SOFTWARE TECHNOLOGIES CORP/
S-1/A, 2000-04-03
PREPACKAGED SOFTWARE
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<PAGE>   1


     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 3, 2000


                                                      REGISTRATION NO. 333-30648
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------


                                AMENDMENT NO. 2

                                       TO

                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                            ------------------------

                       SOFTWARE TECHNOLOGIES CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                            ------------------------

<TABLE>
<S>                                <C>                                <C>
            CALIFORNIA                            7372                            95-4249153
 (STATE OR OTHER JURISDICTION OF      (PRIMARY STANDARD INDUSTRIAL             (I.R.S. EMPLOYER
  INCORPORATION OR ORGANIZATION)         CLASSIFICATION NUMBER)             IDENTIFICATION NUMBER)
</TABLE>

                           404 EAST HUNTINGTON DRIVE
                           MONROVIA, CALIFORNIA 91016
                                 (626) 471-6000
  (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                            ------------------------
                              JAMES T. DEMETRIADES
                            CHIEF EXECUTIVE OFFICER
                       SOFTWARE TECHNOLOGIES CORPORATION
                           404 EAST HUNTINGTON DRIVE
                           MONROVIA, CALIFORNIA 91016
                                 (626) 471-6000
 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                             OF AGENT FOR SERVICE)
                            ------------------------
                                   COPIES TO:

<TABLE>
<S>                                                 <C>
              JEFFREY D. SAPER, ESQ.                           SUZANNE SAWOCHKA HOOPER, ESQ.
            J. ROBERT SUFFOLETTA, ESQ.                              COOLEY GODWARD LLP
         WILSON SONSINI GOODRICH & ROSATI                           5 PALO ALTO SQUARE
             PROFESSIONAL CORPORATION                               3000 EL CAMINO REAL
                650 PAGE MILL ROAD                                  PALO ALTO, CA 94306
                PALO ALTO, CA 94304                                   (650) 843-5000
                  (650) 493-9300
</TABLE>

                            ------------------------
        APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
    If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.  [ ]
    If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.  [ ]
    If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.  [ ]
    If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.  [ ]
    If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.  [ ]

     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.


- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>   2

       THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
       MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
       THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
       NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO
       BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
       PERMITTED.

PROSPECTUS (Subject to Completion)


Issued April 3, 2000


                                6,100,000 Shares

                                   [STC Logo]

                                  COMMON STOCK

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

STC IS OFFERING SHARES OF ITS COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING
AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE
INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $16 AND $18 PER SHARE.

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


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


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

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

                              PRICE $     A SHARE

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

<TABLE>
<CAPTION>
                                                                         UNDERWRITING
                                                              PRICE TO   DISCOUNTS AND   PROCEEDS TO
                                                               PUBLIC     COMMISSIONS        STC
                                                              --------   -------------   -----------
<S>                                                           <C>        <C>             <C>
Per Share...................................................         $            $              $
Total.......................................................  $            $              $
</TABLE>

STC has granted the underwriters the right to purchase up to an additional
915,000 shares of common stock to cover over-allotments.

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.

Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on
            , 2000.

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

MORGAN STANLEY DEAN WITTER
                    MERRILL LYNCH & CO.
                                        DONALDSON, LUFKIN & JENRETTE

            , 2000
<PAGE>   3
                          [Inside Front Cover Artwork]



Graphical representation of STC's e*Xchange product connecting various
e-business systems on a global basis, together with a picture of a computer
screen illustrating use of the e*Gate product. The graphic also includes the
following text:  The STC Solution: The e*Xchange eBusiness Integration Suite



Connects e-Business Systems



o  Optimizes business processes


o  Globally deployed; centrally managed

o  Fully graphical-minimal programming
o  Proven customer success

<PAGE>   4

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                      PAGE
                                      ----
<S>                                   <C>
Prospectus Summary..................    3
Risk Factors........................    6
Special Note Regarding
  Forward-Looking Statements........   15
Use of Proceeds.....................   16
Concurrent Sale of Stock to EDS.....   16
Dividend Policy.....................   16
Capitalization......................   17
Dilution............................   18
Selected Consolidated Financial
  Data..............................   19
Management's Discussion and Analysis
  of Financial Condition and Results
  of Operations.....................   20
</TABLE>

<TABLE>
<CAPTION>
                                      PAGE
                                      ----
<S>                                   <C>
Business............................   30
Management..........................   43
Related Party Transactions..........   53
Principal Shareholders..............   54
Description of Capital Stock........   56
Shares Eligible for Future Sale.....   59
Underwriters........................   61
Legal Matters.......................   63
Experts.............................   63
Where You Can Find More
  Information.......................   63
Index to Consolidated Financial
  Statements........................  F-1
</TABLE>

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

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

     Until           2000, 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 unsold allotments or
subscriptions.

                                        2
<PAGE>   5

                               PROSPECTUS SUMMARY

     You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and accompanying notes
appearing elsewhere in this prospectus.

     We are a leading provider of electronic business, or e-Business,
integration software that enables the seamless flow of information within and
among enterprises on a global basis. e*Xchange, our comprehensive software
suite, provides companies with a flexible and easily configurable platform to
connect applications and systems not only within an organization but also across
geographically dispersed enterprises. We believe that we offer the only
end-to-end e-Business integration solution encompassing intra-enterprise, or
application-to-application, integration and inter-enterprise, or
business-to-business, integration, as well business process management
capabilities. Our e*Xchange product suite includes our core technology engine,
e*Gate, together with a combination of specialized product offerings that meet
specific integration needs. e*Xchange builds upon more than nine years of our
dedication to the continuous development of application and systems integration
solutions within and among enterprises.

     e*Xchange enables our customers to connect applications, databases or
systems, deploy and manage trading partner paradigms, including direct
business-to-business, or B2B, and trading exchanges, and manage and optimize
business processes that occur within and beyond an enterprise. Our solution
provides customers with the flexibility to implement and adapt their business
strategies in response to market dynamics and pursue new business initiatives to
enhance revenue, profit and customer service. e*Xchange's distributed
architecture is designed to scale throughout an organization's network of
customers, partners and suppliers and meet the performance requirements of
global e-Business. Our comprehensive graphically-based solution reduces or
eliminates the need for custom programming and is designed for easy deployment,
enabling rapid time-to-market for e-Business initiatives. e*Xchange can also
lower operational costs for customers by streamlining business processes as well
as by reducing information technology investments and costs.

     To promote additional market penetration of our products, we have
established strategic alliances with three of the largest independent systems
integrators, Andersen Consulting, Computer Sciences Corporation, or CSC, and
Electronic Data Systems Corporation, or EDS. The alliances provide for joint
development and marketing of vertical market offerings and generation of license
revenues for STC. We have incentivized each of these partners by issuing them
warrants to purchase shares of our common stock, with the vesting of the shares
conditioned upon achievement of agreed upon milestones, which include the
generation of qualified customer introductions or revenues for STC. In addition,
Andersen Consulting has an equity interest in STC, and EDS has agreed to buy
shares of our common stock concurrently with our initial public offering at the
public offering price.

     We license our products and sell our services primarily through our direct
sales force, complemented by the selling and support efforts of our systems
integrators and resellers. We have 12 international sales and support offices.
As of December 31, 1999, we had licensed our products to over 1,200 customers
globally in a variety of industries, including financial services/insurance,
healthcare, manufacturing, retail/e-Commerce/services and
telecommunications/utilities. Our customers include Amdahl, ABN Amro, Barnes &
Noble.com, Bausch and Lomb, Denticare of California, Fluor, Hewlett-Packard,
J.P. Morgan, Nike, Northern Trust, PETsMART, UBS AG and WestLB Bank.

     We were incorporated as STDC Corporation in the state of California in
December 1989 and changed our name to Software Technologies Corporation in June
1992. Our principal executive offices are located at 404 East Huntington Drive,
Monrovia, California 91016, and our telephone number at this address is (626)
471-6000. Our World Wide Web address is www.stc.com. The information on our Web
site is not incorporated by reference into this prospectus. Our registered
trademarks include e*Gate, DataGate and the STC logo. This prospectus also
includes other trade names, trademarks and service marks of ours and of other
companies and organizations.
                                        3
<PAGE>   6

                                  THE OFFERING

Common stock offered..................     6,100,000 shares

Common stock to be outstanding after
this offering.........................     68,064,745 shares

Use of proceeds.......................     For repayment of debt and general
                                           corporate purposes, including working
                                           capital. See "Use of Proceeds."

Proposed Nasdaq National Market
symbol................................     STCS

     The foregoing information is based on the number of shares outstanding as
of January 31, 2000 and excludes:

     - 2,662,500 shares of common stock issuable upon exercise of outstanding
       warrants as of January 31, 2000 at a weighted average exercise price of
       $5.59 per share;

     - 21,375,903 shares of common stock reserved for issuance under our stock
       option plans, of which 12,232,314 shares at a weighted average exercise
       price of $2.02 per share were subject to outstanding options as of
       January 31, 2000; and

     - 2,250,000 shares of common stock reserved for issuance under our employee
       stock purchase plan.

      In addition, except as otherwise noted, all information in this prospectus
       assumes:

     - the conversion of all outstanding preferred stock into 13,972,162 shares
       of common stock upon the closing of this offering;

     - the issuance and sale of 1,200,000 shares of common stock to EDS
       concurrently with the closing of this offering; and

     - the underwriters' over-allotment option is not exercised.
                                        4
<PAGE>   7

                   SUMMARY CONSOLIDATED FINANCIAL INFORMATION
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

     The pro forma basic and diluted share calculation below reflects the
conversion upon the closing of this offering of all outstanding shares of
preferred stock into 13,972,162 shares of common stock as if the conversion
occurred at the date of original issuance.

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                         --------------------------------
                                                           1997        1998        1999
                                                         --------    --------    --------
<S>                                                      <C>         <C>         <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues.........................................  $ 26,699    $ 37,461    $ 55,171
Gross profit...........................................    17,177      22,739      29,990
Income (loss) from operations..........................       779     (11,259)    (25,350)
Net income (loss)......................................       506     (11,243)    (25,865)
Basic and diluted net income (loss) per share available
  to common shareholders...............................  $    .01    $   (.27)   $   (.62)
Weighted average shares used in computation of basic
  and diluted net income (loss) per share available to
  common shareholders..................................    42,801      43,748      45,954
Pro forma basic and diluted net loss per share.........                          $   (.44)
Pro forma basic and diluted weighted average shares....                            58,470
</TABLE>

     The pro forma column below gives effect to the automatic conversion of our
redeemable convertible preferred stock into common stock upon the closing of
this offering. The pro forma as adjusted column below gives effect to the sale
of the 6,100,000 shares of common stock in this offering at an assumed public
offering price of $17.00 per share, less the estimated underwriting discounts
and commissions and estimated offering expenses, the sale of 1,200,000 shares of
common stock to EDS in a concurrent private placement at the assumed initial
public offering price and the repayment of outstanding debt from the proceeds of
this offering.


<TABLE>
<CAPTION>
                                                             AS OF DECEMBER 31, 1999
                                                       ------------------------------------
                                                                                 PRO FORMA
                                                        ACTUAL     PRO FORMA    AS ADJUSTED
                                                       --------    ---------    -----------
<S>                                                    <C>         <C>          <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................  $  1,572     $ 1,572      $106,413
Working capital (deficit)............................    (1,917)     (1,917)      102,924
Total assets.........................................    29,852      29,852       134,693
Deferred revenue.....................................    10,354      10,354        10,354
Long-term liabilities................................    10,000      10,000            --
Redeemable convertible preferred stock...............    24,681          --            --
Total shareholders' equity (deficit).................   (28,421)     (3,740)      111,101
</TABLE>



                          RECENT FINANCIAL INFORMATION



     For the three months ended March 31, 2000, we expect to record total
revenues ranging from approximately $17.2 million to $17.4 million. As of the
date of this prospectus, our financial statements for this period have not yet
been completed, and accordingly, information regarding this period is
preliminary and subject to change.

                                        5
<PAGE>   8

                                  RISK FACTORS

     You should carefully consider the risks described below before making an
investment decision. The risks described below are not the only ones facing our
company. Additional risks not presently known to us or that we currently deem
immaterial may also impair our business operations.

     Our business, financial condition or results of operations could be
adversely affected by any of these risks. The trading price of our common stock
could decline due to any of these risks, and you may lose all or part of your
investment.

RISKS RELATED TO STC

     WE HAVE A LARGE ACCUMULATED DEFICIT, WE EXPECT FUTURE LOSSES AND WE MAY NOT
     ACHIEVE OR MAINTAIN PROFITABILITY.

     We incurred substantial losses in 1998 and 1999 as we increased funding of
the development of our products and technologies and expanded our sales and
marketing organization. As of December 31, 1999, we had an accumulated deficit
of $42.3 million. We intend to continue to invest heavily in sales and marketing
and research and development. As a result, we expect to incur losses in 2000 and
2001, and we will need to significantly increase our quarterly revenues to
achieve profitability. We cannot predict when we will operate profitably, if at
all.

     WE EXPERIENCE LONG AND VARIABLE SALES CYCLES, WHICH COULD HAVE A NEGATIVE
     IMPACT ON OUR RESULTS OF OPERATIONS FOR ANY GIVEN QUARTER.

     Our products are often used by our customers throughout their organizations
to address critical business problems. Customers generally consider a wide range
of issues before committing to purchase our products, including product
benefits, the ability to operate with existing and future computer systems, the
ability to accommodate increased transaction volumes and product reliability.
Many customers are addressing these issues for the first time when they consider
whether to buy our products and services. As a result, we or other parties,
including systems integrators, must educate potential customers on the use and
benefits of our products and services. In addition, the purchase of our products
generally involves a significant commitment of capital and other resources by a
customer. This commitment often requires significant technical review,
assessment of competitive products and approval at a number of management levels
within a customer's organization. Our sales cycle may vary based on the industry
in which the potential customer operates and is difficult to predict for any
particular license transaction. The length and variability of our sales cycle
makes it difficult to predict whether particular sales will be concluded in any
given quarter. If one or more of our license transactions are not consummated in
a given quarter, our results of operations for that quarter may be below our
expectations and the expectations of analysts and investors.

     OUR OPERATING RESULTS ARE HIGHLY DEPENDENT ON LICENSE REVENUES FROM ONE
     SOFTWARE SUITE, AND OUR BUSINESS COULD BE MATERIALLY HARMED BY FACTORS THAT
     ADVERSELY AFFECT THE PRICING AND DEMAND FOR THIS SOFTWARE SUITE.

     Substantially all of our license revenues have been, and are expected to
continue to be, derived from the license of our e*Xchange software suite.
Accordingly, our future operating results will depend on the demand for
e*Xchange by future customers, including new and enhanced releases that are
subsequently introduced. Our core technology engine, e*Gate version 4.0, was
completed in September 1999 and commercially launched in November 1999. If our
competitors release new products that are superior to e*Xchange in performance
or price, or if we fail to enhance e*Xchange and introduce new products in a
timely manner, demand for our products may decline, and we may have to reduce
the pricing of our products. A decline in demand or pricing for e*Xchange as a
result of these or other factors would significantly reduce our revenues.

                                        6
<PAGE>   9

     In the past, we have experienced delays in the commencement of commercial
releases of our e*Xchange software suite. To date, these delays have not had a
material impact on our revenues. In the future, we may fail to introduce or
deliver new products on a timely basis. If new releases or products are delayed
or do not achieve market acceptance, we could experience customer
dissatisfaction or a delay or loss of revenues. For example, the introduction of
new enterprise and business applications requires us to introduce new e*Ways
adapters to support the integration of these applications. Our failure to
introduce these or other modules in a timely manner could cause our revenues and
market share to decline. In addition, customers may delay purchases of our
products in anticipation of future releases. If customers defer material orders
in anticipation of new releases or new product introductions, our revenues may
decline.

     Moreover, as we release enhanced versions of our products, we may not be
successful in upgrading our customers who purchased previous versions of
e*Xchange to the current version. We also may not be successful in selling
add-on modules for our products to existing customers. Any failure to continue
to upgrade existing customers' products or sell new modules, if and when they
are introduced, could negatively impact customer satisfaction and our revenues.

     WE MUST CONTINUE TO SUCCESSFULLY SELL OUR PRODUCTS TO COMMERCIAL CUSTOMERS
     OUTSIDE OF THE HEALTHCARE INDUSTRY OR OUR REVENUES MAY DECLINE.

     Since 1998, we have invested a significant amount of our sales and
marketing resources to target various commercial markets outside of the
healthcare industry, particularly for business-to-business integration. As a
result, license revenues from customers in the healthcare industry accounted for
approximately 32% of total license revenues in 1999, down from approximately 65%
of total license revenues in 1998. We expect that license revenues for
non-healthcare customers will continue to increase as a percentage of license
revenues as a result of this continued investment. A license to a commercial
customer is expected to involve a longer sales cycle and higher revenues
compared to a license to a healthcare customer. We must continue to increase the
size of our direct sales force to implement our strategy of increased sales to
commercial customers. In addition, because the healthcare industry, which has
historically represented our largest customer base, has generally not required
business-to-business capabilities, e*Xchange has been deployed to a greater
extent in intra-enterprise environments than in business-to-business
environments. We cannot assure you that e*Xchange will be commercially
successful for business-to-business environments, and we expect to devote
significant resources to the continued development, support, sales and marketing
of e*Xchange for these environments. If we fail to increase our sales force or
to penetrate additional commercial accounts in a meaningful way, our operating
results will suffer.

     The revenue potential from the healthcare market and the various commercial
markets may fluctuate due to industry-specific conditions. For example, in 1999
the healthcare market reduced spending on IT systems because of a downturn in
the healthcare industry. Given our limited market penetration and experience in
other commercial markets, such as financial services, telecommunications and
manufacturing, and the high degree of competition and the rapidly changing
environment in these industries, we cannot assure you that we will be able to
expand sales with respect to these markets. If we fail to successfully penetrate
commercial accounts in these markets, we may experience decreased sales in
future periods. Moreover, if we penetrate additional markets, our results of
operations may fluctuate with the economic conditions in those markets.

                                        7
<PAGE>   10

     OUR REVENUES WILL LIKELY DECLINE IF WE DO NOT DEVELOP AND MAINTAIN
     SUCCESSFUL RELATIONSHIPS WITH OUR SYSTEMS INTEGRATION PARTNERS, AND THESE
     SYSTEMS INTEGRATORS ALSO HAVE RELATIONSHIPS WITH OUR COMPETITORS.

     We recently entered into agreements with Andersen Consulting, CSC and EDS
for them to install and deploy our products and perform custom integration of
systems and applications. These systems integrators will also engage in joint
marketing and sales efforts with us. If these relationships fail, we will have
to devote substantially more resources to the sales and marketing, and
implementation and support of our products than we would otherwise, and our
efforts may not be as effective as those of the systems integrators. In many
cases, these parties have extensive relationships with our existing and
potential customers and influence the decisions of these customers. We rely upon
these firms to recommend our products during the evaluation stage of the
purchasing process, as well as for implementation and customer support services.

     These systems integrators are not contractually required to implement our
products, and competition for these resources may preclude us from obtaining
sufficient resources to provide the necessary implementation services to support
our needs. If the number of installations of our products exceeds our access to
the resources provided by these systems integrators, we will be required to
provide these services internally, which would increase our expenses and
significantly limit our ability to meet our customers' implementation needs. A
number of our competitors have stronger relationships with some of these systems
integrators and, as a result, these systems integrators might be more likely to
recommend competitors' products and services instead of ours. In addition, a
number of our competitors have relationships with a greater number of these
systems integrators or have stronger systems integrator relationships based on
specific vertical markets and, therefore, have access to a broader base of
customers.

     Our failure to establish or maintain systems integrator relationships would
significantly harm our ability to license and successfully implement our
software products. In addition, we rely on the industry expertise and customer
contacts of these firms in order to market our products more effectively.
Therefore, any failure of these relationships would also harm our ability to
increase revenues in key commercial markets. We are currently investing, and
plan to continue to invest, significant resources to develop these
relationships. Our operating results could be adversely affected if these
efforts do not generate license and service revenues necessary to offset this
investment.

     OUR MARKETS ARE HIGHLY COMPETITIVE AND, IF WE DO NOT COMPETE EFFECTIVELY,
     WE MAY SUFFER PRICE REDUCTIONS, REDUCED GROSS MARGINS AND LOSS OF MARKET
     SHARE.

     The market for our products is intensely competitive, evolving and subject
to rapid technological change. We expect the intensity of competition to
increase in the future. As a result of increased competition, we may have to
reduce the price of our products and services, and we may experience reduced
gross margins and loss of market share, any one of which could significantly
reduce our future revenues and operating results. Our current competitors
include vendors offering enterprise application integration, or EAI, and
traditional electronic data interchange, or EDI, software products, as well as
"in house" information technology departments of potential customers that have
developed or may develop systems that provide some or all of the functionality
of our e*Xchange product suite. We may also encounter competition from major
enterprise software developers in the future.

     Many of our existing and potential competitors have more resources, broader
customer relationships and better-established brands than we do. In addition,
many of these competitors have extensive knowledge of our industry. Some of our
competitors have established or may establish cooperative relationships among
themselves or with third parties to offer a single solution and increase the
ability of their products to address customer needs.

                                        8
<PAGE>   11

     OUR GROWTH CONTINUES TO PLACE A SIGNIFICANT STRAIN ON OUR MANAGEMENT
     SYSTEMS AND RESOURCES. IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO
     MARKET AND SELL OUR PRODUCTS AND DEVELOP NEW PRODUCTS MAY BE HARMED.

     We must plan and manage our growth effectively in order to offer our
products and services and achieve revenue growth and profitability in a rapidly
evolving market. We continue to increase the scope of our operations
domestically and internationally and have recently added a number of employees.
Our growth has and will continue to place a significant strain on our management
systems and resources, and we may not be able to effectively manage our growth
in the future.

     Furthermore, if our relationships with systems integrators succeed and we
are able to penetrate additional commercial markets, we will need additional
sales and marketing and professional services resources to support these
customers. The growth of our customer base will require us to invest significant
resources in the training and development of our employees and our systems
integration partners. If these organizations fail to keep pace with the number
and demands of the customers that license our products, our ability to market
and sell our products and services and our ability to develop new products and
services will be harmed. For us to effectively manage our growth, we must
continue to:

     - expand our direct sales force;

     - expand our professional services organization;

     - hire and retain qualified software engineers;

     - improve our operational, financial and management controls;

     - improve our reporting systems and procedures;

     - enhance our management and information control systems; and

     - expand, train and motivate our workforce.

     In addition, in September 1999, we opened an office in Redwood Shores,
California, where our sales and marketing organization is located. This move
will result in higher expenses and will require us to coordinate these
activities with our other operations in Monrovia, California.

     OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, AND AN UNANTICIPATED DECLINE
     IN REVENUES OR GROSS MARGIN MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS
     AND RESULT IN A DECLINE IN OUR STOCK PRICE.

     Our quarterly operating results have fluctuated significantly in the past
and may vary significantly in the future. We believe that period-to-period
comparisons of our historical results of operations are not a good predictor of
our future performance.

     Our revenues and operating results depend upon the volume and timing of
customer orders and payments and the date of product delivery. Historically, a
substantial portion of revenues in a given quarter has been recorded in the
final month of that quarter, with a concentration of these revenues in the last
two weeks of the final month. We expect this trend to continue and, therefore,
any failure or delay in the closing of orders would have a material adverse
effect on our quarterly operating results. Since our operating expenses are
based on anticipated revenues and because a high percentage of these expenses
are relatively fixed, a delay in the recognition of revenues from one or more
license transactions could cause significant variations in operating results
from quarter to quarter and cause a decline in our stock price. We realize
substantially higher gross margins on our license revenues compared to our
services and maintenance revenues. Thus, our margins for any particular quarter
will be highly dependent on our revenues mix in that quarter. In our
international markets, we have experienced some seasonality of revenues, with
lower revenues in the summer months. Although this seasonality has not had a
material impact on our operating results in the past, we cannot assure you that
our operating results will not fluctuate in the future as a result of these and
other international trends.

                                        9
<PAGE>   12

     We record as deferred revenue payments from customers that do not meet our
revenue recognition policy requirements. Since only a small portion of our
revenues each quarter is recognized from deferred revenue, our quarterly results
depend primarily upon entering into new contracts to generate revenues for that
quarter. New contracts may not result in revenues in the quarter in which the
contract was signed, and we may not be able to predict accurately when revenues
from these contracts will be recognized. If our operating results are below the
expectations of securities analysts or investors for these or other reasons, our
stock price would likely decline, perhaps substantially.

     IF WE FAIL TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, OUR ABILITY TO
     COMPETE WILL BE HARMED.

     We depend on the continued service of our key technical, sales and senior
management personnel, including our founder and Chief Executive Officer, James
T. Demetriades. None of these persons is bound by an employment agreement, and
we do not maintain key person life insurance on any of these persons. The loss
of any of our senior management or other key research and development or sales
and marketing personnel could adversely affect our future operating results. We
are currently seeking to hire a senior executive to oversee our European
operations. In addition, we must attract, retain and motivate highly skilled
employees, including sales personnel and software engineers. We face significant
competition for individuals with the skills required to develop, market and
support our products and services. We cannot assure you that we will be able to
recruit and retain sufficient numbers of these highly skilled employees. If we
fail to do so, our ability to compete will be significantly harmed.

     OUR SUBSTANTIAL AND EXPANDING INTERNATIONAL OPERATIONS ARE SUBJECT TO
     UNCERTAINTIES WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS.


     Revenues from the sale of our products and services outside the United
States accounted for 15.0% of our total revenues in 1997, 20.3% of our total
revenues in 1998 and 27.1% of our total revenues in 1999. Revenues from the sale
of our products and services in the United Kingdom as a percent of total
revenues were 8.9% in 1997, 9.9% in 1998 and 9.7% in 1999, while revenues from
the sale of our products and services in Germany as a percent of total revenues
were 2.7% in 1997, 5.6% in 1998 and 10.6% in 1999. We believe that revenues from
sales outside the United States will continue to account for a material portion
of our total revenues for the foreseeable future. We are exposed to several
risks inherent in conducting business internationally, such as:


     - fluctuations in currency exchange rates, which could result in increased
       expenses;

     - unexpected changes in regulatory requirements, including imposition of
       currency exchange controls, applicable to our business or to the
       Internet, which could result in increased costs of doing business
       overseas;

     - difficulties and costs of staffing and managing international operations;

     - political and economic instability, which could result in increasing
       governmental ownership or regulation of businesses or other
       instrumentalities of commerce, wage and price controls, higher interest
       rates and spiraling inflation; and

     - reduced protection for intellectual property rights in some countries.

     Any of these factors could adversely affect our international operations
and, consequently, our operating results.

     WE COULD SUFFER LOSSES AND NEGATIVE PUBLICITY IF NEW VERSIONS OR RELEASES
     OF OUR PRODUCTS CONTAIN ERRORS OR DEFECTS.

     Our products and their interactions with customers' software applications
and IT systems are complex and, accordingly, there may be undetected errors or
failures when products are introduced or as

                                       10
<PAGE>   13

new versions are released. In the past we have discovered software errors in our
new releases and new products after their introduction, which has resulted in
additional research and development expenses. To date, these additional expenses
have not been material. These errors have resulted in product release delays,
delayed revenues and customer dissatisfaction. In the future we may discover
errors, including performance limitations, in new releases or new products after
the commencement of commercial shipments. Since many customers are using our
products for mission-critical business operations, any of these occurrences
could seriously harm our business and generate negative publicity, which could
have a negative impact on future sales. Although we maintain product liability
and errors and omissions insurance, we cannot assure you that these policies
will be sufficient to compensate for losses caused by any of these occurrences.

     IF OUR PRODUCTS DO NOT OPERATE WITH THE MANY HARDWARE AND SOFTWARE
     PLATFORMS USED BY OUR CUSTOMERS AND KEEP PACE WITH TECHNOLOGICAL CHANGE,
     OUR BUSINESS MAY FAIL.

     We currently serve a customer base with a wide variety of constantly
changing hardware, software applications and networking platforms. If our
products fail to gain broad market acceptance due to an inability to support a
variety of these platforms, our operating results may suffer. Our business
depends on a number of factors, including the following:

     - our ability to integrate our products with multiple platforms and
       existing, or legacy, systems and to modify our products as new versions
       of software applications are introduced;

     - the portability of our products, particularly the number of operating
       systems and databases that our products can source or target;

     - our ability to anticipate and support new standards, especially Internet
       standards;

     - the integration of additional software modules under development with our
       existing products; and

     - our management of software being developed by third parties for our
       customers for use with our products.

     Our industry is characterized by very rapid technological change, frequent
new product introductions and enhancements, changes in customer demands and
evolving industry standards. We have also found that the technological life
cycles of our products are difficult to estimate. We believe that we must
continue to enhance our current products and concurrently develop and introduce
new products that anticipate emerging technology standards and keep pace with
competitive and technological developments. Failure to do so will harm our
ability to compete. As a result, we are required to continue to make substantial
product development investments.

RISKS RELATED TO OUR INDUSTRY

     THE MARKET FOR E-BUSINESS INTEGRATION SOFTWARE MAY NOT GROW AS QUICKLY AS
     WE ANTICIPATE, WHICH WOULD CAUSE OUR REVENUES TO FALL BELOW EXPECTATIONS.

     The market for e-Business integration software is rapidly evolving. We earn
substantially all of our license revenues from sales of our e*Xchange software
suite. We expect to earn substantially all of our revenues in the foreseeable
future from sales of e*Xchange and related products and services. Our future
financial performance will depend on continued growth in the number of
organizations demanding software and services for application integration and
e-Business solutions and seeking outside vendors to develop, manage and maintain
this software for their critical applications. Many of our potential customers
have made significant investments in internally developed systems and would
incur significant costs in switching to third-party products, which may
substantially inhibit the growth of the market for e-Business integration
software. If this market fails to grow, or grows more slowly than we expect, our
revenues will be adversely affected.

