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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K

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

  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                      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: 000-26379

                              SOFTWARE.COM, INC.
            (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                            <C>
                  Delaware                                       77-0392373
<CAPTION>
       (State or other jurisdiction of                        (I.R.S. Employer
        incorporation or organization)                     Identification Number)
</TABLE>

                              525 Anacapa Street,
                            Santa Barbara, CA 93101
                    (Address of principal executive office)

                                (805) 882-2470
             (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, $0.001 par value
                               (Title of Class)

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

  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the 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. [_]

  The aggregate market value of the voting-stock held by non-affiliates of the
registrant, based upon the closing sale price of its common stock on March 21,
2000 as reported on The Nasdaq National Market, was approximately
$4,050,072,806. Shares of common stock held by each named executive officer
and director and by each entity that owns 5% or more of the outstanding common
stock have been excluded in that such persons may be deemed affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.

  As of March 21, 2000, the registrant had outstanding 43,964,627 shares of
common stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

  The registrant has incorporated by reference into Part III of this Form 10-K
to the extent stated herein certain sections of its definitive Proxy Statement
for its 2000 Annual Meeting of Stockholders to be held on June 2, 2000.

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                                    PART I

                IMPORTANT NOTE ABOUT FORWARD LOOKING STATEMENTS

  This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions
identify such forward-looking statements. These forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those indicated in the forward-looking statements. Such risks
and uncertainties include those set forth in Part II, Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations,
under the subheading "Additional Risk Factors that Could Affect Operating
Results and Market Price of Stock." Unless required by law, we undertake no
obligation to update publicly any forward-looking statements.

Item 1. Business

Overview

  Software.com develops and markets infrastructure applications for the
Internet based on open, Internet standards and protocols. We design these
applications, which we refer to as Internet infrastructure applications, to
enable service providers to transition to the Internet as the technology
foundation for worldwide communications and services. Our applications are
designed exclusively for the service provider market--traditional
telecommunications carriers; Internet service providers or ISPs and
wholesalers; cable-based, Internet access providers; application service
providers; competitive local exchange carriers; Internet destination sites or
portals; and wireless telephony carriers. We believe that a fundamental
component of the success and timing of the transition to an Internet-based
communications structure will be enabling and empowering those service
providers who possess the vision, experience, infrastructure and economies of
scale to bring next-generation communications and services to the consumer and
business mass-markets. There is significant and increasing competition for
users of these new services, especially with the expansion of the wireless
market. Therefore, we believe successful service providers must utilize
Internet infrastructure applications that have the ability to perform at
increasingly high capacities, or scale, and that have the flexibility to unite
both traditional and next-generation communication devices within a common
architecture in a cost-effective manner.

  Software.com's business is focused on equipping service providers with the
highly scalable Internet infrastructure applications that enable them to offer
the most competitive, next-generation communication capabilities and services
to millions of subscribers. To accomplish this, we provide our customers with
scalable, high-performance products, as well as a broad range of consulting
and customer support services that complement these product offerings. Since
the company's founding in 1993, our vision has remained the same--supplying
Internet standards-based service provider solutions.

  In the race to build user bases, service providers increasingly focus on
providing applications and services that help attract and retain customers.
Our initial Internet infrastructure applications have been designed to provide
service providers with a common platform for multiple messaging services.
Internet electronic mail, or Internet email, has proven to be one of the most
popular applications on the Internet and a compelling application for
attracting subscribers. The growth in the use of Internet email has also
attracted businesses, as email becomes a routine method of communicating among
employees and with customers, vendors, and partners. As service providers seek
to differentiate offerings to attract more business users, service providers
are expanding basic email service to create new and innovative Internet
messaging services, including "fail-safe" email, wireless messaging, and new
types of unified communications services such as integrated email, faxmail and
voicemail.

  To take advantage of opportunities in both consumer and business messaging,
service providers must deploy messaging services capable of meeting the
evolving needs of these groups. Service outages or the loss of messages can
lead to adverse publicity for service providers, and can result in the loss of
substantial numbers of subscribers. In order to leverage infrastructure
investments, service providers must provide systems that can grow

                                       2
<PAGE>

to accommodate hundreds of thousands, or even millions, of users and the
rapidly increasing number of messages being sent by their larger user bases.
Most service providers, however, have neither the products and services in
place nor the existing internal technical and development capabilities to
address this enormous growth.

  Our service provider customers deploy Software.com's scalable, high-
performance Internet infrastructure applications to deliver advanced messaging
services to their consumer and business subscribers. Our products have been
proven to deliver messaging services in some of the most demanding service
provider environments in the world, including those of AT&T WorldNet(R)
Service, Excite@Home, GTE Internetworking Services, Sprint PCS and Telecom
Italia Net. As of December 31, 1999, we had licensed approximately 75 million
seats and we estimate that over 50 million of these seats had been activated.
We combine our infrastructure products and services to create advanced
solutions that provide several benefits to service providers.

  Our products are designed to easily scale and enable a service provider to
offer an increasing array of services to a rapidly-growing number of
subscribers. We design our products to be highly available, meaning that a
user can access the service when needed, as well as highly reliable, meaning
that the users do not lose data that is sent or received. In addition, our
technology enables service providers to create, manage, and host multiple
offerings on the same infrastructure platform. A service provider can
therefore easily tailor feature sets to meet the different and evolving needs
of individual segments of its subscriber base. In addition to software
products, we offer business planning, system design, capacity planning, on-
site operations training, and integrated support services to help service
providers rapidly pilot, launch and scale innovative new service offerings.
After completion of a consulting engagement, our professional services staff
passes essential, site- specific knowledge to our support staff to facilitate
a smooth transition from deployment to ongoing customer care. We support our
customers' sites on a 24 hour basis and have developed sophisticated tracking
and response systems to provide customers with the highest quality support.

  Our goal is to be the leading provider of Internet infrastructure
applications designed for service providers. To this end, we intend to
continue our exclusive focus on the service provider market. We believe that
our exclusive focus on service providers enables us to better identify and
offer the feature sets and attributes that are required for our products to be
successful in the service provider marketplace. Within the service provider
marketplace, we focus our sales efforts on the world's largest service
providers. We believe that this strategy allows us to capture the broadest
possible user base while targeting a limited number of accounts. We also
believe that winning the large, well-known accounts helps our sales to smaller
and medium sized providers by enhancing our reputation as a leading provider
of Internet infrastructure products in the service provider market. We also
intend to leverage our core technology platform to build additional service
provider applications. For example, we have integrated Web-based technology,
acquired in the Mobility.Net acquisition of April 1999, to enhance the
performance of our existing Web interface as well as to ultimately extend our
platform through additional Web-based applications. We intend to pursue a
similar strategy to leverage the wireless technologies acquired in the Telarc
acquisition of October 1999. On March 8, 2000, we entered into an agreement
and plan of merger with AtMobile.com, Inc. (also known as @mobile.com), a
wireless Internet application developer and application service provider with
Instant Messaging technology and Wireless Intelligent Network integration
expertise. We believe that if this acquisition is completed, we will be able
to use @mobile.com's technology to further expand the wireless messaging
capabilities of our platform. We may add additional applications as extensions
to the platform through internal development, partnering arrangements or the
acquisition of third party technologies. We also intend to continue to
leverage the expertise of our professional services organization to help
customers design, build, and deploy systems based on our products.

Recent Developments

  Pursuant to our agreement to acquire AtMobile.com, each outstanding share of
AtMobile.com stock will be exchanged for approximately 0.06 shares of our
Common Stock, and each outstanding option or warrant of AtMobile.com will be
converted into an option or warrant to purchase our Common Stock (adjusted for
the exchange ratio). The proposed merger is expected to be accounted for as a
pooling of interests and is expected to close in the quarter ending June 30,
2000, subject to standard conditions, including regulatory approvals and
approval by AtMobile.com stockholders.

                                       3
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Products and Services

  We have developed a scalable, extensible technology platform that provides
the foundation for our Internet infrastructure applications. This platform is
the core technology that underlies our three current messaging product
packages: Post.Office, InterMail Kx, and InterMail Mx. These product packages
enable service providers to support a user base ranging from hundreds to
millions of subscribers, for both consumers and businesses. The following
table sets forth the target customer and architecture for these product
packages:

<TABLE>
<CAPTION>
                              Post.Office            InterMail Kx           InterMail Mx
                         ---------------------  ---------------------  ---------------------
<S>                      <C>                    <C>                    <C>
Target Customer                                 25,000 to 400,000      250,000 users and
                         100 to 25,000 users     users                  above
Architecture             Single server          Multiple servers,      Multiple servers,
                                                distributed and        distributed and
                                                modular                modular
Operating System         NT, UNIX               UNIX                   UNIX
Object Store Technology  Single multimedia      Single, highly-        Multiple, highly-
                         object store           parallel multimedia    parallel multimedia
                                                object store           object stores
</TABLE>

 Post.Office

  Designed to meet the messaging needs of small to medium size service
providers, Post.Office is typically chosen by service providers with 100 to
25,000 users, although it can scale to support up to 250,000 subscribers on a
single UNIX server. Email system administrators, or postmasters, can use
Post.Office to easily administer their entire email systems, while allowing
end users to manage their individual email accounts. Post.Office provides a
user-friendly administration interface featuring fill- in-the-blank forms and
pop-up options assisted by Web-based help links. Post.Office offers a broad
array of security features, including multiple password protection levels and
numerous user restriction settings. Post.Office also provides a variety of
features for preventing the sending and receiving of Internet junk mail, or
"spam." Post.Office operates independently of the host computer system, making
it difficult to compromise the main system security through the email
application.

 InterMail Kx and InterMail Mx

  The InterMail Mx and InterMail Kx product packages are designed to meet the
rapidly evolving needs of service providers. InterMail Kx and InterMail Mx are
designed to enable service providers to offer premium consumer, business, and
Web-based messaging services from a single, integrated solution. InterMail Kx
is designed for fast-growing, medium-sized service providers with a subscriber
base of up to 400,000. InterMail Mx, which is designed for the largest service
providers, scales to support millions of subscribers. The InterMail Kx and
InterMail Mx product packages provide postmasters with a suite of powerful
system administration tools that enable streamlined subscriber account
creation and management. InterMail Kx and InterMail Mx components run on
multiple servers, providing greater scalability, reliability, and performance
than a single server system.

  Within the InterMail Kx and InterMail Mx product packages, we have developed
a broad set of customizable messaging applications, which are designated as
different editions: InterMail Standard Edition, InterMail Business Advantage
Edition and the recently developed, initial version of InterMail IP VoiceMail
Edition. These editions provide a range of functionality and allow service
providers to create and customize multiple classes of service at varying price
points for consumer and business subscribers. A single InterMail Kx or
InterMail Mx installation can host multiple classes of messaging services,
thereby eliminating the expense associated with running separate systems.
These capabilities help service providers to expand market share, retain
subscribers, lower total cost of ownership, and derive increased profits from
their businesses. Additionally, we intend to sell through our existing
channels a highly scalable, Lightweight Directory Access Protocol (LDAP)
Directory, as part of InterMail Mx and upon which our service provider
customers can design and develop multiple directory applications.


                                       4
<PAGE>

  InterMail Standard Edition--Designed for service providers offering consumer
email or hosting the consumer-oriented services of another service provider,
InterMail Standard Edition provides a standard post office protocol or POP3
mailbox, and interfaces with commonly used desktop email clients such as
Microsoft Outlook and Outlook Express, Netscape Navigator, and QUALCOMM
Eudora. InterMail Standard Edition also includes the ability to access
mailboxes from any location where the Internet can be accessed through
commonly used Internet browsers such as Microsoft Internet Explorer and
Netscape Navigator. InterMail Standard Edition is typically bundled with dial-
up or cable access as part of an entry level service provider offering. As
with all our InterMail editions, InterMail Standard Edition supports
individual account spam protection.

  InterMail Business Advantage Edition--Designed for service providers
offering managed messaging to businesses or hosting the business-oriented
services of another service provider, InterMail Business Advantage Edition
enables service providers to offer fully-functional business mailboxes.
InterMail Business Advantage Edition provides a full range of advanced
features, including the advanced Internet protocol for delivery and retrieval
of messages known as IMAP4, enhanced message encryption, delegated
administration, and customer self-care tools.

  InterMail IP VoiceMail Edition--InterMail IP VoiceMail Edition is designed
to provide a full function "universal mailbox" that works with Internet
standards-based voicemail and faxmail network components. Our solution is
intended to be a cost-efficient replacement for traditional call answering, or
as a more functional universal mailbox where email, faxmail and voicemail
messages are stored in a single mailbox accessed either by telephone or
computer.

 Wireless

  We have developed and will continue to develop wireless products to enable
service providers to meet the increasing demands of both consumer and business
customers to expand mobile communications and access to Internet content and
services beyond wireline devices. For example, we have developed products
designed to enable the extraction and encoding of Internet data (typically
found in HyperText Markup Language (HTML), the document format language used
on the World Wide Web) into a document format language, such as chunks of HTML
(cHTML), or Wireless Markup Language (WML), that is readable on particular
wireless devices.

 Professional and Support Services

  We have designed our professional services offerings to enable our customers
to bring their service offerings to market more quickly by leveraging our
significant expertise in deploying and managing large-scale messaging
solutions. Our professional services offerings include a wide range of
consulting services such as business planning services, system assessment,
system architecture review, system migration, and operations management, as
well as rapid deployment and integration of our InterMail messaging products.
We offer professional services in connection with the initial deployment of
our products, as well as on an ongoing basis to address the continuing needs
of our customers. Our services are designed to ensure on-schedule
implementation, whether the customer is installing a completely new system,
migrating from an old system, or expanding an existing Software.com system. We
work with our customers to ensure that all of the components of their
messaging systems are selected, configured, and integrated to manage
subscriber services and growth. As of December 31, 1999, our professional
services staff consisted of 44 employees. In addition, we also supplement our
professional services staff with outside contractors from time to time.

  Our Support Solutions group provides 24 hour global support services to meet
the demanding needs of the largest service providers. For each customer, we
designate a primary support engineer with responsibility for fielding and
addressing all support issues for that customer. We monitor support issues
internally using a variety of integrated processes, including regular customer
interaction sessions. Customers have access to a dedicated Web site where
information on past and outstanding issues is posted, and through which
updates and upgrades can be delivered for ease of implementation. We maintain
support groups in Santa Barbara, California and

                                       5
<PAGE>

Lexington, Massachusetts for North American customers, as well as Windsor,
England and Naarden, the Netherlands for European customers, Hong Kong, PRC
for Asian customers and Tokyo, Japan for Japanese customers. As of December
31, 1999, our Support Solutions group consisted of 22 employees.

Customers

  Numerous service providers around the world use our products as the platform
for their Internet messaging applications. As of December 31, 1999, over 1,000
service providers had purchased licenses for our Post.Office and InterMail
messaging software. Our customers range from some of the largest service
providers in the world, with millions of users, to local Internet service
providers providing Internet connectivity and services with a hundred or more
users. In 1999 no customer accounted for more than 10% of revenue. The
majority of our customers can be classified according to the following
criteria:

  . Traditional Telecommunication Carriers: These customers are comprised of
     the Internet service provider organizations within established
     telecommunications companies, such as the Regional Bell Operating
     Companies (RBOCs) in the United States and national telephone companies
     overseas.

  . Internet Service Providers (ISPs) and Wholesalers: This group is made up
     of companies focused primarily on providing Internet connectivity and
     related services enabled by the Internet, such as Web hosting and
     managed messaging. Our customers in this group include hundreds of local
     ISPs in North America, South America, Europe, and Asia focused on
     providing Internet services to local communities.

  . Cable-based Internet Access Providers: Our customer base includes a
     number of companies focusing on providing Internet services to end users
     through broadband access, notably cable modems. Some of these customers
     partner with cable companies, and some are wholly owned divisions within
     established cable providers.

  . Application Service Providers: These customers are comprised of companies
     that host applications as a service to their end users.

  . Competitive Local Exchange Carriers (CLECs): This group is made up of
     companies, other than RBOCs, that offer local phone service. These
     companies typically also offer Internet connectivity and services.

  . Internet Portals: A number of companies position themselves as Internet
     destination sites, or portals, a point of entry to the Internet for a
     consumer or business. Many of these portals offer messaging services to
     consumers without charge, generating revenues instead by selling
     advertising space on the message screens.

  . Wireless Telephony Carriers: This group is made up of companies that
     offer wireless network services (such as telephone and short messaging
     services) and, increasingly, Internet access and services (such as
     content delivery to mobile devices).

Strategic Relationships

  We have established a number of formal and informal relationships with
companies that provide infrastructure components and software to service
providers. We work with these companies to develop additional products and
services based on our infrastructure platform. In addition, we believe that
these partners offer opportunities to expand our sales channels. Set forth
below are descriptions of our relationships with several of our partners:

  Cisco Systems. We have been working with Cisco Systems on a variety of
product development efforts, including unified communications based on
Internet protocols, network (hosted) applications, and directory technology.
Our work with Cisco has focused on providing solutions for common customers
and partners. In February 1997, Cisco made the first of two equity investments
in Software.com.

  Hewlett-Packard. Hewlett-Packard has selected InterMail as its preferred
messaging application for the service provider market. Hewlett-Packard markets
solutions, including our applications, to rapidly growing service providers
that are building the infrastructure to offer unified communications and
managed messaging services and to those offering Internet services to
consumers and businesses. We also work closely with Hewlett-

                                       6
<PAGE>

Packard to improve the performance and customization of our applications on
Hewlett-Packard's HP-UX operating systems. In April 1999, Hewlett-Packard
purchased a minority equity interest in Software.com.

  IBM. IBM offers InterMail Kx and Post.Office on its high performance
operating systems and hardware, including bundled offerings of InterMail Kx
and Post.Office on its servers. We work with IBM on a high availability, high
reliability, carrier-scale performance solution based on InterMail and IBM's
Serial Storage Architecture disk subsystems, and high-availability cluster
multiprocessing software. In addition, IBM integrates its Intelligent
Subscriber Management System with InterMail for IBM's service provider
customers.

  Telcordia Technologies. Our Strategic Solutions and Professional Services
groups have been working with Telcordia Technologies (formerly Bellcore) on
deploying a next-generation, unified messaging platform based on standard
Internet protocols. We will continue to partner with Telcordia to explore
emerging opportunities created by the convergence of voice and data networks,
including voicemail and faxmail based on Internet protocols.

  Nortel. Nortel Networks has selected the InterMail platform as the messaging
component of its Managed Application Services Initiative, giving application
service providers (ASPs) an end-to-end solution. We will continue to partner
with Nortel to explore emerging opportunities created by the convergence of
voice and data networks, including voicemail and faxmail based on Internet
protocols in the ASP market.

  We work closely with many other UNIX vendors to customize our messaging
software to run on their systems. These relationships enable us to sell our
products to service providers that use different hardware platforms. We have
relationships with Sun Microsystems (for Solaris) and Compaq/DEC (for Digital
UNIX). We also work on integration, sales and marketing projects with other
companies that currently sell in the service provider market, including
several billing/provisioning systems vendors.

Sales

  We market and sell our products and services exclusively to service
providers. Our sales strategy focuses on the pursuit of key accounts worldwide
through a direct sales force and additional market segments through a
combination of direct and indirect channels. We divide the service provider
market into three segments: Tier One, Tier Two, and Tier Three. Our sales
approach for a given customer depends upon the tier in which we categorize the
customer's account.

