entrepreneurs Fund, L.P. Matrix IV Management Co.,
L.P. is the general partner of each of Matrix Partners IV, L.P. and Matrix
IV Entrepreneurs Fund, L.P. Mr. Barrows, a director of SilverStream, is

51
<PAGE> 53

a general partner of Matrix IV Management Co., L.P. Mr. Barrows disclaims
beneficial ownership of the shares held by Matrix Partners IV, L.P. and
Matrix IV Entrepreneurs Fund, L.P. except to the extent of his pecuniary
interests therein arising from his general partnership interest in Matrix IV
Management Co., L.P.

(2) Composed of 192,417 shares held by Essex Performance Fund, L.P., 192,417
shares held by Essex High Technology Fund, L.P., 96,178 shares held by The
New Discovery Fund Limited Ltd., 32,099 shares held by Robertson Foundation,
and 284,575 shares held by Essex Private Placement Fund, Limited
Partnership. Essex Investment Management Co., LLC acts as investment advisor
to each of the foregoing entities. Joseph C. McNay is the Principal and
Chief Investment Officer of Essex Investment Management Co., LLC and has
voting and investment power with respect to such shares.

(3) Includes 1,000,000 shares held by the David R. Skok Irrevocable Trust and
100,000 shares held by the David R. Skok 1997 Irrevocable Family Trust.

(4) Includes 1,123,000 shares held by the Litwack Irrevocable Trust.

(5) Consists of 1,464,394 shares held by North Bridge Venture Partners, L.P. Mr.
D'Amore, a director of SilverStream, is a general partner of North Bridge
Venture Management L.P., which is the general partner of North Bridge
Venture Partners, L.P. Mr. D'Amore disclaims beneficial ownership of the
shares held by North Bridge Venture Partners, L.P. except to the extent of
his pecuniary interests therein arising from his general partnership
interests in North Bridge Venture Management, L.P.

(6) Consists of 25,000 shares of common stock issuable upon the exercise of
fully vested stock options.

(7) Includes 25,000 shares of common stock issuable upon the exercise of fully
vested stock options.

52
<PAGE> 54

DESCRIPTION OF CAPITAL STOCK

After this offering, the authorized capital stock of SilverStream will
consist of 100,000,000 shares of common stock, $.001 par value per share, and
2,000,000 shares of preferred stock, $.001 par value per share. As of June 30,
1999, there were outstanding:

- 5,320,208 shares of common stock held by 80 stockholders of record;

- 8,659,208 shares of convertible preferred stock held by 71 stockholders
of record; and

- Options to purchase an aggregate of 1,401,192 shares of common stock.

There will be 17,069,808 shares of common stock outstanding upon the
closing of this offering.

The following summary is not intended to be complete and is qualified by
reference to the provisions of applicable law and to our amended and restated
certificate of incorporation and amended and restated bylaws included as
exhibits to the Registration Statement of which this prospectus is a part.

COMMON STOCK

Holders of our common stock are entitled to one vote for each share held on
matters submitted to a vote of stockholders. Holders of our common stock do not
have cumulative voting rights. Accordingly, holders of a majority of the shares
of common stock entitled to vote in any election of directors may elect all of
the directors standing for election. Holders of common stock are entitled to
receive their proportionate share of any dividends declared by the Board of
Directors, subject to any preferential dividend rights of outstanding preferred
stock. Upon the liquidation, dissolution or winding up of SilverStream, the
holders of common stock are entitled to receive ratably the net assets of
SilverStream available after the payment of all debts and other liabilities and
subject to the prior rights of any outstanding preferred stock. The common stock
has no preemptive, subscription, redemption or conversion rights. All
outstanding shares of common stock are fully paid and nonassessable. The shares
offered by SilverStream in this offering will be fully paid and nonassessable.
The rights, preferences and privileges of the common stock are subject to the
rights of the holders of shares of any series of preferred stock which
SilverStream may designate and issue in the future.

PREFERRED STOCK

Our Board of Directors will be authorized to issue shares of preferred
stock in one or more series without stockholder approval. The Board will have
discretion to determine the rights, preferences, privileges and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences of each series of preferred stock.

The purpose of authorizing the Board of Directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The Board's ability to issue preferred
stock will provide desirable flexibility in connection with possible
acquisitions and other corporate purposes. However, this ability could make it
more difficult for a third party to acquire, or could discourage a third party
from acquiring, a majority of the outstanding voting stock of SilverStream. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of common stock. SilverStream has no
present plans to issue any shares of preferred stock.

DELAWARE LAW AND OUR CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS

SilverStream is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for three years after the date of the transaction in which the
person became an interested stockholder, unless the business combination is
approved in a prescribed manner. A "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder. An "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years did own, 15% or more
of the corporation's voting stock.

53
<PAGE> 55

SilverStream's certificate of incorporation and by-laws to be effective on
the closing of this offering provide:

- That the Board of Directors be divided into three classes, as nearly
equal in size as possible, with staggered three-year terms;

- That directors may be removed only for cause by the vote of the holders
of at least 75% of the shares of our capital stock entitled to vote; and

- That any vacancy on the Board of Directors, however occurring, including
a vacancy resulting from an enlargement of the Board, may only be filled
by vote of a majority of the directors then in office.

The classification of the Board of Directors and the limitations on the
removal of directors and filling of vacancies could make it more difficult for a
third party to acquire, or discourage a third party from acquiring,
SilverStream.

The certificate of incorporation and by-laws to be effective on the closing
of this offering also provide that, after the closing of this offering:

- Any action required or permitted to be taken by the stockholders at an
annual meeting or special meeting of stockholders may only be taken if it
is properly brought before such meeting and may not be taken by written
action in lieu of a meeting; and

- Special meetings of the stockholders may only be called by the Chairman
of the Board of Directors, the President, or by the Board of Directors.
Our by-laws will also provide that, in order for any matter to be
considered "properly brought" before a meeting, a stockholder must comply
with requirements regarding advance notice to us.

These provisions could delay until the next stockholders' meeting actions
which are favored by the holders of a majority of our outstanding voting
securities. These provisions may also discourage another person or entity from
making a tender offer for our common stock, because such person or entity, even
if it acquired a majority of our outstanding voting securities, would be able to
take action as a stockholder only at a duly called stockholders' meeting, and
not by written consent.

Delaware law provides that the vote of a majority of the shares entitled to
vote on any matter is required to amend a corporation's certificate of
incorporation or by-laws, unless a corporation's certificate of incorporation or
by-laws, as the case may be, requires a greater percentage. Our certificate of
incorporation requires the affirmative vote of the holders of at least 75% of
the shares of our capital stock entitled to vote to amend or repeal any of the
foregoing provisions of our certificate of incorporation. Generally, our by-laws
may be amended or repealed by a majority vote of the Board of Directors or the
holders of a majority of the shares of our capital stock issued and outstanding
and entitled to vote. Changes to our by-laws regarding special meetings of
stockholders, written actions of stockholders in lieu of a meeting, and the
election, removal and classification of members of the Board of Directors
requires the affirmative vote of the holders of at least 75% of the shares of
our capital stock entitled to vote. The stockholder vote would be in addition to
any separate class vote that might in the future be required pursuant to the
terms of any series preferred stock that might be then outstanding.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Our certificate of incorporation provides that our directors and officers
shall be indemnified by us to the fullest extent authorized by Delaware law.
This indemnification covers all expenses and liabilities reasonably incurred in
connection with their services for or on behalf of us. In addition, our
certificate of incorporation provides that our directors will not be personally
liable for monetary damages to us for breaches of their fiduciary duty as
directors, unless they violated their duty of loyalty to us or our stockholders,
acted in bad faith, knowingly or intentionally violated the law, authorized
illegal dividends or redemptions or derived an improper personal benefit from
their action as directors.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is BankBoston, N.A.

54
<PAGE> 56

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, based on the number of shares outstanding
at June 30, 1999, we will have 16,979,416 shares of common stock outstanding,
assuming no exercise of outstanding options. Of these shares, the 3,000,000
shares to be sold in this offering will be freely tradable without restriction
or further registration under the Securities Act except that any shares
purchased by our affiliates, as that term is defined in Rule 144 under the
Securities Act, may generally only be sold in compliance with the limitations of
Rule 144 described below. The remaining 13,979,416 shares of common stock are
"restricted securities" under Rule 144. Generally, restricted securities that
have been owned for at least two years may be sold immediately after the
completion of this offering and restricted securities that have been owned for
at least one year may be sold 90 days after the completion of this offering.
Following this offering, 12,377,176 shares will become eligible for sale in the
public market beginning 180 days after the date of this prospectus, or earlier
with the consent of Morgan Stanley & Co. Incorporated, and 1,692,632 shares will
become eligible for sale in the public market at various times following 180
days after the date of this prospectus, subject in each case to the limitations
of Rule 144.

