<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                  FORM 10-K/A
                                AMENDMENT NO. 1
           FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13
                OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

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

               FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

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

               FOR THE TRANSITION PERIOD FROM ________ TO ________

                       COMMISSION FILE NUMBER: 000-26735

                          TELEMATE.NET SOFTWARE, INC.
              (Exact Name of Registrant Specified in Its Charter)

<Table>
<S>                                            <C>
                   GEORGIA                                      58-1656726
(State or Other Jurisdiction of Incorporation      (I.R.S. Employer Identification No.)
               or Organization)
       400 GALLERIA PARKWAY, SUITE 200                             30339
              ATLANTA, GEORGIA                                  (Zip Code)
  (Address of Principal Executive Offices)
</Table>

      Registrant's telephone number, including area code:  (678) 589-1623

          Securities registered pursuant to Section 12(b) of the Act:

                                      NONE

          Securities registered pursuant to Section 12(g) of the Act:

                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                                (Title of Class)

    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 reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]

    The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the average of the closing bid and ask quotations for the
Registrant's common stock on March 23, 2001 as reported by The Nasdaq Stock
Market, was approximately $4,270,513. The shares of common stock held by each
officer and director and by each person known to the Registrant who owns 5% or
more of the outstanding common stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. As of March 23, 2001,
Registrant had outstanding 7,995,086 shares of common stock.

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<PAGE>   2

                                EXPLANATORY NOTE

     The Report on Form 10-K/A amends and restates in their entirety Items 7 and
14 of the Annual Report on Form 10-K of Telemate.Net Software, Inc., a Georgia
corporation (the "Company"), for the fiscal year ended December 31, 2000.

                                    PART II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

     The following discussion should be read in conjunction with the Financial
Statements of Telemate.Net Software, Inc. and notes thereto included elsewhere
in this report.

OVERVIEW

     In October 1999, we completed our initial public offering, raising net
proceeds of $43 million to fuel our planned expansion. From the date of our
initial public offering through the second quarter of 2000, we expanded our
sales and marketing activities and increased our product development activities.
By the end of the second quarter, we had identified several key challenges that
were restricting our sales growth including inefficient processes that hampered
our ability to identify and qualify prospects and ensure high sales
productivity. Additionally, our products had substantially different
positioning, features, and sales attributes which resulted in our sales and
marketing efforts, within a single organizational structure, to become diluted.
At the beginning of the third quarter of 2000, we refocused to align our sales
and marketing for each product line into separate divisions. This refocusing and
reorganization of the Company impacted growth and, as a result, at the beginning
of the fourth quarter of 2000, we reduced our work force approximately 20% to
align our expense structure to our revenue. On February 14, 2001, we announced
plans to introduce NetSpective WebFilter, an advanced Internet filtering
solution, and NetSpective Reporter 5.0, an enhanced version of our Internet
reporting software, in the second quarter of 2001.

     As we enter 2001 and complete the development of our enhanced product line,
we believe we are poised to resume growth and return to profitability in late
2002.

     Our revenue consists of product and service revenue. Product revenue is
derived primarily from licensing our software products. We also resell
complementary hardware, which has historically accounted for less than 10% of
our total annual revenue. Service revenue consists of fees paid for maintenance
services, product updates, and professional services. Maintenance services
include diagnosis and correction of errors in the current version of the product
and telephone consultation to discuss general support questions. Product updates
include error correction and minor enhancements to the product models purchased,
and periodic updates to tariff information for call accounting products.
Substantially all of our license agreements are perpetual. Support agreements
are typically for a term of one year and renew automatically upon payment of an
annual maintenance fee by the customer. This support fee typically represents
20% of the current list price of the products licensed. Professional services
includes installation, training, and custom report generation.

     We recognize revenue from software licenses in accordance with the American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") 97-2, Software Revenue Recognition, SOP 98-4, Deferral of the Effective
Date of a Provision of SOP 97-2, and SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions. Revenue
derived from software license fees and hardware is recognized upon shipment.
Revenue derived from software support services primarily involves annual
contracts and is recognized ratably over the service period. Revenue related to
professional services is recognized as services are provided. Deferred revenue
generally represents advance payments received from customers and billings
invoiced to customers for software support and professional services in advance
of the time revenue is recognized.

                                        1
<PAGE>   3

     We identify revenue as call accounting revenue or Internet/integrated
revenue based upon the types of data sources licensed and the delivery of call
accounting product features. If a customer is delivered tariff information for
all data sources they have licensed, the product revenue is identified as call
accounting. All other product revenue is identified as Internet/integrated.
Service revenue is identified based on the associated product identification.

     We sell our products through a combination of direct sales by our sales
personnel and indirect sales primarily through resellers and distributors. While
our direct sales force is expected to continue to generate a large proportion of
future revenue, we are increasingly utilizing indirect distribution channels,
such as network resellers, systems integrators and distributors, as an important
complement to our direct sales force. Distributors and resellers purchase the
product for resale at a discount from our standard price list. This discount
ranges from 20% to 65% and varies based on a number of factors including their
volume of business, whether they distribute to other resellers, and whether they
provide product support.

     We also maintain relationships with leading networking and network security
product vendors that help to market and distribute our products. These vendors
assist in the sales and marketing of our products by bundling them with their
own products, selling our products through their sales forces, and promoting our
products at trade shows, seminars and through their web sites. We have entered
into marketing partnerships with major firewall and proxy server suppliers
including Cisco Systems, Check Point Software Technologies, Microsoft
Corporation, and Symantec/Axent. We intend to continue to focus sales resources
on strengthening existing relationships and creating new relationships with
strategic organizations.

     The Cisco partnership is comprised of an OEM agreement and a cooperative
marketing agreement. Cisco buys and resells our VoIP reporting application and
we are provided a web link from relevant product pages on the Cisco web site. In
addition, for a fee we are able to appear within Cisco's tradeshow space. The
initial term of the February 2000 agreement is for three years. The Check Point
partnership is a cooperative marketing agreement. Our Internet products report
on Check Point's firewall products and in turn we receive a link on Check
Point's web site. In addition, for a fee we can be in Check Point's booth at
tradeshows. The agreement is renewable on an annual basis through 2002. The
Microsoft partnership is a cooperative marketing agreement. Our Internet
products generate reports on Microsoft's firewall products and in turn we
receive a link on Microsoft's web site. As long as our products meet Microsoft's
criteria, we can maintain this relationship. In addition, for a fee we can be in
Microsoft's booth at tradeshows. We have a reseller agreement with Axent, which
has been acquired by Symantec. The agreement allows for cooperative marketing
programs. Such programs have been utilized over the last several years. With the
acquisition of Axent by Symantec, we expect less cooperative marketing efforts.
We expect to continue to focus our sales resources on strengthening existing
relationships and creating new strategic relationships.

     From our inception in 1986 until June 1999, we elected to operate under
subchapter S of the Internal Revenue Code of 1986, as amended, and comparable
provisions of state income tax laws. An S corporation generally is not subject
to income tax at the corporate level. The S corporation's income generally
passes through to shareholders and is taxed on their personal income tax
returns. As a result, our earnings through June 1999 had been taxed directly to
our existing shareholders. On June 16, 1999, we terminated our status as an S
corporation under the tax code. In connection with the termination of our S
corporation status, we distributed $269,000 and we reclassified the accumulated
deficit of $296,000 through the S corporation termination date, limited to the
amount of paid-in capital, to additional paid-in capital.

     Certain amounts in the 1998 and 1999 financial statements have been
reclassified to conform to the presentation adopted in the 2000 financial
statements.

     In January 2001, the Company announced its retention of an investment
banking firm to explore a range of strategic alternatives to enhance shareholder
value, including a possible sale of the Company.

                                        2
<PAGE>   4

RESULTS OF OPERATIONS

     The following tables set forth our Internet/integrated and call accounting
revenue, both in absolute dollars and as a percentage of total revenue:

<Table>
<Caption>
                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                               1998      1999      2000
                                                              -------   -------   -------
                                                                    (IN THOUSANDS)
<S>                                                           <C>       <C>       <C>
Revenue:
  Internet/integrated:
     Product revenue........................................  $   971   $ 2,946   $ 1,978
     Services revenue.......................................       82     1,102     2,184
                                                              -------   -------   -------
          Total Internet/integrated revenue.................    1,053     4,048     4,162
  Call accounting:
     Product revenue........................................    4,479     3,785     1,701
     Services revenue.......................................    4,850     5,132     4,827
                                                              -------   -------   -------
          Total call accounting revenue.....................    9,329     8,917     6,528
                                                              -------   -------   -------
          Total revenue.....................................  $10,382   $12,965   $10,690
                                                              =======   =======   =======
</Table>

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                              1998     1999     2000
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Revenue:
  Internet/integrated:
     Product revenue........................................    9.4%    22.7%    18.5%
     Services revenue.......................................    0.8      8.5     20.4
                                                              -----    -----    -----
          Total Internet/integrated revenue.................   10.2     31.2     38.9
  Call accounting:
     Product revenue........................................   43.1     29.2     15.9
     Services revenue.......................................   46.7     39.6     45.2
                                                              -----    -----    -----
          Total call accounting revenue.....................   89.8     68.8     61.1
                                                              -----    -----    -----
          Total revenue.....................................  100.0%   100.0%   100.0%
                                                              =====    =====    =====
</Table>

                                        3
<PAGE>   5

     The following table sets forth for the periods indicated statement of
operations data expressed as a percentage of total revenue:

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                              1998     1999      2000
                                                              -----    -----    ------
<S>                                                           <C>      <C>      <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
  Product revenue...........................................   52.5%    51.9%     34.4%
  Service revenue...........................................   47.5     48.1      65.6
                                                              -----    -----    ------
          Total revenue.....................................  100.0    100.0     100.0
Costs of revenue:
  Product costs.............................................    9.2     10.8      14.4
  Service costs.............................................   14.5     18.0      34.1
                                                              -----    -----    ------
          Total cost of revenue.............................   23.7     28.8      48.5
Gross profit................................................   76.3     71.2      51.5
Operating expenses:
  Research and development..................................   18.6     17.1      34.8
  Sales and marketing.......................................   46.3     52.5     122.3
  General and administrative................................   23.0     24.4      52.4
  Restructuring.............................................    0.0      0.0       2.9
  Non-cash compensation.....................................    0.0      1.5       0.0
                                                              -----    -----    ------
          Total operating expenses..........................   87.9     95.5     212.4
Operating income (loss).....................................  (11.6)   (24.3)   (160.9)
Increase in redeemable stock purchase warrants..............    0.0    (12.3)      0.0
Other income (expense)......................................   (1.0)     2.6      18.5
                                                              -----    -----    ------
          Net income (loss).................................  (12.6)%  (34.0)%  (142.4)%
                                                              =====    =====    ======
</Table>

Years Ended December 31, 2000 and 1999

     Total Revenue.  Total revenue was $10.7 million in 2000, representing a
17.5% decrease from $13.0 million in 1999. Total product revenue was $3.7
million, or 34.4% of total revenue, in 2000, representing a 45.3% decrease from
$6.7 million, or 51.9% of total revenue, in 1999. Total service revenue was $7.0
million, or 65.6% of total revenue, in 2000, representing a 12.5% increase from
$6.2 million, or 48.1% of total revenue, in 1999. The overall decease in revenue
was the result of the decrease in both call accounting and Internet/integrated
product revenue partially offset by an increase in Internet/integrated support
revenue. $700,000 of the decrease was attributable to a sales agreement with
Electronic Data Systems, a third-party contractor, to provide software, hardware
and installation services for 51 different Army National Guard sites. This sale
agreement comprised $1.8 million or 13.9% of total revenue in 1999, but
accounted for only $1.1 million or 10.5% in 2000. We have delivered all software
and hardware under the agreement and are currently providing support services.
We expect support revenue to be less than $300,000 during 2001. There can be no
assurance that support will be renewed beyond 2001.

     Further, for the first half of 2000, we had reassigned sales resources from
call accounting to Internet products, but these resources failed to productively
generate sales as they had previously. As a result, management restructured the
company by product line at mid-year and began development of our enhanced
Internet reporting product and our Internet filtering appliance. Based on these
new products, management anticipates restoring revenue growth in the second half
of 2001 through increased channel leverage and higher sales force productivity.

     Internet/Integrated Revenue.  Total Internet/integrated revenue was $4.2
million, or 38.9% of total revenue in 2000, representing a 2.8% increase from
$4.0 million, or 31.2% of total revenue, in 1999.

                                        4
<PAGE>   6

Internet/integrated product revenue was $2.0 million, or 18.5% of total revenue
in 2000, representing a 32.9% decrease from $2.9 million, or 22.7% of total
revenue, in 1999. Internet/integrated service revenue was $2.2 million, or 20.4%
of total revenue in 2000, representing a 98.2% increase from $1.1 million, or
8.5% of total revenue, in 1999. The overall decrease in Internet/integrated
product revenue and percentage of total revenue was largely due to the decrease
in revenue from the aforementioned single major customer. This sale agreement
comprised $1.2 million of product revenue in 1999 compared to $494,000 in 2000.
The increase in Internet/integrated service revenue was driven by the increase
in Internet/integrated support revenue. Our Internet customer base has grown
since 1998 resulting in increased support renewals. Additionally, in conjunction
with our reorganization at mid-year, we stopped selling our integrated product
and focused on selling separate call accounting and Internet products. The
integrated product reports on both Internet and telephony data sources and
therefore contains a component of call accounting revenue. Therefore, while
total Internet/integrated revenue was relatively consistent, we were successful
in increasing total Internet revenue to replace the call accounting revenue in
the Internet/integrated revenue category. However, a significant increase in
sales resources was required to produce these results, resulting in substantial
losses. Therefore, management began development efforts to improve and expand
our Internet product offerings in order to create products which our sales force
would be able to sell profitably.

     Call Accounting Revenue.  Total call accounting revenue was $6.5 million,
or 61.1% of total revenue in 2000, representing a 26.8% decrease from $8.9
million, or 68.8% of total revenue, in 1999. Call accounting product revenue was
$1.7 million, or 15.9% of total revenue in 2000, representing a 55.1% decrease
from $3.8 million, or 29.2% of total revenue, in 1999. Call accounting service
revenue was $4.8 million, or 45.2% of total revenue in 2000, representing a 5.9%
decrease from $5.1 million, or 39.6% of total revenue, in 1999. The decline in
call accounting revenue and percentage share of total revenue for the year was
due to the increased focus of our sales force on selling our Internet/integrated
products during the first half of the year. Additionally, the hardware component
of call accounting product revenue declined as management attempted to shift
sales focus away from lower margin hardware sales and toward software sales. We
anticipate this reduced emphasis on hardware sales will continue for the
foreseeable future.

     Cost of Product Revenue.  Cost of product revenue includes employee
compensation, costs of complementary hardware, costs of materials related to
production, shipment and fulfillment, amortization of a software license, and
payments under third-party licensing agreements. Cost of product revenue was
$1.5 million, or 14.4% of total revenue in 2000, representing a 9.0% increase
from $1.4 million, or 10.9% of total revenue, in 1999. The increase in product
cost is attributable primarily to amortization of purchased software. The
increase in the percentage of revenue reflects a change in product revenue mix
as well as increases in overhead expenses and the aforementioned software
amortization. We expect cost of product revenue to decrease slightly as a
percentage of product revenue due to reductions in staffing and higher average
selling prices associated with our new products partially offset by the hardware
associated with our new WebFilter product.

     Cost of Service Revenue.  Cost of service revenue is comprised primarily of
service employee compensation. Cost of service revenue was $3.6 million, or
34.0% of total revenue in 2000, representing a 55.5% increase from $2.3 million,
or 18.0% of total revenue, in 1999. The increase in both absolute dollars and as
a percentage of revenue resulted from increased service staffing levels to
improve service levels to existing customers and in anticipation of future
support and service requirements. As part of our reduction in force in October
2000, management reduced service staff levels to correspond more directly with
current revenue levels. Management believes this reduction will result in
improved margins on service revenue while maintaining service levels.

     Research and Development Expenses.  Research and development expenses
include salaries and related costs for software developers, quality assurance
personnel, and documentation personnel involved in our research and development
efforts. Research and development expenses were $3.7 million, or 34.8% of total
revenue, in 2000, representing a 68.3% increase from $2.2 million, or 17.1% of
total revenue, in 1999.

                                        5
<PAGE>   7

The increase in total research and development expenses reflects increased
research and development personnel to accelerate new product development. With
the anticipated release of our WebFilter product in the second quarter of 2001,
we expect slight increases in research and development expenses in the first
half of 2001, with a declining trend during the second half of the year. On a
year-over-year basis, we anticipate research and development expenses to be
slightly lower in 2001 than 2000.

     Sales and Marketing Expenses.  Sales and marketing expenses include
salaries and related costs, commissions, travel, facilities, communications
costs, and promotional expenses for our sales organization and marketing staff.
Sales and marketing expenses were $13.1 million, or 122.3% of total revenue, in
2000, representing a 92.1% increase from $6.8 million, or 52.5% of total
revenue, in 1999. The increases in both absolute dollars and as a percentage of
total revenue were due to several factors, primarily the addition of sales and
marketing personnel and initiation of marketing lead generation programs in an
effort to accelerate our revenue growth following our initial public offering.
We expect sales and marketing expenses to decrease in both absolute dollars and
as a percentage of revenue in 2001 due to the reduction of sales and marketing
staff that occurred in October 2000 and due to a decrease in our promotional
activities.

     General and Administrative Expenses.  General and administrative expenses
include administrative salaries and related benefits, depreciation and
amortization, management fees, recruiting, and relocation expenses, as well as
legal, accounting, and other professional fees. General and administrative
expenses were $5.6 million, or 52.4% of total revenue, in 2000, representing a
77.2% increase from $3.2 million, or 24.4% of total revenue, for the same period
in 1999. This increase was primarily due to staff related costs, insurance, and
professional service fees largely related to the requirements of being a public
company. We expect general and administrative costs will be relatively flat in
absolute dollars in 2001.

     Restructuring Expenses.  Restructuring expense of $310,000, or 2.9% of
total revenue, represents the charges taken in connection with the Company's
reduction in force which occurred at the beginning of the fourth quarter of
2000. This charge primarily represents severance compensation.

     Non-cash Compensation Expenses.  Non-cash compensation of $188,000, or 1.5%
of total revenue in 1999, was charged in connection with stock options granted
at a price below market value, primarily to an executive officer. No options
were granted below market value in 2000.

     Redeemable Stock Purchase Warrant.  Charges for the increase in value of
our redeemable common stock purchase warrant were zero in 2000, as compared to
$1.6 million, or 12.3% of total revenue, for 1999. This charge represents the
increase in the value of the warrant granted in connection with a $1,000,000
loan. The warrant was exercised and the loan was repaid in September 1999.