 Tier One Accounts

  Tier One accounts consist of a designated list of the largest and most well-
known service providers in the world, and are targeted by our direct sales
force. Our InterMail Mx product is specifically designed for these Tier One
accounts whose current subscriber base generally exceeds 250,000 users, and
whose projected subscriber base generally exceeds one million users. We have
Tier One direct sales force personnel located in California, Colorado, Texas,
Virginia, Massachusetts, England, Germany, France, Spain, the Netherlands,
Japan, Australia, and the People's Republic of China (PRC). The direct sales
force is organized into account teams, consisting of a sales director and a
sales engineer, or "technology consultant." Each team has responsibility for a
designated number of Tier One accounts in the region. We generate sales leads
for Tier One accounts through a combination of direct and indirect
initiatives, such as seminars, presentations and responses to requests for
proposals. The Tier One sales process typically involves a large expense
commitment from us and the sales cycle in these accounts lasts from several
months to over a year. We intend to increase the size of our direct sales
force in the Americas, Europe, and Asia to further pursue Tier One account
opportunities.

 Tier Two Accounts

  We characterize Tier Two accounts as those service providers with a current
subscriber base in excess of 25,000 users and a projected subscriber base of
up to 400,000 users. The performance and feature requirements of Tier Two
accounts are closely aligned with those of larger service providers. We offer
the InterMail Kx

                                       7
<PAGE>

package to satisfy the requirements for these Tier Two accounts. We target
these accounts through a combination of direct and indirect channels, referred
to as the "territory" channel. We have Tier Two direct sales force personnel
located in California, Colorado, Texas, Massachusetts, Virginia, England,
Italy, the Netherlands, Japan, and Singapore. The Tier Two direct sales force
is complemented by multiple indirect distribution channel partners, including
resellers, systems integrators, and joint marketing partners, such as IBM and
Hewlett-Packard. The majority of our indirect sales partners purchase our
software from us at a specified discount and resell the software to their
customers. The indirect channels are designed to increase geographic sales
coverage for Tier Two service providers and to leverage the existing sales
organizations of key strategic partners. We are in the early stages of
building these distribution channels and intend to significantly increase our
indirect channel for territory sales.

 Tier Three Accounts

  Tier Three accounts consist of small to medium size service providers that
operate on a single-server architecture and typically have an installed base
of less than 25,000 users. In general, these small to medium size service
providers are best suited for the Post.Office product package. We target these
accounts primarily through indirect channels, including resellers, systems
integrators, and joint marketing partners. However, we also have several Tier
Three direct telephone sales force personnel located in California. We conduct
a substantial amount of Tier Three sales via our external website with direct
software downloads to users.

Marketing

  We engage in a broad range of marketing activities, including advertising
our products and services in print and electronic media, sponsoring seminars
and events for customers and potential customers, participating in trade shows
and conferences, and providing product information through our Web site. We
also work closely with the marketing departments of our strategic partners and
customers to promote new service offerings, including their messaging
initiatives, that are enabled by our products. These efforts are augmented
with the assistance of several public relations firms specializing in the
technology marketplace in an effort to further establish and define the market
for highly scalable messaging products for service providers. For the Tier Two
and Tier Three market segments, we periodically undertake direct mail programs
designed to promote brand name awareness and inform existing customers of
advances in product features. In addition, we periodically publish white
papers and industry reports to promote awareness of our technology and
advances in industry practices.

  Through product planning, market strategy, competitive analysis, and product
program management, we continue to provide marketing and product leadership
for our customers by delivering quality products and services in a timely and
predictable manner. For example, we travel to customers and prospects
worldwide to gather market research, competitive information, and customer
input on product features so that our future products and services meet the
unique needs and requirements of the service provider market.

Technology

  With our InterMail Mx and InterMail Kx packages, we have developed a
scalable, high performance platform for building messaging and other Internet-
standard, data intensive applications. Our platform is based on a partitioned
cluster architecture, which is described below.

  Partitioned Cluster Architecture--Our software partitions or separates
message processing into a series of steps, such as retrieving a message from
the Internet, storing it on disk, and delivering it to the user. The software
for each step is called a component, and a set of partitioned components makes
up a cluster. All components can run on a single computer for a smaller
system, or can be distributed across many computers for a large system. When
required, components can be duplicated to provide even more capacity. The
partitioned cluster architecture increases performance and capacity by doing
steps in parallel on separate computers. Disk intensive operations, such as
saving messages on the disk, are separated from network intensive operations,
such as delivering

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<PAGE>

messages to the Internet. The computer running a disk-intensive component can
be optimized for high-speed disk access, while the network intensive component
can run on a much less expensive computer. Partitioning increases overall
performance and capacity while minimizing hardware costs. Components are
location independent in that they can be freely moved from one computer to
another to reconfigure the cluster. Hardware can be added or removed from the
cluster while it continues to operate. Duplicating individual partitions
enables high-availability or non-stop operation, where the cluster continues
to run even with a particular partition out of service.

  Distributed Object Protocol--We have developed an innovative distributed
object communications protocol for reliable, efficient communications between
the components. This protocol, called Remote Method Execution, or RME,
supports messaging transactions and journaling to insure that the cluster is
reliable. A transaction is composed of several operations, such as inserting a
message into a user's mailbox. Our transaction software ensures that every
operation is either fully completed or fully reversed so it can be done at a
later time. A list of completed transactions is kept in a separate file,
called a journal. The journal is used to reconstruct the messages in the event
that there is a system failure. In addition, RME has a "versioning" mechanism
that allows older components to properly work with newer ones. This allows
upgrading the cluster to new software while the cluster is running for non-
stop operation. RME provides a high performance programming interface to all
components and enables us and third parties to create new messaging
applications.

  Multimedia Object Store--The object-level storage component is used to
reliably and efficiently store, organize and retrieve a variety of messaging
media types, including text, graphics, voice, audio, video, and facsimile. In
our storage component, messaging data is accessed via an object-oriented
software layer, which uses self-contained, reusable pieces of software code
known as objects to separate, protect, and isolate the data from the
components that use it, so that both the data structures and components can be
independently updated. Our object store is multithreaded, meaning that several
specific tasks within the component are run in parallel. It utilizes a high
degree of caching, where frequently used information is kept in memory, to
increase performance and scalability for data intensive messaging operations.
The object store has an extensible file system layout, so that additional
storage can be added while the system is on-line, supporting high availability
operation.

  Replicated, Multi-Master Directory--Each component in a cluster needs to
access common information, such as a user's name and password. This data is
accessed every time a message arrives or a user accesses a mailbox. As a
result, specialized replicated directory technology is needed to support a
large cluster. The cluster has a core database that contains the common
information and a set of high-speed multi-threaded replicas of that
information, meaning that different operations can take place concurrently
within the same program. By using multiple replicas, the common information
can be accessed a virtually unlimited number of times. The replicas support
the industry standard Lightweight Directory Access Protocol (LDAP) access, so
third party applications can access information in a standard format. The
directory is a "multi-master" system, meaning that applications can access or
add information to any replica and the directory will automatically update the
database and other replicas so that data is consistent across all components.
These advanced replication and updating protocols are unique to our messaging
system and are a key element in providing scalability.

  Access and Delivery Components--Our cluster has a set of data access and
delivery servers that implement the standard Internet messaging protocols. The
Message Transport Agent (MTA) implements simple mail transfer protocol or
SMTP, the standard protocol used to send mail from one computer to another on
the Internet. POP3 and IMAP4 data access components implement the protocols
used by desktop email applications, such as Microsoft Outlook or Netscape
Navigator. The Web component provides a complete Web server for access email
using standard browsers. Our Mobility.Net technology provides additional
flexibility for service providers to customize their Web interfaces. The
number and type of access components can be optimized to meet the requirements
of particular service providers.

The platform technology used for the Post.Office product package shares many
of the underlying technology components of the InterMail Kx and InterMail Mx
platform. Post.Office is a single computer package, so all messaging
components are pre-configured to run on the same computer, to simplify
installation and operation. It has a single MTA, POP3, directory and message
store component.

                                       9
<PAGE>

  Mobility.Net Technology. Our Mobility.Net technology consists primarily of
software designed to improve a user's ability to retrieve and send electronic
messages using a Web browser. This is referred to as a Web access server. We
have integrated the Mobility.Net technology into our Post.Office and InterMail
product packages to improve the performance of our Web access server and to
enable us to offer additional features that are dependent on advanced Web
access server technology.

  Unified Messaging. Our multimedia messaging platform has been integrated
with voice-over Internet protocol, or VOIP, gateway services from vendors such
as Cisco Systems. In a typical unified communications system, voice and fax
data are converted into email messages, which are then delivered to the
messaging platform for storage and retrieval. An LDAP directory provides
account and mailbox information storage. Our unified messaging platform also
provides service providers the ability to leverage their existing subscriber
bases and offer enhanced services such as unified mailbox and integrated fax
services. In addition to offering a unified communications platform for new
market entrants, our messaging platform may also allow a service provider to
replace legacy voice mail servers, thereby reducing costs, increasing
telephony bandwidth and maintaining a flexible service creation platform.

  Telephony Integration. Our messaging platform is extended into existing
wireline and wireless carrier networks and is integrated with existing
telephony architectures. Our Telarc technology provides an infrastructure for
the convergence of IP-based services and telephony-based services by enabling
IP-based access directly to networks using standard telephony protocols known
as Signaling System 7 (SS7) protocols. Our Telarc technology also allows us to
offer products to service providers in the short messaging services market by
allowing direct access to the mobile switching centers of a wireless telephony
provider.

  If our proposed acquisition of @mobile.com closes, we will acquire
technology which we intend to layer applications upon our Telarc
infrastructure. We plan to leverage @mobile.com's Wireless Intelligent
Networking expertise and its instant messaging technology to adapt our
intended release of an LDAP directory to address the wireless data services
needs of wireless network carriers, to produce a wireless instant messaging
product, and ultimately to enhance our multimedia messaging platform and short
messaging technology. Our goal is to enable our customers to provide end-to-
end wireless unified communications solutions to their subscribers.

  We have made substantial investments in research and development. We believe
that our future performance will depend in large part on our ability to
maintain and enhance our current platform and product families, develop or
acquire new products that achieve market acceptance, maintain technological
competitiveness and meet an expanding range of service provider requirements.
As of December 31, 1999, our research and development staff consisted of 111
employees.

Competition

  The market for Internet standards-based messaging and infrastructure
products and services is intensely competitive, and we expect it to become
increasingly so in the future. We compete in our core service provider market
with many software providers and, in some instances, with outsourced messaging
providers who have either internally developed or acquired their own messaging
software. We also compete, principally on the basis of performance, features
and price, against messaging solutions based on public domain software code
that is developed and enhanced internally by service providers. We compete to
a more limited extent with providers of messaging applications designed for
the enterprise market.

  Our current software competitors in the service provider market include
iPlanet E-Commerce Solutions (a SunNetscape Alliance) and Isocor, which was
recently acquired by Critical Path. We also indirectly compete with Critical
Path when it offers outsourced messaging to the service provider market and
with Microsoft, whose current messaging product was developed for the
enterprise market but is sold to some service providers. In addition, with our
intended release of a highly scalable LDAP directory with InterMail Mx, we
will become more direct competitors with Novell's NDS technology and
Microsoft's Active Directory product, to the extent that these products are
marketed to service providers. In addition, as we continue to enter the
wireless messaging

                                      10
<PAGE>

market, a rapidly developing field, several larger companies could turn out to
be our competitors. We believe that competition will intensify as our current
competitors increase the sophistication of their offerings and as new market
participants, including additional providers of outsourced messaging services
enter the market. Many of our current and future competitors have longer
operating histories, larger installed customer bases, greater brand
recognition, and significantly greater financial, marketing and other
resources than we do. In addition, these competitors may benefit from existing
strategic and other relationships with each other or with our current
customers. We must respond quickly and effectively to the new products,
services, and enhancements offered by our competitors in order to continue our
growth.

  Microsoft, among other software providers, is well-positioned to become
increasingly competitive in our core service provider messaging market. We
believe that Microsoft is currently in the process of developing electronic
messaging software to compete more directly in our core service provider
market. Because of its dominance in other software markets, Microsoft has many
competitive advantages over us. For example, Microsoft could incorporate
electronic messaging technology into its Web browser software, its client
operating system or email interface, or its server software offerings,
possibly at no additional cost to service providers or end users. In addition,
Microsoft may promote technologies and standards that are not compatible with
our technology, or that are less compatible with our technology than
competitive products offered by Microsoft. We believe that Microsoft's
increasing presence in the electronic messaging software industry will
dramatically increase competitive pressure in the market, leading to increased
pricing pressure and longer sales cycles. These competitive pressures may
force us to reduce the prices of our products, and may also materially reduce
our market share.

  In addition to the existing competitors listed above, voicemail solutions
providers could be formidable competitors in the unified communications
infrastructure software and Internet voicemail markets because of their
established presences as voicemail providers to the service provider market
and ownership of technologies for the conversion of voice to data. If we are
unable to cooperate or compete effectively with Microsoft, existing voicemail
solution providers, or our other existing or emerging competitors, our
business, financial condition, and operating results will suffer.

Intellectual Property and Proprietary Rights

  Our ability to compete and continue to provide technological innovation is
substantially dependent upon internally developed technology, including the
entire InterMail product line. We rely on a combination of copyright, trade
secret, and trademark law to protect our technology, although we believe that
other factors such as the technological and creative skills of our personnel,
new product developments, frequent product and feature enhancements, and
reliable product support and maintenance are more essential to maintaining a
technology leadership position. As of December 31, 1999, we did not have any
patents issued or pending; however, if the proposed AtMobile.com acquisition
closes, we will acquire 1 patent and a number of patent applications,
specifically for wireless subject matter.

  We generally enter into confidentiality and nondisclosure agreements with
our employees, consultants, prospective customers, licensees, and corporate
partners. In addition, we control access to and distribution of our software,
documentation, and other proprietary information. Except for certain limited
escrow arrangements, we do not provide third parties with access to the source
code for our products. Despite our efforts to protect our intellectual
property and proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Effectively policing the
unauthorized use of our products is time-consuming and costly, and there can
be no assurance that the steps taken by us will prevent misappropriation of
our technology, particularly in foreign countries where in many instances the
local laws or legal systems do not offer the same level of protection as in
the United States.

  We attempt to avoid infringing known proprietary rights of third parties in
our product development efforts. However, we do not regularly conduct
comprehensive patent searches to determine whether the technology used in our
products infringes patents held by third parties. There are many issued
patents as well as patent

                                      11
<PAGE>

applications in the electronic messaging field. Because patent applications in
the United States are not publicly disclosed until the patent is issued,
applications may have been filed which relate to our software products. In
addition, our competitors and other companies as well as research and academic
institutions have conducted research for many years in the electronic
messaging and wireless fields, and this research could lead to the filing of
further patent applications. If we were to discover that our products violated
or potentially violated third party proprietary rights, we might not be able
to obtain licenses to continue offering those products without substantial
reengineering. Any reengineering effort may not be successful, nor can we be
certain that any licenses would be available on commercially reasonable terms.

  Substantial litigation regarding intellectual property rights exists in the
software industry, and we expect that software products may be increasingly
subject to third-party infringement claims as the number of competitors in our
industry segments grows and the functionality of software products in
different industry segments overlaps. Any third-party infringement claims
could be time- consuming to defend, result in costly litigation, divert
management's attention and resources, cause product and service delays or
require us to enter into royalty or licensing agreements. Any royalty or
licensing arrangements, if required, may not be available on terms acceptable
to us, if at all. A successful claim of infringement against us and our
failure or inability to license the infringed or similar technology could have
a material adverse effect on our business, financial condition, and results of
operations.

Employees

  As of December 31, 1999, we had 309 full-time employees, 111 of whom were in
research and development, 74 in sales and marketing, 82 in services and
support and documentation, and 42 in general and administrative. None of our
employees is represented by a labor union. We have not experienced any work
stoppages, and we consider our relations with our employees to be good.

Item 2. Properties

  Our corporate headquarters are located in Santa Barbara, California, where
we have two leases for approximately 36,085 square feet of space in separate
office buildings. Our East Coast headquarters are located in Lexington,
Massachusetts, where we have a lease for approximately 32,000 square feet of
space in a single office building. We lease additional space in San Mateo,
California, Bellevue, Washington and Hauppauge, New York for development
personnel. Our primary European operations are located in Naarden, the
Netherlands, with an additional office in Windsor, England. Our primary Asian
operations are located in Tokyo, Japan. In addition to these facilities, we
also lease office space for sales personnel in Dallas, Denver, Reston,
Germany, Australia and the PRC. We believe that these existing facilities are
adequate to meet current foreseeable requirements or that suitable additional
or substitute space will be available on commercially reasonable terms.

Item 3. Legal Proceedings

  From time to time we have been subject to legal proceedings and claims in
the ordinary course of business. Although we are not currently involved in any
material legal proceedings, we expect that we will in the future be subject to
legal disputes, including claims of alleged infringement of third party
patents, trademarks, and other intellectual property rights by us and our
licensees. Any claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources. We are not
aware of any legal proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse effect on our business,
financial condition, or results of operations.

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

  None.

                                      12
<PAGE>

                                    PART II

Item 5. Market For The Registrant's Common Stock And Related Stockholder
Matters

  Our common stock commenced trading on The Nasdaq National Market under the
trading symbol SWCM on June 23, 1999. The price for the common stock as of the
close of business on March 20, 2000 was $ 138.000 per share. As of March 20,
2000, we had approximately 317 stockholders of record.

  The following table sets forth the high and low sales prices per share of
our common stock for the periods indicated:

<TABLE>
<CAPTION>
                                                                 High     Low
                                                               -------- -------
   <S>                                                         <C>      <C>
   1999:
     Second Quarter (from June 23, 1999)...................... $ 23.188 $18.063
     Third Quarter............................................ $ 53.250 $24.938
     Fourth Quarter........................................... $114.000 $44.625
   2000:
     First Quarter (through March 20, 2000)................... $155.000 $65.000
</TABLE>

  We have never paid any cash dividends on our common stock. We intend to
retain any earnings for use in our business and do not anticipate paying any
cash dividends on our common stock in the foreseeable future.

  The stock markets have experienced price and volume fluctuations that have
particularly affected technology companies, resulting in changes in the market
prices of the stocks of many companies which may not have been directly
related to the operating performance of those companies. Such broad market
fluctuations may adversely affect the market price of our common stock. In
addition, factors such as announcements of technological innovations or new
products by us or our competitors, market conditions in the software or
Internet infrastructure industries and quarterly fluctuations in our operating
results may have a significant adverse effect on the market price of common
stock.

  On October 20, 1999, we issued 211,918 shares of our common stock, along
with cash, to the former sole stockholder of Telarc, Inc., in connection with
the merger of Telarc with and into our wholly-owned subsidiary. The actual
number of shares we issue in connection with the transaction is subject to
downward adjustment to the extent that claims are made against an escrow fund
created at the time of the transaction. The transaction did not involve any
underwriters, underwriting discounts or commissions, or any public offering,
and we believe that it was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof. The recipient in the
transaction represented his intention to acquire the securities for investment
only and not with a view to or for sale in connection with any distribution
thereof, and appropriate legends were affixed to the share certificates and
instruments issued in the transaction. The recipient had adequate access,
through his relationship with us, to information about us.

Item 6. Selected Consolidated Financial Data

  In reading the selected consolidated financial data set forth on the
opposite page, you should refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our Consolidated Financial
Statements and the Notes included elsewhere herein.

  The statement of operations data for the years ended December 31, 1999,
1998, 1997 and 1996 and the balance sheet data at December 31, 1999, 1998,
1997 and 1996 are derived from our consolidated financial statements, which
have been audited by Ernst & Young LLP, independent auditors. The statement of
operations data for the year ended December 31, 1995 and the balance sheet
data as of December 31, 1995 are derived from unaudited consolidated financial
statements not included herein.

  Our historical results are not necessarily indicative of the results we will
achieve in any future period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."