                                       11
<PAGE>   14

     IF WE FAIL TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WE MAY LOSE THESE
     RIGHTS AND OUR BUSINESS MAY BE SERIOUSLY HARMED.

     We depend upon our ability to develop and protect our proprietary
technology and intellectual property rights to distinguish our product from our
competitors' products. The use by others of our proprietary rights could
materially harm our business. We rely on a combination of copyright, trademark
and trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect our proprietary rights. We have no issued
patents. Despite our efforts to protect our proprietary rights, existing laws
afford only limited protection. Attempts may be made to copy or reverse engineer
aspects of our products or to obtain and use information that we regard as
proprietary. Accordingly, we cannot be certain that we will be able to protect
our proprietary rights against unauthorized third-party copying or use.
Furthermore, policing the unauthorized use of our products is difficult, and
expensive litigation may be necessary in the future to enforce our intellectual
property rights.

     OUR PRODUCTS COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS,
     CAUSING COSTLY LITIGATION AND THE LOSS OF SIGNIFICANT RIGHTS.

     Third parties may claim that we have infringed their current or future
intellectual property rights. We expect that software developers in our market
will increasingly be subject to infringement claims as the number of products in
different software industry segments overlap. Any claims, with or without merit,
could be time-consuming, result in costly litigation, prevent product shipment
or cause delays, or require us to enter into royalty or licensing agreements,
any of which could harm our business. Patent litigation in particular has
complex technical issues and inherent uncertainties. In the event an
infringement claim against us is successful and we cannot obtain a license on
acceptable terms, license a substitute technology or redesign our products to
avoid infringement, our business would be harmed. Furthermore, former employers
of our current and future employees may assert that our employees have
improperly disclosed to us or are using their confidential or proprietary
information.

RISKS RELATED TO THIS OFFERING

     THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR
     FUTURE MAY CAUSE THE MARKET PRICE FOR OUR COMMON STOCK TO DECLINE.


     Sales of a substantial number of shares of our common stock in the public
market following this offering could cause the market price of our common stock
to decline. The number of shares of common stock available for sale in the
public market is limited by restrictions under federal securities law and under
agreements that substantially all of our shareholders have entered into with the
underwriters and with us. The lockup agreements restrict those shareholders from
selling, pledging or otherwise disposing of their shares for a period of 180
days after the date of this prospectus without the prior written consent of
Morgan Stanley & Co. Incorporated. However, Morgan Stanley & Co. Incorporated
may, in its sole discretion, release all or any portion of the common stock from
the restrictions of the lockup agreements. The following table indicates
approximately when the 61,964,745 shares of our common stock that are not being
sold in the offering but which were outstanding as of January 31, 2000, after
giving effect to the concurrent private placement of 1,200,000 shares of our
common stock to EDS, will be eligible for sale into the public market:



<TABLE>
<CAPTION>
                  FIRST ELIGIBLE FOR SALE                        NUMBER
                  -----------------------                     ------------
<S>                                                           <C>
  On the date of this prospectus............................   1.0 million
  180 days after the date of this prospectus................  49.4 million
  At various times thereafter...............................  11.6 million
</TABLE>


     Additional shares will be eligible for sale upon the exercise of
outstanding options or warrants to purchase our common stock, including warrants
to purchase an aggregate of up to 3,600,000 additional

                                       12
<PAGE>   15

shares of our common stock held by Andersen Consulting, CSC and EDS. Issuance of
additional shares upon exercise of options and warrants could result in a
dilution to our shareholders and a decline in the market price of our common
stock. For a further description of the eligibility of shares for sale into the
public market following the offering, see "Shares Eligible for Future Sale."

     FAILURE TO RAISE ADDITIONAL CAPITAL OR GENERATE THE SIGNIFICANT CAPITAL
     NECESSARY TO EXPAND OUR OPERATIONS AND INVEST IN NEW PRODUCTS COULD REDUCE
     OUR ABILITY TO COMPETE AND RESULT IN LOWER REVENUES.

     We expect that the net proceeds from this offering 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 debt or equity financing on
favorable terms, or at all. If we raise additional equity financing, our
shareholders may experience significant dilution of their ownership interests
and the per share value of our common stock could decline. If we engage in debt
financing, we may be required to accept terms that restrict our ability to incur
additional indebtedness and that force us to maintain specified liquidity or
other ratios, any of which could harm our business. If we need additional
capital and cannot raise it on acceptable terms, we may not be able to, among
other things:

     - develop or enhance our products and services;

     - continue to expand our sales and marketing organizations;

     - acquire complementary technologies, products or businesses;

     - expand operations, in the United States or internationally;

     - hire, train and retain employees; or

     - respond to competitive pressures or unanticipated working capital
       requirements.

Our failure to do any of these things could result in lower revenues and could
seriously harm our business.

     OUR STOCK PRICE MAY BE VOLATILE BECAUSE OUR SHARES HAVE NOT BEEN PUBLICLY
     TRADED BEFORE, AND YOU MAY LOSE ALL OR A PART OF YOUR INVESTMENT.

     Prior to this offering, you could not buy or sell our common stock in the
public market. The price of the common stock that will prevail in the market
after this offering may be higher or lower than the price you pay. An active
public market for our common stock may not develop or be sustained after the
offering, and therefore, we cannot predict how liquid this market will become.
We will negotiate and determine the initial public offering price with the
representatives of the underwriters, and this price may not be indicative of
prices that will prevail in the trading market.

     As a result, you may be unable to sell your shares of common stock at or
above the offering price, and you may lose all or a part of your investment. The
market price of the common stock may fluctuate significantly in response to the
following factors, most of which are beyond our control, including:

     - 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 significant contracts,
       acquisitions, strategic partnerships, joint ventures or capital
       commitments;

     - loss of a major customer or failure to complete significant license
       transactions;

                                       13
<PAGE>   16

     - additions or departures of key personnel; and

     - fluctuations in stock market price and volume, which are particularly
       common among securities of software and Internet-oriented companies.

     OUR MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF THE NET PROCEEDS
     OF THIS OFFERING AND MAY FAIL TO USE THESE FUNDS EFFECTIVELY.

     Our management will have broad discretion with respect to the use of the
net proceeds from this offering, and investors will be relying on the judgment
of our management regarding the application of these proceeds. Currently,
anticipated uses include the repayment of debt, general corporate purposes and
working capital, as well as expansion of our sales and marketing efforts.

     CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS
     AND PRINCIPAL SHAREHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING
     SIGNIFICANT CORPORATE DECISIONS.

     Upon completion of this offering, our chief executive officer, James T.
Demetriades, will beneficially own approximately 44.4% of our outstanding common
stock. Mr. Demetriades, together with our other executive officers, directors
and principal shareholders will beneficially own, in the aggregate,
approximately 70.7% of our outstanding common stock. As a result, these
shareholders will be able to exercise control over all matters requiring
shareholder 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 STC and will make some transactions difficult
or impossible without the support of these shareholders. See "Principal
Shareholders."

     WE MAY BE AT RISK OF SECURITIES 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 a decline in the market price of its securities.
This risk is especially acute for us because technology companies have
experienced greater than average stock price volatility in recent years and, as
a result, have been subject to, on average, a greater number of securities class
action claims than companies in other industries. In the future, we may be the
target of similar litigation. Securities litigation could result in substantial
costs and divert our management's attention and resources, and could seriously
harm our business.

     WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS THAT COULD DISCOURAGE OR
     PREVENT A TAKEOVER, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO OUR
     SHAREHOLDERS.

     Some provisions of California law and our articles of incorporation and
bylaws could have the effect of delaying or preventing a third party from
acquiring us, even if a change in control would be beneficial to our
shareholders. For example, our articles of incorporation provide for a
classified board of directors whose members serve staggered three-year terms and
do not provide for cumulative voting in the election of directors. Our board of
directors has the authority, without further action by our shareholders, to fix
the rights and preferences of and issue shares of preferred stock. In addition,
our shareholders are unable to act by written consent. These and other
provisions could make it more difficult for a third party to acquire us, even if
doing so would benefit our shareholders. See "Description of Capital Stock" for
additional information.

     NEW INVESTORS IN OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
     DILUTION.

     The initial public offering price is substantially higher than the book
value per share of our common stock. Investors purchasing common stock in this
offering will, therefore, incur immediate dilution of $15.36 in net tangible
book value per share of common stock, based on an assumed initial public
offering price of $17.00 per share. Our existing shareholders paid an average
price of $.56 per share, or an

                                       14
<PAGE>   17

aggregate of $33.8 million, for their approximately 60.5 million shares held as
of December 31, 1999. Based upon an assumed public offering price of $17.00 per
share, the value of the shares held by our existing shareholders will increase
by an aggregate of $994.7 million, or $16.44 per share. In addition, the number
of shares available for issuance under our stock option and employee stock
purchase plans will automatically increase without shareholder approval.
Investors will incur additional dilution upon the exercise of outstanding stock
options.

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "intend," "anticipate," "believe," "estimate,"
"predict," "potential" or "continue," the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined in the Risk
Factors section above. These factors may cause our actual results to differ
materially from any forward-looking statement.

     Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform these statements to actual results
or to changes in our expectations.

                                       15
<PAGE>   18

                                USE OF PROCEEDS

     We estimate that the net proceeds to us from this offering will be
approximately $95.0 million, or approximately $109.5 million if the
underwriters' over-allotment option is exercised in full, at an assumed initial
public offering price of $17.00 per share, after deducting the estimated
underwriting discounts and commissions and estimated offering expenses.

     We intend to use the net proceeds of this offering primarily for additional
working capital and other general corporate purposes, including increased
research and development expenditures, sales and marketing expenditures, and
general and administrative expenditures. We also intend to use $10.0 million of
the proceeds from this offering to repay our outstanding long-term note. This
note bears interest at a rate of prime plus 2% and is due on February 1, 2001.
Through December 31, 1999, we had paid approximately $175,000 in total interest
on this note, at an average interest rate of 10.5% per annum.

     We may also use a portion of the net proceeds to acquire additional
businesses, products and technologies, to lease additional facilities, or to
establish joint ventures that we believe will complement our current or future
business. However, we have no specific plans, agreements or commitments to do so
and are not currently engaged in any negotiations for any acquisition or joint
venture.

     The amounts that we actually expend for working capital and other general
corporate purposes will vary significantly depending on a number of factors,
including future revenues growth, if any, and the amount of cash we generate
from operations. As a result, we will retain broad discretion in the allocation
of the net proceeds of this offering. Pending the uses described above, we will
invest the net proceeds of this offering in short-term interest bearing,
investment-grade securities.

                        CONCURRENT SALE OF STOCK TO EDS


     Electronic Data Systems Corporation, or EDS, has agreed to purchase from
us, in a private placement to occur concurrently with the closing of this
offering, 1,200,000 shares of our common stock, subject to reduction if the
aggregate purchase price for the shares would exceed $24.0 million. EDS has
agreed to pay a per share purchase price for this common stock equal to the
initial public offering price in this offering. The sale of these shares to EDS
is conditioned upon the termination of the waiting period under the Hart Scott
Rodino Antitrust Improvements Act of 1976, also known as the HSR clearance. To
the extent this clearance is not obtained by the closing of this offering, EDS
would purchase $14.9 million of shares, or 876,470 shares at an assumed initial
public offering price of $17.00 per share, concurrently with the closing of this
offering and would purchase the remaining shares upon the receipt of the HSR
clearance.


                                DIVIDEND POLICY

     We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future.

                                       16
<PAGE>   19

                                 CAPITALIZATION

     The following table sets forth the following information:

     - our actual capitalization as of December 31, 1999;

     - our pro forma capitalization after giving effect to the conversion of all
       outstanding shares of redeemable convertible preferred stock upon the
       closing of this offering; and


     - our pro forma as adjusted capitalization to give effect to the sale of
       the 6,100,000 shares of common stock in this offering at an assumed
       initial public offering price of $17.00 per share, less the estimated
       underwriting discounts and commissions and estimated offering expenses,
       the sale of 1,200,000 shares of common stock to EDS in a concurrent
       private placement at the assumed initial public offering price and the
       repayment of outstanding debt from the proceeds of this offering. If we
       have not obtained HSR clearance for the private placement to EDS prior to
       the closing of this offering, EDS would purchase $14.9 million of shares,
       or 876,470 shares at an assumed initial public offering price of $17.00
       per share, concurrently with the closing of this offering and would
       purchase the remaining shares upon receipt of the HSR clearance.



<TABLE>
<CAPTION>
                                                             AS OF DECEMBER 31, 1999
                                                       ------------------------------------
                                                                                 PRO FORMA
                                                        ACTUAL     PRO FORMA    AS ADJUSTED
                                                       --------    ---------    -----------
                                                        (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                                    <C>         <C>          <C>
Note payable.........................................  $ 10,000    $ 10,000      $     --
                                                       ========    ========      ========
Redeemable convertible preferred stock, Series A: no
  par value; 2,864,583 shares authorized; 2,864,583
  shares issued and outstanding, actual; no shares
  issued and outstanding, pro forma and pro forma as
  adjusted...........................................  $ 12,856    $     --      $     --
Redeemable convertible preferred stock, Series B: no
  par value; 2,637,900 shares authorized; 2,588,215
  shares issued and outstanding, actual; no shares
  issued and outstanding, pro forma and pro forma as
  adjusted...........................................    11,825          --            --
Shareholders' equity:
  Preferred stock, no par value; 10,000,000 shares
     authorized; no shares issued and outstanding,
     pro forma and pro forma as adjusted.............        --          --            --
  Common stock: no par value; 200,000,000 shares
     authorized; 46,531,377 shares issued and
     outstanding, actual; 60,503,539 shares issued
     and outstanding, pro forma; 67,803,539 shares
     issued and outstanding, pro forma as adjusted...    19,519      44,200       159,041
  Deferred stock compensation........................    (5,379)     (5,379)       (5,379)
  Accumulated other comprehensive loss...............      (237)       (237)         (237)
  Accumulated deficit................................   (42,324)    (42,324)      (42,324)
                                                       --------    --------      --------
          Total shareholders' equity (deficit).......   (28,421)     (3,740)      111,101
                                                       --------    --------      --------
               Total capitalization..................  $ (3,740)   $ (3,740)     $111,101
                                                       ========    ========      ========
</TABLE>


     This table excludes the following:

     - 2,662,500 shares of common stock issuable upon exercise of outstanding
       warrants as of January 31, 2000 at a weighted average exercise price of
       $5.59 per share;

     - 21,375,903 shares of common stock reserved for issuance under our stock
       option plans, of which 12,232,314 shares at a weighted average exercise
       price of $2.02 per share were subject to outstanding options as of
       January 31, 2000; and

     - 2,250,000 shares of common stock reserved for issuance under our employee
       stock purchase plan.

                                       17
<PAGE>   20

                                    DILUTION

     The pro forma net tangible book value (deficit) of our common stock, as of
December 31, 1999, after giving effect to the conversion of all outstanding
shares of redeemable preferred stock upon the closing of the offering was
approximately $(3.7) million, or approximately $(.06) per share. Pro forma net
tangible book value per share represents the amount of our total tangible assets
less total liabilities divided by the number of shares of common stock
outstanding. Dilution in pro forma net tangible book value per share represents
the difference between the amount per share paid by purchasers of shares of
common stock in this offering and the net tangible book value per share of our
common stock immediately afterwards. Assuming our sale of 6,100,000 shares of
common stock offered by this prospectus at an assumed initial public offering
price of $17.00 per share and our sale of 1,200,000 shares of common stock in
the concurrent private placement to EDS at an assumed price of $17.00 per share,
and after deducting estimated underwriting discounts and commissions and
estimated offering expenses, our net tangible book value as of December 31, 1999
would have been approximately $111.3 million or $1.64 per share. This represents
an immediate decrease in net tangible book value of $15.36 per share to new
investors purchasing shares of common stock in this offering. The following
table illustrates this dilution:

<TABLE>
<S>                                                             <C>       <C>
Assumed initial public offering price per share.............              $17.00
  Pro forma net tangible book value per share as of December
     31, 1999...............................................    $ (.06)
  Increase per share attributable to new investors..........      1.70
                                                                ------
Pro forma net tangible book value per share after the
  offering..................................................                1.64
                                                                          ------
Dilution in pro forma net tangible book value per share to
  new investors.............................................              $15.36
                                                                          ======
</TABLE>

     The following table summarizes, on a pro forma basis, as of December 31,
1999, the differences between the number of shares of common stock purchased
from us, the total consideration paid and the average price per share paid by
existing shareholders and by the new investors purchasing shares in this
offering. We have assumed an initial public offering price of $17.00 per share,
and we have not deducted estimated underwriting discounts and commissions and
estimated offering expenses in our calculations.

<TABLE>
<CAPTION>
                                SHARES PURCHASED           TOTAL CONSIDERATION         AVERAGE
                            ------------------------    --------------------------      PRICE
                              NUMBER      PERCENTAGE       AMOUNT       PERCENTAGE    PER SHARE
                            ----------    ----------    ------------    ----------    ---------
<S>                         <C>           <C>           <C>             <C>           <C>
Existing shareholders.....  60,503,539       89.2%      $ 33,771,000       21.4%       $  .56
New investors.............   7,300,000       10.8        124,100,000       78.6         17.00
                            ----------      -----       ------------      -----
          Total...........  67,803,539      100.0%      $157,871,000      100.0%
                            ==========      =====       ============      =====
</TABLE>

     The foregoing discussion and tables assume no exercise of any outstanding
stock options or warrants. The exercise of options or warrants having an
exercise price less than the offering price would increase the dilutive effect
to new investors. See "Capitalization" and "Management -- Employee Stock Plans."

     If the underwriters exercise their over-allotment in full, the following
will occur: the number of shares of common stock held by existing shareholders
will decrease to approximately 88.0% of the total number of shares of our common
stock outstanding; and the number of shares held by new investors will increase
to 8,215,000, or approximately 12.0% of the total number of our common stock
outstanding after this offering.


     If we have not obtained HSR clearance for the private placement to EDS
prior to the closing of this offering, EDS would purchase $14.9 million of
shares, or 876,470 shares at an assumed initial public offering price of $17.00
per share, concurrently with the closing of this offering and would purchase the
remaining shares upon receipt of the HSR clearance. In that case, the dilution
in pro forma net tangible book value per share to new investors immediately
following the closing of the offering would be $15.43.


                                       18
<PAGE>   21

                      SELECTED CONSOLIDATED FINANCIAL DATA

     The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statements
of operations data for the years ended December 31, 1997, 1998 and 1999, and the
balance sheet data as of December 31, 1998 and 1999, are derived from the
audited consolidated financial statements included elsewhere in this prospectus.
The consolidated statements of operations data for the years ended December 31,
1995 and 1996, and the balance sheet data as of December 31, 1995, 1996 and
1997, are derived from the audited consolidated financial statements not
included elsewhere in this prospectus. The historical results are not
necessarily indicative of results to be expected for future periods.

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                             ------------------------------------------------------
                                                              1995       1996        1997        1998        1999
                                                             -------    -------    --------    --------    --------
                                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                          <C>        <C>        <C>         <C>         <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
  License..................................................  $ 6,419    $ 7,575    $ 10,911    $ 18,142    $ 24,051
  Services.................................................    4,181      6,397      10,149      10,853      20,268
  Maintenance..............................................      717      1,506       2,919       5,142       9,055
  Other....................................................    1,938      2,237       2,720       3,324       1,797
                                                             -------    -------    --------    --------    --------
    Total revenues.........................................   13,255     17,715      26,699      37,461      55,171
                                                             -------    -------    --------    --------    --------
Cost of revenues:
  License..................................................      136          5         229         959         690
  Services.................................................    3,222      5,578       6,727      11,269      20,904
  Maintenance..............................................      180        339         366         587       2,368
  Other....................................................    1,282      1,910       2,200       1,907       1,219
                                                             -------    -------    --------    --------    --------
    Total cost of revenues.................................    4,820      7,832       9,522      14,722      25,181
                                                             -------    -------    --------    --------    --------
Gross profit...............................................    8,435      9,883      17,177      22,739      29,990
                                                             -------    -------    --------    --------    --------
Operating expenses:
  Research and development.................................    2,317      3,786       4,242       8,496      11,990
  Sales and marketing......................................    3,174      6,311       6,849      16,273      28,652
  General and administrative...............................    3,066      2,958       5,307       9,229      12,176
  Amortization of alliance warrants........................       --         --          --          --         814
  Amortization of stock-based compensation.................       --         --          --          --       1,708
                                                             -------    -------    --------    --------    --------
    Total operating expenses...............................    8,557     13,055      16,398      33,998      55,340
                                                             -------    -------    --------    --------    --------
Income (loss) from operations..............................     (122)    (3,172)        779     (11,259)    (25,350)
Interest income (expense), net.............................     (103)      (151)       (263)         16        (515)
                                                             -------    -------    --------    --------    --------
Income (loss) before provision for taxes...................     (225)    (3,323)        516     (11,243)    (25,865)
Provision for income taxes.................................       72       (297)         10          --          --
                                                             -------    -------    --------    --------    --------
Net income (loss)..........................................  $  (297)   $(3,026)   $    506    $(11,243)   $(25,865)
                                                             =======    =======    ========    ========    ========
Accretion on preferred stock...............................       --         --          --         686       2,410
                                                             -------    -------    --------    --------    --------
Net income (loss) available to common shareholders.........  $  (297)   $(3,026)   $    506    $(11,929)   $(28,275)
                                                             =======    =======    ========    ========    ========
Basic and diluted net income (loss) per share available to
  common shareholders......................................  $  (.01)   $  (.08)   $    .01    $   (.27)   $   (.62)
Weighted average shares used in computation of basic and
  diluted net income (loss) per share available to common
  shareholders.............................................   37,772     40,047      42,801      43,748      45,954
Pro forma basic and diluted net loss per share.............                                                $   (.44)
Pro forma basic and diluted weighted average shares........                                                  58,470
</TABLE>

<TABLE>
<CAPTION>
                                                                                AS OF DECEMBER 31,
                                                                ---------------------------------------------------
                                                                 1995      1996       1997       1998        1999
                                                                ------    -------    -------    -------    --------
                                                                                  (IN THOUSANDS)
<S>                                                             <C>       <C>        <C>        <C>        <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................................    $  347    $ 3,587    $   750    $ 3,255    $  1,572
Working capital (deficit)...................................       212      3,313      1,797     (1,196)     (1,917)
Total assets................................................     6,769     13,701     15,519     22,857      29,852
Deferred revenue............................................       986      2,731      4,415      6,122      10,354
Long-term liabilities.......................................       597        812        802        367      10,000
Redeemable convertible preferred stock......................        --         --         --     11,445      24,681
Total shareholders' equity (deficit)........................     1,342      5,073      4,458     (7,335)    (28,421)
</TABLE>

                                       19
<PAGE>   22

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

     You should read the following discussion in conjunction with the
consolidated financial statements and related notes of STC appearing elsewhere
in this prospectus. The following discussion contains forward-looking statements
that involve risks and uncertainties, including statements regarding anticipated
costs and expenses, mix of revenues and plans for introducing new products and
services. Our actual results could differ materially from the results
contemplated by these forward-looking statements as a result of a number of
factors, including those discussed below, under "Risk Factors" and elsewhere in
this prospectus.

OVERVIEW

     We were founded in 1989 and sold our first products and services in 1991.
From 1991 to 1998, our sales and marketing efforts were primarily focused on
customers in the healthcare industry. In 1998, we began to significantly
increase our sales and marketing expenses to target customers in other vertical
markets, such as financial services/insurance, manufacturing,
retail/e-Commerce/services and telecommunications/utilities. As a result of
these efforts, license sales to non-healthcare customers accounted for
approximately 68% of our license revenues in 1999 compared to 35% of our license
revenues in 1998 and 11% of our license revenues in 1997. In November 1999, we
launched the fourth generation of our primary product with the introduction of
e*Gate 4.0 and changed the name of this product from DataGate to e*Gate. In
anticipation of this release, we accelerated the growth of our product
development, services and sales and marketing organizations. We incurred
significant losses in 1998 and 1999, and as of December 31, 1999, we had an
accumulated deficit of $42.3 million.

     We derive revenues primarily from three sources: licenses, services and
maintenance. We market our products and services on a global basis through our
direct sales force, and augment our marketing efforts through relationships with
systems integrators, and in other instances, through value-added resellers and
technology vendors. Our products are typically licensed directly to customers
for a perpetual term, with pricing based on the number of systems or
applications the customer is integrating or connecting with our products. We
recently began licensing our products based on the customer's system CPU power,
or Mhz. We record license revenues when a license agreement has been signed by
both parties, the fee is fixed or determinable, collection of the fee is
probable, delivery of our products has occurred and no other significant
obligations remain. Payments for licenses, services and maintenance received in
advance of revenue recognition are recorded as deferred revenue.

     In 1994, we opened our first international sales office in Belgium, and we
completed our first international sale in 1995. We currently have sales offices
in six countries outside of the United States. Revenues derived from
international sales have grown from 15% of total revenues in 1997 to 27% in
1999. We believe that international revenues will continue to be significant in
future periods. To date, we have not experienced significant seasonality of
revenues. However, we expect that our future results will fluctuate in response
to the fiscal or quarterly budget cycles of our customers.

     Revenues from services include consulting and implementation services and
training. A majority of our customers use third-party systems integrators to
implement our products. Customers also typically purchase additional consulting
services from us to support their implementation activities. These consulting
services are generally sold on a time and materials or fixed fee basis, and
services revenues are recognized as the services are performed. We also offer
training services, which are sold on a per student basis and for which revenues
are recognized as the classes are attended.

     Customers who license our products normally purchase maintenance contracts.
These contracts provide unspecified software upgrades and technical support over
a fixed term, which is typically 12 months. Maintenance contracts are usually
paid in advance, and revenues from these contracts are recognized ratably over
the term of the contract.

                                       20
<PAGE>   23

     In the past, we offered our healthcare customers our expertise in
configuring hardware and software systems in conjunction with their purchase of
our products. In these instances, we would sell third-party hardware and
software to our customers in addition to our products. Other revenues consists
of these sales of third-party hardware and software. We discontinued offering
this service to our customers during the fourth quarter of 1999.

     For 1997 and prior years, we recognized revenues in accordance with
American Institute of
Certified Public Accountants Statement of Position, or SOP, 91-1 "Software
Revenue Recognition". Commencing in 1998, we began recognizing revenues in
accordance with American Institute of Certified Public Accountants SOP 97-2,
"Software Revenue Recognition," as amended by SOP 98-4 and SOP 98-9. To date,
our adoption of these new standards has not had any material effect on our
revenue recognition.

     Cost of revenues consists of cost of license revenues, cost of services
revenues, cost of maintenance revenues and cost of other revenues. Cost of
license revenues includes the cost of third-party licensed software embedded or
bundled with our products. Cost of services revenues consists of compensation
and related overhead costs for personnel engaged in implementation consulting
and services and training. Cost of maintenance revenues includes compensation
and related overhead costs for personnel engaged in maintenance and support
activities. Cost of other revenues consists of the cost of third-party hardware
and software sales. In 1999, our gross margin was 97.1% on our license revenues,
(3.1%) on our services revenues and 73.8% on our maintenance revenues. We expect
in the future to continue to earn substantially higher gross margins on our
license and maintenance revenues compared to our services revenues. As a result,
our overall gross margin depends significantly on our revenues mix.

     Our operating expenses are classified as research and development, sales
and marketing and general and administrative. Each category includes related
expenses for salaries, employee benefits, incentive compensation, bonuses,
travel, telephone, communications, rent and allocated facilities and
professional fees. Our sales and marketing expenses include additional
expenditures specific to the marketing group, such as public relations and
advertising, trade shows, and marketing collateral materials and expenditures
specific to the sales group, such as commissions. To date, all software product
development costs have been expensed as incurred. Also included in our operating
expenses are the amortization of alliance warrants and the amortization of stock
compensation.

     In order to increase both our company's and our products' market presence,
we entered into strategic alliances with Andersen Consulting in November 1999,
EDS in January 2000 and CSC in March 2000. We granted each of these strategic
partners a warrant to purchase up to 1,200,000 shares of our common stock which
becomes exercisable upon the achievement of various milestones, which include
the creation of e*Gate market offerings in the case of Andersen Consulting and
CSC and the generation of STC license revenues in the case of EDS and CSC. These
warrants expire from July 2002 to November 2003, and have a per share exercise
price of $5.33 for Andersen Consulting, $6.67 for EDS and the greater of $14.00
or the initial public offering price for CSC. These warrants contain a
significant economic disincentive for non-performance, and accordingly, the fair
value of these warrants was measured at the date of grant in accordance with
Emerging Issues Task Force No. 96-18. Using the Black-Scholes option pricing
model, we valued the warrants granted to Andersen Consulting in 1999 at $3.3
million as of December 31, 1999. This amount is included in additional paid-in
capital and is being amortized by charges to operations over the vesting periods
of the warrants. In the first quarter of 2000, we expect to record an additional
$14.3 million related to the valuation of the remaining warrants to purchase
2,400,000 shares granted to EDS and CSC, based on an assumed exercise price
equal to the assumed initial public offering price of $17.00 per share for the
warrants granted to CSC. We valued these warrants using the Black-Scholes option
pricing model. We recognized amortization of $814,000 for 1999, and we will
recognize additional amortization of $8.3 million in 2000, $7.2 million in 2001
and $1.3 million in 2002, based on an assumed exercise price equal to the
assumed initial public offering price

                                       21
<PAGE>   24

of $17.00 per share for the warrants granted to CSC. The amortization of the
alliance warrants is classified as a separate component of operating expenses in
our consolidated statement of operations.

