<PAGE>   1
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-Q


[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

               FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1999

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934


                        COMMISSION FILE NUMBER 000-25491

                             SILKNET SOFTWARE, INC.
             (Exact Name of registrant as specified in its charter)


                   DELAWARE                               02-0478949
        (State or other jurisdiction of               (I.R.S. Employer
          incorporation or organization)           Identification Number)

   50 PHILLIPPE COTE STREET, MANCHESTER, NH                03101
   (Address of principal executive offices)              (Zip Code)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (603) 625-0070


    Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]   No [ ]

    The number of shares outstanding of the Registrant's $.01 par value Common
Stock as of November 5, 1999 was 16,415,667.




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<PAGE>   2


                             SILKNET SOFTWARE, INC.

                                    FORM 10-Q

                        QUARTER ENDED SEPTEMBER 30, 1999

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>

                                                                                                            PAGE NO.
                                                                                                            --------
<S>          <C>                                                                                             <C>
PART I       FINANCIAL INFORMATION

Item 1.      Financial Statements
                Consolidated Balance Sheets - September 30, 1999 and June 30, 1999..........................   3
                Consolidated Statements of Operations - Three months ended September 30, 1999 and 1998......   4
                Consolidated Statements of Cash Flows - Three months ended September 30, 1999 and 1998......   5
                Notes to Consolidated Financial Statements..................................................   6

Item 2.      Management's Discussion and Analysis of Financial Condition and Results of Operations..........   8

Item 3.      Quantitative and Qualitative Disclosures about Market Risk.....................................  17


PART II      OTHER  INFORMATION

Item 1.      Legal Proceedings..............................................................................  18

Item 2.      Changes in Securities and Use of Proceeds......................................................  18

Item 3.      Defaults upon Senior Securities................................................................  18

Item 4.      Submission of Matters to a Vote of Security Holders............................................  18

Item 5.      Other Information..............................................................................  18

Item 6.      Exhibits and Reports on Form 8-K...............................................................  19

SIGNATURES..................................................................................................  19
</TABLE>







                                       2
<PAGE>   3




                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                             SILKNET SOFTWARE, INC.

                           CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                                                                      SEPTEMBER 30,       JUNE 30,
                                                                                          1999              1999
                                                                                      -------------       --------
                                                                                       (unaudited)
<S>                                                                                     <C>               <C>
ASSETS
Current assets:
  Cash and cash equivalents ..........................................................  $ 51,794          $ 57,352
  Accounts receivable, net of allowance for doubtful accounts of $600 and $275 .......     5,688             3,985
  Prepaid expenses and other current assets ..........................................       889               689
                                                                                        --------          --------
          Total current assets .......................................................    58,371            62,026
                                                                                        --------          --------
Property and equipment, net ..........................................................     3,381             2,468
Other assets .........................................................................       250               252
                                                                                        --------          --------
          Total assets ...............................................................  $ 62,002          $ 64,746
                                                                                        ========          ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable ...................................................................  $    853          $  1,176
  Accrued expenses ...................................................................     4,929             4,751
  Deferred revenue ...................................................................     2,525             2,187
Note payable to bank, current portion ................................................       133               133
                                                                                        --------          --------
          Total current liabilities ..................................................     8,440             8,247
                                                                                        --------          --------
  Note payable to bank ...............................................................        56                89
Commitments and contingencies
Stockholders' equity:
  Common stock, $.01 par value;
     Authorized: 50,000 shares
     Issued and outstanding: 15,584 and 15,547 shares at September 30, 1999
      and June 30, 1999, respectively ................................................       156               155
  Additional paid-in capital .........................................................    75,566            75,619
  Deferred compensation ..............................................................      (644)             (711)
  Accumulated other comprehensive income (loss) ......................................       (29)                3
  Accumulated deficit ................................................................   (21,543)          (18,656)
                                                                                        --------          --------
       Total stockholders' equity ....................................................    53,506            56,410
                                                                                        --------          --------
          Total liabilities and stockholders' equity .................................  $ 62,002          $ 64,746
                                                                                        ========          ========
</TABLE>




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



                                       3
<PAGE>   4


                             SILKNET SOFTWARE, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>

                                                                      FOR THE THREE MONTHS ENDED
                                                                             SEPTEMBER 30,
                                                                        1999                1998
                                                                      --------            --------
                                                                              (unaudited)
<S>                                                                  <C>                   <C>
Revenue:
  License .........................................................  $  4,217              $ 1,648
  Services ........................................................     1,812                  621
                                                                     --------              -------
          Total revenue ...........................................     6,029                2,269
Cost of revenue:
  License .........................................................        70                   92
  Services ........................................................     1,495                  538
                                                                     --------              -------
          Total cost of revenue ...................................     1,565                  630
                                                                     --------              -------
Gross margin ......................................................     4,464                1,639
Operating expenses:
  Sales and marketing .............................................     3,834                1,892
  Research and development ........................................     2,641                1,005
  General and administrative ......................................     1,525                  630
                                                                     --------              -------
          Total operating expenses ................................     8,000                3,527
                                                                     --------              -------
Operating loss ....................................................    (3,536)              (1,888)
Interest income, net ..............................................       649                   91
                                                                     --------              -------
Net loss ..........................................................    (2,887)              (1,797)
Accrued dividends for preferred stockholders ......................        --                  474
                                                                     --------              -------
Net loss attributable to common stockholders ......................  $ (2,887)             $(2,271)
                                                                     ========              =======

Basic and diluted net loss per share ..............................  $  (0.19)             $ (0.86)
Shares used in computing basic and diluted net loss per share .....    15,584                2,644
</TABLE>





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




                                       4
<PAGE>   5



                             SILKNET SOFTWARE, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                    FOR THE THREE MONTHS ENDED
                                                                                          SEPTEMBER 30,
                                                                                       1999             1998
                                                                                    ----------        --------
                                                                                           (unaudited)
<S>                                                                                 <C>               <C>
Cash flows from operating activities:
  Net loss .....................................................................    $ (2,887)         $(1,797)
  Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization .............................................         360              154
     Provision for doubtful accounts ...........................................         325               --
     Amortization of deferred compensation .....................................          67               20
     Changes in operating assets and liabilities:
       Accounts receivable .....................................................      (2,028)            (199)
       Prepaid expenses and other current assets ...............................        (200)            (134)
       Other assets ............................................................           2               --
       Accounts payable ........................................................        (323)             615
       Accrued expenses ........................................................         178             (271)
       Deferred revenue ........................................................         338              327
                                                                                    --------          -------
          Net cash used in operating activities ................................      (4,168)          (1,285)
                                                                                    --------          -------