                                      13
<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                          Year Ended December 31,
                                  --------------------------------------------
                                    1999     1998      1997     1996     1995
                                  --------  -------  --------  -------  ------
                                    (in thousands, except per share data)
<S>                               <C>       <C>      <C>       <C>      <C>
Consolidated Statement of
 Operations Data:
Revenues:
  Software licenses.............. $ 26,847  $17,462  $  7,859  $ 6,555  $3,185
  Services.......................   17,791    8,157     2,807    1,327   1,542
                                  --------  -------  --------  -------  ------
Total revenues...................   44,638   25,619    10,666    7,882   4,727
Cost of revenues:
  Software licenses..............    2,677    1,568       689      218      58
  Services.......................   11,591    7,451     2,675      767     --
                                  --------  -------  --------  -------  ------
Total cost of revenues...........   14,268    9,019     3,364      985      58
                                  --------  -------  --------  -------  ------
Gross profit.....................   30,370   16,600     7,302    6,897   4,669
Operating expenses:
  Sales and marketing............   18,505   10,769     8,607    4,554     552
  Research and development.......   14,080    8,716     6,309    3,457   1,263
  General and administrative.....    6,101    4,036     3,093    2,136     811
  Amortization of goodwill and
   purchased intangible assets...      329      --        --       --      --
  Purchased in-process research
   and development...............    3,210      --        --       --      --
  Legal matter...................     (200)    (400)    1,000      --      --
                                  --------  -------  --------  -------  ------
Total operating expenses.........   42,025   23,121    19,009   10,147   2,626
                                  --------  -------  --------  -------  ------
  Income (loss) from operations..  (11,655)  (6,521)  (11,707)  (3,250)  2,043
Other income (expense):
  Interest income................    2,060      293       298       87     --
  Interest expense...............     (598)    (645)      (59)     --      --
  Other..........................     (128)     (84)      --       --       (4)
                                  --------  -------  --------  -------  ------
  Total other income (expense)...    1,334     (436)      239       87      (4)
                                  --------  -------  --------  -------  ------
  Income (loss) before income
   taxes.........................  (10,321)  (6,957)  (11,468)  (3,163)  2,039
Provision for income taxes.......      212      446         1      --       69
                                  --------  -------  --------  -------  ------
Net income (loss)................  (10,533)  (7,403)  (11,469)  (3,163)  1,970
  Accretion on redeemable
   convertible preferred stock...     (403)    (825)     (730)    (180)    --
                                  --------  -------  --------  -------  ------
  Net income (loss) applicable to
   common stockholders........... $(10,936) $(8,228) $(12,199) $(3,343) $1,970
                                  ========  =======  ========  =======  ======
  Basic and diluted net income
   (loss) per share.............. $  (0.31) $ (0.29) $  (0.44) $ (0.13) $ 0.10
                                  ========  =======  ========  =======  ======
  Weighted average shares
   outstanding used in computing
   per share amounts.............   35,341   28,228    27,814   25,419  20,080
                                  ========  =======  ========  =======  ======
</TABLE>

                                       14
<PAGE>

<TABLE>
<CAPTION>
                                           December 31,
                              -----------------------------------------
                                1999     1998     1997     1996   1995  1994
                              -------- --------  -------  ------ ------ -----
                                              (in thousands)
<S>                           <C>      <C>       <C>      <C>    <C>    <C>
Consolidated Balance Sheet
 Data:
Cash and cash equivalents.... $ 41,715 $  5,447  $ 6,083  $3,163 $2,182 $ 143
Working capital
 (deficiency)................   73,044     (115)    (531)  4,446  2,271  (178)
Total assets.................  104,039   19,059   13,944   7,692  3,742   315
Long-term debt...............      --       100      340     --     --    --
Redeemable convertible
 preferred stock.............      --    13,370   12,838   4,710    --    --
Total stockholders' equity
 (deficit)...................   85,429  (10,061)  (9,912)  1,975  2,551    (9)
</TABLE>

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 within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions identify such forward-looking statements. These
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those indicated in the forward-
looking statements. Factors which could cause actual results to differ
materially include those set forth in the following discussion, and, in
particular, the risks discussed below under the subheading "Additional Risk
Factors that Could Affect Operating Results and Market Price of Stock." Unless
required by law, we undertake no obligation to update publicly any forward-
looking statements.

Overview

  Software.com is a leading developer and provider of scalable Internet
infrastructure software applications. Our products and services are
specifically designed to enable service providers to market Internet based
services to businesses and consumers. We have focused on developing carrier-
scale, high performance messaging software applications for providers of
Internet communications and services. We currently develop, market, sell, and
support a variety of Internet standards-based messaging software to customers
worldwide, including traditional telecommunications carriers, Internet service
providers and wholesalers, application service providers, cable-based Internet
access providers, competitive local exchange telephone carriers, Internet
destination sites or portals and wireless telephony carriers. We have
developed three product packages: Post.Office, InterMail Kx and InterMail Mx
based on our infrastructure platform. These products allow our customers to
provide a variety of advanced messaging services to their Internet-based
consumer and business users.

  We were incorporated in California in October 1994. Our operating activities
during 1994 and through 1995 related primarily to research and development of
our messaging software platform. In May 1996, we merged with Accordance
Corporation. Accordance had a multiple server messaging product called
InterMail. During the second half of 1996, we focused on integrating our two
product lines and building sales and marketing channels to target the service
provider market.

  In March 1997, we began building our professional services organization and
offering systems architecture and deployment consulting services to our
customers. The initial professional services group consisted of five
consultants and grew to 14 by the end of 1997 and to 44 by the end of 1999 as
the number of customers requesting our services increased. During 1997, we
also continued to build our development and quality assurance teams using
proceeds from the sale of preferred stock to Cisco Systems in February 1997.
Cisco Systems increased its equity investment in August 1998, which we used to
begin our overseas expansion in Europe and Asia, as well as to grow our global
direct sales force and service organizations.

  In March 1999, we entered into a marketing relationship with Hewlett-Packard
and, in connection with this agreement, Hewlett-Packard made an investment in
Software.com in April of 1999. In April 1999, we completed

                                      15
<PAGE>

the acquisition of Mobility.Net Corporation, a California company incorporated
in July 1996. Mobility.Net developed an integrated Web mail and calendaring
system using a Java-based technology platform that complements our product
offerings. The acquisition of Mobility.Net has been accounted for as a
pooling. In June 1999 we released WebEdge Mail and Calendar, a Web-based email
and calendaring server from Mobility.Net, for small and medium sized service
providers. In October 1999, we completed the acquisition of Telarc, Inc.,
which currently provides carrier-scale Short Messaging Service (SMS)
technologies that complement our product offerings. The acquisition of Telarc
Inc. has been accounted for as a purchase.

  We recognize revenue from sales of software upon delivery of a license key
to the customer, provided that persuasive evidence of an arrangement exists,
the license fee is fixed and determinable, and collection of the fee is
considered probable. If the license agreement has a multi-year term, as is
typical with an InterMail Mx contract, or the license fees are calculated
based on variable measures, such as the number of mailboxes in use, we
recognize revenue as the customer activates mailboxes on their system. When we
enter into a contract where a customer may activate up to a specified number
of mailboxes and support and maintenance fees are based on that specified
number, we recognize revenue evenly and ratably as payments become due over
the term of the arrangement. When we enter into license agreements under which
our revenues are based on a percentage of our customer's revenues, we
recognize revenue as earned and reported by the customer. Revenues from sales
to significant resellers are not recognized until the product is sold through
to the end user and the license key is issued.

  Service revenue is composed of revenue from support and maintenance
contracts as well as professional services and training. Revenues from support
and maintenance contracts are recognized ratably over the term of the support
and maintenance period. Substantially all of our InterMail Mx and InterMail Kx
customers purchase support and maintenance, which is paid generally on a
quarterly basis. Although the majority of our Post.Office customers initially
purchase an annual support and maintenance contract, a relatively small
percentage of these customers renew the contracts after the first year. This
is primarily due to the ease of use of the product and the customers' ability
to purchase more economical "per-incident" support services. Consulting
services revenues are primarily related to deployment services performed on a
time-and- materials basis under separate service arrangements. We recognize
revenues from consulting and training services using the percentage of
completion method. When software and services are billed prior to the time the
related revenue is recognized, deferred revenue is recorded.

  In a typical InterMail Mx customer relationship, we receive software license
revenue, support and maintenance revenue, and professional services revenue.
We recognize these three types of revenue at different stages of our customer
relationship. Substantially all of our professional services are performed
prior to the activation of mailboxes by the customer. As a result, we
generally recognize revenue from professional services in advance of revenue
from software license fees. If a customer has a large number of existing
users, we typically see a large revenue contribution at the time the customer
transfers or "migrates" existing user mailboxes to our software platform.
After this transfer, the software license revenue primarily reflects the
growth in the number of mailboxes on the customer's system. Support and
maintenance revenue begins after installation of our software and also
primarily reflects the growth in the number of mailboxes.

  In 1999, 1998 and 1997, revenues attributable to customers outside of North
America accounted for approximately 55%, 37% and 24% of our total revenues. We
are making significant expenditures on expansion in Europe and Asia, including
the translation of our products for use in these regions, and we expect these
expenditures to increase. If our revenues from international operations do not
exceed the expense of establishing and maintaining these operations, our
business, financial condition and operating results will suffer.

  We believe our success depends on our ability to execute on our global sales
strategy and continue to develop carrier-class products and services which
address the unique requirements of service providers. Accordingly, we intend
to continue to invest heavily in sales, support, and research and development.
Furthermore, we expect to continue to incur operating losses for the next
several quarters, and our expected increase in operating expenses will require
further increases in revenues before we become profitable.

                                      16
<PAGE>

  In view of the rapidly changing nature of our business and our limited
operating history, we believe that period-to-period comparisons of revenues
and operating results are not necessarily meaningful and should not be relied
upon as indications of future performance. Additionally, despite our
sequential quarterly revenue growth during 1999 and 1998, we do not believe
that historical growth rates are necessarily sustainable or indicative of
future growth.

Results of Operations

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

<TABLE>
<CAPTION>
                                                       Year Ended December
                                                               31,
                                                       -------------------------
                                                       1999   1998   1997   1996
                                                       ----   ----   ----   ----
<S>                                                    <C>    <C>    <C>    <C>
Consolidated Statement of Operations Data:
Revenues:
  Software licenses...................................  60 %   68 %    74 %  83 %
  Services............................................  40     32      26    17
                                                       ---    ---    ----   ---
    Total Revenues.................................... 100    100     100   100
Gross margins:
  Gross margin on software licenses...................  90     91      91    97
  Gross margin on services............................  35      9       5    42
                                                       ---    ---    ----   ---
    Gross profit......................................  68     65      68    88
Operating expenses:
  Sales and marketing.................................  41     42      81    58
  Research and development............................  32     34      59    44
  General and administrative..........................  14     16      29    27
  Amortization of goodwill and purchased intangible
   assets.............................................   1    --      --    --
  Purchased in-process research and development.......   7    --      --    --
  Legal matter........................................ --      (2)      9   --
                                                       ---    ---    ----   ---
    Total operating expenses..........................  95     90     178   129
                                                       ---    ---    ----   ---
Loss from operations.................................. (27)   (25)   (110)  (41)
Other income (expense):
  Interest income.....................................   5      1       3     1
  Interest expense....................................  (1)    (3)     (1)  --
  Other............................................... --     --      --    --
                                                       ---    ---    ----   ---
Total other income (expense)..........................   4     (2)      2     1
                                                       ---    ---    ----   ---
Loss before income taxes.............................. (23)   (27)   (108)  (40)
Provision for income taxes............................   1      2     --    --
                                                       ---    ---    ----   ---
Net loss.............................................. (24)%  (29)%  (108)% (40)%
                                                       ===    ===    ====   ===
</TABLE>

Comparison of Years Ended December 31, 1999 and 1998

  Software Licenses. Software license revenue increased $9.3 million, or 53%,
from $17.5 million in 1998 to $26.8 million in 1999. The increase in software
license revenue was primarily due to greater revenue from sales of our
InterMail product offerings, somewhat offset by a decrease in sales of our
Post.Office product. The largest contributor to software license revenue
continues to be our InterMail Mx product offering, which grew 56% in 1999 over
1998. The increase in InterMail Mx revenue was primarily a result of increased
growth from existing and new customers and to a lesser extent large migrations
of mailboxes from other existing platforms of new customers.

                                      17
<PAGE>

  Our InterMail Kx product was introduced in March of 1999 and overlaps to
some extent with our Post.Office product. Both products are targeted at small
and medium size service providers worldwide. Combined revenues from
Post.Office and InterMail Kx resulted in a 57% increase from 1998 to 1999,
however revenues from Post.Office decreased 27% from 1998 to 1999. We expect
revenues from Post.Office to continue to decrease as sales of our InterMail Kx
product offering increase.

  The decrease in software license revenue as a percentage of total revenues
was primarily related to an increase in support and maintenance from ongoing
and new contracts and to a lesser extent a decrease in migrations of mailboxes
from new customers from 1998 to 1999. In 1999 we had seven migrations compared
to 13 in 1998.

  Services. Services revenue is primarily derived from consulting services,
maintenance and support contracts, and training. Services revenue increased
$9.6 million, or 117%, from $8.2 million in 1998 to $17.8 million in 1999. The
increase in services revenue for 1999 as compared to 1998 was primarily due to
a $4.9 million increase in support and maintenance contracts as our customer
base grew, and a $4.8 million increase in professional services as the number
of professional services engagements increased. As a percentage of total
revenues, services revenue increased to 40% in 1999 from 32% in 1998. This
increase was primarily related to support and maintenance from ongoing and new
contracts as well as an increased number of professional services engagements
associated with new and existing contracts. In 2000 we expect services revenue
as a percentage of total revenues to decrease to some extent as a result of
continued growth in license revenue relative to growth in services revenue.

  Cost of Software License Revenue. Cost of software license revenue consists
primarily of the cost of third party products integrated into our products or
resold by us and the salaries and related costs for our documentation
department and the production of documentation for our InterMail products.
Cost of software license revenue increased $1.1 million, or 69%, from $1.6
million in 1998 to $2.7 million in 1999. The increase was primarily due to an
increase in our documentation department as well as increased investment in
product translation for our international markets. Additionally, in 1999 we
resold a third party database to eight of our InterMail Mx customers, with the
cost of that software included in cost of software license revenue in 1999. In
1998, we resold a third-party database to five of our customers.

  Cost of Services Revenue. Cost of services revenue includes salaries and
related costs of our consulting services and customer support organizations,
cost of third parties contracted to provide consulting services to our
customers, and an allocation of our facilities and depreciation expenses. Cost
of services revenue increased $4.1 million, or 55%, from $7.5 million in 1998
to $11.6 million in 1999. The increase in cost of services was primarily due
to an increase in our consulting and support organizations from 37 employees
at December 31, 1998 to 73 employees at December 31, 1999 to support our
larger customer base. The improvement in gross margin on services revenue from
9% for 1998 to 35% in 1999 was substantially attributable to improved margins
on support and maintenance contracts.

  Sales and Marketing. Sales and marketing expense consists primarily of
salaries and benefits of our sales, marketing, product management and business
development organizations, sales commissions, marketing programs, and an
allocation of our facilities and depreciation expenses. Sales and marketing
expense increased by $7.7 million, or 71%, from $10.8 million in 1998 to $18.5
million in 1999. The increase in sales and marketing expense was primarily due
to an increase in sales commissions commensurate with the increase in revenues
as well as growth in our global sales organization. The total number of
employees in the sales and marketing organization increased from 53 at
December 31, 1998 to 74 at December 31, 1999. We expect our sales and
marketing expenses will increase in absolute dollars in future periods due to
the planned expansion of our international sales and marketing operations.

  Research and Development. Research and development expense consists
primarily of salaries and benefits of our engineering and quality assurance
organizations, and an allocation of our facilities and depreciation expenses.
Research and development expense increased by $5.4 million, or 62%, from $8.7
million in 1998 to

                                      18
<PAGE>

$14.1 million in 1999. The increase in research and development expense was
primarily due to an increase in our development organization from 64 employees
at December 31, 1998 to 111 employees at December 31, 1999. We believe
continued investment in research and development is essential to our future
success, and we expect our research and development expenses to increase in
absolute dollars in future periods with the growth in demand of unified and
wireless messaging products.

  General and Administrative. General and administrative expense consists
primarily of salaries and benefits of our finance, human resources and legal
services organizations, third party legal, accounting, and other professional
services fees, and an allocation of our facilities and depreciation expenses.
General and administrative expense increased by $2.1 million, or 53%, from
$4.0 million in 1998 to $6.1 million in 1999. The increase in general and
administrative expense for 1999 was primarily related to fees for accounting
and legal services, increased reserves for bad debts, and an increase in our
general and administrative organization from 27 employees at December 31, 1998
to 42 employees at December 31, 1999. We expect general and administrative
expenses to decrease as a percentage of total revenues in future periods.

  Acquisition costs. In April, 1999, Software.com completed the acquisition of
Mobility.Net, Inc. which offers products for Web messaging using a Java-based
technology platform that complement our product offerings. We issued 1,579,000
shares of our common stock in exchange for all of the outstanding shares of
Mobility.Net. The acquisition was accounted for as a pooling-of-interests.
Accordingly, the financial information presented reflects the combined
financial position and operations of Software.com and Mobility.Net for all
dates and periods presented.

  In October, 1999, we acquired Telarc, Inc., which provides carrier-scale
Short Messaging Service (SMS) technologies that complement our product
offerings. In exchange for all of the issued and outstanding stock of Telarc,
we issued 212,000 shares of Software.com Common Stock and $1.5 million in
cash. The acquisition of Telarc was accounted for as a purchase and,
accordingly, the acquired assets and liabilities were recorded at their
estimated fair values at the date of acquisition. Telarc's operating results
have been included in Software.com's consolidated financial statements results
from the acquisition date of October 20, 1999. The purchase price plus costs
directly attributable to the completion of the acquisition have been allocated
to the assets and liabilities acquired based on their approximate fair market
value. A significant portion of the purchase price was identified as
intangible assets in an independent appraisal using proven valuation
procedures and techniques. The appraisal of the acquired business included
$3.2 million of purchased in-process research and development (IPR&D). This
acquired technology had not yet reached technological feasibility and had no
alternative future uses. Accordingly, it was written off at the time of the
acquisition. The remainder of the purchase price was allocated as follows:
$263,000 to net intangible assets, $5.7 million to developed technology,
$125,000 to assembled workforce and other intangibles and $2.3 million to
goodwill. Goodwill and identified intangibles are being amortized on a
straightline basis over their estimated economic useful lives of three to five
years.

  On the date of its acquisition, Telarc's technology was classified between
core or developed technology and IPR&D. Three principal Telarc products were
identified and their reliance on the developed technology and IPR&D was
determined. IPR&D was further analyzed to determine: (1) the estimated time
required to complete the development, (2) the estimated cost to complete and
(3) the complexity involved in overcoming technological obstacles that must be
resolved during development. The completion of in-process development at the
time of the acquisition ranged from 50% to 86%. Management estimates the cost
to complete the development effort to be approximately $1.8 million as of
December 31, 1999 and the release of the products incorporating these
technologies to occur during the fourth quarter of 2000.

  These IPR&D valuations represent the five year after-tax cash flow of this
technology using a discounted rate of 40%. In valuing the developed technology
and IPR&D, the initial focus was on the revenue contribution generated by each
of the products. Revenue estimates were based on the following: (1) aggregate
revenue growth rates for the business as a whole, (2) individual product
revenues, (3) growth rates for related products, (4) anticipated product
development and introduction schedules, (5) product sales cycles and (6) the
estimated useful life of a product's underlying technology. The aggregate
product revenue amounts were estimated and

                                      19
<PAGE>

segregated between the developed technology and IPR&D. Operating expenses were
deducted from the revenue estimates to arrive at operating income. Operating
expenses include cost of revenue, selling and marketing, and general and
administrative expenses but no non-cash charges such as depreciation and
amortization. Certain adjustments were made to operating income to derive the
after-tax cash flow. These adjustments included the calculation of an
applicable tax expense and an appropriate charge for the use of contributory
assets necessary to generate revenue and operating income associated with the
subject intangible assets.