     In connection with stock option grants to our employees, we have recorded
deferred stock compensation totaling $4.6 million through December 31, 1999, of
which approximately $2.9 million remains to be amortized. This amount represents
the difference between the exercise price and the estimated fair value of our
common stock on the date the options were granted multiplied by the number of
option shares granted. This amount is included as a component of shareholders'
equity and is being amortized by charges to operations over the vesting period
of the options, consistent with the method described in Financial Accounting
Standards Board Interpretation No. 28. We recognized amortization of deferred
compensation expense of $1.7 million in 1999. We expect to record additional
deferred stock compensation with respect to stock option grants made subsequent
to December 31, 1999. The amortization of the remaining deferred stock
compensation at December 31, 1999 will result in additional charges to
operations through 2004. The amortization of stock compensation is classified as
a separate component of operating expenses in our consolidated statement of
operations.


     For the three months ended March 31, 2000, we expect to record total
revenues ranging from approximately $17.2 million to $17.4 million. As of the
date of this prospectus, our financial statements for this period have not yet
been completed, and accordingly, information regarding this period is
preliminary and subject to change.


RESULTS OF OPERATIONS

     The following table sets forth our results of operations expressed as a
percentage of total revenues:

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                              -------------------------
                                                              1997      1998      1999
                                                              -----     -----     -----
<S>                                                           <C>       <C>       <C>
Revenues:
  License...................................................    41%       48%       44%
  Services..................................................    38        29        37
  Maintenance...............................................    11        14        16
  Other.....................................................    10         9         3
                                                               ---       ---       ---
    Total revenues..........................................   100       100       100
Cost of revenues:
  License...................................................     1         2         1
  Services..................................................    25        30        38
  Maintenance...............................................     2         2         4
  Other.....................................................     8         5         2
                                                               ---       ---       ---
    Gross profit............................................    64        61        55
                                                               ---       ---       ---
Operating expenses:
  Research and development..................................    16        23        22
  Sales and marketing.......................................    25        43        52
  General and administrative................................    20        25        22
  Amortization of alliance warrants.........................    --        --         2
  Amortization of stock based compensation..................    --        --         3
                                                               ---       ---       ---
    Total operating expenses................................    61        91       101
                                                               ---       ---       ---
Income (loss) from operations...............................     3       (30)      (46)
Interest income (expense), net..............................    (1)       --        (1)
                                                               ---       ---       ---
Income (loss) before tax provision..........................     2       (30)      (47)
Provision for income taxes..................................    --        --        --
                                                               ---       ---       ---
Net income (loss)...........................................     2%      (30)%     (47)%
                                                               ===       ===       ===
</TABLE>

                                       22
<PAGE>   25

     COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

     Revenues

     Our total revenues were $26.7 million for 1997, $37.5 million for 1998 and
$55.2 million for 1999, representing increases of $10.8 million, or 40%, from
1997 to 1998 and $17.7 million, or 47%, from 1998 to 1999. We had no customer
that accounted for more than 10% of our total revenues in 1998 or 1999. In 1997,
one of our customers, HBO and Company, accounted for approximately 11.3% of our
total revenues.

     License Revenues. Our license revenues were $10.9 million for 1997, $18.1
million for 1998 and $24.1 million for 1999, representing increases of $7.2
million, or 66%, from 1997 to 1998 and $6.0 million, or 33%, from 1998 to 1999.
License revenues as a percentage of total revenues were 41% for 1997, 48% for
1998 and 44% for 1999. The increase in license revenues from 1997 to 1998 was
due to sales of e*Gate 3.6, expansion of our direct sales force, and a 392%
increase in sales to non-healthcare industry customers from $1.3 million in 1997
to $6.4 million in 1998. The increase in license revenues from 1998 to 1999 was
due to the continued license sales of e*Gate 3.6 during 1999, the introduction
of e*Gate 4.0 in November 1999, and a 165% increase in sales to non-healthcare
industry customers from $6.4 million in 1998 to $17.0 million in 1999.

     Services Revenues. Our services revenues were $10.1 million for 1997, $10.9
million for 1998 and $20.3 million for 1999, representing increases of $800,000,
or 8%, from 1997 to 1998 and $9.4 million, or 86%, from 1998 to 1999. Services
revenues as a percentage of total revenues were 38% in 1997, 29% in 1998 and 37%
in 1999. The increases in services revenues from 1997 to 1998 and from 1998 to
1999 were primarily due to increases in our professional services staff and the
impact of increases in license revenues from 1997 to 1998.

     Maintenance Revenues. Our maintenance revenues were $2.9 million for 1997,
$5.1 million for 1998 and $9.1 million for 1999, representing increases of $2.2
million, or 76%, from 1997 to 1998 and $4.0 million, or 78%, from 1998 to 1999.
Maintenance revenues as a percentage of total revenues were 11% in 1997, 14% in
1998 and 16% in 1999. The increases in maintenance revenues and maintenance
revenues as a percentage of total revenues from 1997 to 1998 and from 1998 to
1999 were primarily due to increased licenses for our products, and, to a lesser
extent, to renewals of prior period maintenance contracts.

     Other Revenues. Our other revenues were $2.7 million for 1997, $3.3 million
for 1998 and $1.8 million for 1999, representing an increase of $600,000, or
22%, from 1997 to 1998 and a decrease of $1.5 million, or 45%, from 1998 to
1999. Other revenues as a percentage of total revenues were 10% in 1997, 9% in
1998 and 3% in 1999. The increase in other revenues from 1997 to 1998 was due to
an increase in the number of healthcare customers that required us to provide
third party hardware in conjunction with the sale of our software. The decrease
in other revenues from 1998 to 1999 was due to a decrease in our customer mix of
the type of customer that required us to provide third party hardware with our
software. In the fourth quarter of 1999, we discontinued providing this service.

     Cost of Revenues

     Our cost of revenues was $9.5 million for 1997, $14.7 million for 1998 and
$25.2 million for 1999. Gross margin was 64% in 1997, 61% in 1998 and 54% in
1999. The decrease in gross margin from 1997 to 1998 resulted primarily from
focusing our services organization on assisting our sales organization in the
sales cycle by performing non-billable services to potential customers in the
form of proof of concepts and software pilots. The decrease in gross margin from
1998 and 1999 was due to the continued use of our services organization in the
selling cycle combined with an increase in services revenues as a percentage of
total revenues.

                                       23
<PAGE>   26

     Cost of License Revenues. Cost of license revenues was $229,000 for 1997,
$959,000 for 1998 and $690,000 for 1999. Cost of license revenues as a
percentage of total revenues was 1% in 1997, 2% in 1998 and 1% in 1999. The
increase in cost of license revenues from 1997 to 1998 and the decrease in cost
of license revenues from 1998 to 1999 were primarily due to the change in the
sales mix of products which contain third-party software which is embedded or
bundled with our software product offerings.

     Cost of Services Revenues. Cost of services revenues was $6.7 million for
1997, $11.3 million for 1998 and $20.9 million for 1999. Cost of services
revenues as a percentage of total revenues was 25% in 1997, 30% in 1998 and 38%
in 1999. The increases in cost of services revenues from 1997 to 1998 and from
1998 to 1999 were primarily due to the increase in professional services staff
and the related increases in revenues, as well as to services personnel
assisting our sales organization in the sales cycle by performing non-billable
services to potential customers in the form of proof of concepts and software
pilots.

     Cost of Maintenance Revenues. Cost of maintenance revenues was $366,000 for
1997, $587,000 for 1998 and $2.4 million for 1999. Cost of maintenance revenues
as a percentage of total revenues was 2% in 1997, 2% in 1998 and 4% in 1999. The
increases in cost of maintenance revenues from 1997 to 1998 and from 1998 to
1999 were primarily due to the increases in maintenance revenues from 1997 to
1998 and from 1998 to 1999.

     Cost of Other Revenues. Cost of other revenues was $2.2 million for 1997,
$1.9 million for 1998 and $1.2 million for 1999. Cost of other revenues as a
percentage of total revenues was 8% in 1997, 5% in 1998 and 2% in 1999. The
increase in cost of other revenues from 1997 to 1998 and decrease from 1998 to
1999 were directly related to the increase and decrease in other revenues.

     Operating Expenses

     Research and Development Expenses. Research and development expenses were
$4.2 million for 1997, $8.5 million for 1998 and $12.0 million for 1999.
Research and development expenses as a percentage of total revenues were 16% in
1997, 23% in 1998 and 22% in 1999. The increases in research and development
expenses from 1997 to 1998 and from 1998 to 1999 were primarily due to the
increase in the number of software developers and quality assurance personnel to
support our product development, documentation and testing activities related to
the development and release of the latest versions of our products. We
anticipate that research and development expenses will continue to increase in
absolute dollars for the foreseeable future as we continue to add to our
research and development staff.

     Sales and Marketing Expenses. Sales and marketing expenses were $6.8
million for 1997, $16.3 million for 1998 and $28.7 million for 1999. Sales and
marketing expenses as a percentage of total revenues were 25% in 1997, 43% in
1998 and 52% in 1999. The increases in sales and marketing expenses from 1997 to
1998 and from 1998 to 1999 were primarily due to the expansion of our domestic
and international direct sales forces. The increase in sales and marketing
expenses from 1998 to 1999 also reflects increased hiring rates, and, to a
lesser extent, increased public relations and marketing costs related to the
launch of e*Gate 4.0 in November 1999. We anticipate that our sales and
marketing expenses will increase in absolute dollars for the foreseeable future
as we expand our domestic and international sales forces, expand our marketing
staff and develop product marketing and awareness campaigns for both the company
and our products.

     General and Administrative Expenses. General and administrative expenses
were $5.3 million for 1997, $9.2 million for 1998 and $12.2 million for 1999.
General and administrative expenses as a percentage of total revenues were 20%
in 1997, 25% in 1998 and 22% in 1999. The increases in costs from 1997 to 1998
and from 1998 to 1999 were primarily due to hiring additional finance, executive
and administrative personnel to support the growth of our business during those
periods. We expect that

                                       24
<PAGE>   27

general and administrative expenses will increase in absolute dollars for the
foreseeable future as we expand our operations.

     Amortization of Stock-Based Compensation. In connection with stock option
grants to employees and non-employee directors during 1999, we recorded total
deferred compensation of $4.6 million, of which $1.7 million was expensed as
amortization of stock compensation in 1999. In connection with the grant of
common stock warrants to a strategic alliance partner during 1999, we recorded
deferred compensation related to the warrants of $3.3 million in 1999 of which
$814,000 was expensed as amortization of alliance warrants in 1999.

     Interest Income (Expense), Net

     Interest income (expense), net, was $(263,000) in 1997, $16,000 in 1998 and
$(515,000) in 1999. At December 31, 1999, we had unamortized financing fees of
$596,000 related to common stock warrants issued in connection with our $10.0
million note payable and a $10.0 million asset-based line of credit. We plan to
use a portion of the proceeds from this offering to prepay the note payable in
its entirety. As a result, we will recognize the unamortized interest balance as
an expense in the period we prepay the note.

     Income Taxes

     No provision for income taxes has been recorded since our inception because
we have incurred net losses in all periods except 1997. As of December 31, 1999,
we had net operating loss carryforwards for federal income tax reporting
purposes of approximately $24.8 million that expire in various amounts beginning
in 2018. We also had net operating loss carryforwards for state income tax
reporting purposes of approximately $10.9 million that expire in various amounts
beginning in 2003. The U.S. tax laws contain provisions that limit the use in
any future period of net operating loss and credit carryforwards upon the
occurrence of certain events, including a significant change in ownership
interests. We had deferred tax assets, including our net operating loss
carryforwards and tax credits of approximately $14.7 million as of December 31,
1999. A valuation allowance has been recorded for the entire deferred tax asset
as a result of uncertainties regarding the realization of the asset balance. See
note 5 of notes to consolidated financial statements.

                                       25
<PAGE>   28

QUARTERLY RESULTS OF OPERATIONS

     The following table sets forth quarterly data from our consolidated
statements of operations and such data as a percentage of total revenues. The
consolidated statements of operations data have been derived from our unaudited
consolidated financial statements, which have been prepared on substantially the
same basis as our audited consolidated financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information for the periods presented. You
should read this information in conjunction with our consolidated financial
statements and the notes thereto included elsewhere in this prospectus. Our
operating results in any quarter are not necessarily indicative of the results
that may be expected for any future period.

<TABLE>
<CAPTION>
                                                                          THREE MONTHS ENDED
                                       -----------------------------------------------------------------------------------------
                                       MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,   MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,
                                         1998        1998       1998        1998       1999        1999       1999        1999
                                       ---------   --------   ---------   --------   ---------   --------   ---------   --------
                                                                            (IN THOUSANDS)
<S>                                    <C>         <C>        <C>         <C>        <C>         <C>        <C>         <C>
Revenues:
  License............................   $2,825     $ 4,276     $ 5,514    $ 5,527     $ 3,661    $ 4,919     $ 7,580    $  7,891
  Services...........................    2,219       2,443       2,820      3,371       3,979      5,530       6,099       4,660
  Maintenance........................    1,080       1,178       1,338      1,546       1,798      2,081       2,450       2,726
  Other..............................      573       1,180         704        867       1,070        603         115           9
                                        ------     -------     -------    -------     -------    -------     -------    --------
    Total revenues...................    6,697       9,077      10,376     11,311      10,508     13,133      16,244      15,286
                                        ------     -------     -------    -------     -------    -------     -------    --------
Cost of revenues:
  License............................       23         367         325        244         125        222          27         316
  Services...........................    1,940       2,145       3,032      4,152       4,352      5,222       5,713       5,617
  Maintenance........................       95          92         167        233         477        451         646         794
  Other..............................      397         761         254        495         826        352           1          40
                                        ------     -------     -------    -------     -------    -------     -------    --------
    Gross profit.....................    4,242       5,712       6,598      6,187       4,728      6,886       9,857       8,519
                                        ------     -------     -------    -------     -------    -------     -------    --------
Operating expenses:
  Research and development...........    1,335       1,744       2,318      3,099       2,789      3,275       2,980       2,946
  Sales and marketing................    2,480       3,279       4,817      5,697       6,056      6,135       7,212       9,249
  General and administrative.........    1,347       2,389       2,556      2,937       2,306      2,688       2,625       4,557
  Amortization of alliance
    warrants.........................       --          --          --         --          --         --          --         814
  Amortization of stock
    compensation.....................       --          --          --         --           3        622         479         604
                                        ------     -------     -------    -------     -------    -------     -------    --------
    Total operating expenses.........    5,162       7,412       9,691     11,733      11,154     12,720      13,296      18,170
                                        ------     -------     -------    -------     -------    -------     -------    --------
Loss from operations.................     (920)     (1,700)     (3,093)    (5,546)     (6,426)    (5,834)     (3,439)     (9,651)
Interest income (expense), net.......      (73)        (26)         52         63         (55)        66         (85)       (441)
                                        ------     -------     -------    -------     -------    -------     -------    --------
Income (loss) before tax provision...     (993)     (1,726)     (3,041)    (5,483)     (6,481)    (5,768)     (3,524)    (10,092)
Provision for income taxes...........       --          --          --         --          --         --          --          --
                                        ------     -------     -------    -------     -------    -------     -------    --------
Net income (loss)....................   $ (993)    $(1,726)    $(3,041)   $(5,483)    $(6,481)   $(5,768)    $(3,524)   $(10,092)
                                        ======     =======     =======    =======     =======    =======     =======    ========
</TABLE>

                                       26
<PAGE>   29

<TABLE>
<CAPTION>
                                                                          THREE MONTHS ENDED
                                       -----------------------------------------------------------------------------------------
                                       MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,   MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,
                                         1998        1998       1998        1998       1999        1999       1999        1999
                                       ---------   --------   ---------   --------   ---------   --------   ---------   --------
<S>                                    <C>         <C>        <C>         <C>        <C>         <C>        <C>         <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
  License............................      42%        47%         53%        49%         35%        37%         47%        52%
  Services...........................      33         27          27         30          38         42          37         30
  Maintenance........................      16         13          13         13          17         16          15         18
  Other..............................       9         13           7          8          10          5           1         --
                                          ---        ---         ---        ---         ---        ---         ---        ---
    Total revenues...................     100        100         100        100         100        100         100        100
Cost of revenues:
  License............................      --          4           3          2           1          2          --          2
  Services...........................      29         23          29         37          41         40          35         37
  Maintenance........................       2          1           2          2           5          3           4          5
  Other..............................       6          8           2          4           8          3          --         --
                                          ---        ---         ---        ---         ---        ---         ---        ---
    Gross profit.....................      63         64          64         55          45         52          61         56
                                          ---        ---         ---        ---         ---        ---         ---        ---
Operating expenses:
  Research and development...........      20         20          22         27          26         25          18         19
  Sales and marketing................      37         36          46         52          58         47          45         61
  General and administrative.........      20         27          25         25          22         20          16         30
  Amortization of alliance
    warrants.........................      --         --          --         --          --         --          --          5
  Amortization of stock
    compensation.....................                 --          --         --          --          5           3          4
                                          ---        ---         ---        ---         ---        ---         ---        ---
    Total operating expenses.........      77         82          93        104         106         97          82        119
                                          ---        ---         ---        ---         ---        ---         ---        ---
Loss from operations.................     (14)       (19)        (29)       (49)        (61)       (45)        (21)       (63)
Interest income (expense), net.......      (1)        --          --          1          (1)         1          (1)        (3)
                                          ---        ---         ---        ---         ---        ---         ---        ---
Income (loss) before tax provision...     (15)       (19)        (29)       (48)        (62)       (44)        (22)       (66)
Provision for income taxes...........      --         --          --         --          --         --          --         --
                                          ---        ---         ---        ---         ---        ---         ---        ---
Net income (loss)....................     (15)%      (19)%       (29)%      (48)%       (62)%      (44)%       (22)%      (66)%
                                          ===        ===         ===        ===         ===        ===         ===        ===
</TABLE>

     Revenues. Our revenues have fluctuated from quarter to quarter due to many
factors, including the timing of new product introductions and the signing of
significant license agreements. During 1998, we experienced sequential quarterly
total revenues increases due to increases in license and services revenues. From
the fourth quarter of 1998 to the first quarter of 1999, we experienced a
decrease in sequential quarterly license revenues due to strong year-end sales
in 1998. During 1999, we experienced sequential quarterly total revenues
increases, except from the third quarter to the fourth quarter which was due to
a decrease in services revenues. Services revenues in the fourth quarter of 1999
decreased from the third quarter in 1999 due to a slowdown in customer activity
during the holidays and as a result of customers preparing for the year 2000.

     Cost of Revenues. Our cost of revenues has fluctuated in both absolute
dollars and as a percentage of total revenues, primarily as a result of changes
in the level of quarterly services revenues as the majority of our cost of
revenues is directly related to our services revenues. Gross margins have been
affected by changes in our sales mix, especially with respect to the mix between
services revenues and license revenues.

     Operating Expenses. Operating expenses have generally increased each
quarter beginning with the first quarter of 1998. These increases primarily
reflect the addition of sales staff as we expanded our domestic and
international direct sales forces and our research and development efforts
leading up to the launch of e*Gate 4.0 in November 1999. In the fourth quarter
of 1999, sales and marketing expenses increased primarily due to the expansion
of our domestic and international sales forces and the launch of e*Gate 4.0.
General and administrative expenses increased as we added staff to support a
larger, more global organization.

                                       27
<PAGE>   30

     Our operating results have varied widely in the past, and we expect that
they will continue to fluctuate in the future as a result of a variety of
factors, many of which are outside of our control. These factors include the
timing of significant orders and the length of our sales cycle, the growth rate
of the e-Business software market, our ability to continue to attract and retain
customers in international markets and the success of our strategic partners and
other distributors in selling our products. Due to the emerging nature of the
markets in which we compete, it may be difficult to forecast our revenues
accurately. Normal payment terms for our license fees range from being due upon
signing an agreement to ninety days from signing an agreement. To date we have
not offered extended payment terms to our customers. Slow paying and delinquent
accounts are identified and estimated reserve requirements are provided for in
the allowance for doubtful accounts. Our expense levels are based in part on our
expectations with regard to future revenues. We may be unable to adjust spending
in a timely manner to compensate for any unexpected revenues shortfall. Any of
these factors may seriously harm our business, results of operations and
financial condition. See "Risk Factors" for a further description of these and
other factors that could harm our business, results of operations and financial
condition.

LIQUIDITY AND CAPITAL RESOURCES

     From our inception until 1995, we funded our operations internally. Since
1995, we have funded our operations primarily through private sales of our
capital stock. We have raised an aggregate of $32.4 million from the sale of
common and preferred stock through December 31, 1999. To a lesser extent, we
have financed our operations through lending arrangements and equipment
financing.

     As of December 31, 1999, we had cash and cash equivalents of $1.6 million,
a decrease from $3.3 million of cash and cash equivalents held as of December
31, 1998. Our working capital deficit as of December 31, 1999 was $1.9 million
compared to a working capital deficit of $1.2 million as of December 31, 1998.
The increase in working capital deficit is attributable to the net loss incurred
during 1999 offset by the proceeds received from the sale of preferred and
common stock, and, to a lesser extent, the refinancing of our lending facility
in 1999.

     We have a $10.0 million senior line of credit facility with a lending
institution that bears interest at a rate of prime plus 2%, payable monthly, and
expires on February 1, 2001. As of December 31, 1999, borrowings under the line
totaled $3.4 million. During the year ended December 31, 1999, we paid
approximately $26,000 in total interest on this line of credit, at an average
interest rate of 10.5% per annum. This line of credit is secured by accounts
receivable and other assets. We also have a $10.0 million long-term note payable
which bears interest at the same rate and is due on February 1, 2001. Through
December 31, 1999, we had paid approximately $175,000 in total interest on this
note, at an average interest rate of 10.5% per annum. We plan to use a portion
of the net proceeds from this offering to repay the note in its entirety. Our
line of credit contains no financial covenants other than borrowing base
restrictions and restrictions on related party transactions and incurrence of
additional debt.

     We also have noncancelable operating leases for office space and equipment
of approximately $13.4 million, which are payable through 2004.

     Net cash used in operating activities in 1998 was $6.0 million, resulting
primarily from the net loss incurred in 1998. Net cash used in operating
activities in 1999 was $21.9 million, resulting primarily from the net loss
incurred in 1999.

     Net cash used in investing activities was $3.3 million in 1998 and $4.4
million in 1999. Net cash used in investing activities in these periods was
related primarily to the purchase of computer equipment, principally desktop and
network hardware and software, leasehold improvements and the implementation of
our information and data processing systems.

                                       28
<PAGE>   31

     Net cash provided by financing activities was $11.8 million in 1998 and
$24.7 million in 1999. Cash provided by financing activities primarily was the
result of proceeds generated from the sale of our preferred stock and, to a
lesser extent, our common stock and lending arrangement refinancing.

     We anticipate continued growth in our operating expenses for the
foreseeable future, particularly in sales and marketing expenses and, to a
lesser extent, research and development and general and administrative expenses.
As a result, we expect our operating expenses and capital expenditures to
constitute the primary uses of our cash resources. In addition, we may require
cash resources to fund acquisitions or investments in complementary businesses,
technologies or product lines. We believe that the net proceeds from the
offering, together with our current cash and cash equivalents and our expected
cash from operations, will be sufficient to meet our anticipated cash
requirements for working capital and capital expenditures for at least the next
12 months. Thereafter, we may need to raise additional funds, and we cannot be
certain that we will be able to obtain additional debt or equity financing on
favorable terms, if at all.

YEAR 2000 READINESS DISCLOSURE

     In late 1999, we completed our remediation and testing of systems related
to year 2000 compliance. As a result of these efforts, we experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believe those systems successfully
responded to the year 2000 date change. We are not aware of any material
problems resulting from year 2000 issues, either with our products, our internal
systems, or the products and services of third parties. We will continue to
monitor our mission-critical computer applications and those of our vendors
throughout the year 2000 to ensure that any latest year 2000 matters that may
arise are addressed promptly.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because we do
not currently hold any derivative instruments and do not engage in hedging
activities, we expect the adoption of SFAS No. 133 will not have a material
impact on our financial position, results of operations or cash flows. In July
1999, SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133" was
issued. We will be required to adopt SFAS No. 133 in 2000.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

     We develop products in the United States and sell them in North America,
Europe, Africa and the Pacific Rim. As a result, our financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. If any of the events described above
were to occur, our revenues could be seriously impacted, since a significant
portion of our revenues are derived from international customers. In 1999, we
incurred net gains of approximately $12,000 due to foreign currency
fluctuations, as compared to net losses of ($1,000) in 1997 and ($22,000) in
1998. Revenues from international customers represented 27.1% of total revenues
in 1999. Our line of credit and note payable carry floating interest rates based
on prime plus 2%. Accordingly, we are subject to the risk of incurring
additional interest expense should the prime interest rate increase in the
future. The interest rate on our line of credit and note payable as of December
31, 1999 was 10.5%.

                                       29
<PAGE>   32

                                    BUSINESS

OVERVIEW

     We are a leading provider of e-Business integration software that enables
the seamless flow of information within and among enterprises on a global basis.
We believe that we offer the only end-to-end e-Business integration solution
encompassing intra-enterprise, or application-to-application, integration and
inter-enterprise, or business-to-business, integration, as well business process
management capabilities. As of December 31, 1999, we had licensed our products
to over 1,200 customers worldwide.

INDUSTRY BACKGROUND

     Escalating competitive pressures are requiring businesses to respond
quickly to market dynamics. Corporate mergers and acquisitions, the ubiquity of
the Internet, shortened development and production cycles, shifting supplier
relationships and diverse customer demands are forcing companies to adopt
aggressive e-Business initiatives, whereby business transactions and
relationships are conducted electronically both within and among enterprises.
The speed of e-Business demands higher levels of business process integration,
which is increasingly complex and dynamic. e-Business initiatives have evolved
from relatively simple internal "intranets" and business-to-consumer e-Commerce
to intricate business-to-business, or B2B, relationships. Dynamic B2B exchanges
have recently emerged, where multiple vendors, suppliers, partners and customers
transact business electronically in real-time. The goals of these initiatives
are significant increases in efficiency and profitability. However, if business
applications are not integrated, the full potential of e-Business to automate
and optimize falls short of being realized. As companies seek to capitalize on
e-Business by connecting to each other electronically, integrating business
processes and related information technology, or IT, systems will become
critical to meet consumer and business expectations.

     E-BUSINESS INTEGRATION CHALLENGES

     Integrating business systems in order to automate and improve business
processes presents major challenges. Companies have made significant investments
in a range of custom and packaged software applications, which generally were
not designed to communicate with each other. The proliferation of packaged
applications such as enterprise resource planning, or ERP, supply chain
management, customer relationship management, sales force automation, decision
support and e-Commerce technologies has resulted in highly disconnected and
disparate IT infrastructures. These diverse systems and applications often
reside on different hardware platforms with varying and incompatible data
formats and communication methods. As a result, information stays trapped within
isolated systems. To enable a truly automated e-Business process, these isolated
systems must be seamlessly integrated.

     As companies deploy new e-Business initiatives that extend beyond the
confines of an enterprise, the need to integrate disparate IT systems will
increase substantially. These external integration challenges are exacerbated by
the growth in corporate acquisition strategies and the subsequent need to
integrate acquired systems, as well as by the growth of geographically
distributed companies. Examples of e-Business integration challenges are as
follows:

     - Companies, both business-to-consumer and B2B, are attempting to improve
       the individual user experience by delivering personalized information to
       their online users. Delivering customized information, however, requires
       seamless integration with a variety of data sources that may not
       otherwise communicate with one another. For example, online catalogs need
       to be integrated with back-office systems of both buyers and sellers to
       provide real-time information such as product availability and delivery
       schedule. An online catalog should also integrate with a buyer's
       purchasing system in order to automate and streamline the procurement
       process. The dynamic

                                       30
<PAGE>   33

       integration of these systems is critical in order to provide higher
       quality service, satisfy customer demands and compete more effectively.

     - New B2B trading exchanges that bring buyers and sellers together via the
       Internet have complex integration requirements. Each buyer and seller
       must integrate its systems with one or more exchanges in order to
       transact business online. A seller's inventory and order management
       systems must be integrated with each exchange to enable real-time product
       availability and order fulfillment, and a buyer's purchasing systems must
       be integrated with each exchange to automatically initiate the purchasing
       process once an order has been submitted. The trading exchange itself
       must provide for the management of trading partner relationships and the
       routing and transformation of transactions between buyers and sellers.
       The seamless integration of these systems over the Internet in a secure,
       automated and reliable fashion is critical for a trading exchange to meet
       customer and market demands.

     LIMITATIONS OF TRADITIONAL APPROACHES FOR E-BUSINESS INTEGRATION

     Companies have historically tried to bridge disparate systems through
in-house or third-party custom development of point-to-point interfaces. This
approach is no longer viable for many companies given the large and growing
number of applications and the cost, time and resources required to create and
maintain integration in a rapidly changing environment. Integrating systems
outside of an enterprise is an additional challenge that requires expertise in
Internet technologies and a solution that is reliable, secure, centrally managed
and scalable to a very large number of users.

     The integration demands of e-Business present major technical challenges.
In an attempt to address these challenges, companies have implemented ERP,
enterprise application integration, or EAI, and electronic data interchange, or
EDI, technologies. However, these solutions each have their own limitations in
terms of time-to-market, cost, performance or flexibility, and no one approach
fully addresses the entire e-Business integration challenge.

