<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K
   FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

(Mark One)
       [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; or

[_] 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 0-22667

                            Mercator Software, Inc.
                            -----------------------
            (Exact Name of Registrant as Specified in its Charter)

              Delaware                                      06-1132156
   (State or Other Jurisdiction of                       (I.R.S. Employer
   Incorporation or Organization)                     Identification Number)

           45 Danbury Road
         Wilton, Connecticut                                   06897
   (Address of Principal Offices)                           (Zip Code)

                                (203) 761-8600
              (Registrant's Telephone Number Including Area Code)

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

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.

                                 Yes [_] No [_]

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of March 23, 2001 was approximately
$125,175,000 based upon $4.125 per share, the last reported sale price of the
Common Stock on the Nasdaq National Market on that date. As of March 23, 2001,
there were 30,345,557 shares of the Registrant's Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None
<PAGE>

                             Mercator Software, Inc.

                           Annual Report on Form 10-K
                   For the Fiscal Year Ended December 31, 2000

                                TABLE OF CONTENTS
<TABLE>
<S>                                                                                                 <C>
PART 1.                                                                                             Page
Item 1.     Business ..............................................................................    3
Item 2.     Properties ............................................................................   10
Item 3.     Legal Proceedings .....................................................................   10
Item 4.     Submission of Matters to a Vote of Security Holders ...................................   11


PART II
Item 5.     Market of Registrant's Common Equity and Related Stockholder Matters ..................   12
Item 6.     Selected Financial Data ...............................................................   13
Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations..   14
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk ............................   28
Item 8.     Financial Statements and Supplementary Data ...........................................   28
Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...   28


PART III
Item 10.    Directors and Executive Officers of the Registrant ....................................   29
Item 11.    Executive Compensation ................................................................   29
Item 12.    Security Ownership of Certain Beneficial Owners and Management ........................   29
Item 13.    Certain Relationships and Related Transactions ........................................   29


PART IV
Item 14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K .......................   30

Signatures  .......................................................................................   31
</TABLE>


Mercator Software, the Mercator Software logo, Mercator, Trading Partner,
OnCall and KEY/MASTER are registered trademarks, and Mercator for R/3, Trading
Partner PC, Trading Partner PC/32 and OnCall*EDI are trademarks of Mercator
Software Inc. This Report also contains trademarks and trade names of other
companies.
<PAGE>

                                    PART I

Forward-Looking Information

This report contains certain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 as amended, and Section 27A
of the Securities Act of 1933, as amended, that involve risks and uncertainties.
When used in this filing words such as "anticipate," "believe," "estimate,"
"expect," "future," "intend," "plan," and similar expressions as they relate to
Mercator Software are included to identify forward-looking statements. Our
actual results may differ significantly from the results discussed in the
forward-looking statements as a result of certain factors including those set
forth under "Factors That May Affect Future Results" and elsewhere in this
document.

ITEM 1.  Business

Mercator Software, Inc., is a leading provider of software and services that
help customers achieve speed, flexibility, efficiency, and return on investment
in existing technology. We do this by integrating technologies and transactions
throughout the extended enterprise and with trading partners and customers. In
combination with our software, professional staff and strategic trading
partners, we enable companies to integrate electronic transactions and computer
applications across the entire value chain of business activities and
information technology including back-office systems, Web applications,
traditional electronic commerce applications, electronic marketplaces and
electronic exchanges. Mercator products and services solve incompatibilities in
data formats and semantics by providing a single, standards-based architecture
that can be applied to all business integration requirements, including
business-to-business, consumer-to-business, and internal
application-to-application integration.

Customers of our integration software and services include banks and brokerage
institutions, insurance companies, telecommunications companies, and large-scale
manufacturing and retail operations. We also sell our products and services
through strategic partners to third party customers including Internet market
makers, channel masters, group purchasing organizations and application service
providers.

We were originally incorporated in Connecticut in 1985 as TSI International
Software Ltd. and reincorporated in Delaware in 1993. Effective April 3, 2000,
we officially changed our name to Mercator Software, Inc. Our principal
executive offices are located at 45 Danbury Road, Wilton, Connecticut 06897, and
the telephone number is (203) 761-8600.

From inception through 1996 we operated primarily as a private domestic software
company with limited direct sales activities in the United Kingdom and Canada.
In 1997 we completed our initial public offering, which raised $25 million, and
opened a sales office in France. In 1998 we completed a secondary public
offering, which raised $22 million, and acquired certain assets of Software
Consulting Partners, a consulting firm with expertise in the implementation of
enterprise resource planning systems, for $5.5 million in common stock and
assumed liabilities.

In 1999 we acquired the Braid Group Limited, a provider of integration software
products for straight-through processing of financial transactions in the
international banking and securities markets, for $30 million in cash and
approximately $80 million in common stock and stock options, excluding
approximately $20 million in contingent consideration to be paid upon the
achievement of certain criteria. Braid was based in the United Kingdom with
operations in the Asia Pacific area. We subsequently opened a sales office in
Germany. Also, in 1999 we acquired Novera Software Inc., a developer of Web
application solutions, for approximately $58 million in common stock and stock
options.

During 2000 we conducted operations in two principal segments: domestic and
international; our international revenues represented 37% of our total revenues.

Industry Background

Customer demand for integration software and services is strong across a broad
range of businesses with the following requirements:

     .    Integration of core business systems and processes with
          business-to-business transactions, including Web-based transactions;
          connection to electronic marketplaces and exchanges; electronic data
          interchange over private networks and proprietary e-commerce
          connections to major partners for a completely integrated supply
          chain.

                                       (3)
<PAGE>

     .    Integration of customer-facing business applications with core
          business systems, including Web-based consumer-to-business
          applications; Web servers; and client applications based on Web
          standards.

     .    Integration of core business systems throughout the enterprise,
          including packaged applications, legacy systems, databases and data
          warehouses.

To meet these requirements integration software must enable rapid, efficient and
flexible implementation of scalable, high-performance business solutions in
complex technology environments. At the same time, these solutions must leverage
the significant investments made in existing information technology
architectures. Additional essential capabilities of integration software
include:

     .    Support for all tasks associated with creating end-to-end integration
          solutions, from integration workflow design to solution deployment and
          management.
     .    High levels of automation that generate significant reductions in
          information technology resources needed to implement end-to-end
          integration solutions.
     .    Complete elimination of custom programming for integrating business
          content across application boundaries.
     .    Graphical specifications of integration rules and business logic to
          speed implementation and enable rapid response to changes in business
          objectives and technology.
     .    Native support for all Web-based and traditional e-business
          application and transaction standards.
     .    Seamless integration with and message routing across, all systems for
          message and data transport including message software, transaction
          monitors, and all public and private networks.
     .    Superior performance and scalability for both Web-based and
          traditional e-business transactions across the enterprise.
     .    Comprehensive management of the run-time integration environment,
          including real-time and event-driven transaction management.

Achieving fast, efficient and seamless integration depends on the ability to
automate without custom programming. Automated programming requires resolving
the differences in the syntax, structure and semantic meaning of content being
routed between applications that support different data.

Mercator technology identifies, comprehends and codifies any data transaction in
any technology environment. Mercator is prized for its ability to eliminate
programming, rapidly assimilate new standards and technologies, reduce skill
levels needed to solve complex problems, simplify connectivity to the business
world, provide greater choice in technology decisions, and respond quickly to
new business initiatives.

Strategy

Our objective is to establish Mercator as the premier provider of enterprise
wide integration software, services and solutions. Our major strategies for
doing this are:

Leveraging and expanding our direct and indirect distribution channels

We have a large direct sales organization focused on Global 2000 accounts in
three geographic markets: The Americas, EMEA (Europe, Middle East and Africa)
and Asia Pacific. Strategic vertical market sales teams are focused on
opportunities in financial services, telecommunications, and healthcare, as well
as supply chain management opportunities across a variety of industries. In
addition, over 100 Mercator World Alliance Partners, including application
software vendors, systems integrators, and other technology providers, embed or
resell our software with their own products and services. Revenue from partners,
or influenced by partners, accounted for approximately 18% of revenues for the
year ending December 31, 2000.

Leveraging strategic partnerships

Our partners include companies in the following categories:

 .    Application software vendors who embed our e-business integration software
     in their own products.
 .    E-business solution providers, including Internet market makers, Global
     2000 channel masters, group purchasing organizations and application
     service providers.
 .    Technology vendors who re-sell or recommend our software as part of their
     solutions.
 .    Systems integrators who re-sell or recommend our software in support of
     their solutions.

                                       (4)
<PAGE>

Direct and indirect channels are the primary vehicles for delivering
enterprise-class integration software and services to market. Our channel
productivity is being increased several ways:

 .    By focusing on key vertical markets where we enjoy domain expertise and
     successful customers, such as financial services, telecommunications, and
     healthcare, as well as supply chain customers across a variety of
     industries.
 .    Through increased participation of strategic professional services in the
     selling process, provide customers higher value-added services in
     conjunction with software purchases.
 .    Focusing on selected world-wide partnerships.

Leveraging our large base of enterprise customers

Our software products and services are used by over 1,500 enterprise-class
customers worldwide in all major industries to achieve speed, flexibility and
efficiency, while maximizing return on investment from existing IT
infrastructure. With our products and services, customers can integrate internal
applications in support of e-business initiatives, integrate packaged
applications such as enterprise resource planning (ERP) systems with legacy
systems, best-of-breed applications and databases to extend their reach within
the enterprise, integrate financial transaction processing with back-office
systems in banking and brokerage, and integrate existing systems with e-commerce
transactions from customers and suppliers. As these customers adapt to changing
business conditions, whether in the shape of expanding markets or merger and
acquisition activity, the demand for integration products and services is
expected to rise. We intend to exploit this opportunity by selling to existing
customers further up the organizational chart, i.e., to CIO's, CTO's and CEO's.

Leveraging our expertise in fast-growing vertical markets

We enjoy substantial experience and a growing base of customers in these key
vertical markets: financial services, healthcare, telecommunications and supply
chain management across a variety of industries.

In financial services Global banking institutions, brokerage houses and mutual
fund companies use our software for application-to-application integration and
straight through processing of transactions between financial institutions
processed over both the Internet and private financial networks. Mercator
addresses a wide range of application integration requirements, including
transaction validation, reporting and management, to facilitate straight through
processing and integration with all major financial networks such as S.W.I.F.T.,
providing a competitive advantage in international banking and brokerage
markets.

In healthcare, the US Federal government has mandated that health plans, health
care providers, health care clearing houses/intermediaries, and self-insured
employers comply with new regulations associated with the Health Insurance
Portability and Accountability Act (HIPAA). HIPAA establishes a broad set of
regulations that lays out requirements for maintaining and exchanging patient
healthcare data. Our software makes it possible for healthcare companies to
achieve compliance by managing communications between organizations that must
exchange HIPAA-compliant transactions, validating information to ensure
compliance, transforming HIPAA transactions to and from legacy applications and
data stores, and ensuring the confidentiality of patient data in accordance with
HIPAA regulations.

In the telecommunications industry we have helped large customers meet federal
standards for processing critical customer information in dynamic environments
featuring mergers and acquisitions and rapid transitions between local,
long-distance and mobile service.

In Enterprise Resource Management (ERM), we help orchestrate the integration of
purchase orders, inventory systems and Customer Relationship Management (CRM)
applications that handle critical information and transactions. Here Mercator
solutions facilitate the fulfillment and billing of purchase orders placed with
large business operations by multiple individual customers, as well as post-sale
marketing campaigns. In the related area of Supply Chain Management (SCM) our
products and services are used by major manufacturing and retail corporations to
reduce the size and cost of inventory and achieve faster distribution of goods
and supplies by significantly reducing the number of interfaces between critical
management systems.

Extending our technology leadership

We are an established technology leader, having pioneered the market for
application integration with the release of the very first version of our
Mercator Integration Broker in 1993. We were the first company to introduce an
integration product with graphical templates for defining and managing
transaction workflows in event-driven environments, the first product certified
by SAP(TM) for integration of its ERP (Enterprise Resource Planning) software
with non-SAP applications, and the first enterprise application integration
software to support double-byte character sets for the Asian market.

                                       (5)
<PAGE>

Going forward we will continue to strive to understand the needs of our
customers and develop and bring to market the products and services they require
for full enterprise-wide integration on a global scale. Research and development
resources will be maximized and new capabilities will be developed within the
Mercator Integration Broker suite of software products. In addition, we will
look for key external technology partners whose products add complementary
capabilities to our product.