SALES OF RESTRICTED SHARES

In general, under Rule 144 stockholders, including our affiliates, who have
beneficially owned shares for at least one year are entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater of
one percent of the then outstanding shares of common stock or the average weekly
trading volume in the common stock on the Nasdaq National Market during the four
calendar weeks preceding the date on which notice of such sale is filed,
provided requirements concerning availability of public information, manner of
sale and notice of sale are satisfied. In addition, our affiliates must comply
with the restrictions and requirements of Rule 144, other than the one-year
holding period requirement, in order to sell shares of common stock which are
not restricted securities.

Under Rule 144(k), a stockholder who is not an affiliate and has not been
an affiliate for at least three months prior to the sale and who has
beneficially owned shares for at least two years may sell such shares without
compliance with the foregoing requirements. In meeting the holding periods
described above, a stockholder can include the holding periods of a prior owner
who was not an affiliate. The holding periods described above do not begin until
the full purchase price or other consideration is paid by the stockholder. Rule
701 provides that currently outstanding shares of common stock acquired under
our employee compensation plans may be sold beginning 90 days after the date of
this prospectus (1) by stockholders other than affiliates subject only to the
manner of sale provisions of Rule 144, and (2) by affiliates under Rule 144
without compliance with its one-year holding period requirement.

STOCK OPTIONS

At June 30, 1999, approximately 217,800 shares of common stock were
issuable pursuant to vested options granted under our 1997 Stock Incentive Plan,
substantially all of which are subject to lock-up agreements with the
underwriters.

We intend to file a registration statement on Form S-8 under the Securities
Act within 180 days after the date of this prospectus, to register up to
3,089,792 shares of common stock issuable under our 1997 Stock Incentive Plan,
including the 1,401,192 shares of common stock subject to outstanding options as
of June 30, 1999. This registration statement is expected to become effective
upon filing.

LOCK-UP AGREEMENTS

SilverStream and our executive officers, directors and other
securityholders have entered into lock-up agreements with the underwriters.
Without the prior written consent of Morgan Stanley & Co. Incorporated, none of
us will sell or transfer shares of common stock during the period ending 180
days after the date of this prospectus. Up to 150,000 shares purchased pursuant
to the directed share program are not subject to the lock-up agreements. In
addition, for a period of 180 days from the date of this prospectus, except as
required by law, we have agreed not to consent to any offer for sale, sale or
other
55
<PAGE> 57

disposition, or any transaction which is designed or could be expected, to
result in, the disposition by any person, directly or indirectly, of any shares
of common stock without the prior written consent of Morgan Stanley & Co.
Incorporated except that we may, without such consent, grant options and sell
shares pursuant to our stock plans.

REGISTRATION RIGHTS

After this offering, the holders of approximately 10,905,208 shares of
common stock will be entitled to rights with respect to the registration of such
shares under the Securities Act. If we propose to register any of our securities
under the Securities Act, either for our own account or for the account of other
security holders exercising registration rights, such holders are entitled to
notice of such registration and are entitled to include shares of common stock.
Additionally, such holders are also entitled to demand registration rights
pursuant to which they may require us on up to two occasions to file a
registration statement under the Securities Act at our expense. We are required
to use our best efforts to effect any such registration. Further, holders may
require us to file an unlimited number of additional registration statements on
Form S-3 at our expense. All of these registration rights are subject to the
right of the underwriters of an offering to limit the number of shares included
in such registration and our right not to effect a requested registration within
180 days following an offering of our securities pursuant to a Form S-1,
including the offering made hereby.

56
<PAGE> 58

UNDERWRITERS

Under the terms and subject to the conditions contained in the underwriting
agreement, the underwriters named below, for whom Morgan Stanley & Co.
Incorporated, BancBoston Robertson Stephens Inc. and SG Cowen Securities
Corporation are acting as representatives, have severally agreed to purchase,
and SilverStream has agreed to sell to the underwriters, the respective number
of shares of common stock set forth opposite the names of the underwriters
below:

<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ---- ----------
<S> <C>
Morgan Stanley & Co. Incorporated........................... 1,230,000
BancBoston Robertson Stephens Inc. ......................... 615,000
SG Cowen Securities Corporation............................. 615,000
Adams, Harkness & Hill, Inc. ............................... 60,000
Brad Peery Inc. ............................................ 60,000
Dain Rauscher Incorporated.................................. 60,000
Edward D. Jones & Co., L.P. ................................ 60,000
First Union Capital Markets................................. 60,000
Legg Mason Wood Walker, Incorporated........................ 60,000
Punk, Ziegel & Knoell....................................... 60,000
Thomas Weisel Partners LLC.................................. 60,000
Volpe Brown Whelan & Company, LLC........................... 60,000
----------

Total............................................. 3,000,000
==========
</TABLE>

The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of common stock offered in this offering are
subject to the approval of legal matters by their counsel. The underwriters are
obligated to take and pay for all of the shares of common stock offered in this
offering, other than those covered by the over-allotment option described below,
if any such shares are taken.

The underwriters initially propose to offer part of the shares of common
stock directly to the public at the initial public offering price set forth on
the cover page hereof and part to dealers at a price that represents a
concession not in excess of $.68 a share under the public offering price. Any
underwriters may allow, and such dealers may reallow, a concession not in excess
of $.10 a share to other underwriters or to other dealers. After the initial
offering of the shares of common stock, the offering price and other selling
terms may from time to time be varied by the representatives of the
underwriters.

SilverStream has granted to the underwriters an option, exercisable for 30
days from the date of this prospectus, to purchase up to an aggregate of 450,000
additional shares of common stock at the public offering price set forth on the
cover page of this prospectus, less underwriting discounts and commissions. The
underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
common stock offered in this offering. To the extent such option is exercised,
each underwriter will become obligated to purchase approximately the same
percentage of such additional shares of common stock as the number set forth
next to such underwriter's name in the preceding table bears to the total number
of shares of common stock set forth next to the names of all underwriters in the
preceding table. If the underwriter's over-allotment option is exercised in
full, the total price to public would be $55,200,000, the total underwriters'
discounts and commissions would be $3,864,000, and the total proceeds to us
would be $51,336,000 before deducting estimated offering expenses.

At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 150,000 of the shares of common stock offered in
this offering for our directors, officers, employees and related persons.
Individuals purchasing these shares must have a retail account with Morgan
Stanley & Co. Incorporated and must commit to the purchase of these shares
within one day after the date of this prospectus. The number of shares of common
stock available for sale to the general public will be reduced to the extent
such individuals purchase such reserved shares. Any reserved shares which are
not so

57
<PAGE> 59

purchased will be offered by the underwriters to the general public on the same
basis as the other shares offered hereby.

SilverStream, our directors and executive officers and other
securityholders have each agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the underwriters, during the
period ending 180 days after the date of this prospectus, he, she or it will not
directly or indirectly:

- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or

- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock,

whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.

The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.

Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "SSSW."

In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases previously
distributed shares of common stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the common stock above independent
market levels. The underwriters are not required to engage in these activities
and may end any of these activities at any time.

We and the underwriters have agreed to indemnify each other against
liabilities in connection with this offering, including liabilities under the
Securities Act.

In March, April and May 1999, we sold shares of our Series D Preferred
Stock in a private placement. In this private placement, a fund invested in by
entities affiliated with Morgan Stanley & Co. Incorporated purchased 105,263
shares of Series D Preferred Stock, which are convertible into 105,263 shares of
common stock, for approximately $1,000,000, or $9.50 per share. The fund
purchased these shares on the same terms as the other investors in the private
placement.

PRICING OF THE OFFERING

Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the initial public offering price for the shares of
common stock was determined by negotiations between SilverStream and the
representatives of the underwriters. Among the factors considered in determining
the initial public offering price were:

- our record of operations, our current financial position and future
prospects;

- the experience of our management;

- sales, earnings and other financial and operating information in recent
periods; and

- the price-earnings ratios, price-sales ratios, market prices of
securities and financial and operating information of companies engaged
in activities similar to ours.