     While ERP software can automate business processing within an enterprise,
it generally requires lengthy implementation times, is difficult to maintain, is
difficult to integrate with third-party technologies and was not designed to
meet e-Business performance requirements, such as security and scalability. EAI
software helps solve some aspects of enterprise integration but generally does
not have some key capabilities, such as security and business process
management, that are necessary for rapid and cost-effective integration between
enterprises. Traditional EAI solutions are also limited by their "hub and spoke"
architecture, whereby a centralized software hub serves as the integration
broker, limiting scalability and creating a single point of failure.
Historically, EDI has been used by large organizations for B2B integration, but
it generally is expensive to implement and deploy, lacks the flexibility to
quickly respond to business changes, lacks real-time data exchange capabilities
and is not scalable to large numbers of users.

     We believe there is a significant opportunity to provide companies with an
e-Business integration solution that rapidly and cost-effectively addresses
integration challenges and enables the flow of information within and among
enterprises. This system would provide a comprehensive integration platform and
provide the flexibility and scalability to adjust to dynamic business needs and
to enable companies to capitalize on e-Business opportunities.

THE STC SOLUTION

     We provide a comprehensive solution for e-Business integration, enabling
the seamless flow of information across systems, applications and enterprises on
a global basis. Our e*Xchange software suite provides companies with a flexible
and easily configurable platform to connect applications and systems not only
within an organization, but also among geographically dispersed enterprises,
allowing for continuous and reliable information exchange to meet today's
fast-paced e-Business demands. In

                                       31
<PAGE>   34

contrast to traditional EAI approaches, our solution allows companies to
integrate applications, business systems and resources without altering existing
application code, as well as to automate, monitor and optimize business
processes. We believe that we offer the only end-to-end e-Business integration
solution encompassing both intra-enterprise, or application-to-application,
integration and B2B integration, with built-in business process management
capabilities.

     Our application-to-application integration capability provides extensive
pre-built application connectivity to rapidly deploy interfaces to packaged
applications, legacy applications, Web and object technologies and industry
standard relational databases. Our products provide a robust and highly scalable
integration platform that can be fully distributed on a global basis, yet
efficiently managed and configured from a single location.

     Our B2B integration capability enables various trading partner paradigms,
including direct partner-to-partner integration and trading exchange or
marketplace integration, as well as more traditional EDI integration. Trading
partner management enables a company to maintain partner profiles that allow for
the transformation, routing and transportation of transactions to the
appropriate recipients in a format or message standard that is appropriate for
that recipient. We also provide support for a wide range of traditional and
emerging communications standards including TCP/IP, XML, EDI or EDI over the
Internet, and e-Commerce standards such as RosettaNet and Microsoft Biztalk.

     Our business process management capability enables a customer to model,
monitor and manage business processes that occur within and among enterprises.
This allows users to automate business processes, understand how long a
particular process takes to execute and optimize that business process.

     Our solution provides the following business benefits to our customers:

     Enhanced Revenue, Profit and Customer Service. The open architecture and
robust functionality of our solution allows our customers to efficiently
implement and adapt their business strategies in response to market dynamics and
other factors. Customers can quickly react and easily adapt to operational and
system changes as a result of dynamic supplier and customer relationships,
e-Business initiatives and mergers and acquisitions. Our flexible integration
platform enables our customers to focus on pursuing new business initiatives
designed to enhance revenue, profit and customer service.

     Scalable e-Business Integration Platform. Our modular solution is designed
to be expandable not only within a customer's organization, but also throughout
its geographically dispersed and technologically diverse network of customers,
suppliers and partners. Our e*Xchange product suite can grow to manage the
transaction levels required for global e-Business with minimal technical or
administrative complexity. The distributed architecture of e*Xchange avoids the
typical bottlenecks associated with traditional approaches by distributing
processing throughout a network and providing a central registry that manages
this distributed configuration across the entire network.

     Rapid Time to Market. Our solution is designed for easy and rapid
deployment, enabling our customers to reduce time to market for their products
and services and to facilitate the implementation of e-Business strategies. Our
e*Xchange platform is designed to allow the efficient incorporation of, and
integration with, evolving technologies and standards, minimizing programming
effort and enabling real-time integration of applications and systems. Our
comprehensive solution is fully integrated, eliminating the need for disparate
integration technologies from multiple vendors.

     Lower Operational Costs. Our solution is designed to enable customers to
automate and streamline business processes for increased operating efficiency,
resulting in improved cycle times, optimized service level agreements and lower
operational costs. Our platform builds upon companies' existing IT investments
and minimizes the need for expensive custom programming. As a result, our
solution allows for efficient business modification in response to application,
system or process changes, substantially reducing the implementation and
maintenance costs associated with traditional integration approaches.

                                       32
<PAGE>   35

     Dependable Performance. With over 1,200 customers to date, we believe our
solution provides the performance, security and reliability necessary to
integrate and manage mission-critical business processes. Our e-Business
integration solution builds upon more than nine years of dedication to the
continuous development of application and systems integration solutions within
and among enterprises.

THE STC STRATEGY

     Our objective is to provide the leading e-Business integration solution to
manage the seamless flow of information within and among enterprises on a global
basis. Our strategy for achieving this objective includes the following
elements:

     Capitalize on e-Business Growth. An increasing number of companies are
implementing e-Business initiatives that require rapid integration of multiple
software, hardware and networking technologies that interoperate and support a
large number of users. We intend to capitalize on this growth opportunity
through our e*Xchange software platform, which supports all major aspects of e-
Business integration and process automation. We are developing a number of new
technologies that are designed to further enable seamless B2B transactions and
incorporate additional support for e-Business applications.

     Maintain Technological Leadership. We are a leader in application
integration within and among enterprises, and we are extending this leadership
to the emerging e-Business integration market. The fourth generation of our core
product, e*Gate, is a comprehensive and centrally managed solution that
addresses the need for a distributed, scalable, global e-Business
infrastructure. We will continue to invest in e*Gate and other products to
enhance the functionality of our solution. Our product architecture is open, and
we intend to incorporate new technologies and standards for messaging,
communications, process management and business applications to provide a
complete solution for e-Business integration.

     Enhance Presence in Targeted Vertical Markets. Our e*Xchange product suite
is designed to be easily adaptable to different vertical markets, and our
products have been adopted by customers across a broad range of industry
segments, including healthcare, financial services/insurance, retail/
e-Commerce/services, telecommunications/utilities and manufacturing. We intend
to continue expanding penetration of vertical markets that we believe represent
significant revenue opportunities. We have dedicated sales and marketing
resources targeted at specific vertical markets, and we plan to extend this
approach to additional industry segments. We also intend to provide additional
industry-specific product functionality and partner with systems integrators
that have expertise in particular vertical markets.

     Build upon STC Awareness. We intend to leverage our installed base of
customers and to make substantial investments in sales and marketing to increase
our visibility and market share. We will focus on increasing our sales to
existing customers and new customers, particularly by providing integration
solutions for their expansion into e-Business activities. We are also expanding
our geographic coverage by increasing our presence internationally, including in
Europe, the Middle East, Africa and the Pacific Rim.

     Expand Distribution, Consulting and Implementation Through Strategic
Alliances. We intend to expand and seek additional strategic alliances with
leading systems integrators and software vendors to increase our market
penetration. We believe that our e*Xchange solution enables our strategic
partners to offer readily deployable, repeatable e-Business solutions.
Consistent with our strategy to foster strategic alliances, Andersen Consulting,
CSC and EDS have acquired equity interests in and entered into alliances with
STC. Our alliance with Andersen Consulting provides for qualified customer
introductions and the joint development and marketing of repeatable vertical
industry market offerings, our alliance with CSC provides for the generation of
license revenues for STC and the joint development and marketing of repeatable
vertical industry market offerings, and our alliance with EDS provides for the
generation of license revenue for STC. We have also signed reseller agreements
with software vendors such as BroadVision and will continue to pursue
opportunities to provide our e-Business integration capabilities to additional
software vendors.

                                       33
<PAGE>   36

PRODUCTS

     Our e*Xchange business integration suite provides the following key
capabilities:

     - Enterprise Integration. Integration capabilities are the core of all
       e*Xchange offerings. Whether at the application, network or system level,
       e*Xchange provides a robust, scalable and reliable integration platform.
       Business applications or systems are connected to a network via pre-built
       adapters that we call e*Way Intelligent Adapters, enabling them to work
       together. As opposed to solutions based upon "hub and spoke"
       architectures, e*Xchange's distributed architecture delivers scalability
       through its ability to deploy run-time components anywhere on the
       network, thus making maximum use of enterprise computing capacity.
       e*Xchange's reliability is a result of its flexible deployment options
       for load balancing and reliable communication across unreliable channels,
       its ability to change business processes dynamically without stopping the
       system, its ability to recover from hardware failures without risk of
       data loss or duplication and its support of transactional integrity.

     - Business Process Management. Using graphical business modeling tools,
       business users can quickly define physical business processes and easily
       modify those processes in response to dynamic changes. The technical
       details of each business process are exposed in a hierarchy of graphical
       views that span all levels of integration down to the most detailed data
       manipulation and networking aspects. Graphical monitoring of business
       processes allows business users to observe the status of individual
       events and processes, to detect and correct abnormal conditions in real-
       time, and to audit and analyze process history for further optimization.
       Real-time alerts or process exceptions can trigger faxes, pages, e-mails
       or messages to system management tools based on any business or system
       event.

     - B2B Management. e*Xchange supports a wide range of inter- and
       intra-business processes. e*Xchange can incorporate information and
       events external to the enterprise, including XML-based exchanges over the
       Internet, either directly or through trading exchanges, traditional EDI
       over value added networks or new Internet-based EDI protocols, as well as
       other methods of communication, such as faxes, e-mail and messages over
       dedicated and dial-up connections. Business processes may also include
       transactions via electronic funds transfer networks such as S.W.I.F.T.,
       direct bank deposits, and credit, securities, and other financial
       transactions. e*Xchange also provides trading partner management to
       simplify the setup and configuration of partner and customer profiles.
       Additionally, pattern matching and cross-indexing capabilities allow
       customers and trading partners to be identified uniquely and
       automatically from various data-stores within and among enterprises.

                                       34
<PAGE>   37

                                      LOGO

     [Graphical depiction of STC's e*Xchange e-Business Integration product
suite, showing various architectural layers of the product alongside sample
depictions of computer screens that show the user interfaces for those layers.]

     A customer typically licenses e*Gate as a core technology engine, together
with a combination of specialized product offerings that meet specific
integration needs. Our specialized product offerings are as follows:

     - e*Way Intelligent Adapters (e*Ways) provide specialized application
       connectivity and support for robust data processing. e*Gate's open
       architecture combined with e*Way adapters enable seamless
       interoperability with a wide variety of packaged applications, message
       standards, operating systems, databases, networks and communication
       protocols. We currently offer over 500 e*Way intelligent adapters,
       including adapters for direct database access, Web server access,
       packaged applications (such as SAP, PeopleSoft, Siebel, Clarify, Vantive,
       Oracle and BroadVision), communication protocols and legacy applications
       and data stores. An e*Way Extension Kit is available for rapid
       development of custom e*Ways.

     - Intelligent Bridges are out-of-the-box solutions that bundle all the
       components, including e*Ways, business logic and application extensions,
       necessary to automate specific business processes among popular
       applications. Intelligent Bridges provide customers with a fast and
       predictable time-to-market advantage. Examples of Intelligent Bridges
       include the PeopleSoft-to-SAP Intelligent Bridge and the Siebel-to-SAP
       Intelligent Bridge.

     - e*Xchange Integrator is a secure system for managing trading partner
       relationships and facilitating the exchange of business information
       outside a corporate firewall via both traditional EDI and
       state-of-the-art XML technology. Seamless integration with e*Gate enables
       the use of these transactions or messages by other enterprise
       applications and systems.

                                       35
<PAGE>   38

     - e*Index (Global Identifier) is an intelligent system that uniquely
       identifies persons, organizations or other entities and cross-indexes how
       they are identified by all systems that communicate with e*Xchange.
       e*Index allows companies to access their customers, partners and other
       entities from a single view and to automatically resolve exact or near
       duplicate entries.

     We are continually enhancing the e*Xchange product suite. In particular, we
are focused on enhancing the functionality of e*Xchange with additional trading
partner and business process management capabilities, extended B2B functionality
and broader platform support. In addition, we are developing reporting and
analysis capabilities that will leverage historical process data stored in the
business process warehouse within e*Xchange and facilitate process optimization
activities. We will continue to develop new e*Ways for emerging packaged
applications, Web technologies and data formats to provide even greater
application and system connectivity as well as develop new Intelligent Bridges,
such as BroadVision-to-SAP.

PROFESSIONAL SERVICES

     Our customers typically purchase consulting services from us to support
their implementation activities. We offer professional services with the initial
deployment of our product, as well as on an ongoing basis to address the
continuing needs of our customers. Our consulting services range from
architectural planning to complete development and deployment of our products.
In each case, our services are tailored to meet our customers' needs. Our
professional services organization also provides comprehensive education at our
state-of-the-art training facility, as well as on-site courses. As of December
31, 1999, our professional services organization consisted of 116 experienced
professionals. Many of our professional services employees have advanced degrees
or substantial industry experience in systems architecture and design. We expect
that the number of service professionals and the scope of the services that we
offer will increase as we continue to address the expanding enterprise
infrastructure needs of large organizations.

                                       36
<PAGE>   39

CUSTOMERS

     We have directly or indirectly licensed our products to over 1,200
customers internationally. The following is a representative list of our
customers by industry:


<TABLE>
<S>                             <C>                             <C>

FINANCIAL SERVICES/INSURANCE    Dominion Dental Care            RETAIL/E-COMMERCE/SERVICES
                                Fairview Health System
ABN Amro Bank                   Kaleida Health                  Ames Dept Stores
Banque Nationale de Paris       McLaren Health Corp.            Andersen Consulting
Continental Casualty Company    Medicalogic                     Barnes & Noble.com
CNA Insurance                   Mid-Michigan Medical Center     Enterprise Rent-a-car
Credit Agricole Luxembourg      New York and Presbyterian       IAMA
Fidelity Management             Hospital                        MedicaLogic
HypoVereinsbank                 Northwest Med Info/Whatcom      Neoforma.com
ING Barings                     Skagit                          Onyx Software
J.P. Morgan                     Oral Health                     PeopleSoft
Lloyds Financial Systems        PacifiCare Dental & Vision      PETsMART, Inc.
Nationwide Insurance            Renal Care Group
NGH Luxembourg                  University of Pennsylvania      TELECOMMUNICATIONS/UTILITIES
Northern Trust                  Healthsystem
Ord Minett                      Wentworth Area Health           Chevron
Thomas Weisel Partners          Service                         Fluor Corporation
UBS A.G.                                                        National Power
Westpac Banking Corp.           MANUFACTURING                   Portland General Electric
WestLB                                                          Racal Telecom
                                Agilent                         Scottish and Southern
GOVERNMENT                      Amdahl Corporation              Energy plc.
                                Amgen                           Schlumberger
U.S. Veterans Administration    Australian Co-operative         Tesion GmbH
U.S. Department of Defense      Foods Limited
                                Bausch & Lomb
HEALTHCARE                      Hewlett-Packard Company
                                Maersk/AP Moller
Caregroup                       Nike Inc.
Caritas Christi Hospital        O.C. Tanner
Cedars-Sinai Hospital           Raytheon
Denticare of California         Warner Lambert
Digital Equipment Corp.
</TABLE>



     In 1997, one customer accounted for 11% of our revenues. In 1998 and 1999,
no single customer accounted for more than 10% of our revenues. Revenues from
the sale of our products and services outside the United States accounted for
$4.0 million, or 15.0% of our total revenues in 1997, $7.6 million, or 20% of
our total revenues in 1998 and $14.9 million, or 27% of our total revenues in
1999. Revenues from the sale of our products and services in the United Kingdom
as a percent of total revenues were 8.9% in 1997, 9.9% in 1998 and 9.7% in 1999,
while revenues from the sale of our products and services in Germany as a
percent of total revenues were 2.7% in 1997, 5.6% in 1998 and 10.6% in 1999. We
believe that revenues from sales outside the United States will continue to
account for a material portion of our total revenues for the foreseeable future.
Long-lived assets located outside the United States, principally in Europe, were
$358,000 at December 31, 1997, $933,000 at December 31, 1998, and $1.4 million
at December 31, 1999.


     The following examples illustrate how some of our customers have deployed
our products:

     BARNES & NOBLE.COM

     Opportunity: Since launching its online business in May 1997, Barnes &
Noble.com has become one of the world's largest Web sites and the fourth largest
e-Commerce site, according to Media Metrix. With access to Barnes & Noble's more
than 750,000 in-stock titles, Barnes & Noble.com has the largest

                                       37
<PAGE>   40

standing inventory of any online bookseller ready for immediate delivery. One of
the challenges facing Barnes & Noble.com was the need to reliably collect and
distribute the high volume of information about the titles and the sales process
to and from many sources and systems to support the rapid business process
required by a business-to-consumer and B2B e-Commerce company.

     Solution: Barnes & Noble.com entered into a multi-year software and support
agreement with STC to use e*Xchange to enable and manage the information flow
among their multiple systems and the Web. The e*Xchange integration platform
allows Barnes & Noble.com to eliminate duplication of effort in information
flows, improve the accuracy and consistency of data across participating
systems, and ultimately provide its customers a higher quality experience when
buying from Barnes & Noble.com. While customers receive a satisfying experience
when shopping on the Web site, Barnes & Noble.com achieves a seamless supply
chain integration in the back-office among SAP systems, data warehousing systems
and the systems of multiple suppliers and partners.

     HEWLETT-PACKARD COMPANY

     Opportunity: Hewlett-Packard Company, or HP, is a leading global business
provider of computing and imaging solutions and services for business and home.
In order for HP to provide integrated services to its customers, HP needed its
internal systems to be able to share critical information with each other and
along the extended supply chain.

     Solution: e*Xchange was a comprehensive solution to meet HP's requirements
and is currently being used within HP to integrate a major ERP system with
existing systems and business partners across the Internet.

     NEWYORK-PRESBYTERIAN HEALTHCARE NETWORK

     Opportunity: NewYork-Presbyterian Healthcare Network presented a complex
integration challenge across its network of 15 sponsored hospitals and 13
affiliated hospitals, as well as three specialty institutions, six long term
care facilities, 11 home health agencies, 62 satellite primary care centers, 12
physician groups and four managed case entities. Rapid and accurate translation
and routing of information from one system to another is vital to the hospitals'
success. The applications were originally linked through traditional
point-to-point, system-to-system, integration technologies. However, as systems
were added, the time, cost and effort to link patient data became prohibitive.

     Solution: e*Xchange was implemented by the hospital network to provide an
intelligent application integration solution that allows multiple information
systems to communicate and exchange information, despite platform differences
and data format disparities. More than 70 mission-critical applications on the
hospital network have already been integrated using e*Xchange with hundreds more
to follow. Applications sharing information through e*Xchange range from
critical mainframe-based financial and patient registration applications to a
host of clinical systems.

     WESTLB

     Opportunity: WestLB is one of the largest credit institutions in Germany
and has a presence in leading financial markets worldwide. WestLB launched its
Electronic Banking Services unit to establish worldwide banking solutions which
will offer automatic, quick and inexpensive transactions to clients. The
Electronic Banking Services unit needed a solution to provide the enterprise
integration platform behind its services for an integrated electronic banking
environment. The bank had legacy environments that needed to be integrated with
all of its transaction-based systems, including trading, dealing and cash
management. Because of the high volume of transactions and data, the bank also
had a number of formats and processes to manage. In order for WestLB Electronic
Banking Services to provide a competitive offering and establish market
leadership, it needed a robust and flexible solution that could cope with the
highly complex requirements of its dynamic business.

                                       38
<PAGE>   41

     Solution: WestLB Electronic Banking Services implemented e*Xchange to
create a fully integrated electronic banking environment. e*Xchange is designed
to provide synchronized real-time processing required in the banking industry,
enabling WestLB to improve operating efficiencies and the integrity of the data
transferred. e*Xchange can handle electronic data transfers in any format,
enabling centralized treasury functions and conversion of payment orders into
international formats, sending them directly into the clearing systems of those
countries for processing. e*Xchange has enabled WestLB to enhance cash and
treasury management services, establish an extranet platform for Internet
applications and services and handle electronic data transfers in any format
between WestLB and its business partners, customers or third party banks.

SALES AND MARKETING

     We license our products and sell our services primarily through our direct
sales organization, complemented by the selling and support efforts of our
systems integrators and through our relationships with independent software
vendors. As of December 31, 1999, our sales and marketing organization consisted
of 118 professionals. We have sales offices in the greater metropolitan areas of
San Francisco and Los Angeles and in Australia, Belgium, France, Germany, Japan
and the United Kingdom. Our direct sales force works closely with our
professional services organization, which provides pre-sales support to
potential customers on product information and deployment capabilities. We plan
to significantly expand the size of our direct sales organization and are hiring
specialized sales personnel with expertise in vertical markets such as financial
services, telecommunications and utilities. We also plan to establish additional
sales offices domestically and internationally.

     Our sales process requires that we work closely with targeted customers to
identify short term technical needs and long term goals. Our sales team, which
includes both sales and technical professionals, then works with the customer to
develop a proposal to address these needs. The length of our sales cycle
generally depends on the customer's industry.

     Through our global software partner program, we license our technology to
leading independent software vendors so that they can embed our e*Xchange
technology into their product on a limited basis for seamless integration with
specific applications. These relationships enable these companies to resell our
products to their customers worldwide and provide our sales force further
opportunities to sell our products to these same customers. We have OEM and
reseller arrangements with a number of software vendors, including BroadVision.

     We focus our marketing efforts on creating awareness of our products and
their applications, identifying and educating potential customers and generating
new sales opportunities. We have not historically made large investments in
promoting our brand or our products. However, we intend to significantly
increase our marketing expenses to increase awareness of e*Xchange as a
comprehensive solution for e-Business application integration. Our marketing
activities include advertising, direct mail, seminars, tradeshows and industry
conferences. We also have a public relations program focused on the trade and
business press as well as industry analysts.

     Our marketing organization works closely with our systems integrator
partners and independent software vendors to jointly develop targeted marketing
programs to leverage the solutions offered by our partners. We plan to establish
additional programs to educate systems integrators and independent software
vendors on the benefits of e*Xchange.

STRATEGIC ALLIANCES WITH LEADING SYSTEMS INTEGRATORS

     To promote additional market penetration of our products, we have
established strategic relationships with three of the largest independent
systems integrators, Andersen Consulting, CSC and EDS. Our relationships with
these systems integrators position us as a preferred e-Business integration
technology. We believe these relationships will enable us to increase market
awareness of our products

                                       39
<PAGE>   42

and increase sales. As we work with these firms, we intend to better utilize our
professional services organization and more effectively implement our products
with our customers. We have incentivized each of these integrators by issuing
warrants to purchase shares of our common stock, with the vesting of such
warrants conditioned upon achievement of agreed upon milestones relating to the
generation of qualified customer introductions or revenues for STC. In addition,
Andersen Consulting purchased a total of $1.0 million of our stock in September
1998 and March 1999, and EDS will buy shares of our common stock concurrently
with this offering at the public offering price. In addition to these strategic
relationships, we have relationships with other systems integrators including
Arthur Andersen, Deloitte & Touche, KPMG and PricewaterhouseCoopers.

PRODUCT DEVELOPMENT

     Our core software product was commercially introduced in 1991, and in
November 1999, we released the 4.0 version of e*Gate. We are continually
enhancing our e*Xchange product suite. In particular, we are focusing on
enhancing the functionality of e*Gate with additional trading partner and
business process management capabilities, extended B2B functionality and broader
platform support. We will continue to develop new e*Ways for emerging packaged
applications, Web technologies and data formats to provide even greater
application and system connectivity as well as develop new Intelligent Bridges.
As of December 31, 1999, our product development organization included 78
employees. In 1999, our research and development expenses were $12.0 million, as
compared to $8.5 million in 1998 and $4.2 million in 1997. Our product
development organization includes the following departments:

     Product Management. This group is the primary interface between the product
development team and the rest of our organization. Product management collects
input from marketing, sales, services, support, pilot programs, partners and
users to define product requirements. Product management defines product
strategies and works with technical staff to assess implementation effort.

     Architecture and Research. This group is tasked with innovating new
technology in our core areas of expertise, including distributed architecture,
security, scalability and performance. This group also performs advance
prototyping and technical specification of new products.

     Development. Our development team is responsible for building specified
products. This team receives functional input from our product management group
and technical input from our architecture and research group. Our development
team works very closely with our documentation group to ensure that all releases
are accurately described in user manuals and help systems. The development team
releases its work to the quality assurance team, which verifies stability
against defined acceptance criteria.

CUSTOMER SERVICE AND SUPPORT

     We provide support for all of our products on a global basis 24 hours a
day, seven days a week. Our support centers are located in California and the
United Kingdom. Each of these support centers tracks support incidents on one
global system, providing a consistent level of service everywhere. Customers
have the option to log, track and update service and support inquiries
electronically, via the Web, telephone, or a combination of both. Our customer
service group handles incoming calls, shipping requests, call logging,
maintaining customer information and responding to basic product questions. Our
technical support engineering group is responsible for all technical cases until
the issue is resolved and is responsible for meeting targeted response times and
providing regular updates. Our technical support engineering group interfaces
with our research and development group for product maintenance and bug fixing.
As of December 31, 1999, our support organization included 27 employees.

                                       40
<PAGE>   43

COMPETITION

     The market for our products is intensely competitive, evolving and subject
to rapid technological change. The intensity of competition is expected to
increase in the future. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any one of which
could significantly reduce our future revenues and increase operating losses.
Our current competitors include:

     EAI vendors. We face competition from vendors offering EAI software
products. These vendors include Active Software, CrossWorlds Software and New
Era of Networks, also known as NEON. A number of other companies are offering
products that address different aspects of our solution, including BEA Systems,
IBM, Tibco Software and Vitria Technology. In the future, some of these
companies may expand their products to enhance their functionality to provide a
solution more similar to ours.

     B2B integration vendors. We face competition from vendors offering EDI
software solutions. These vendors include Sterling Commerce and Harbinger. These
solutions may be entrenched in particular functions of a potential customer's
organization for its data exchange with third parties. We also face competition
from a number of emerging software vendors focused on aspects of B2B
integration, such as webMethods.

     Other software vendors. We may in the future also encounter competition
from major enterprise software developers including Oracle, PeopleSoft and SAP.
In addition, Microsoft has announced its intention to introduce products which
could compete with some aspects of our products. These companies have
significantly greater resources than we have.

     Internal IT departments. "In house" information technology departments of
potential customers have developed or may develop systems that provide for some
of the functionality of our e*Xchange product suite. In particular, it can be
difficult to sell our product to a potential customer whose internal development
group has already made large investments in and progress towards completion of
systems that our product is intended to replace.

     Many of our existing and potential competitors have more resources, broader
customer relationships and better-established brands than we do. In addition,
many of these competitors have extensive knowledge of our industry. Some of our
competitors have established or may establish cooperative relationships among
themselves or with third parties to offer a single solution and increase the
ability of their products to address customer needs.

     We believe that the principal competitive factors affecting the market for
our products and services include product functionality and features, product
price and performance, ease of implementation, market awareness, quality of
professional services offerings, acceptance of product or vendor by leading
system integrators, quality of customer support services, quality of training
and documentation and vendor and product reputation. Although we believe that
our solutions generally compete favorably with respect to these factors, our
market is evolving rapidly. We may not be able to maintain our competitive
position against current and potential competitors, especially those with
significantly greater resources.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

     Our success is dependent upon the technological and creative skills of our
personnel in developing and enhancing our software products, as well as our
ability to protect the related proprietary technology and intellectual
proprietary rights. We rely primarily on a combination of contractual
provisions, confidentiality procedures, trade secrets, copyright and trademark
laws to accomplish these goals. We do not currently hold any patents. We have
filed one provisional patent application in the United States and may file
additional patent applications in the future. We cannot assure you that a patent
will be issued from any patent application we submit. Moreover, we cannot assure
you that we will develop proprietary products or technologies that are
patentable, that any patent issued to us will provide us with any competitive
advantages, or that the patents of others will not seriously harm our ability to
do business.

                                       41
<PAGE>   44

     We license our products pursuant to license agreements that prohibit
reverse engineering or decompilation of our software, impose restrictions on the
licensee's ability to utilize the software and provide for specific remedies in
the event of a breach of these restrictions. In addition, we take measures to
avoid disclosure of our trade secrets, including but not limited to requiring
employees, customers and others with access to our proprietary information to
execute confidentiality agreements with us which define the unauthorized uses
and disclosures of our trade secrets and other proprietary materials and
information. Additionally, we restrict access to our source code.

     We assert copyright in software, documentation and other works of
authorship and periodically file for and are granted copyright from the U.S.
Copyright Office in and to qualifying works of authorship. We assert trademark
rights in and to our name, product names, logos and other markings that are
designed to permit consumers to identify our goods and services. We routinely
file for and have been granted trademark protection from the U.S. Patent and
Trademark Office for qualifying marks.

     Despite our efforts to protect our proprietary rights, existing laws,
contractual provisions and remedies afford only limited protection. In addition,
effective copyright and trade secret protection may be unavailable or limited in
some foreign countries. Attempts may be made to copy or reverse engineer aspects
of our product or to obtain and use information that we regard as proprietary.
Accordingly, we cannot assure you that we will be able to protect our
proprietary rights against unauthorized third-party copying or use. Use by
others of our proprietary rights could materially harm our business.
Furthermore, policing the unauthorized use of our product is difficult and
expensive litigation may be necessary in the future to enforce our intellectual
property rights.