     Other Income (Expense).  Interest income (expense) was $2.0 million, or
18.5% of total revenue, for 2000, compared to $336,000, or 2.6% of total
revenue, for 1999. Proceeds from investment of the funds received in the initial
public offering for the full year account for this interest income. Interest
income in the future will be dependent on cash levels maintained.

  Years Ended December 31, 1999 and 1998

     Total Revenue.  Total revenue was $13.0 million in 1999, representing a
24.9% increase from $10.4 million in 1998. Total product revenue was $6.7
million, or 51.9% of total revenue, in 1999, representing a 23.5% increase from
$5.4 million, or 52.5% of total revenue, in 1998. Total service revenue was $6.2
million, or 48.1% of total revenue, in 1999, representing a 26.4% increase from
$4.9 million, or 47.5% of total revenue, in 1998. This increase was the result
of the increase in Internet/integrated revenue and professional services sold.
Part of the increase was attributable to a sales agreement with Electronic Data
Systems, a third-party contractor, to provide software, hardware and
installation for 51 different Army National Guard sites. This sales agreement
comprised 13.9% of total revenue in 1999. This agreement did not contribute as
significantly to revenue in 2000.

     Internet/Integrated Revenue.  Total Internet/integrated revenue was $4.0
million, or 31.2% of total revenue, in 1999, representing a 284.4% increase from
$1.1 million, or 10.2% of total revenue, in 1998. Internet/integrated product
revenue was $2.9 million, or 22.7% of total revenue, in 1999, representing a

                                        6
<PAGE>   8

203.4% increase from $971,000, or 9.4% of total revenue, in 1998.
Internet/integrated service revenue was $1.1 million, or 8.5% of total revenue,
in 1999, representing a 1,243.9% increase from $82,000, or 0.8% of total
revenue, in 1998. The increase in Internet/integrated product revenue and
percentage of total revenue was due to the increased focus of our sales force on
selling our Internet/integrated products. The increase in Internet/integrated
service revenue was driven by the increase in Internet/integrated product sales,
including the sales agreement mentioned under Total Revenue above.

     Call Accounting Revenue.  Total call accounting revenue was $8.9 million,
or 68.8% of total revenue, in 1999, representing a 4.4% decrease from $9.3
million, or 89.8% of total revenue, in 1998. Call accounting product revenue was
$3.8 million, or 29.2% of total revenue, in 1999, representing a 15.5% decrease
from $4.5 million, or 43.1% of total revenue, in 1998. Call accounting service
revenue was $5.1 million, or 39.6% of total revenue, in 1999, representing a
5.8% increase from $4.8 million, or 46.7% of total revenue, in 1998. The decline
in call accounting revenue and percentage share of total revenue for the year
was due to the increased focus of our sales force on selling our
Internet/integrated products as compared to selling call accounting only
products.

     Cost of Product Revenue.  Cost of product revenue includes employee
compensation, costs of materials related to production, shipment and fulfillment
and payments under third-party licensing agreements. Cost of product revenue was
$1.4 million, or 10.9% of total revenue, in 1999, representing a 47.7% increase
from $958,000, or 9.2% of total revenue, in 1998. This increase in cost and the
corresponding increase as a percentage of total revenue was primarily
attributable to higher hardware costs on a number of large product sales
requiring an unusually large amount of hardware and an increase in the
percentage of total costs for royalty payments for third-party licensing.

     Cost of Service Revenue.  Cost of service revenue is comprised primarily of
service employee compensation. Cost of service revenue was $2.3 million, or
18.0% of total revenue, in 1999, representing a 55.7% increase from $1.5
million, or 14.5% of total revenue, in 1998. This increase was due to an
increase in staff to handle the expansion of the number of companies under
annual maintenance contracts and the increase in professional services sold.

     Research and Development Expenses.  Research and development expenses
include salaries and related costs for software developers, quality assurance
personnel and documentation personnel involved in our research and development
efforts. Research and development expenses were $2.2 million, or 17.1% of total
revenue, in 1999, representing a 14.7% increase from $1.9 million, or 18.6% of
total revenue, in 1998. The increase in total research and development
expenditures reflects the increased headcount during the second half of the year
as we accelerated our new product development.

     Sales and Marketing Expenses.  Sales and marketing expenses include
salaries and related costs, commissions, travel, facilities, communications
costs and promotional expenses for our sales organization and marketing staff.
Sales and marketing expenses were $6.8 million, or 52.5% of total revenue, in
1999, representing a 41.7% increase from $4.8 million, or 46.3% of total
revenue, 1998. This increase in expenditures and percentage of total revenue is
the result of higher commissions on greater sales and expansion of both the
Sales and Marketing staffs in the second half of the year, as we positioned
ourselves for expected future growth.

     General and Administrative Expenses.  General and administrative expenses
include administrative salaries and related benefits, depreciation and
amortization, management fees, recruiting and relocation expenses, as well as
legal, accounting and other professional fees. General and administrative
expenses were $3.2 million, or 24.4% of total revenue, in 1999, representing a
32.4% increase from $2.4 million, or 23.0% of total revenue, for the same period
in 1998. This increase was primarily due to an increased provision for
uncollectible accounts, an increase in a sales tax provision, recruiting fees
and other professional services.

     Non-cash Compensation Expenses.  Non-cash compensation of $188,000, or 1.5%
of total revenue, was charged in connection with stock options granted at a
price below market value, primarily to an executive officer.

                                        7
<PAGE>   9

     Redeemable Stock Purchase Warrant.  Changes for the increase in value of
our redeemable common stock purchase warrant was $1.6 million, or 12.3% of total
revenue for 1999. This change represents the increase in the value of the
warrant granted in connection with a $1,000,000 loan. The warrant was exercised
and the loan was repaid in September 1999.

     Other Income (Expense).  Other income was $336,000, or 2.6% of total
revenue, for 1999 compared to expense of $107,000 or 1.0% in 1998. The net
interest income reflects the impact of the proceeds from investment of the funds
received in the initial public offering for the fourth quarter of 1999.

QUARTERLY RESULTS OF OPERATIONS

     The following table presents unaudited quarterly statements of operations
data for each of our last eight quarters. The unaudited quarterly financial
statements have been prepared on substantially the same basis as the audited
financial statements contained herein. In the opinion of management, the
unaudited quarterly financial statements include all adjustments, consisting
only of normal recurring adjustments, that we consider to be necessary to fairly
present this information when read in conjunction with our financial statements
and related notes appearing elsewhere in this report. The results of operations
for any quarter are not necessarily indicative of the results to be expected for
any future period.

<Table>
<Caption>
                                                            THREE MONTHS ENDED
                          ---------------------------------------------------------------------------------------
                          MAR. 31,   JUNE 30,   SEPT. 30,   DEC. 31,   MAR. 31,   JUNE 30,   SEPT. 30,   DEC. 31,
                            1999       1999       1999        1999       2000       2000       2000        2000
                          --------   --------   ---------   --------   --------   --------   ---------   --------
                                                              (IN THOUSANDS)
<S>                       <C>        <C>        <C>         <C>        <C>        <C>        <C>         <C>
Revenue:
  Product revenue.......  $ 1,364     $1,442     $ 1,798    $ 2,127    $ 1,106    $ 1,109     $   785    $   679
  Service revenue.......    1,294      1,323       1,685      1,932      2,012      1,663       1,696      1,640
                          -------     ------     -------    -------    -------    -------     -------    -------
          Total
            revenue.....    2,658      2,765       3,483      4,059      3,118      2,772       2,481      2,319
Costs of revenue:
  Product costs.........      272        296         412        435        499        410         373        260
  Service costs.........      428        444         621        846        897      1,015       1,042        684
                          -------     ------     -------    -------    -------    -------     -------    -------
          Total cost of
            revenue.....      700        740       1,033      1,281      1,396      1,425       1,415        944
                          -------     ------     -------    -------    -------    -------     -------    -------
Gross profit............    1,958      2,025       2,450      2,778      1,722      1,347       1,066      1,375
Operating expenses:
  Research and
     development........      398        401         612        801        898        937         877      1,011
  Sales and marketing...    1,027      1,244       1,724      2,810      3,412      4,151       3,358      2,154
  General and
     administrative.....      803        574         743      1,041      1,066      1,484       1,497      1,553
                          -------     ------     -------    -------    -------    -------     -------    -------
  Restructuring.........       --         --          --         --         --         --          --        310
  Non-cash
     compensation.......       --         --         153         35         --         --          --         --
                          -------     ------     -------    -------    -------    -------     -------    -------
          Total
            operating
            expenses....    2,228      2,219       3,232      4,687      5,376      6,572       5,732      5,028
                          -------     ------     -------    -------    -------    -------     -------    -------
Operating loss..........     (270)      (194)       (782)    (1,909)    (3,654)    (5,225)     (4,666)    (3,653)
Increase in redeemable
  stock purchase
  warrants..............     (734)        --        (856)        --         --         --          --         --
Other income
  (expense).............      (41)       (37)        (89)       503        518        510         493        453
                          -------     ------     -------    -------    -------    -------     -------    -------
          Net loss......  $(1,045)    $ (231)    $(1,727)   $(1,406)   $(3,136)   $(4,715)    $(4,173)   $(3,200)
                          =======     ======     =======    =======    =======    =======     =======    =======
</Table>

LIQUIDITY AND CAPITAL RESOURCES

     Historically, we have funded our operations from cash generated from
operations and the issuance of long-term debt. In October 1999, we completed our
initial public offering that provided us approximately

                                        8
<PAGE>   10

$43 million in net cash proceeds. We had cash and cash equivalents of $28.3
million at December 31, 2000 and $42.8 million at December 31, 1999.