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<PAGE> 60

LEGAL MATTERS

The validity of the shares of common stock we are offering will be passed
upon for us by Hale and Dorr LLP, Boston, Massachusetts. Certain legal matters
in connection with this offering will be passed upon for the underwriters by
Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1997 and 1998, and for the
period ended December 31, 1996 and each of the two years in the period ended
December 31, 1998, as set forth in their report. We have included our financial
statements and schedule in this prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
we propose to sell in this offering. This prospectus, which is a part of the
registration statement, does not contain all of the information set forth in the
registration statement. For further information about us and the common stock we
propose to sell in this offering, we refer you to the registration statement and
the exhibits and schedules filed as a part of the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document filed as an exhibit to the registration statement are not
necessarily complete. If a contract or document has been filed as an exhibit to
the registration statement, we refer you to the copy of the contract or document
that has been filed. The registration statement, including exhibits, may be
inspected without charge at the principal office of the Securities and Exchange
Commission in Washington, D.C. and copies of all or any part of which may be
inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Room 1024, Washington, D.C. 20549, and at the Commission's regional offices
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can also be obtained at prescribed rates by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the operation of the
public reference room by calling the Commission at 1-800-SEC-0330. In addition,
the Securities and Exchange Commission maintains a website at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission.

59
<PAGE> 61

(This page intentionally left blank)
<PAGE> 62

SILVERSTREAM SOFTWARE, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Changes in Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit)........ F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 63

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
SilverStream Software, Inc.

We have audited the accompanying consolidated balance sheets of
SilverStream Software, Inc. (the Company) as of December 31, 1997 and 1998, and
the related consolidated statements of operations, redeemable convertible
preferred stock and stockholders' equity (deficit), and cash flows for the
period May 8, 1996 (inception) through December 31, 1996 and the years ended
December 31, 1997 and 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SilverStream
Software, Inc. at December 31, 1997 and 1998, and the consolidated results of
its operations and its cash flows for the period May 8, 1996 (inception) through
December 31, 1996 and the years ended December 31, 1997 and 1998, in conformity
with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP
--------------------------------------

Boston, Massachusetts
March 5, 1999, except for Note 13,
as to which the date is July 23, 1999

F-2
<PAGE> 64

SILVERSTREAM SOFTWARE, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
-------------------------- JUNE 30, JUNE 30,
1997 1998 1999 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $16,649,341 $ 1,198,584 $10,777,706 $10,777,706
Marketable securities................................... -- 3,330,603 246,690 246,690
Accounts receivable; net of allowances of $44,660 at
December 31, 1997, $475,993 at December 31, 1998, and
$738,403 at June 30, 1999 (unaudited)................. 193,255 3,339,667 5,953,127 5,953,127
Prepaid expenses........................................ 317,250 247,413 577,122 577,122
Other................................................... 267,754 100,930 3,310 3,310
----------- ----------- ----------- -----------
Total current assets............................. 17,427,600 8,217,197 17,557,955 17,557,955
Furniture, equipment and leasehold improvements, net...... 1,528,155 1,796,346 2,323,845 2,323,845
Intangibles, (net)........................................ -- -- 1,013,273 1,013,273
----------- ----------- ----------- -----------
Total assets..................................... $18,955,755 $10,013,543 $20,895,073 $20,895,073
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................ $ 728,653 $ 1,176,190 $ 2,638,400 $ 2,638,400
Accrued expenses........................................ -- 422,749 1,562,061 1,562,061
Deferred revenue........................................ 37,087 1,063,658 2,416,690 2,416,690
Current portion of long-term debt....................... 313,210 435,820 502,168 502,168
----------- ----------- ----------- -----------
Total current liabilities........................ 1,078,950 3,098,417 7,119,319 7,119,319
Long-term debt, less current portion...................... 294,727 324,787 681,783 681,783
Commitments and contingencies............................. -- -- -- --
Redeemable convertible preferred stock:
Series A redeemable convertible preferred stock, $.001
par value -- authorized, issued and outstanding
3,683,050 (liquidation preference $3,683,050)......... 3,658,050 3,658,050 3,658,050 --
Series B redeemable convertible preferred stock, $.001
par value -- authorized 1,600,000 shares; issued and
outstanding 1,500,938 (liquidation preference
$8,000,000)........................................... 7,980,000 7,980,000 7,980,000 --
Stockholders' equity (deficit):
Series C convertible preferred stock, $.001 par value --
authorized 2,000,000 shares; issued and outstanding
1,728,283 at December 31, 1997 and 1,922,588 at
December 31, 1998 and June 30, 1999, respectively
(liquidation preference $16,880,323).................. 15,154,325 16,856,323 16,856,323 --
Series D convertible preferred stock, $.001 par value --
authorized 1,600,000 shares; issued and outstanding
1,552,632 at June 30, 1999 (liquidation preference
$12,475,001) (unaudited).............................. -- -- 14,727,997 --
Common stock, $.001 par value -- authorized 21,000,000
shares; issued and outstanding 5,086,391 at December
31, 1997, 5,206,779 at December 31, 1998, 5,320,208 at
June 30, 1999 (unaudited) and 13,979,416 at June 30,
1999 (pro forma)...................................... 5,086 5,207 5,320 13,979
Additional paid-in capital.............................. 174,796 365,985 3,404,612 46,618,323
Deferred compensation................................... -- -- (1,847,821) (1,847,821)
Accumulated deficit..................................... (9,286,679) (22,171,726) (31,513,775) (31,513,775)
Other comprehensive loss................................ -- -- (73,235) (73,235)
Notes receivable from stockholders...................... (103,500) (103,500) (103,500) (103,500)
----------- ----------- ----------- -----------
Total stockholders' equity (deficit)............. 5,944,028 (5,047,711) 1,455,921 13,093,971
----------- ----------- ----------- -----------
Total liabilities and stockholders' equity
(deficit)...................................... $18,955,755 $10,013,543 $20,895,073 $20,895,073
=========== =========== =========== ===========
</TABLE>

See accompanying notes

F-3
<PAGE> 65

SILVERSTREAM SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
MAY 8, 1996 YEARS ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, -------------------------- -------------------------
1996 1997 1998 1998 1999
-------------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Software license.................... $ -- $ 248,524 $ 5,982,534 $ 1,526,718 $ 5,515,280
Services............................ -- -- 825,365 217,371 2,267,159
----------- ----------- ------------ ----------- -----------
Total revenue............... -- 248,524 6,807,899 1,744,089 7,782,439
Cost of revenue:
Software license.................... -- 89,997 767,225 234,213 685,399
Services............................ -- 281,796 1,413,962 519,033 3,166,726
----------- ----------- ------------ ----------- -----------
Total cost of revenue....... -- 371,793 2,181,187 753,246 3,852,125
----------- ----------- ------------ ----------- -----------
Gross profit (loss)................... -- (123,269) 4,626,712 990,843 3,930,314
Operating expenses:
Sales and marketing................. 34,532 3,853,766 10,776,396 4,421,760 8,258,392
Research and development............ 849,868 2,622,200 5,069,465 2,429,214 3,341,916
General and administrative.......... 120,398 1,961,205 2,141,187 993,326 1,659,914
Compensation charge for issuance of
stock options -- -- -- -- 190,257
----------- ----------- ------------ ----------- -----------
Total operating expenses.... 1,004,798 8,437,171 17,987,048 7,844,300 13,450,479
----------- ----------- ------------ ----------- -----------
Loss from operations.................. (1,004,798) (8,560,440) (13,360,336) (6,853,457) (9,520,165)
Interest income....................... 53,214 274,331 559,495 295,396 281,104
Interest expense...................... -- (48,986) (84,206) (43,409) (102,988)
----------- ----------- ------------ ----------- -----------
Net loss.............................. $ (951,584) $(8,335,095) $(12,885,047) $(6,601,470) $(9,342,049)
Beneficial conversion feature in
Series D preferred stock............ -- -- -- -- (263,158)
----------- ----------- ------------ ----------- -----------
Net loss applicable to common
stockholders........................ $ (951,584) $(8,335,095) $(12,885,047) $(6,601,470) $(9,605,207)
=========== =========== ============ =========== ===========
Basic and diluted net loss per share
applicable to common
stockholders:....................... $ (5.12) $ (10.61) $ (4.89) $ (2.83) $ (2.70)
Weighted-average common shares used in
computing basic and diluted net loss
per share applicable to common
stockholders........................ 185,686 785,548 2,632,496 2,334,575 3,551,349
Pro forma basic and diluted net loss
per share applicable to common
stockholders........................ $ (1.33) $ (.83)
Weighted-average common shares used in
computing pro forma basic and
diluted net loss per share
applicable to common stockholders... 9,691,693 11,618,248
</TABLE>