     Although we do not believe our products infringe the proprietary rights of
third parties and are not aware of any currently pending claims that our
products, trademarks or other proprietary rights infringe upon the proprietary
rights of third parties, it is possible that third parties will claim that we
have infringed their current or future products. Any claims, with or without
merit, could be time-consuming, result in costly litigation, prevent product
shipment, cause delays or require us to enter into royalty or licensing
agreements, any of which could harm our business. Patent litigation in
particular has complex technical issues and inherent uncertainties. Parties
making claims against us could secure substantial damages, as well as injunctive
or other equitable relief which could effectively block our ability to license
our products in the United States or abroad. Such a judgment could seriously
harm our business. In the event an infringement claim against us were successful
and we could not obtain a license on acceptable terms or license a substitute
technology or redesign to avoid infringement, our business would be harmed.

EMPLOYEES

     As of December 31, 1999, we had a total of 400 employees, including 78 in
research and development, 118 in sales and marketing, 27 in customer support,
116 in professional services and training, and 61 in operations, administration
and finance. None of our employees is represented by a collective bargaining
agreement, nor have we experienced any work stoppage. We consider our relations
with our employees to be good.

FACILITIES

     Our principal executive and corporate offices are located in Monrovia,
California, where we lease a total of approximately 68,000 square feet under a
lease that expires in August 2003. We lease approximately 17,000 square feet in
Redwood Shores, California for our sales and marketing offices under a lease
that expires in September 2004. We also have sales and marketing offices in
Australia, Belgium, France, Germany, Japan and the United Kingdom under leases
that cover from 200 to 9,600 square feet and that expire from December 2001 to
January 2009. We believe that these facilities are adequate for our current
operations and that additional space can be obtained on commercially reasonable
terms if needed.

                                       42
<PAGE>   45

                                   MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

     The following table sets forth information with respect to our executive
officers, directors and key employees as of February 1, 2000.

<TABLE>
<CAPTION>
               NAME                 AGE                          POSITION
               ----                 ----                         --------
<S>                                 <C>   <C>
James T. Demetriades..............   37   Chairman of the Board, President and Chief Executive
                                          Officer
Paul J. Hoffman...................   49   President, Americas
Kathleen M. Mitchell..............   47   Senior Vice President, Marketing and Business
                                          Development
Barry J. Plaga....................   38   Senior Vice President, Finance, Chief Financial
                                          Officer and Assistant Secretary
Rangaswamy Srihari................   43   Vice President, Engineering and Chief Technology
                                          Officer
Paul J. Celuch....................   45   Vice President, Human Resources
Alex Demetriades..................   31   Vice President, Products
Harry R. Gould....................   40   Vice President, Global Alliances
Lionel Laurin.....................   56   Vice President, Professional Services
Scott West........................   45   Vice President, International
Sterge T. Demetriades.............   71   Director
Richard L. deNey..................   50   Director
Salah M. Hassanein(1).............   78   Director
Raymond J. Lane(1)................   53   Director
Steven A. Ledger(1)...............   40   Director
Jerry F. Murdock(2)...............   41   Director
George J. Still(1)(2).............   41   Director
Jack L. Wilson(2).................   52   Director
</TABLE>

- -------------------------
(1) Member of Compensation Committee

(2) Member of Audit Committee

     EXECUTIVE OFFICERS AND DIRECTORS

     James T. Demetriades has served as our Chairman of the Board, President and
Chief Executive Officer since he founded STC in 1989. Prior to founding STC, Mr.
Demetriades was employed by Information Concepts, Inc. where he managed
development of software for use in the insurance industry. Mr. Demetriades then
worked for a division of American Medical International designing and building
custom interfaces between software systems. Mr. Demetriades is a founding member
of the ANSI standards group HL7 and a Cal Tech Fellow. Mr. Demetriades holds a
B.S. degree in computer science and economics from Loyola Marymount University,
Los Angeles.

     Paul J. Hoffman has served as our President, Americas since April 1999.
From September 1996 to April 1999, Mr. Hoffman served as Vice President,
Worldwide Sales for Documentum, a document management software company. From
September 1994 to September 1996, Mr. Hoffman served as Vice President,
Worldwide Operations for Oracle Corporation. Mr. Hoffman holds a B.S. degree in
finance from Fairfield University.

     Kathleen M. Mitchell has served as our Senior Vice President, Marketing and
Business Development since April 1999. From June 1997 to December 1998, Ms.
Mitchell was President and Chief Executive Officer of Live Picture, Inc., an
Internet imaging company which filed for bankruptcy protection in 1999. From
January 1995 to January 1997, Ms. Mitchell was employed with Ceridian
Corporation, an information services company, as President of the Employer
Services division.

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<PAGE>   46

Ms. Mitchell holds a B.A. degree in economics from Newton College (later merged
with Boston College).

     Barry J. Plaga has served as our Senior Vice President, Finance and Chief
Financial Officer since November 1999. From June 1999 to November 1999, Mr.
Plaga served as Executive Vice President and Chief Financial Officer for
Activision, Inc., a publisher and developer of interactive software and video
games. From June 1997 to June 1999, Mr. Plaga served as Senior Vice President
and Chief Financial Officer for Activision. From January 1992 to June 1997, Mr.
Plaga served as Senior Vice President, Finance and Chief Administrative Officer
of Activision. Mr. Plaga received his B.S. in accounting and his master of
accounting degree from the University of Southern California.

     Rangaswamy Srihari has served as our Vice President, Engineering and Chief
Technology Officer since April 1998. Mr. Srihari served as our Vice President,
Technology and Services from July 1997 to March 1998, and as our Vice President,
Commercial Markets from January 1997 to June 1997. From November 1994 to
December 1996, Mr. Srihari was employed with Delphi Info Systems as Vice
President, Development and Chief Technical Officer. Mr. Srihari holds a B.S.
degree in chemical engineering from the University of Madras (India), and an
M.S. in electrical engineering from the Illinois Institute of Technology.

     Sterge T. Demetriades has served as a member of the Board of STC since
1989. From 1964 to 1995, Mr. Demetriades was Chief Executive Officer of several
privately-held research and development companies in the aerospace, energy and
large system simulation environments, most recently at STD Research Corporation,
a scientific research company. He has published numerous technical articles, and
is an invited contributor to technical handbooks and encyclopedias. Since 1995,
Mr. Demetriades has continued to serve as a consultant on technology issues for
various governmental agencies. Mr. Demetriades holds an A.B. degree in physics,
math and chemistry from Bowdoin College, an M.S. degree in chemical engineering
from the Massachusetts Institute of Technology, and a Mech. Eng. degree from the
California Institute of Technology.

     Richard L. deNey has served as a member of the Board of STC since February
2000. Since August 1999, Mr. deNey has been Senior Vice President of EDS,
responsible for strategic planning and business development. From 1994 until
August 1999, Mr. deNey served as Executive Vice President of Corporate Strategy
and Development at Borden, Inc. Prior to that, Mr. deNey served as a Managing
Director at Bankers Trust and at Bear, Stearns & Co. Inc. He also serves as a
director of Unigraphics Solutions Inc., a mechanical engineering software and
services company. Mr. deNey holds a B.S. degree in electrical engineering from
The Johns Hopkins University and an M.B.A. from The University of Chicago.

     Salah M. Hassanein has served as a member of the Board of STC since July
1996. From July 1996 to the present, Mr. Hassanein has served as President and
Chief Executive Officer of the Todd-AO Corporation, a motion picture and
television post-production company. From July 1994 to July 1996, Mr. Hassanein
served as President and Chief Operating Officer of the Todd-AO Corporation. Mr.
Hassanein also serves as a director of the Todd-AO Corporation.

     Raymond J. Lane has served as a member of the Board of STC since May 1998.
Mr. Lane has served as President and Chief Operating Officer of Oracle
Corporation since July 1996. From October 1993 to June 1996, Mr. Lane served as
Executive Vice President and President of Worldwide Operations at Oracle. From
June 1992 to September 1993, Mr. Lane served as a Senior Vice President at
Oracle and as President of Oracle USA. Prior to joining Oracle, Mr. Lane was a
Senior Vice President and Managing Partner of the Worldwide Information
Technology Group at Booz-Allen & Hamilton from July 1986 to May 1992. He served
on the Booz-Allen & Hamilton Executive Committee and its Board of Directors from
April 1987 to May 1992. Mr. Lane is also a member of the Board of Trustees of
Carnegie-Mellon University and serves on the Board of Directors of Special
Olympics International.

                                       44
<PAGE>   47

Mr. Lane is a director of Marimba Inc., a computer software company, and
C-bridge Internet Solutions, Inc.

     Steven A. Ledger has served as a member of the Board of STC since June
1996. Mr. Ledger has been Managing Partner of eCompanies Venture Management,
LLC, a venture capital firm, since July 1999. Since November 1993, he has served
as Managing Partner of Storie Advisors, Inc., a venture capital firm that
invests in emerging growth companies, and Managing Partner of San Francisco
Sentry Investment Group, an investment firm. Mr. Ledger also serves as a
director of BigStar Entertainment, Inc. and ValueStar Corp., a customer
satisfaction rating company. Mr. Ledger holds a B.A. degree in economics from
the University of Connecticut.

     Jerry F. Murdock has served as a member of the Board of STC since May 1998.
Since 1995, Mr. Murdock has been employed by InSight Capital Partners, an
investment firm which he co-founded in that year. From 1987 to 1995, Mr. Murdock
was President of Aspen Technology Group, a consulting firm which he founded in
1987. Mr. Murdock also serves as a director of Quest Software, Inc. Mr. Murdock
holds a B.A. degree in political science from San Diego State University.

     George J. Still has served as a member of the Board of STC since May 1998.
Mr. Still has been employed with Norwest Venture Partners, a venture capital
firm, since October 1989 and is Managing Partner of several Norwest Venture
Capital Partnerships. Mr. Still also serves as a director of PeopleSoft, Inc.,
an enterprise software and services company, and also serves as a director of
the National Venture Capital Association. Mr. Still holds a B.S. degree from
Pennsylvania State University and an M.B.A. from the Amos Tuck School at
Dartmouth College.

     Jack L. Wilson has served as a member of the Board of STC since February
2000. Mr. Wilson has been Managing General Partner of AC Ventures, a unit of
Andersen Consulting, since December 1999. From 1983 until December 1999, Mr.
Wilson served as a partner of Andersen Consulting, and had various management
roles, including Managing Partner of Global Markets and Managing Partner of
Industry Markets and Packaged Knowledge. Mr. Wilson has served as a member of
the Executive Committee, Global Operations Committee and Global Management
Council of Andersen Consulting. Mr. Wilson also serves as a director of Security
First Technologies, Inc., a company providing Internet-based financial services
solutions. Mr. Wilson holds a B.S. in economics from the University of Arizona
and an M.B.A. from the University of Southern California.

     KEY EMPLOYEES

     Paul J. Celuch has served as our Vice President, Human Resources since
March 1998. From January 1988 to March 1998, Mr. Celuch was employed with
Citicorp as Vice President, responsible for human resources. Mr. Celuch holds a
B.S. degree from Slippery Rock University and an M.S. from Southern Illinois
University.

     Alex Demetriades has served as our Vice President, Products since January
2000. From January 1995 to January 2000, Mr. Demetriades was employed in various
other positions at STC, most recently as Director of Product Management,
Architecture and Research. Mr. Demetriades holds B.S. degrees in cognitive
science and biophysics, and a B.A. degree in psychology, each from the
University of California at San Diego.

     Harry R. Gould has served as our Vice President, Global Alliances since
June 1999. Prior to joining STC, from August 1998 to June 1999, Mr. Gould served
as Vice President of Sales for SDT, Inc. an enterprise software testing company.
From January 1997 to January 1998, Mr. Gould served as Vice President of Sales
for Chordiant Software, Inc., an Internet software applications company. From
June 1987 to December 1996, Mr. Gould was employed as Vice President, Alliances
for Oracle Corporation. Mr. Gould holds a B.A. degree in communications from
University of California, Los Angeles.

                                       45
<PAGE>   48

     Lionel Laurin has served as our Vice President, Professional Services since
July 1999. From November 1994 to July 1999, Mr. Laurin was employed at Oracle
Corporation, as a Regional Vice President of Industrial Consulting. From June
1992 to November 1994, Mr. Laurin served as Director of Professional Services
for Marcam Corporation, a process enterprise resource planning software and
services vendor. Mr. Laurin holds a B.A. degree from California State
University, Fullerton.

     Scott West has served as our Vice President, International since November
1999. From March 1999 to November 1999, Mr. West served as our Vice President,
Applications Development, Global Corporate Operations and Pacific Rim Sales.
From 1994 to March 1999, Mr. West held various positions with us including Vice
President, International Sales. Mr. West attended Southern Oregon State
University.

     Sterge Demetriades is the father of James T. Demetriades and Alex
Demetriades. There are no other family relationships between any of our
executive officers, directors and key employees. Our executive officers are
appointed by our board of directors and serve at the discretion of the board.

BOARD COMPOSITION

     We currently have authorized nine directors. Our restated articles of
incorporation will provide that, effective upon the closing of this offering,
the terms of office of the members of the board of directors will be divided
into three classes: Class I, whose term will expire at the annual meeting of
shareholders to be held in 2001, Class II, whose term will expire at the annual
meeting of shareholders to be held in 2002, and Class III, whose term will
expire at the annual meeting of shareholders to be held in 2003. The Class I
directors are Messrs. Ledger, Murdock and Still, the Class II directors are
Messrs. Sterge Demetriades, deNey and Hassanein, and the Class III directors are
Messrs. James Demetriades, Lane and Wilson. At each annual meeting of
shareholders after the initial classification, the successors to directors whose
term will then expire will be elected to serve from the time of election and
qualification until the third annual meeting following election. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the total number of directors. This classification
of the board of directors may have the effect of delaying or preventing changes
in control or management of STC.

     Messrs. Murdock and Still are currently serving on the board as
representatives of the holders of our Series A preferred stock and Series B
preferred stock. The holders of our Series A preferred stock and Series B
preferred stock are entitled to elect these directors pursuant to the terms of
the preferred stock as set forth in our restated articles of incorporation. Upon
the closing of this offering, the outstanding shares of preferred stock will
convert into shares of common stock and the holders of the preferred stock will
no longer have the right to appoint any directors. Messrs. Murdock and Still are
expected to continue to serve as directors following the closing of this
offering.

BOARD COMMITTEES

     The audit committee of the board of directors reviews our internal
accounting procedures and consults with and reviews the services provided by our
independent accountants. The audit committee currently consists of Messrs.
Murdock, Still and Wilson.

     The compensation committee of the board of directors reviews and recommends
to the board the compensation and benefits of all of our executive officers,
administers our stock option plan and employee stock purchase plan and
establishes and reviews general policies relating to compensation and benefits
of our employees. The compensation committee currently consists of Messrs. Lane,
Ledger, Hassanein and Still.

DIRECTOR COMPENSATION

     Our directors do not receive cash for services they provide as directors.
In July 1998, Mr. Lane was granted an option to purchase 202,500 shares of
common stock, Messrs. Murdock and Still were each

                                       46
<PAGE>   49

granted an option to purchase 67,500 shares of common stock, and Messrs. Sterge
Demetriades, Hassanein and Ledger were each granted an option to purchase 16,875
shares of common stock. Each of these options is fully vested and was granted at
an exercise price of $1.37 per share. In December 1998, each of these directors
was granted an option to purchase 45,000 shares of common stock at an exercise
price of $1.37 per share. These options are fully vested and exercisable. In
June 1997, Messrs. Demetriades, Hassanein and Ledger were each granted an option
to purchase 90,000 shares of common stock. Each of these options is fully vested
and was granted at an exercise price of $1.15 per share.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     No executive officer of STC serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of STC's board of directors. None of the members of our
compensation committee is an officer or employee of STC.

EXECUTIVE COMPENSATION

     The following table sets forth a summary of the compensation paid by STC
during the fiscal year ended December 31, 1999 to our Chief Executive Officer
and four other most highly compensated executive officers whose salary and bonus
exceeds $100,000 for services rendered in all capacities to STC. We refer to
these officers elsewhere in this prospectus as the Named Executive Officers.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                        LONG-TERM
                                                                      COMPENSATION
                                                    OTHER ANNUAL        AWARDS OF        ALL OTHER
NAME AND PRINCIPAL POSITION   SALARY     BONUS     COMPENSATION(1)    STOCK OPTIONS   COMPENSATION(2)
- ---------------------------  --------   --------   ---------------    -------------   ---------------
<S>                          <C>        <C>        <C>                <C>             <C>
James T. Demetriades.....    $300,000   $184,500      $     --                 --(3)      $3,200
  Chairman, President and
  Chief Executive Officer
Paul J. Hoffman..........     212,500    100,000            --          1,350,000             --
  President, Americas(4)
Rangaswamy Srihari.......     187,500     58,500       202,436(5)          90,000             --
  Vice President,
  Engineering and Chief
  Technology Officer
Kathleen M. Mitchell.....     158,045     37,500            --          1,170,000             --
  Senior Vice President,
  Marketing and Business
  Development(6)
Stephen Edwards(7).......     161,550     72,000            --                 --             --
  Vice President, Europe,
  Middle East and Africa
</TABLE>

- -------------------------
(1) Other compensation in the form of perquisites and other personal benefits
    has been omitted in those cases where the aggregate amount of such
    perquisites and other personal benefits constituted less than the lesser of
    $50,000 or 10% of the total annual salary and bonus for the named executive
    officer for such year.

(2) Represents 401(k) plan matching.

                                       47
<PAGE>   50

(3) In February 2000, Mr. Demetriades was granted an option to purchase
    1,000,000 shares of common stock at the public offering price, vesting in
    four equal annual installments beginning in February 2001.

(4) Mr. Hoffman joined us in March 1999, and has an annual salary of $300,000.

(5) Represents reimbursement for relocation expenses.

(6) Ms. Mitchell joined us in April 1999, and has an annual salary of $250,000.

(7) Mr. Edwards ceased to be an employee of STC in December 1999.

OPTION GRANTS IN LAST FISCAL YEAR

     The following table sets forth information for the fiscal year ended
December 31, 1999 with respect to each grant of stock options to the Named
Executive Officers.

     All options were granted at an exercise price equal to the fair value of
the common stock on the date of grant. Potential realizable values are computed
by (a) multiplying the number of shares of common stock subject to a given
option by the exercise price per share, (b) assuming that the aggregate stock
value derived from that calculation compounds at the annual 5% or 10% rates
shown in the table for the entire ten year term of the option and (c)
subtracting from that result the aggregate option exercise price. The 5% and 10%
assumed annual rates of stock price appreciation are mandated by the rules of
the Securities and Exchange Commission and do not represent our estimate or
projection of future common stock prices.

     Each of these options was granted pursuant to the 1998 Stock Plan and is
subject to the terms of such plan. These options were granted at an exercise
price equal to the fair market value of our common stock as determined by the
board of directors on the date of grant and, as long as the optionee maintains
continuous employment with us.

               OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1999


<TABLE>
<CAPTION>
                                                                               POTENTIAL REALIZABLE VALUE
                                                                                 AT ASSUMED ANNUAL RATES
                                        % OF TOTAL                                   OF STOCK PRICE
                                         OPTIONS                                      APPRECIATION
                                        GRANTED TO    EXERCISE                       FOR OPTION TERM
                            OPTIONS    EMPLOYEES IN   PRICE PER   EXPIRATION   ---------------------------
          NAME              GRANTED      1999(1)        SHARE        DATE           5%            10%
          ----             ---------   ------------   ---------   ----------   ------------   ------------
<S>                        <C>         <C>            <C>         <C>          <C>            <C>
James T.
  Demetriades(2).........         --         --%        $  --           --      $       --     $       --
Paul J. Hoffman(3).......  1,350,000       19.6          1.67      5/14/09       1,417,843      3,593,092
Rangaswamy Srihari.......     45,000         .7          1.67      5/14/09          47,261        119,770
                              45,000         .7          1.49      1/26/09          42,167        108,860
Kathleen M.
  Mitchell(4)............  1,170,000       17.0          1.67      5/14/09       1,228,797      3,114,013
Stephen Edwards(5).......     45,000         .7          1.49      1/26/09          42,167        106,860
</TABLE>


- -------------------------
(1) In 1999, we granted employees and consultants options to purchase an
    aggregate of 6,901,088 shares of common stock.

(2) In February 2000, Mr. Demetriades was granted an option to purchase
    1,000,000 shares of common stock at the public offering price, vesting in
    four equal annual installments beginning in February 2001.

(3) The option granted to Mr. Hoffman vests and is exercisable as follows:
    vested with respect to 225,000 shares on April 1, 1999, with the remainder
    vesting in four equal annual installments beginning on the first anniversary
    thereafter.

                                       48
<PAGE>   51

(4) The option granted to Ms. Mitchell vests and is exercisable as follows:
    vested with respect to 45,000 shares on April 15, 1999, with the remainder
    vesting in four equal annual installments beginning on the first anniversary
    thereafter.

(5) The option granted to Mr. Edwards vests in four equal annual installments
    beginning on the first anniversary of the date of grant. Mr. Edwards ceased
    to be an employee of STC in December 1999, at which time his option expired
    unexercised.

1999 YEAR-END OPTION VALUES

     The following table sets forth information concerning the number and value
of unexercised options held by each of our Named Executive Officers as of
December 31, 1999. None of the Named Executive Officers exercised options to
purchase common stock during the year ended December 31, 1999. The value of
in-the-money options is based on the assumed initial public offering price of
$17.00 per share and is net of the option exercise price.

<TABLE>
<CAPTION>
                                                 NUMBER OF SHARES
                                                    UNDERLYING               VALUE OF UNEXERCISED
                                              UNEXERCISED OPTIONS AT        IN-THE-MONEY OPTIONS AT
                                                 DECEMBER 31, 1999             DECEMBER 31, 1999
                                            ---------------------------   ---------------------------
                   NAME                     EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
                   ----                     -----------   -------------   -----------   -------------
<S>                                         <C>           <C>             <C>           <C>
James T. Demetriades......................    450,000              --     $7,077,000     $        --
Paul J. Hoffman...........................    225,000       1,125,000      3,450,000      17,250,000
Rangaswamy Srihari........................    157,500         202,500      2,491,050       3,156,450
Kathleen M. Mitchell......................     45,000       1,125,000        690,000      17,250,000
Stephen Edwards...........................     45,000              --        664,650              --
</TABLE>

COMPENSATION PLANS

     1998 STOCK PLAN

     Our Stock Plan was approved by the board of directors and our shareholders
in July 1998, and amended by the board of directors in February 2000. The Stock
Plan provides for the grant to employees of STC, including officers and employee
directors, of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, and for the grant of nonstatutory
stock options to employees, directors and consultants of STC. The Stock Plan is
currently administered by the board of directors which selects the optionees,
determines the number of shares to be subject to each option and determines the
exercise price of each option. The Stock Plan currently authorizes the issuance
of an aggregate of up to 13,725,903 shares of common stock, and provides for
automatic annual increases on January 1 of each year beginning January 1, 2001
equal to the lesser of:

     - 6,000,000 shares;

     - 5.0% of the outstanding shares on such date; or

     - an amount determined by our board of directors.

     As of January 31, 2000, options to purchase an aggregate of 5,098,238
shares of common stock were outstanding under the Stock Plan, and an aggregate
of 8,504,853 shares of common stock remained available for future grants.

     The exercise price of all incentive stock options granted under the Stock
Plan must be at least equal to the fair market value of the common stock on the
date of grant. The exercise price of all nonstatutory stock options granted
under the Stock Plan shall be determined by the administrator, but in no event
may be less than 85% of the fair market value on the date of grant. With respect
to any participant who owns stock possessing more than 10% of the voting power
of all classes of stock of STC, the exercise price of

                                       49
<PAGE>   52

any incentive or nonstatutory option granted must equal at least 110% of the
fair market value on the grant date and the maximum term of any such option must
not exceed five years. The term of all other options granted under the Stock
Plan may not exceed ten years.

     In the event a participant in the Stock Plan ceases to be an employee,
director or consultant of STC, other than upon the participant's death or
disability, the participant may exercise his or her vested options for a period
of three months following such termination, unless a different exercise period
is specified in his or her option agreement.

     In the event of a merger of STC with or into another corporation or a sale
of substantially all of our assets, the Stock Plan requires that each
outstanding option be assumed or an equivalent option substituted by the
successor corporation; provided, however, that in the event the successor
corporation refuses to assume or substitute for the outstanding options, such
options will become fully vested and exercisable for a period of fifteen days
after notice from the administrator. Unless terminated sooner, the Stock Plan
will terminate ten years from its effective date. The board has authority to
amend or terminate the Stock Plan, provided that no such action may impair the
rights of the holder of any outstanding options without the written consent of
that holder.

     1997 STOCK PLAN

     Our 1997 Stock Plan provides for the grant to our employees, including
officers and employee directors, of incentive stock options within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended, and for the
grant of nonstatutory stock options to employees, directors and consultants of
STC. To date, we have granted options to purchase an aggregate of 7,449,810
shares of common stock under the 1997 Plan with a weighted average exercise
price of $1.79 per share. From and after the completion of this offering, no
further options will be granted under the 1997 Plan.

     In the event of a merger of STC with or into another corporation or a sale
of substantially all of our assets, the 1997 Plan requires that each outstanding
option be assumed or an equivalent option substituted by the successor
corporation; provided, however, that in the event the successor corporation
refuses to assume or substitute for the outstanding options, such options will
become fully vested and exercisable for a period of fifteen days after notice
from the administrator. Unless terminated sooner, the 1997 Plan will terminate
ten years from its effective date. The board of directors has authority to amend
or terminate the 1997 Plan, provided that no such action may impair the rights
of the holder of any outstanding options without the written consent of that
holder.

     2000 EMPLOYEE STOCK PURCHASE PLAN

     Our 2000 Employee Stock Purchase Plan provides our employees with an
opportunity to purchase our common stock through accumulated payroll deductions.
This plan will become effective upon the date of this prospectus. A total of
2,250,000 shares of common stock have been reserved for issuance under the
Purchase Plan, none of which have been issued. The number of shares reserved for
issuance under the Purchase Plan will be subject to an annual increase on
January 1 of each year beginning January 1, 2001 equal to the lesser of:

     - the number of shares issued under the Purchase Plan in the prior year; or

     - an amount determined by the Board.

     The Purchase Plan will be administered by the board of directors or by a
committee appointed by the board. The Purchase Plan permits eligible employees
to purchase common stock through payroll deductions up to a maximum of $25,000
for all purchases ending within the same calendar year and up to a maximum of
1,500 shares per year. Employees are eligible to participate if they are
employed by us for at least 20 hours per week and more than five months in any
calendar year. The Purchase Plan contains successive 24 month offering periods.
The offering periods generally start on the first trading day on or

                                       50
<PAGE>   53

after May 16 and November 16 of each year, except for the first such offering
period, which we expect will commence on the date of this prospectus and end on
or about November 15. In the event we are acquired, each outstanding option
shall be assumed or an equivalent option substituted by the successor
corporation. In the event that the successor corporation refuses to assume or
substitute for the option, the offering period then in progress will be
shortened by setting a new exercise date. The price at which common stock will
be purchased under the Purchase Plan is equal to 85% of the fair market value of
the common stock on the first or last day of the applicable offering period,
whichever is lower. Employees may end their participation in the offering period
at any time, and participation automatically ends on termination of employment.
Generally, the board of directors may amend, modify or terminate the Purchase
Plan at any time as long as such amendment, modification or termination does not
impair the rights of plan participants. The Purchase Plan will terminate at
2010, unless terminated earlier in accordance with its provisions.

     401(k) PLAN

     We adopted a retirement savings plan, or 401(k) Plan, that covers all of
our employees. An employee may elect to defer, in the form of contributions to
the 401(k) Plan, up to 15% of the total annual compensation that would otherwise
be paid to the employee, subject to statutory limitations. Employee
contributions are invested in selected mutual funds or money market funds
according to the directions of the employee. We make matching contributions as a
percentage of employee contributions, subject to established limits. The
employees' contributions are fully vested and nonforfeitable at all times.

LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS

     Our restated articles of incorporation limit the liability of directors to
the maximum extent permitted by California law. As a result, our directors will
not be personally liable for monetary damages for breach of their fiduciary
duties as directors, except liability as required by California law for:

     - acts or omissions which involve intentional misconduct or a knowing and
       culpable violation of law;

     - acts or omissions that the director believes to be contrary to the best
       interests of the corporation or its shareholders or that involve an
       absence of good faith;

     - any transaction from which the director derived any improper personal
       benefit;

     - acts or omissions that show a reckless disregard for the director's duty
       to the corporation or its shareholders;

     - acts or omissions that constitute an unexcused pattern of inattention
       that amounts to an abdication of the director's duty to the corporation
       or its shareholders;

     - any transaction between the corporation and interested directors or
       affiliated corporations not properly approved under California law; and

     - any unlawful distribution, loan or guaranty.

     This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.

     Our restated articles of incorporation and bylaws provide that we shall
indemnify our directors and executive officers and may indemnify other officers
and employees and our agents to the fullest extent permitted by law. We believe
that these indemnification provisions cover at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in that

                                       51
<PAGE>   54

capacity, regardless of whether the bylaws would permit indemnification. We have
director and officer liability insurance that covers matters, including matters
arising under the Securities Act.

     We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for judgments, fines, settlement amounts and expenses,
including attorneys' fees, incurred by any of these persons in any action or
proceeding, including any action by or in the right of STC, arising out of that
person's services as a director or executive officer of ours, any subsidiary of
ours or any other company or enterprise to which the person provides services at
our request. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors and executive officers.