  We believe that we are positioned to complete development of the Telarc
technology and products, however there is a risk that we may not be able to
complete these projects within the estimated timeframe or cost budget.
Furthermore, there is no assurance that any product will meet with either
technological or commercial success. See "Risk Factors" for further
information.

  Legal Matter. The Company was involved in a contract dispute with a third
party technology partner under a 1996 licensing agreement. The dispute related
to a minimum royalty obligation of $1,000,000 purportedly owed by the Company
to the third party. In 1997, the Company accrued $1,000,000 for its potential
exposure under the claim. In February 1999, the parties entered into an
agreement to settle all outstanding claims. The Company paid the third party
$400,000, and as a result the related accrual was reduced to $600,000 at
December 31, 1998 to reflect the complete resolution of this matter.

  Other Income (Expense). Other income (expense) consists primarily of
interest income from our cash and short-term investments net of interest
associated with our credit facility. Total other income (expense) increased
$1.8 million, from an expense of $436,000 for 1998 to income of $1.3 million
in 1999. The increase was primarily related to interest earned on the proceeds
of our initial public offering of common stock in June of 1999.

  Provision for Income Taxes. Provision for income taxes consists mainly of
foreign withholding and income taxes. Provision for income taxes decreased
$234,000 from $446,000 in 1998 to $212,000 in 1999. The decrease was primarily
related to the completion of a large professional services engagement in
Canada in 1998 that resulted in withholding and income taxes during that
period.

  As of December 31, 1999, we had federal and state net operating loss
carryforwards of approximately $27.9 million and $11.1 million, respectively.
The net operating loss and credit carryforwards will expire at various dates
beginning in 2011 through 2019 for federal and 2002 to 2004 for state, if not
utilized. On December 31, 1999, we also had federal and state research and
development tax credit carryforwards of approximately $613,000 and $188,000,
expiring in 2011 to 2014. We also have a foreign tax credit of approximately
$484,000, which will expire in 2003. As a result of changes in our equity
ownership resulting from our convertible preferred stock financings and this
offering, utilization of the net operating losses and tax credits may be
subject to substantial annual limitations. This is due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration
of net operating losses and tax credits before utilization. See Note 6 of
Notes to Consolidated Financial Statements.

  Stock-based Compensation. We recorded deferred compensation of approximately
$1.5 million and $770,000 in 1998 and 1999, respectively, representing the
difference between the exercise prices of options granted to employees during
1998 and 1999 and the deemed fair value for accounting purposes of our common
stock on the grant dates. We amortized deferred compensation expense of
$545,000 during 1999. This compensation expense relates to options awarded to
individuals in all operating expense categories. Total deferred compensation
at December 31, 1999 of $1.67 million is being amortized over the vesting
periods of the options. The amortization of deferred compensation recorded
will approximate $600,000, $521,000, $480,000, and $47,000 for the years 2000,
2001, 2002 and 2003.

                                      20
<PAGE>

Comparison of Years Ended December 31, 1998 and 1997

  Software Licenses. Software licenses revenue increased $9.6 million, or
122%, from $7.9 million in 1997 to $17.5 million in 1998. The increase in
software license revenue was primarily due to an increase in the number of
service providers worldwide using InterMail Mx for their consumer email
offering. Software license revenue from InterMail Mx increased 291% from 1997
to 1998. In addition, software license revenue from Post.Office increased 36%
from 1997 to 1998 as we continued to expand sales of Post.Office into the
small to medium size service provider market. During 1998, we received
$619,000 of software license revenue from the resale of a third party database
to our InterMail Mx customers as compared to $94,000 during 1997.

  Services. Services revenue increased $5.4 million, or 191%, from $2.8
million in 1997 to $8.2 million in 1998. As a percentage of total revenues,
services revenue increased from 26% in 1997 to 32% in 1998. The increase in
services revenue was due to a 303% increase in professional services revenue
from 1997 to 1998 as the number of consulting projects increased, including a
large InterMail Mx installation for which we recognized $2.4 million in
services revenue.

  In addition, support and maintenance revenue increased 116% from 1997 to
1998 as our customer base grew. The increase in services revenue as a
percentage of total revenues was primarily due to the recognition of services
revenue from this large InterMail Mx installation.

  Cost of Software License Revenue. Cost of software license revenue increased
by $879,000, or 128%, from $689,000 in 1997 to $1.6 million in 1998. This
increase was primarily due to a $433,000 increase resulting from the resale of
third party software used in conjunction with our InterMail Mx product and, to
a lesser extent, a $317,000 increase due to growth in the number of employees
in our documentation department.

  Cost of Services Revenue. Cost of services revenue increased by $4.8
million, or 179%, from $2.7 million in 1997 to $7.5 million in 1998. Cost of
services during this period increased commensurate with the increase in the
number of professional services deployments.

  Sales and Marketing. Sales and marketing expense increased by $2.2 million,
or 25%, from $8.6 million in 1997 to $10.8 million in 1998. Substantially all
of this increase was due to significant expansion in our global direct sales
organization, primarily in North America. The total number of employees in the
sales and marketing organization increased from 37 at the end of 1997 to 53 at
the end of 1998. The decrease in sales and marketing expense as a percentage
of total revenues from 81% in 1997 to 42% in 1998 was primarily due to the
recognition of InterMail Mx software licenses revenue from contracts signed in
1997.

  Research and Development. Research and development expense increased by $2.4
million, or 38%, from $6.3 million in 1997 to $8.7 million in 1998. The
increase in research and development expense was primarily due to costs
associated with the development and testing of our new InterMail Kx product
package, which was introduced in March 1999, and, to a lesser extent, the cost
of porting our InterMail messaging technology to the Hewlett-Packard and IBM
Unix platforms. The decrease in research and development as a percentage of
total revenues from 59% in 1997 to 34% in 1998 was primarily due to an
increase in software licenses revenue from products developed in previous
periods.

  General and Administrative. General and administrative expense increased by
$943,000, or 30%, from $3.1 million in 1997 to $4.0 million in 1998. The
increase in general and administrative expense was due in significant part to
a $431,000 increase in the provision for doubtful accounts. The decrease in
general and administrative costs as a percentage of total revenues was
primarily due to our increase in software license revenue.

  Legal Matter. We accrued in 1997 for an asserted claim related to a minimum
royalty obligation of $1 million purportedly owed by us under a licensing
agreement with a third party technology partner. In February 1999, we and the
third party entered into an agreement to settle all outstanding claims. Under
the settlement agreement, we agreed to pay the third party a minimum of
$400,000, with a contingent obligation to pay an additional $200,000 if we did
not take certain actions prior to December 31, 1999.

                                      21
<PAGE>

  Other Income (Expense). Other income (expense) consists primarily of
interest expense associated with our credit facility and interest income on
short-term investments. Interest expense increased $586,000, or 993%, from
$59,000 in 1997 to $645,000 in 1998. The increase in interest expense was
primarily related to an increase in interest paid for our credit facility. The
credit facility was opened in November 1997, resulting in only two months of
interest expense for 1997.

  Provision for Income Taxes. For the year ended December 31, 1998, we had a
tax provision of $446,000 related to foreign withholding taxes.

Liquidity and Capital Resources

  We have funded our operations primarily through the private placement of
equity securities and the initial public offering of shares, and raised net
proceeds of approximately $79.8 million in 1999. We have also used a bank line
of credit to supplement our cash flow requirements. At December 31, 1999, our
principal sources of liquidity included approximately $41.7 million of cash
and cash equivalents and $25.7 million of marketable securities.

  Net cash used in operations for 1999 and 1998 was $8.5 million and $10.1
million, respectively. Cash used in operating activities for 1999 was
primarily due to an increase in accounts receivable of $14.0 million and our
net loss of $10.5 million, partially offset by an increase in deferred revenue
and a write-off of in-process research and development related to the Telarc
acquisition of $6.7 million and $3.2 million, respectively. Cash used in
operating activities for 1998 was primarily due to our net loss of $7.4
million and an increase in accounts receivable of $7.1 million, partially
offset by an increase in depreciation and amortization of $1.7 million.

  Net cash used in investing activities increased $28.7 million from $912,000
in 1998 to $29.6 million in 1999. The change from 1998 to 1999 was primarily
due to the purchase of $30.7 million in short-term investments from the
proceeds of our initial public offering in June 1999, partially offset by $5.5
million in maturities of short-term investments. The Company may use cash for
additional investments or acquisition related activities in 2000.

  Net cash provided by financing activities increased $64.0 million from $10.4
million in 1998 to $74.4 million in 1999. The increase from 1998 to 1999 was
primarily due to the net proceeds from the sale of common stock of $69.7
million in June 1999 as part of our initial public offering and $10.0 million
of convertible preferred stock (Series D) in April 1999, offset by the
repayment of our note payable to a bank of $7.6 million. Cash provided by
financing activities for 1998 was primarily related to the issuance of
preferred stock and proceeds from notes payable to a bank in the amounts of
$6.8 million and $3.0 million, respectively.

Year 2000 Readiness Disclosure

  In 1998, we initiated a company-wide program to ensure that our products,
date-sensitive information, and business systems, and certain other equipment
would properly recognize the Year 2000 as a result of the century change on
January 1, 2000 and the Year 2000 leap year. The program focused on our
software products, and our operational hardware and software, as well as
third-party vendors and suppliers, and third-party networks that were
associated with the identified systems. We substantially completed the program
during the fourth quarter of 1999 and neither our products nor our systems
experienced any significant disruptions as a result of the century change or
the Year 2000 leap year. In total, we have spent approximately $50,000 in
external costs on this program through December 31, 1999, and do not expect to
incur any significant additional costs related to Year 2000 compliance
subsequent to 1999.

                                      22
<PAGE>

Additional Risk Factors That Could Affect Operating Results and Market Price
of Stock

 Our future revenues are unpredictable and we expect our quarterly operating
 results to fluctuate, which could cause our stock price to decline

  We cannot accurately forecast our revenues in any given period as a result
of our limited operating history, the emerging nature of the markets in which
we compete and our reliance on a small number of products and large customers.
Our revenues could fall short of our expectations if we experience delays in
signing new customer accounts or cancellation of one or more current or new
customer accounts. A number of factors are likely to cause fluctuations in our
operating results, including:

  .  the volume and timing of mailbox activation by our InterMail Mx
     customers;

  .  the length of our sales and product deployment cycles for our InterMail
     products;

  .  our ability to attract and retain customers in new markets, including
     Europe and Asia;

  .  our continuing dependence on the InterMail line of products and related
     services for substantially all of our revenues;

  .  our dependence on a small number of large customers;

  .  our dependence on continued growth of the service provider market;

  .  any delays in our introduction of new products or enhancements;

  .  the amount and timing of operating costs and capital expenditures
     relating to expansion of our operations;

  .  the announcement or introduction of new or enhanced products or services
     by our competitors;

  .  adverse customer reaction to technical difficulties or "bugs" in our
     software;

  .  the growth rate and performance of the Internet in general and of
     Internet communications in particular;

  .  the growth rate and performance of wireless networks in general and of
     wireless communications in particular;

  .  the volume of sales by our distribution partners and resellers;

  .  our pricing policies and those of our competitors; and

  .  the increase in our cost to resell, or our customers' cost to buy, the
     Oracle 8i database which is currently necessary to use our InterMail Mx
     product and any related price concessions on our InterMail Mx product
     that our customers demand as a result.

  Due to the foregoing factors, our quarterly operating results have
fluctuated significantly and we expect that future operating results will be
subject to similar fluctuations. Our revenue from large-scale installations of
our software depends heavily on the customers' timing of deployment of our
software, the migration of their installed base of users to our software
platform, and the rate of growth of their customer base. Accordingly, a delay
in a deployment past the end of a particular quarter could negatively impact
our results of operations for that quarter. It is possible that in future
quarters our operating results could fall below the expectations of public
market analysts or investors. In this event, the price of our common stock may
fall.

  We plan to significantly increase our operating expenses to expand our
international sales and marketing operations and fund greater levels of
research and development. Our operating expenses, which include sales and
marketing, research and development, and general and administrative expenses,
are based on expectations of future revenues and are relatively fixed in the
short term. If revenues fall below our expectations and we are not able to
quickly reduce our spending in response, our business, financial condition,
and operating results will suffer. Accordingly, period-to-period comparisons
of our operating results are not a good indication of our future performance.
It is possible that our operating results in some quarters will not meet the
expectations of stock market analysts and investors. In that event, our stock
price would probably decline.

                                      23
<PAGE>

 Variations in the time it takes to sell, deploy and activate mailboxes using
 our InterMail Mx product may cause fluctuations in our operating results,
 which could cause our stock price to decline

  Variations in the length of our sales and deployment cycles for InterMail Mx
could cause our revenue, and thus our business, financial condition and
operating results, to fluctuate widely from period to period. Our customers
generally take a long time to evaluate our InterMail Mx product, and many
people are involved in the evaluation process. We expend significant resources
educating and providing information to our prospective customers regarding the
use and benefits of InterMail Mx. Additionally, at present, in order to deploy
our InterMail Mx product, a customer must have a license to use an Oracle 8i
database. Our reseller agreement with Oracle, which previously enabled us to
sublicense the database to our customers, recently expired and we are in the
process of negotiating a new agreement with Oracle. Our customers' cost for
purchasing an Oracle 8i database, whether from us if a new reseller agreement
is successfully negotiated or directly from Oracle, has increased and may
cause potential customers to decide not to buy our InterMail Mx product. If
this happens, we may be forced to absorb some of the costs of the increase in
order to sell the InterMail Mx product. In either case, unless we are able to
identify and implement a suitable alternative to the Oracle database, our
revenues from our InterMail Mx product would decrease. Although we are
actively evaluating alternative databases, there can be no assurance that we
will be able to substitute a new database for Oracle in a timely and cost-
effective manner. Even if a customer decides to purchase our InterMail Mx
product, our customers tend to integrate InterMail Mx into their existing
systems slowly and deliberately. The timing of the deployment depends upon:

  .  the efforts of our professional services staff;

  .  the geographic disbursement of the customer's hardware;

  .  the complexity of the customer's network and the resulting degree of
     hardware configuration necessary to deploy InterMail Mx on their system;

  .  the internal technical capabilities of the customer;

  .  the customer's budgetary constraints; and

  .  the stability and sophistication of the customer's current messaging
     system.

  Because of the number of factors influencing the sales and deployment
processes, the period between our initial contact with a new customer and the
time when we begin to recognize revenue from that customer varies widely in
length. Our sales cycles for InterMail Mx typically range from six months to a
year, and our software deployment cycles typically range from three to six
months thereafter, although occasionally these cycles can be much longer.
During these cycles, we typically commit substantial resources in advance of
receiving any software license revenue.

  In addition, the amount of software license revenue that we are able to
recognize in any given period depends on how quickly our customers activate
new mailboxes and report the activation of those new mailboxes to us. Under
our InterMail Mx license agreements, our customers typically pay us a fee for
each new user account, or "mailbox," they activate using InterMail Mx. We
recognize software license revenue from these agreements when our customer
reports its mailbox activations to us or we otherwise learn of such
activations. Customers typically report activations on a quarterly basis after
they have completed a deployment of InterMail Mx. Because we charge our
customers only for activating "new" mailboxes, a customer can reassign a lost
subscriber's mailbox to a new subscriber without having to pay us a fee. We
cannot control how quickly our customers activate new mailboxes. The primary
factors affecting the timing are the ability of our customers to retain
subscribers and grow their subscriber bases by attracting end users to their
online services, and their willingness to promote InterMail Mx messaging
services with their subscribers. Mailbox activations and the associated
revenue may be concentrated in a particular quarter and, as a result, our
revenue for a particular quarter is not a good indication of our future
revenue. Our revenues may fluctuate widely from period to period depending on
the timing of our customers' activation of new mailboxes, and any delay in or
failure by our customers to activate new mailboxes will harm our business,
financial condition, and operating results.

                                      24
<PAGE>

  In addition, we base our quarterly revenue projections, in part, upon our
expectations of how many mailboxes our InterMail Mx customers will activate in
that quarter. Because the timing of mailbox activation is outside of our
control, it is often difficult for us to make accurate forecasts. If our
expectations, and thus our revenue projections, are not accurate for a
particular quarter, our actual operating results for that quarter could fall
below the expectations of analysts and investors.

 Because we have a limited operating history, it may be difficult for you to
 evaluate our business and prospects

  We have only a limited operating history, which makes it difficult for
investors to predict our future operating performance. When making your
investment decision, you should consider the risks, expenses, and difficulties
that we may encounter as a young company in a rapidly evolving market. These
risks include our ability to:

  .  expand our sales and marketing activities;

  .  expand our customer base;

  .  develop and introduce new products and services;

  .  identify and integrate acquisitions; and

  .  compete effectively.

  We cannot be certain that our business strategy will be successful or that
we will successfully address these risks.

 We have a history of losses and we expect future losses

  We have a history of losses, and we may not achieve or sustain
profitability. We have historically invested heavily in our sales and
marketing efforts and in technology research and development. We expect to
continue to spend substantial resources on developing and introducing new
software products and on expanding our sales and marketing activities,
particularly in Europe and Asia. As a result, we need to generate significant
revenues to achieve and maintain profitability. We expect that our sales and
marketing expenses, research and development expenses, and general and
administrative expenses will continue to increase in absolute dollars and may
increase as percentages of revenues. In addition, any amortization of goodwill
or other assets, or other charges resulting from the costs of acquisitions
could significantly impact our business, financial condition, and operating
results.

  We incurred net losses of approximately $32.8 million for the period from
July 1994 through December 31, 1999. As of December 31, 1999, we had an
accumulated deficit of approximately $32.8 million. Although our revenues have
grown significantly in recent quarters, we may not be able to sustain these
growth rates or obtain sufficient revenues to achieve profitability. If we do
achieve profitability, we may not be able to sustain or increase profitability
in the future. Our failure to achieve and maintain profitability could
adversely affect our stock price.

 We depend on a small number of customers for most of our revenues, and our
 business, financial condition, and operating results could be harmed by a
 decline or delay in revenue from these customers

  We have generated a significant portion of our revenues from a limited
number of customers. We expect that a small number of customers will continue
to account for a significant portion of revenues for the foreseeable future.
Our target market is made up only of service providers, which constitute only
a small portion of all users of messaging solutions. As a result, if we lose a
major customer, or if there is a decline in usage, or if there is a downturn
in the service provider industry, our business, financial condition, and
operating results will suffer. We cannot be certain that customers that have
accounted for significant revenues in past periods, individually or as a
group, will continue to generate revenues for us in any future period.

                                      25
<PAGE>

 We must overcome significant and increasing competition in order to continue
 our growth

  The market for Internet standards-based messaging and infrastructure
products and services is intensely competitive, and we expect it to become
increasingly so in the future. We compete in our core service provider market
with many software providers and, in some instances, with outsourced messaging
providers who have either internally developed or acquired their own messaging
software. We also compete, principally on the basis of performance, features
and price, against messaging solutions based on public domain software code
that is developed and enhanced internally by service providers. We compete to
a more limited extent with providers of messaging applications designed for
the enterprise market.