     Cash used in operating activities during 2000 and 1999 was $13.3 million
and $1.77 million, respectively. This increase reflects the net impact of the
increase in our net loss, which was offset by decreases in accounts receivable,
accounts payable and accrued expenses, and in deferred revenue.

     Our investing activities primarily include expenditures for fixed assets in
support of our product development activities and infrastructure. Net cash used
in investing activities increased to $1.8 million in 2000, compared to $1.0 in
1999. This increase resulted from an increase in fixed assets purchased during
our expansion.

     Net cash provided by financing activities was $594,000 in 2000, compared to
$45.5 million in 1999. This change was due primarily to our initial public
offering that provided $43.0 million in cash proceeds in October 1999. In 2000,
funds provided by financing activity primarily resulted from proceeds from the
exercise of options which vested during the year. Other significant events in
1999 were the sale of Series A redeemable convertible preferred stock for $6.0
million, the redemption of common stock for $4.0 million, the repayment of the
loan from Sirrom Investments, Inc. for $1.0 million, and the sale of common
stock for $500,000.

     Because we have not generated significant revenue from sales outside the
United States, we have not sustained material foreign currency exchange losses
and presently do not attempt to hedge our exposure to fluctuations in foreign
currency exchange rates. Should our revenue from international sales increase,
and should such sales be denominated in foreign currencies, we intend to adopt a
hedging strategy against foreign currency fluctuations.

     We believe that our existing liquidity and capital resources will be
sufficient to satisfy our cash requirements for at least the next 12 months.
Beyond the next 12 months, we expect to remain cash flow positive from
operations and to fund any ongoing investments in capital equipment from cash
flow from operations and the remaining proceeds from the IPO. However, to the
extent that income from operations is insufficient to implement our business
strategies, or if we identify additional strategic investments in our business,
technology or products, we may be required to raise additional funds through
equity or debt financing. If adequate funds are not available on acceptable
terms or at all, our ability to implement our business strategies or take
advantage of unanticipated opportunities or otherwise respond to competitive
pressures would be limited. There can be no assurance that we will be able to
raise these additional funds on terms acceptable to us, or at all.

     On January 10, 2001, we announced we had retained the investment banking
firm of Robinson-Humphrey Company LLC to explore a range of strategic
alternatives to enhance shareholder value, including a possible sale of our
company.

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) The following documents are filed as part of this report:

     1. Financial Statements

     The financial statements are submitted as a separate section of this
report, beginning on page F-1.

     2. Financial Statement Schedule

(b) Reports on Form 8-K.

     None.

                                        9
<PAGE>   11

(c) Exhibits.  The following exhibits are filed as part of, or are incorporated
by reference into, this report on Form 10-K/A:

<Table>
<Caption>
EXHIBIT
NUMBER                                DESCRIPTION
-------                               -----------
<C>      <C>  <S>
 3.1      --  Amended and Restated Articles of Incorporation of
              Telemate.Net Software, Inc. (incorporated by reference to
              Exhibit 3.1 to the Company's Registration Statement on Form
              S-1 (File No. 33-81443))
 3.2      --  Amended and Restated Bylaws of Telemate.Net Software, Inc.
              (incorporated by reference to Exhibit 3.3 to the Company's
              Registration Statement on Form S-1 (File No. 33-81443))
 4.1      --  See Exhibits 3.1 and 3.2 for provisions of the Amended and
              Restated Articles of Incorporation and Amended and Restated
              Bylaws of the Registrant defining rights of the holders of
              common stock of Telemate.Net Software, Inc.
 4.2      --  Specimen Stock Certificate (incorporated by reference to
              Exhibit 4.2 to the Company's Registration Statement on Form
              S-1 (File No. 33-81443))
10.1      --  Lease Agreement, dated January 28, 1992, between KGE
              Associates, LP and Complementary Solutions, Inc.
              (incorporated by reference to Exhibit 10.2 to the Company's
              Registration Statement on Form S-1 (File No. 33-81443))
10.2      --  First Amendment to Lease, dated June 11, 1993, between KGE
              Associates, LP and LP and Complementary Solutions, Inc.
              (incorporated by reference to Exhibit 10.3 to the Company's
              Registration Statement on Form S-1 (File No. 33-81443))
10.3      --  Second Amendment to Lease, dated June 22, 1994, between KGE
              Associates, LP and LP and Complementary Solutions, Inc.
              (incorporated by reference to Exhibit 10.4 to the Company's
              Registration Statement on Form S-1 (File No. 33-81443))
10.4      --  Third Amendment to Lease, dated March 30, 1995, between KGE
              Associates, LP and LP and Complementary Solutions, Inc.
              (incorporated by reference to Exhibit 10.5 to the Company's
              Registration Statement on Form S-1 (File No. 33-81443))
10.5      --  Fourth Amendment to Lease, dated June 14, 1996, between KGE
              Associates, LP and LP and Telemate Software, Inc.
              (incorporated by reference to Exhibit 10.6 to the Company's
              Registration Statement on Form S-1 (File No. 33-81443))
10.6      --  Fifth Amendment to Lease, dated July 26, 1996, between KGE
              Associates, LP and Telemate Software, Inc. (incorporated by
              reference to Exhibit 10.7 to the Company's Registration
              Statement on Form S-1 (File No. 33-81443))
10.7      --  Sixth Amendment to Lease, dated August 2, 1996, between KGE
              Associates, LP and Telemate Software, Inc. (incorporated by
              reference to Exhibit 10.8 to the Company's Registration
              Statement on Form S-1 (File No. 33-81443))
10.8      --  Seventh Amendment to Lease, dated July 16, 1998, between KGE
              Associates, LP and Telemate Software, Inc. (incorporated by
              reference to Exhibit 10.9 to the Company's Registration
              Statement on Form S-1 (File No. 33-81443))
10.9      --  Eighth Amendment to Lease, dated November 9, 1999, between
              KGE Associates, LP and Telemate.Net Software, Inc.
              (incorporated by reference to Exhibit 10.15 to the Company's
              Annual Report on Form K for the year ended December 31, 1999
              (File No. 000-26735))
10.10     --  Ninth Amendment to Lease, dated November 10, 1999, between
              KGE Associates, LP and Telemate.Net Software, Inc.
              (incorporated by reference to Exhibit 10.16 to the Company's
              Annual Report on Form K for the year ended December 31, 1999
              (File No. 000-26735))
10.11     --  Tenth Amendment to Lease, dated November 15, 1999, between
              KGE Associates, LP and Telemate.Net Software, Inc.
              (incorporated by reference to Exhibit 10.17 to the Company's
              Annual Report on Form K for the year ended December 31, 1999
              (File No. 000-26735))
</Table>

                                        10
<PAGE>   12

<Table>
<Caption>
EXHIBIT
NUMBER                                DESCRIPTION
-------                               -----------
<C>      <C>  <S>
10.12     --  Eleventh Amendment to Lease, dated May 24, 2000 between
              Telemate.Net Software, Inc. and KGE Associates, LP and
              Telemate.Net Software, Inc. (incorporated by reference to
              Exhibit 10.12 to the Company's Annual Report on Form 10-K
              for the year ended December 31, 2000 (File No. 000-26735))
10.13     --  Amended and Restated Employment Agreement of Richard L.
              Mauro dated March 2, 2001 (incorporated by reference to
              Exhibit 10.13 to the Company's Annual Report on Form 10-K
              for the year ended December 31, 2000 (File No. 000-26735))
10.14     --  Form of Executive Employment Agreements (incorporated by
              reference to Exhibit 10.14 to the Company's Annual Report on
              Form 10-K for the year ended December 31, 2000 (File No.
              000-26735))
10.15     --  Telemate Software, Inc. Stock Incentive Plan (incorporated
              by reference to Exhibit 10.10 to the Company's Registration
              Statement on Form S-1 (File No. 33-81443))
10.16     --  Telemate.Net Software, Inc. 1999 Stock Incentive Plan
              (incorporated by reference to Exhibit 10.13 to the Company's
              Registration Statement on Form S-1 (File No. 33-81443))
10.17     --  Amendment to Telemate.Net Software, Inc. 1999 Stock
              Incentive Plan (incorporated by reference to Exhibit 10.14
              to the Company's Registration Statement on Form S-1 (File
              No. 33-81443))
10.18     --  Second Amendment to Telemate.Net Software, Inc. 1999 Stock
              Incentive Plan (incorporated by reference to Exhibit 10.18
              to the Company's Annual Report on Form 10-K for the year
              ended December 31, 2000 (File No. 000-26735))
10.19     --  Telemate.Net Software, Inc. Employee Stock Purchase Plan
              (incorporated by reference to Exhibit 10.18 to the Company's
              Registration Statement on Form S-1 (File No. 33-81443))
23.1      --  Consent of KPMG LLP
24.1      --  Powers of Attorney (included on signature page)
99.1      --  Safe Harbor Compliance Statement for Forward-Looking
              Statements (incorporated by reference to Exhibit 99.1 to the
              Company's Annual Report on Form 10-K for the year ended
              December 31, 2000 (File No. 000-26735))
</Table>

                                        11
<PAGE>   13

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 12th day of
October, 2001.