     We have agreed to indemnify one of our executive officers and another
employee with respect to expenses and damages arising out of lawsuits filed
against such individuals by their former employer following their employment by
us. There is no other pending litigation or proceeding involving any director,
officer, employee or agent of STC where indemnification will be required or
permitted. We are not aware of any other pending or threatened litigation or
proceeding that might result in a claim for such indemnification. We currently
have liability insurance for our directors and officers that covers public
securities matters.

                                       52
<PAGE>   55

                           RELATED PARTY TRANSACTIONS

SALES OF STOCK TO INSIDERS

     In May, June and September 1998, we issued an aggregate of 2,864,583 shares
of Series A preferred stock at a per share purchase price of $3.84 to investors.
On February 23, 1999, we issued an aggregate of 2,703,675 shares of common stock
at a per share price of $1.49 to investors. In March 1999, we issued an
aggregate of 2,588,215 shares of Series B preferred stock at a per share price
of $4.25 to investors. Immediately prior to the closing of this offering, each
share of Series A preferred stock will convert into 2.84463 shares of our common
stock, and each share of Series B preferred stock will convert into 2.25 shares
of our common stock. Each of these financing transactions involved the issuance
and sale of securities to certain of our directors, principal shareholders or
affiliated entities, as detailed in the following table:

<TABLE>
<CAPTION>
                                      SERIES A                SERIES B    TOTAL SHARES
                                      PREFERRED    COMMON     PREFERRED        AS           TOTAL
              INVESTOR                  STOCK       STOCK       STOCK      CONVERTED     AMOUNT PAID
              --------                ---------   ---------   ---------   ------------   -----------
<S>                                   <C>         <C>         <C>         <C>            <C>
Salah M. Hassanein and Todd-AO
  Corporation.......................         --     336,825          --      336,825     $  499,998
Raymond J. Lane.....................     65,104                  58,823      317,549        499,997
Funds affiliated with InSight
  Capital Partners..................    474,332          --     428,572    2,313,586      3,642,867
Norwest Venture Partners VI,
  L.P. .............................  1,261,503          --   1,139,805    6,153,071      9,688,343
Storie Partners, L.P................         --   2,020,958          --    2,020,958      2,999,998
</TABLE>

     Mr. Hassanein, a director of STC, is affiliated with Todd-AO Corporation, a
shareholder of STC. Mr. Lane is a director of STC. Mr. Jerry F. Murdock, a
director of STC, is a partner in InSight Capital Partners. The investing funds
affiliated with InSight Capital Partners include InSight Capital Partners II,
L.P. and InSight Capital Partners (Cayman) II, L.P. Mr. George J. Still, a
director of STC, is a partner in Norwest Venture Partners and Mr. Steven A.
Ledger, a director of STC, is a partner in Storie Partners, L.P. See "Principal
Shareholders" for more detail on shares held by these investors.

     We have also granted options to our executive officers. See
"Management -- Option Grants."

OTHER AGREEMENTS WITH INSIDERS

     We are a party to a lease for a building in Arcadia, California half of
which is owned by the Demetriades Family Trust dated December 20, 1983, a
majority interest of which is owned by Sterge Demetriades, one of our directors,
and his wife. The other half of the building is owned by another trust, The 150
E. Foothill Trust dated December 20, 1983, of which James T. Demetriades, our
Chairman, President and Chief Executive Officer is one of the beneficiaries.
During the previous three fiscal years, we have paid rent in the aggregate
amount of $262,000 under this lease. The lease expires in December 2002.

     We have paid the premiums on certain life insurance policies for the
benefit of James T. Demetriades. Total premiums paid as of January 31, 2000 were
$256,384. This amount is classified as a related party receivable on our
consolidated balance sheet. STC has been named as a beneficiary on such policies
up to the amount of the cash value of the policy, which was approximately
$297,000 as of January 31, 2000.

                                       53
<PAGE>   56

                             PRINCIPAL SHAREHOLDERS

     The following table sets forth information regarding the beneficial
ownership of our common stock as of January 31, 2000 with respect to:

     - each person or group of affiliated persons known by us to own
       beneficially more than 5% of the outstanding shares of common stock;

     - each of our directors;

     - each of our Named Executive Officers; and

     - all directors and executive officers as a group.

     The address for each listed director and officer is c/o STC, 404 East
Huntington Avenue, Monrovia, California 91016. Except as otherwise indicated in
the footnotes to the table, each of the shareholders has sole voting and
investment power with respect to the shares beneficially owned by such
shareholders, subject to community property laws where applicable.


     Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. The number of shares of common stock outstanding after
this offering includes the 6,100,000 shares of common stock being offered in
this offering and the 1,200,000 shares being offered in the concurrent private
placement to EDS and does not include the shares that are subject to the
underwriters' over-allotment option. The percentage of common stock outstanding
as of January 31, 2000 is based on 60,764,745 shares of common stock outstanding
on that date.



<TABLE>
<CAPTION>
                                                                              PERCENTAGE OF SHARES
                                                               NUMBER OF       BENEFICIALLY OWNED
                                                                 SHARES       --------------------
                                                              BENEFICIALLY     BEFORE      AFTER
                  NAME OF BENEFICIAL OWNER                       OWNED        OFFERING    OFFERING
                  ------------------------                    ------------    --------    --------
<S>                                                           <C>             <C>         <C>
James T. Demetriades(1).....................................   30,416,979       49.7%       44.4%
Norwest Venture Partners VI, L.P.(2)........................    7,272,446       12.0        10.7
  George J. Still
  245 Lytton Avenue, Suite 250
  Palo Alto, California 94301
Storie Partners, L.P.(3)....................................    5,239,007        8.6         7.7
  Steven A. Ledger
  100 Pine Street, Suite 2700
  San Francisco, California 94111
InSight Capital Partners(4).................................    2,397,961        3.9         3.5
  Jerry F. Murdock
  122 E. 42nd Street, Suite 2300
  New York, New York 10168
Sterge T. Demetriades(5)....................................    1,192,986        2.0         1.7
Andersen Consulting LLP(6)..................................    1,044,597        1.7         1.5
  Jack L. Wilson
  1661 Page Mill Road
  Palo Alto, CA 94304
Salah M. Hassanein(7).......................................      937,143        1.5         1.4
Raymond J. Lane(8)..........................................      686,924        1.1         1.0
Richard L. deNey............................................           --         --          --
Paul J. Hoffman(9)..........................................      225,000          *           *
Rangaswamy Srihari(10)......................................      157,500          *           *
Kathleen M. Mitchell(11)....................................       45,000          *           *
Stephen Edwards(12).........................................       45,000          *           *
All directors and officers as a group (13 persons)..........   49,660,543       79.0        70.7
</TABLE>


- -------------------------
  *  less than 1% of the outstanding shares of common stock.

 (1) Includes 450,000 shares issuable upon exercise of options which are
     exercisable within 60 days of January 31, 2000. Also represents 29,966,979
     shares held by the James T. Demetriades Family

                                       54
<PAGE>   57

     Trust UTD dated March 15, 1996, of which Mr. James T. Demetriades is
     trustee and over which he has voting and dispositive power.

 (2) Includes 84,375 shares issuable upon the exercise of options which are
     exercisable within 60 days of January 31, 2000. Also represents 7,188,071
     shares held by Norwest Venture Partners VI, L.P. over which Mr. Still
     shares voting and disposition power. Mr. Still disclaims beneficial
     ownership of such shares except to the extent of his pecuniary interest
     therein.

 (3) Includes 123,750 shares issuable upon the exercise of options which are
     exercisable within 60 days of January 31, 2000. Also represents 5,115,257
     shares held by Storie Partners, L.P. over which Mr. Ledger shares voting
     and disposition power. Mr. Ledger disclaims beneficial ownership of such
     shares except to the extent of his pecuniary interest therein.

 (4) Includes 84,375 shares issuable upon the exercise of options which are
     exercisable within 60 days of January 31, 2000. Also represents 2,313,586
     shares held by InSight Capital Partners over which Mr. Murdock shares
     voting and disposition power. Mr. Murdock disclaims beneficial ownership of
     such shares except to the extent of his pecuniary interest therein.

 (5) Includes 123,750 shares issuable upon the exercise of options which are
     exercisable within 60 days of January 31, 2000. Also represents 1,069,236
     shares held by the Demetriades Family Trust UTD dated December 20, 1930, of
     which Mr. Sterge T. Demetriades is trustee and over which he has voting and
     dispositive power.

 (6) Includes 409,500 shares held by Andersen Consulting, LLP issuable upon the
     exercise of warrants which are exercisable within 60 days of January 31,
     2000, over which Mr. Wilson has shared voting or dispositive power. Mr.
     Wilson disclaims beneficial ownership of such shares except for his
     pecuniary interest therein. Also represents 635,097 shares held by AC
     Ventures, B.V., over which Mr. Wilson has no voting or dispositive power.

 (7) Includes 123,750 shares issuable upon the exercise of options which are
     exercisable within 60 days of January 31, 2000. Also represents 338,634
     shares held by Mr. Hassanein, and 474,761 shares held by the Todd-AO
     Corporation, of which Mr. Hassanein is President and Chief Executive
     Officer.

 (8) Includes 219,375 shares issuable upon the exercise of options which are
     exercisable within 60 days of January 31, 2000.

 (9) Includes 225,000 shares issuable upon the exercise of options which are
     exercisable within 60 days of January 31, 2000.

(10) Includes 157,500 shares issuable upon the exercise of options which are
     exercisable within 60 days of January 31, 2000.

(11) Includes 45,000 shares issuable upon the exercise of options which are
     exercisable within 60 days of January 31, 2000.

(12) Includes 45,000 shares issuable upon the exercise of options which are
     exercisable within 60 days of January 31, 2000.

                                       55
<PAGE>   58

                          DESCRIPTION OF CAPITAL STOCK

     Our restated articles of incorporation, which will be filed prior to the
closing of this offering, authorize the issuance of up to 200,000,000 shares of
common stock and 10,000,000 shares of undesignated preferred stock, the rights
and preferences of which may be established by our board of directors. As of
January 31, 2000, after giving effect to the conversion of all outstanding
shares of Series A and B preferred stock prior to the closing of this offering
and the concurrent private placement, 60,764,745 shares of common stock were
issued and outstanding and held by approximately 200 shareholders.

COMMON STOCK

     The holders of common stock are entitled to one vote for each share held of
record upon such matters and in such manner as may be provided by law. Subject
to preferences applicable to any outstanding shares of preferred stock, the
holders of common stock are entitled to receive ratably dividends, if any, as
may be declared by the board of directors out of funds legally available for
dividend payments. In the event we liquidate, dissolve or wind up, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities and liquidation preferences of any outstanding shares of
the preferred stock. Holders of common stock have no preemptive rights or rights
to convert their common stock into any other securities. There are no redemption
or sinking fund provisions applicable to the common stock. All outstanding
shares of common stock are fully paid and nonassessable.

PREFERRED STOCK

     Upon the closing of this offering, the board of directors will be
authorized, absent any limitations prescribed by law, without shareholder
approval, to issue up to an aggregate of 10,000,000 shares of preferred stock,
in one or more series, each of the series to have rights and preferences,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, as shall be determined by the board of
directors. The rights of the holders of common stock will be subject to, and may
be adversely affected by, the rights of holders of any preferred stock that may
be issued in the future. An issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire, a majority of our outstanding voting stock. We have no present plans to
issue any shares of preferred stock.

REGISTRATION RIGHTS

     Set forth below is a summary of the registration rights of the holders of
our Series A preferred stock and Series B preferred stock:

     Demand Registrations. At any time on or after six months following the
closing date of the initial public offering of our common stock, the holders of
registration rights may request us to register shares of common stock having a
gross offering price of at least $15.0 million subject to our right, upon advice
of our underwriters, to reduce the number of shares proposed to be registered.
We will be obligated to effect only two registrations pursuant to such a request
by holders of registration rights. If shares requested to be included in a
registration must be excluded due to limitations on the number of shares to be
registered on behalf of the selling shareholders pursuant to the underwriters'
advice, the shares registered on behalf of the selling shareholders will be
allocated among all holders of shares with rights to be included in the
registration on the basis of the number of shares with such rights held by such
shareholders.

     Piggyback Registration Rights. The holders who have registration rights
have unlimited rights to request that shares be included in any
company-initiated registration of common stock other than registrations of
employee benefit plans or business combinations subject to Rule 145 under the
Securities

                                       56
<PAGE>   59

Act. In our registration subsequent to this offering, the underwriters may, for
marketing reasons, limit the shares requested to be registered on behalf of all
shareholders having the right to request inclusion in such registration.

     Form S-3 Registrations. After we have qualified for registration on Form
S-3 which will not be available until at least 12 months after we become a
publicly reporting company, holders of registration rights may request in
writing that we effect an unlimited number of registrations of such shares on
Form S-3 provided that the gross offering price of the shares to be so
registered in each such registration exceeds $5.0 million. If such registration
is to be an underwritten public offering, the underwriters may reduce for
marketing reasons the number of shares to be registered on behalf of all
shareholders having the right to request inclusion in such registration. We are
not obligated to effect a registration on Form S-3 prior to expiration of twelve
months following effectiveness of the most recent registration requested by the
holders.

     Future Grants of Registration Rights. We cannot grant further piggyback
registration rights without the prior written consent of current shareholders
owning at least a majority of the then outstanding registrable securities,
including grants to any holder or prospective holder of any registration rights
which would be on equal or more favorable terms than the existing piggyback
registration rights.

     Transferability. The registration rights are transferable upon notice by
the holder to us of the transfer, provided that the transferee or assignee is
not deemed by the board of directors to be a competitor of ours and assumes the
rights and obligations of the transferor for such shares.

     Termination. The registration rights will terminate on the first to occur
of five years after the date of our initial public offering or the date on which
the holder may sell the shares pursuant to Rule 144, provided that the aggregate
of the shares held by the holder represent less than 1% of our then outstanding
equity securities.

WARRANTS

     In connection with a loan and security agreement with Greyrock Capital, we
issued to Greyrock a warrant to purchase up to 262,500 shares of common stock at
an exercise price of $1.89 per share. The warrant expires in October 2004 and is
fully exercisable.

     In connection with our alliance with Andersen Consulting, we issued to
Andersen Consulting a warrant to purchase up to 1,200,000 shares of common stock
at an exercise price of $5.33 per share. The warrant expires in November 2003
and became exercisable as to 409,500 shares as of January 31, 2000. The warrant
generally vests and becomes exercisable as to the remaining shares as new
customer generation and other milestones are completed by Andersen Consulting.
The warrant contains a significant economic disincentive for nonperformance.

     In connection with our alliance with EDS, we issued to EDS a warrant to
purchase up to 1,200,000 shares of common stock at an exercise price of $6.67
per share. The warrant expires in July 2002 and is not yet exercisable. The
warrant generally vests and becomes exercisable as to the shares as EDS
completes new customer generation milestones that result in a signed license
between STC and the new customer within an agreed upon schedule. The warrant
contains a significant economic disincentive for nonperformance.

     In connection with our alliance with CSC, we issued to CSC a warrant to
purchase up to 1,200,000 shares of common stock at an exercise price equal to
the greater of $14.00 or the per share price of the common stock in this
offering. The warrant expires in September 2002 and is not yet exercisable. The
warrant generally vests and becomes exercisable as CSC completes various
milestones, including new customer generation milestones that result in a signed
license between STC and the new customer within an agreed upon schedule. The
warrant contains a significant economic disincentive for nonperformance.

                                       57
<PAGE>   60

     All of the outstanding warrants may be net exercised by applying the value
of a portion of the warrant, which is equal to the number of shares issuable
under the warrant being exercised multiplied by the fair market value of the
security receivable upon exercise of the warrant, less the per share exercise
price, in lieu of payment of the exercise price per share.

ANTI-TAKEOVER PROVISIONS

     Provisions of California law and our restated articles of incorporation and
bylaws could make more difficult our acquisition by a third party and the
removal of our incumbent officers and directors. These provisions, summarized
below, are expected to discourage coercive takeover practices and inadequate
takeover bids and to encourage persons seeking to acquire control of us to first
negotiate with us. We believe that the benefits of increased protection of our
ability to negotiate with the proponent of an unfriendly or unsolicited
acquisition proposal outweigh the disadvantages of discouraging such proposals
because, among other things, negotiation could result in an improvement of their
terms.

     Our restated articles of incorporation and bylaws:

     - do not provide for the right of shareholders to act by written consent
       without a meeting;

     - do not provide for cumulative voting in the election of directors;

     - permit the board of directors to issue preferred stock with voting or
       other rights without further shareholder action; and

     - permit the board of directors to fill any vacancy on the board of
       directors, including vacancies caused by removal.

These provisions, which require the vote of shareholders holding at least a
majority of the outstanding common stock to amend, may have the effect of
deterring hostile takeovers or delaying changes in our management.

TRANSFER AGENT AND REGISTRAR

     The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C. The transfer agent's address and telephone number
is 235 Montgomery Street, 23rd Floor, San Francisco, California 94104 and (415)
743-1423.

                                       58
<PAGE>   61

                        SHARES ELIGIBLE FOR FUTURE SALE

     Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. As described below, no shares
currently outstanding will be available for sale immediately after this offering
because of contractual restrictions on resale. Sales of substantial amounts of
our common stock in the public market after the restrictions lapse or are
released could adversely affect the prevailing market price and impair our
ability to raise equity capital in the future.

     Upon completion of this offering and the concurrent private placement, we
will have 68,064,745 outstanding shares of common stock. Of these shares, the
6,100,000 shares sold in the offering, plus any shares issued upon exercise of
the underwriters' over-allotment option, will be freely tradable without
restriction under the Securities Act, unless purchased by our "affiliates" as
that term is defined in Rule 144 under the Securities Act. In general,
affiliates include officers, directors or 10% shareholders.

     The remaining 61,964,745 shares outstanding are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Sales of the restricted securities in the public market, or
the availability of such shares for sale, could adversely affect the market
price of the common stock.

     Our directors, officers and substantially all our shareholders have entered
into lock-up agreements in connection with this offering generally providing
that they will not offer, sell, contract to sell or grant any option to purchase
or otherwise dispose of our common stock or any securities exercisable for or
convertible into our common stock without the prior written consent of Morgan
Stanley & Co. Incorporated for a period of 180 days after the date of this
prospectus. Notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements
will not be salable until such agreements expire or are waived by Morgan Stanley
& Co. Incorporated. Taking into account the lock-up agreements, and assuming
Morgan Stanley & Co. Incorporated does not release shareholders from these
agreements, the following shares will be eligible for sale in the public market
at the following times:


     - beginning on the date of this prospectus, the shares sold in the offering
       and 1.0 million additional shares will be immediately available for sale
       in the public market.



     - beginning 180 days after the date of this prospectus, an additional 7.4
       million shares will be freely tradeable pursuant to Rule 144(k), and an
       additional 42.0 million shares will be eligible for sale subject to
       volume limitations, as explained below, pursuant to Rules 144 and 701.


     In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:


     - one percent of the number of shares of common stock then outstanding
       which will equal approximately 680,647 shares immediately after the
       offering; or


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

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

                                       59
<PAGE>   62

     Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written compensatory
plan or contract to resell such shares in reliance upon Rule 144 but without
compliance with specific restrictions. Rule 701 provides that affiliates may
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirement and that non-affiliates may sell such shares in reliance on
Rule 144 without complying with the holding period, public information, volume
limitation or notice provisions of Rule 144. Any shares sold under Rule 701 may
only be sold on or following the date that is 90 days after the date of this
prospectus.

     In addition, we intend to file a registration statement on Form S-8 under
the Securities Act within 90 days following the date of this prospectus to
register shares to be issued pursuant to our employee benefit plans. As a
result, any options or rights exercised under the 1998 Stock Plan, the 1997
Stock Plan, the 2000 Employee Stock Purchase Plan or any other benefit plan
after the effectiveness of the registration statement will also be freely
tradable in the public market. However, such shares held by affiliates will
still be subject to the volume limitation, manner of sale, notice and public
information requirements of Rule 144 unless otherwise resalable under Rule 701.
As of January 31, 2000, there were outstanding options for the purchase of
approximately 12.2 million shares of common stock, of which options to purchase
approximately 4.5 million shares were vested and exercisable.

                                       60
<PAGE>   63

                                  UNDERWRITERS

     Under the terms and subject to the conditions contained in an underwriting
agreement, the underwriters named below, for whom Morgan Stanley & Co.
Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Donaldson,
Lufkin & Jenrette Securities Corporation and are acting as representatives, have
severally agreed to purchase, and we have agreed to sell to them, severally, the
number of shares indicated below:

<TABLE>
<CAPTION>
                                                               NUMBER
                            NAME                              OF SHARES
                            ----                              ---------
<S>                                                           <C>
Morgan Stanley & Co. Incorporated...........................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Donaldson, Lufkin & Jenrette Securities Corporation.........

                                                              ---------
  Total.....................................................  6,100,000
                                                              =========
</TABLE>

     The underwriters are offering the shares 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 by this prospectus are subject to the
approval of certain legal matters by their counsel and to certain other
conditions. The underwriters are obligated to take and pay for all of the shares
of common stock offered by this prospectus, other than those covered by the
over-allotment option described below, if any of the shares are taken. Morgan
Stanley Dean Witter Online, an affiliate of Morgan Stanley & Co. Incorporated,
is acting as a selected dealer in connection with the offering and will be the
sole distributor of shares of common stock over the Internet to its eligible
account holders.


     The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page of this prospectus and part to certain dealers at a price that represents a
concession not in excess of $          a share under the public offering price.
No underwriter will allow, and no dealer will reallow, any concession 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.


     We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of 915,000
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 this option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent the option is exercised,
each underwriter will become obligated, subject to certain conditions, to
purchase about the same percentage of the additional shares of common stock as
the number located next to that 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 underwriters' option is exercised in
full, the total price to public would be $          , the total underwriters'
discounts and commissions would be $          , and the total proceeds to us
would be $          .


     At our request, the underwriters expect to reserve for sale at the initial
public offering price up to 305,000 shares offered in this prospectus for our
directors, officers, employees and business associates and related persons. The
number of shares of common stock available for sale to the general public will
be reduced to the extent these persons purchase the reserved shares. Any
reserved shares which are not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares offered in this
prospectus.


                                       61
<PAGE>   64

     We, the directors, officers and substantially all of our other
shareholders, and substantially all individuals holding options to acquire
shares of our common stock that will be vested within the 180-day period after
the date of this prospectus, have each agreed that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, we
will not, during the period ending 180 days after the date of this prospectus:

     - 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, whether
       the shares or any of those securities are then owned by that person or
       are later acquired directly from us; 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 transaction described above is to be settled by
       delivery of common stock or such other securities, in cash or otherwise.

     The restrictions described in the previous paragraph do not apply to:

     - the sale of shares to the underwriters under the underwriting agreement;

     - the issuance by us of shares of common stock upon the exercise of an
       option or a warrant or the conversion of a security outstanding on the
       date of this prospectus which is described in the prospectus;

     - transactions by any person other than us relating to shares of common
       stock or other securities acquired in open market transactions after the
       completion of the offering of the shares;

     - gifts and transfers by will or intestacy, provided that the transferee
       agrees in writing to be bound by the restrictions described above;

     - transfers to members, partners, affiliates or immediate family or
       transfers to a trust for the benefit of the transferor or the
       transferor's immediate family, provided the transferee agrees in writing
       to be bound by the restrictions described above; and

     - issuances of shares of common stock or options to purchase shares of
       common stock under our employee benefit plans as in existence on the date
       of the prospectus and consistent with past practices.

     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 "STCS."


     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
common stock in transactions to cover syndicate short positions, in stabilizing
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 certain
liabilities, including liabilities under the Securities Act.


     Upon the closing of the offering, we will pay to one of the underwriters an
advisory fee of $600,000.


                                       62
<PAGE>   65

PRICING OF THE OFFERING

     Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between us and the representatives. Among the factors to be considered in
determining the initial public offering price will be our record of operations,
our current financial position and future prospects, the experience of our
management, sales, earnings and certain of our other financial and operating
information in recent periods, the price-earnings ratios, price-sales ratios,
market prices of securities and certain financial and operating information of
companies engaged in activities similar to ours. The estimated initial public
offering price range set forth on the cover page of this preliminary prospectus
is subject to change as a result of market conditions and other factors.

                                 LEGAL MATTERS

     The validity of the shares of common stock offered hereby will be passed
upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Cooley Godward LLP, Palo Alto, California, will pass upon
certain legal matters in connection with this offering for the underwriters. As
of the date of this prospectus, members of Wilson Sonsini Goodrich & Rosati,
P.C. and an investment partnership composed of current and former members of and
persons associated with Wilson Sonsini Goodrich & Rosati, P.C. beneficially
owned an aggregate of 128,264 shares of common stock. Jeffrey D. Saper, a member
of Wilson Sonsini Goodrich & Rosati, P.C., serves as the Secretary of STC.

                                    EXPERTS

     Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1999 and 1998, and for each of
the three years in the period ended December 31, 1999, as set forth in their
reports. We have included our financial statements and schedule in the
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's reports, 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
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedule thereto. For further information with respect to STC and the common
stock offered in this offering, we refer you to the registration statement and
to the attached exhibits and schedules. Statements made in this prospectus
concerning the contents of any document referred to in this prospectus are not
necessarily complete. With respect to each such document filed as an exhibit to
the registration statement, we refer you to the exhibit for a more complete
description of the matter involved.

     The reports and other information we file with the SEC can be inspected and
copied at the public reference facilities that the SEC maintains at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048,
and Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of these materials can be obtained at prescribed rates
from the Public Reference Section of the SEC at the principal offices of the
SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information
regarding the operation of the public reference room by calling 1-800-SEC-0330.
The SEC also maintains a web site (http://www.sec.gov) that makes available the
reports and other information we have filed with the SEC.

                                       63
<PAGE>   66

                       SOFTWARE TECHNOLOGIES CORPORATION

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Ernst & Young LLP, Independent Auditors...........  F-2
Consolidated Balance Sheets.................................  F-3
Consolidated Statements of Operations.......................  F-4
Consolidated Statements of Shareholders' Equity (Deficit)...  F-5
Consolidated Statements of Cash Flows.......................  F-6
Notes to Consolidated Financial Statements..................  F-7
</TABLE>

                                       F-1
<PAGE>   67

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Software Technologies Corporation and Subsidiaries

     We have audited the accompanying consolidated balance sheets of Software
Technologies Corporation and subsidiaries as of December 31, 1998 and 1999, and
the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1999. 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 auditing standards generally
accepted in the United States. 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 Software
Technologies Corporation and subsidiaries as of December 31, 1998 and 1999, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.