Cash flows from investing activities:
  Purchase of property and equipment ...........................................      (1,265)            (313)
                                                                                    --------          -------
          Net cash used in investing activities ................................      (1,265)            (313)
                                                                                    --------          -------

Cash flows from financing activities:
  Proceeds from exercise of common stock options ...............................          57               35
  Costs associated with the issuance of common stock ...........................        (110)              --
  Payments on note payable to bank .............................................         (39)             (72)
                                                                                    --------          -------
          Net cash used in financing activities ................................         (86)             (37)
                                                                                    --------          -------
Net decrease in cash and cash equivalents ......................................      (5,519)          (1,635)
Effect of exchange rate changes on cash and cash equivalents ...................         (39)              --
                                                                                    --------          -------
Cash and cash equivalents at beginning of year .................................      57,352            9,045
Cash and cash equivalents at end of year .......................................    $ 51,794          $ 7,410
                                                                                    ========          =======
</TABLE>




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




                                       5
<PAGE>   6

                             SILKNET SOFTWARE, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


A.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     NATURE OF BUSINESS - Silknet Software, Inc. ("Silknet") provides software
     that allows companies to offer their customers personalized marketing,
     sales, electronic commerce and customer support services through a single
     Web site interface tailored by the company to meet its customer
     requirements.

     BASIS OF PRESENTATION - The accompanying interim consolidated financial
     statements are unaudited, but include all adjustments (consisting only of
     normal, recurring adjustments) which Silknet's management believes to be
     necessary for the fair presentation of the financial position, results of
     operations, and changes in cash flows for the periods presented. 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 at the date of
     the financial statements and the reported amounts of revenues and expenses
     during the reported periods. Despite management's best effort to establish
     good faith estimates and assumptions, and to manage the achievement of the
     same, actual results may differ.

     INTERIM FINANCIAL INFORMATION - The accompanying interim financial
     statements should be read in conjunction with the financial statements and
     related notes included in Silknet's Annual Report to Stockholders (Form
     10-K) for the year ended June 30, 1999. Certain information and footnote
     disclosures normally included in annual financial statements prepared in
     accordance with generally accepted accounting principles have been
     condensed or omitted pursuant to the Securities and Exchange Commission
     rules and regulations. The consolidated financial statements include the
     accounts of Silknet and its wholly-owned subsidiaries. All intercompany
     balances and transactions have been eliminated in consolidation. Interim
     results of operations for the three month period ended September 30, 1999
     are not necessarily indicative of operating results or performance levels
     that can be expected for the full fiscal year.

     NET LOSS PER SHARE - Net loss per share is computed under Statement of
     Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
     Basic net loss per share is computed using the weighted average number of
     shares of common stock outstanding. Net loss used in the calculation is
     increased by the accrued dividends for the preferred stock outstanding in
     each year. Diluted loss per share does not differ from basic loss per share
     since potential common shares from conversion of preferred stock, stock
     options and warrants are anti-dilutive for all periods presented and are
     therefore excluded from the calculation. During the three months ended
     September 30, 1999 and 1998, options to purchase 2,578,805 and 2,068,128
     shares of common stock, respectively, preferred stock convertible into 0
     and 7,953,741 shares of common stock, respectively, and warrants to
     purchase 750,000 and 750,000 shares of common stock, respectively, were not
     included in the computation of diluted earnings per share since their
     inclusion would be anti-dilutive.

     COMPREHENSIVE LOSS - The following table presents the calculation of
     comprehensive loss and its components for the three months ended September
     30, 1999 and 1998 (in thousands):

<TABLE>
<CAPTION>
                                                          SEPTEMBER 30,  SEPTEMBER 30,
                                                              1999           1998
                                                              ----           ----

<S>                                                         <C>            <C>
     Net loss.............................................  $(2,887)       $(1,797)
     Foreign currency translation adjustments.............      (32)            --
                                                            -------        -------
          Comprehensive loss..............................  $(2,919)       $(1,797)
                                                            =======        =======
</TABLE>

    RECENT ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
    Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
    Instruments and Hedging Activities." The new standard establishes accounting
    and reporting standards for derivative instruments, including certain
    derivative instruments embedded in other contracts, and for hedging
    activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all
    fiscal quarters of fiscal years beginning after June 15, 2000. Management
    determined that SFAS No. 133 had no significant impact on its financial
    position or results of operations through September 30, 1999.




                                       6
<PAGE>   7


     In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SoP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SoP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. SoP 98-1 is effective for
Silknet beginning July 1, 1999. Management determined that SoP 98-1 had no
significant impact on its financial position or results of operations through
September 30, 1999.

     In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of
Start-Up Activities." Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SoP 98-5, the cost of start-up activities should be expensed as incurred.
SoP 98-5 is effective for Silknet beginning July 1, 1999. Management determined
that SoP 98-5 had no significant impact on its financial position or results of
operations through September 30, 1999.


B.        SUBSEQUENT EVENTS:

     ACQUISITION - On October 5, 1999, Silknet completed its acquisition of
InSite Marketing Technology, Inc. ("InSite"). InSite develops, markets and
supports customer-centric, Web-based marketing and sales software, which
identifies and integrates the buying style of the customer and the selling style
of the company to assist the customer through the buying process. Silknet
intends to utilize InSite's personalization technology with Silknet's e-business
solutions to offer an integrated line of Web-based e-commerce, customer service
and sales and marketing software that will enhance e-business initiatives by
focusing on the customer experience. In connection with the transaction, an
aggregate of 590,708 shares of Silknet Common Stock will be issued or reserved
in exchange for all of the shares of InSite common stock issued and outstanding
and all options to purchase InSite common stock at the effective time
of the merger. This merger was accounted for as a pooling of interests.

     The following table presents results for the combined entities (in
thousands, except per share amounts) for the first thirty-one days of combined
operations (October 6, 1999 to November 5, 1999). Intercompany transactions have
been eliminated.