See accompanying notes

F-4
<PAGE> 66

SILVERSTREAM SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN
REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
----------------------- ----------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES PAR VALUE
------ ------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock in May, July, August and
November 1996....................................... 4,639,367 $4,639
Issuance of Series A preferred stock in July, August
and November 1996 (net of issuance costs of
$25,000)............................................ 3,683,050 $ 3,658,050
Net loss.............................................
--------- ----------- --------- ----------- --------- ------
Balance at December 31, 1996......................... 3,683,050 3,658,050 4,639,367 4,639
Issuance of common stock in April, August, November
and December 1997................................... 577,914 578
Issuance of Series B preferred stock in June and
September 1997 (net of issuance costs of $20,000)... 1,500,938 7,980,000
Note issued for purchase of common stock in August
1997................................................
Repurchase and retirement of common stock in February
and
October 1997........................................ (130,890) (131)
Issuance of Series C preferred stock in November and
December (net of issuance costs of $20,000)......... 1,728,283 $15,154,325
Net loss.............................................
--------- ----------- --------- ----------- --------- ------
Balance at December 31, 1997......................... 5,183,988 11,638,050 1,728,283 15,154,325 5,086,391 5,086
Issuance of common stock in January and December
1998................................................ 64,863 65
Issuance of Series C preferred stock in March 1998
(net of issuance costs of $4,000)................... 194,305 1,701,998
Exercise of stock options in June through December
1998................................................ 55,525 56
Net loss.............................................
--------- ----------- --------- ----------- --------- ------
Balance at December 31, 1998......................... 5,183,988 11,638,050 1,922,588 16,856,323 5,206,779 5,207
Issuance of Series D preferred stock in March, April
and May 1999 (net of issuance costs of $22,000)
(unaudited)......................................... 1,552,632 14,727,997
Repurchase and retirement of common stock in March
1999 (unaudited).................................... (10,754) (11)
Exercise of stock options in March 1999
(unaudited)......................................... 54,683 54
Issuance of common stock in June 1999 (unaudited).... 69,500 70
Deferred compensation on grant of stock options
(unaudited).........................................
Amortization of deferred compensation (unaudited)....
Net loss (unaudited).................................
Currency translation adjustment (unaudited)..........
Comprehensive loss (unaudited).......................
--------- ----------- --------- ----------- --------- ------
Balance at June 30,
1999 (unaudited).................................... 5,183,988 $11,638,050 3,475,220 $31,584,320 5,320,208 $5,320
========= =========== ========= =========== ========= ======

OTHER NOTES
ADDITIONAL COMPREHENSIVE RECEIVABLE
PAID-IN DEFERRED ACCUMULATED INCOME FROM SALE
CAPITAL COMPENSATION DEFICIT (LOSS) OF STOCK
---------- ------------ ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock in May, July, August and
November 1996.......................................
Issuance of Series A preferred stock in July, August
and November 1996 (net of issuance costs of
$25,000)............................................
Net loss............................................. $ (951,584)
---------- ----------- ------------ --------- ---------
Balance at December 31, 1996......................... (951,584)
Issuance of common stock in April, August, November
and December 1997................................... $ 174,796
Issuance of Series B preferred stock in June and
September 1997 (net of issuance costs of $20,000)...
Note issued for purchase of common stock in August
1997................................................ $(103,500)
Repurchase and retirement of common stock in February
and
October 1997........................................
Issuance of Series C preferred stock in November and
December (net of issuance costs of $20,000).........
Net loss............................................. (8,335,095)
---------- ----------- ------------ --------- ---------
Balance at December 31, 1997......................... 174,796 (9,286,679) (103,500)
Issuance of common stock in January and December
1998................................................ 181,887
Issuance of Series C preferred stock in March 1998
(net of issuance costs of $4,000)...................
Exercise of stock options in June through December
1998................................................ 9,302
Net loss............................................. (12,885,047)
---------- ----------- ------------ --------- ---------
Balance at December 31, 1998......................... 365,985 (22,171,726) (103,500)
Issuance of Series D preferred stock in March, April
and May 1999 (net of issuance costs of $22,000)
(unaudited).........................................
Repurchase and retirement of common stock in March
1999 (unaudited)....................................
Exercise of stock options in March 1999
(unaudited)......................................... 27,619
Issuance of common stock in June 1999 (unaudited).... 972,930
Deferred compensation on grant of stock options
(unaudited)......................................... $2,038,078 $(2,038,078)
Amortization of deferred compensation (unaudited).... 190,257
Net loss (unaudited)................................. (9,342,049)
Currency translation adjustment (unaudited).......... $ (73,235)
----------- ---------
Comprehensive loss (unaudited).......................
---------- ----------- ------------ --------- ---------
Balance at June 30,
1999 (unaudited).................................... $3,404,612 $(1,847,821) $(31,513,775) $ (73,235) $(103,500)
========== =========== ============ ========= =========

TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Issuance of common stock in May, July, August and
November 1996....................................... $ 4,639
Issuance of Series A preferred stock in July, August
and November 1996 (net of issuance costs of
$25,000)............................................
Net loss............................................. (951,584)
------------
Balance at December 31, 1996......................... (946,945)
Issuance of common stock in April, August, November
and December 1997................................... 175,374
Issuance of Series B preferred stock in June and
September 1997 (net of issuance costs of $20,000)...
Note issued for purchase of common stock in August
1997................................................ (103,500)
Repurchase and retirement of common stock in February
and
October 1997........................................ (131)
Issuance of Series C preferred stock in November and
December (net of issuance costs of $20,000)......... 15,154,325
Net loss............................................. (8,335,095)
------------
Balance at December 31, 1997......................... 5,944,028
Issuance of common stock in January and December
1998................................................ 181,952
Issuance of Series C preferred stock in March 1998
(net of issuance costs of $4,000)................... 1,701,998
Exercise of stock options in June through December
1998................................................ 9,358
Net loss............................................. (12,885,047)
------------
Balance at December 31, 1998......................... (5,047,711)
Issuance of Series D preferred stock in March, April
and May 1999 (net of issuance costs of $22,000)
(unaudited)......................................... 14,727,997
Repurchase and retirement of common stock in March
1999 (unaudited).................................... (11)
Exercise of stock options in March 1999
(unaudited)......................................... 27,673
Issuance of common stock in June 1999 (unaudited).... 973,000
Deferred compensation on grant of stock options
(unaudited).........................................
Amortization of deferred compensation (unaudited).... 190,257
Net loss (unaudited)................................. (9,342,049)
Currency translation adjustment (unaudited).......... (73,235)
------------
Comprehensive loss (unaudited)....................... (9,415,284)
------------
Balance at June 30,
1999 (unaudited).................................... $ 1,455,921
============
</TABLE>

See accompanying notes

F-5
<PAGE> 67

SILVERSTREAM SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
MAY 8, 1996 YEARS ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, -------------------------- --------------------------
1996 1997 1998 1998 1999
-------------- ----------- ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................... $ (951,584) $(8,335,095) $(12,885,047) $ (6,601,470) $(9,342,049)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 29,750 345,494 724,045 328,421 541,235
Provision for allowances on accounts
receivable..................................... -- 44,660 431,333 119,086 262,410
Operating expenses paid with issuance of
preferred stock................................ 83,050 79,998 -- -- --
Operating expenses paid with issuance of common
stock.......................................... -- 20,700 181,952 22,500 --
Compensation charge for issuance of stock
options........................................ -- -- -- -- 190,257
Changes in operating assets and liabilities:
Accounts receivable............................ -- (237,915) (3,577,745) (1,545,511) (2,875,870)
Prepaid expenses............................... (13,671) (303,579) 69,837 (46,936) 244,103
Other current assets........................... -- -- 166,824 166,158 (476,192)
Other non-current assets....................... -- -- -- -- (735,273)
Accounts payable and accrued expenses.......... 75,413 385,486 870,286 23,632 2,601,522
Deferred revenue............................... -- 37,087 1,026,571 790,762 1,353,032
---------- ----------- ------------ ------------ -----------
Net cash used in operating activities.............. (777,042) (7,963,164) (12,991,944) (6,743,358) (8,236,825)
---------- ----------- ------------ ------------ -----------
INVESTING ACTIVITIES
Purchase of furniture and equipment................ (338,587) (1,564,812) (992,236) (486,339) (1,068,734)
Sale (purchase) of available-for-sale securities... -- -- (3,330,603) (6,807,351) 3,083,913
---------- ----------- ------------ ------------ -----------
Net cash provided by (used in) investing
activities....................................... (338,587) (1,564,812) (4,322,839) (7,293,690) 2,015,179
---------- ----------- ------------ ------------ -----------
FINANCING ACTIVITIES
Net proceeds from issuance of preferred stock...... 3,575,000 23,054,327 1,701,998 1,701,993 14,727,997
Net proceeds from issuance of common stock......... 4,639 51,043 9,358 213 722,662
Proceeds from line of credit....................... 269,914 513,110 602,317 602,317 673,264
Payments on long-term debt......................... -- (175,087) (449,647) (199,727) (249,920)
---------- ----------- ------------ ------------ -----------
Net cash provided by financing activities.......... 3,849,553 23,443,393 1,864,026 2,104,796 15,874,003
---------- ----------- ------------ ------------ -----------
Effects of exchange rate on cash and cash
equivalents...................................... -- -- -- -- (73,235)
Net increase (decrease) in cash and cash
equivalents...................................... 2,733,924 13,915,417 (15,450,757) (11,932,252) 9,579,122
Cash and cash equivalents at beginning of period... -- 2,733,924 16,649,341 16,649,341 1,198,584
---------- ----------- ------------ ------------ -----------
Cash and cash equivalents at end of period......... $2,733,924 $16,649,341 $ 1,198,584 $ 4,717,089 $10,777,706
========== =========== ============ ============ ===========
SUPPLEMENTAL INFORMATION
Cash paid during the period for:
Income taxes..................................... $ -- $ 456 $ 14,283 $ 2,392 $ --
========== =========== ============ ============ ===========
Interest......................................... $ -- $ 48,986 $ 84,206 $ 43,409 $ 31,504
========== =========== ============ ============ ===========
</TABLE>