  Our current software competitors in the service provider market include
iPlanet E-Commerce Solutions (a SunNetscape Alliance) and Isocor, which was
recently acquired by Critical Path. We also indirectly compete with Critical
Path when it offers outsourced messaging to the service provider market and
with Microsoft, whose current messaging product was developed for the
enterprise market but is sold to some service providers. In addition, with our
intended release of a highly scalable LDAP directory with InterMail Mx, we
will become more direct competitors with Novell's NDS technology and
Microsoft's Active Directory product, to the extent that these products are
marketed to service providers. We believe that competition will intensify as
our current competitors increase the sophistication of their offerings and as
new market participants, including additional providers of outsourced
messaging services enter the market. Many of our current and future
competitors have longer operating histories, larger installed customer bases,
greater brand recognition, and significantly greater financial, marketing and
other resources than we do. In addition, these competitors may benefit from
existing strategic and other relationships with each other or with our current
customers. We must respond quickly and effectively to the new products,
services, and enhancements offered by our competitors in order to continue our
growth.

 Microsoft and other competitors possess many competitive advantages over us
 that present risks to the sales of our products

  Microsoft, among other software providers, is well-positioned to become
increasingly competitive in our core service provider messaging market. We
believe that Microsoft is currently in the process of developing electronic
messaging software to compete more directly in our core service provider
market. Because of its dominance in other software markets, Microsoft has many
competitive advantages over us. For example, Microsoft could incorporate
electronic messaging technology into its Web browser software, its client
operating system or email interface, or its server software offerings,
possibly at no additional cost to service providers or end users. In addition,
Microsoft may promote technologies and standards that are not compatible with
our technology, or that are less compatible with our technology than
competitive products offered by Microsoft. We believe that Microsoft's
increasing presence in the electronic messaging software industry will
dramatically increase competitive pressure in the market, leading to increased
pricing pressure and longer sales cycles. These competitive pressures may
force us to reduce the prices of our products, and may also materially reduce
our market share.

  In addition to the existing competitors listed above, voicemail solutions
providers could be formidable competitors in the unified communications
infrastructure software and Internet voicemail markets because of their
existing presences in service providers and ownership of technologies for the
conversion of voice to data. If we are unable to cooperate or compete
effectively with Microsoft, existing voicemail solution providers, or our
other existing or emerging competitors, our business, financial condition, and
operating results will suffer.

 Our InterMail Kx product may interfere with sales of our other products

  Competition from InterMail Kx has had a negative effect on our sales of
Post.Office and could have a negative impact on our sales of InterMail Mx, or
the prices we could charge for these products. Our InterMail Kx product was
introduced in March of 1999 and overlaps to some extent with our Post.Office
product as both products are targeted at small and medium size service
providers worldwide. We currently have several licenses

                                      26
<PAGE>

for our Post.Office product with service providers that have more than 25,000
subscribers and we have licensed our InterMail Mx product to service providers
with fewer than 250,000 subscribers. Accordingly, InterMail Kx may compete to
some extent with our other products. Combined revenues from Post.Office and
InterMail Kx resulted in a 66% increase from 1998 to 1999, but revenues from
Post.Office decreased 16% from 1998 to 1999. We may also divert sales and
marketing resources from Post.Office in order to successfully promote and
develop InterMail Kx. This diversion of resources could have a further
negative effect on our sales of Post.Office. If our revenues from InterMail Kx
are not sufficient to compensate for the effect of any decrease in sales or
prices of our other products, our business, financial condition, and operating
results will suffer.

 Our acquisition strategy could cause financial or operational problems

  Our success depends on our ability to continually enhance and broaden our
product offerings in response to changing technologies, customer demands, and
competitive pressures. To this end, we may acquire new and complementary
businesses, products, or technologies, instead of developing them ourselves.
We do not know if we will be able to complete any acquisitions or that we will
be able to successfully integrate any acquired business, operate them
profitably, or retain their key employees. For example, we completed the
acquisitions of Mobility.Net Corporation in April 1999 and of Telarc, Inc. in
October 1999, and continue to integrate these companies' products and
personnel into our organization. We intend to complete the acquisition of
AtMobile.com, Inc. in April 2000. If the acquisition closes, AtMobile.com is a
substantially larger organization than either Mobility.Net or Telarc and
therefore will present greater challenges in terms of integration of products
and employees. Integrating AtMobile.com or any other newly acquired business,
product or technology could be expensive and time-consuming, could disrupt our
ongoing business, and could distract our management. We may face competition
for acquisition targets from larger and more established companies with
greater financial resources. In addition, in order to finance any
acquisitions, we might need to raise additional funds through public or
private financings. In that event, we could be forced to obtain equity or debt
financing on terms that are not favorable to us and, in the case of equity
financing, that results in dilution to our stockholders. If we are unable to
integrate AtMobile.com or any other newly acquired entities or technologies
effectively, our business, financial condition, and operating results would
suffer. In addition, any amortization of goodwill or other assets, or other
charges resulting from the costs of acquisitions could harm our business,
financial condition, and operating results.

 Our expanding international operations are subject to significant
uncertainties in addition to those we  face in domestic markets

  For 1999 and 1998, approximately 55% and 37% of our total revenues,
respectively were attributable to customers outside of North America. If our
revenues from international operations, and particularly from our operations
in the countries and regions on which we have focused our spending, do not
exceed the expense of establishing and maintaining these operations, our
business, financial condition, and operating results will suffer. We continue
to invest significant financial and managerial resources to expand our sales
and marketing operations in international markets, and we must continue to do
so for the foreseeable future in order to succeed in these markets. In
particular, we are making significant expenditures on expansion in Europe and
Asia, including the translation of our products for use in these regions, and
we expect these expenditures to continue or increase. We are expending the
most resources in the countries and regions that we think will be the most
receptive markets for our products. We have only limited experience in
international operations, and we may not be able to capitalize on our
investment in these markets. In this regard, we face certain risks inherent in
conducting business internationally, including:

  .  fluctuations in currency exchange rates;

  .  problems caused by the ongoing conversion of various European currencies
     into a single currency, the Euro;

  .  any imposition of currency exchange controls;

  .  unexpected changes in regulatory requirements applicable to the Internet
     or our business;

                                      27
<PAGE>

  .  difficulties and costs of staffing and managing international
     operations;

  .  differing technology standards;

  .  difficulties in collecting accounts receivable and longer collection
     periods;

  .  seasonal variations in customer buying patterns or electronic messaging
     usage;

  .  political instability or economic downturns;

  .  potentially adverse tax consequences; and

  .  reduced protection for intellectual property rights in certain
     countries.

  Any of these factors could harm our international operations and,
consequently, our business, financial condition, and operating results.

 The loss of any of our senior management or key personnel could harm our
 business, financial condition, and operating results

  Our success depends on the skills, experience and performance of our senior
management and certain other key personnel, some of whom have worked together
for only a short period of time. With the exception of certain key personnel
who have joined us in connection with acquisitions, we do not have employment
agreements with any of our senior management, and their employment is at will.
The loss of the services of any of our senior management or other key
personnel could harm our business, financial condition, and operating results.

 If we are unable to attract and retain highly skilled employees, our
 financial and operational results may suffer

   Our success depends on our ability to recruit, integrate, retain, and
motivate highly skilled sales and marketing, engineering, and quality
assurance personnel. In particular, our ability to attract and retain
qualified sales management personnel is critical to the success of our planned
expansion in Europe and Asia. Competition for these people in the Internet
messaging industry is intense, and we may not be able to successfully recruit,
train, or retain qualified personnel. If we fail to retain and recruit
necessary sales and marketing, engineering, and quality assurance personnel,
our ability to obtain new customers, develop new products and provide
acceptable levels of customer service could suffer, and this could harm our
business, financial condition, and operating results.

 We must adapt to rapid changes in technology and customer preferences in
 order to remain competitive

  The Internet messaging industry is characterized by rapidly changing
technology, changes in customer and end user requirements and preferences, and
evolving industry standards and practices that could render our software
products obsolete. Our success depends on our ability to enhance our existing
messaging platform and products on a timely basis and to develop new products
that address the increasingly sophisticated and varied needs of our customers
and their end users. We must accurately forecast the features and
functionality required by our target customers and end users in order to
continually improve our products. For example, in response to customer and end
user demand, we have recently developed for some of our products a voicemail
feature based on Internet standards that govern data transmission and receipt,
known as Internet Protocol or "IP." In addition, in response to the rapid
development of opportunities in the wireless sector, we are aggressively
pursuing the development and/or acquisition of key technologies required by
service providers in the wireless sector. The development of proprietary
technology and product enhancements has required, and will continue to
require, substantial expenditures and lead-time, and we may not always be able
to keep pace with the latest technological developments. If we cannot, for
technical, legal, financial, or other reasons, adapt our products to changing
customer or end user requirements or industry standards in a cost-effective
and timely fashion, or if any new product, enhancement, or feature, including
IP voicemail or the wireless messaging products and technologies acquired in
the Telarc acquisition and the proposed AtMobile.com acquisition is not
favorably received and accepted by customers and end users, our business,
financial condition, and operating results will suffer.

                                      28
<PAGE>

 Our software products may have unknown defects, which could harm our
 reputation or impede market acceptance of our products

  Despite testing by us, defects have in the past and may in the future occur
in our software. Complex software like ours is difficult to integrate with
customers' existing systems and often contains errors or defects, particularly
when first introduced or when new versions or enhancements are released.
Although we conduct extensive testing, we may not discover software defects
that affect our current or new products, including new releases or editions of
our InterMail products, the wireless messaging products acquired in the Telarc
acquisition or the wireless products intended to be developed as a result of
the proposed AtMobile.com acquisition, until after they are sold. We also
experience difficulty in deploying software at our customer's sites due to its
complex nature. Any defect in other software or hardware with which our
software interacts could be mistakenly attributed to our software by our
customers or their end users. These defects or perceptions of defects could
cause our customers and their end users to experience service interruptions.
Because our customers depend on our software to provide critical services to
their end users, any service interruptions could damage our reputation or
increase our product development costs, divert our product development
resources, cause us to lose revenue, or delay market acceptance of our
products, any of which could harm our business, financial condition, and
operating results.

 The rapid growth of our operations could strain our resources and harm our
 business, financial condition, and operating results

  Our recent growth has placed and will continue to place a significant strain
on our management systems, infrastructure, and resources. We are increasing
the scope of our operations and our customer base domestically and
internationally, and we have recently increased our headcount substantially.
From December 31, 1997 to December 31, 1999 our total number of employees
increased from 144 to 309. We expect that we will need to continue to improve
our financial and managerial controls and reporting systems and procedures,
and will need to continue to expand, train, and manage our workforce
worldwide. We expect that we will be required to manage an increasing number
of relationships with various customers and other third parties. Our ability
to successfully offer products and services and implement our business plan in
a rapidly evolving market requires an effective planning and management
process. Any failure to expand any of the foregoing areas efficiently and
effectively could harm our business, financial condition and operating
results. In addition, there can be no assurance that our business will
continue to grow at historical rates.

 Our business depends on continued growth in use and improvement of the
 Internet and our customers ability to operate their systems effectively

  The infrastructure, products, and services necessary to maintain and expand
the Internet may not be developed, and the Internet may not continue to be a
viable medium for secure and reliable personal and business communication, in
which case our business, financial condition, and operating results would be
harmed. Because we are in the business of providing Internet infrastructure
applications, our future success depends on the continued expansion of, and
reliance of consumers and businesses on, the Internet for communications and
other services. The Internet may not be able to support an increased number of
users or an increase in the volume of data transmitted over it. As a result,
the performance or reliability of the Internet in response to increased
demands will require timely improvement of the high speed modems and other
communications equipment that form the Internet's infrastructure. The Internet
has already experienced temporary outages and delays as a result of damage to
portions of its infrastructure. The effectiveness of the Internet may also
decline due to delays in the development or adoption of new technical
standards and protocols designed to support increased levels of activity and
due to the transmission of computer viruses.

  In addition to problems that may affect the Internet as a whole, our
customers have in the past experienced some interruptions in providing their
Internet-related services, including services related to our software
products. We believe that these interruptions will continue to occur from time
to time. Our revenues depend substantially upon the number of end-users who
use the services provided by our customers. Our business may suffer if our
customers experience frequent or long system interruptions that result in the
unavailability or reduced performance of their systems or networks or reduce
their ability to provide services to their end users.

                                      29
<PAGE>

 The market for wireless communications and the delivery of Internet-based
 services through wireless technology is rapidly evolving, and we may not be
 able to adequately address this market.

  The market for wireless communications and the delivery of Internet-based
services through wireless technology is rapidly evolving and is characterized
by an increasing number of market entrants that have introduced or developed,
or are in the process of introducing or developing, products that facilitate
wireless communication and the delivery of Internet-based services through
wireless devices. We intend to devote significant efforts and resources on
developing and marketing infrastructure applications for wireless
communications and the wireless delivery of Internet-based content and
services. Our acquisition of Telarc in October 1999 and our proposed
acquisition of AtMobile.com were undertaken in part to address opportunities
in that market. If wireless devices are not widely adopted for data
communications or mobile delivery of Internet-based services, we would not
realize expected benefits from these acquisitions and our business would
suffer. In addition, the emerging nature of the market for wireless
communications and Internet-based services via wireless devices may lead
prospective customers to postpone adopting wireless devices or using wireless
technology. As a result, the life cycle of our wireless products is difficult
to estimate. We may not be able to develop and introduce new products,
services and enhancements that respond to technological changes or evolving
industry standards on a timely basis, in which case our business would suffer.
In addition, we cannot predict the rate of adoption by wireless subscribers of
these services or the price they will be willing to pay for these services. As
a result, it is extremely difficult to predict the pricing of these services
and the future size and growth rate of the wireless market.

  Our service provider customers face implementation and support challenges in
expanding wireless communications and introducing Internet-based services via
wireless devices, which may slow their rate of adoption or implementation of
the services our wireless messaging products enable. Historically, service
providers have been relatively slow to implement new complex services such as
wireless messaging services and wireless delivery of Internet content. In
addition, service providers may encounter greater customer service demands to
support Internet-based services via wireless devices than they do for their
traditional Internet services. We have limited or no control over the pace at
which service providers implement these new services. The failure of service
providers to introduce and support services utilizing our products in a timely
and effective manner could harm our business.

 Our intellectual property or proprietary rights could be misappropriated,
 which could force us to become involved in expensive and time-consuming
 litigation

  Our ability to compete and continue to provide technological innovation is
substantially dependent upon internally developed technology, including the
entire InterMail product line. We rely on a combination of copyright, trade
secret, and trademark law to protect our technology, although we believe that
other factors such as the technological and creative skills of our personnel,
new product developments, frequent product and feature enhancements, and
reliable product support and maintenance are more essential to maintaining a
technology leadership position. As of December 31, 1999, we did not have any
patents issued or pending; however, if the proposed AtMobile.com acquisition
closes, we will acquire 1 patent and a number of patent applications,
specifically for wireless subject matter.

  We generally enter into confidentiality and nondisclosure agreements with
our employees, consultants, prospective customers, licensees, and corporate
partners. In addition, we control access to and distribution of our software,
documentation, and other proprietary information. Except for certain limited
escrow arrangements, we do not provide third parties with access to the source
code for our products. Despite our efforts to protect our intellectual
property and proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Effectively policing the
unauthorized use of our products is time-consuming and costly, and there can
be no assurance that the steps taken by us will prevent misappropriation of
our technology, particularly in foreign countries where in many instances the
local laws or legal systems do not offer the same level of protection as in
the United States.


                                      30
<PAGE>

 If others claim that our products infringe their intellectual property
 rights, we may be forced to seek expensive licenses, reengineer our products,
 engage in expensive and time-consuming litigation, or stop marketing our
 products

  We attempt to avoid infringing known proprietary rights of third parties in
our product development efforts. However, we do not regularly conduct
comprehensive patent searches to determine whether the technology used in our
products infringes patents held by third parties. There are many issued
patents as well as patent applications in the electronic messaging field.
Because patent applications in the United States are not publicly disclosed
until the patent is issued, applications may have been filed which relate to
our software products. In addition, our competitors and other companies as
well as research and academic institutions have conducted research for many
years in the electronic messaging field, and this research could lead to the
filing of further patent applications. If we were to discover that our
products violated or potentially violated third party proprietary rights, we
might not be able to obtain licenses to continue offering those products
without substantial reengineering. Any reengineering effort may not be
successful, nor can we be certain that any licenses would be available on
commercially reasonable terms.

  Substantial litigation regarding intellectual property rights exists in the
software industry, and we expect that software products may be increasingly
subject to third-party infringement claims as the number of competitors in our
industry segments grows and the functionality of software products in
different industry segments overlaps. Any third-party infringement claims
could be time- consuming to defend, result in costly litigation, divert
management's attention and resources, cause product and service delays or
require us to enter into royalty or licensing agreements. Any royalty or
licensing arrangements, if required, may not be available on terms acceptable
to us, if at all. A successful claim of infringement against us and our
failure or inability to license the infringed or similar technology could have
a material adverse effect on our business, financial condition, and results of
operations.

 The geographic disbursement of our senior management could impede their
 ability to communicate effectively

  Our senior management and key personnel are based in several different
offices, which makes coordination of projects more difficult. For example,
John MacFarlane, our Chief Executive Officer, and John Ingalls, our Chief
Financial Officer, are based at our headquarters in Santa Barbara, California,
while Valdur Koha, our President, and John Poulack, our Senior Vice President,
Operations, are based at our office in Lexington, Massachusetts. In addition,
acquisitions may have the effect of increasing geographic disbursement of
senior management and key personnel. The geographic disbursement of our senior
management team and key personnel could impede their ability to communicate
effectively or work together efficiently, either of which could harm our
business, financial condition, and operating results.

 The security provided by our messaging products could be breached, in which
 case our reputation, business, financial condition, and operating results
 could suffer

  The occurrence or perception of security breaches could harm our business,
financial condition, and operating results. A fundamental requirement for
online communications is the secure transmission of confidential information
over the Internet. Third parties may attempt to breach the security provided
by our messaging products, or the security of our customers' internal systems.
If they are successful, they could obtain confidential information about our
customers' end users, including their passwords, financial account
information, credit card numbers, or other personal information. Our customers
or their end users may file suits against us for any breach in security. Even
if we are not held liable, a security breach could harm our reputation, and
even the perception of security risks, whether or not valid, could inhibit
market acceptance of our products. Despite our implementation of security
measures, our software is vulnerable to computer viruses, electronic break-ins
and similar disruptions, which could lead to interruptions, delays, or loss of
data. We may be required to expend significant capital and other resources to
license encryption or other technologies to protect against security breaches
or to alleviate problems caused by these breaches. In addition, our customers
might decide to stop using our software if their end users experience security
breaches.

                                      31
<PAGE>

 Future governmental regulation of the Internet could limit our ability to
conduct our business

  Although there are currently few laws and regulations directly applicable to
the Internet and commercial messaging, a number of laws have been proposed
involving the Internet, including laws addressing user privacy, pricing,
content, copyrights, distribution, antitrust, and characteristics and quality
of products and services. Further, the growth and development of the market
for online messaging may prompt calls for more stringent consumer protection
laws that may impose additional burdens on those companies, including us, that
conduct business online. The adoption of any additional laws or regulations
may impair the growth of the Internet or commercial online services, which
would decrease the demand for our services and could increase our cost of
doing business or otherwise harm our business, financial condition, and
operating results. Moreover, the applicability of existing laws governing
property ownership, sales and other taxes, libel, and personal privacy to the
Internet is uncertain and may take years to resolve.

 Our failure to complete the proposed merger with AtMobile.com could adversely
affect our business

  If our proposed acquisition of AtMobile.com is not completed, we may be
subject to a number of material risks, including the following:

  .  the price of our Common Stock may decline to the extent that the current
     market price for our Common Stock reflects a market assumption that the
     proposed merger will be completed and will benefit our entry into the
     wireless market; and

  .  costs related to the proposed merger, such as legal, accounting, and
     financial advisor fees, must be paid even if the merger is not
     completed.