Products

We are a leading provider of integration solutions for businesses seeking
greater efficiencies and higher returns on information technology (IT)
investment throughout their entire enterprise. By providing a mix of products,
professional expertise, and strategic partnerships, we help customers integrate
mission-critical systems across a variety of operating platforms and
applications. Our solutions are used to meet a variety of business needs
including the integration of diverse global asset management systems, inventory
networks, international trading marketplaces, and sophisticated electronic
purchase-order and auction programs connecting multiple independent suppliers
and brokers.

Our professional service teams assist businesses in determining their
integration strategies. Our strategic partnerships provide additional technology
and consulting capabilities for meeting enterprise-wide integration challenges.

At the core of our solution is Mercator technology known as integration broker
software, which addresses customers' application integration requirements at
every business stage. We provide a software suite for automating the design,
development, implementation and management of end-to-end integration across
business-to-business, consumer-to-business, and internal
application-to-application integration requirements.

Our integration broker products provide a scalable solution that combines
capabilities for integrating any application to any other whether they are new
Web-based applications or old legacy systems. Our powerful graphical technology
resolves application semantics, integrates application content, and provides
real-time management controls to enable seamless integration of applications
across the extended enterprise, encompassing all commerce touch points.

Mercator E-Business Broker suite

In 2000 we introduced a suite of integration products called the Mercator
E-Business Broker suite, which included Mercator Commerce Broker, and Mercator
Enterprise Broker. Mercator Enterprise Broker and Mercator Commerce Broker are
software solutions for integrating applications within and between enterprises,
including procurement, supply chain management, and other business-to-business
applications, as well as enterprise resource planning, customer relationship
management, and legacy applications. They support integration between
enterprises using both Web-based and traditional e-commerce standards, and allow
customers to implement high-volume, mission-critical business-to-business
applications that are fully integrated with existing systems. Mercator
Enterprise Broker also supports integration of content for data warehouses,
enterprise portals, and electronic catalog applications.

Our software's non-procedural integration approach enables customers to
completely transform and route transactions between applications without writing
programs. It combines powerful software for executing and managing integration
solutions with an extensive array of adapters for integrating packaged
applications from companies such as SAP, PeopleSoft, Oracle, Siebel and others.
Off-the-shelf support is also included for a broad range of electronic commerce
formats, including XML, X12 and EDIFACT EDI, S.W.I.F.T., ACORD, and HL7, and for
major public and private networks including the Internet, value-added networks,
and financial gateways such as S.W.I.F.T., CREST, DTC and others.

Financial services customers can use Mercator E-Business integration brokers
with Mercator FS Manager to manage the integration of financial transactions
with internal and external systems, according to financial industry processing
standards for mission-critical operations. Mercator's Global Securities
Solutions (GSS) initiative leverages Mercator Enterprise Broker, FS Manager, and
our industry-leading S.W.I.F.T. Gold Certification to provide a solution to the
expected "T+1" SEC mandate, continuing industry STP challenges, and the need for
integration with emerging transaction processing hubs governed by the GSTPA
initiative.

Customers in other industries can use Mercator E-Business integration brokers
with Mercator Commerce Manager to manage the integration of both standard and
proprietary business transactions with enterprise applications and resources.
Mercator Commerce Manager provides graphical trading partner management, message
validation, routing, and integration, and message auditing and logging functions
to ensure the integrity of business-to-business transactions.

Our products support execution on all major platforms, offer native integration
with all major databases, and operate natively with most popular messaging
middleware, including BEA MessageQ and Tuxedo, Candle Roma, IBM MQSeries,
Microsoft MQ, Oracle AQ and TIBCO Rendezvous.

                                       (6)
<PAGE>

Services

Mercator Professional Services - Our professional service teams assist customers
in designing and implementing Mercator's integration products and solutions. By
providing strategic and technology consulting services, we are able to
accelerate the delivery of Mercator-based integration solutions and promote our
customers' success in their integration and e-business initiatives.

Training - To ensure that our customers are successful using our products, we
provide training in five training centers globally and at customer locations. We
offer a number of courses ranging from two to five days in length with
educational content including basic to advanced levels of product functionality
and hands-on use of products. We recommend that our customers attend a basic
three-day training course and believe that a majority of our customers elect to
participate in such training. In addition, in 2000 we instituted a Partner
Certification Program that provides testing to identify, qualify and certify
consultants, systems engineers and support analysts as Mercator Certified
Consultants. Once three or more of a partner's consultants are certified, they
become a Mercator Certified Partner.

Maintenance

We believe that a high level of customer service and support is important to our
success, and we provide a range of support services to our customers. We
maintain product and technology experts on call at all times and have support
call centers located at offices in the United States and in the United Kingdom.
We have also implemented an automated Company-wide help desk system to augment
our customer support efforts. This system allows for the optimization of our
resources and knowledge base at all locations and offers the customer improved
service through a single point of contact.

Customers

As of December 31, 2000, we had directly licensed our Mercator E-Business
integration broker software to approximately 5,000 customers worldwide. Numerous
others have licensed our products through value-added resellers, independent
software vendors, systems integrators or other third parties who distribute
their products to business partners to facilitate the integration of their
respective business applications. No one customer accounted for more than 10% of
our revenues in 2000, 1999, or 1998.

Sales and Marketing

Sales - We market our products and services through both direct and third party
channels. Our goal is to achieve broad market penetration by pursuing multiple
channels of distribution.

Our direct field sales force focuses on sales of the Mercator Integration Broker
suite of products to Global 2000 companies, as well as companies in vertical
industries such as financial services, healthcare, telecommunications, and in
supply chain management. We also maintain a telesales organization, which
targets mid-market opportunities. In addition, the field sales force also
includes alternate channel managers who are responsible for generating sales of
our products through third parties. Finally, the sales organization includes
systems engineers who assist with both pre- and post-sales activities.

An important part of our sales strategy is to continue to develop indirect
distribution channels such as value-added resellers, independent software
vendors and software integrators and distributors. As of December 31, 2000, over
100 third parties had agreements with us to resell, embed or otherwise bundle
our products with their offerings in the United States.

We market our products and services outside of North America through sales
offices located in the United Kingdom, Sweden, Germany, France, Australia,
Singapore and Hong Kong as well as through indirect channels. A majority of the
international employees are located in the United Kingdom. Revenues from
international sales offices were approximately 37% of our total revenues during
2000 as compared to 29% in 1999. In addition, we have a distribution partnership
with Mitsui for the Japanese market. The international market is very important
to our long-term growth, and we intend to continue to expand our sales and
marketing efforts outside North America by adding sales staff and distributors.

Marketing - We utilize a wide variety of marketing programs, which are intended
to attract potential customers and to promote Mercator Software and its brand
names. We use a mix of market research, analyst updates, seminars, direct mail,
print advertising, trade shows, speaking engagements, public relations, customer
newsletters and Web-site marketing in order to achieve these goals. We host
annual conferences for our customers and partners, and provide a range of
marketing programs, incentives and support plans as part of our Mercator World
alliance program.

                                       (7)
<PAGE>

Technology

Our core Mercator E-Business integration broker technology provides the platform
for creating solutions that satisfy requirements for end-to-end integration of
all applications that drive business from the Web to the back office to external
business partners.

The architecture of the Mercator E-Business integration broker platform is based
on object concepts, providing reusability, interoperability, and scalability
during the design process and in the resulting solutions. The Mercator
Integration Broker platform permits the company to efficiently construct and
deliver integration solutions for specific markets, allows customers to design
and deploy integration solutions for their own use, and also allows independent
software vendors and system integrators to embed Mercator functionality within
their own offerings.

The central components of the Mercator technology platform are a Windows-based
design studio for defining integration solutions and one or more integration
servers for executing the solutions created through the design process.

Our integration servers operate on more than 20 platforms including PC/Intel
(Windows 9x, Windows NT, Windows 2000, SCO Open Server); IBM AS/400 (OS/400),
IBM RS/6000 (AIX) and IBM Mainframe (MVS, OS390, CICS, UNIX); HP9000 (HP-UX);
Siemens-Nixdorf/Pyramid (SINIX-Reliant); Sun SPARC (Solaris, OS); Compaq Alpha
(UNIX, Windows NT, Open VMS) and VAX(VMS); and Stratus R5 (FTX , VOS).

We also provide adapters and importers, which interface to and from specific
databases, messaging systems, and applications, enabling connectivity to a
specific source or destination. Database adapters are currently available for
ODBC-compliant databases as well as Oracle7 and Oracle8, Microsoft SQL Server,
IBM DB2, and Sybase. Messaging adapters are available for SAP's ALE, IBM's
MQSeries, Microsoft MSMQ, TIBCO Rendezvous, BEA MessageQ and Tuxedo, Candle Roma
and Oracle AQ. Importers are currently available for COBOL copybooks; database
tables for ODBC- compliant and Oracle7 and Oracle8, Microsoft SQL Server, IBM
DB2, and Sybase databases; SAP R/3 interfaces including IDocs, BAPIs, DXOB, BDC,
and XML. In addition, Mercator Software provides pre-packaged data objects for
national and international standards, including X12 EDI, EDIFACT, HL7 (for
health care), and S.W.I.F.T. (for banking and financial services).

Product Development

Since inception, we have made substantial investments in research and
development through both internal development and technology acquisition. In an
effort to speed time to market, we will evaluate buy, build or align strategies
to bring new products to market, but we expect that most of our new products and
enhancements to existing products and new products will be developed internally.
Where appropriate, we will evaluate externally developed technologies for
integration into our product lines.

We expect that a substantial majority of our research and development activities
will be related to developing enhancements and extensions to our Mercator
E-Business Broker suite of products. Following the introduction of the original
Mercator integration broker software, product development was initially driven
by demand for additional mapping functionality and support for additional
execution platforms. Later, development focus shifted to automating Mercator
support for specific sources and destinations through an expanded set of
adapters and importers, and development of additional pre-packaged integration
solutions for specific markets. We also added a graphical management tool for
cross application process workflow to the core set of Mercator capabilities. In
1999, we enhanced the Mercator product family through the acquisition of Braid's
technology and the addition of increased Web based capabilities. During the year
2000, we focused on the delivery of the new Mercator E-Business Integration
Broker suite of products, as well as on providing support for additional
application environments and Web-based technology.

Our product development expenditures for 2000, 1999 and 1998 were $21.2 million,
$15.3 million and $5.7 million, respectively. We expect that we will continue to
commit significant resources to product development in the future. To date, all
product development expenditures have been expensed as incurred.

Competition

The market for application integration products is extremely competitive and
subject to rapid change. Due to the relatively low barriers to entry in the
software market, we will continue to encounter competition from other
established and emerging companies. The competitive factors affecting the market
for integration products and services include comprehensiveness of product
functionality and features; quality of professional services offerings; product
quality, performance and price; ease of product implementation; quality of
customer support services; customer training and documentation; and vendor and
product reputation. The relative importance of each of these factors depends
upon the specific customer environment.

                                       (8)
<PAGE>

Although none of our competitors or potential competitors currently produce a
solution that is completely identical to our solution, we are subject to
competition from several different types of companies: large multi-product
software companies, EDI software companies, vendors of proprietary messaging
technology and other application integration software vendors. Our Mercator
Integration Broker suite of products and related services also competes against
solutions developed internally by individual businesses to meet their specific
business integration requirements. As a result, we must educate prospective
customers regarding the advantages of our products and services over internally
developed solutions from a cost perspective as well as a long-term maintenance
perspective. In addition, we must be able to adequately educate potential
customers about the quantitative and qualitative benefits provided by our
products and services.

We believe that many current packaged e-business integration offerings address
only a portion of customers' integration requirements, or can only address them
through partnerships with other companies. None provide technology that resolves
complex differences in application content and semantics, while also providing -
on a common architecture - the other key elements of e-business integration.
Most provide an incomplete solution around which a significant amount of
programming must be written. They include:

     .    Message-based integration tools that focus on data transformation and
          routing and have their origin in the middleware or "plumbing" used to
          connect applications. Their focus has been on connecting, not
          integrating applications, and they have developed extensions to the
          messaging middleware itself that were not built for general-purpose
          use. As a result, these tools provide limited support for integration
          beyond the range of the middleware on which the tool is based, often
          forcing a specific integration topologies such as hub and spoke,
          publish and subscribe, point to point, or networked architectures, on
          the overall integration design. Web integration is clearly an
          afterthought, with minimum support for native Web standards. In
          contrast, our products are messaging system independent. Our solutions
          work with any messaging system or approach customers may wish to use
          for transporting data, with no loss of functionality or performance,
          as well as supporting any integration topology customers may wish to
          deploy.