                                          /s/ ERNST & YOUNG LLP

Woodland Hills, California
February 11, 2000, except for Note 10,
as to which the date is March 23, 2000

                                       F-2
<PAGE>   68

               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                       PRO FORMA
                                                            DECEMBER 31,             SHAREHOLDERS'
                                                      ------------------------     EQUITY (DEFICIT)
                                                         1998          1999        DECEMBER 31, 1999
                                                      ----------    ----------    -------------------
                                                                                      (UNAUDITED)
                                                      (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S>                                                   <C>           <C>           <C>
ASSETS:
  Current assets:
     Cash and cash equivalents......................   $  3,255      $  1,572
     Accounts receivable, net of allowances of $391
       and $1,055 at December 31, 1998 and 1999,
       respectively.................................     13,473        18,522
     Prepaid expenses and other current assets......        456         1,581
                                                       --------      --------
          Total current assets......................     17,184        21,675
  Property and equipment, net.......................      4,794         7,206
  Related party receivable..........................        214           256
  Other assets......................................        665           715
                                                       --------      --------
          Total assets..............................   $ 22,857      $ 29,852
                                                       ========      ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
  SHAREHOLDERS' EQUITY (DEFICIT):
  Current liabilities:
     Bank line of credit............................   $  3,235      $  3,361
     Accounts payable...............................      3,742         4,994
     Compensation and related expenses..............      2,714         3,781
     Other accrued expenses.........................      2,567         1,102
     Deferred revenue...............................      6,122        10,354
                                                       --------      --------
          Total current liabilities.................     18,380        23,592
  Note payable and other obligation.................        367        10,000
  Commitments and contingencies
  Redeemable convertible preferred stock, no par
     value -- 10,000,000 shares authorized;
     2,864,583 and 5,452,798 shares issued and
     outstanding as of December 31, 1998 and 1999
     respectively; aggregate liquidation preference
     of $22,000 at December 31, 1999, pro
     forma -- no shares issued and outstanding......     11,445        24,681           $     --
  SHAREHOLDERS' EQUITY (DEFICIT):
     Preferred stock, no par value -- 10,000,000
       shares authorized; no shares issued and
       outstanding as of December 31, 1998 and 1999;
       pro forma -- no shares issued and
       outstanding..................................         --            --                 --
     Common stock, no par value -- 200,000,000
       shares authorized; 43,754,765 and 46,531,377
       issued and outstanding as of December 31,
       1998 and 1999, respectively; pro
       forma -- 60,503,539 shares issued and
       outstanding..................................      6,766        19,519             44,200
     Deferred stock compensation....................         --        (5,379)            (5,379)
     Accumulated other comprehensive loss...........        (52)         (237)              (237)
     Accumulated deficit............................    (14,049)      (42,324)           (42,324)
                                                       --------      --------           --------
          Total shareholders' equity (deficit)......     (7,335)      (28,421)          $ (3,740)
                                                       --------      --------           ========
          Total liabilities, redeemable convertible
            preferred stock and shareholders' equity
            (deficit)...............................   $ 22,857      $ 29,852
                                                       ========      ========
</TABLE>

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

                                       F-3
<PAGE>   69

               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                          -------------------------------------
                                                            1997          1998          1999
                                                          ---------    ----------    ----------
                                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                       <C>          <C>           <C>
Revenues:
  License...............................................   $10,911      $ 18,142      $ 24,051
  Services..............................................    10,149        10,853        20,268
  Maintenance...........................................     2,919         5,142         9,055
  Other.................................................     2,720         3,324         1,797
                                                           -------      --------      --------
          Total revenues................................    26,699        37,461        55,171
Cost of revenues:
  License...............................................       229           959           690
  Services (exclusive of stock-based compensation
     expense of $0 in 1997 and 1998 and $157 in 1999)...     6,727        11,269        20,904
  Maintenance...........................................       366           587         2,368
  Other.................................................     2,200         1,907         1,219
                                                           -------      --------      --------
          Total cost of revenues........................     9,522        14,722        25,181
                                                           -------      --------      --------
  Gross profit..........................................    17,177        22,739        29,990
                                                           -------      --------      --------
Operating expenses:
  Research and development (exclusive of stock-based
     compensation expense of $0 in 1997 and 1998 and
     $112 in 1999)......................................     4,242         8,496        11,990
  Sales and marketing (exclusive of stock-based
     compensation expense of $0 in 1997 and 1998 and
     $1,390 in 1999)....................................     6,849        16,273        28,652
  General and administrative (exclusive of stock-based
     compensation expense of $0 in 1997 and 1998 and $49
     in 1999)...........................................     5,307         9,229        12,176
  Amortization of alliance warrants.....................        --            --           814
  Amortization of stock-based compensation..............        --            --         1,708
                                                           -------      --------      --------
          Total operating expenses......................    16,398        33,998        55,340
                                                           -------      --------      --------
Income (loss) from operations...........................       779       (11,259)      (25,350)
Interest and other income...............................        14           217           165
Interest expense........................................      (277)         (201)         (680)
                                                           -------      --------      --------
Income (loss) before provision for income taxes.........       516       (11,243)      (25,865)
Provision for income taxes..............................        10            --            --
                                                           -------      --------      --------
Net income (loss).......................................       506       (11,243)      (25,865)
                                                           -------      --------      --------
Accretion on preferred stock............................        --           686         2,410
                                                           -------      --------      --------
Net income (loss) available to common shareholders......   $   506      $(11,929)     $(28,275)
                                                           =======      ========      ========
Basic and diluted net income (loss) per share...........   $  0.01      $  (0.27)     $  (0.62)
                                                           =======      ========      ========
Number of shares used in computing basic and diluted net
  income (loss) per share...............................    42,801        43,748        45,954
                                                           =======      ========      ========
Pro forma basic and diluted net loss per share
  (unaudited)...........................................                              $  (0.44)
                                                                                      ========
Pro forma basic and diluted weighted average shares
  (unaudited)...........................................                                58,470
                                                                                      ========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-4
<PAGE>   70

               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                ACCUMULATED
                                                                                   OTHER
                                               COMMON STOCK       DEFERRED     COMPREHENSIVE                      TOTAL
                                             ----------------      STOCK          INCOME       ACCUMULATED    SHAREHOLDERS'
                                             SHARES   AMOUNT    COMPENSATION      (LOSS)         DEFICIT     EQUITY(DEFICIT)
                                             ------   -------   ------------   -------------   -----------   ----------------
<S>                                          <C>      <C>       <C>            <C>             <C>           <C>
Balance as of January 1, 1997..............  42,179   $7,699      $    --          $  --        $ (2,626)        $  5,073
  Components of comprehensive income
    Net income.............................      --       --           --             --             506              506
    Foreign currency translation
      adjustment...........................      --       --           --           (104)             --             (104)
                                                                                                                 --------
        Total comprehensive income.........                                                                           402
  Issuance of common stock.................   3,087    1,647                          --              --            1,647
  Repurchase of common stock...............  (1,539)  (2,702)          --             --              --           (2,702)
  Issuance of common stock pursuant to
    employee stock option plan.............      15        3           --             --              --                3
  Issuance of stock options................      --       35           --             --              --               35
                                             ------   -------     -------          -----        --------         --------
Balance as of December 31, 1997............  43,742    6,682           --           (104)         (2,120)           4,458
  Components of comprehensive loss
    Net loss...............................      --       --           --             --         (11,243)         (11,243)
    Foreign currency translation
      adjustment...........................      --       --           --             52              --               52
                                                                                                                 --------
        Total comprehensive loss...........                                                                       (11,191)
  Accretion on preferred stock.............      --       --           --             --            (686)            (686)
  Issuance of common stock pursuant to
    employee stock option plan.............      13       16           --             --              --               16
  Issuance of stock options................      --       68           --             --              --               68
                                             ------   -------     -------          -----        --------         --------
Balance as of December 31, 1998............  43,755    6,766           --            (52)        (14,049)          (7,335)
  Components of comprehensive loss
    Net loss...............................      --       --           --             --         (25,865)         (25,865)
    Foreign currency translation
      adjustment...........................      --       --           --           (185)             --             (185)
                                                                                                                 --------
        Total comprehensive loss...........                                                                       (26,050)
  Issuance of common stock.................   2,703    4,074           --             --              --            4,074
  Issuance of common stock warrants........      --    3,944       (3,256)            --              --              688
  Amortization of common stock warrants....      --       --          814             --              --              814
  Deferred stock compensation related to
    stock options..........................      --    4,645       (4,645)            --              --               --
  Amortization of deferred stock
    compensation...........................      --       --        1,708             --              --            1,708
  Accretion on preferred stock.............      --       --           --             --          (2,410)          (2,410)
  Issuance of common stock pursuant to
    employee stock option plan.............      73       90           --             --              --               90
                                             ------   -------     -------          -----        --------         --------
Balance as of December 31, 1999............  46,531   $19,519     $(5,379)         $(237)       $(42,324)        $(28,421)
                                             ======   =======     =======          =====        ========         ========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-5
<PAGE>   71

               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                   FOR THE YEARS ENDED
                                                                      DECEMBER 31,
                                                              -----------------------------
                                                               1997       1998       1999
                                                              -------   --------   --------
                                                                     (IN THOUSANDS)
<S>                                                           <C>       <C>        <C>
Cash flows from operating activities:
  Net income (loss).........................................  $   506   $(11,243)  $(25,865)
  Adjustments to reconcile net income (loss) to net cash
     used in operating activities:
     Depreciation and amortization..........................      921      1,121      1,863
     Provision for doubtful accounts receivable.............      221        416        685
     Amortization of alliance warrants......................       --         --        814
     Amortization of stock based compensation...............       --         --      1,708
  Changes in assets and liabilities:
     Accounts receivable....................................   (4,403)    (2,747)    (5,734)
     Prepaid expenses and other current assets..............      417       (292)      (437)
     Accounts payable.......................................     (133)     2,038      1,252
     Other accrued expenses.................................      768      3,017       (398)
     Deferred revenue.......................................    1,684      1,707      4,232
                                                              -------   --------   --------
Net cash used in operating activities.......................      (19)    (5,983)   (21,880)
                                                              -------   --------   --------
Cash flows from investing activities:
  Purchases of property and equipment.......................   (1,683)    (2,991)    (4,275)
  Other.....................................................     (233)      (340)       (92)
                                                              -------   --------   --------
Net cash used in investing activities.......................   (1,916)    (3,331)    (4,367)
                                                              -------   --------   --------
Cash flows from financing activities:
  Net borrowings under bank line of credit..................       36      1,535        126
  Proceeds from issuance of redeemable convertible preferred
     stock, net.............................................       --     10,759     10,826
  Proceeds from issuance of common stock, net...............    1,647         --      4,074
  Proceeds from issuance of common stock pursuant to stock
     option plan............................................       38         84         90
  Repurchase of common stock................................   (2,702)        --         --
  Proceeds from notes payable, net..........................      767         --      9,781
  Payments on notes payable and other obligations...........     (584)      (611)      (148)
                                                              -------   --------   --------
Net cash provided by (used in) financing activities.........     (798)    11,767     24,749
Effect of exchange rate changes on cash and cash
  equivalents...............................................     (104)        52       (185)
                                                              -------   --------   --------
Net increase (decrease) in cash and cash equivalents........   (2,837)     2,505     (1,683)
Cash and cash equivalents at beginning of year..............    3,587        750      3,255
                                                              -------   --------   --------
Cash and cash equivalents at end of year....................  $   750   $  3,255   $  1,572
                                                              =======   ========   ========
Supplemental cash flow disclosure:
  Income taxes paid.........................................  $    --   $     30   $     --
  Interest paid.............................................  $   277   $    201   $    530
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-6
<PAGE>   72

               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The Company

     Software Technologies Corporation ("STC" or the "Company") provides a
comprehensive solution for e-Business application integration, enabling the
seamless flow of information across all systems, applications and enterprises on
a global basis. The Company provides this solution to its customers primarily by
license of its software and also by offering software implementation and
consulting services. The Company was founded in 1989 and sold its first product
and services in 1991. In November 1999, the Company launched the fourth
generation of its product, e*Gate 4.0, and concurrently renamed its product
line, previously called DataGate, to e*Gate.

     The Company's operations are subject to certain risks and uncertainties,
including rapid technological changes, success of the Company's product
marketing and product distribution strategies, the need to manage growth, the
need to retain key personnel and protect intellectual property, and the
availability of additional capital financing on terms acceptable to the Company.

     Liquidity and Financing Considerations

     The Company incurred operating losses for the years ended December 31, 1998
and 1999, and as of December 31, 1999, the Company had an accumulated deficit of
$42.3 million and its current liabilities exceeded its current assets by
approximately $1.9 million. The Company's ability to meet its obligations in the
ordinary course of business is dependent upon its ability to establish
profitable operations or to obtain additional funding through public or private
debt or equity financing. The Company is currently preparing for an initial
public offering of its common stock. In the opinion of management, alternative
financing from new or existing investors will be available to the Company if the
initial public offering is delayed or cancelled. However, there is no assurance
the Company will be able to obtain future financing on terms acceptable to the
Company, or at all. Management believes that they can delay anticipated
increases in the Company's operating costs such that available cash resources
would be sufficient to fund ongoing operations for the next year if additional
financing could not be obtained.

     Basis of Presentation

     The consolidated financial statements include the accounts of STC and its
wholly owned subsidiaries. All material intercompany transactions have been
eliminated in consolidation. Certain reclassifications have been made to the
1997 and 1998 information to conform to the 1999 presentation.

     Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. Significant
estimates made in preparing the consolidated financial statements include the
allowance for doubtful accounts, certain accrued liabilities and estimates of
future cash flows developed to determine whether conditions of impairment are
present.

     Cash and Cash Equivalents

     The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.

                                       F-7
<PAGE>   73
               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Concentration of Credit Risk

     Financial instruments that potentially expose the Company to concentration
of credit risk consist primarily of temporary cash investments and accounts
receivable. The Company places its temporary cash investments with financial
institutions. The Company's accounts receivable are derived from revenues earned
from customers located primarily in the United States, Europe, Australia and
Japan. The Company performs ongoing credit evaluations of its customers'
financial condition and maintains allowances for potential credit losses. Credit
losses have historically been within management's expectations. The Company
generally does not require collateral or other security from its customers.

     Fair Value of Financial Instruments

     The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities are carried at
cost, which approximates their fair value, due to the relatively short maturity
of these instruments. As of December 31, 1998 and 1999, the Company's short-term
line of credit and long-term debt had variable interest rates and, accordingly,
the Company believes the carrying value of the short-term line of credit and
long-term debt approximates its fair value.

     Software Development Costs

     Costs related to the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility of the product has been established, at which time
such costs are capitalized, subject to expected recoverability. To date, the
Company has not capitalized any development costs related to its software
products since the time period between technological feasibility and general
release of a product is not significant and related costs incurred during that
time period have not been material.

     For software developed for internal use, certain qualifying costs incurred
in the application development stage are capitalized and amortized over a period
of three years.

     Revenue Recognition

     In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position (SOP) No. 97-2, Software Revenue
Recognition. SOP 97-2, as amended by SOP 98-4 "Deferral of the Effective Date of
a Provision of SOP 97-2", was adopted by the Company as of January 1, 1998. In
December 1998, the AICPA issued SOP 98-9 "Modification of SOP 97-2 , Software
Revenue Recognition, With Respect to Certain Transactions", which requires
recognition of revenue using the "residual method" when (1) there is
vendor-specific objective evidence of the fair values of all undelivered
elements in a multiple-element arrangement that is not accounted for using
long-term contract accounting, (2) vendor-specific objective evidence of fair
value does not exist for one or more of the delivered elements in the
arrangement, and (3) all revenue-recognition criteria in SOP 97-2 other than the
requirement for vendor-specific objective evidence of the fair value of each
delivered element of the arrangement are satisfied.

     The adoption of these statements, as amended, did not have a material
impact on the Company's operating results, financial position or cash flows.

     The Company enters into arrangements with end users, which may include the
sale of licenses of software, maintenance and services under the arrangement or
various combinations of each element, including the sale of such elements
separately. For each arrangement, revenues are recognized when an

                                       F-8
<PAGE>   74
               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

agreement has been signed by both parties, the fees are fixed or determinable,
collection of the fees is probable and delivery of the product has occurred and
no other significant obligations remain.

     For multi-element arrangements, each element of the arrangement is analyzed
and the Company allocates a portion of the total fee under the arrangement to
the undelivered elements, primarily services and maintenance, using vendor
specific objective evidence of fair value of the element and the remaining
portion of the fee is allocated to the delivered elements (i.e. generally the
software license), regardless of any separate prices stated within the contract
for each element, under the residual method prescribed by SOP 98-9. Vendor
specific objective evidence of fair value is based on the price the customer is
required to pay when the element is sold separately (i.e. hourly rates charged
for consulting services when sold separately from a software license and the
renewal rate for maintenance arrangements). Each license agreement offers
additional maintenance renewal periods at a stated price. If vendor specific
objective evidence of fair value does not exist for the undelivered elements,
all revenue is deferred and recognized ratably over the service period if the
undelivered element is services, or over the period the maintenance is provided
if the undelivered element is maintenance, or until sufficient objective
evidence exists or all elements have been delivered.

     License Revenues:  Amounts allocated to license revenues under the residual
method are recognized at the time of delivery of the software when vendor
specific objective evidence of fair value exits for the undelivered elements, if
any, and all the other revenue recognition criteria discussed above have been
met.

     Services Revenues:  Revenues from services are comprised of consulting and
implementation services and, to a limited extent, training. Consulting services
are generally sold on a time-and-materials or fixed fee basis and include a
range of services including installation of off-the-shelf software, data
conversion and building non-complex interfaces to allow the software to operate
in customized environments. Services are generally separable from the other
elements under the arrangement since the performance of the services are not
essential to the functionality (i.e. do not involve significant production,
modification, or customization of the software or building complex interfaces)
of any other element of the transaction and are described in the contract such
that the total price of the arrangement would be expected to vary as the result
of the inclusion or exclusion of the services. Revenues for services are
recognized as the services are performed. Training services are sold on a per
student basis and are recognized as classes are attended.

     Maintenance Revenues:  Maintenance revenues consist primarily of fees for
providing unspecified software upgrades on a when-and-if-available basis and
technical support over a specified term, which is typically twelve months.
Maintenance revenues are typically paid in advance and are recognized on a
straight-line basis over the term of the contract.

     To date, there have been no transactions involving licenses with OEMs and
systems integrators and only a limited number of transactions with resellers.
Revenues on sales made by our resellers are generally recognized upon shipment
of our software to the end user, if all other revenue recognition criteria noted
above are met. Under limited arrangements with certain distributors, all the
revenue recognition criteria have been met upon delivery of the product to the
distributor and, accordingly, revenues are recognized at that time. The Company
does not offer a right of return on its products.

     Prior to January 1, 1998, the Company recognized revenue in accordance with
the provisions of AICPA's SOP 91-1, "Software Revenue Recognition."

                                       F-9
<PAGE>   75
               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Net Loss Per Share

     Basic and diluted net income (loss) per share has been computed using the
weighted-average number of shares of common stock outstanding during the period.
The Company has excluded all redeemable convertible preferred stock, warrants
and outstanding stock options from the calculation of diluted net income (loss)
per share because all such securities are antidilutive for all periods
presented.

     Pro Forma Net Loss Per Share (Unaudited)

     Pro forma net loss per share for the year ended December 31, 1999 was
computed using the weighted average number of common shares outstanding,
including the pro forma effects of the automatic conversion of the Company's
redeemable convertible preferred stock into shares of common stock effective
upon the closing of the Offering, as if such conversion occurred on January 1,
1999 or at the date of original issuance, if later. The resulting pro forma
adjustment includes an increase in the weighted average shares used to compute
basic and diluted net loss per share of 12,516,000 shares for the year ended
December 31, 1999. The pro forma effects of these transactions are unaudited and
have been reflected in the pro forma loss per share information in the
accompanying Statement of Operations for the year ended December 31, 1999.

     Income Taxes

     The Company uses the liability method of accounting for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to financial statements carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax
credit carryforwards. The measurement of deferred tax assets and liabilities is
based on provisions of applicable tax law. The measurement of deferred tax
assets is reduced, if necessary, by a valuation allowance based on the amount of
tax benefits that, based on available evidence, is not expected to be realized.

     Long-lived Assets

     The Company reviews for impairment long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The recoverability test is performed at the lowest level at
which undiscounted net cash flows can be attributable to long-lived assets.

     Comprehensive Income (Loss)

     The Company accounts for comprehensive income (loss) using Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income, as defined
therein, refers to revenues, expenses, gains and losses that are not included in
net income (loss) but rather are recorded directly in shareholders' equity
(deficit).

     Foreign Currency Translation

     The functional currency for the Company's foreign operations is the local
currency. Foreign currency financial statements are converted into United States
dollars by translating asset and liability accounts at the current exchange rate
at year-end and statement of operations accounts at the average exchange rate
for the year, with the resulting translation adjustment reflected in accumulated
other comprehensive income (loss) in shareholders' equity (deficit).

                                      F-10
<PAGE>   76
               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Stock-based Compensation

     The Company accounts for its stock-based compensation arrangements in
accordance with the provisions of SFAS No. 123 "Accounting for Stock Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of the grant.
Alternatively, SFAS No. 123 allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net income (loss) and pro forma
earnings (loss) per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.

     Pro Forma Shareholders Equity (Deficit) (unaudited)

     Effective upon the closing of the Company's initial public offering, the
outstanding shares of the Company's Redeemable Convertible Preferred Stock will
automatically convert into approximately 13,972,162 shares of Common Stock. The
pro forma effects of this conversion are unaudited and have been reflected in
the accompanying pro forma shareholders' equity (deficit) section of the
accompanying balance sheet as of December 31, 1999.

     Recently Issued Accounting Pronouncements

     In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because we do
not currently hold any derivative instruments and do not engage in hedging
activities, we expect the adoption of SFAS No. 133 will not have a material
impact on our financial position, results of operations or cash flows. In July
1999, SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133" was
issued. We will be required to adopt SFAS No. 133 in 2000.

NOTE 2. PROPERTY AND EQUIPMENT

     Property and equipment are recorded at cost. Property and equipment
purchased under capital leases are recorded at cost (based on the present value
of minimum lease payments discounted at the contractual interest rate).
Depreciation is computed using the straight-line method over the shorter of the
estimated useful lives or the lease term of the assets: computer equipment,
three years; office furniture and equipment, five years; leasehold improvements,
through the lesser of useful life or life of the lease. Property and equipment,
stated at cost, was as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                                    AS OF
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1998       1999
                                                              -------    -------
<S>                                                           <C>        <C>
Computer equipment (hardware and software)..................  $ 6,869    $ 8,530
Office furniture and equipment..............................      623      1,785
Leasehold improvements......................................      689        846
                                                              -------    -------
Total cost of property and equipment........................    8,181     11,161
Less accumulated depreciation and amortization..............   (3,387)    (3,955)
                                                              -------    -------
Property and equipment, net.................................  $ 4,794    $ 7,206
                                                              =======    =======
</TABLE>

                                      F-11
<PAGE>   77
               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Depreciation and amortization expense for the years ended December 31,
1997, 1998 and 1999 was $921,000, $1,121,000 and $1,863,000, respectively.

NOTE 3. OPERATIONS BY REPORTABLE SEGMENTS AND GEOGRAPHIC AREA

     The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company's chief
operating decision maker is considered to be the Company's Chief Executive
Officer ("CEO"). The CEO reviews financial information presented on a
consolidated basis similar to the consolidated financial statements. Therefore,
the Company has concluded that it operates primarily in one industry segment
and, accordingly, has provided enterprise-wide disclosures.

     The Company maintains operations in North America and six international
territories in Europe and the Pacific Rim: United Kingdom, Germany, France,
Belgium, Australia and Japan. Information about the Company's operations in
North America and international territories for the years ended December 31,
1997, 1998 and 1999 is presented below.

     Revenues and long-lived assets by geographic area were as follows (in
thousands):

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                                    -----------------------------
                                                     1997       1998       1999
                                                    -------    -------    -------
<S>                                                 <C>        <C>        <C>
Revenues:
  North America...................................  $22,700    $29,858    $40,223
  Europe..........................................    3,084      6,613     12,406
  Pacific Rim.....................................      915        990      2,542
                                                    -------    -------    -------
          Total revenues..........................  $26,699    $37,461    $55,171
                                                    =======    =======    =======
</TABLE>

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                       --------------------------
                                                        1997      1998      1999
                                                       ------    ------    ------
<S>                                                    <C>       <C>       <C>
Long-lived assets:
  North America......................................  $3,106    $4,740    $6,806
  Europe.............................................     328       896     1,234
  Pacific Rim........................................      30        37       137
                                                       ------    ------    ------
          Total long-lived assets....................  $3,464    $5,673    $8,177
                                                       ======    ======    ======
</TABLE>

     No single customer accounted for more than 10% of the Company's revenues
during the years ended December 31, 1998 and 1999. One customer accounted for
11.3% of the Company's revenues for the year ended December 31, 1997. Included
in revenues from operations in Europe are $2,365,000, $3,726,000 and $5,350,000
of revenues from the Company's operations in the United Kingdom and $719,000,
$2,102,000 and $5,845,000 of revenues from the Company's operations in Germany,
for the years ended December 31, 1997, 1998 and 1999, respectively.

                                      F-12
<PAGE>   78
               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4. COMPUTATION OF NET INCOME (LOSS) PER SHARE

     The following table sets forth the computations of basic and diluted net
income (loss) per share for the years indicated (in thousands, except per share
data):

<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                                  -------------------------------
                                                   1997        1998        1999
                                                  -------    --------    --------
<S>                                               <C>        <C>         <C>
Numerator:
  Net income (loss).............................  $   506    $(11,243)   $(25,865)
     Accretion on preferred stock...............       --         686       2,410
                                                  -------    --------    --------
     Net income (loss) available to common
       stockholders.............................  $   506    $(11,929)   $(28,275)
                                                  =======    ========    ========
Denominator:
  Denominator for basic and diluted net income
     (loss) per share -- weighted average shares
     outstanding................................   42,801      43,748      45,954
                                                  -------    --------    --------
  Basic and diluted net income (loss) per
     share......................................  $  0.01    $  (0.27)   $  (0.62)
                                                  =======    ========    ========
</TABLE>

     Options to purchase 4,753,166, 7,993,841 and 12,525,921 shares of common
stock were outstanding as of December 31, 1997, 1998 and 1999, respectively, but
were not included in the calculations of diluted net income (loss) per share
because their effect would be antidilutive. Redeemable convertible preferred
stock was not included in the calculations of diluted net loss per share in 1998
and 1999 because its effect would be antidilutive. Common stock warrants were
not included in the calculations of diluted net loss per share because their
effect would be antidilutive.

NOTE 5. INCOME TAXES

     The provision for income taxes for the year ended December 31, 1997
consisted of foreign taxes payable. The items accounting for the difference
between income taxes computed at the U.S. federal statutory income tax rate and
the income tax provisions for each of the years presented were as follows:

<TABLE>
<CAPTION>
                                                             1997    1998    1999
                                                             ----    ----    ----
<S>                                                          <C>     <C>     <C>
Statutory federal income tax rate..........................   34%    (34)%   (34)%
  Valuation allowance......................................  (43)     40      39
  Other....................................................   10      (6)     (5)
                                                             ---     ---     ---
Income tax provision.......................................    1%     --%     --%
                                                             ===     ===     ===
</TABLE>

                                      F-13
<PAGE>   79
               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Significant components of the Company's deferred tax liabilities and assets
at December 31 were as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                              1998        1999
                                                             -------    --------
<S>                                                          <C>        <C>
Deferred tax liabilities:
  Tax over book depreciation...............................  $  (180)   $   (255)
                                                             -------    --------
          Total deferred tax liabilities...................     (180)       (255)
Deferred tax assets:
  Net operating loss carryforwards (foreign and
     domestic).............................................    4,296      11,784
  Accrued liabilities and deferred revenue.................      258         791
  Allowance for doubtful accounts..........................      115         337
  Tax credits..............................................      692       1,423
  Miscellaneous............................................       49         397
                                                             -------    --------
          Total deferred tax assets........................    5,410      14,732
Valuation allowance........................................   (5,230)    (14,477)
                                                             -------    --------
Net deferred taxes.........................................  $    --    $     --
                                                             =======    ========
</TABLE>

     Due to the uncertainty surrounding the realization of its deferred tax
assets as of December 31, 1998 and 1999, the Company has provided a valuation
allowance on its net deferred tax assets of $5,230,000 and $14,477,000,
respectively.

     As of December 31, 1999, the Company had net operating loss carryforwards
for federal and state purposes of $24,847,000 and $10,898,000, respectively,
expiring commencing in the year 2018 for federal and 2003 for state. The Company
also had federal and state research and development credit carryforwards of
$971,000 and $689,000, respectively, expiring in years beginning in 2008.
Utilization of net operating loss carryforwards may be subject to substantial
limitations due to ownership change and other limitations provided by the
Internal Revenue Code and similar state provisions. These limitations may result
in the expiration of net operating loss carryforwards before full utilization.

     Income (loss) before provision for income taxes of the Company's foreign
operations amounted to $63,000, $(1,194,000) and $(6,388,000), respectively, for
the years ended December 31, 1997, 1998 and 1999.

NOTE 6. COMMITMENTS, CONTINGENCIES AND DEBT

     Bank Line of Credit and Notes Payable

     As of December 31, 1999, the Company had a $10.0 million senior line of
credit facility (the "Line") with a lending institution that bears interest at
an annual rate of prime plus 2% (payable monthly) and expires on February 1,
2001. As of December 31, 1999, the interest rate was 10.5% and borrowings under
the Line totaled approximately $3.4 million. The Line is secured by accounts
receivable and certain other assets and is subject to certain borrowing base
restrictions. The Line contains no financial covenants, with the exception of
restrictions on related party transactions and restrictions on incurring
additional debt.

     The Company also has a $10.0 million long-term note payable with the same
lending institution. The long-term note payable bears interest at an annual rate
of prime plus 2% (10.5% at December 31, 1999), payable monthly, and is due on
February 1, 2001.

                                      F-14
<PAGE>   80
               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Lease Obligations

     The Company leases office facilities, computers and office equipment under
noncancelable operating lease agreements with third parties expiring through
2005. The Company also leases, from a related party, a 4,000-square-foot office
facility under a noncancelable operating lease agreement expiring in December
2002. The Company also leases certain storage space and computer and office
equipment under month-to-month leases.

     Future minimum payments, by year and in the aggregate, on noncancelable
operating leases with initial terms of one year or more, consisted of the
following at December 31, 1999 (in thousands):

<TABLE>
<CAPTION>
                                                         OPERATING LEASES
                                              ---------------------------------------
                                                 RELATED       NON-RELATED
                                                  PARTY           PARTY        TOTAL
                                              -------------    -----------    -------
<S>                                           <C>              <C>            <C>
Year ended December 31,
  2000......................................      $ 51           $ 4,276      $ 4,327
  2001......................................        51             3,875        3,926
  2002......................................        --             2,767        2,767
  2003......................................        --             1,758        1,758
  2004......................................        --               221          221
  Thereafter................................        --               419          419
                                                  ----           -------      -------
                                                  $102           $13,316      $13,418
                                                  ====           =======      =======
</TABLE>

     Total rent expense was $555,000 in 1997, $1,611,000 in 1998 and $4,285,000
in 1999, of which $147,000, $65,000 and $50,000 was paid to related parties in
1997, 1998 and 1999, respectively.

     Legal Proceedings

     The Company is party to routine claims and suits brought against it in the
ordinary course of business. In the opinion of management, such routine claims
should not have any material adverse effect upon the results of operations, cash
flows or the financial position of the Company.

NOTE 7. REDEEMABLE CONVERTIBLE PREFERRED STOCK

     As of December 31, 1999, the Company had 10,000,000 shares of preferred
stock authorized. The two classes of preferred stock designated and issued as of
December 31, 1998 and December 31, 1999 were as follows:

<TABLE>
<CAPTION>
                                                  SHARES OUTSTANDING AS OF
                                                        DECEMBER 31,
                                      SHARES      ------------------------      CASH CONSIDERATION PER
                       PAR VALUE    DESIGNATED       1998          1999       SHARE RECEIVED ON ISSUANCE
                       ---------    ----------    ----------    ----------    --------------------------
<S>                    <C>          <C>           <C>           <C>           <C>
Series A.............   $0.001      2,864,583     2,864,583     2,864,583               $3.84
Series B.............   $0.001      2,637,900            --     2,588,215               $4.25
                                    ---------     ---------     ---------
                                    5,502,483     2,864,583     5,452,798
                                    =========     =========     =========
</TABLE>

     In May 1998, the Company issued 2,864,583 shares of Series A preferred
stock. In March 1999, the Company issued 2,588,215 shares of Series B preferred
stock.