 Our stock price may be volatile, exposing us to expensive and time-consuming
 securities class action litigation

  The stock market in general, and the stock prices of Internet-related
companies in particular, have recently experienced extreme volatility, which
has often been unrelated to the operating performance of any particular
company or companies. If market or industry-based fluctuations continue, our
stock price could decline below current levels or the initial public offering
price regardless of our actual operating performance. Furthermore, the
historical trading volume of our stock is not indicative of any future trading
volume of our stock because a substantial portion of shares were not eligible
for sale until recently. Therefore, if a large number of shares of our stock
are sold in a short period of time, our stock price will decline. In the past,
securities class action litigation has often been brought against companies
following periods of volatility in their stock prices. We may in the future be
the target of similar litigation. Securities litigation could result in
substantial costs and divert our management's time and resources, which could
harm our business, financial condition, and operating results.

 Provisions of our corporate documents and Delaware law could deter takeovers
 and prevent you from receiving a premium for your shares

  Provisions of our certificate of incorporation, our bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
might be beneficial to our stockholders. For example, our certificate of
incorporation provides that our board may issue up to 5,000,000 shares of
preferred stock without stockholder approval.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

  We develop products in the United States and sell in North America, South
America, Asia and Europe. As a result, our financial results could be affected
by factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. As all sales are currently made in U.S.
dollars, a strengthening of the dollar could make our products less
competitive in foreign markets. Our interest income is sensitive to changes in
the general level of U.S. interest rates, particularly since the majority of
our investments are in short-term instruments. Due to the nature of our short-
term investments and debt, we have concluded that there is no material market
risk exposure.

                                      32
<PAGE>

Item 8. Financial Statements and Supporting Data

  Reference is made to the Index to Consolidated Financial Statements which
appears on page F-1 of this report. The Report of Ernst & Young LLP,
Independent Auditors, Consolidated Financial Statements and Notes to
Consolidated Financial Statements which are listed in the Index to
Consolidated Financial Statements and which appear beginning on page F-2 of
this report are incorporated into this Item 8.

                                      33
<PAGE>

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

  Not Applicable.

                                   PART III

Item 10. Directors and Executive Officers of the Registrant

  The information required by this item is incorporated by reference to the
information set forth in the sections entitled "Election of Class I Directors"
and "Compliance with Section 16(a) of the Securities Exchange Act" contained
in the Proxy Statement for our 2000 Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission within 120 days of the end
of our fiscal year ended December 31, 1999.

Item 11. Executive Compensation

  The information required by this item is incorporated by reference to the
information set forth in the section entitled "Executive Compensation"
contained in the Proxy Statement for our 2000 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission within 120 days of the
end of our fiscal year ended December 31, 1999.

Item 12. Security Ownership of Certain Beneficial Owners and Management

  The information required by this item is incorporated by reference to the
information set forth in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" contained in the Proxy Statement for our
2000 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission within 120 days of the end of our fiscal year ended
December 31, 1999.

Item 13. Certain Relationships and Related Transactions

  The information required by this item is incorporated by reference to the
information set forth in the section entitled "Certain Transactions" contained
in the Proxy Statement for our 2000 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission within 120 days of the end of our
fiscal year ended December 31, 1999.

                                      34
<PAGE>

                                    PART IV

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

  (a)(1) Financial Statements

  The following financial statements and the Report of Ernst & Young LLP,
Independent Auditors therein are filed as part of this Form 10-K:

<TABLE>
<CAPTION>
                                                                      Page No.
                                                                      --------
<S>                                                                   <C>
Report of Ernst & Young LLP, Independent Auditors....................   F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998.........   F-3
Consolidated Statements of Operations for the years ended December
 31, 1999, 1998 and 1997.............................................   F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
 years ended December 31, 1999, 1998 and 1997........................   F-5
Consolidated Statements of Cash Flows for the years ended December
 31, 1999, 1998 and 1997.............................................   F-6
Notes to Consolidated Financial Statements...........................   F-7
</TABLE>

  (a)(2) Financial Statement Schedule

  The following financial statement schedule for the years ended December 31,
1997, 1998 and 1999 filed as part of this Form 10-K should be read in
conjunction with the consolidated financial statements and related notes
thereto and report of independent auditors filed herewith:

<TABLE>
<CAPTION>
                                                                        Page No.
                                                                        --------
<S>                                                                     <C>
Schedule II Valuation and Qualifying Accounts..........................   S-1
</TABLE>

  Schedules not listed above have been omitted because the information
required to be set forth therein is not required, not applicable or the
information is otherwise included elsewhere in this Form 10-K.

  (a)(3) Exhibits

<TABLE>
<CAPTION>
 Exhibit
 Number
 -------
 <C>     <S>
   3.1   Amended and Restated Certificate of Incorporation of the Registrant
          (incorporated by reference to the Registrant's Registration Statement
          on Form S-1 (File No. 333-76263) as declared effective in the
          Securities and Exchange Commission on June 22, 1999).

   3.3   Bylaws of the Registrant (incorporated by reference to the
          Registrant's Registration Statement on Form S-1 (File No. 333-76263)
          as declared effective in the Securities and Exchange Commission on
          June 22, 1999).

   4.1   Specimen Common Stock Certificate (incorporated by reference to the
          Registrant's Registration Statement on Form S-1 (File No. 333-76263)
          as declared effective in the Securities and Exchange Commission on
          June 22, 1999).

   4.2   Registration Rights Agreement dated as of June 1, 1996, as amended, by
          and among the Registrant and certain holders of the Registrant's
          Common Stock (incorporated by reference to the Registrant's
          Registration Statement on Form S-1 (File No. 333-76263) as declared
          effective in the Securities and Exchange Commission on June 22,
          1999).

   4.3   Amended and Restated Registration Rights Agreement, dated February 10,
          1997, as amended, by and among the Registrant and the purchasers of
          the Registrant's Series A Preferred Stock, Series B Preferred Stock,
          Series C Preferred Stock and Series D Preferred Stock (incorporated
          by reference to the Registrant's Registration Statement on Form S-1
          (File No. 333-76263) as declared effective in the Securities and
          Exchange Commission on June 22, 1999).
</TABLE>

                                      35
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number
 -------
 <C>     <S>
   4.4   Warrant to purchase Common Stock dated August 10, 1998 issued by the
          Registrant to Coast Business Credit (incorporated by reference to the
          Registrant's Registration Statement on Form S-1 (File No. 333-76263)
          as declared effective in the Securities and Exchange Commission on
          June 22, 1999).

   4.5   Share Purchase Agreement between the Registrant, Mobility.Net
          Corporation and Michael Machado dated April 3, 1999 (incorporated by
          reference to the Registrant's Registration Statement on Form S-1
          (File No. 333-76263) as declared effective in the Securities and
          Exchange Commission on June 22, 1999).

   4.6   Agreement and Plan of Reorganization among the Registrant,
          Software.com Acquisition, Inc., Telarc, Inc. and Thomas Gleason dated
          October 20, 1999 (incorporated by reference to the Registrant's
          Current Report on Form 8-K dated November 1, 1999).

   4.7   Agreement and Plan of Merger among the Registrant, Software.com
          Wireless, Inc., and AtMobile.com, Inc. dated March 8, 2000.

  10.1   Form of Indemnification Agreement between the Registrant and each of
          its directors and officers. (incorporated by reference to the
          Registrant's Registration Statement on Form S-1 (File No. 333-76263)
          as declared effective in the Securities and Exchange Commission on
          June 22, 1999).

  10.2*  1995 Stock Plan, as amended and restated (incorporated by reference to
          the Registrant's Registration Statement on Form S-1 (File No. 333-
          76263) as declared effective in the Securities and Exchange
          Commission on June 22, 1999).

  10.3*  1999 Employee Stock Purchase Plan (incorporated by reference to the
          Registrant's Registration Statement on Form S-1 (File No. 333-76263)
          as declared effective in the Securities and Exchange Commission on
          June 22, 1999).

  10.4*  Mobility.Net Corporation 1999 Stock Option Plan, and form of
          agreements thereunder (incorporated by reference to the Registrant's
          Registration Statement on Form S-1 (File No. 333-76263) as declared
          effective in the Securities and Exchange Commission on June 22,
          1999).

  10.5*  Form of Severance Agreement in the Event of a Change of Control
          entered into between the Registrant and certain executive officers
          (incorporated by reference to the Registrant's Registration Statement
          on Form S-1 (File No. 333-76263) as declared effective in the
          Securities and Exchange Commission on June 22, 1999).

  10.6*  Severance Agreement in the Event of a Change of Control, dated
          February 3, 1999 between the Registrant and John S. Ingalls
          (incorporated by reference to the Registrant's Registration Statement
          on Form S-1 (File No. 333-76263) as declared effective in the
          Securities and Exchange Commission on June 22, 1999).

  10.7   Lease Agreement dated February 21, 1996 between the Registrant and 525
          Anacapa LLC (incorporated by reference to the Registrant's
          Registration Statement on Form S-1 (File No. 333-76263) as declared
          effective in the Securities and Exchange Commission on June 22,
          1999).

  10.8   Lease Agreement dated November 22, 1996 between the Registrant and
          Cito Corporation (incorporated by reference to the Registrant's
          Registration Statement on Form S-1 (File No. 333-76263) as declared
          effective in the Securities and Exchange Commission on June 22,
          1999).

  10.9   Lease Agreement dated September 11, 1996 between the Registrant and 91
          Hartwell Avenue Trust (incorporated by reference to the Registrant's
          Registration Statement on Form S-1 (File No. 333-76263) as declared
          effective in the Securities and Exchange Commission on June 22,
          1999).

  10.10  Lease Agreement dated May 24, 1999 between the Registrant and 10
          Maguire Road LLC (incorporated by reference to the Registrant's
          Registration Statement on Form S-1 (File No. 333-76263) as declared
          effective in the Securities and Exchange Commission on June 22,
          1999).
</TABLE>

                                       36
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number
 -------
 <C>     <S>
 10.11*  2000 Nonstatutory Stock Option Plan.

 21.1    List of Subsidiaries.

 23.1    Consent of Ernst & Young LLP, Independent Auditors.

 24.1    Power of Attorney (see page 38).

 27.1    Financial Data Schedule.
</TABLE>
--------
*  Indicates management compensatory plan, contract or arrangement.

  (b) Reports on Form 8-K

  On November 1, 1999, we filed a Current Report on Form 8-K to announce that
we had completed the acquisition of Telarc, Inc. On December 30, 1999, we
filed a Form 8-K/A with the required financial statements for Telarc, Inc.

  (c) Exhibits

  See item 14(a)(3) above.

  (d) Financial Statement Schedules

  See Item 14(a)(2) above.

                                      37
<PAGE>

                                  SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, on
this 27th day of March 2000.

                                          SOFTWARE.COM, INC.

                                                  /s/ John L. MacFarlane
                                          By: _________________________________
                                                     John L. MacFarlane
                                                  Chief Executive Officer

                               POWER OF ATTORNEY

  KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints John L. MacFarlane and John S. Ingalls,
and each of them, his or her true and lawful attorneys-in-fact and agents,
each with full power of substitution and resubstitution, to sign any and all
amendments (including post-effective amendments) to this Report and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact, or
their substitute or substitutes, or any of them, shall do or cause to be done
by virtue hereof.

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
               Signature                          Title                 Date
               ---------                          -----                 ----

 <C>                                    <S>                        <C>
        /s/ John L. MacFarlane          Chief Executive Officer    March 27, 2000
 ______________________________________  and Director (Principal
           John L. MacFarlane            Executive Officer)

         /s/ John S. Ingalls            Senior Vice President,     March 27, 2000
 ______________________________________  Chief Financial Officer
            John S. Ingalls              (Principal Financial
                                         Officer)

           /s/ Mark A. Root             Corporate Controller       March 27, 2000
 ______________________________________  (Principal Accounting
              Mark A. Root               Officer)

           /s/ Neal Douglas             Director                   March 27, 2000
 ______________________________________
              Neal Douglas

         /s/ Judith Hamilton            Director                   March 27, 2000
 ______________________________________
            Judith Hamilton

          /s/ Donald Listwin            Director                   March 27, 2000
 ______________________________________
             Donald Listwin
</TABLE>

                                      38
<PAGE>

<TABLE>
<CAPTION>
               Signature                  Title         Date
               ---------                  -----         ----

 <C>                                    <S>        <C>
           /s/ Frank Perna              Director   March 27, 2000
 ______________________________________
              Frank Perna

         /s/ Bernard Puckett            Director   March 27, 2000
 ______________________________________
            Bernard Puckett

         /s/ Bernhard Woebker           Director   March 27, 2000
 ______________________________________
            Bernhard Woebker
</TABLE>

                                       39
<PAGE>

Index to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                        Page No.
                                                                        --------
<S>                                                                     <C>
Report of Ernst & Young LLP, Independent Auditors......................   F-2
Consolidated Balance Sheets............................................   F-3
Consolidated Statements of Operations..................................   F-4
Consolidated Statements of Shareholders' Equity (Deficit)..............   F-5
Consolidated Statements of Cash Flows..................................   F-6
Notes to Consolidated Financial Statements.............................   F-7
</TABLE>

                                      F-1
<PAGE>

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders of Software.com, Inc.

  We have audited the accompanying consolidated balance sheets of
Software.com, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity (deficit), and
cash flows for each of the three years in the period ended December 31, 1999.
Our audits also included the financial statement schedule listed in the Index
at Item 14a. These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

  In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Software.com,
Inc. at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.

                                          Ernst & Young LLP

Woodland Hills, California
January 24, 2000

                                      F-2
<PAGE>

                               SOFTWARE.COM, INC.

                          CONSOLIDATED BALANCE SHEETS
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              1999      1998
                                                            --------  --------
<S>                                                         <C>       <C>
                          ASSETS
                          ------
Current assets:
  Cash and cash equivalents................................ $ 41,715  $  5,447
  Marketable securities....................................   25,748       496
  Accounts receivable, less allowance of $1,024 and $481
   for December 31, 1999 and 1998..........................   22,268     9,091
  Prepaid expenses and other current assets................    1,923       501
                                                            --------  --------
    Total current assets...................................   91,654    15,535
Property and equipment, net................................    3,936     3,275
Goodwill and intangibles, net..............................    8,048       --
Deposits and other assets..................................      401       249
                                                            --------  --------
                                                            $104,039  $ 19,059
                                                            ========  ========
      LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
      ----------------------------------------------
Current liabilities:
  Accounts payable......................................... $  2,708  $  1,129
  Accrued payroll and related liabilities..................    3,399     1,291
  Other accrued liabilities................................    2,015     1,848
  Deferred revenue.........................................   10,488     3,747
  Note payable to bank.....................................      --      7,395
  Current portion of long-term debt........................      --        240
                                                            --------  --------
    Total current liabilities..............................   18,610    15,650
Long term debt.............................................      --        100
Commitments and contingencies
Redeemable convertible preferred stock--Series A, no par
 value, 0 and 1,587,000 shares authorized, issued and
 outstanding in 1999 and 1998..............................      --      5,972
Redeemable convertible preferred stock--Series B, no par
 value, 0 and 1,789,000 shares authorized, issued and
 outstanding in 1999 and 1998..............................      --      7,398
Shareholder's equity (deficit):
  Convertible preferred stock--Series C, no par value, 0
   and 1,329,000 shares authorized, issued and outstanding
   in 1999 and 1998........................................      --      6,848
  Common stock, no par value, authorized--150,000,000
   shares in 1999 and 50,000,000 in 1998, issued and
   outstanding 42,205,000 and 28,632,000 shares at December
   31, 1999 and 1998, respectively.........................  119,902     6,396
  Deferred compensation....................................   (1,673)   (1,447)
  Accumulated other comprehensive loss.....................       (6)      --
  Accumulated deficit......................................  (32,794)  (21,858)
                                                            --------  --------
    Total shareholders' equity (deficit)...................   85,429   (10,061)
                                                            --------  --------
    Total liabilities and shareholders' equity (deficit)... $104,039  $ 19,059
                                                            ========  ========
</TABLE>

                            See accompanying notes.

                                      F-3
<PAGE>

                               SOFTWARE.COM, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                  ---------------------------
                                                    1999     1998      1997
                                                  --------  -------  --------
<S>                                               <C>       <C>      <C>
Revenues:
  Software licenses.............................. $ 26,847  $17,462  $  7,859
  Services.......................................   17,791    8,157     2,807
                                                  --------  -------  --------
    Total revenues...............................   44,638   25,619    10,666
Cost of revenues:
  Software licenses..............................    2,677    1,568       689
  Services.......................................   11,591    7,451     2,675
                                                  --------  -------  --------
    Total cost of revenues.......................   14,268    9,019     3,364
                                                  --------  -------  --------
Gross profit.....................................   30,370   16,600     7,302
Operating expenses:
  Sales & marketing..............................   18,505   10,769     8,607
  Research & development.........................   14,080    8,716     6,309
  General & administrative.......................    6,101    4,036     3,093
  Amortization of goodwill and purchased
   intangible assets.............................      329      --        --
  Purchased in-process research and development..    3,210      --        --
  Legal matter...................................     (200)    (400)    1,000
                                                  --------  -------  --------
    Total operating expenses.....................   42,025   23,121    19,009
                                                  --------  -------  --------
Loss from operations.............................  (11,655)  (6,521)  (11,707)
Other income (expense):
  Interest income................................    2,060      293       298
  Interest expense...............................     (598)    (645)      (59)
  Other..........................................     (128)     (84)      --
                                                  --------  -------  --------
    Total other income (expense).................    1,334     (436)      239
                                                  --------  -------  --------
  Loss before income taxes.......................  (10,321)  (6,957)  (11,468)
                                                  --------  -------  --------
  Provision for income taxes.....................      212      446         1
                                                  --------  -------  --------
  Net loss.......................................  (10,533)  (7,403)  (11,469)
  Accretion on redeemable convertible preferred
   stock.........................................     (403)    (825)     (730)
                                                  --------  -------  --------
    Net loss applicable to common stockholders... $(10,936) $(8,228) $(12,199)
                                                  ========  =======  ========
    Basic and diluted net loss per share......... $  (0.31) $ (0.29) $  (0.44)
                                                  ========  =======  ========
Weighted average shares of common stock
 outstanding used in computing basic and diluted
 net loss per share..............................   35,341   28,228    27,814
                                                  ========  =======  ========
</TABLE>

                            See accompanying notes.

                                      F-4
<PAGE>

                               SOFTWARE.COM, INC.