                                                    THIRTY-ONE DAYS ENDED
                                                      NOVEMBER 5, 1999
                                                    ---------------------
                                                         (unaudited)

      Revenue ....................................          $2,992
      Net loss ...................................          $ (595)
      Earnings per share .........................          $(0.04)





                                       7
<PAGE>   8




ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

Except for the historical information contained or incorporated by reference
herein, this following discussion contains forward-looking statements that
involve numerous risks and uncertainties, certain of which are beyond Silknet's
control. These statements relate to future events or our future financial
performance, and are identified by terminology such as "may," "will," "should,"
"expects," "scheduled," "plans," "intends," "anticipates," "believes,"
"estimates," "potential," or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Actual results
could differ materially. In evaluating these forward-looking statements you
should specifically consider a number of factors including, but not limited
to, those factors described in "Factors That May Affect Future Results" and
elsewhere in this Form 10-Q.

OVERVIEW

    Silknet provides software that allows companies to offer personalized
marketing, sales, electronic commerce and customer support services through a
single, company-tailored Web site interface. Silknet's products enable a company
to conduct business with its customers over the Web through the phone and via
e-mail. In January 1997, Silknet recorded its first license revenue upon
delivery of the trial version of its initial product, Silknet eService, to
customers. Silknet commercially released Silknet eService in July 1997, and
since that time has introduced Silknet eBusiness System, Silknet eCommerce,
Silknet eCommerce Extensions, and Silknet eBusiness Toolkit.


                              RESULTS OF OPERATIONS


THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

REVENUE

    Since the beginning of fiscal year 1997, Silknet's revenue has been derived
principally from licenses for software products and from professional services
including consulting, training, implementation, technical support and
maintenance. Revenue from sales of licenses to use Silknet's software products
is recognized upon delivery of products to customers, provided no significant
post-delivery obligations or uncertainties remain and collection of the related
receivable is probable. License or services revenue subject to a significant
acceptance clause is deferred until acceptance is received from the customer.
Revenue under arrangements where multiple products or services are sold together
under one contract is allocated to each element based on its relative fair
value, with these fair values being determined using the price charged when that
element is sold separately. Revenue for consulting and training services is
recognized as services are provided, and revenue for maintenance and post-
contract customer support services is recognized ratably over the term of the
service agreement.

    Silknet generates its license revenue through direct sales to its customers
and sales through its relationships with systems integrators and consulting
firms.

    Silknet's total revenue increased 166% to $6.0 million for the quarter ended
September 30, 1999 from $2.3 million for the quarter ended September 30, 1998.

    License Revenue

    License revenue increased 156% to $4.2 million for the quarter ended
September 30, 1999 from $1.6 million for the quarter ended September 30, 1998.
The increase was primarily due to an increase in the number of licenses sold,
combined with an increase in the average selling prices of software licenses
resulting from broader product offerings.

    Services Revenue

    Services revenue increased 192% to $1.8 million for the quarter ended
September 30, 1999 from $621,000 for the quarter ended September 30, 1998. Of
this increase, $770,000 was attributable to additional training and consulting
services sold to both new and existing customers. The remaining increase was
attributable to maintenance contracts sold to Silknet's new customers. The total
number of customers increased to 52 as of September 30, 1999 from 24 as of
September 30, 1998.




                                       8
<PAGE>   9


COST OF REVENUE

    Cost of license revenue consists primarily of royalties paid to third
parties under technology license arrangements and fees paid to third-party
vendors for referral fees. Cost of license revenue decreased to $70,000 for the
quarter ended September 30, 1999 from $92,000 for the quarter ended September
30, 1998. Of this decrease, $48,000 was attributable to a referral fee paid on a
license sold during the quarter ended September 30, 1998. The resulting
increase, net of this one transaction, was due to an increase in royalty
obligations to third parties whose products are incorporated into Silknet
products. Silknet anticipates that the cost of license revenue will increase in
absolute dollars. The improvement in software license fee gross margins to 98%
for the quarter ended September 30, 1999 from 94% for the quarter ended
September 30, 1998 was primarily attributable to higher sales volume. Cost of
license revenue as a percent of license revenue has varied in the past due to
the timing and volume of product sales and the nature of royalty agreements
during the period.

    Cost of services revenue consists primarily of employee-related costs and
third-party consultant fees incurred to provide services for consulting
projects, post-contract customer support and training. Cost of services revenue
increased 178% to $1.5 million for the quarter ended September 30, 1999 from
$538,000 for the quarter ended September 30, 1998. The dollar increase resulted
primarily from the hiring of additional employees and the use of contractors to
support increased customer demand for consulting and training services. The
number of consulting employees dedicated to providing implementation services
increased to 20 as of September 30, 1999 from 13 as of September 30, 1998 to
meet the needs of Silknet's customer base. The improvement in services gross
margins to 17% for the quarter ended September 30, 1999 from 13% for the quarter
ended September 30, 1998 was primarily attributable to the growth in consulting
and maintenance revenue from Silknet's increased installed customer base. The
total number of employees in the services organization increased to 31 as of
September 30, 1999 from 17 as of September 30, 1998.

    Overall gross margins are primarily affected by the mix of license revenue
and services revenue. Silknet historically has realized higher gross margins on
license revenue than on services revenue. If services revenue increases as a
percentage of total revenue, Silknet's overall gross margins may be adversely
affected.

OPERATING EXPENSES

    Sales and Marketing

    Sales and marketing expenses consist primarily of employee-related
costs, commissions, and costs associated with marketing programs, such as trade
shows, marketing campaigns, seminars, public relations and new product
launches. Sales and marketing expenses increased 103% to $3.8 million, or 64%
of total revenue, for the quarter ended September 30, 1999 from $1.9 million,
or 83% of total revenue, for the quarter ended September 30, 1998. The increase
in absolute dollars was primarily attributable to an increase in the number of
sales and marketing employees to 63 as of September 30, 1999 from 30 as of
September 30, 1998. To a lesser extent, the increase was related to an increase
in marketing programs, including trade shows and public relations related to
new product launch activities. Sales and marketing expenses are expected to
continue to increase in absolute dollars as Silknet continues to expand its
marketing programs and its sales force to support product launches and
international expansion.