     .    Integration tools that require adherence to a fixed, top-down
          methodology, the end result of which is a technology framework or
          harness on which user-written code is hung. Basic technical-level
          connectivity is provided for applications outside the framework, but
          the integration of application content -- the most difficult
          integration task -- is accomplished only by a developer writing custom
          programs. These "framework" products typically have their origins in
          proprietary approaches to application development and have been
          optimized to work best when used with a proprietary architecture for
          data transport.

     .    XML-centric technology for parsing and transforming XML documents that
          provide little automated support for integration of non-XML data types
          and application environments. Programming is required whenever the
          integration requirement goes outside the XML box, including
          integration with existing e-commerce formats and
          application-to-application integration within the enterprise. These
          restrictions confine the use of XML-centric tools to a narrow set of
          e-business requirements. Our solution supports multiple data types,
          including XML DTD's, as well as multiple application and database
          formats.

     .    Loosely coupled, non-integrated technologies from vendors offering the
          promise of a one-stop shopping approach to e-business integration.
          These offerings are typically based on components that are not best of
          breed, requiring users to compromise at critical steps along the
          integration path. These products provide no coherent support for
          end-to-end integration requirements, requiring use of separate
          interfaces for design, development, implementation and management.

Most other e-business integration technology requires the addition of
substantial programming and technical resources in order to develop and
implement complete solutions. Once built, the solutions that are created require
the use of separate systems for managing and controlling the e-business
operating environment. Our software and services provide best-of-breed
capabilities that reduce information technology resource requirements to develop
and implement complete solutions, and provide end-to-end integration management.

Proprietary Technology

Our success depends upon our proprietary software technology. We do not
currently have patents on the majority of our products and rely principally on
trade secret, copyright and trademark laws, nondisclosure and other contractual
agreements and technical measures to protect our technology. We also believe
that factors such as the technological and creative skills of our personnel,
product enhancements and new product developments are essential to establishing
and maintaining a technology leadership position. We enter into confidentiality
and/or license agreements with our employees, distributors and customers, and
limit access to and distribution of our software documentation and other
proprietary information.

                                       (9)
<PAGE>

Employees

As of December 31, 2000, we had 659 employees, including 115 in research and
development, 118 in professional services, 68 in customer support, 220 in sales,
46 in marketing, and 92 in finance and administration; 441 of these employees
are in the United States with the remaining in our international locations.
Other than the Chairman and Chief Executive Officer, the Vice-Chairman, the
Chief Financial Officer and one of our area vice-presidents, all employees are
employed on an at-will basis and we have no fixed-term employment agreements
with our employees. Our employees are not represented by any union. We believe
that our relations with employees are good.


ITEM 2.    PROPERTIES

Mercator Software's principal executive offices are located in Wilton,
Connecticut, and consist of approximately 25,000 square feet under a lease
expiring January 31, 2004. Mercator also has leased approximately 58,000 square
feet of new office space in Wilton, Connecticut, under a lease beginning October
1, 2001 and expiring September 30, 2013, in anticipation of relocating and
expanding its executive offices.

Mercator Software also leases approximately 37,000 square feet in Boca Raton,
Florida, which is used primarily for research and development activities;
approximately 18,000 square feet in Bannockburn, Illinois, which is used
primarily for tele-sales, technical support and production activities; and
approximately 27,000 square feet in the United Kingdom, which is used primarily
for customer support and sales activities.

In addition, Mercator Software also leases smaller sales/customer support
offices in various locations in the United States, Canada, Europe, Australia and
Asia.


ITEM 3.    LEGAL PROCEEDINGS

On or about February 1, 2000, Mercator was named as a defendant and served with
a complaint in an action entitled Carpet Co-Op of America Association, Inc., and
FloorLINK, L.L.C. v. TSI International Software, Ltd., Civil Action No.
00CC-0231, pending in the Circuit Court of St. Louis County, Missouri (the
"Missouri Action"). The complaint includes counts for breach of contract, fraud
and negligent misrepresentation in connection with certain software
implementation work provided under contract by Mercator. The plaintiffs allege
that Mercator failed to provide and implement certain software products and
designs within an alleged time requirement and misrepresented Mercator's ability
to implement the products within that timeframe. The complaint seeks an
unspecified damage amount in excess of $2 million. On or about March 30, 2000,
plaintiffs in the Missouri Action filed an amended complaint adding a claim of
negligence in connection with the contract. On April 10, 2000, Mercator filed a
motion to dismiss the Missouri Action in its entirety, which currently is
pending and is scheduled to be heard on March 30, 2001. Mercator believes that
the allegations in the amended complaint in the Missouri action are without
merit and intends to contest them vigorously.

On March 30, 2000, Mercator filed an action entitled TSI International Software,
Ltd. (d/b/a Mercator Software Inc.) v. Carpet Co-op of America Association, Inc.
and FloorLink, LLC, Civil Action No. 300-CV-603 (SRU), in the United States
District Court for the District of Connecticut (the "Connecticut Action"). The
Connecticut Action asserts claims for copyright infringement, trademark
infringement, unfair competition, misappropriation of trade secrets, breach of
contract, fraud, unjust enrichment and violation of the Connecticut Unfair Trade
Practices Act, in connection with the software implementation project at issue
in the Missouri Action. The Mercator complaint in the Connecticut Action alleges
that the defendants have failed to pay the more than $1.7 million still owed to
Mercator under the contract, and that, during the course of the project, the
defendants fraudulently misappropriated certain of Mercator's copyrighted
software, trademarks and other software implementation related secrets. On May
9, 2000, the court in the Connecticut Action entered a Stipulated Injunction
barring the defendants from using, copying or disclosing any of Mercator's
copyrighted software, trademarks or other trade secrets or proprietary
information. On May 12, 2000, the defendants filed a motion to dismiss the
Connecticut Action. On December 15, 2000, the court in the Connecticut Action
denied the defendant's motion to dismiss insofar as it related to Mercator's
federal claims and the motion to dismiss as to the state law claims is still
pending.

                                      (10)
<PAGE>

Between August 23, 2000 and September 21, 2000 a series of fourteen purported
securities class action lawsuits were filed in the United States District Court
for the District of Connecticut, naming as defendants Mercator, Constance Galley
and Ira Gerard. Kevin McKay was also named as a defendant in nine of these
complaints. On or about November 24, 2000, these lawsuits were consolidated into
one lawsuit captioned: In re Mercator Software, Inc. Securities Litigation,
Master File No. 3:00-CV-1610 (GLG). The lead plaintiffs purport to represent a
class of all persons who purchased Mercator's common stock from April 20, 2000
through and including August 21, 2000. Each complaint in the new consolidated
action alleges violations of Section 10(b) and Rule 10b-5 through alleged
material misrepresentations and omissions and seeks an unspecified award of
damages. On January 26, 2001 the lead plaintiffs filed an amended complaint in
the consolidated matter with substantially the same allegations. Named as
defendants in the amended complaint are Mercator, Constance Galley and Ira
Gerard. The amended complaint in the consolidated action alleges violations of
Section 10(b) and Rule 10b-5 through alleged material misrepresentations and
omissions and seeks an unspecified award of damages. Mercator filed a motion to
dismiss the amended complaint on March 12, 2001. Mercator believes that the
allegations in the amended complaint are without merit and intends to contest
them vigorously.


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

No matters were submitted to a vote of our shareholders during the quarter ended
December 31, 2000. The Company's 2001 Annual Meeting is to be held on May 17,
2001. Proposals of stockholders intended to be presented at the Company's 2001
Annual Meeting of Stockholders must be received by the Company at its principal
executive office a reasonable time before April 16, 2001.

                                      (11)
<PAGE>

                                    PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Mercator Software's common stock is listed for trading on the Nasdaq National
Market (Symbol: MCTR). Prior to February 7, 2000 our stock traded on the Nasdaq
under the symbol "TSFW". Our common stock began trading on the Nasdaq National
Market on July 2, 1997. Prior to that time, there was no public market for our
common stock. The following table sets for the fiscal periods indicated the high
and low reported sale prices for our common stock as reported by the Nasdaq
National Market. The stock prices have been adjusted to reflect a two-for-one
stock split that occurred on April 5, 1999.


                                               Reported Sale Price
                                               -------------------
                                                      High                   Low
                                                      ----                   ---
1998
First Quarter.                                       9.313                  4.75
Second Quarter                                      12.375                  8.75
Third Quarter.                                      18.125                10.563
Fourth Quarter                                       25.50                  8.50
1999
First Quarter.                                       32.00                 20.50
Second Quarter                                      28.875                 14.00
Third Quarter.                                       28.00                16.875
Fourth Quarter                                       66.75                 22.00
2000
First Quarter                                      149.875                 47.00
Second Quarter                                       84.00                 26.75
Third Quarter                                       70.375                13.438
Fourth Quarter                                      16.188                  2.81
2001
First Quarter *                                     11.313                  3.50


* Through March 23, 2001

The closing price for the common stock on the Nasdaq National Market on March
23, 2001 was $4.125.

There were approximately 12,376 holders of record of our common stock as of
March 14, 2001, although we believe that the number of beneficial owners of our
common stock exceeds this number.

We have never paid cash dividends on our common stock and do not anticipate the
payment of cash dividends in the foreseeable future. We currently anticipate
that any future earnings will be retained to finance our operations.

Recent Sales of Unregistered Securities

On January 18, 2001 we sold 228,180 shares of stock to Mitsui & Co., Ltd. for
$2.0 million cash.

                                      (12)
<PAGE>

ITEM 6    SELECTED FINANCIAL DATA

Selected Financial Data for the Last Five Years

<TABLE>
<CAPTION>


Statements of Operations Data:                                                 Year Ended December 31,
                                                                               -----------------------
(In thousands, except per share data)                        2000            1999            1998             1997             1996
                                                             ----            ----            ----             ----             ----
<S>                                                       <C>             <C>             <C>              <C>               <C>
Revenues:
  Software licensing                                      $78,825         $56,820         $29,105          $14,603           $9,310
  Services                                                 32,883          23,208           6,371            3,746            1,659
  Maintenance                                              26,582          18,597           9,840            8,321            8,035
                                                           ------          ------           -----            -----            -----
     Total revenues                                       138,290          98,625          45,316           26,670           19,004
                                                          -------          ------          ------           ------           ------

Cost of revenues:
  Software licensing                                        1,537           1,286           1,482              778              495
  Services                                                 24,402          16,319           3,292            1,184              399
  Maintenance                                               6,621           5,051           2,115            1,306            1,607
                                                            -----           -----           -----            -----            -----
     Total cost of revenues                                33,560          22,656           6,889            3,268            2,501
                                                           ------          ------           -----            -----            -----

  Gross profit                                            104,730          75,969          38,427           23,402           16,503
                                                          -------          ------          ------           ------           ------

Operating expenses:
  Product development                                      21,189          15,276           5,699            4,462            3,452
  Selling and marketing                                    68,861          41,187          22,033           13,095            8,715
  General and administrative                               24,219           9,300           5,929            3,792            2,922
  Amortization of intangibles                              46,863          27,689             303               --               --
  Intangibles impairment charge                            39,757              --              --               --               --
                                                           ------         -------         -------          -------           -------

     Total operating expenses                             200,889          93,452          33,964           21,349           15,089
                                                          -------          ------          ------           ------           ------

     Operating income (loss)                             (96,159)        (17,483)           4,463            2,053            1,414

  Other income (expense), net                                 650             987           2,015              503            (150)
                                                              ---             ---           -----              ---            -----

  Income (loss) before income taxes                      (95,509)        (16,496)           6,478            2,556            1,264

  Provision for (benefit from) income taxes                 2,583           (228)           (679)               76               36
                                                            -----           -----           -----               --               --

  Net income (loss)                                    $ (98,092)       $(16,268)          $7,157           $2,480           $1,228
                                                       ==========       =========          ======           ======           ======


Net income (loss) per share:
     Basic                                                $(3.36)          $(.64)           $0.35            $0.21            $0.21
     Diluted                                              $(3.36)          $(.64)           $0.30            $0.14            $0.10
Weighted average number of common shares and
  common equivalent shares outstanding:
     Basic                                                 29,154          25,376          20,300           11,834            5,774
     Diluted*                                              29,154          25,376          23,816           17,134           11,622

Balance Sheet Data (In thousands):
  Cash and marketable securities                           $21,747        $14,886         $47,945          $21,403              $41
  Working capital                                          $23,411        $39,669         $53,742          $23,371         $(1,220)
  Total assets                                            $160,891       $226,815         $78,187          $32,942           $7,521
  Total stockholders' equity (deficit)                    $111,406       $187,653         $61,899          $25,416         $(2,294)
</TABLE>

* For an explanation of the determination of the number of shares used in
computing per share amounts, see note (6) of Notes to Consolidated Financial
Statements.