                                          TELEMATE.NET SOFTWARE, INC.

                                          By:      /s/ JANET VAN PELT
                                            ------------------------------------
                                                       Janet Van Pelt
                                              Senior Vice President, Finance &
                                                       Operations, and
                                                  Chief Financial Officer

                                        12
<PAGE>   14

                          TELEMATE.NET SOFTWARE, INC.

                              FINANCIAL STATEMENTS

                       DECEMBER 31, 2000, 1999, AND 1998

                       (WITH INDEPENDENT AUDITORS' REPORT
                                    THEREON)

                                       F-1
<PAGE>   15

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Telemate.Net Software, Inc.:

     We have audited the accompanying balance sheets of Telemate.Net Software,
Inc. as of December 31, 2000 and 1999, and the related statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2000. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 financial position of Telemate.Net Software, Inc.
as of December 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

KPMG LLP
February 6, 2001

                                       F-2
<PAGE>   16

                          TELEMATE.NET SOFTWARE, INC.

                                 BALANCE SHEETS

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2000        1999
                                                              ---------   ---------
                                                              (IN THOUSANDS, EXCEPT
                                                                   SHARE DATA)
<S>                                                           <C>         <C>
                                      ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 28,263    $ 42,755
  Trade accounts receivable, net of allowances of $500
     and $300 for 2000 and 1999, respectively...............     2,264       3,467
  Prepaid expenses and other current assets.................       511         518
                                                              --------    --------
          Total current assets..............................    31,038      46,740
Property and equipment, net.................................     2,215       1,474
Other assets................................................        75          60
                                                              --------    --------
                                                              $ 33,328    $ 48,274
                                                              ========    ========
                       LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $    615    $  1,212
  Accrued expenses and other liabilities....................     2,089       1,705
  Deferred revenue..........................................     2,933       3,041
                                                              --------    --------
          Total liabilities.................................     5,637       5,958
                                                              --------    --------
Shareholders' equity:
  Preferred stock, $.01 par value; 19,700,000 authorized
     and undesignated, none issued..........................        --          --
  Common stock, $.01 par value; 100,000,000 shares
     authorized, 7,958,486 and 7,359,962 shares issued and
     outstanding at December 31, 2000 and 1999,
     respectively...........................................        80          73
  Additional paid-in capital................................    53,123      52,537
  Accumulated deficit.......................................   (25,491)    (10,267)
  Notes receivable and accrued interest from shareholders...       (21)        (27)
                                                              --------    --------
          Total shareholders' equity........................    27,691      42,316
                                                              --------    --------
Commitments and contingencies
                                                              --------    --------
                                                              $ 33,328    $ 48,274
                                                              ========    ========
</Table>

                See accompanying notes to financial statements.

                                       F-3
<PAGE>   17

                          TELEMATE.NET SOFTWARE, INC.

                            STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                   YEAR ENDED DECEMBER 31,
                                                             ------------------------------------
                                                                2000         1999         1998
                                                             ----------   ----------   ----------
                                                              (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                                          <C>          <C>          <C>
Revenue:
  Product sales............................................  $    3,679   $    6,731   $    5,450
  Service revenue..........................................       7,011        6,234        4,932
                                                             ----------   ----------   ----------
          Total revenue....................................      10,690       12,965       10,382
                                                             ----------   ----------   ----------
Cost of revenue:
  Product costs............................................       1,542        1,415          958
  Service costs............................................       3,638        2,339        1,502
                                                             ----------   ----------   ----------
          Total cost of revenue............................       5,180        3,754        2,460
                                                             ----------   ----------   ----------
          Gross profit.....................................       5,510        9,211        7,922
                                                             ----------   ----------   ----------
Operating expenses:
  Research and development.................................       3,723        2,212        1,929
  Sales and marketing......................................      13,075        6,805        4,804
  General and administrative...............................       5,600        3,349        2,388
  Restructuring............................................         310           --           --
                                                             ----------   ----------   ----------
          Total operating expenses.........................      22,708       12,366        9,121
                                                             ----------   ----------   ----------
          Operating loss...................................     (17,198)      (3,155)      (1,199)
                                                             ----------   ----------   ----------
Interest income (expense):
  Increase in redeemable stock purchase warrant............          --       (1,590)          --
  Other interest expense...................................          --         (198)        (142)
  Interest income..........................................       1,974          534           35
                                                             ----------   ----------   ----------
          Total interest income (expense)..................       1,974       (1,254)        (107)
                                                             ----------   ----------   ----------
          Net loss before income taxes.....................     (15,224)      (4,409)      (1,306)
Income taxes...............................................          --           --           --
                                                             ----------   ----------   ----------
          Net loss.........................................  $  (15,224)  $   (4,409)  $   (1,306)
                                                             ==========   ==========   ==========
Basic and diluted net loss per share.......................  $    (1.96)  $    (1.07)  $    (0.40)
                                                             ==========   ==========   ==========
Basic and diluted weighted-average shares outstanding......   7,750,614    4,102,999    3,261,813
                                                             ==========   ==========   ==========
</Table>

                See accompanying notes to financial statements.

                                       F-4
<PAGE>   18

                          TELEMATE.NET SOFTWARE, INC.

                       STATEMENTS OF SHAREHOLDERS' EQUITY

<Table>
<Caption>
                                                                                        NOTE
                                                                                     RECEIVABLE         TOTAL
                                       COMMON STOCK      ADDITIONAL                  AND ACCRUED    SHAREHOLDERS'
                                    ------------------    PAID-IN     ACCUMULATED   INTEREST FROM      EQUITY
                                     SHARES     AMOUNT    CAPITAL       DEFICIT     SHAREHOLDERS      (DEFICIT)
                                    ---------   ------   ----------   -----------   -------------   -------------
                                                          (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                 <C>         <C>      <C>          <C>           <C>             <C>
Balance at December 31, 1997......  3,261,813    $33      $   170      $   (585)        $(361)        $   (743)
Grant of compensatory stock
  options.........................         --     --            6            --            --                6
Accrued interest on shareholder
  notes...........................         --     --           --            --           (22)             (22)
Net loss..........................         --     --           --        (1,306)           --           (1,306)
                                    ---------    ---      -------      --------         -----         --------
Balance at December 31, 1998......  3,261,813     33          176        (1,891)         (383)          (2,065)
Issuance of common stock for
  software product................     30,000     --          306            --            --              306
Effects of change from S
  corporation to C corporation for
  income taxes:
  Distributions...................         --     --           --          (269)          264               (5)
  Reclassification of accumulated
    deficit to additional paid-in
    capital.......................         --     --         (296)          296            --               --
Purchase and retirement of common
  stock...........................   (600,000)    (6)          --        (3,994)           --           (4,000)
Sale of common stock..............     75,000      1          499            --            --              500
Conversion of Series A redeemable
  convertible preferred stock to
  common stock....................    900,000      9        5,941            --            --            5,950
Rescission of put feature on
  redeemable stock purchase
  warrant and issuance of common
  stock...........................    122,418      1        1,713            --            --            1,714
Stock option exercises............    121,731      1          106            --            --              107
Proceeds from initial public
  offering, net of costs..........  3,449,000     34       43,904            --            --           43,938
Grant of compensatory stock
  options.........................         --     --          188            --            --              188
Repayment of notes receivable from
  shareholders....................         --     --           --            --           109              109
Accrued interest on shareholder
  notes...........................         --     --           --            --           (17)             (17)
Net loss..........................         --     --           --        (4,409)           --           (4,409)
                                    ---------    ---      -------      --------         -----         --------
Balance at December 31, 1999......  7,359,962     73       52,537       (10,267)          (27)          42,316
Issuance of common stock under
  Employee Stock Purchase Plan....     53,656      1           82            --            --               83
Stock option exercises............    544,868      6          497            --            --              503
Compensatory stock options........         --     --            7            --            --                7
Repayment of notes receivable from
  shareholders....................         --     --           --            --             8                8
Accrued interest on shareholder
  notes...........................         --     --           --            --            (2)              (2)
Net loss..........................         --     --           --       (15,224)           --          (15,224)
                                    ---------    ---      -------      --------         -----         --------
Balance at December 31, 2000......  7,958,486    $80      $53,123      $(25,491)        $ (21)        $ 27,691
                                    =========    ===      =======      ========         =====         ========
</Table>

                See accompanying notes to financial statements.

                                       F-5
<PAGE>   19

                          TELEMATE.NET SOFTWARE, INC.