    Research and Development

    Research and development expenses consist primarily of employee-related
costs and consulting fees associated with the development of Silknet's products.
Costs incurred for the research and development of Silknet's software products
are expensed as incurred until such time that technological feasibility is
established and capitalized thereafter. Research and development expenses
increased 163% to $2.6 million, or 44.0% of total revenue, for the quarter ended
September 30, 1999 from $1.0 million, or 44.0% of total revenue, for the quarter
ended September 30, 1998. The increase primarily resulted from salaries
associated with newly hired development personnel. The number of research and
development employees increased to 84 as of September 30, 1999 from 35 as of
September 30, 1998 to support the development of new products. Silknet
anticipates that research and development expenses will continue to increase in
absolute dollars.

    General and Administrative

    General and administrative expenses consist primarily of employee-related
costs for executive and financial personnel, as well as legal, accounting,
insurance and other professional services fees. General and administrative
expenses increased 142% to $1.5 million, or 25% of total revenue, for the
quarter ended September 30, 1999 from $630,000, or 28% of total revenue, for the
quarter ended September 30, 1998. Substantially all of the increase in absolute
dollars was due to salaries associated with newly hired personnel and related






                                       9
<PAGE>   10


costs required to manage Silknet's growth and facilities expansion. The number
of general and administrative employees increased to 24 as of September 30, 1999
from 13 as of September 30, 1998. In addition, $200,000 in merger and
acquisition costs were incurred during the quarter ended September 30, 1999
related to Silknet's acquisition of InSite. Silknet expects that its general and
administrative expenses will increase in absolute dollars as it continues to
expand its staffing to support expanded operations and facilities and incurs
expenses relating to its new responsibilities as a public company.

    Interest Income, net

    Interest income, net of interest expense, increased to $649,000, or 11% of
total revenue, for the quarter ended September 30, 1999 from $91,000, or 4% of
total revenue, for the quarter ended September 30, 1998. The increase was due to
interest income earned from the investment of net cash proceeds from Silknet's
initial public offering in May 1999.

    Silknet incurred aggregate net losses of $21.5 million from inception
through September 30, 1999. Silknet has recorded a valuation allowance for the
full amount of its net deferred tax assets as the future realization of the tax
benefit is not sufficiently assured.


                         LIQUIDITY AND CAPITAL RESOURCES

    In May 1999, Silknet sold 3,450,000 shares of its common stock through an
initial public offering. Net proceeds from the offering were approximately $46.8
million after deducting underwriting discounts and commissions and offering
expenses. Prior to its initial public offering, Silknet had funded operations
primarily through net cash proceeds from private placements of preferred stock
totaling $26.8 million. As of September 30, 1999, Silknet had cash and cash
equivalents totaling $51.8 million.

    Cash used in operating activities for the quarter ended September 30, 1999
was $4.2 million, primarily due to a net loss of $2.9 million and an increase in
accounts receivable. The increase in net accounts receivable to $5.7 million at
September 30, 1999 from $4.0 million at June 30,1999 resulted from increases in
license and service revenues, offset by cash collections and a $325,000 increase
in the allowance for doubtful accounts. Cash used for operating activities for
the quarter ended September 30, 1998 was $1.3 million, primarily due to a net
loss of $1.8 million and an increase in accounts receivable, partially offset by
increases in accounts payable and deferred revenue.

    Cash used in investing activities for the quarter ended September 30, 1999
and the quarter ended September 30, 1998 was $1.3 million and $300,000,
respectively. Investing activities for the periods consisted primarily of
purchases of equipment, including computer servers, workstations and networking
equipment, to support personnel growth and regional expansion.

    Cash used in financing activities for the quarter ended September 30, 1999
was $86,000, primarily due to payments on a note payable under an equipment loan
line, and disbursements related to the initial public offering in excess of
estimates recorded as of June 30, 1999, partially offset by proceeds from the
exercise of common stock options. Cash used in financing activities for the
quarter ended September 30, 1998 was $37,000, primarily due to payments on notes
payable under the equipment loan line.

    As of September 30, 1999 and September 30, 1998, Silknet's primary financial
commitments consisted of obligations outstanding under operating leases and
notes payable under an equipment loan line of $189,000 and $222,000,
respectively.

    In March 1999, Silknet entered into a new bank line of credit which allows
Silknet to borrow up to $3.0 million for working capital purposes and for the
issuance of letters of credit. The line of credit expires in March 2000. Amounts
available under the line of credit are a function of eligible accounts
receivable and bear interest at the bank's prime rate plus 0.5%. As of September
30, 1999, no borrowings were outstanding under this line, leaving $3.0 million
available for borrowing. The bank's prime rate at September 30, 1999 was 8.25%.

    Since its inception, Silknet has significantly increased its operating
expenses. Silknet anticipates that it will continue to experience significant
growth in its operating expenses for the foreseeable future and that its
operating expenses and capital expenditures will constitute a material use of
Silknet's cash resources. In addition, Silknet may utilize cash resources to
fund acquisitions or investments in businesses, technologies, products or
services that are complementary to Silknet's business. Silknet believes that the




                                       10
<PAGE>   11


net proceeds from its initial public offering, together with its existing
cash and cash equivalents, will be sufficient to meet its anticipated
cash requirements for working capital and capital expenditures for at least 12
months. Thereafter, if cash generated from operations is insufficient to
satisfy Silknet's liquidity requirements, Silknet may seek to sell additional
equity or debt securities, or obtain additional credit facilities. The issuance
of additional equity or convertible debt securities could result in additional
dilution to Silknet's stockholders.


                         YEAR 2000 READINESS DISCLOSURE

    Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with these Year 2000
requirements. The use of software and computer systems that are not Year 2000
ready could result in system failures or miscalculations causing disruptions of
operations including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.

    The purchasing patterns of customers or potential customers may be affected
by Year 2000 issues as companies expend significant resources to make their
current systems Year 2000 ready. These expenditures may result in reduced funds
available for purchases, which could have a material adverse effect on
Silknet's business, operating results and financial condition. Year 2000
complications may disrupt the operations, viability or commercial acceptance
of the Internet, which also could have a material adverse impact on Silknet's
business, operating results and financial condition.

    Silknet has conducted a review of its supported products, including the
third-party products embedded into Silknet's products, and believes that they
are substantially Year 2000 ready. Silknet expects that modifications with
respect to any remaining Year 2000 issues will be made by the end of calendar
year 1999. Nevertheless, there can be no assurances that the implementation of
modifications to any embedded products will not be delayed or that Silknet will
not experience unexpected Year 2000 problems with its products.