                                      (13)
<PAGE>

ITEM 7

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

The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. When used in this filing, the words "intend," "anticipate,"
"believe", "estimate," "plan" and "expect" and similar expressions as they
relate to Mercator Software are included to identify forward-looking statements.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors including those set
forth under "Factors That may Affect Future Results" and elsewhere in this
document.


OVERVIEW

The Company was incorporated in Connecticut in 1985 as TSI International
Software Ltd. and reincorporated in Delaware in September 1993. We completed our
initial public offering in July 1997 and a secondary offering in June 1998. We
changed our name to Mercator Software, Inc. effective April 3, 2000.

Our revenues are derived principally from three sources: (i) license fees for
the use of our software products, (ii) fees for consulting services and training
and (iii) fees for maintenance and technical support. We generally recognize
revenue from software license fees upon delivery, unless there are significant
post-delivery obligations, in which case revenues are recognized when these
obligations are satisfied. We intend to continue to increase the scope of
service offerings insofar as it supports the sale of license revenues from our
products. We believe that software licensing revenue will continue to account
for a larger portion of total revenues than services and maintenance revenues.

Our products can be used by information technology professionals, as well as
value added resellers, independent software vendors, software integrators or
other third parties who resell, embed or otherwise bundle our products with
their products. License fee revenues are derived from direct licensing of
software products through our direct sales force and indirect third parties.
International revenues accounted for 37%, 29% and 12% of total revenues for the
years ended December 31, 2000, 1999 and 1998, respectively. The increase is
primarily attributed to the purchase of Braid in March 1999 and the addition of
a sales office in Frankfurt, Germany in 1999.

The size of orders can range from a few thousand dollars to over $3.0 million
per order. The loss or delay of large individual orders, therefore, can have a
significant impact on revenue and other quarterly results. In addition, we
generally recognize a substantial portion of our quarterly software licensing
revenues in the last month of each quarter, and as a result, revenue for any
particular quarter may be difficult to predict in advance. Because operating
expenses are relatively fixed, a delay in the recognition of revenue from a
limited number of license transactions could cause significant variations in
operating results from quarter to quarter and could result in significant
losses. To the extent such expenses precede, or are not subsequently followed by
increased revenue, operating results would be materially and adversely affected.
As a result of these and other factors, operating results for any quarter are
subject to variation, and period-to period comparisons of results of operations
are not necessarily meaningful and should not be relied upon as indications of
future performance.

                                      (14)
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain items from our statements of operations:

<TABLE>
<CAPTION>
                                                                                   Year Ended December 31,
                                                                                   -----------------------
Revenues:                                                            2000                    1999                     1998
                                                                     ----                    ----                     ----
<S>                                                                 <C>                     <C>                      <C>
   Software licensing                                                57.0%                   57.6%                    64.2%
   Services                                                          23.8                    23.5                     14.1
   Maintenance                                                       19.2                    18.9                     21.7
                                                                     ----                    ----                     ----
      Total revenue                                                 100.0                   100.0                    100.0
                                                                    -----                   -----                    -----

Cost of revenues:
   Software licensing                                                 1.1                     1.3                      3.3
   Services                                                          18.4                    16.5                      7.2
   Maintenance                                                        4.8                     5.2                      4.7
                                                                      ---                     ---                      ---
      Total cost of revenues                                         24.3                    23.0                     15.2
                                                                     ----                    ----                     ----

Gross profit                                                         75.7                    77.0                     84.8
                                                                     ----                    ----                     ----

Operating expenses:
   Product development                                               15.3                    15.5                     12.6
   Selling and marketing                                             49.8                    41.8                     48.6
   General and administrative                                        17.5                     9.4                     13.1
   Amortization of intangibles                                       33.9                    28.1                      0.7
   Intangibles impairment charge                                     28.8                      --                        --
                                                                     ----                      --                        --
      Total operating expenses                                      145.3                    94.8                     75.0
                                                                    -----                    ----                     ----

   Operating income (loss)                                          (69.6)                  (17.7)                     9.8
   Other income (expense), net                                        0.5                     1.0                      4.5
                                                                      ---                     ---                      ---

   Income (loss) before taxes                                       (69.1)                  (16.7)                    14.3
   Income taxes (expense) benefit.                                    1.9                     0.2                      1.5
                                                                      ---                     ---                      ---

   Net income (loss)                                                (70.9)%                 (16.5)%                   15.8%
                                                                    =======                 =======                   =====


Gross profit:
   Software licensing                                                98.1%                   97.7%                    94.9%
   Services                                                          22.8%                   29.7%                    48.3%
   Maintenance                                                       75.1%                   72.8%                    78.5%
</TABLE>

                                      (15)
<PAGE>

Year Ended December 31, 2000 Compared with Year Ended December 31, 1999

During 2000 we incurred a net (loss) of ($98 million) compared to a net (loss)
of ($16 million) in 1999. Our 2000 operating income (loss) excluding
amortization and intangibles impairment charge was ($9.5 million) versus $10.2
million in 1999. While gross profit increased $29 million as a result of
increased revenues, we increased our spending in product development by $6
million, selling and marketing by $28 million and general and administrative
expenses by $15 million. Most of the increase in selling and marketing expenses
and general and administrative expenses were incurred in anticipation of higher
revenue growth throughout the year. These higher expenses contributed to the
Company's lack of profitability in the second half of the year, as we did not
achieve our anticipated level of revenues. Additionally, in connection with the
August restatement of first quarter results and the adjustment of previously
released second quarter results, we incurred incremental expenses and related
reorganization costs in the third and fourth quarters, some of which will
continue into 2001.


REVENUES

Total Revenues. Total revenues increased 40% from $98.6 million in 1999 to
$138.3 million in 2000. This increase resulted from increased license revenues
as well as increased billings for services and maintenance.

Software Licensing. Total software licensing revenues increased 39% from $56.8
million in 1999 to $78.8 million in 2000. Domestic software licensing revenues
increased 27% from $41.5 million in 1999 to $52.6 million in 2000 primarily due
to an increase in revenues from the Mercator Integration Broker suite of
products introduced in 2000 and, to a lesser extent, an increase in license
pricing which began to take effect in the fourth quarter of 2000. International
software licensing revenues increased 71% from $15.3 million in 1999 to $26.2
million in 2000 primarily due to the successful introduction of the Mercator
Integration Broker suite to the Braid customer base, a larger salesperson base
available to market our products internationally and our focus on growing our
international channels.

Services. Total services revenues increased 42% from $23.2 million in 1999 to
$32.9 million in 2000 primarily due to increased licensing of our products which
produced greater services and training opportunities. Domestic services revenues
increased 19% from $15.7 million in 1999 to $18.7 million in 2000. International
services revenues increased 88% from $7.5 million in 1999 to $14.1 million in
2000.

Maintenance. Total maintenance revenues increased 43% from $18.6 million in 1999
to $26.6 million in 2000 primarily due to increased licensing of our products
including the Mercator Integration Broker suite, the overall growth in the
customer base using our products and, to lesser extent, an increase in
maintenance pricing which began to take effect in the fourth quarter of 2000.
Domestic maintenance revenues increased 31% from $ 12.4 million in 1999 to $16.2
million in 2000 in line with the 27% increase in domestic software licensing
revenues. International maintenance and other revenues increased 67% from $6.2
million in 1999 to $10.4 million in 2000 in line with the 71% increase in
international software licensing revenues.


COST OF REVENUES

Cost of software licensing revenues consists primarily of CD-ROMs, manuals,
distribution costs and the cost of third-party software that Mercator Software
resells. Cost of services consists primarily of personnel-related and travel
costs in providing consulting and training to customers. Cost of maintenance
revenues consists primarily of personnel-related and communication costs in
providing maintenance and technical support to customers.

Gross margin on software licensing revenues is higher than gross margins on
services and maintenance revenues reflecting the low materials, packaging and
other costs of software products compared with the relatively high personnel
costs associated with providing consulting and training services, maintenance
and technical support. Cost of services also varies based upon the mix of
consulting and training services.

Cost of Software Licensing. Total software licensing costs increased 20% from
$1.3 million in 1999 to $1.5 million in 2000. This increase was due to increased
imbedded third-party software royalty costs partially offset by reduced shipping
costs as we expanded electronic transmission of our products over the WEB and
delivery of software and documentation via CD ROM. The net increase in licensing
costs is consistent with the correspondent increase in license revenues.
Software licensing gross margin remained constant at 98% in both 1999 and 2000.
Domestic software licensing gross margin remained constant at 98% in both 1999
and 2000. International software licensing gross margin increased from 97% in
1999 to 98% in 2000.

                                      (16)
<PAGE>

Cost of Services. Total services costs increased 56% from $16.3 million in 1999
to $25.4 million in 2000. Total services gross margin decreased from 30% in 1999
to 23% in 2000. Domestic services costs increased 41% from $10.8 million in 1999
to $15.1 million in 2000 primarily due to additional personnel costs involved in
delivering additional services to customers. Increased recruiting and training
costs as well as lower initial productivity related to new services personnel
and revenue reserves related to contract disputes caused domestic services gross
margin to decrease from 31% in 1999 to 19% in 2000. International services costs
increased 84% from $5.6 million in 1999 to $10.3 million in 2000 in line with
the 88% increase in international service revenues noted above. International
services gross margin increased marginally from 26% in 1999 to 27% in 2000.

Cost of Maintenance. Total maintenance costs increased 31% from $5.1 million in
1999 to $6.6 million in 2000 to support the increased number of customer
installations as well as the Mercator Integration Broker suite of products
introduced in 2000. Total maintenance gross margin increased from 73% in 1999 to
75% in 2000. Domestic maintenance costs increased 23% from $3.8 million in 1999
to $4.7 million in 2000 to support the 31% increase in revenues noted above
while related gross margin increased from 69% in 1999 to 71% in 2000.
International maintenance costs increased 56% from $1.3 million in 1999 to $2.0
million in 2000 to support the 67% increase in revenues noted above. Related
gross margin increased marginally from 80% in 1999 to 81% in 2000.


OPERATING EXPENSES

Product Development. Product development expenses include expenses associated
with the development of new products and enhancements to existing products.
These expenses consist primarily of salaries, recruiting, and other
personnel-related costs, depreciation of development equipment, supplies, travel
and allocated facilities and communication costs.

Product development expenses increased 39% from $15.3 million in 1999 to $21.2
million in 2000 primarily due to increased personnel costs related to developing
the Mercator Integration Broker suite as well as the acquisition of Novera in
September 1999. Product development expenses represented 15% of total revenues
in both 1999 and 2000. International product development expenses decreased from
$6.0 million in 1999 to $5.8 million in 2000 as we prioritized development of
the Mercator Integration Broker suite in the United States.

We believe that a significant level of research and development expenditures is
required to remain competitive. Accordingly, we expect to continue to devote
substantial resources to research and development. We expect that the dollar
amount of research and development expenses will continue to increase. To date,
all research and development expenditures have been expensed as incurred.

Selling and Marketing. Selling and marketing expenses consist of sales and
marketing personnel costs, including sales commissions, recruiting, travel,
advertising, public relations, seminars, trade shows, product descriptive
literature, and allocated facilities and communications costs.

Selling and marketing expenses increased 67% from $41.2 million in 1999 to $68.9
million in 2000 primarily due to an increase in quota carrying sales
representatives, increased spending on advertising and marketing programs and
increased sales incentives required by events related to the adjustment of our
first and second quarter 2000 operating results. Selling and marketing expenses
as a percentage of total revenues increased from 42% in 1999 to 50% in 2000.
International selling and marketing expenses increased 78% from $11.8 million in
1999 to $20.9 million in 2000 primarily due to the Braid acquisition in 1999 and
successful efforts to introduce the Mercator Integration Broker suite to Braid's
customer base in 2000. We anticipate that selling and marketing expenses will
increase in absolute dollars as revenues increase, but decrease as a percentage
of total revenues.