                            STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------    -------    -------
                                                                      (IN THOUSANDS)
<S>                                                           <C>         <C>        <C>
Cash flows from operating activities:
  Net loss..................................................  $(15,224)   $(4,409)   $(1,306)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation and amortization..........................     1,017        467        353
     Provision for bad debts, returns and allowances........       718        525        404
     Compensation on stock options..........................         7        188          6
     Interest earned on shareholder notes...................        (2)       (17)       (22)
     Amortization of discount on redeemable stock purchase
       warrants.............................................        --         91         33
     Accretion of common stock put warrants.................        --      1,590         --
     Changes in operating assets and liabilities:
       Trade accounts receivable............................       485     (2,183)      (643)
       Prepaid expenses and other current assets............         7       (391)        77
       Other assets.........................................       (15)        43         24
       Accounts payable, accrued expenses, and other
          liabilities.......................................      (213)     1,679         54
       Deferred revenue.....................................      (108)       651        249
                                                              --------    -------    -------
          Net cash used in operating activities.............   (13,328)    (1,766)      (771)
                                                              --------    -------    -------
Cash flows from investing activities:
  Purchases of property and equipment.......................    (1,758)    (1,044)      (306)
                                                              --------    -------    -------
Cash flows from financing activities:
  Proceeds (payments) from/on credit facility...............        --        (80)        80
  Proceeds (payments) from/on issuance of long-term debt,
     net....................................................        --     (1,000)       965
  Proceeds from issuance of common stock under Employee
     Stock Purchase Plan....................................        83         --         --
  Proceeds from the exercise of stock options...............       503        107         --
  Proceeds from issuance of common stock, net...............        --     44,438         --
  Proceeds from issuance of Series A redeemable convertible
     preferred stock, net...................................        --      5,950         --
  Purchase and retirement of common stock...................        --     (4,000)        --
  Payments received on notes receivable from shareholders...         8        109         --
  Shareholder distributions.................................        --         (5)        --
                                                              --------    -------    -------
          Net cash provided by financing activities.........       594     45,519      1,045
                                                              --------    -------    -------
          Net change in cash and cash equivalents...........   (14,492)    42,709        (32)
Cash and cash equivalents at beginning of year..............    42,755         46         78
                                                              --------    -------    -------
Cash and cash equivalents at end of year....................  $ 28,263    $42,755    $    46
                                                              ========    =======    =======
Supplemental disclosure of cash paid for interest...........  $     --    $   106    $   110
                                                              ========    =======    =======
Supplemental disclosure of reduction of notes from
  shareholders in exchange for distributions................  $     --    $   264    $    --
                                                              ========    =======    =======
</Table>

                See accompanying notes to financial statements.

                                       F-6
<PAGE>   20

                          TELEMATE.NET SOFTWARE, INC.

                         NOTES TO FINANCIAL STATEMENTS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) BUSINESS

     Telemate.Net Software, Inc. (the "Company") develops, markets and supports
internet and voice network usage management software which allows customers to
manage the use of their voice and data networks. Organizations utilize the
Company's products to help improve employee productivity, enhance network
security, and control and recover network costs.

     Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities as of the balance sheet dates and revenues and
expenses for the reporting periods to prepare these financial statements in
conformity with accounting principles generally accepted in the United States of
America. Actual results could differ from those estimates.

(B) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Revenue Recognition and Deferred Revenue

     The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") No. 97-2,
Software Revenue Recognition, SOP 98-4, Deferral of the Effective Date of a
Provision of SOP 97-2 and SOP No. 98-9, Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions.

     Product revenue primarily consists of software license fees. Hardware sales
are also included in product revenue and represent less than 10% of total
revenue. Service revenue includes installation, training and support services.

     The Company uses the residual method to recognize revenue under
multi-element arrangements. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement is
recognized as revenue. Any discounts offered are applied to the delivered
elements. The Company has established fair value for the undelivered elements
based on the price charged when such elements are sold separately.

     Revenue from license fees and hardware is recognized when persuasive
evidence of an agreement exists (in the form of a signed order confirmation or
purchase order), delivery of the product has occurred, the fee is fixed or
determinable and collectibility is reasonably assured. Although the Company does
not typically offer a contractual right of return, revenue is reduced for
estimated customer allowances. Such estimates are based on historical allowance
rates.

     Revenue from installation and training is recognized upon performance of
the related services. Installation and training services are offered separately
and are not essential to the functionality of the software.

     Software support is offered separately and includes the right to
unspecified upgrades on a when-and-if available basis. Support revenue is
deferred and recognized ratably over the term of the related contract, usually
one year. Specified upgrades are not typically offered to customers.

     Deferred revenue represents payments received from customers and billings
invoiced to customers in advance of revenue recognition.

  Cash and Cash Equivalents

     The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.

                                       F-7
<PAGE>   21
                          TELEMATE.NET SOFTWARE, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                       (IN THOUSANDS, EXCEPT SHARE DATA)

  Property and Equipment

     Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are provided using accelerated
and straight-line methods over the shorter of the estimated useful life or lease
term. The estimated useful lives of the assets are as follows:

<Table>
<S>                                                           <C>
Computer equipment and purchased software...................  3 -- 5 years
Furniture and office equipment..............................  5 -- 7 years
Leasehold improvements......................................       5 years
</Table>

  Computation of Net Loss Per Share

     The Company has presented net loss per share pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, and the
Securities and Exchange Commission Staff Accounting Bulletin No. 98. Pursuant to
SEC Staff Accounting Bulletin No. 98, common stock and convertible preferred
stock issued for nominal consideration, prior to the effective date of the
initial public offering ("IPO"), are required to be included in the calculation
of basic and diluted net income (loss) per share, as if they were outstanding
for all periods presented. The Company has not had any such issuances or grants
for nominal consideration.

     The Company has excluded all outstanding stock options (note 7) from the
calculation of diluted net loss per share because the shares are antidilutive.
As a result, basic and diluted net loss per share are identical for all periods
presented.

  Research and Development and Software Development Costs

     Research and development costs are expensed as incurred. Costs incurred
subsequent to establishing technological feasibility, in the form of a working
model, are capitalized and amortized over their estimated useful lives. To date,
software development costs incurred after technological feasibility has been
established have not been material.

  Income Taxes

     Through June 16, 1999, the shareholders of the Company elected that the
earnings of the Company be taxed under the S Corporation provisions of the
Internal Revenue Code. As a result of this election, the Company had not
provided for federal or state income tax expense or any deferred income taxes as
earnings were passed through to, and the related income tax liabilities became
the individual responsibility of, the shareholders of the Company.

     On June 16, 1999, the Company's S corporation status terminated upon
closing of the Series A preferred stock sale (note 6(c)).

     Subsequent to June 16, 1999, income taxes were accounted for under the
asset and liability method. In accordance with the asset and liability method,
deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred income tax assets and
liabilities of changes in tax rates is recognized in income in the period that
includes the enactment date.

                                       F-8
<PAGE>   22
                          TELEMATE.NET SOFTWARE, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                       (IN THOUSANDS, EXCEPT SHARE DATA)

  Stock Compensation Plan

     The Company accounts for stock-based compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") No. 25,
Accounting for Stock Issued to Employees, and complies with the disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB
No. 25, compensation cost for fixed plan accounting is recognized to the extent
that the estimated fair value of the underlying stock exceeds the exercise price
on the date of grant.

  Comprehensive Income

     No statement of comprehensive income has been included in the accompanying
financial statements since the results would not differ from the accompanying
statements of operations or shareholders' equity.

  Industry Segment

     Under SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, the Company operates and manages its business in one reportable
segment, that being a software and services provider to the network usage
management market.

  Fair Value of Financial Instruments

     The carrying value of the Company's financial instruments approximates fair
value due to their short-term nature.

  Recent Accounting Pronouncements

     SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended, is effective for the Company beginning January 2001. The new
Statement requires all derivatives to be recorded on the balance sheet at fair
value and establishes accounting treatment for three types of hedges: hedges of
changes in the fair value of assets, liabilities or firm commitments, hedges of
the variable cash flows of forecasted transactions, and hedges of foreign
currency exposures of net investments in foreign operations. The Company does
not anticipate there will be a material impact on the result of operations or
financial position upon adoption of this standard.

     In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation ("Interpretation No. 44"),
with an effective date of July 1, 2000. Interpretation No. 44 clarifies guidance
for certain issues that arose in the application of APB No. 25. The adoption of
Interpretation No. 44 did not have an impact on the Company's results of
operations or financial position.

  Reclassification

     Certain amounts in the 1998 and 1999 financial statements have been
reclassified to conform to the presentation adopted in the 2000 financial
statements.

                                       F-9
<PAGE>   23
                          TELEMATE.NET SOFTWARE, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                       (IN THOUSANDS, EXCEPT SHARE DATA)

2. PROPERTY AND EQUIPMENT

     Property and equipment consists of the following at December 31:

<Table>
<Caption>
                                                               2000     1999
                                                              ------   ------
<S>                                                           <C>      <C>
Computer equipment and purchased software...................  $3,891   $2,619
Furniture and office equipment..............................     713      484
Leasehold improvements......................................     378      121
                                                              ------   ------
                                                               4,982    3,224
Less accumulated depreciation and amortization..............   2,767    1,750
                                                              ------   ------
                                                              $2,215   $1,474
                                                              ======   ======
</Table>

3. ACCRUED EXPENSES AND OTHER LIABILITIES

     Accrued expenses and other liabilities consist of the following at December
31:

<Table>
<Caption>
                                                               2000     1999
                                                              ------   ------
<S>                                                           <C>      <C>
Accrued bonuses.............................................  $  553   $  408
Personnel related accruals..................................     690      490
Other accruals..............................................     846      807
                                                              ------   ------
                                                              $2,089   $1,705
                                                              ======   ======
</Table>

4. NOTE PAYABLE AND REDEEMABLE STOCK PURCHASE WARRANT

     In March 1998, the Company obtained $1 million from the issuance of a
secured promissory note. The proceeds of the note provided working capital for
the Company's continued product development activities. During September 1999,
the outstanding balance was repaid.

     In connection with the note, the Company issued a warrant for the purchase
of common stock at an exercise price of $.003 per share. The terms of the stock
purchase warrant provide for the number of shares available for exercise to
increase at certain future dates if the note payable remains outstanding. The
lender exercised its warrants in September 1999 in a cashless exercise using 30
shares at the current market value at the date of exercise.