    There is no assurance that third-party software or computer hardware of
Silknet's customers which interface with Silknet's products and which may be
necessary in order to use Silknet's products are Year 2000 ready. Therefore,
there can be no assurance that implementations of Silknet's products on its
customers' systems are, or will be, Year 2000 ready.

    Silknet installed new internal software systems in July 1998, and it has
received written confirmations from software vendors that the software they
installed is Year 2000 ready. Based on the foregoing, Silknet currently has no
reason to believe that its internal software systems are not Year 2000 ready.
Silknet has obtained written certifications from suppliers of hardware systems
to the effect that the hardware they provide are Year 2000 ready. Failure of the
internal hardware or software systems to operate properly with regard to the
Year 2000 and thereafter could require Silknet to incur significant
unanticipated expenses to remedy any problems or replace affected vendors, and
could have a material adverse effect on Silknet's business, operating results
and financial condition.

    To date, Silknet has not incurred significant incremental costs in
order to comply with Year 2000 requirements for its products or internal
systems, and Silknet does not believe it will incur significant incremental
costs in the foreseeable future. Silknet is developing contingency plans for
unanticipated Year 2000 issues relating to its products. Silknet has identified
the mission critical functions for its internal systems and is in the process
of developing a contingency plan for unanticipated Year 2000 problems that
arise with respect to those functions, including the identification of
replacement products for third-party products that may fail. There can be no
assurance that Year 2000 issues will not be discovered in Silknet's products or
internal software systems and, if such issues are discovered, there can also be
no assurance that the costs of making such products and systems Year 2000 ready
will not have a material adverse effect on Silknet's business, operating
results and financial condition.

    In October 1999, Silknet acquired InSite Marketing Technology, Inc.
Silknet is in the process of assessing systems and products related to this
acquisition. There can be no assurance that Year 2000 issues will not be
discovered in InSite's products, including any third-party software included
therein, or internal software systems or in the third-party software or
computer hardware of customers which interface with InSite's products and which
may be necessary in order to use InSite's products. If such issues are
discovered, there can be no assurance that such products, software or hardware
may be made Year 2000 ready or that the costs of making such products and
systems Year 2000 ready will not have a material adverse effect on Silknet's
business, operating results and financial condition.


                                       11
<PAGE>   12





                     FACTORS THAT MAY AFFECT FUTURE RESULTS

    Silknet operates in a rapidly changing environment that involves a number of
risks, some of which are beyond its control. Certain of the above statements in
this report are forward-looking statements that involve risks and uncertainties.
The discussion below, and in Silknet's other reports filed with the Securities
and Exchange Commission, highlight some of the risks which may affect future
operating results.

OUR LIMITED OPERATING HISTORY MAY IMPEDE YOUR ABILITY TO VALUE OUR BUSINESS AND
ITS FUTURE PROSPECTS

    Your evaluation of our business will be more difficult because of our
limited operating history and could cause you to overpay for our common stock.
We commenced operations in March 1995 and we recorded our first license revenue
upon delivery of Silknet eService in a trial version to customers in January
1997. Accordingly, it is difficult to evaluate our business and prospects. In
addition, because we are in an early stage of development in a new and rapidly
evolving market, our prospects are difficult to predict and may change rapidly
and without warning.

WE HAVE INCURRED SUBSTANTIAL OPERATING LOSSES AND WE MAY NOT BE PROFITABLE IN
THE FUTURE

    Since we began operations, we have incurred substantial operating losses in
every fiscal period. We cannot be certain if or when we will become profitable.
Failure to achieve profitability within the timeframe expected by investors may
adversely affect the market price of our common stock. As a result of
accumulated operating losses, at September 30, 1999, we had an accumulated
deficit of $21.5 million. We have generated relatively small amounts of revenue,
while increasing expenditures in all areas, particularly in research and
development and sales and marketing, in order to execute our business plan.
Although we have experienced revenue growth in recent periods, the growth has
been from a limited base of historical revenue, and it is unlikely that such
growth rates are sustainable.

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE BECAUSE WE DEPEND ON A SMALL
NUMBER OF LARGE ORDERS

    We derive a significant portion of our software license revenue in each
quarter from a small number of relatively large orders. Our operating results
for a particular fiscal period could be materially adversely affected if we are
unable to complete one or more substantial license sales planned for that
period. In each of the last eight quarters, we had at least one customer that
accounted for more than 17% of total revenue in that quarter. In addition, the
purchase and implementation of our products typically involve a significant cost
to our customers, including the purchase of related hardware and software, as
well as training and integration costs. These implementations also include
substantial commitment of resources by our customers or their consultants over
an extended period of time. As a result, our sales cycle is relatively long.

    In addition, our services revenue, which is largely correlated with our
license revenue, has fluctuated and may fluctuate in the future due to
significant consulting and implementation services performed in a quarter.
Investors should not expect a commensurate increase in services revenue between
future quarters.

DISAPPOINTING QUARTERLY REVENUE OR OPERATING RESULTS COULD CAUSE THE PRICE OF
OUR COMMON STOCK TO FALL

    Our quarterly revenue and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter. If our quarterly revenue or
operating results fall below the expectations of investors or securities
analysts, the price of our common stock could fall substantially.

    Our quarterly revenue may fluctuate as a result of a variety of factors,
including the following:

    -   the market for interactive, Web-based electronic business solutions is
        in an early stage of development and it is therefore difficult to
        accurately predict customer demand; and

    -   the sales cycle for our products and services varies substantially from
        customer to customer, and we expect the sales cycle to be long. As a
        result, we have difficulty determining whether and when we will receive
        license revenue from a particular customer.




                                       12
<PAGE>   13

    In addition, because our revenue from implementation, maintenance and
training services is largely correlated with our license revenue, a decline in
license revenue could also cause a decline in our services revenue in the same
quarter or in subsequent quarters.

    Most of our expenses, such as employee compensation and rent, are relatively
fixed in the short term. Moreover, our expense levels are based, in part, on our
expectations regarding future revenue levels. As a result, if revenue for a
particular quarter is below our expectations, we could not proportionately
reduce operating expenses for that quarter, and therefore this revenue shortfall
would have a disproportionate effect on our expected operating results for that
quarter.

OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WEB-BASED ELECTRONIC BUSINESS
SOLUTIONS ARE NOT WIDELY ADOPTED

    Our products address a new and emerging market for Web-based, interactive
electronic business solutions. Therefore, our future success depends
substantially upon the widespread adoption of the Web as a primary medium for
commerce and business applications. The failure of this market to develop, or a
delay in the development of this market, would have a material adverse effect on
our business, financial condition and operating results. The Web has
experienced, and is expected to continue to experience, significant user and
traffic growth, which has, at times, caused user frustration with slow access
and download times. The Web infrastructure may not be able to support the
demands placed on it by the continued growth upon which our success depends.
Moreover, critical issues concerning the commercial use of the Web, such as
security, reliability, cost, accessibility and quality of service, remain
unresolved and may negatively affect the growth of Web use or the attractiveness
of commerce and business communication over the Web. In addition, the Web could
lose its viability due to delays in the development or adoption of new standards
and protocols to handle increased activity or due to increased government
regulation and taxation of Internet commerce.

INTENSE COMPETITION FROM OTHER TECHNOLOGY COMPANIES MAY ADVERSELY AFFECT OUR
FINANCIAL CONDITION AND OPERATING RESULTS

    The market for interactive, Web-based electronic business solutions is
intensely competitive. If we are unable to compete effectively, our business,
financial condition and operating results would be materially adversely
affected. Many of our current and potential competitors have longer operating
histories, greater name recognition and substantially greater financial,
technical, marketing, management, service, support and other resources than we
do. Therefore, they may be able to respond more quickly than we can to new or
changing opportunities, technologies, standards or customer requirements.

    In addition, we expect that new competitors will enter the market with
competing products as the size and visibility of the market opportunity
increases. We also expect that competition will increase as a result of software
industry consolidations and formations of alliances among industry participants.
Increased competition could result in pricing pressures, reduced margins or the
failure of our products to achieve or maintain market acceptance.

WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS OR ENHANCE EXISTING PRODUCTS ON A
TIMELY BASIS

    To be competitive, we must develop and introduce on a timely basis new
products and product enhancements which meet the needs of companies seeking to
deploy and manage electronic business applications over the Web. We have in the
past failed to ship certain new products or product enhancements by our planned
shipment date. If we fail to develop and introduce new products and enhancements
successfully and on a timely basis, it could have a material adverse effect on
our business, operating results and financial condition.

FAILURE TO EXPAND OUR RELATIONSHIPS WITH SYSTEMS INTEGRATORS AND CONSULTING
FIRMS WOULD IMPEDE ACCEPTANCE OF OUR PRODUCTS AND GROWTH OF OUR REVENUE

    To increase our revenue and implementation capabilities, we must develop and
expand relationships with systems integrators and consulting firms. A failure to
do so could have a material adverse effect on our business, operating results
and financial condition. We rely on systems integrators and consulting firms to
recommend our products to their clients and to install and support our products
for their clients. Systems integrators and consulting firms may develop, market
or recommend software applications that compete with our products. Moreover, if
these firms fail to implement our products successfully for their clients, we
may not have the resources to implement our products on the schedule required by
the client, which could have a material adverse effect on our business,
operating results and financial condition.





                                       13
<PAGE>   14

OUR FAILURE TO EXPAND OUR DIRECT SALES FORCE AND THIRD-PARTY DISTRIBUTION
CHANNELS WOULD IMPEDE OUR REVENUE GROWTH AND FINANCIAL CONDITION

    To increase our revenue, we must increase the size of our direct sales force
and the number of our indirect marketing and distribution partners, including
software and hardware vendors and resellers. A failure to do so could have a
material adverse effect on our business, operating results and financial
condition. There is intense competition for sales personnel in our business, and
we may not be successful in attracting, integrating, motivating or retaining new
personnel for these positions. Our existing or future marketing and distribution
partners may choose to devote greater resources to marketing and supporting the
products of competitors.

OUR FAILURE TO MANAGE PROPERLY OUR RAPID GROWTH COULD STRAIN OUR RESOURCES AND
ADVERSELY AFFECT OUR BUSINESS

    Our failure to manage properly our rapid growth could have a material
adverse effect on the quality of our products, our ability to retain key
personnel and our business, operating results and financial condition. Our
revenue increased 166% in the quarter ended September 30, 1999 from the same
period the year earlier. From October 1, 1998 to September 30, 1999, the number
of our employees increased from 95 to 202. The rapid rate of our recent
personnel growth has made management of that growth more difficult. To manage
future growth effectively we must maintain and enhance our financial and
accounting systems and controls, integrate new personnel and manage expanded
operations.

WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE THE BUSINESS AND PRODUCTS OF INSITE
MARKETING TECHNOLOGY WITH OUR BUSINESS

      In October 1999, Silknet acquired InSite Marketing Technology, Inc. There
can be no assurance that the combined companies can successfully integrate the
acquired businesses, personnel, products or technologies. Silknet's integration
of the InSite business may cause a diversion of management time and reallocation
of resources. There can be no assurance that the InSite personalization
technology can be successfully integrated with Silknet's product offerings and
distribution infrastructure, or that significant product research and
development, and development expenses, will not be required to fully integrate
InSite's products with those of Silknet. There can be no assurances that
revenues, if any, from the InSite products or the combined Silknet/InSite
products will exceed operating expenses, that Silknet can be successful in
reducing expenses to achieve profitability, or that customers will continue to
support Silknet's new product initiatives following the integration.

OUR FAILURE TO EXPAND AND MANAGE OUR INTERNATIONAL OPERATIONS WOULD ADVERSELY
AFFECT OUR REVENUE GROWTH AND FINANCIAL CONDITION

    We expect international revenue to account for a significant percentage of
total revenue in the future and we believe that we must continue to expand our
international sales activities in order to be successful. Our failure to expand
our international sales could have a material adverse effect on our business,
operating results and financial condition. Our plans to expand internationally
may be adversely affected by a number of risks, including:

    -    expenses associated with customizing products for foreign countries;

    -    challenges inherent in managing geographically dispersed operations;

    -    protectionist laws and business practices that favor local competitors;

    -    dependence on local vendors;

    -    multiple, conflicting and changing governmental laws and regulations;
         and

    -    foreign currency exchange rate fluctuations.