General and Administrative. General and administrative expenses consist
primarily of salaries, recruiting, and other personnel related expenses for the
Company's administrative, executive, and finance personnel as well as outside
legal, consulting, tax services and audit fees.

General and administrative expenses increased 160% from $9.3 million in 1999 to
$24.2 million in 2000 primarily due to increased headcount, incremental legal,
accounting and consulting fees related to the adjustment of our first and second
quarter 2000 operating results, turnover costs related to senior management as
well as other administrative costs incurred to support our worldwide revenue
growth. General and administrative expenses as a percentage of total revenues
increased from 9% in 1999 to 18% in 2000. International general and
administrative expenses increased 168% from $2.0 million in 1999 to $5.3 million
in 2000 primarily due to the Braid acquisition in March 1999 and expansion of
activities in the European and Asia Pacific regions.

                                      (17)
<PAGE>

We expect to incur incremental general and administrative costs through the
first half of 2001 in connection with changes in the senior management team,
including a reevaluation of our overall growth strategy and the adjustment
previously noted. We believe general and administrative expenses, as a
percentage of total revenues, will decrease from the 18% level experienced in
2000; however, in order to support our worldwide growth, we expect these
expenses to remain above the 1999 level of 9%.

Amortization of Intangibles. Intangible assets are comprised of the excess of
the purchase price and related costs of an acquired business over the value
assigned to tangible assets. The acquisitions we made in 1998 and 1999 were
accounted for under the purchase method of accounting. The purchase prices were
allocated to the tangible and identifiable intangible assets based on their
estimated fair values with any excess designated as goodwill. Intangible assets,
including goodwill, are amortized over their estimated useful lives, which range
from three to five years.

Amortization expense increased 69% from $27.7 million in 1999 to $46.9 million
in 2000 primarily due to a full 12 months of intangibles amortization in 2000
related to the Braid and Novera acquisitions, which occurred in March and
September 1999, respectively. In addition, in April 2000 we determined that
operating targets related to contingent consideration included in the Braid
acquisition agreement had been achieved. In accordance with the terms of the
agreement, we issued stock and cash valued at $17.3 million in additional
consideration; this consideration was added to goodwill and goodwill
amortization for the year 2000 was increased accordingly. Amortization of
intangibles, as a percentage of total revenues, increased from 28% in 1999 to
34% in 2000.

Intangibles impairment charge. During the fourth quarter of 2000 we reevaluated
intangible assets related to recent acquisitions and determined that the Novera
operations and certain Braid products no longer supported our focus on
e-business integration. We closed the Novera operation in December 2000.
Accordingly, in our statement of operations for the year ended December 31, 2000
we recorded an intangibles impairment charge of $39.8 million consisting of
$28.6 million of remaining net book value of Novera goodwill and $11.2 million
of identifiable intangible assets net book value relating to the Braid products
to be phased out. This impairment charge represented 29% of total revenues in
2000.

We had net intangible assets of $81.6 million and $153.2 million at December 31,
2000 and 1999, respectively. The $81.6 million net intangible asset balance at
December 31, 2000 will be fully amortized by February 2004.


OTHER INCOME (EXPENSE), NET

Other income (expense), net represents interest income earned on our cash and
marketable securities balances and term license contracts offset by borrowing
costs related to certain contractual obligations.

Interest income decreased 19% from $1.0 million in 1999 to $.8 million in 2000
primarily due to lower average cash and marketable securities balances relating
to the acquisitions of Braid and Novera partially offset by higher average rates
of return on these investments. Borrowing expenses increased from $0 in 1999 to
$151,000 in 2000 primarily due to interest on the Braid contingent consideration
obligation, commitment fees related to the Fleet Bank credit line agreement, and
letter of credit fees.


INCOME TAXES

At December 31, 2000 we established a valuation allowance against deferred tax
assets relating to net operating loss carryforwards and federal tax credits
because of uncertainty that all of these assets could be utilized in the near
term. This valuation allowance, partially offset by benefits in foreign tax
jurisdictions, resulted in a net tax provision of $2.6 million in 2000 as
compared to a ($.2 million) net tax (benefit) in 1999.

Our effective tax rate for both 2000 and 1999 is impacted by the fact that the
majority of intangibles amortization is not deductible for income tax purposes;
the intangibles impairment charge incurred in 2000 is also not deductible for
income tax purposes. In addition, the change in valuation allowance noted above
substantially reduced the effective tax rate benefit for 2000.

Year Ended December 31, 1999 compared with Year Ended December 31, 1998

During 1999 we incurred a net (loss) of ($16 million) compared to generating net
income of $7 million in 1998. Gross margin increased by $38 million primarily
due to a $53 million increase in revenues. Operating income before amortization
of intangibles increased to $10 million in 1999 from $5 million in 1998.
Operating income in 1999 was negatively impacted by $28 million of intangibles
amortization resulting from the Braid and Novera acquisitions.

                                      (18)
<PAGE>

REVENUES

Total Revenues. Total revenues increased 118% from $45.3 million in 1998 to
$98.6 million in 1999. This overall increase resulted from increases in each of
our product lines of software licensing, services and maintenance.

Software Licensing. Total software licensing revenues increased 95% from $29.1
million in 1998 to $56.8 million in 1999. Domestic software licensing revenues
increased 61% from $25.9 million in 1998 to $41.5 million in 1999, primarily due
to an increase in Mercator license revenues as a result of a larger customer
base. International software licensing revenues increased 372% from $3.2 million
in 1998 to $15.3 million in 1999. This increase was the result of the Braid
acquisition and the larger salesperson base available to sell our Mercator
products. International licensing revenues from Braid products and Mercator
products were $8.0 million and $7.3 million, respectively.

Services. Services revenues increased 264% from $6.4 million in 1998 to $23.2
million in 1999. Domestic services revenues increased 177% from $5.7 million in
1998 to $15.7 million in 1999. This increase was a result of increased service
demands from our customers and the related acquisition of services personnel to
address those needs. International services revenues increased 958% from $0.7
million in 1998 to $7.5 million in 1999. This increase is primarily attributed
to the acquisition of Braid in March 1999, which provided us with an immediate
presence in the United Kingdom services market.

Maintenance. Maintenance revenues increased 89% from $9.8 million in 1998 to
$18.6 million in 1999. Domestic maintenance revenues increased 47% from $8.4
million in 1998 to $12.4 million in 1999 primarily due to higher Mercator
license revenues. International maintenance revenues increased 348% from $1.4
million in 1998 to $6.2 million in 1999. This increase is primarily attributed
to the acquisition of Braid in March 1999, which instantly provided us with an
established customer base requiring maintenance and technical support services
in the United Kingdom.


COST OF REVENUES

Cost of Software Licensing. Total cost of software licensing revenues decreased
from $1.5 million in 1998 to $1.3 million in 1999. This decrease was due to a
decrease in costs of distribution. In 1999, the majority of products were sold
on a single CD-ROM, which includes all documentation and other materials,
thereby reducing the costs of packaging and materials as well as shipping
charges. Software licensing gross margin increased from 95% in 1998 to 98% in
1999 due to the volume of sales and low cost of software distribution. Cost of
software licensing revenues for domestic operations decreased from $1.3 million
in 1998 to $0.9 million in 1999 and related gross margin increased from 95% in
1998 to 98% in 1999 as a result of the low cost of distribution and the
resulting economies of scale on the larger number of transactions. The cost of
software licensing from international operations was $0.4 million in 1999. This
cost was due to the purchase of Braid in March of 1999 and the increase in
international sales of Braid's traditional financial services products as well
as the increased sales of our Mercator product suite. Costs for international
sales for 1998 were minimal. International software licensing gross margin was
97% for 1999.

Cost of Services. Cost of services increased 396% from $3.3 million in 1998 to
$16.3 million in 1999. Total gross margin on services revenues decreased from
48% in 1998 to 30% in 1999. Domestic cost of services increased 272% from $2.9
million in 1998 to $10.8 million in 1999 due primarily to the addition of
professional services personnel from SCP in November 1998. Domestic services
gross margin decreased from 49% in 1998 to 31% in 1999. International cost of
services increased from $0.4 million in 1998 to $5.5 million in 1999. This
increase was the result of the acquisition of Braid in March 1999 and related
services personnel. In addition, Braid's traditional financial services products
have a larger professional services component than the Mercator product suite.
International services gross margin was 26% in 1999 compared to 48% in 1998.

Cost of Maintenance. Cost of maintenance revenues increased 139% from $2.1
million in 1998 to $5.1 million in 1999. Maintenance gross margin declined
marginally from 78% in 1998 to 73% in 1999. Domestic cost of maintenance
increased 111% from $1.8 million in 1998 to $3.8 million in 1999 as we added
technical support resources required by increased revenues. Domestic maintenance
gross margin decreased from 79% in 1998 to 69% in 1999. International cost of
maintenance increased 333% from $0.3 million in 1998 to $1.3 million in 1999.
International maintenance gross margin increased marginally from 78% in 1998 to
80% in 1999.

                                      (19)
<PAGE>

OPERATING EXPENSES

Product Development. Product development expenses increased 168% from $5.7
million in 1998 to $15.3 million in 1999, primarily due to increased headcount
associated with the development of new Mercator based products and the
acquisition of Braid in March 1999 and Novera in September 1999. Product
development expenses represented 13% and 15% of total revenues for 1998 and
1999, respectively. International product development expenses were $5.6 million
in 1999. There was no development performed internationally in 1998.

Selling and Marketing. Selling and marketing expenses increased 87% from $22.0
million in 1998 to $41.2 million in 1999. This increase was primarily due to the
acquisitions and the increased number of sales and marketing personnel hired to
pursue marketing opportunities and programs. Selling and marketing expenses
represented 49% and 42% of total revenues for 1998 and 1999, respectively.

During 1999, the acquisition of Braid resulted in an increase in headcount of 27
salespeople. These individuals sold both the traditional Braid financial
services products as well as the Mercator product line. Selling and marketing
costs for international operations were $11.8 million in 1999.

General and Administrative. General and administrative expenses increased 57%
from $5.9 million in 1998 to $9.3 million in 1999. The increase was primarily
due to increased number of employees, the cost of management information system
staff, as well as increased depreciation expenses for related equipment and
software. The acquisition of Braid in March of 1999 and the establishment of a
German sales office increased both headcount and expense in the administrative
area. International administrative costs were $2.9 million for 1999. General and
administrative expenses were 13% and 9% of total revenues for 1998 and 1999,
respectively.

Amortization of Intangibles Amortization expense increased from $0.3 million in
1998 to $27.7 million in 1999 as a result of the acquisitions of Braid in March
1999 and Novera in September 1999. The amortization expense in 1998 consisted of
two months of amortization relating to the acquisition of SCP. As a result of
these acquisitions, as of December 31, 1999 and 1998, we had net intangible
assets of $153.2 million and $5.2 million, respectively.


OTHER INCOME (EXPENSE), NET

Interest income decreased from $2.0 million in 1998 to $1.0 million in 1999,
primarily due to the use of cash in the acquisitions of Braid and Novera during
1999. Borrowing expenses decreased from $11,000 in 1998 to $0 in 1999 due to the
expiration of our line of credit with Bank of New York. We had no other
outstanding debt obligations during 1999.


TAXES

For the year ended December 31, 1999, we had $21.0 million of non-deductible
expenses, primarily amortization of goodwill and other intangible assets. We
also had deferred tax assets of $10.6 million. At December 31, 1999 we concluded
that it was more likely than not that we would realize the benefits of these
deferred tax assets; accordingly, we reversed the valuation allowance for
deferred income taxes. This resulted in the recording of a net tax benefit for
the year ending December 31, 1999. At December 31, 1998, we had concluded that
it was more likely than not that all net operating loss carryforwards would be
utilized; accordingly, we reversed a portion of the remaining valuation
allowance for deferred income taxes, which resulted in the recording of a net
tax benefit for the year ending December 31, 1998.


LIQUIDITY AND CAPITAL RESOURCES

On December 31, 2000 we had net working capital of $23.4 million, which included
cash and marketable securities of $21.7 million. Net working capital at December
31, 1999 was $39.7 million including cash and marketable securities of $14.9
million. The $16 million decrease in working capital was caused primarily by a
$14 million increase in accounts payable and accrued expenses and other current
liabilities, a $3 million increase in the current portion of deferred revenue
and a $7 million decrease in deferred tax assets, partially offset by a $7
million increase in cash and marketable securities.