See accompanying notes.
F-6
<PAGE> 68

SILVERSTREAM SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS

SilverStream Software, Inc. (the Company) was incorporated on May 8, 1996.
The Company is a global provider of application server software and services
that enable businesses and other large organizations to create, deploy and
manage software applications for intranets, extranets and the Internet. The
Company markets their software worldwide and has sales offices in the United
Kingdom, The Netherlands, Belgium, Germany, Norway, the Czech Republic, France,
Hong Kong, Singapore and Taiwan.

The market for application server software has only recently begun to
develop, is rapidly evolving and will likely have an increasing number of
competitors. The market is marked by rapid technological change, frequent new
product introductions and enhancements and evolving industry standards. The
Company's future financial performance will depend on the market's acceptance of
its application server products and the Company's ability to successfully
introduce enhancements to their application server products and to expand its
operations to meet the evolving customer needs within the industry.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its international subsidiaries, all of which are wholly owned, located in
Europe and Asia. All intercompany accounts and transactions have been eliminated
in consolidation.

The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described in this note and
elsewhere in the accompanying consolidated financial statements and notes.

USE OF ESTIMATES

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.

CASH EQUIVALENTS AND MARKETABLE SECURITIES

The Company accounts for cash equivalents and marketable securities in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Cash
equivalents are short-term, highly liquid investments with original maturity
dates of three months or less. Cash equivalents are carried at cost, which
approximates fair market value. The Company's marketable securities are
classified as available-for-sale and are recorded at fair value with any
unrealized gain or loss recorded as an element of stockholders' equity
(deficit). As of December 31, 1998 and March 31, 1999, the Company's marketable
securities consisted of investment-grade corporate bonds.

As of December 31, 1998, the Company's marketable securities had the
following contractual maturities.

<TABLE>
<S> <C>
Within 1 year............................................... $3,083,913
After 1 year through 5 years................................ 246,690
----------
$3,330,603
==========
</TABLE>

F-7
<PAGE> 69
SILVERSTREAM SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist of cash and cash equivalents, marketable
securities and accounts receivable. Concentration of credit risk with respect to
marketable securities is limited as marketable securities are primarily
investment-grade corporate bonds with high-credit, quality financial
institutions.

Concentration of credit risk with respect to accounts receivable is limited
due to the large number of companies comprising the Company's customer base.
On-going credit evaluations of customers' financial condition are performed and
collateral is generally not required. The Company maintains reserves for
potential credit losses and such losses, in the aggregate, have not exceeded
management's expectations.

FURNITURE AND EQUIPMENT

Furniture and equipment is stated at cost. Depreciation is computed by use
of the straight-line method over the following estimated useful lives:

<TABLE>
<S> <C>
Leasehold improvements........................
Lesser of remaining
lease-term or useful
life
Furniture and fixtures........................
5 years
Computer equipment and software...............
3 years
Telephone equipment...........................
3 years
</TABLE>

ADVERTISING COSTS

The Company expenses advertising costs as incurred. Advertising costs were
$0, $187,000 and $858,000 for the period ended December 31, 1996 and the years
ended December 31, 1997 and 1998, respectively, and $506,000 and $219,000 for
the six months ended June 30, 1998 and 1999, respectively.

CAPITALIZED SOFTWARE

Capitalization of software development costs under SFAS No. 86 begins upon
the establishment of technological feasibility. Technological feasibility is
established upon the completion of a working model. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenues, estimated
economic life, and changes in software and hardware technologies. Costs incurred
by the Company between completion of a working model and the point at which the
product is ready for general release have been insignificant. Therefore, through
December 31, 1998 and June 30, 1999, all research and development costs have
been expensed as incurred.

REVENUE RECOGNITION

Revenue recognition from software license fees and from sales of software
products is recognized when persuasive evidence of an agreement exists, delivery
of the product has occurred, no significant Company obligations with regard to
implementation remain, the fee is fixed or determinable and collectibility is
probable. Update assurance agreements represent the right to receive unspecified
upgrades on an if-and-when available basis. Fees from update assurance
agreements, which are separately negotiated and priced, are deferred and
recognized on a straight-line basis over the life of the related agreement,
which is typically one year.

F-8
<PAGE> 70
SILVERSTREAM SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Services revenue is primarily comprised of revenue from consulting,
technical support and education services. Services revenue from consulting and
education is billed on a time and materials basis and is recognized as the
services are performed. Technical support revenue is deferred and recognized on
a straight-line basis as service revenue over the life of the related agreement,
which is typically one year.

Customer advances and billed amounts due from customers in excess of
revenue recognized are recorded as deferred revenue and recognized as the
services are delivered.

Revenue derived from arrangements with resellers of our products is not
recognized until the software is shipped to the customer.

Sales to independent software vendors (ISVs) are deferred and recognized on
a straight line basis as product revenue over the life of the agreement, which
is typically one year, since the only undelivered element under these agreements
is service for which no pattern of performance is discernible. ISV-related
partner fees are deferred and recognized on a straight line basis as an offset
to the related expenses over the life of the agreement, which is typically one
year, since the Company considers such fees to be reimbursement for costs
incurred, primarily marketing support, in connection with its ISV partner
program.

Customer returns are estimated and accrued for as a percentage of net
product revenues based upon historical trends.

The Company adopted Statement of Position (SOP) 97-2, "Software Revenue
Recognition" and SOP 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition," as of January 1, 1998. SOP 97-2 and SOP
98-4 provide guidance for recognizing revenue on software transactions and
supersede SOP 91-1.

The Company will adopt SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions." SOP 98-9 amends SOP
98-4 to extend the period of deferral of the application of certain passages of
SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or before March
15, 1999. All other provisions of SOP 97-2 are effective for transactions
entered into in fiscal years beginning after March 15, 1999.

The adoption of SOP 97-2 and SOP 98-4 did not have a material impact on the
Company's financial results. In addition, the Company believes that the adoption
of SOP 98-9 will not have a material impact on the Company's financial results.

LICENSING AGREEMENTS

The Company has entered into various licensing agreements with third-party
software and technology companies, primarily for encryption technology,
requiring royalty payments which are based on either a percentage of product
revenue or per unit sales. Royalty expenses, which are charged to cost of
revenue under these license agreements, totaled $168,000 for the year ended
December 31, 1998, and $20,000 and $119,000 for the six months ended June 30,
1998 and 1999, respectively. Prepaid royalties related to these licensing
agreements were $183,000 and $113,000 for the years ended December 31, 1997 and
1998, respectively, and $217,000 and $316,000 for the periods ended June 30,
1998 and 1999, respectively.

EARNINGS PER SHARE

The Company computes earnings per share in accordance with SFAS No. 128,
"Earnings per Share". SFAS 128 requires calculation and presentation of basic
and diluted earnings per share. Basic earnings per share is calculated based on
the weighted average number of common shares outstanding and excludes any
dilutive effects of warrants, stock options, common stock subject to repurchase
or other type securities. Diluted earnings per share is calculated based on the
weighted average number of common shares outstanding and the dilutive effect of
warrants, stock options, and related securities calculated using the

F-9
<PAGE> 71
SILVERSTREAM SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

treasury stock method. Dilutive securities are excluded from the diluted
earnings per share calculation if their effect is anti-dilutive.