    Our international sales growth will be limited if we are unable to:

    -    establish additional foreign operations;

    -    expand international sales channel management and support
         organizations;




                                       14
<PAGE>   15

    -    hire additional personnel;

    -    customize products for local markets;

    -    develop relationships with international service providers; or

    -    establish relationships with additional distributors and systems
         integrators.

LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS

    Our future success depends to a significant degree on the skills, experience
and efforts of James C. Wood, our founder, Chairman of the Board, President and
Chief Executive Officer. The loss of the services of Mr. Wood could have a
material adverse effect on our business, operating results and financial
condition. The loss of one or more of our executive officers and other members
of senior management could have a material adverse effect on our business,
operating results and financial condition.

WE MAY BE UNABLE TO HIRE AND RETAIN THE SKILLED PERSONNEL WE NEED TO SUCCEED

    Qualified personnel are in great demand throughout the software industry.
The demand for qualified personnel is particularly acute in the New England
area, due to the large number of software companies and the low unemployment in
the region. Our success depends in large part upon our ability to attract,
train, motivate and retain highly skilled employees, particularly marketing
personnel, software engineers and other senior personnel. Our failure to attract
and retain the highly-trained technical personnel that are integral to our
product development, professional services and support teams may limit the rate
at which we can develop new products or product enhancements. This could have a
material adverse effect on our business, operating results and financial
condition.

WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY RIGHTS

    Our success depends to a significant degree upon the protection of our
software and other proprietary technology rights. We rely on trade secret,
copyright and trademark laws and confidentiality agreements with employees and
third-parties, all of which offer only limited protection. Moreover, the laws of
other countries in which we market our products may afford little or no
effective protection of our proprietary technology. The reverse engineering,
unauthorized copying or other misappropriation of our proprietary technology
could enable third parties to benefit from our technology without paying us for
it. This could have a material adverse effect on our business, operating results
and financial condition. If we resort to legal proceedings to enforce our
intellectual property rights, the proceedings could be burdensome and expensive
and could involve a high degree of risk. Further, names such as eBusiness,
eCommerce and eService are becoming widely used and descriptive. As a result, we
do not expect to be able to prevent third parties from using these names for
competing products.

CLAIMS BY OTHER COMPANIES THAT OUR PRODUCTS INFRINGE THEIR COPYRIGHTS OR PATENTS
COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION

    If any of our products violate third-party proprietary rights, we may be
required to reengineer our products or seek to obtain licenses from third
parties to continue offering our products without substantial reengineering. Any
efforts to reengineer our products or obtain licenses from third parties may not
be successful and, in any case, would substantially increase our costs and have
a material adverse effect on our business, operating results and financial
condition. We do not conduct comprehensive patent searches to determine whether
the technology used in our products infringes patents held by third parties. In
addition, product development is inherently uncertain in a rapidly evolving
technological environment in which there may be numerous patent applications
pending, many of which are confidential when filed, with regard to similar
technologies.

OUR USE OF THE "SILKNET" AND "EBUSINESS" TRADEMARKS MAY INFRINGE THE TRADEMARK
RIGHTS OF OTHER COMPANIES

    Silknet's use of "eBusiness," as well as the use of other names, may result
in costly litigation, divert management's attention and resources, cause product
shipment delays or require Silknet to pay damages and/or to enter into royalty
or license agreements to continue to use a product name. Silknet may be required
to stop using the name "eBusiness" or other names currently used for its
products. Any of these events could have a material adverse effect on our
business, operating results and financial condition.



                                       15
<PAGE>   16


    We have applied for registration of some of our trademarks in the United
States, Canada and the European Community. Most of these applications have not
been approved. Our applications for the registration of "Silknet" and "Silknet"
combined with the Silknet logo were denied in Canada because a company filed an
earlier application for the use of "Silk" in connection with Internet
information resource services.

    Other companies have filed trademark applications for marks similar to the
names of Silknet's products. For example, IBM has filed a trademark application
for "e-Business" for use in creating, implementing and maintaining Web sites and
integration of computer systems and networks. Silknet's use of "Silknet
eBusiness System" could infringe the rights of IBM and other companies using a
mark that contains "eBusiness."

WE MAY LOSE ACCESS TO THIRD-PARTY TECHNOLOGY USED IN OUR PRODUCTS

    We incorporate into our products technology licensed from third parties,
such as Microsoft Corporation. The loss of access to this technology could
result in delays in the development and introduction of new products or
enhancements until equivalent or replacement technology could be accessed, if
available, or developed internally, if feasible. These delays could have a
material adverse effect on our business, operating results and financial
condition. It is possible that technology from others will not be available to
us on commercially reasonable terms, if at all.

OUR BUSINESS COULD BE ADVERSELY AFFECTED IF OUR PRODUCTS FAIL TO PERFORM
PROPERLY

    Software products as complex as ours may contain undetected errors, or bugs,
which result in product failures, or otherwise fail to perform in accordance
with customer expectations. Our products may be particularly susceptible to bugs
or performance degradation because of the emerging nature of Web technologies
and the stress that may be placed on our products by the full deployment of our
products over the Web to thousands of end-users. Product performance problems
could result in loss of or delay in revenue, loss of market share, failure to
achieve market acceptance, diversion of development resources or injury to our
reputation, any of which could have a material adverse effect on our business,
operating results and financial condition. Prior to November 1998, we warranted
some of our products for five years, providing customers a right to refund a
portion of the license fee if we are unable to correct an error in the product.
To date, no customer has requested a refund under the warranty provisions.
However, if we are required to refund significant portions of license fees, our
business, operating results and financial condition could be materially
adversely affected.

WE COULD INCUR SUBSTANTIAL COSTS AS A RESULT OF PRODUCT LIABILITY CLAIMS
RELATING TO OUR CUSTOMERS' CRITICAL BUSINESS OPERATIONS

    Our products are critical to the operations of our customers' businesses. If
one of our products fails, a customer may assert a claim for substantial damages
against us, regardless of our responsibility for such failure. Product liability
claims could require us to spend significant time and money in litigation or to
pay significant damages. Although we maintain general liability insurance,
including coverage for errors and omissions, there can be no assurance that such
coverage will continue to be available on reasonable terms or will be available
in amounts sufficient to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim.