                                      (20)
<PAGE>

Net accounts receivable increased modestly from $38.3 million at December 31,
1999 to $38.9 million at December 31, 2000 despite a 26 percent increase in
fourth quarter revenues and a $4 million net increase in deferred revenue during
2000. This stability was accomplished primarily by a change in standard payment
terms for our customers from "net 30 days" to "due upon receipt," improved
collection procedures and a $1.8 million net increase in the allowance for
doubtful accounts. Consequently, the number of days sales in net accounts
receivable decreased from 111 at December 31, 1999 to 89 at December 31, 2000.

Operating activities provided cash of $11.3 million during the year ended
December 31, 2000 compared to using cash of $8.4 million during the year ended
December 31, 1999. $94 million of the $98 million net loss for the year ended
December 31, 2000 resulted from non-cash expenses including $51 million of
intangibles amortization and depreciation and $40 million for an intangibles
impairment charge. Operations generated cash primarily from a $20 million
increase in operating liabilities (accounts payable, accrued expenses and other
current liabilities, and deferred revenue) offset by a $5 million increase in
operating assets (accounts receivable and prepaid expenses) and the remaining $4
million net loss.

Investing activities consumed cash of $7.3 million during the year ended
December 31, 2000 compared to $.7 million during the year ended December 31,
1999. 2000 activities included a $6.2 million net investment in furniture,
fixtures and equipment, a $1.8 million increase in intangible assets in
connection with the Braid acquisition earn-out agreement and a $1.5 million
restricted collateral deposit in connection with a new headquarters facility
lease partially offset by a $2.2 million liquidation of investments in
marketable securities.

Financing activities generated cash of $5.8 million during the year ended
December 31, 2000 compared to $4.0 million during the year ended December 31,
1999. In both years the increase in cash was primarily due to proceeds from the
sale of stock through employee stock option exercises and employee stock plan
purchases.

In April 2000 we entered into a three-year agreement with Fleet Bank for a $20
million line of credit. Since inception no amounts have been borrowed under this
agreement. In June 2000 Fleet Bank issued a $1.24 million letter of credit
against the credit line facility in connection with the new headquarters office
lease. In November 2000 Fleet Bank notified us that it would only make advances
under the agreement on a discretionary basis because the Company was in
violation of certain financial covenants. Accordingly, at Fleet Bank's request
we provided a $1.5 million restricted collateral deposit as security for the
letter of credit. In March 2001 the line of credit agreement with Fleet Bank was
terminated.

Capital expenditures have been, and future capital expenditures are anticipated
to be primarily for facilities, computer equipment and software to support the
expansion our operations. Certain computer equipment used in development
activities may be available through operating leases. As of December 31, 2000 we
had commitments for capital expenditures in the amount of $2.6 million through
June 2001. In January 2001, pursuant to the new headquarters lease agreement, we
increased the letter of credit to $2.5 million and the related restricted
collateral deposit to $3.0 million.

In the short term, in order to achieve our business plan, we expect to continue
to experience growth in our quarterly expenses and planned capital expenditures.
In addition, in light of changing economic conditions, we continue to review our
current cost structure in order to realign our resources to support the new
geographic business units (Americas, EMEA and Asia Pacific) and eliminate
non-strategic expenditures. We believe that current cash and cash equivalent
balances combined with net cash generated from operations will be sufficient to
meet anticipated cash needs for working capital and capital expenditures through
December 31, 2001. However, any projection of future revenues is subject to a
level of uncertainty; therefore, we have developed plans that will allow the
Company to reduce its expense base if planned revenues are not achieved. If
current cash, cash equivalents and cash that may be generated from operations
are insufficient to satisfy our liquidity requirements, we will likely seek to
obtain a new line of credit or sell additional equity securities to strategic
investors. The sale of additional equity or equity-related securities would
result in additional dilution to our stockholders.

Beyond December 2001, we may require additional cash to fund our ongoing working
capital and capital expenditures and will, from time to time, consider the
acquisition of or investment in complementary businesses, products, services and
technologies, which might impact our liquidity requirements or cause us to issue
debt or additional equity securities. There can be no assurance that financing
will be available in amounts or on terms acceptable to us, or at all and that
such financing would not be dilutive to our shareholders.

In January 2001 we sold 228,180 shares of our restricted stock to Mitsui & Co,
Ltd. for $2.0 million cash as part of a transaction that anticipates the
formation of a joint venture with Mitsui to market our products in Japan.

                                      (21)
<PAGE>

CONVERSION TO A SINGLE EUROPEAN CURRENCY

We generate revenues in a number of foreign countries. However, as the majority
of foreign contracts are denominated in US dollars, we do not expect the
conversion to a single European currency to have a material impact on our
financial results.


FACTORS THAT MAY AFFECT FUTURE RESULTS

Our quarterly and annual operating results are volatile and difficult to predict
and may cause our stock price to fluctuate.

Our quarterly and annual operating results have varied significantly in the past
and are expected to do so in the future. We believe that you should not rely on
period-to-period comparisons of our results of operations, as they are not
necessarily indications of our future performance. In some future periods, our
results of operations may be below the expectation of public market analysts and
investors. In this case, the price of our common stock would likely decline.

Our revenues and results of operations are difficult to forecast and depend on a
variety of factors. These factors include the following:

 .    personnel changes, our ability to attract and retain qualified sales,
     professional services and research and development personnel and the rate
     at which these personnel become productive;

 .    general economic conditions;

 .    the size, timing and terms of individual license transactions;

 .    the sales cycle for our products;

 .    demand for and market acceptance of our products and related services,
     particularly our Mercator products;

 .    our ability to expand, and market acceptance of, our services business;

 .    the timing of our expenditures in anticipation of product releases or
     increased revenue;

 .    the timing of product enhancements and product introductions by us and our
     competitors;

 .    market acceptance of enhanced versions of our existing products and of new
     products;

 .    changes in pricing policies by our competitors and us;

 .    variations in the mix of products and services sold by us;

 .    the mix of channels through which our products and services are sold;

 .    our success in penetrating international markets; and

 .    the buying patterns and budgeting cycles of customers.

We have historically derived a substantial portion of our revenues from the
licensing of our software products, and we anticipate that this trend will
continue for the foreseeable future. Software license revenues are difficult to
forecast for a number of reasons, including the following:

 .    we typically do not have a material backlog of unfilled orders, and
     revenues in any quarter substantially depend on orders booked and shipped
     in that quarter;

 .    the length of the sales cycles for our products can vary significantly from
     customer to customer and from product to product and can be as long as nine
     months or more;

 .    the terms and conditions of individual license transactions, including
     prices and discounts, are often negotiated based on volumes and
     commitments, and may vary considerably from customer to customer; and

 .    we have generally recognized a substantial portion of our quarterly
     software licensing revenues in the last month of each quarter.

Accordingly, the cancellation or deferral of even a small number of purchases of
our products could harm our business.

                                      (22)
<PAGE>

Investors, customers and vendors may react adversely to change in our company.

Our success depends in large part on the support of investors, key customers and
vendors who may react adversely to changes in our company since the restatement
of our first quarter earnings and the adjustment to previously disclosed second
quarter 2000 results. Many members of our senior management have joined us since
August 2000. It will take time and resources for these individuals to effect
change within our organization and during this period our vendors and customers
may re-examine their willingness to do business with us. If we are unable to
retain and attract our existing and new customers and vendors, our business,
operating results and financial condition could be materially adversely
affected.

Our future success depends on retaining our key personnel and attracting and
retaining additional highly qualified employees.

Our future success depends in large part on the retention of our key sales,
professional services and research and development personnel, as well as senior
management. Other than the Chairman and Chief Executive Officer, the
Vice-Chairman and the Chief Financial Officer and one of our area vice
presidents, all employees are employed at-will and we have no fixed-term
employment agreements with our employees, which prevents them from terminating
their employment at any time. The loss of the services of any of one or more of
our key employees could harm our business.

Our future success also depends on our ability to attract, train and retain
highly qualified sales, research and development, professional services and
managerial personnel, particularly sales, professional services and research and
development personnel with expertise in enterprise resource planning systems.
Competition for these personnel is intense. We may not be able to attract,
assimilate or retain qualified personnel. We have at times experienced, and we
continue to experience, difficulty in recruiting qualified sales and research
and development personnel, and we anticipate these difficulties will continue in
the future. Furthermore, we have in the past experienced, and in the future we
expect to continue to experience, a significant time lag between the date sales,
research and development and professional services personnel are hired and the
date these employees become fully productive.

It would be difficult for us to adjust our spending if we experience any revenue
shortfalls.

Our future revenues will also be difficult to predict and we could fail to
achieve our revenue expectations. Our expense levels are based, in part, on our
expectation of future revenues, and expense levels are, to a large extent, fixed
in the short term. We may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. If revenue levels are below
expectations for any reason, our operating results and cash flows are likely to
be harmed. Net income may be disproportionately affected by a reduction in
revenue because large portions of our expenses are related to headcount that
cannot be easily reduced without harming our business.

In addition, we currently intend to increase our operating expenses by expanding
our research and product development staff, particularly research and
development personnel to be devoted to our Mercator product line, increasing our
sales and marketing and professional services operations, expanding distribution
channels, and hiring personnel in other operating areas. We expect to experience
a significant time lag between the date professional services, sales, and
technical personnel are hired and the date these employees become fully
productive. The timing of expansion and the rate at which new technical,
professional services, and sales personnel become productive as well as the
timing of the introduction and success of new distribution channels could cause
material fluctuations in our results of operations. Furthermore, to the extent
increased operating expenses precede or are not subsequently followed by
increased revenues, our operating results could be harmed.

We may experience seasonal fluctuations in our revenues or results of
operations.

It is not uncommon for software companies to experience strong fourth quarters
followed by weaker first quarters, in some cases with sequential declines in
revenues or operating profit. We believe that many software companies exhibit
this pattern in their sales cycles primarily due to customers' buying patterns
and budget cycles. We may display this pattern in future years.

We depend on the sales of our Mercator products and related services.

We first introduced our Mercator products in 1993. In recent years, a
significant portion of our revenue has been attributable to licenses of our
Mercator products and related services, and we expect that revenue attributable
to our Mercator products and related services will continue to represent a
significant portion of our total revenue for the foreseeable future.
Accordingly, our future operating results significantly depend on the market
acceptance and growth of our Mercator product line and enhancements of these
products and services. Market acceptance of our Mercator product line may not
increase or remain at current levels, and we may not be able to

                                      (23)
<PAGE>

successfully market our Mercator product line or develop extensions and
enhancements to this product line on a long-term basis. In the event that our
current or future competitors release new products that provide, or are
perceived as providing, more advanced features, greater functionality, better
performance, better compatibility with other systems or lower prices than our
Mercator product line, demand for our products and services would likely
decline. A decline in demand for, or market acceptance of, our Mercator product
line would harm our business.

We may experience difficulties in developing and introducing new or enhanced
products necessitated by technological changes.

Our future success will depend, in part, upon our ability to anticipate changes,
to enhance our current products and to develop and introduce new products that
keep pace with technological advancements and address the increasingly
sophisticated needs of our customers. Our products may be rendered obsolete if
we fail to anticipate or react to change.

Development of enhancements to existing products and new products depends, in
part, on a number of factors, including the following:

 .    the timing of releases of new versions of applications systems by vendors;

 .    the introduction of new applications, systems or computing platforms;

 .    the timing of changes in platforms;

 .    the release of new standards or changes to existing standards; and

 .    changing customer requirements.

Our product enhancements or new products may not adequately meet the
requirements of the marketplace or achieve any significant degree of market
acceptance. In addition, our introduction or announcement, or those of one or
more of our current or future competitors, of products embodying new
technologies or features could render our existing products obsolete or
unmarketable. Our introduction or announcement of enhanced or new product
offerings or by our current or future competitors may cause customers to defer
or cancel purchases of our existing products. Any deferment or cancellation of
purchases could harm our business.

We could experience delays in developing and releasing new products or product
enhancements.

We may experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products or product enhancements.
We have in the past experienced delays in the introduction of product
enhancements and new products and we may experience delays in the future.