INCOME TAXES

The Company provides for income taxes under SFAS No. 109, "Accounting for
Income Taxes." Under SFAS 109, the liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.

FINANCIAL INSTRUMENTS

The fair value of the Company's financial instruments, which include cash
and cash equivalents, marketable securities, accounts receivable and accounts
payable and long term debt, are based on assumptions concerning the amount and
timing of estimated future cash flows and assumed discount rates reflecting
varying degrees of perceived risk. The carrying value of these financial
instruments approximated their fair value at December 31, 1997 and 1998 due to
the short term nature of these instruments and the variable interest rate on the
long term debt.

FOREIGN CURRENCY TRANSLATIONS

Financial statements of foreign subsidiaries are translated into U.S.
dollars at the exchange rate as of the balance sheet dates, with the exception
of revenues, costs and expenses. All revenues, costs and expenses are translated
at a weighted-average of exchange rates in effect during the year. Net exchange
gains or losses resulting from the translation of the foreign financial
statements are recorded as a separate component of comprehensive income.
Transaction adjustments for all foreign subsidiaries are included in income.

STOCK COMPENSATION ARRANGEMENTS

The Company adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the
Company has continued to account for employee stock options in accordance with
Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued
to Employees," and has included the pro forma disclosures required by SFAS No.
123 for all periods presented.

NON-MONETARY TRANSACTIONS

The Company has entered into certain non-monetary transactions involving
the issuance of preferred or common stock in consideration for professional and
marketing services provided to the Company by third parties. The Company has
accounted for these non-monetary transactions in accordance with SFAS No. 123.
All transactions are accounted for based on the fair value of the goods or
services received or on the fair value of the equity instruments issued,
whichever is more reliably measurable. All expenses related to non-monetary
transactions were recognized in the period incurred.

COMPREHENSIVE INCOME

As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes new rules for the reporting and display
of comprehensive income and its components. SFAS 130 requires unrealized gains
and losses on the Company's available-for-sale securities and the foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders'

F-10
<PAGE> 72
SILVERSTREAM SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

equity, to be included in other comprehensive income. Prior to the three-month
period ended March 31, 1999, amounts pertaining to comprehensive income were not
material and have therefore not been separately stated.

SEGMENT REPORTING

Effective January 1, 1998, the Company adopted the SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS 131
superseded SFAS No. 14, "Financial Reporting for Segment of a Business
Enterprise." SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in interim financial
reports. The Company views its operations and manages its business as one
segment: the development and delivery of application server solutions, that
include software and related products and services. Factors used to identify the
Company's single operating segment include the organizational structure of the
Company and the financial information available for evaluation by the chief
operating decision maker in making decisions about how to allocate resources and
assess performance. The adoption of SFAS 131 did not affect results of operation
or financial position, but did affect the disclosure of segment information. See
Note 11.

UNAUDITED INTERIM FINANCIAL INFORMATION

The interim financial information at June 30, 1999 and for the six months
ended June 30, 1998 and 1999, all of which is unaudited, was prepared by the
Company on a basis consistent with the audited financial statements. In
management's opinion, such information reflects all adjustments which are of a
normal recurring nature and which are necessary to present fairly the results of
the periods presented.

UNAUDITED PRO FORMA BALANCE SHEET

Upon an initial public offering of the Company's common stock, each
outstanding share of Series A, B, C, and D convertible preferred stock will be
converted into one share of common stock. This reclassification has been
reflected in the unaudited pro forma balance sheet as of June 30, 1999.

UNAUDITED PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE

The unaudited pro forma basic and diluted net loss per share is computed
using the weighted-average number of outstanding common shares assuming
conversion of all preferred shares into common shares (at date of original
issuance), which will occur upon completion of the initial public offering, as
contemplated herein. Common share equivalents are excluded from the calculation
as their effect is anti-dilutive.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In March 1998, the Accounting Standard Executive Committee ("AcSEC") issued
SOP 98-1, "Accounting of the Costs of Computer Software Developed or Obtained
for Internal Use." The adoption of SOP 98-1, which is effective for SilverStream
beginning January 1, 1999, did not have a material effect on SilverStream's
financial condition or results of operations.

In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 is effective for SilverStream's calendar year
1999 financial statements and the adoption did not have a material effect on
SilverStream financial condition or results of operations.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities." The Company is
currently analyzing the effect, if any, the standard will have on its financial
condition or results of operations.

F-11
<PAGE> 73
SILVERSTREAM SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Furniture, equipment and leasehold improvements consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1997 1998 1999
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures....................... $ 360,315 $ 502,821 $ 443,804
Computer equipment and software.............. 1,302,285 2,051,809 3,077,767
Telephone equipment.......................... 150,067 162,205 163,306
Leasehold improvements....................... 90,732 178,800 279,492
---------- ----------- -----------
1,903,399 2,895,635 3,964,369
Less accumulated depreciation and
amortization............................... (375,244) (1,099,289) (1,640,524)
---------- ----------- -----------
$1,528,155 $ 1,796,346 $ 2,323,845
========== =========== ===========
</TABLE>

4. ACCRUED EXPENSES

Accrued expenses include the following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
(UNAUDITED)
<S> <C> <C>
Fringe benefits............................................ $124,337 $ 482,718
Occupancy.................................................. 130,507 480,177
Professional fees.......................................... 66,387 83,829
Bonus...................................................... 19,996 239,998
Other...................................................... 81,522 275,339
-------- ----------
$422,749 $1,562,061
======== ==========
</TABLE>

5. DEBT

LONG-TERM DEBT

Under the terms of a credit facility, negotiated in 1996 and expiring March
1, 2000, borrowings of approximately $501,598 and $295,286 converted fully into
separate term loans on March 31, 1997 and September 30, 1997, respectively.
Principal repayments began April 1, 1997 and October 1, 1997 in 30 equal monthly
payments. Interest on the loans accrues at prime rate plus 0.5% (8.25% at
December 31, 1998) and is payable monthly in arrears. The outstanding balance
under the facility at December 31, 1997 and 1998 and June 30, 1999 was $607,937,
$308,870 and $159,336, respectively.

Under terms of a credit facility, negotiated in 1997 and expiring March 1,
2001, borrowings of approximately $602,000 converted fully into a term loan on
March 31, 1998. Principal repayments began April 1, 1998 in 36 equal monthly
payments. Interest on the loan accrues at prime rate plus 0.5% and is payable
monthly in arrears. The outstanding balance under the facility at December 31,
1998 and June 30, 1999 was $451,737 and $351,351, respectively.

Borrowings under the terms of both credit facilities are secured by
substantially all the Company's tangible assets.

F-12
<PAGE> 74
SILVERSTREAM SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The aggregate maturities of long term debt are as follows:

LINE OF CREDIT

The Company currently has a $750,000 line of credit with its bank for the
purpose of financing equipment purchases. The line of credit converts fully into
a term loan on October 31, 1999. Principal repayments begin on November 1, 1999
in 36 equal monthly payments. Interest on the loan accrues at prime plus 0.5%
and is payable monthly. Borrowings are secured by substantially all the
Company's tangible assets. The loan contains restrictive covenants which
include, among other restrictions, maintaining minimum tangible net worth
requirements, and limitations on incurring additional indebtedness and paying
cash dividends. There was $673,263 outstanding under the line of credit at June
30, 1999.

6. LEASES

The Company leases office space and certain equipment under operating
leases expiring through April 2003. Future minimum payments under noncancelable
operating leases are as follows:

<TABLE>
<S> <C>
1999........................................... $1,184,150
2000........................................... 535,114
2001........................................... 31,876
2002........................................... 29,604
2003........................................... 2,415
----------
Total minimum lease payments................... $1,783,159
==========
</TABLE>

Rent expense charged to operations for the period ended December 1996, and
the years ended December 1997 and 1998 was $41,000, $336,000 and $602,000,
respectively, and for the six months ended June 30, 1998 and 1999 was $202,000
and $546,000, respectively.

7. EMPLOYEE BENEFITS

RESTRICTED STOCK ISSUED TO FOUNDER

In May and July 1996, the Company sold 1,123,000 shares of common stock to
the founder pursuant to a founders stock restriction agreement at the fair value
of the stock at the date of the issuance. The shares were issued in the name of
the founder, who has all rights of a stockholder, subject to certain repurchase
and transfer provisions. If the founder ceases to be employed by the Company,
the Company shall have the option to repurchase from the founder a portion of
the shares based upon a predetermined formula. In addition, the founder shall
not sell any of the shares that are subject to repurchase by the Company.

An aggregate of 617,650 shares, 393,050 shares and 280,750 shares of common
stock are subject to repurchase at December 31, 1997 and 1998, and June 30,
1999, respectively.