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                      Accumulated
                          Preferred Stock    Common Stock                                Other
                          ----------------  --------------- Accumulated   Deferred   Comprehensive
                          Shares   Amount   Shares  Amount    Deficit   Compensation     Loss       Total
                          ------  --------  ------ -------- ----------- ------------ ------------- --------
<S>                       <C>     <C>       <C>    <C>      <C>         <C>          <C>           <C>
Balance at December 31,
 1996...................     --   $    --   26,163 $  3,406  $ (1,431)    $   --         $ --      $  1,975
 Net loss...............     --        --      --       --    (11,469)        --           --       (11,469)
 Issuance of common
  stock.................     --        --    1,579       24       --          --           --            24
 Accretion of mandatory
  redemption value of
  preferred stock.......     --        --      --       --       (730)        --           --          (730)
 Stock option
  exercises.............     --        --      273      288       --          --           --           288
                          ------  --------  ------ --------  --------     -------        ----      --------
Balance at December 31,
 1997...................     --        --   28,015    3,718   (13,630)        --           --        (9,912)
 Net loss...............     --        --      --       --     (7,403)        --           --        (7,403)
 Issuance of preferred
  Series C..............   1,330     6,848     --       --        --          --           --         6,848
 Repricing of warrants..     --        --      --       294       --          --           --           294
 Capital contribution...     --        --      --        36       --          --           --            36
 Accretion of mandatory
  redemption value of
  preferred stock.......     --        --      --       --       (825)        --           --          (825)
 Stock option
  exercises.............     --        --      617      759       --          --           --           759
 Issuance of warrants...     --        --      --        94       --          --           --            94
 Deferred compensation
  related to stock
  options...............     --        --      --     1,495       --       (1,495)         --           --
 Amortization of
  deferred compensation
  in connection with
  stock options.........     --        --      --       --        --           48          --            48
                          ------  --------  ------ --------  --------     -------        ----      --------
Balance at December 31,
 1998...................   1,330     6,848  28,632    6,396   (21,858)     (1,447)         --       (10,061)
 Comprehensive loss:
 Net loss...............     --        --      --       --    (10,533)        --           --       (10,533)
 Other comprehensive
  loss, net of tax:
  Unrealized loss on
   securities...........     --        --      --       --        --          --           (6)           (6)
                          ------  --------  ------ --------  --------     -------        ----      --------
 Comprehensive loss.....     --        --      --       --    (10,533)        --           (6)      (10,539)
 Issuance of preferred
  Series D..............   1,626    10,000     --       --        --          --           --        10,000
 Capital contribution...     --        --      --        12       --          --           --            12
 Accretion of mandatory
  redemption value of
  preferred stock.......     --        --      --       --       (403)        --           --          (403)
 Stock option
  exercises.............     --        --    1,200    3,301       --          --           --         3,301
 Issuance of common
  stock in connection
  with employee stock
  purchase plan.........     --        --       76      968       --          --           --           968
 Deferred compensation
  related to stock
  options...............     --        --      --       770       --         (770)         --           --
 Amortization of
  deferred compensation
  in connection with
  stock options.........     --        --      --       --        --          544          --           544
 Conversion into common
  stock of redeemable
  convertible preferred
  Series A and B........     --        --    3,376   13,840       --          --           --        13,840
 Conversion into common
  stock of convertible
  preferred Series C
  and D.................  (2,956)  (16,848)  2,956   16,848       --          --           --           --
 Issuance of common
  stock in initial
  public offering, net
  of offering costs of
  $1,983................     --        --    5,000   67,767       --          --           --        67,767
 Issuance of common
  stock in connection
  with Telarc, Inc.
  acquisition...........     --        --      212   10,000       --          --           --        10,000
 Exercise of warrants...     --        --      753      --        --          --           --           --
                          ------  --------  ------ --------  --------     -------        ----      --------
Balance at December 31,
 1999...................     --   $    --   42,205 $119,902  $(32,794)    $(1,673)       $ (6)     $ 85,429
                          ======  ========  ====== ========  ========     =======        ====      ========
</TABLE>

                            See accompanying notes.

                                      F-5
<PAGE>

                               SOFTWARE.COM, INC

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                  Year ended December 31,
                                                 ----------------------------
                                                   1999      1998      1997
                                                 --------  --------  --------
<S>                                              <C>       <C>       <C>
Operating activities
Net loss........................................ $(10,533) $ (7,403) $(11,469)
Adjustments to reconcile net loss to net cash
 used in operating activities:
  Depreciation and amortization.................    2,265     1,652     1,204
  Deferred compensation.........................      544        48       --
  Write-off of in-process R&D...................    3,210       --        --
  Provision for doubtful accounts...............      790       554       123
  Changes in operating assets and liabilities:
    Accounts receivable.........................  (13,974)   (7,102)   (1,246)
    Prepaid expenses and other current assets...   (1,415)      128       (17)
    Deferred income taxes.......................      --        --        258
    Accounts payable............................    1,579       519        51
    Accrued payroll and related liabilities.....    2,107       759       291
    Other accrued liabilities...................      175       506     1,249
    Deferred revenue............................    6,740       182     3,452
    Other.......................................      --         23       --
                                                 --------  --------  --------
      Net cash used in operating activities.....   (8,512)  (10,134)   (6,104)
                                                 --------  --------  --------
Investing activities
Acquisition of property and equipment...........   (2,597)   (1,385)   (2,555)
Acquisition of Telarc, Inc......................   (1,601)      --        --
Purchase of marketable securities...............  (30,752)     (504)     (892)
Maturities of marketable securities.............    5,500       900       --
Increase (decrease) in other assets.............     (151)       77      (197)
                                                 --------  --------  --------
      Net cash used in investing activities.....  (29,601)     (912)   (3,644)
                                                 --------  --------  --------
Financing activities
Proceeds from long-term debt....................      --        --        600
Repayments of long-term debt....................     (100)     (240)      (20)
Proceeds (repayments) of note payable to bank,
 net............................................   (7,635)    3,007     4,388
Issuance of convertible preferred stock.........   10,000     6,848     7,398
Issuance of common stock related to ESPP........      968       --        --
Exercise of stock options.......................    3,301       759       288
Issuance of common stock........................   69,762        36        14
Costs related to issuance of common stock.......   (1,914)      --        --
                                                 --------  --------  --------
      Net cash provided by financing
       activities...............................   74,382    10,410    12,668
                                                 --------  --------  --------
Net (decrease) increase in cash and cash
 equivalents....................................   36,269      (636)    2,920
Cash and cash equivalents at beginning of
 period.........................................    5,447     6,083     3,163
                                                 --------  --------  --------
Cash and cash equivalents at end of period...... $ 41,715  $  5,447  $  6,083
                                                 ========  ========  ========
Supplemental cash flow information:
Interest and income taxes paid during the year:
  Income taxes paid............................. $     87  $    383  $      1
                                                 --------  --------  --------
  Interest paid................................. $    504  $    625  $     59
                                                 --------  --------  --------
</TABLE>

                            See accompanying notes.

                                      F-6
<PAGE>

                              SOFTWARE.COM, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

 Organization and Business

  Software.com, Inc. (the Company) develops, markets, sells, and supports a
variety of Internet infrastructure applications to service providers
worldwide, including telecommunications companies, Internet Service Providers,
application service providers, cable-based Internet access providers, wireless
telephony carriers, Internet portals, competitive local exchange carriers, and
Internet service wholesalers. Service providers use these products to provide
advanced messaging offerings, such as Internet mail services, to their
consumer and business customers.

  Principles of Consolidation

  The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated.

 Cash and Cash Equivalents

  The Company considers cash equivalents to be only those investments which
are highly liquid, readily convertible to cash and which mature within three
months from date of purchase. Cash and cash equivalents include commercial
paper, money market accounts and auction rate securities at December 31, 1999
and 1998.

 Marketable Securities

  Marketable securities consist of investments in commercial paper, government
securities, corporate notes and certificates of deposit that have maturities
greater than three months but less than one year from date of purchase.

  The Company considers its investment portfolio available-for-sale as defined
in Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" issued by the Financial
Accounting Standards Board ("FASB"). Accordingly, these investments are
recorded at fair value. Unrealized losses for the year ended December 31, 1999
were $6,000 and have been recorded as comprehensive income (loss). There were
no material unrealized gains or losses nor any material differences between
the estimated fair values and costs of securities at December 31, 1998 and
1997. There were no material realized gains and losses for the years ended
December 31, 1999, 1998 and 1997. The cost of securities sold is based on the
specific identification method. The fair value of available-for-sale
marketable securities by type of security are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                  December 31,
                                                           1999       1998
                                                          ------- ------------
   <S>                                                    <C>     <C>
   Type of security:
   Commercial paper...................................... $15,842     $496
   U.S. Treasury securities and obligations of U.S.
    government agencies..................................   5,927      --
   Corporate notes.......................................   2,979
   Other interest bearing securities.....................   1,000      --
                                                          -------     ----
                                                          $25,748     $496
                                                          =======     ====
</TABLE>

 Concentration of Credit Risk, Other Risks and Significant Customers

  The Company's business is extremely competitive and is characterized by
rapid technology change, new product development and product obsolescence, and
evolving industry standards.

                                      F-7
<PAGE>

                              SOFTWARE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The Company grants credit terms in the normal course of business to its
customers. The Company does not require collateral; however, it does perform
periodic credit evaluations and analysis of the amounts due from its
customers. Credit losses have been within management's expectations and
potential uncollectible accounts have been provided for in the financial
statements.

  There were no customers that accounted for greater than 10% of total
revenues for the year ended December 31, 1999. Revenues from the Company's two
largest customers in each of the years ended December 31, 1998 and 1997,
accounted for 12% and 10% and 17% and 11% of total revenues, respectively. At
December 31, 1999 and 1998, accounts receivable from one and two customers,
respectively, was 18% and 26% of total accounts receivable.

 Property and Equipment

  Property and equipment are stated at cost less accumulated depreciation.
Maintenance and repairs are charged to expense as incurred. Expenditures for
additions and major improvements are capitalized.

  Depreciation and amortization are computed on a straight-line basis over the
following estimated useful lives:

<TABLE>
   <S>                                          <C>
   Computer equipment and software.............   3 to 5 years
   Furniture and fixtures...................... 7 years
   Leasehold improvements...................... Lesser of estimated useful life or life of lease
</TABLE>

 Goodwill and Intangible Assets

  Goodwill recognized in business combinations accounted for as a purchase is
being amortized on a straight-line basis over five years. Goodwill
amortization expense was $100,000 for the year ended December 31, 1999.

  Intangible assets resulting from business combinations consists of
core/alternative use technology, a covenant not to compete and assembled
workforce and are being amortized on a straight-line basis over three to five
years. Intangible asset amortization expense was $229,000 for the year ended
December 31, 1999.

 Long-Lived Assets

  The Company assesses on an ongoing basis the recoverability of long-lived
assets, including goodwill and other intangible assets, based on estimates of
future undiscounted cash flows for the applicable business compared to net
book value. If the future undiscounted cash flows estimate were less than net
book value, net book value would then be reduced to fair value based on an
estimate of discounted cash flows. The Company also evaluates the amortization
periods of all assets to determine whether events or circumstances warrant
revised estimates of useful lives.

 Income Taxes

  Income taxes are accounted for using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," issued by the FASB (see Note 6). Under this method, deferred tax
liabilities and assets are recognized for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of
assets and liabilities.

                                      F-8
<PAGE>

                              SOFTWARE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Accounting for Stock Based Compensation

  Employee stock options are accounted for under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," which requires the
recognition of expense when the option price is less than the fair value of
the stock at the date of grant.

  The Company generally awards options for a fixed number of shares at an
option price equal to the fair value at the date of grant. The Company has
adopted the disclosure-only provisions of FASB's Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123).

 Other Comprehensive Income (Loss)

  In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (FAS 130). Under FAS 130, the
Company is required to report unrealized gains (losses) on its marketable
securities and any other foreign currency translation adjustments within other
comprehensive income (loss). In 1999, other comprehensive loss consists of
unrealized gains (losses) on marketable securities.

 Revenue Recognition

  In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 (SOP 97-2), which was amended by SOP 98-4
and SOP 98-9, "Software Revenue Recognition." These statements provide
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions. This guidance is effective for the Company's
transactions entered into subsequent to January 1, 1998. The application of
certain provisions were deferred until fiscal years beginning on or after
March 15, 1999. Final adoption of these provisions is not expected to have a
material impact on the Company's financial condition or results of operation.

  Revenue from Software Licenses. The Company recognizes revenue from sales of
software upon delivery of a license key to the customer, provided that
persuasive evidence of an arrangement exists, the license fee is fixed and
determinable, and collection of the fee is considered probable. If the license
agreement has a multi-year term, as is typical with an InterMail Mx contract,
or the license fees are calculated based on variable measures, such as the
number of mailboxes in use, the Company recognizes revenue as the customer
activates mailboxes on their system. When the Company enters into a contract
where a customer may activate up to a specified number of mailboxes and
support and maintenance fees are based on that specified number, the Company
recognizes revenue evenly and ratably as payments become due over the term of
the arrangement. When the Company enters into license agreements under which
our revenues are based on a percentage of our customer's revenues, the Company
recognizes revenue as earned and reported by the customer. To date, revenues
and expenses related to these revenue sharing arrangements have not been
significant. Revenues from sales to significant resellers are not recognized
until the end user has been identified and the license key is issued.

  Revenue from Services. Support and maintenance contracts generally call for
the Company to provide technical support and software updates and upgrades to
customers. Support and maintenance revenue is recognized ratably over the
support or maintenance period. Other services revenue, primarily consulting
and training, is recognized under the percentage of completion method and is
billed monthly on a time and materials basis.

  When software and services are billed prior to the time the related revenue
is recognized under the foregoing policy, deferred revenue is recorded. There
were no unbilled accounts receivable at December 31, 1999 and 1998.

                                      F-9
<PAGE>

                              SOFTWARE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Research and Development

  Pursuant to Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,"
development costs related to software products are expensed as incurred until
the "technological feasibility" of the product has been established. Because
of the relatively short time period between "technological feasibility" and
product release, and the insignificant amount of costs incurred during such
period, no software development costs have been capitalized.

 Advertising Costs

  The Company expenses advertising costs as incurred. Advertising expense
totaled $589,000, $296,000 and $528,000 for 1999, 1998 and 1997, respectively.

 Net Loss Per Share

  Basic and diluted net loss per common share are presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS
128), for all periods presented. In accordance with FAS 128, basic and diluted
net loss per share has been computed using the weighted-average number of
shares of common stock outstanding during the period.

  For the year ended December 31, 1999 options to purchase 239,400 shares with
exercise prices greater than the average market prices of common stock were
outstanding. The Company has excluded all stock options from the calculation
of diluted loss per share for the year ended December 31, 1999 because all
such securities are anti-dilutive.

  Similarly the Company excluded all redeemable convertible preferred stock,
convertible preferred stock, warrants and outstanding stock options from the
calculation of diluted loss per share for the year ended December 31, 1998 and
1997 because all such securities are also anti-dilutive.

 Segment Information

  In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(FAS 131). This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers, presented in Notes 1 and 9. Based on the
provisions of FAS 131 and the manner in which management analyzes its
business, the Company has determined that it does not have separately
reportable operating segments.

 Fair Value of Financial Instruments

  The carrying amounts reported in the balance sheets for cash and cash
equivalents, marketable securities, accounts receivable and accounts payable
approximate their fair values due to the short term nature of these financial
instruments. The carrying values of the note payable to bank and the long term
debt outstanding as of December 31, 1998 approximate their fair values. The
fair values of these instruments were estimated based on current interest
rates available to the Company for debt instruments with similar terms,
degrees of risk and remaining maturities.

                                     F-10
<PAGE>

                              SOFTWARE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Use of Estimates

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

2. Acquisitions

  In April, 1999, the Company completed its acquisition of Mobility.Net, Inc.
which offers products for Web messaging using a Java-based technology platform
that complement the Company's product offerings. The Company issued 1,579,000
shares of its common stock in exchange for all of the outstanding shares of
Mobility.Net. The acquisition was accounted for as a pooling-of-interests.
Accordingly, the financial information presented reflects the combined
financial position and operations of the Company and Mobility.Net for all
dates and periods presented.

  In October, 1999, the Company completed its acquisition of Telarc, Inc.
(Telarc), which currently provides carrier-scale Short Messaging Service (SMS)
technologies that complement the Company's product offerings. In exchange for
all of the issued and outstanding stock of Telarc, the Company issued 212,000
shares of the Company's common stock with a value of $10.0 million and $1.5
million in cash. The acquisition of Telarc was accounted for as a purchase
and, accordingly, the acquired assets and liabilities were recorded at their
estimated fair values at the date of acquisition. Telarc's operating results
have been included in the Company's consolidated financial statements results
from the acquisition date of October 20, 1999. The purchase price plus costs
directly attributable to the completion of the acquisition of approximately
$101,000 have been allocated to the assets and liabilities acquired based on
their approximate fair value as determined through an independent appraisal
using proven valuation procedures and techniques. The purchase price of $11.6
million was allocated as follows (in thousands):

<TABLE>
     <S>                                                                <C>
     Tangible assets................................................... $   263
     Developed technology..............................................   5,700
     Assembled workforce and other intangibles.........................     125
     In-process research and development...............................   3,210
     Goodwill..........................................................   2,303
                                                                        -------
     Total purchase price.............................................. $11,601
                                                                        =======
</TABLE>

  The appraisal of the acquired business included $3.2 million of in-process
research and development, which was primarily related to three products under
development. The valuation represents the five-year after tax cash flow of the
in-process technology using a discount rate of 40%. This acquired technology
had not yet reached technological feasibility and had no future alternative
uses. Accordingly, it was written off at the time of the acquisition. Goodwill
and identified intangibles are being amortized on a straight-line basis over
their estimated economic useful lives of three to five years. The pro-forma
effect of the Telarc acquisition as if it has occurred on January 1, 1999 and
1998, is not significant to the financial statements presented herein.

  In addition, in conjunction with the Company's acquisition of Telarc, the
Company entered into an employment agreement with an executive of Telarc which
the Company will pay a total of $3.5 million in cash to be paid out and
expensed in equal quarterly installments over ten quarters beginning March
2000.

                                     F-11
<PAGE>

                              SOFTWARE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


3. Property and Equipment

  The major components of property and equipment are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                    December 31,
                                                              1999      1998
                                                             ------ ------------
     <S>                                                     <C>    <C>
     Computer equipment and software........................ $6,389    $4,615
     Furniture and fixtures.................................  1,593       987
     Leasehold improvements.................................  1,260     1,043
                                                             ------    ------
                                                              9,242     6,645
     Less accumulated depreciation..........................  5,306     3,370
                                                             ------    ------
                                                             $3,936    $3,275
                                                             ======    ======
</TABLE>

4. Note Payable to Bank, Long-Term Debt and Credit Facilities

  The Company had an arrangement with a financial institution which provided
for a total line of credit not to exceed the lesser of $15.0 million (of which
the Company could draw down up to $2.5 million as an equipment acquisition
loan), or an amount based on certain receivables collection criteria. As of
December 31, 1999, the Company had repaid all borrowings using proceeds of the
initial public offering of its common stock in June 1999, and has terminated
this arrangement. At December 31, 1998, borrowings under the line of credit
and the equipment acquisition loan totaled $7,395,000 and $340,000,
respectively. The interest rates for borrowing under the line of credit and
the equipment acquisition loan were prime rate plus 1.5% (9.25% at December
31, 1998) and prime rate plus 1.75% (9.5% at December 31, 1998), respectively.

  In connection with a renegotiation of the credit facility in 1998, the
Company issued a warrant to the financial institution to purchase 68,000
shares of common stock of the Company at an exercise price of $5.15 per share.
The fair value of the warrants was determined to be approximately $94,000,
using the Black-Scholes option pricing model with an expected volatility
factor of 35%, risk-free interest rate of 6%, no dividend yield, and a 5 year
life, and was amortized as interest expense over the term of the credit
facility agreement.

  In August, 1999, the Company obtained an $800,000 letter of credit with a
bank to secure a long-term facilities operating lease.

5. Stockholders Equity

 Preferred Stock

  The following table summarizes the Company's convertible preferred stock
issuances:

<TABLE>
<CAPTION>
                                                                         Net
     Date Issued                                    Series  Shares    Proceeds
     -----------                                    ------ --------- -----------
     <S>                                            <C>    <C>       <C>
     October 1996..................................   A    1,587,302 $ 4,960,000
     February 1997.................................   B    1,789,279   7,398,000
     August 1998...................................   C    1,329,781   6,848,000
     April 1999....................................   D    1,626,016  10,000,000
                                                           --------- -----------
                                                           6,332,378 $29,206,000
                                                           ========= ===========
</TABLE>

  Upon completion of the Company's initial public offering on June 29, 1999,
all series of preferred stock automatically converted into common stock at a
1:1 ratio.