Furthermore, as the number of applications, systems and platforms supported by
our products increases, we could experience difficulties in developing, on a
timely basis, product enhancements which address the increased number of new
versions of applications, systems or platforms served by our existing products.
If we fail, for technological or other reasons, to develop and introduce product
enhancements or new products in a timely and cost-effective manner or if we
experience any significant delay in product development or introduction, our
customers may delay or decide against purchases of our products, which could
harm our business.

The success of our products will also depend upon the success of the platforms
we target.

We may, in the future, seek to develop and market enhancements to existing
products or new products, which are targeted for applications, systems or
platforms that we believe will achieve commercial acceptance. This could require
us to devote significant development, sales and marketing personnel, as well as
other resources, to these efforts, which would otherwise be available for other
purposes. We may not be able to successfully identify these applications,
systems or platforms, and even if we do so, they may not achieve commercial
acceptance or we may not realize a sufficient return on our investment. Failure
of these targeted applications, systems or platforms to achieve commercial
acceptance or our failure to achieve a sufficient return on our investment could
harm our business.

We may not successfully expand our sales and distribution channels.

An integral part of our strategy is to expand our indirect sales channels,
including value-added resellers, independent software vendors, systems
integrators and distributors. This channel is accounting for a growing
percentage of our total revenues and we are increasing resources dedicated to
developing and expanding these indirect distribution channels. We may not be
successful in

                                      (24)
<PAGE>

expanding the number of indirect distribution channels for our products. If we
are successful in increasing our sales through indirect sales channels, we
expect that those sales will be at lower per unit prices than sales through
direct channels, and revenue we receive for each sale will be less than if we
had licensed the same product to the customer directly.

Selling through indirect channels may also limit our contact with our customers.
As a result, our ability to accurately forecast sales, evaluate customer
satisfaction and recognize emerging customer requirements may be hindered.

Even if we successfully expand our indirect distribution channels, any new value
added resellers, independent software vendors, system integrators or
distributors may offer competing products, or have no minimum purchase
requirements of our products. These third parties may also not have the
technical expertise required to market and support our products successfully. If
the third parties do not provide adequate levels of services and technical
support, our customers could become dissatisfied, or we would have to devote
additional resources for customer support. Our brand name and reputation could
be harmed. Selling products through indirect sales channels could cause
conflicts with the selling efforts of our direct sales force.

Our strategy of marketing products directly to end-users and indirectly through
value added resellers; independent software vendors, systems integrators and
distributors may result in distribution channel conflicts. Our direct sales
efforts may compete with those of our indirect channels and, to the extent
different resellers target the same customers, resellers may also come into
conflict with each other. Although we have attempted to manage our distribution
channels to avoid potential conflicts, channel conflicts may harm our
relationships with existing value added resellers, independent software vendors,
systems integrators or distributors or impair our ability to attract new value
added resellers, independent software vendors, systems integrators and
distributors.

We may encounter difficulties in managing our growth.

Our business has grown in recent periods, with total revenues increasing from
approximately $16.1 million in 1995 to $138.3 million in 2000. We acquired
certain assets of Software Consulting Partners in November 1998 and acquired
Braid Limited, Inc. in March 1999, and Novera Software, Inc. in September 1999.
The growth of our business has placed, and is expected to continue to place, a
strain on our administrative, financial, sales and operational resources and
increased demands on our systems and controls.

To address this growth, we have recently implemented, or are in the process of
implementing and will implement in the future, a variety of new and upgraded
operational and financial systems, procedures and controls. In addition, we
intend to hire additional administrative personnel. We may not be able to
successfully complete the implementation and integration of these systems,
procedures and controls, or hire additional personnel, in a timely manner. Our
inability to manage our growth and changing business conditions, or to adapt our
operational, management and financial control systems to accommodate our growth
could harm our business.

We may face significant risks in expanding our international operations.

International revenues accounted for 29% of our total revenues for 1999 compared
to 37% of our total revenues for 2000. Continued expansion of our international
sales and marketing efforts will require significant management attention and
financial resources. We also expect to commit additional time and development
resources to customizing our products for selected international markets and to
developing international sales and support channels.

International operations involve a number of additional risks, including the
following:

 .    impact of possible recessionary environments in economies outside the
     United States;

 .    longer receivables collection periods and greater difficulty in accounts
     receivable collection;

 .    unexpected changes in regulatory requirements;

 .    dependence on independent resellers;

 .    reduced protection for intellectual property rights in some countries,
     tariffs and other trade barriers;

 .    foreign currency exchange rate fluctuations;

 .    difficulties in staffing and managing foreign operations;

 .    the burdens of complying with a variety of foreign laws;

 .    potentially adverse tax consequences; and

 .    political and economic instability.

                                      (25)
<PAGE>

To the extent that our international operations expand, we expect that an
increasing portion of our international license and service and other revenues
will be denominated in foreign currencies, subjecting us to fluctuations in
foreign currency exchange rates. We do not currently engage in foreign currency
hedging transactions. However, as we continue to expand our international
operations, exposures to gains and losses on foreign currency transactions may
increase. We may choose to limit our exposure by the purchase of forward foreign
exchange contracts or similar hedging strategies. The currency exchange strategy
that we adopt may not be successful in avoiding exchange-related losses. In
addition, the above-listed factors may cause a decline in our future
international revenue and, consequently, may harm our business. We may not be
able to sustain or increase revenue that we derive from international sources.

Our success depends upon the widespread use and adoption of the internet and
intranets.

We believe that demand for enterprise application integration solutions, such as
those that we offer, will depend, in part, upon the adoption by businesses and
end-users of the internet and intranets as platforms for electronic commerce and
communications. The internet and intranets are new and evolving, and they may
not be widely adopted, particularly for electronic commerce and communications
among businesses. Critical issues concerning the internet and intranets,
including security, reliability, cost, ease of use and access and quality of
service remain unresolved at this time, inhibiting adoption by many enterprises
and end- users. If the internet and intranets are not widely used by businesses
and end- users, particularly for electronic commerce, this could harm our
business.

Government regulation and legal uncertainties relating to the internet could
adversely affect our business.

Congress has recently passed legislation and several more bills have recently
been sponsored in both the House and Senate that are designed to regulate
certain aspects of the internet, including on-line content, copyright
infringement, user privacy, taxation, access charges, liability for third-party
activities and jurisdiction. In addition, federal, state, local and foreign
governmental organizations are also considering other legislative and regulatory
proposals that would regulate the internet. Areas of potential regulation
include libel, pricing, quality of products and services, and intellectual
property ownership.

The laws governing the use of the internet, in general, remain largely
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws such as those governing
intellectual property; privacy, libel and taxation apply to the internet. In
addition, the growth and development of the market for online commerce may
prompt calls for more stringent consumer protection laws, both in the United
States and abroad. This occurrence may impose additional burdens on companies
conducting business online by limiting how information can flow over the
internet and the type of information that can flow over the internet. The
adoption or modification of laws or regulations relating to the internet could
adversely affect our business.

It is not known how courts will interpret both existing and new laws. Therefore,
we are uncertain as to how new laws or the application of existing laws will
affect our business. In addition, our clients who may be subject to such
legislation may indirectly affect our business. Increased regulation of the
internet may decrease the growth in the use of the internet, which could
decrease the demand for our services, increase our cost of doing business or
otherwise have a material adverse effect on our business, results of operations
and financial condition.

Capacity constraints caused by growth in the use of the internet may, unless
resolved, impede further development of the internet to the extent that users
experience delays, transmission errors and other difficulties. Further, the
adoption of the internet for commerce and communications, particularly by those
individuals and companies that have historically relied upon alternative means
of commerce and communication generally requires the understanding and
acceptance of a new way of conducting business and exchanging information. In
particular, companies that have already invested substantial resources in other
means of conducting commerce and exchanging information may be particularly
reluctant or slow to adopt a new internet-based strategy that may make their
existing personnel and infrastructure obsolete. If the necessary infrastructure,
products, services or facilities are not developed, or if the internet does not
become a viable commercial medium, our business, results of operations and
financial condition could be materially and adversely affected.

The United States Omnibus Appropriations Act of 1998 places a moratorium on
taxes levied on internet access from October 1, 1998 to October 21, 2001.
However, states may place taxes on internet access if taxes had already been
generally imposed and actually enforced prior to October 1, 1998. States which
can show they enforced internet access taxes prior to October 1, 1998 and states
after October 21, 2001 may be able to levy taxes on internet access resulting in
increased cost to access to the internet, resulting in a material adverse effect
on our business.

We face significant competition in the market for e-business integration
software.

The market for our products and services is extremely competitive and subject to
rapid change. Because there are relatively low barriers to entry in the software
market, we expect additional competition from other established and emerging
companies.

                                      (26)
<PAGE>

In the e-business integration market, our Mercator products and related services
compete primarily against solutions developed internally by individual
businesses to meet their specific e-business integration needs. In addition, we
face increasing competition in the e-business integration market from other
third-party software vendors.

Many of our current and potential competitors have longer operating histories,
significantly greater financial, technical, product development and marketing
resources, greater name recognition and larger customer bases than we do. Our
present or future competitors may be able to develop products that are
comparable or superior to those we offer, adapt more quickly than we do to new
technologies, evolving industry trends or customer requirements, or devote
greater resources than we do to the development, promotion and sale of their
products. Accordingly, we may not be able to compete effectively in our target
markets against these competitors.

We expect that we will face increasing pricing pressures from our current
competitors and new market entrants. Our competitors may engage in pricing
practices that reduce the average selling prices of our products and related
services. To offset declining average selling prices, we believe that we must
successfully introduce and sell enhancements to existing products and new
products on a timely basis. We must also develop enhancements to existing
products and new products that incorporate features that can be sold at higher
average selling prices. To the extent that enhancements to existing products and
new products are not developed in a timely manner, do not achieve customer
acceptance or do not generate higher average selling prices, our operating
margins may decline.

We have only limited protection for our proprietary technology.

Our success is dependent upon our proprietary software technology. We do not
currently have any patents and we rely principally on trade secret, copyright
and trademark laws, nondisclosure and other contractual agreements and technical
measures to protect our technology. We also believe that factors such as the
technological and creative skills of our personnel, product enhancements and new
product developments are essential to establishing and maintaining a technology
leadership position. We enter into confidentiality and/or license agreements
with our employees, distributors and customers, and we limit access to and
distribution of our software, documentation and other proprietary information.
The steps taken by us may not be sufficient to prevent misappropriation of our
technology, and such protections do not preclude competitors from developing
products with functionality or features similar to our products. Furthermore, it
is possible that third parties will independently develop competing technologies
that are substantially equivalent or superior to our technologies. In addition,
effective copyright and trade secret protection may be unavailable or limited in
certain foreign countries, which could pose additional risks of infringement as
we continues to expand internationally. Our failure or inability to protect our
proprietary technology could have a material adverse effect on our business.

Although we do not believe our products infringe the proprietary rights of any
third parties, infringement claims could be asserted against us or our customers
in the future. Furthermore, we may initiate claims or litigation against third
parties for infringement of our proprietary rights, or for purposes of
establishing the validity of our proprietary rights. Litigation, either as
plaintiff or defendant, would cause us to incur substantial costs and divert
management resources from productive tasks whether or not such litigation is
resolved in our favor, which could have a material adverse effect on our
business. Parties making claims against us could secure substantial damages, as
well as injunctive or other equitable relief, which could effectively block our
ability to license our products in the United States or abroad. Such a judgment
could have a material adverse effect on our business. If it appears necessary or
desirable, we may seek licenses to intellectual property that it is allegedly
infringing. Licenses may not be obtainable on commercially reasonable terms, if
at all. The failure to obtain necessary licenses or other rights could have a
material adverse effect on our business. As the number of software products in
the industry increases and the functionality of these products further overlaps,
we believe that software developers may become increasingly subject to
infringement claims. Any such claims, with or without merit, can be
time-consuming and expensive to defend and could adversely affect our business.
We are not aware of any currently pending claims that our products, trademarks
or other proprietary rights infringe upon the proprietary rights of third
parties.

We may become subject to infringement claims.

Although we do not believe that our products infringe the proprietary rights of
any third parties, third parties might assert infringement claims against us or
our customers in the future. Furthermore, we may initiate claims or litigation
against third parties for infringement of our proprietary rights or to establish
the validity of our proprietary rights. Litigation, either as plaintiff or
defendant, would cause us to incur substantial costs and divert management
resources from productive tasks. Any litigation, regardless of the outcome,
could harm our business. Furthermore, parties making claims against us could
secure substantial damages, as well as injunctive or other equitable relief,
which could effectively block our ability to license our products in the United
States or abroad. A large monetary judgment could harm our business.