     The terms of the stock purchase warrant included many rights and privileges
in favor of the lender, including but not limited to certain registration rights
and put rights for cash for a period of 30 days immediately prior to the
expiration thereof at a price equal to the fair market value of the common stock
issuable to the holder upon exercise, as defined. In accordance with Emerging
Issues Task Force No. 96-13, Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock, the Company
estimated the fair value of the warrant at the date of issuance. The Company
anticipated repaying the indebtedness in February 2000; accordingly, the Company
amortized the initial fair value of the warrant to the extent of 122,448 shares,
or $123, over 23 months as additional interest cost. The Company adjusted the
carrying value of the warrant to fair value with changes in fair value reported
in interest expense. At the exercise date, the fair value was $14.00 per share,
as determined by the Black-Scholes pricing model and, accordingly, the Company
increased the redeemable stock purchase warrant carrying value and recorded a
charge of $1,590 to interest expense.

                                       F-10
<PAGE>   24
                          TELEMATE.NET SOFTWARE, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                       (IN THOUSANDS, EXCEPT SHARE DATA)

5. NOTES RECEIVABLE FROM SHAREHOLDERS

     In 1997 and prior years, the Company issued shares of common stock for
options that were exercised under the terms of the Company's Stock Incentive
Plan. Upon exercise, the Company received cash and full recourse promissory
notes payable to the Company secured by this common stock. The notes accrue
interest at 110% of the applicable federal rate, as adjusted each January 1, and
are due at various dates through 2007.

     In addition, funds were also advanced to certain shareholders in 1997 and
prior years for various reasons. The shareholders signed promissory notes for
the advanced funds. The notes bore interest at rates ranging from 6.00% to
7.11%. These notes were repaid in 1999.

6. SHAREHOLDERS' EQUITY

(A) AMENDMENT IN THE ARTICLES OF INCORPORATION

     Effective June 16, 1999, the articles of incorporation of the Company were
amended whereby the amount of common stock authorized for issuance was increased
from 10 million shares to 100 million shares. Additionally, the articles of
incorporation were amended whereby 20 million shares of preferred stock with a
par value of $.01 per share were authorized, part or all of which shares of
preferred stock will be established and designated from time to time by the
Board of Directors in such series and with such preferences, limitations, and
relative rights as may be determined by the Board of Directors. Of the preferred
shares authorized, Series A redeemable convertible preferred stock ("Preferred
Stock") was established and had many rights and privileges, including, but not
limited to, those included herein. The Series A Preferred Stock was
automatically converted into three shares of common stock for each share of
preferred upon the completion of the Company's public offering (note 6(d)).

(B) COMMON STOCK

     On June 8, 1999, the Company entered into an asset purchase agreement
whereby the Company issued 30,000 shares of common stock in exchange for a
software product from an unrelated party. The purchase was valued at $306,000
based on the estimated fair value of common stock at the time of the
accomplishment of certain milestones. The seller has certain rights, privileges,
and restrictions, including, but not limited to, piggyback registration rights.

     On June 16, 1999, the Company purchased and retired an aggregate of 600,000
shares of common stock from two principal shareholders, one of which is a member
of the Company's Board of Directors, for $4,000,000.

     On June 21, 1999, the Company sold 75,000 shares of common stock to a board
member for $500,000 in total proceeds. The purchaser has certain rights,
including, but not limited to, registration rights and piggyback rights.

     On September 2, 1999, the Company consummated a three-for-one stock split
in the form of a stock dividend. The information in the accompanying financial
statements has been retroactively restated to reflect the effects of the stock
split.

(C) SALE OF SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK

     On June 16, 1999, the Company issued 300,000 shares of Series A Preferred
Stock for cash totaling $6,000,000 ($5,950,000 after expenses of $50,000). Upon
the completion of the Company's initial public offering, the Preferred Stock
automatically converted into three shares of common stock for each share of
preferred stock.

                                       F-11
<PAGE>   25
                          TELEMATE.NET SOFTWARE, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                       (IN THOUSANDS, EXCEPT SHARE DATA)

     The holders of Preferred Stock were entitled to receive a 12% accruing
dividend, compounded annually, payable only upon liquidation or redemption.
Holders of the Preferred Stock were also entitled to participate equally (on an
as-converted basis) in any cash dividends paid to any other class of equity
securities of the Company. The Preferred Stock had voting rights, and the
holders of the Preferred Stock were entitled to representation by two board
members. The holders of Preferred Stock also had the right of first refusal for
sale of additional shares.

(D) COMPLETION OF INITIAL PUBLIC OFFERING

     On October 4, 1999, the Company successfully completed its initial public
offering of common stock. The Company sold 3,284,000 shares of common stock in
the initial public offering for approximately $42,758 less issuance costs of
$968.

     On November 1, 1999, the Company sold 165,000 shares of common stock as
part of the underwriters' overallotment from the initial public offering for
$2,148.

7. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN

(A) STOCK OPTION PLANS

     In June 1999, the Board of Directors and Shareholders approved the 1999
Stock Incentive Plan (the "1999 Plan"), ultimately authorizing 2,055,384 options
to acquire common stock. The 1999 Plan provides for the grant of incentive stock
options, nonqualified stock options, and restricted stock awards to selected
employees. The stock options vest and become exercisable over a period
determined by the Board of Directors not to exceed 10 years after the date of
grant.

     The Company also has a previously existing Stock Incentive Plan (the
"Plan"), under which the Board of Directors was authorized to grant selected
employees, including officers, options to purchase the Company's common stock.
Options granted pursuant to the Plan are exercisable for shares of common stock
at a price not less than 100% of the fair market value on the date of grant. The
Plan provided for the grant of incentive stock options, nonqualified stock
options, and restricted stock awards to selected employees. The stock options
vest and become exercisable over a period determined by the Board of Directors
not to exceed ten years after the date of grant.

                                       F-12
<PAGE>   26
                          TELEMATE.NET SOFTWARE, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                       (IN THOUSANDS, EXCEPT SHARE DATA)

     A summary of stock option activity under the 1999 Plan and the Stock
Incentive Plan is as follows:

<Table>
<Caption>
                                                                          WEIGHTED-
                                                                           AVERAGE
                                                              NUMBER OF   EXERCISE
                                                               SHARES       PRICE
                                                              ---------   ---------
<S>                                                           <C>         <C>
Options outstanding at December 31, 1997....................  2,712,687     $0.82
Granted.....................................................    674,025      0.96
Canceled....................................................   (458,025)     0.91
                                                              ---------
Options outstanding at December 31, 1998....................  2,928,687      0.84
Granted.....................................................  1,398,446      9.51
Canceled....................................................   (136,332)     2.11
Exercised...................................................   (121,731)     0.88
                                                              ---------
Options outstanding at December 31, 1999....................  4,069,070      3.77
Granted.....................................................  1,741,700      2.25
Canceled....................................................   (887,250)     6.33
Exercised...................................................   (544,868)     0.92
                                                              ---------
Options outstanding at December 31, 2000....................  4,378,652      3.00
                                                              ---------
Options available for grant at December 31, 2000............     27,434
                                                              =========
</Table>

     The following table summarizes information about stock options outstanding
at December 31, 2000:

<Table>
<Caption>
                                                                   OPTIONS EXERCISABLE
                                                                 -----------------------
                                   WEIGHTED-      WEIGHTED-                    WEIGHTED-
                                    AVERAGE        AVERAGE                      AVERAGE
     RANGE OF         NUMBER       REMAINING       EXERCISE        NUMBER      EXERCISE
 EXERCISE PRICES    OUTSTANDING      LIFE           PRICE        EXERCISABLE     PRICE
------------------  -----------   -----------   --------------   -----------   ---------
<S>                 <C>           <C>           <C>              <C>           <C>
$ 0.53 --  0.96      2,530,602    6.0 years       $    0.76       1,915,702     $ 0.80
$ 1.19 --  3.13      1,025,050    9.4 years            2.82          14,667       3.13
$ 6.67                 282,000    8.4 years            6.67          54,000       6.67
$11.50                 451,500    8.7 years           11.50         140,001      11.50
$14.00 -- 14.19         89,500    8.8 years           14.00          60,000      14.00
                     ---------                                    ---------
                     4,378,652    7.3 years            3.00       2,184,370       2.01
                     =========                                    =========
</Table>

     The weighted-average fair value of options granted during the years ended
December 31, 2000, 1999, and 1998 was $2.25, $2.79, and $0.32, respectively. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: expected dividend yield of 0%; expected volatility of 0% for the
period of January 1, 1999 to October 1, 1999 and for the year ended December 31,
1998 and 75% for the period of October 1, 1999 to December 31, 1999 and for the
year ended December 31, 2000; risk-free interest rate of 6.12%, 5.52%, and 5.25%
for 2000, 1999, and 1998, respectively; and expected lives of six years.

                                       F-13
<PAGE>   27
                          TELEMATE.NET SOFTWARE, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                       (IN THOUSANDS, EXCEPT SHARE DATA)

     During 1999, the Company granted 31,482 options with an exercise price less
than the market value per share at the date of grant. As a result, a
compensation charge totaling approximately $167 will be expensed over the
vesting period. These options vest over periods ranging from immediately to
three years.