                                      F-15
<PAGE>   81
               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The following are the characteristics of the Company's Series A Preferred
Stock as of December 31, 1998 and 1999 and Series B Preferred Stock as of
December 31, 1999:

          (i) To the extent requested by holders of not less than 66% of the
     then outstanding shares of preferred stock, the Company shall redeem on or
     after the dates below, and in the amounts specified below, any such shares
     which were purchased by the shareholders, net of any shares previously
     redeemed, plus any accrued and unpaid dividends:

<TABLE>
<CAPTION>
                                                                        CUMULATIVE
           MANDATORY REDEMPTION              PERCENTAGE OF SHARES    REDEMPTION AMOUNT
           --------------------              --------------------    -----------------
                                                                      (IN THOUSANDS)
<S>                                          <C>                     <C>
Series A:
  April 2003...............................          33.3%                $ 5,903
  April 2004...............................          50.0                   9,735
  April 2005...............................         100.0                  21,450
Series B:
  March 2004...............................          33.3%                $ 5,903
  March 2005...............................          50.0                   9,735
  March 2006...............................         100.0                  21,450
</TABLE>

     The redemption price for the shares of preferred stock to be redeemed on
the fifth, sixth and seventh anniversaries of the original issue date for such
Preferred Stock shall equal the original issue price for such series of
Preferred Stock multiplied by 1.61, 1.77 and 1.95, respectively. For any shares
redeemed after the seventh anniversary of the original issue date, the
redemption price shall equal the original issue price for such series of
preferred stock multiplied by 1.95. The pro rata portion of the redemption price
has been accreted to the carrying value of preferred stock through December 31,
1999 using the effective interest method.

          (ii) The Series A and Series B Preferred Stock have a liquidation
     preference value equal to the original issue price of such stock plus
     accrued (i.e. dividends declared by the Board of Directors) and unpaid
     dividends and are senior to all classes of common stock. Each share of
     Preferred Stock has a number of votes equal to the number of shares of
     common stock issuable upon conversion. The holders of each series of
     preferred stock are entitled to receive, when and if declared by the Board
     of Directors of the Company, noncumulative dividends equal to 6% of the
     original issue price.

          (iii) At the option of the holder, each share of Series A and B
     Preferred Stock may be converted into 2.84463 and 2.25 shares of common
     stock, respectively.

          (iv) Each share of preferred stock shall automatically be converted
     into shares of common stock at the effective conversion rate for such
     series of preferred stock upon the closing of an initial public offering
     with a price at least equal to the automatic conversion price, as defined,
     and in which the aggregate gross proceeds received by the Company equal or
     exceed $20,000,000.

NOTE 8. SHAREHOLDERS' EQUITY (DEFICIT)

     Common Stock

     In February 1999, the Company issued 2,703,675 shares of common stock for
net proceeds of approximately $4,074,000. In February 2000, the Company
increased its authorized shares of common stock to 200,000,000.

                                      F-16
<PAGE>   82
               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Option Plans

     In July 1998, the Board of Directors of the Company adopted the 1998 Stock
Option Plan (the "Plan"), which replaced the 1997 Stock Option Plan (the "1997
Plan") as to future grants. Under the Plan, the maximum aggregate number of
shares of common stock available for the grant of options is 13,875,903 shares,
which includes any unused shares reserved for issuance under the 1997 Plan that
were not covered by grants prior to the termination of the 1997 Plan. In
addition, any forfeited shares pursuant to terms and conditions of the 1997 Plan
will also be available under the Plan. Under the Plan, stock options may be
granted to employees, directors and consultants of the Company. At December 31,
1999, there were options to purchase 1,247,642 shares of common stock that were
available for grant under the Plan.

     The exercise price of options granted under the Plan may not be less than
the fair market value of the common stock at the time of grant with respect to
incentive stock options and not less than 85% of the fair market value with
respect to nonstatutory options. Options granted under the Plan carry a maximum
term of 10 years from the date of grant and typically vest and become
exercisable at the rate of at least 25% per year from the date of grant.

     Activity of the Plan for the last three years was as follows:

<TABLE>
<CAPTION>
                                                                 OPTIONS OUTSTANDING
                                                         ------------------------------------
                                                                             WEIGHTED AVERAGE
                                                         NUMBER OF SHARES     EXERCISE PRICE
                                                         ----------------    ----------------
<S>                                                      <C>                 <C>
Balance as of January 1, 1997..........................         78,300            $ .03
  Granted..............................................      4,895,969             1.16
  Cancelled............................................       (205,200)            1.16
  Exercised............................................        (15,903)             .22
                                                            ----------
Outstanding as of December 31, 1997....................      4,753,166             1.15
  Granted..............................................      4,654,350             1.36
  Cancelled............................................     (1,400,175)            1.33
  Exercised............................................        (13,500)            1.16
                                                            ----------
Balance as of December 31, 1998........................      7,993,841             1.24
  Granted..............................................      6,901,088             2.59
  Cancelled............................................     (2,296,070)            1.29
  Exercised............................................        (72,938)            1.24
                                                            ----------
Outstanding as of December 31, 1999....................     12,525,921             1.98
                                                            ==========
</TABLE>

                                      F-17
<PAGE>   83
               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Information regarding stock options outstanding as of December 31, 1999 was
as follows:

<TABLE>
<CAPTION>
                        OPTIONS OUTSTANDING
- -------------------------------------------------------------------          OPTIONS EXERCISABLE
                                    WEIGHTED                          ---------------------------------
                   NUMBER           AVERAGE            WEIGHTED           NUMBER           WEIGHTED
                 OF SHARES         REMAINING       AVERAGE EXERCISE     OF SHARES          AVERAGE
 PRICE RANGE   (IN THOUSANDS)   CONTRACTUAL LIFE        PRICE         (IN THOUSANDS)    EXERCISE PRICE
- -------------  --------------   ----------------   ----------------   --------------   ----------------
<S>            <C>              <C>                <C>                <C>              <C>
    $0.03             78              7.44              $0.03                78             $0.03
$1.15 - $1.37      5,867              7.79              $1.27             3,617             $1.23
$1.49 - $1.67      3,656              9.24              $1.65               338             $1.64
$2.67 - $3.33      1,004              9.60              $2.77                --                --
    $4.00          1,266              9.80              $4.00                34             $4.00
    $5.33            657              9.95              $5.33                30             $5.33
</TABLE>

     As of December 31, 1997, 1998 and 1999, respectively, 1,363,000, 2,355,000
and 4,096,500 options were exercisable under the Plan.

     In February 2000, the Board of Directors authorized an increase in the
number of shares of common stock available for issuance under the Plan of
7,500,000 shares.

     Reserved for Future Issuance

     As of December 31, 1999, the Company had reserved the following shares of
authorized but unissued common stock for future issuance:

<TABLE>
<S>                                                           <C>
Preferred stock conversion..................................  13,972,163
Stock option plan...........................................  13,773,562
Common stock warrants.......................................   1,462,500
                                                              ----------
                                                              29,208,225
                                                              ==========
</TABLE>

     Fair Value Disclosure

     The weighted average exercise prices and fair market value of stock options
granted using the minimum value option valuation model were as follows:

<TABLE>
<CAPTION>
                                         1997                 1998                 1999
                                   -----------------    -----------------    -----------------
                                   FAIR     EXERCISE    FAIR     EXERCISE    FAIR     EXERCISE
                                   VALUE     PRICE      VALUE     PRICE      VALUE     PRICE
                                   -----    --------    -----    --------    -----    --------
<S>                                <C>      <C>         <C>      <C>         <C>      <C>
Exercise price equals market
  value of stock at date of
  grant..........................  $0.29     $1.14      $0.36     $1.36      $0.74     $3.22
Exercise price exceeds market
  value of stock at date of
  grant..........................  $0.21     $1.27         --        --         --        --
Exercise price was less than
  market value of stock at date
  of grant.......................  $0.99     $0.22      $  --     $  --      $1.10     $2.36
</TABLE>

     Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS No. 123. Had compensation expense for the years ended
December 31, 1997, 1998 and 1999 been determined based on the fair value at the
grant dates as prescribed by SFAS No. 123, the Company's net income (loss) and
net income (loss) per share would have increased or decreased to the pro forma
amounts indicated below (amounts in thousands, except for net income (loss) per
share).
                                      F-18
<PAGE>   84
               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                            ----------------------------
                                                            1997      1998        1999
                                                            ----    --------    --------
<S>                                                         <C>     <C>         <C>
Net income (loss), as reported............................  $506    $(11,243)   $(25,865)
Pro forma net income (loss)...............................  $ 95    $(11,508)   $(27,151)
Pro forma net income (loss) available to common
  shareholders............................................  $ 95    $(12,194)   $(29,561)
Pro forma basic and diluted net (income) loss per share...  $ --    $  (0.28)   $  (0.51)
</TABLE>

     The Company estimated the fair value of options granted in the years ended
December 31, 1997, 1998 and 1999 using the minimum value method, which utilizes
a near-zero volatility factor. The following weighted average assumptions were
used:

<TABLE>
<CAPTION>
                                                                 YEARS ENDED
                                                                 DECEMBER 31,
                                                             --------------------
                                                             1997    1998    1999
                                                             ----    ----    ----
<S>                                                          <C>     <C>     <C>
Expected life (in years)...................................    5       5       5
Risk-free interest rate....................................  6.0%    6.0%    5.3%
Dividend yield.............................................    0%      0%      0%
</TABLE>

     The determination of fair value of options granted after such time as the
Company becomes a public entity would include an expected volatility factor, in
addition to the factors described above. As a result, the effects on pro forma
disclosures of applying SFAS No. 123 may not be representative of the effects on
pro forma disclosures in future years.

     Alliance Warrant

     On November 15, 1999, the Company issued a warrant to a strategic alliance
partner (the "1999 Alliance Warrant") to purchase 1,200,000 shares of common
stock at $5.33 per share. The 1999 Alliance Warrant vests contingently upon the
achievement of various milestones, which include the creation of e*Xchange
market offerings and new customer introductions. The 1999 Alliance Warrant
expires on November 15, 2003, and as of December 31, 1999, was vested as to
409,500 shares. The 1999 Alliance Warrant contains a significant economic
disincentive for non-performance, and accordingly, the fair value of the 1999
Alliance Warrant was measured at the date of grant in accordance with Emerging
Issues Task Force No. 96-18. The 1999 Alliance Warrant was recorded at its fair
value of $3,256,000, which was determined using the Black-Scholes pricing model,
assuming a risk free rate of 5.3%, a volatility factor of 0.60 and an estimated
fair value at the time of grant of $5.33 per common share. Amortization for the
1999 Alliance Warrant was approximately $814,000 for the year ended December 31,
1999.

     Other Warrant

     In October 1999, the Company issued a warrant to a lending institution (the
"Lender Warrant") to purchase 262,500 shares of common stock at $1.89 per share.
The Lender Warrant vested immediately on the date of the grant and expires in
October 2004. The Lender Warrant was recorded at its fair value of $688,000,
which was determined using the Black-Scholes pricing model, assuming a risk free
interest rate of 5.3%, a volatility factor of 0.60 and an estimated fair value
at the time of grant of $4.00 per common share. Amortization of the Lender
Warrant is being recorded ratably, over the term of the associated debt of
fifteen months as a charge to interest expense. Amortization expense was
approximately $92,000 for the year ended December 31, 1999.

                                      F-19
<PAGE>   85
               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Deferred Stock-based Compensation

     When the exercise price of an employee stock option is less than the
estimated fair value of the underlying stock on the date of grant, deferred
compensation is recognized and amortized to expense in accordance with the
aggregation methodology prescribed by the Financial Accounting Standards Board
Interpretation No. 28 over the vesting period of the individual option grants
which is generally four years.

     During the year ended December 31, 1999, in connection with the grant of
certain stock options, the Company recorded deferred stock compensation of
approximately $4,645,000, representing the difference between the exercise price
of the option and the estimated fair value of the Company's common stock on the
date of grant. Amortization of deferred stock compensation was approximately
$1,708,000 for the year ended December 31, 1999.

NOTE 9. 401(K) PLAN

     The Company has a 401(K) plan covering substantially all of its eligible
employees. Under this plan, employees may defer up to 15% of their pre-tax
salary, subject to statutory limits. The Company contributes an amount equal to
50% of each participant's elective contribution, up to 4% of compensation. On
January 1, 2000, the Company modified the Plan to provide for company matching
contributions equal to 50% of each participant's elective contribution, up to 8%
of compensation. The Company's matching contributions to the plan were $53,000,
$168,000 and $257,000 during the years ended December 1997, 1998 and 1999,
respectively.

NOTE 10. SUBSEQUENT EVENTS

     In February 2000, the Company's board of directors approved, subject to
shareholder approval, the increase in authorized shares of common stock to
200,000,000 shares and the creation of newly undesignated preferred stock
totaling 10,000,000 shares. In addition, the Company's board of directors
approval of three-for-two stock split, subject to shareholder approval, to be
effective upon the filing of the Company's restated articles of incorporation.
All references to common share and per common share data in the accompanying
financial statements have been retroactively restated to reflect the effects of
this stock split.

     Warrant Grants

     In January 2000, the Company issued a warrant (the "January 2000 Alliance
Warrant") to a second strategic alliance partner to purchase up to 1,200,000
shares of common stock at $6.67 per share. The January 2000 Alliance Warrant
vests contingently upon the achievement of certain milestones, primarily the
generation of license revenue for the Company, and expires on July 31, 2002. In
March 2000, the Company issued a warrant (the "March 2000 Alliance Warrant") to
a third strategic alliance partner to purchase up to 1,200,000 shares of common
stock at the greater of a $14.00 price per share or the initial public offering
price per share. The March 2000 Alliance Warrant vests contingently upon the
achievement of certain milestones, primarily the creation of e*Gate market
offerings and the generation of license revenue for the Company, and expires on
September 22, 2002. Both the January 2000 Alliance Warrant and the March 2000
Alliance Warrant (the "2000 Alliance Warrants") contain a significant economic
disincentive for non-performance, and, accordingly, the fair value of the 2000
Alliance Warrants will be measured at the date of grant in accordance with
Emerging Issues Task Force No. 96-18. The fair value of the January 2000
Alliance Warrant will be determined using the Black-Scholes pricing model,
assuming a risk free interest rate of 5.3%, a volatility factor of 0.60 and an
estimated fair value at the time of grant of $9.60 per common share. The fair
value of the March 2000

                                      F-20
<PAGE>   86
               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


]Alliance Warrant will be determined using the Black-Scholes pricing model,
assuming a risk free interest rate of 5.3%, a volatility factor of 0.60 and an
estimated fair value at the time of grant of the greater of $14.00 or the
initial public offering price per common share.



     Employee Stock Purchase Plan



     In February 2000, the Board of Directors approved the Company's 2000
Employee Stock Purchase Plan (the "ESPP"). The ESPP will become effective upon
the completion of the Offering. A total of 2,250,000 shares of common stock are
initially available for issuance under the ESPP. The number of shares of common
stock available for issuance under the ESPP will be increased on the first day
of each calendar year during the term of the ESPP to 2,250,000 shares of common
stock.



     The ESPP, which is intended to qualify under Section 423 of the IRS Code,
will be implemented by a series of overlapping offering periods of 24 months'
duration, with new offering periods, other than the first offering period,
commencing on or about May 16 and November 16 of each year. Each offering period
will consist of four consecutive purchase periods of approximately six months'
duration, and at the end of each offering period, an automatic purchase will be
made for participants. The initial offering period is expected to commence on
the date of the offering and end on May 15, 2002; the initial purchase period is
expected to begin on the date of the offering and end on November 15, 2002.
Participants generally may not purchase more than 1,500 shares in any calendar
year or stock having a value measured at the beginning of the offering period
greater than $25,000 in any calendar year.



     The purchase price per share will be 85% of the lower of (1) the fair
market value of our common stock on the purchase date or (2) the fair market
value of a share of our common stock on the last trading day before the offering
date, or, in the case of the first offering period under the plan, the price at
which one share of our common stock is offered to the public in our initial
public offering.



     Initial Public Offering and Unaudited Pro Forma Shareholders' Equity
(Deficit)



     In February 2000, the Board of Directors authorized the filing of a
Registration Statement with the Securities and Exchange Commission which would
permit the Company to sell shares of the Company's common stock in connection
with a proposed initial public offering. If the offering is consummated under
the terms currently anticipated, all of the outstanding shares of the Company's
redeemable convertible preferred stock will automatically convert into shares of
common stock upon closing of the proposed offering. The conversion of the
redeemable convertible preferred stock has been reflected in the unaudited pro
forma shareholders' equity (deficit) on the accompanying consolidated balance
sheet.



     Concurrent Offering



     Concurrent with its initial public offering, the Company plans to sell an
additional 1,200,000 shares of common stock to a purchaser in a private
transaction at a price per share equal to the initial public offering price,
subject to reduction if the aggregate purchase price for the shares would exceed
$24.0 million. The sale of these shares to the purchaser is conditioned upon the
termination of the waiting period under the Hart Scott Rodino Antitrust
Improvements Act of 1976, also known as the HSR clearance. To the extent this
clearance is not obtained by the closing of this offering, the purchaser would
purchase $14.9 million of shares, or 876,470 shares at an assumed initial public
offering price of $17.00 per share, concurrently with the closing of this
offering and would purchase the remaining shares upon the receipt of the HSR
clearance.


                                      F-21
<PAGE>   87

                                   [STC Logo]
<PAGE>   88

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

     The following table sets forth the costs and expenses, other than the
underwriting discounts, payable by the Registrant in connection with the sale of
the securities being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq/NMS listing fee.

<TABLE>
<S>                                                           <C>
SEC Registration Fee........................................  $   33,336
NASD Filing Fee.............................................      10,500
Nasdaq National Market Listing Fee..........................      95,000
Printing Costs..............................................     200,000
Legal Fees and Expenses.....................................     600,000
Accounting Fees and Expenses................................     350,000
Blue Sky Fees and Expenses..................................      15,000
Transfer Agent and Registrar Fees...........................      10,000
Miscellaneous...............................................      86,164
                                                              ----------
          Total.............................................  $1,400,000
                                                              ==========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

     Section 317 of the General Corporation Law of the State of California
authorizes a corporation to grant indemnity to directors and officers in terms
sufficiently broad to permit such indemnification under certain circumstances
for liabilities (including reimbursement for expenses incurred) arising under
the Securities Act of 1933. Our Restated Articles of Incorporation and Bylaws
provide for indemnification of our directors, officers, employees and other
agents to the maximum extent permitted by California law. In addition, we have
entered into Indemnification Agreements with our officers and directors. The
Underwriting Agreement also provides for cross-indemnification among STC and the
Underwriters with respect to certain matters, including matters arising under
the Securities Act.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

     Since February 1997, we have sold and issued the following securities:

          1. In May, June and September 1998, we issued an aggregate of
     2,864,583 shares of Series A preferred stock to 27 investors for an
     aggregate cash consideration of $11.0 million. Among the investors were
     Raymond J. Lane, funds affiliated with InSight Capital Partners and Norwest
     Venture Partners VI, L.P. Mr. Lane is a director of the Registrant. Jerry
     F. Murdock, a director of the Registrant, is a partner in InSight Capital
     Partners. George J. Still, a director of the Registrant, is a partner in
     Norwest Venture Partners.

          2. In February 1999, we issued an aggregate of 2,703,675 shares of
     common stock to 12 investors for an aggregate cash consideration of $4.0
     million. Among the investors were Salah Hassanein, Todd-AO Corporation and
     Storie Partners, L.P. Mr. Hassanein, a director of the Registrant, is
     affiliated with Todd-AO Corporation. Steven A. Ledger, a director of the
     Registrant, is a partner in Storie Partners, L.P.

          3. In March 1999, we issued an aggregate of 2,588,215 shares of Series
     B preferred stock to 28 investors for an aggregate cash consideration of
     $11.0 million. Among the investors were Raymond J. Lane, funds affiliated
     with InSight Capital Partners and Norwest Venture Partners VI, L.P.

          4. In October 1999, we issued a warrant to purchase 262,500 shares of
     our common stock with an exercise price of $1.89 per share to a third party
     in connection with a loan facility.

                                      II-1
<PAGE>   89

          5. In November 1999, we issued a warrant to purchase 1,200,000 shares
     of our common stock with an exercise price of $5.33 per share to Andersen
     Consulting.

          6. In January 2000, we issued a warrant to purchase 1,200,000 shares
     of our common stock, with an exercise price of $6.67 per share to EDS.

          7. From February 1997 to February 2000, we issued an aggregate of
     16,919,931 shares of common stock to employees, non-employee directors and
     consultants pursuant to our 1997 Stock Plan and 1998 Stock Plan with an
     aggregate exercise price of $32,417,728.

          8. In March 2000, we issued a warrant to purchase 1,200,000 shares of
     our common stock to CSC, with an exercise price equal to the greater of
     $14.00 or the initial public offering price per share.

     The issuances of the securities in paragraphs 1, 2, 3, 4, 5, 6 and 8 above
were deemed to be exempt from registration under the Securities Act in reliance
upon Section 4(2) or Regulation D as transactions by an issuer not involving any
public offering. In addition, certain issuances described in paragraph 7 above
were deemed exempt from registration under the Securities Act in reliance upon
Rule 701 promulgated under the Securities Act. The recipients of securities in
each of the above transactions represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and warrants issued in such transactions. All recipients either
received adequate information about STC or had adequate access, through their
relationships with STC, to information about us.

ITEM 16. EXHIBITS.


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
- -------                           -----------
<C>       <S>
 1.1+     Form of Underwriting Agreement.
 3.1+     Restated Articles of Incorporation of the Registrant.
 3.2+     Restated Articles of Incorporation to be filed following the
          closing of the offering.
 3.3+     Bylaws of the Registrant.
 4.1+     Specimen common stock certificate.
 5.1+     Opinion of Wilson Sonsini Goodrich & Rosati, Professional
          Corporation.
10.1+     Form of Indemnification Agreement between the Registrant and
          each of its directors and officers.
10.2+     1997 Stock Plan.
10.3+     1998 Stock Plan, as amended.
10.4+     2000 Employee Stock Purchase Plan and form of agreements
          thereunder.
10.5+     Warrant dated November 16, 1999 issued to Andersen
          Consulting.
10.6+     Warrant dated January 31, 2000 issued to EDS.
10.7+     Loan and Security Agreement, dated October 29, 1999, between
          the Registrant and Greyrock Capital.
10.8+     Registration Rights Agreement, dated May 8, 1998, as
          amended.
10.9+     Lease Agreement dated June 6, 1997 between the Registrant
          and Boone/Fetter/Occidental I for premises in Monrovia,
          California.
10.10+    Lease Agreement dated June 10, 1999 between the Registrant
          and Franklin Select Realty Trust for premises in Redwood
          Shores, California.
10.11+    Lease Agreement dated December 30, 1991 between the
          Registrant and the Demetriades Family Trust (dated December
          20, 1983) for premises in Arcadia, California.
10.12+    Warrant dated March 23, 2000 issued to Computer Sciences
          Corporation.
10.13+    Warrant purchase agreement dated November 16, 1999 between
          the Registrant and Andersen Consulting.
10.14+    Warrant purchase agreement dated January 31, 2000 between
          the Registrant and EDS.
10.15+    Warrant purchase agreement dated March 23, 2000 between the
          Registrant and Computer Sciences Corporation.
</TABLE>


                                      II-2
<PAGE>   90


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
- -------                           -----------
<C>       <S>
21.1+     List of subsidiaries of the Registrant.
23.1      Consent of Ernst & Young, LLP, Independent Auditors.
23.2+     Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included
          in Exhibit 5.1)
24.1+     Powers of Attorney.
27.1+     Financial Data Schedule.
</TABLE>


- -------------------------
+ Previously filed.

     (b) Financial Statement Schedules.

     Report of Independent Auditors, Ernst & Young LLP

     Schedule II

ITEM 17. UNDERTAKINGS.

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

     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

     The undersigned registrant hereby undertakes that:

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

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

                                      II-3
<PAGE>   91

                                   SIGNATURES


     Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Monrovia,
State of California on April 3, 2000.


                                      SOFTWARE TECHNOLOGIES CORPORATION

                                      By:     /s/ JAMES T. DEMETRIADES*
                                         ---------------------------------------
                                         Name: James T. Demetriades
                                         Title:  President and Chief Executive
                                          Officer


     Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on April 3, 2000:


<TABLE>
<CAPTION>
                       SIGNATURE                                            TITLE
                       ---------                                            -----
<S>                                                       <C>
/s/ JAMES T. DEMETRIADES*                                 Chairman of the Board, President and Chief
- --------------------------------------------------------  Executive Officer (Principal Executive
James T. Demetriades                                      Officer)

/s/ BARRY J. PLAGA                                        Chief Financial Officer (Principal
- --------------------------------------------------------  Financial and Accounting Officer)
Barry J. Plaga

/s/ STERGE T. DEMETRIADES*                                Director
- --------------------------------------------------------
Sterge T. Demetriades

/s/ SALAH M. HASSANEIN*                                   Director
- --------------------------------------------------------
Salah M. Hassanein

/s/ RAYMOND J. LANE*                                      Director
- --------------------------------------------------------
Raymond J. Lane

/s/ STEVEN A. LEDGER*                                     Director
- --------------------------------------------------------
Steven A. Ledger

/s/ JERRY F. MURDOCK*                                     Director
- --------------------------------------------------------
Jerry F. Murdock

/s/ GEORGE J. STILL*                                      Director
- --------------------------------------------------------
George J. Still

/s/ JACK L. WILSON*                                       Director
- --------------------------------------------------------
Jack L. Wilson

/s/ RICHARD L. DENEY*                                     Director
- --------------------------------------------------------
Richard L. deNey

* /s/ BARRY J. PLAGA                                      Attorney-in-fact
 -------------------------------------------------------
 Barry J. Plaga
</TABLE>

                                      II-4
<PAGE>   92

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

     We have audited the consolidated financial statements of Software
Technologies Corporation and subsidiaries as of December 31, 1998 and 1999, and
for each of the three years in the period ended December 31, 1999, and have
issued our report thereon dated February 11, 2000 (except for Note 10, as to
which the date is March 23, 2000) (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedule listed in
Item 16(b) of this Registration Statement. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.

     In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

                                          /s/ Ernst & Young LLP

Woodland Hills, California
February 11, 2000

                                       S-1
<PAGE>   93

                                  SCHEDULE II

               SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                          BALANCE AT                                   BALANCE AT
                                         BEGINNING OF                   DEDUCTIONS       END OF
             DESCRIPTION                     YEAR          ADDITIONS   (DESCRIBE)(A)      YEAR
- -------------------------------------    ------------      ---------   -------------   -----------
<S>                                    <C>                 <C>         <C>             <C>
Year Ended December 31, 1997
  Allowance for doubtful accounts....        $328            $221          $200          $  349
Year Ended December 31, 1998
  Allowance for doubtful accounts....        $349            $416          $374          $  391
Year Ended December 31, 1999
  Allowance for doubtful accounts....        $391            $685          $ 21          $1,055
</TABLE>

(A) Actual write-offs of uncollectible accounts receivable.

                                       S-2
<PAGE>   94

                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
                                                                         SEQUENTIALLY
EXHIBIT                                                                    NUMBERED
NUMBER                       DESCRIPTION OF DOCUMENT                         PAGE
- -------                      -----------------------                     ------------
<C>        <S>                                                           <C>
 1.1+      Form of Underwriting Agreement.
 3.1+      Restated Articles of Incorporation of the Registrant.
 3.2+      Restated Articles of Incorporation to be filed following the
           closing of the offering.
 3.3+      Bylaws of the Registrant.
 4.1+      Specimen common stock certificate.
 5.1+      Opinion of Wilson Sonsini Goodrich & Rosati, Professional
           Corporation.
10.1+      Form of Indemnification Agreement between the Registrant and
           each of its directors and officers.
10.2+      1997 Stock Plan.
10.3+      1998 Stock Plan, as amended.
10.4+      2000 Employee Stock Purchase Plan and form of agreements
           thereunder.
10.5+      Warrant dated November 16, 1999 issued to Andersen
           Consulting.
10.6+      Warrant dated January 31, 2000 issued to EDS.
10.7+      Loan and Security Agreement, dated October 29, 1999, between
           the Registrant and Greyrock Capital.
10.8+      Registration Rights Agreement, dated May 8, 1998, as
           amended.
10.9+      Lease Agreement dated June 6, 1997 between the Registrant
           and Boone/Fetter/Occidental I for premises in Monrovia,
           California.
10.10+     Lease Agreement dated June 10, 1999 between the Registrant
           and Franklin Select Realty Trust for premises in Redwood
           Shores, California.
10.11+     Lease Agreement dated December 30, 1991 between the
           Registrant and the Demetriades Family Trust (dated December
           20, 1983) for premises in Arcadia, California.
10.12+     Warrant dated March 23, 2000 issued to Computer Sciences
           Corporation.
10.13+     Warrant purchase agreement dated November 16, 1999 between
           the Registrant and Andersen Consulting.
10.14+     Warrant purchase agreement dated January 31, 2000 between
           the Registrant and EDS.
10.15+     Warrant purchase agreement dated March 23, 2000 between the
           Registrant and Computer Sciences Corporation.
21.1+      List of subsidiaries of the Registrant.
23.1       Consent of Ernst & Young, LLP, Independent Auditors.
23.2+      Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included
           in Exhibit 5.1)
24.1+      Powers of Attorney.
27.1+      Financial Data Schedule.
</TABLE>


- -------------------------
+ Previously filed.

<PAGE>   1

                                                                    EXHIBIT 23.1

               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 11, 2000 (except for Note 10, as to which the
date is March 23, 2000) in Amendment No. 2 to the Registration Statement (No.
333-30648) and related Prospectus of Software Technologies Corporation.


                                          /s/ Ernst & Young LLP

Woodland Hills, California

April 3, 2000



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