                                      (27)
<PAGE>

Securities Litigation

As is outlined above in Part I, Item 3, after the restatement of our first
quarter earnings and the adjustment to previously disclosed second quarter
results, Mercator Software was named in a series of similar purported securities
class action lawsuits. These lawsuits have now been consolidated into one
matter. The amended complaint in the consolidated matter alleges violations of
United States federal securities law through alleged material misrepresentations
and omissions and seeks an unspecified award of damages. We believe that the
allegations in the amended complaint are without merit and we intend to contest
them vigorously. However, there can be no guarantee as to the ultimate outcome
as to this pending litigation matter.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the ordinary course of operations, our financial position and cash flows are
subject to a variety of risks, which include market risks associated with
changes in foreign currency exchange rates and movement in interest rates. We do
not, in the normal course of business, use derivative financial instruments for
trading or speculative purposes. Uncertainties that are either non-financial or
nonquantifiable, such as political, economic, tax, other regulatory or credit
risks are not included in the following assessment of our market risks.

Foreign Currency Exchange Rates

Operations outside of the U.S. expose us to foreign currency exchange rate
changes and could impact translations of foreign denominated assets and
liabilities into U.S. dollars and future earnings and cash flows from
transactions denominated in different currencies. During 2000, 37% of our total
revenue was generated from our international operations, and the tangible net
assets of our foreign subsidiaries totaled approximately 66% of consolidated
tangible net assets as of December 31, 2000. Our exposure to currency exchange
rate changes is diversified due to the number of different countries in which we
conduct business. We operate outside the U.S. primarily through wholly owned
subsidiaries in the United Kingdom, France, Germany, Singapore, Hong Kong, and
Australia. These foreign subsidiaries use local currencies as their functional
currency, as sales are generated and expenses are incurred in such currencies.
Foreign currency gains and losses will continue to result from fluctuations in
the value of the currencies in which we conduct our operations as compared to
the U.S. dollar. We do not believe that possible near-term changes in exchange
rates will result in a material effect on our future earnings or cash flows and,
therefore, have chosen not to enter into foreign currency hedging instruments.
There can be no assurance that this approach will be successful, especially in
the event of a sudden and significant decline in the value of foreign currencies
relative to the United States dollar.

Interest Rates

We invest our cash in a variety of financial instruments, consisting principally
of investments in commercial paper, interest-bearing demand deposit accounts
with financial institutions, money market funds and highly liquid debt
securities of corporations, municipalities and the U.S. Government. These
investments are denominated in U.S. dollars. Cash balances in foreign currencies
overseas are operating balances and are only invested in short-term deposits of
the local operating bank.

We classify our investment instruments as available-for-sale in accordance with
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, (SFAS No. 115). Investments in both
fixed rate and floating rate interest earning instruments carry a degree of
interest rate risk. Changes in interest rates could impact our anticipated
interest income or could impact the fair market value of our investments.
However, we believe these changes in interest rates will not cause a material
impact on our financial position, results of operations or cash flows.


ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial statements of Mercator Software meeting the requirements of Regulation
S-X are filed on page F-1 to F-23 of this Annual Report on Form 10-K. See Part
IV, Item 14.


ITEM 9.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                ACCOUNTING AND FINANCIAL DISCLOSURE

        None

                                      (28)
<PAGE>

                                   Part III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

Directors

The information concerning directors of the Company required under this item is
incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, to be filed with the Commission not later than 120
days after the close of the Company's fiscal year ended December 31, 2000.


Executive Officers

The information concerning officers of the Company required under this item is
incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, to be filed with the Commission not later than 120
days after the close of the Company's fiscal year ended December 31, 2000.


ITEM 11.  EXECUTIVE COMPENSATION AND OTHER INFORMATION

The information required under this item is incorporated herein by reference to
the Company's definitive proxy statement pursuant to Regulation 14A, to be filed
with the Commission not later than 120 days after the close of the Company's
fiscal year ended December 31, 2000.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required under this item is incorporated herein by reference to
the Company's definitive proxy statement pursuant to Regulation 14A, to be filed
with the Commission not later than 120 days after the close of the Company's
fiscal year ended December 31, 2000.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required under this item is incorporated herein by reference to
the Company's definitive proxy statement pursuant to Regulation 14A, to be filed
with the Commission within 120 days after the close of the Company's fiscal year
ended December 31, 2000.


                                      (29)
<PAGE>

                                    Part IV

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

The following documents are filed as part of this Annual Report on Form 10-K:

     1.   Consolidated Financial Statements. The following consolidated
     financial statements of Mercator Software, Inc. and Report from the
     Independent Accountants are incorporated in Item 8 of this Annual Report on
     Form 10-K.

          Independent Auditors' Report

          Consolidated Balance Sheets at December 31, 2000 and 1999

          Consolidated Statements of Operations for the Years Ended December 31,
          2000, 1999 and 1998

          Consolidated Statements of Stockholders' Equity for the Years Ended
          December 31, 2000, 1999 and 1998

          Consolidated Statements of Cash Flows for the Years Ended December 31,
          2000, 1999 and 1998

          Notes to Consolidated Financial Statements

     2.   Consolidated Financial Statement Schedules. Consolidated financial
     statement schedules have been omitted because the required information is
     not present or not present in amounts sufficient to require submission of
     the schedule, or because the information required is included in the
     consolidated financial statements or the notes thereto.

     3.(a) The Exhibits listed in the Exhibit Index immediately preceding the
     Exhibits are filed as a part of this Annual Report on Form 10-K.

     3.(b) Mercator Software filed a report on Form 8-K on August 22, 2000
     with respect to the Company's adjustments to expenses for the first and
     second quarter of 2000, including adjusted Consolidated Condensed
     Statements of Operations for the quarters ended June 30, 2000 and 1999 and
     the six months ended June 30, 2000 and 1999 and Consolidated Condensed
     Balance Sheets (unaudited) as of June 30, 2000, March 31, 2000 and December
     31, 1999 (audited).

                                      (30)
<PAGE>

                                   SIGNATURES

               Pursuant to the requirements of Section 13 or 15(d) of the
Securities Act, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                    By /s/ Roy C. King
                                       --------------------------------------
                                       Roy C. King
                                       President, Chief Executive Officer
                                        and Chairman of the Board of Directors


Pursuant to the requirements of the Securities Act, this Annual Report on Form
10-K has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

Name                                        Capacity                                                    Date
----                                        --------                                                    ----
<S>                                         <C>                                                         <C>
/s/ Roy C. King                             President, Chief Executive Officer and                      March 30, 2001
---------------                             Chairman of the Board of Directors
Roy C. King

/s/ Richard M. Applegate                    Senior Vice President, Chief                                March 30, 2001
------------------------                    Financial Officer and Treasurer
Richard M. Applegate

/s/ James P. Schadt                         Vice-Chairman of the Board and                              March 30, 2001
-------------------                         Director
James P. Schadt

/s/ Diane Baker                             Director                                                    March 30, 2001
---------------
Diane Baker

/s/Constance F. Galley                      Director                                                    March 30, 2001
----------------------
Constance F. Galley

/s/ Ernest Keet                             Director                                                    March 30, 2001
---------------
Ernest E. Keet

/s/ Richard Little                          Director                                                    March 30, 2001
------------------
Richard Little

/s/ Dennis G. Sisco                         Director                                                    March 30, 2001
-------------------
Dennis G. Sisco

/s/ Mark C. Stevens                         Director                                                    March 30, 2001
-------------------
Mark C. Stevens
</TABLE>


                                      (31)
<PAGE>

                                  EXHIBIT INDEX


Exhibit Number                          Exhibit Title
--------------                          -------------

2.1                 Agreement and Plan of Reorganization dated as of September
                    30, 1999 by and among Mercator Software, Inc. Natchez
                    Acquisition Corp. and Novera Software, Inc. (filed as
                    Exhibit 2.1 to Mercator Software's current Report on Form
                    8-K dated September 30, 1999 and incorporated herein by
                    reference)./(1)/

2.2                 Stock Purchase Agreement dated as of March 18, 1999 by and
                    among Mercator Software and each of the stockholders of
                    Braid (filed as exhibit 2.2 to Mercator Software's Report on
                    Form 8-K dated March 18, 1999 and incorporated herein by
                    reference.

2.3                 Asset Transfer Agreement dated as of November 13, 1998 by
                    and among the Mercator Software, Software Consulting
                    Partners and the sole stockholder of Software Consulting
                    Partners, (filed as exhibit 2.3 to Mercator Software's
                    Report on Form 8-K dated November 13, 1998 and incorporated
                    herein by reference.

3.1                 Amended and Restated Certificate of Incorporation/(5)/

3.2                 Registrant's Amended and Restated Bylaws/(3)/

3.3                 Certificate of Designations specifying the terms of the
                    Series A Junior Participating Preferred Stock of Mercator
                    Software/(4)/

4.1                 Form of Specimen Certificate for Registrant's Common
                    Stock/((2)/

4.2                 Stockholders Agreement dated as of June 1, 1989, as
                    amended/(2)/

4.3                 1989 Stock Purchase Agreement dated as of June 1, 1989, as
                    amended/(2)/

10.1                Employment Agreement dated as of January 1, 1999 between
                    Registrant and Albert Denz

10.2                Employment Agreement dated as of January 16, 2001 between
                    Registrant and Roy C. King

10.3                *Registrant's 1993 Stock Option Plan and related
                    documents/(2)/

10.4                *Registrant's 1997 Equity Incentive Plan/(2)/

10.5                *Registrant's 1997 Directors Stock Option Plan/(2)/

10.6                *Registrant's 1997 Employee Stock Purchase Plan/(2)/

10.7                *Registrant's Profit Participation Plan/(2)/

10.8                Form of Indemnification Agreement entered into by Registrant
                    with each of its directors and executive officers/(2)/

                                      (32)
<PAGE>

10.9                Lease Agreement dated as of January 2, 1990 between
                    Registrant and Robert D. Scinto, as amended/(2)/

10.10               Lease Agreement dated as of June 26, 2000 between Registrant
                    and Bannockburn Development Company

10.11               Lease Agreement dated as of January 29, 2001 between
                    Registrant and CDR Federal LLC

10.12               *Letter Agreement, between Registrant and Constance
                    Galley/(5)/

10.13               *Letter Agreement dated as of December 5, 1995 between
                    Registrant and Eric Amster/(2)/

10.14               *Letter Agreement dated as of October 1, 1994 between
                    Registrant and Saydean Zeldin/(2)/

10.15               Series E Preferred Stock Purchase Agreement dated as of May
                    15, 1997 between Mercator Software and the Purchasers named
                    therein/(2)/

10.16               Credit Agreement between registrant and Fleet Nation Bank
                    dated as of February 25, 2000/(6)/

10.17               Agreement between Registrant and James P. Schadt dated as of
                    August 21,2000/(5)/

10.18               Lease Agreement between Registrant and Wilton Realty
                    Investors Corp. dated June 6, 2000/5/

10.19               Letter Agreement between Registrant and James P Schadt dated
                    as of November 21, 2000

10.20               Agreement between Registrant and Richard Applegate dated as
                    of November 15, 2000

10.21               Agreement between Registrant and Patricia Boggs dated
                    December 22, 2000

13.0                Consolidated Financial Statements as of and for the years
                    ended December 31, 2000 and 1999

21.1                Subsidiaries of the Company

23.1                Consent of Independent Auditors

24.01               Power of Attorney (see signature page)

 .    Indicates a management contract or compensatory plan or arrangement.

(1)  Previously filed as an exhibit to Mercator Software's current Report on
     Form 8-K filed on October 15, 1999 and incorporated herein by reference.
(2)  Previously filed as an exhibit to Mercator Software's Registration
     Statement on Form S-1 (File No. 333-27293) and incorporated herein by
     reference.
(3)  Previously filed as an exhibit to Mercator Software's Registration
     Statement on Form 8-A (File No. 000-22667) filed on September 4, 1998 and
     incorporated herein by reference.
(4)  Previously filed as an exhibit to Mercator Software's Report on Form 8-K
     filed on September 4, 1998 and incorporated herein by reference.
(5)  Previously filed as an exhibit to Mercator Software's report on Form 10Q
     filed on November 14, 2000 and incorporated herein by reference.
(6)  Previously filed as an exhibit to Mercator Software's report on For 10Q
     filed on August 2000.

                                      (33)