     The Company applies APB No. 25 and related interpretations in accounting
for its plans. Accordingly, no other compensation cost has been recognized for
its stock option plan because the exercise price of the option equals or exceeds
the fair value of the underlying stock at the date of the grant. Had
compensation costs for the Company's stock-based compensation plans been
determined in accordance with SFAS No. 123, the Company's net loss would have
been increased to the pro forma amounts indicated below:

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31,
                                                           ----------------------------
                                                             2000      1999      1998
                                                           --------   -------   -------
<S>                                                        <C>        <C>       <C>
Net loss:
  As reported............................................  $(15,224)  $(4,409)  $(1,306)
  Pro forma..............................................   (16,300)   (5,590)   (1,433)
Basic and diluted net loss per common share:
  As reported............................................     (1.96)    (1.07)    (0.40)
  Pro forma..............................................     (2.10)    (1.36)    (0.43)
</Table>

(B) EMPLOYEE STOCK PURCHASE PLAN

     In 2000, the Company adopted an Employee Stock Purchase Plan under which
500,000 shares of the Company's common stock can be sold to employees. Under the
terms of the plan, substantially all employees can choose each year to have up
to 10% of their annual earnings withheld to purchase the Company's common stock.
The purchase price of the stock is equal to 85% of the lower of the stock's
beginning or end of the quarter market price. At December 31, 2000, 53,656
shares had been purchased by and issued to employees under the Plan.

8. INCOME TAXES

     The Company did not record any income taxes through June 16, 1999 since it
was operating as an S corporation. On June 16, 1999, the Company converted to a
C corporation for income tax purposes and reclassified the accumulated deficit
totaling approximately $296 on this date to additional paid-in
capital which represented undistributed estimated losses during the S
corporation period limited to the amount of paid-in capital.

     The following table reconciles the expected corporate federal income tax
(computed by multiplying the Company's net loss before income taxes by 34%) to
the Company's actual provision for income taxes:

<Table>
<Caption>
                                                              YEAR ENDED    JUNE 17 THROUGH
                                                             DECEMBER 31,    DECEMBER 31,
                                                                 2000            1999
                                                             ------------   ---------------
<S>                                                          <C>            <C>
Expected tax benefit.......................................    $(5,176)         $(1,054)
State benefit, net of federal tax..........................       (474)            (142)
Permanent differences......................................         13              299
Change in valuation allowance..............................      5,882              897
Other, net.................................................       (245)              --
                                                               -------          -------
                                                               $    --          $    --
                                                               =======          =======
</Table>

                                       F-14
<PAGE>   28
                          TELEMATE.NET SOFTWARE, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                       (IN THOUSANDS, EXCEPT SHARE DATA)

     The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and liability as of December 31, 2000
and 1999, are presented below:

<Table>
<Caption>
                                                               2000      1999
                                                              -------   -------
<S>                                                           <C>       <C>
Deferred income tax assets:
  Allowances and deferrals..................................  $   283   $   210
  Accrued bonuses and vacation pay..........................       96       160
  Research and development capitalization...................      134       368
  Depreciation..............................................      101        --
  Stock option grants.......................................       60        62
  Net operating loss carryforwards..........................    6,829       821
                                                              -------   -------
          Gross deferred income tax assets..................    7,503     1,621
  Valuation allowance.......................................   (7,503)   (1,621)
                                                              -------   -------
                                                              $    --   $    --
                                                              =======   =======
</Table>

     In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment.

     At December 31, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $17,511 which are available to
offset future federal taxable income, if any, through 2021.

     Following are the provisions for income taxes on an unaudited pro forma
basis, using the asset and liability method, as if the Company had been a C
corporation, fully subject to federal and state income taxes.

     The components of unaudited pro forma income taxes are as follows:

<Table>
<Caption>
                                                              JANUARY 1
                                                               THROUGH     YEAR ENDED
                                                              JUNE 16,    DECEMBER 31,
                                                                1999          1998
                                                              ---------   ------------
<S>                                                           <C>         <C>
Pro forma income taxes:
  Current:
     Federal................................................    $ (9)         $ 9
     State..................................................      (4)           4
                                                                ----          ---
          Total current.....................................     (13)          13
                                                                ----          ---
  Deferred:
     Federal................................................      --           --
     State..................................................      --           --
                                                                ----          ---
          Total deferred....................................      --           --
                                                                ----          ---
          Total pro forma income taxes......................    $(13)         $13
                                                                ====          ===
</Table>

                                       F-15
<PAGE>   29
                          TELEMATE.NET SOFTWARE, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                       (IN THOUSANDS, EXCEPT SHARE DATA)

     The following table reconciles the expected corporate federal income taxes
(computed by multiplying the Company's net loss before income taxes by 34%) to
the Company's unaudited pro forma provision for (benefit from) income taxes:

<Table>
<Caption>
                                                              JANUARY 1
                                                               THROUGH     YEAR ENDED
                                                              JUNE 16,    DECEMBER 31,
                                                                1999          1998
                                                              ---------   ------------
<S>                                                           <C>         <C>
Expected pro forma provision for (benefit from) income
  taxes.....................................................    $(445)       $(444)
State income taxes, net of federal tax effect...............       (2)           2
Permanent differences.......................................      261           52
Change in valuation allowance...............................      192          486
Other, net..................................................      (19)         (83)
                                                                -----        -----
                                                                $ (13)       $  13
                                                                =====        =====
</Table>

     Pro forma net loss is actual net loss adjusted for unaudited pro forma
income tax expense (benefits) as follows:

<Table>
<Caption>
                                                              JANUARY 1
                                                               THROUGH     YEAR ENDED
                                                              JUNE 16,    DECEMBER 31,
                                                                1999          1998
                                                              ---------   ------------
<S>                                                           <C>         <C>
Unaudited pro forma net loss data:
  Pro forma provision for (benefit from) income taxes.......   $   (13)     $    13
                                                               =======      =======
  Pro forma net loss........................................   $(4,396)     $(1,319)
                                                               =======      =======
Unaudited pro forma basic and diluted net loss per share:...   $ (1.07)     $ (0.40)
                                                               =======      =======
</Table>

9. COMMITMENTS

(A) LEASES

     In the ordinary course of business, the Company had entered into
noncancelable operating lease agreements for its office facilities. Rental
expense under the operating leases was $805, $418, and $324 for the years ended
December 31, 2000, 1999, and 1998, respectively. The lease term for the office
facility is through September 2003. Future minimum annual lease payments under
the noncancelable operating lease agreements with remaining terms greater than
one year are as follows:

<Table>
<Caption>
                        YEARS ENDING
                        DECEMBER 31,
                        ------------
<S>                                                           <C>
2001........................................................  $  714
2002........................................................     739
2003........................................................     497
                                                              ------
                                                              $1,950
                                                              ======
</Table>

(B) EMPLOYEE BENEFIT PLAN

     Effective January 1, 1993, the Company adopted the Telemate Software 401(k)
Savings and Investment Plan (the "401(k) Plan"). In order to participate in the
401(k) Plan, employees must be at least 21 years of age. The terms of the 401(k)
Plan allow employees to contribute up to 20% of pretax compensation up to the
maximum allowed under Internal Revenue Service ("IRS") regulations. The Company
may make discretionary matching contributions up to the maximum allowed under
IRS

                                       F-16
<PAGE>   30
                          TELEMATE.NET SOFTWARE, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                       (IN THOUSANDS, EXCEPT SHARE DATA)

regulations. In addition, the Company may make a discretionary profit-sharing
contribution to the 401(k) Plan. The discretionary matching and profit-sharing
contributions vest at the rate of 20% per year. For the years ended December 31,
2000, 1999, and 1998, the Company made discretionary matching contributions of
$122, $72, and $73, respectively, to the 401(k) Plan. The Company did not make
any discretionary profit sharing contributions during 2000, 1999, or 1998.

10. MAJOR CUSTOMER

     In 1999 the Company entered into a sales agreement with a third-party
contractor to provide software, hardware, and installation services for 51
different sites. This sales agreement comprised 10.5% and 13.9%, of 2000 and
1999 revenue, respectively. Accounts receivable from this customer totaled $289
and $710 at December 31, 2000 and 1999, respectively.

11. RESTRUCTURING COSTS

     On October 30, 2000, the Company entered into a plan of termination,
whereby 34 employees either resigned or were terminated. As a result of the
restructuring, the Company incurred expenses totaling $310, which was comprised
mainly of severance pay, outplacement services, and legal fees. Approximately
$11 in severance remained unpaid at December 31, 2000 which was included in the
accompanying financial statements.

12. SUBSEQUENT EVENT

     In January 2001, the Company announced its retention of an investment
banking firm to explore a range of strategic alternatives to enhance shareholder
value, including a possible sale of the Company.

                                       F-17
<PAGE>   31

                       VALUATION AND QUALIFYING ACCOUNTS

                                                                     SCHEDULE II

                          TELEMATE.NET SOFTWARE, INC.
                 YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998

ACCOUNTS RECEIVABLE ALLOWANCES

<Table>
<Caption>
                                                           ADDITIONS
                                            BALANCE AT      CHARGED     ADDITIONS                 BALANCE AT
                                           BEGINNING OF    TO COSTS     CHARGED TO                  END OF
YEAR ENDED                                     YEAR       AND EXPENSE    REVENUE     DEDUCTIONS      YEAR
----------                                 ------------   -----------   ----------   ----------   ----------
<S>                                        <C>            <C>           <C>          <C>          <C>
December 31, 1998........................    $ 60,000      $ 35,000      $368,501     $368,501     $ 95,000
December 31, 1999........................    $ 95,000      $245,000      $280,091     $320,091     $300,000
December 31, 2000........................    $300,000      $301,258      $416,607     $517,900     $499,965
</Table>

                                       F-18