1996 FOUNDERS STOCK INCENTIVE PLAN

In May 1996, the Company adopted the 1996 Founders Stock Incentive Plan
(the 1996 Plan) covering all eligible employees, officers, directors consultants
and advisors. At inception of the 1996 Plan,

F-13
<PAGE> 75
SILVERSTREAM SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Company authorized the issuance of up to 3,877,000 shares of common stock.
The Company issued and sold an aggregate of 3,775,031 shares of common stock
under the 1996 Plan pursuant to founders stock restriction agreements at the
fair value of the stock at the date of the issuance. The shares were issued in
the name of the employee, who has all rights of a stockholder, subject to
certain repurchase and transfer provisions. If the employee ceases to be
employed by the Company, the Company shall have the option to repurchase from
the employee a portion of the shares based upon a predetermined formula. In
addition, the employee shall not sell any of the shares that are subject to
repurchase by the Company. An aggregate of 145,394 shares of common stock have
been repurchased by the Company under the 1996 Plan and retired.

An aggregate of 2,235,839 shares, 1,436,707 shares and 1,063,434 shares of
common stock are subject to repurchase at December 31, 1997 and 1998, and June
30, 1999, respectively.

1997 STOCK INCENTIVE PLAN

In February 1997, the Company adopted the 1997 Stock Incentive Plan (the
1997 Plan) covering all eligible employees, officers, directors, consultants and
advisors. As of December 31, 1998 the Company has reserved 1,305,719 shares of
common stock for issuance under the 1997 Plan. As of June 30, 1999, the Company
authorized the issuance of up to 3,500,000 shares of common stock under the 1997
Plan. Under the 1997 Plan, the Company may grant stock options to purchase
shares of the Company's common stock, restricted common stock awards and other
stock-based awards having terms and conditions at the discretion of the
Company's Board of Directors. The prices, terms and vesting periods of stock
awards under the 1997 Plan are determined by the Board of Directors at the date
of the grant. The 1997 Plan also contains provisions which stipulate that upon
an acquisition event the Board of Directors is authorized to determine that any
stock option, restricted stock or other stock-based award granted under the 1997
Plan may become immediately exercisable in full or in part.

The Company issued and sold an aggregate of 300,000 shares of common stock
under the 1997 Plan pursuant to founders stock restriction agreements at the
fair value of the stock at the date of issuance. The shares are issued in the
name of the employee, who has all rights of a stockholder, subject to certain
repurchase and transfer provisions. If the employee ceases to be employed by the
Company, the Company shall have the option to repurchase from the employee a
portion of shares based upon a predetermined formula. In addition, the employee
shall not sell any of the shares that are subject to repurchase by the Company.

An aggregate of 300,000 shares, 160,875 shares and 143,000 shares of common
stock are subject to repurchase at December 31, 1997 and 1998, and June 30,
1999.

In March 1999, options to purchase an aggregate of 201,450 shares of common
stock which vest over a five year period were granted to employees with an
exercise price of $4.00 per share. In April 1999, options to purchase an
aggregate of 11,600 and 215,450 shares of common stock which vest over a five
year period were granted to employees with an exercise price of $6.00 and $8.00
per share, respectively. Additionally, on April 30, 1999, an option to purchase
an aggregate of 25,000 shares of common stock which vested immediately was
granted to a director with an exercise price of $8.00 per share. In May 1999,
options to purchase an aggregate of 113,250 shares of common stock which vest
over a five year period were granted to employees with an exercise price of
$8.00 per share. In June 1999, options to purchase an aggregate of 27,000 shares
of common stock which vest over a five-year period were granted to employees
with an exercise price of $10.00 per share.

The Company has recorded deferred compensation of $2,038,078 relating to
these option grants, which is being charged ratably to operations over the
vesting period of the options.

F-14

<PAGE> 76
SILVERSTREAM SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company holds notes receivable totaling $103,500 from employees at
December 31, 1997 and 1998, and at June 30, 1998 and 1999. These notes arose
from transactions in September 1997 whereby the Company loaned the employees
money to purchase an aggregate of 207,000 shares of the Company's common stock
at the then fair market value. The notes receivable are fully recourse to the
employees and are due to be paid in full, with accrued interest at the rate of
6.39% per annum, on August 26, 2002. These notes receivable are shown as a
reduction in stockholders' equity in the accompanying balance sheets.

401(K) PLAN

The Company has a 401(k) plan (the Plan), whereby eligible employees may
contribute up to 15% of their compensation, subject to limitations established
by the Internal Revenue Code. The Company may also contribute a discretionary
matching contribution, to each such participant's deferred compensation equal to
a discretionary percentage determined by the Company. As of June 30, 1999, the
Company had not made any discretionary matching contributions in any of the
fiscal periods presented.

STOCK OPTION DISCLOSURES

The Company has adopted the disclosure provisions only of SFAS 123. The
fair values for these options were estimated at the date of grant using the
minimum value method with the following assumptions:

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
------------ ------------
1997 1998 1998 1999
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expected life (years)........................... 4.97 5.35 5.17 5.16
Risk free interest rate......................... 5.66% 4.75% 5.5% 5.25%
Dividend yield.................................. -- -- -- --
</TABLE>

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:

<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- ---------------------------
1997 1998 1998 1999
----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Pro forma net loss......................... $(8,351,473) $(12,996,310) $(6,662,982) $(9,675,132)
Pro forma net loss per share............... $ (10.63) $ (4.94) $ (2.85) $ (2.80)
</TABLE>

Compensation expense under SFAS 123 for 1997 and 1998 is not representative
of future expense, as it includes one and two years of expense, respectively. In
future years, the effect of determining compensation cost using the fair value
method will include additional vesting and associated expense.

F-15
<PAGE> 77
SILVERSTREAM SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Option activity under the 1997 Plan is summarized below:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------- SIX MONTHS ENDED
1997 1998 JUNE 30, 1999
------------------ ------------------ --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
year........................ -- -- 607,000 $ .34 895,175 $ 1.15
Granted....................... 614,000 $.34 381,950 2.21 593,750 6.69
Expired or canceled........... (7,000) .20 (38,250) .37 (33,050) 1.32
Exercised..................... -- (55,525) .17 (54,683) .32
------- ------- ---------
Outstanding, end of year...... 607,000 .34 895,175 1.15 1,401,192 3.53
======= ======= =========
Exercisable at end of year.... -- 159,850 217,800
Available for future grants... 398,719 55,019 1,688,600
Weighted-average fair value of
options granted during
year........................ $.33 $2.16 $10.08
</TABLE>

The following table presents weighted-average price and life information
about significant option groups outstanding at December 31, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ .02 - $ .20 162,475 6.79 Years $ .07 30,525 $.08
$ .50 363,750 5.89 Years .50 127,225 .50
$ .90 137,500 7.99 Years .90 2,100 .90
$3.00 241,450 9.23 Years 3.00 -- --
------- -------
$ .02 - $3.00 905,175 7.26 Years $1.15 159,850 $.43
======= =======
</TABLE>

8. PREFERRED STOCK

In July, August and November 1996, the Company sold 3,683,050 shares of
Series A redeemable convertible preferred stock, par value $.001, at $1.00 per
share. Proceeds to the Company were $3,575,000 (net of $25,000 of issuance
costs).

In June and September 1997, the Company sold 1,500,938 shares of Series B
redeemable convertible preferred stock, par value $.001, at $5.33 per share.
Proceeds to the Company were $7,900,002 (net of $20,000 of issuance costs).

In November and December 1997, the Company sold 1,728,283 shares of Series
C convertible preferred stock, par value $.001, at $8.78 per share. Proceeds to
the Company were $15,154,325 (net of $20,000 of issuance costs).

In March 1998, the Company sold 194,305 shares of Series C convertible
preferred stock, par value $.001, at $8.78 per share. Proceeds to the Company
were $1,701,998 (net of $4,000 of issuance costs).

The Company has reserved up to 8,659,208 shares of its common stock for
issuance upon conversion of the preferred stock.

F-16
<PAGE> 78
SILVERSTREAM SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Significant features of the Series A, B and C preferred stocks are as
follows:

CONVERSION

As more fully described in the Company's amended Certificate of
Incorporation, each share of preferred stock is convertible at the shareholder's
option into such number of shares of common stock as determined by a conversion
factor, as defined. The preferred stock will automatically convert upon the
closing of a qualified public offering of the Company's common stock, as
defined.