WE MAY BE AFFECTED BY UNEXPECTED YEAR 2000 TECHNOLOGY PROBLEMS

    Many existing computer systems and software products do not properly
recognize dates after December 31, 1999. This Year 2000 problem could result in
miscalculations, data corruption, system failures or disruptions of operations.
We are subject to potential Year 2000 problems affecting our products, our
customers' systems, our internal systems and the systems of our vendors, any of
which could have a material adverse effect on our business, operating results
and financial condition.

    Changing purchasing patterns of customers impacted by Year 2000 issues may
result in reduced resources available for purchases of interactive electronic
business solutions. In addition, there can be no assurance that Year 2000 errors
or defects will not be discovered in our internal software systems and, if such
errors or defects are discovered, there can be no assurance that the costs of
making such systems Year 2000 compliant will not be material.

    Year 2000 errors or defects in the internal systems maintained by our
vendors could require us to incur significant unanticipated expenses to remedy
any problems or replace affected vendors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000 Readiness
Disclosure."



                                       16
<PAGE>   17


OUR COMMON STOCK IS PARTICULARLY SUBJECT TO VOLATILITY BECAUSE OF THE INDUSTRY
THAT WE ARE IN

    The stock market in general has recently experienced extreme price and
volume fluctuations. In addition, the market prices of securities of technology
companies, particularly Web-related companies, have been extremely volatile, and
have experienced fluctuations that have often been unrelated or disproportionate
to the operating performance of such companies. These broad market fluctuations
could adversely affect the market price of our common stock.

THE SIGNIFICANT CONTROL OVER STOCKHOLDER VOTING MATTERS WHICH MAY BE EXERCISED
BY OUR EXECUTIVE OFFICERS AND DIRECTORS WILL DEPRIVE YOU OF THE ABILITY TO
INFLUENCE CORPORATE ACTIONS

    As of September 30, 1999, our executive officers and directors and their
affiliates together control approximately 48% of the outstanding common stock.
As a result, these stockholders, if they act together, will be able to exert
strong influence over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. This
concentration of ownership may have the effect of delaying, preventing or
deterring a change in control of Silknet, could deprive our stockholders of an
opportunity to receive a premium for their common stock as part of a sale of
Silknet and might affect the market price of our common stock.

FUTURE SALES BY EXISTING SECURITY HOLDERS COULD DEPRESS THE MARKET PRICE OF OUR
COMMON STOCK

    If our existing stockholders sell a large number of shares of our common
stock, the market price of the common stock could decline significantly.
Moreover, the perception in the public market that our existing stockholders
might sell shares of common stock could depress the market price of the common
stock.


ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    The following discussion about Silknet's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. Silknet is exposed to market risk
related to changes in interest rates and foreign currency exchange rates. As of
September 30, 1999, Silknet did not use derivative financial instruments for
speculative or trading purposes.

   Interest Rate Risk

    Silknet invests its excess cash in high quality securities with maturities
not exceeding ninety days and therefore would not expect its operating results
or cash flows to be affected to any significant degree by the effect of a sudden
change in market interest rates.

   Foreign Currency Exchange Risk

    To date, Silknet has not generated significant revenues originating outside
the United States, and therefore, foreign currency fluctuations have not had a
material effect on Silknet's operating results.




                                       17
<PAGE>   18





                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

    Silknet is not a party to any material legal proceedings.


ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

    On May 5, 1999, Silknet commenced its initial public offering of 3,000,000
shares of common stock, $.01 par value per share, pursuant to Silknet's final
prospectus dated May 5, 1999. This prospectus was contained in Silknet's
Registration Statement on Form S-1, which was declared effective by the
Securities and Exchange Commission (SEC File No. 333-73295) on May 5, 1999. As
part of the initial public offering, Silknet granted the several underwriters,
for whom Credit Suisse First Boston Corporation, BancBoston Robertson Stephens
Inc., Banc of America Securities LLC (formerly NationsBanc Montgomery Securities
LLC) and First Union Securities, Inc. (formerly First Union Capital Markets
Corp.) acted as representatives (the "Representatives"), an overallotment
option to purchase up to an additional 450,000 shares of common stock. The
initial public offering closed on May 10, 1999.

    On May 14, 1999, the Representatives, on behalf of the several underwriters,
purchased 450,000 shares of common stock pursuant to the exercise of the
overallotment option.

    The aggregate offering price of the initial public offering to the public
was $45,000,000 (exclusive of the overallotment option), with proceeds to
Silknet, after deduction of underwriting discounts and commissions, of
$41,850,000 (before deducting offering expenses payable by Silknet). The
aggregate offering price of the overallotment option to the several underwriters
was $6,750,000, with proceeds to Silknet, after deduction of the underwriting
discounts and commissions, of $6,277,500.

    The aggregate amount of expenses incurred by Silknet through September 30,
1999 in connection with the issuance and distribution of the shares of common
stock offered and sold in the initial public offering was approximately
$4,920,000, including $3,622,500 in underwriting discounts and $1,297,500 in
other expenses.

    None of the expenses paid by Silknet in connection with the initial public
offering or the exercise of the overallotment option were paid, directly or
indirectly, to directors, officers, persons owning ten percent or more of
Silknet's equity securities, or affiliates of Silknet.

    The net proceeds to Silknet from the initial public offering, after
deducting underwriting discounts and commissions and other expenses, were
approximately $46.8 million.

    Silknet invested the net proceeds primarily in high quality securities with
maturities not exceeding ninety days.


ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

      Not applicable.


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      Not applicable.


ITEM 5.   OTHER INFORMATION

      Not applicable.





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<PAGE>   19

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K.

    (a) The following documents are filed as part of this Form 10-Q:

        (1)  Exhibits

    The following exhibits are filed as part of and incorporated by reference
into this Form 10-Q:

EXHIBIT NO.      EXHIBIT
-----------      -------

  27.01*         Financial Data Schedule.

----------
 * Filed herewith

    (b)      Reports on Form 8-K.

    No reports on form 8-K were filed on behalf of Silknet during the quarter
ended September 30, 1999.



                                   SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.

                                          SILKNET SOFTWARE, INC.
                                          (Registrant)
Date:  November 10, 1999

                                          By: /s/ PATRICK J. SCANNELL, JR.
                                              ----------------------------------
                                              Vice President, Chief Financial
                                              Officer, Treasurer and Secretary




                                       19