REDEMPTION

At the written request of the holders of a majority of the outstanding
shares of Series A and Series B preferred stock, the Company will redeem a
specified percentage of the Series A and Series B preferred stock on December
31, 2001, 2002 and 2003, respectively. The price per share to be paid to the
Series A and Series B preferred stockholders shall be $1.00 and $5.33,
respectively, plus any dividends declared but unpaid.

DIVIDENDS

The holders of preferred stock shall be entitled to receive, when and if
declared by the Board of Directors of the Company, dividends in the same amount
per share as would be payable on the number of shares of common stock into which
the preferred stock is then convertible, payable in preference and priority to
payment of any cash dividend on common stock.

VOTING

Shares of preferred stock are entitled to a number of votes on any matter
put before the shareholders of the Company equal to the number of shares of
common stock into which they are convertible.

LIQUIDATION

Upon liquidation of the Company, holders of Series A, Series B and Series C
preferred stock shall be first entitled, before any distribution or payment is
made to holders of common stock, to be paid $1.00, $5.33 and $8.78 per share,
respectively, plus any declared and unpaid dividends thereon.

9. NON-MONETARY TRANSACTIONS

In August 1996, the Company issued 83,050 shares of its Series A redeemable
convertible preferred stock in consideration for $83,050 of fees for personnel
placement services. The transaction was accounted for by recognizing
professional fees expense of $83,050 and increasing the preferred stock balance
by the same amount.

In June 1997, the Company issued 15,009 shares of its Series B redeemable
convertible preferred stock in consideration for $79,998 of fees for marketing
services. The transaction was accounted for by recognizing marketing expense of
$79,998 and increasing the preferred stock balance by the same amount.

In September 1997, the Company issued 207,000 shares of common stock in
exchange for interest bearing notes of $103,500 and cash of $11,500 (see Note
7).

In November 1997, the Company entered into an agreement to issue up to
48,000 shares of its common stock in consideration of software services and
co-marketing efforts. The Company has issued 48,000 shares under the agreement.
The transaction was accounted for by recognizing marketing expense of $43,200
and increasing the common stock balance by the same amount.

F-17
<PAGE> 79
SILVERSTREAM SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In September 1998, the Company issued 39,863 shares of its common stock in
consideration for $159,452 of fees for marketing services. The transactions were
accounted for by recognizing total marketing expense of $159,452 and increasing
the common stock balance by the same amount.

10. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. A valuation allowance has been established to reflect
the uncertainty of future taxable income to utilize available tax loss
carryforwards and other deferred tax assets. Significant components of the
Company's deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward......................... $ 3,700,000 $ 8,900,000
Research and development credit carryforward............ 150,000 350,000
Other................................................... 67,000 146,000
Deferred tax liabilities:
Depreciation............................................ (135,000) (247,000)
----------- -----------
3,782,000 9,149,000
Less valuation allowance for deferred tax assets........ (3,782,000) (9,149,000)
----------- -----------
Total..................................................... $ -- $ --
=========== ===========
</TABLE>

As of December 31, 1998, the Company has net operating loss carryforwards
and research and development tax carryforwards of approximately $22,300,000 and
$350,000, respectively, available to offset future Federal taxable income. These
carryforwards begin to expire in 2012 and may be subject to certain limitations.

11. SEGMENT AND GEOGRAPHIC INFORMATION

As discussed in Note 2, the Company operates in one business segment: the
development and delivery of application server software and related software
products and services. In making this determination, the Company considered the
information which management uses to oversee the Company's operations as well as
the manner in which the business is managed.

Foreign operations in 1998 were conducted in four countries in Europe.
During the first six months of 1999, foreign operations were expanded.
Operations are currently conducted in six countries in Europe and three
countries in the Asia Pacific region.

Revenues by geographic region are as follows:

F-18
<PAGE> 80
SILVERSTREAM SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Total long lived assets by geographic region are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- -------------------------
1996 1997 1998 1998 1999
-------------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States............ $308,837 $1,528,155 $1,733,471 $1,686,072 $2,841,435
Other.................... -- -- 62,876 -- 217,683
-------- ---------- ---------- ---------- ----------
Total.................... $308,837 $1,528,155 $1,796,347 $1,686,072 $3,059,118
======== ========== ========== ========== ==========
</TABLE>

12. LOSS PER SHARE

The following table sets forth the computation of basic and diluted loss
per share:

<TABLE>
<CAPTION>
PERIOD FROM
MAY 8, 1996
(INCEPTION) TO YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
DECEMBER 31, -------------------------- -------------------------
1996 1997 1998 1998 1999
-------------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss................. $ (951,584) $(8,335,095) $(12,885,047) $(6,601,470) $(9,342,049)
Beneficial conversion
feature in series D
preferred stock........ -- -- -- -- (263,158)
---------- ----------- ------------ ----------- -----------
Net loss applicable to
common stockholders.... (951,584) (8,335,095) (12,885,047) (6,601,470) (9,605,207)
========== =========== ============ =========== ===========
Denominator:
Weighted average common
shares outstanding..... 2,322,605 5,065,356 5,122,480 5,109,286 5,230,455
Weighted average common
shares subject to
repurchase............. (2,136,919) (4,279,808) (2,489,984) (2,774,711) (1,679,106)
---------- ----------- ------------ ----------- -----------
Denominator for basic and
diluted loss per share
applicable to common
stockholders............. 185,686 785,548 2,632,496 2,334,575 3,551,349
========== =========== ============ =========== ===========
Basic and diluted net
loss per share
applicable to common
stockholders........... $ (5.12) $ (10.61) $ (4.89) $ (2.83) $ (2.70)
Pro forma:
Shares used above........ 2,632,496 3,551,349
Pro forma adjustment to
reflect weighted effect
of assumed conversion
of convertible
preferred stock........ 7,059,197 8,066,899
------------ -----------
Shares used in computing
pro forma basic net
loss per share
applicable to common
stockholders........... 9,691,693 11,618,248
============ ===========
Pro forma basic and
diluted net loss per
share applicable to
common stockholders.... $ (1.33) $ (.83)
</TABLE>

F-19
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SILVERSTREAM SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has excluded all preferred stock, outstanding stock options and
shares subject to repurchase by the Company from the calculation of loss per
share because all such securities are antidilutive for all periods presented.
Shares subject to repurchase by the Company will be included in the computation
of earnings per share when the Company's option to repurchase these shares
expires. Weighted-average options outstanding to purchase 0, 168,192, and
348,880 shares of common stock for the years ended December 31, 1996, 1997, and
1998, were not included in the computation of net loss per share because the
effect would be antidilutive. Such securities, had they been dilutive, would
have been included in the computation of diluted net loss per share using the
treasury stock method.

13. SUBSEQUENT EVENTS

ISSUANCE OF SERIES D STOCK

In March, April and May 1999, the company sold 1,552,632 shares of Series D
convertible preferred stock, par value $.001, at $9.50 per share. Proceeds to
the Company were $14,727,997 (net of $22,000 of issuance costs). Terms of the
Series D stock are consistent with Series A, Series B and Series C (see Note 8)
except that Series D has no mandatory redemption provisions. The issuance of
Series D stock in May 1999 resulted in a beneficial conversion of $263,158.

CHANGE IN AUTHORIZED STOCK

On June 9, 1999, the Board of Directors approved an amendment and
restatement of the Company's certificate of incorporation to increase the number
of authorized shares to 100,000,000 shares of common stock and 2,000,000 shares
of undesignated preferred stock. Such amended and restated certificated
incorporation will be effective upon the closing of this offering.

EMPLOYEE STOCK PURCHASE PLAN

On June 9, 1999, the Board of Directors approved the adoption of the
Company's 1999 employee stock purchase plan (the 1999 Purchase Plan). A total of
300,000 shares of common stock has been reserved for issuance under the 1999
Purchase Plan. The 1999 Purchase Plan permits eligible employees to acquire
shares of the Company's common stock through periodic payroll deductions of up
to 10% of base cash compensation. Each offering period will have a maximum
duration of 12 months. The price at which the common stock may be purchased is
85% of the lesser of the closing price of the Company's common stock on the
first day of the applicable offering period or on the last day of the respective
purchase period. The initial offering period will commence on the effectiveness
of the initial public offering and will end at the end of a six month period.

ACQUISITIONS

In June and July 1999, the Company acquired three international
distributors by issuing 140,000 shares of common stock. The transactions have
been accounted for as purchases and, accordingly, their results of operations
are included in the consolidated financial statements from the dates of
acquisition. The purchase prices have been allocated to the assets acquired and
liabilities assumed based upon their respective fair values.

F-20

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SilverStream Application Server

Allowing corporations to build and deploy Java & HTML business applications.
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[SILVERSTREAM SOFTWARE, INC. CORPORATE LOGO]