                                     F-12
<PAGE>

                              SOFTWARE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  In connection with the issuance of the Series A Preferred stock, the Company
also issued a warrant to purchase 529,101 shares of common stock of the
Company at an exercise price of $5.00 per share and a warrant to purchase
279,841 shares of common stock at an exercise price of $7.00 per share (the
Common Stock Purchase Warrants). The warrants were exercisable for a period of
five years from the date of issuance. At issuance, the fair value of the
warrants, approximately $430,000, was recorded as common stock on the
Company's balance sheet. The fair value of the warrants was determined using
the Black-Scholes option pricing model using an expected volatility factor of
30%, risk free interest rate of 6%, no dividend yield, and a 5-year life. In
November, 1999, the warrant holders exercised the warrants which resulted in
the issuance of 753,379 shares of common stock.

  In July 1998, the Company executed an agreement with the holders of the
Preferred Stock A (the Waiver of Redemption Rights Agreement) whereby the
holders of such shares agreed to extend the redemption date of the Series A
Preferred Stock for a period of 15 months to January 3, 2000. In consideration
of the Waiver of Redemption Rights Agreement, the Company executed an
amendment to the Common Stock Purchase Warrants which reduced the exercise
price of such warrants to $4.15 per share. The exercise period of the warrants
remained unchanged. As a result of the change in the exercise price, the fair
value of the warrants increased by approximately $294,000, which was
reclassified from redeemable convertible preferred stock into common stock.

  Prior to the conversion of all outstanding preferred stock into common stock
upon completion of the Company's initial public offering, the Series A
Preferred Stock redemption price included a redemption premium of 10% per year
compounded annually. Accordingly, the initial fair value of the Preferred
Stock A was increased by periodic accretions, using the interest method, so
that the carrying amount would equal the mandatory redemption amount at the
redemption date. For the years ended December 31, 1999, 1998 and 1997, such
periodic accretions totaled $403,000, $825,000 and $730,000 respectively, and
are reflected as charges against the Company's accumulated deficit for each
year.

 Authorization To Issue Common Stock

  In June 1999, the Company's Board of Directors increased the number of
authorized common shares from 50,000,000 to 150,000,000.

6. Income Taxes

  The provision for income taxes consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                    Year Ended
                                                                   December 31,
                                                                  --------------
                                                                  1999 1998 1997
                                                                  ---- ---- ----
   <S>                                                            <C>  <C>  <C>
   Current:
     Federal..................................................... $--  $--  $--
     State.......................................................    1    1   1
     Foreign.....................................................  211  445  --
                                                                  ---- ---- ---
                                                                   212  446   1
   Deferred......................................................   --   --  --
                                                                  ---- ---- ---
     Total....................................................... $212 $446 $ 1
                                                                  ==== ==== ===
</TABLE>

  The provision for foreign income taxes in 1999 and 1998 relates primarily to
foreign withholding and foreign income taxes.

                                     F-13
<PAGE>

                              SOFTWARE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  A reconciliation of the statutory federal income tax rate to the effective
tax rate, as a percentage of loss before income tax is as follows:

<TABLE>
<CAPTION>
                                                              Year Ended
                                                             December 31,
                                                            ------------------
                                                            1999   1998   1997
                                                            ----   ----   ----
   <S>                                                      <C>    <C>    <C>
   Statutory federal income tax (benefit) rate............. (34)%  (34)%  (34)%
   State income tax benefits...............................  --     (2)    (4)
   Research and development credits........................  --     (6)    (2)
   Non qualified stock options.............................  --     (7)    --
   Deferred compensation...................................   2     --     --
   Foreign taxes...........................................   2      7     --
   In process research and development.....................  10     --     --
   Changes in valuation allowance..........................  20     47     41
   Non deductible expenses.................................   2     --     --
   Other...................................................  --      2     (1)
                                                            ---    ---    ---
                                                              2 %    7 %   -- %
                                                            ===    ===    ===
</TABLE>

  The components of the Company's deferred tax assets and liabilities as of
December 31, 1999 and 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                1999     1998
                                                              --------  -------
   <S>                                                        <C>       <C>
   Deferred tax assets
   Net operating loss carryforwards.......................... $ 10,460  $ 5,923
   Tax credit carryforwards..................................    1,339      996
   Deferred revenue..........................................    3,947    1,232
   Accruals and reserves.....................................      973      317
                                                              --------  -------
     Total deferred tax assets...............................   16,719    8,468
   Less valuation allowance..................................  (14,306)  (8,468)
                                                              --------  -------
   Net deferred tax assets................................... $  2,413  $   --

   Deferred tax liabilities
   Basis difference in assets................................   (2,413)     --
                                                              --------  -------
     Net deferred taxes...................................... $    --   $   --
                                                              ========  =======
</TABLE>

  Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its otherwise recognizable deferred tax assets.

  At December 31, 1999, the Company had net operating loss carryforwards
available to reduce future federal and state income of $27.9 million and $11.1
million respectively, which expire from 2011 to 2019 for federal and 2002 to
2004 for state.

  The Company has federal and state research and development credits of
approximately $613,000 and $188,000, respectively, expiring in 2011 to 2014,
which may be used to offset future tax liabilities. The Company also has
foreign tax credits of approximately $484,000, which will expire in the years
2003 to 2004.

  Under Section 382 of the Internal Revenue Code, the utilization of the net
operating loss and tax credit carryforwards may be limited based on changes in
the percentage of ownership of the Company.

                                     F-14
<PAGE>

                              SOFTWARE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Included in the valuation allowance balance is $5.8 million related to the
exercise of stock options which is not reflected as an expense for financial
reporting purposes. Accordingly, any future reduction in the valuation
allowance relating to this amount will be recorded in equity and not reflected
as an income tax benefit in the statement of operations.

  No provision has been made for federal, state, or additional foreign income
taxes related to approximately $506,000 of undistributed earnings of foreign
subsidiaries which have been or are intended to be permanently reinvested.

7. Commitments and Contingencies

  The Company leases its facilities and other equipment under non-cancelable
operating leases which expire at various dates through 2001. Approximate
minimum annual lease commitments under operating leases are as follows (in
thousands):

<TABLE>
<CAPTION>
       Year                                                               Amount
       ----                                                               ------
       <S>                                                                <C>
       2000.............................................................. $1,226
       2001..............................................................  1,043
       2002..............................................................    108
       2003..............................................................     73
       2004..............................................................     43
                                                                          ------
                                                                          $2,493
                                                                          ======
</TABLE>

  Rent expense totaled $2,157,000, $1,378,000 and $955,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.

  The Company leases one of its facilities from a related party (see Note 10).
The lease expires in February 2002.

  The Company was involved in a contract dispute with a third party technology
partner under a 1996 licensing agreement. The dispute related to a minimum
royalty obligation of $1,000,000 purportedly owed by the Company to the third
party. In 1997, the Company accrued $1,000,000 for its potential exposure
under the claim. In February 1999, the parties entered into an agreement to
settle all outstanding claims. The Company paid the third party $400,000, and
as a result the related accrual was reduced to $600,000 at December 31, 1998
to reflect the complete resolution of this matter.

8. Employee Stock Option, Stock Purchase and Defined Contribution Plans

 Employee Stock Option Plans

  In October 1995, the Company adopted a stock option plan (the "1995 Plan")
which provides for the issuance of incentive and nonqualified stock options.
Options under the 1995 Plan are granted for a term of five and ten years at an
exercise price equal to the fair market value of the shares at the date of
grant, as determined by the board of directors. The options generally vest
over a period of four years at 25% per year. The 1995 Plan authorizes a total
of up to 10,500,000 shares of Common Stock for issuances as either incentive
stock or nonqualified options. At December 31, 1999, 362,000 shares remain
available for grant under this plan and 8,011,000 shares are reserved for
issuance upon the exercise of outstanding options.

  In addition to the options granted under the 1995 Plan, the Company has
granted options outside of the 1995 Plan to purchase an aggregate of 1,074,000
shares of common stock. These options contain the same

                                     F-15
<PAGE>

                              SOFTWARE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

vesting provisions as those granted under the 1995 Plan except that an option
to purchase 250,000 shares is subject to accelerated vesting in certain
circumstances. At December 31, 1999, 38,000 shares remained authorized and
available for grant and 1,020,000 shares were reserved for issuance upon the
exercise of outstanding options.

  Subsequent to year end, in January 2000, the Company adopted a stock option
plan (the "2000 Plan") which provides for the issuance of nonqualified stock
options. Options under the 2000 Plan are granted for a term of ten years at an
exercise price equal to the fair market value of the shares at the date of
grant, as determined by the board of directors. The options generally vest
over a period of four years at 25% per year. The 2000 Plan authorizes a total
of up to 750,000 shares of common stock for issuances as nonqualified options.

  A summary of the stock option activity is as follows (in thousands, except
per share amounts):

<TABLE>
<CAPTION>
                                                              Exercise Price
                                                           ---------------------
                                                                        Weighted
                                                   Shares   Low   High  Average
                                                   ------  ----- ------ --------
   <S>                                             <C>     <C>   <C>    <C>
   Outstanding at December 31, 1996...............  5,016  $1.00 $ 3.35  $1.56
     Granted......................................  2,333   3.50   3.65   3.63
     Exercised....................................   (273)  1.00   3.35   1.06
     Canceled..................................... (1,567)  1.00   3.65   1.43
                                                   ------  ----- ------  -----
   Outstanding at December 31, 1997...............  5,509   1.00   3.65   2.50
     Granted......................................  3,754   3.65   3.65   3.65
     Exercised....................................   (617)  1.00   3.65   1.23
     Canceled..................................... (1,135)  1.00   3.65   3.06
                                                   ------  ----- ------  -----
   Outstanding at December 31, 1998...............  7,511   1.00   3.65   3.10
     Granted......................................  3,177   0.63  96.50  16.59
     Exercised.................................... (1,200)  0.63  11.00   2.75
     Canceled.....................................   (457)  0.63  11.00   4.13
                                                   ------  ----- ------  -----
   Outstanding at December 31, 1999...............  9,031  $0.63 $96.50  $7.84
                                                   ======  ===== ======  =====
</TABLE>

<TABLE>
<CAPTION>
                            Options Outstanding at         Options Exercisable
                               December 31, 1999           at December 31, 1999
                     ------------------------------------- --------------------
                                                  Weighted             Weighted
                      Number of  Weighted Average Average   Number of  Average
       Exercise        Shares       Remaining     Exercise   Shares    Exercise
      Price Range    Outstanding Contractual Life  Price   Exercisable  Price
      -----------    ----------- ---------------- -------- ----------- --------
   <S>               <C>         <C>              <C>      <C>         <C>
   $0.63-$1.50......    1,049          1.52        $ 1.19       901     $ 1.19
   $3.00-$3.65......    5,001          4.15          3.62     2,273       3.59
   $5.50-$6.15......    1,377          5.93          5.71        65       5.50
   $9.00-$32.13.....    1,163          9.40         12.58       112      10.88
   $41.00-$96.50....      441          9.83         65.66         1      43.62
                        -----          ----        ------     -----     ------
                        9,031          5.07        $ 7.84     3,352     $ 3.24
                        =====          ====        ======     =====     ======
</TABLE>

  Prior to the Company's initial public offering in June 1999, the fair value
of each option grant was determined on the date of the grant using the minimum
value method. Subsequent to the offering, the fair value was of each option
grant was determined using the Black-Scholes method. The weighted average fair
value of an option granted during 1999, 1998 and 1997 was $8.65, $0.65 and
$0.65, respectively. Except for the volatility assumption, which was only used
under the Black-Scholes method, the following assumptions were used for 1999,
1998 and 1997, respectively, to perform the calculations: risk-free interest
rate of 5.8%, 6% and 6%, a

                                     F-16
<PAGE>

                              SOFTWARE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

weighted-average expected life of the options of 4.3, 3.3 and 3.4 years, 90%
volatility in 1999 only and no assumed dividend yield for all years.

  If the Company recognized employee stock option-related compensation expense
in accordance with FAS 123 and used the combined Black-Scholes and minimum
value methods for 1999 and the minimum value method for 1998 and 1997 for
determining the weighted average fair value of options granted, the Company's
pro forma net loss applicable to common shareholders would have been
$14,866,000, $8,999,000 and $12,749,000, respectively. The 1999, 1998 and 1997
pro forma basic and diluted loss per share would have been $0.42, $0.32 and
$0.46.

  For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The pro forma effect
on net loss for 1999, 1998 and 1997 is not representative of the pro forma
effect on net income or loss in future years because compensation expense in
future years will reflect the amortization of a larger number of stock options
granted in several succeeding years.

  As of December 31, 1999, the Company's stock options had a weighted-average
remaining contractual life of 5.1 years.

  In connection with the grant of certain share options to employees during
1999 and 1998, the Company recorded deferred compensation of approximately
$770,000 and $1,495,000, respectively for the aggregate differences between
the exercise prices of options at their dates of grant and the deemed fair
value for accounting purposes of the common shares subject to such options.
Such amounts are being amortized over the vesting period of the related
options. Amortization expense recognized for the years ended December 31, 1999
and 1998 totaled $545,000 and $48,000, respectively.

 Employee Stock Purchase Plan

  In May 1999, the Company adopted an employee stock purchase plan (the
"ESPP"). A total of 1,000,000 shares of common stock have been reserved for
issuance under the ESPP. The number of common shares reserved under the ESPP
may be increased annually on July 1 of each year beginning in 2000. Such
increases are limited to the lesser of 500,000 shares or 2% of the shares
outstanding on that date or can be further limited by the Board of Directors.

  The ESPP, which is intended to qualify under Section 423 of the Internal
Revenue Code, contains four six month purchase periods within twenty-four
month offering periods. The offering periods generally start on the first
trading day on or after May 1 and November 1 of each year. Eligible
participants may purchase common stock through payroll deductions of up to 15%
of each participants compensation. The maximum number of shares a participant
may purchase is 10,000 shares. Amounts deducted and accumulated by the
participant are used to purchase common shares at the end of each purchase
period. The price of stock purchased under the ESPP is 85% of the lower of the
fair market value of the common stock at the beginning of the offering period
and the end of each purchase period. The ESPP will terminate in 2009.

  For the year ended December 31, 1999, employees purchased 75,948 shares at
$12.75. At December 31, 1999, 924,000 shares remained available for future
issuance under the ESPP.

 Defined Contribution Plan

  The Company maintains a defined contribution 401(k) plan under which its
employees are eligible to participate. Participants may make, within certain
limitations, voluntary contributions based upon a percentage of their
compensation. The Company may make voluntary contributions to the Plan.
Participants are fully vested

                                     F-17
<PAGE>

                              SOFTWARE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

in the Company's contributions after a specified number of years of service,
as defined under the plan. No Company contributions have been made to date
under the plan.

9. Geographic Information

  Information regarding revenues and long-lived assets attributable to the
Company's primary geographic operating regions is as follows (in thousands):

<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                                         -----------------------
                                                          1999    1998    1997
                                                         ------- ------- -------
     <S>                                                 <C>     <C>     <C>
     Revenues:
       United States.................................... $17,781 $13,378 $ 7,403
       Europe...........................................  14,171   5,130   1,034
       Asia.............................................   9,964   3,884   1,232
       Canada...........................................   2,347   2,754     701
       Other............................................     375     473     296
                                                         ------- ------- -------
         Total Revenues................................. $44,638 $25,619 $10,666
                                                         ======= ======= =======
</TABLE>

  The geographic classification of revenues is based upon the location of the
customer.

<TABLE>
<CAPTION>
                                                               December 31,
                                                           --------------------
                                                            1999   1998   1997
                                                           ------ ------ ------
     <S>                                                   <C>    <C>    <C>
     Long-lived Assets:
       United States...................................... $3,723 $3,188 $3,543
       Europe.............................................    160     53    --
       Asia...............................................     53     34    --
                                                           ------ ------ ------
         Total long-lived assets.......................... $3,936 $3,275 $3,543
                                                           ====== ====== ======
</TABLE>

10. Related Party Transactions

  The Company leases one of its facilities from a limited liability company,
which includes two members of the board of directors. The aggregate lease
commitments related to this lease totaled $418,000 at December 31, 1999. Rent
expense under this lease for the years ended December 31, 1999, 1998, and 1997
totaled $193,000, $171,000, and $165,000, respectively.

  For the years ended December 31, 1999, 1998, and 1997, revenues from
companies affiliated with AT&T Corporation, which is considered a related
party due to its involvement with AT&T Ventures, a preferred/common
shareholder, totaled approximately $1,962,000, $3,599,000 and $2,687,000,
respectively. At December 31, 1999 and 1998, accounts receivable from such
companies totaled approximately $532,000 and $948,000, respectively.

11. Initial Public Offering Registration

  In June 1999, the Company completed an initial public offering in which it
sold 5,000,000 shares of common stock at $15.00 per share, resulting in
proceeds to the Company of approximately $68.0 million, net of issuance costs
of approximately $1.9 million.

                                     F-18
<PAGE>

                              SOFTWARE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


12. Subsequent Event (unaudited)

  In March 2000, the Company announced that it had signed a definitive
agreement to acquire AtMobile.com, Inc. a leading wireless Internet
application service provider with wireless Instant Messaging technology and
Wireless Intelligent Network integration expertise. The acquisition is
expected to be accounted for as a pooling of interests.

13. Quarterly Results of Operations (unaudited)

<TABLE>
<CAPTION>
                                                     1999 Quarters Ended
                                               -------------------------------
                                                         June   Sept.
                                               March 31   30     30    Dec. 31
                                               -------- ------ ------- -------
                                               (in thousands, except per share
                                                            data)
   <S>                                         <C>      <C>    <C>     <C>
   Total revenues.............................  $8,071  $9,048 $12,006 $15,513
   Gross profit...............................   5,651   5,594   7,740  11,385
   Net loss applicable to common
    shareholders..............................   2,263   3,066   1,704   3,903
   Basic and diluted loss per share...........    0.08    0.10    0.04    0.09
<CAPTION>
                                                     1998 Quarters Ended
                                               -------------------------------
                                                         June   Sept.
                                               March 31   30     30    Dec. 31
                                               -------- ------ ------- -------
                                               (in thousands, except per share
                                                            data)
   <S>                                         <C>      <C>    <C>     <C>
   Total revenues.............................  $4,898  $6,140 $ 6,877 $ 7,704
   Gross profit...............................   2,766   4,281   4,579   4,974
   Net loss applicable to common
    shareholders..............................   2,914   1,378   1,683   2,253
   Basic and diluted loss per share...........    0.10    0.05    0.06    0.08
</TABLE>

                                     F-19
<PAGE>

                       VALUATION AND QUALIFYING ACCOUNTS

              For the years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                               Additions  Deductions
                                               ---------- ----------
                                      Balance
                                        at     Charged to   Amount   Balance at
                                     Beginning Costs and  Charged to   End of
                                     of Period  Expenses   Reserve     Period
                                     --------- ---------- ---------- ----------
<S>                                  <C>       <C>        <C>        <C>
Allowance for Doubtful Accounts
December 31, 1999................... $481,000   $794,000   $251,000  $1,024,000
December 31, 1998...................  114,000    554,000    187,000     481,000
December 31, 1997...................   21,000    123,000     30,000     114,000
</TABLE>

                                      S-1
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
   3.1   Amended and Restated Certificate of Incorporation of the Registrant
          (incorporated by reference to the Registrant's Registration Statement
          on Form S-1 (File No. 333-76263) as declared effective in the
          Securities and Exchange Commission on June 22, 1999).

   3.3   Bylaws of the Registrant (incorporated by reference to the
          Registrant's Registration Statement on Form S-1 (File No. 333-76263)
          as declared effective in the Securities and Exchange Commission on
          June 22, 1999).

   4.1   Specimen Common Stock Certificate (incorporated by reference to the
          Registrant's Registration Statement on Form S-1 (File No. 333-76263)
          as declared effective in the Securities and Exchange Commission on
          June 22, 1999).

   4.2   Registration Rights Agreement dated as of June 1, 1996, as amended, by
          and among the Registrant and certain holders of the Registrant's
          Common Stock (incorporated by reference to the Registrant's
          Registration Statement on Form S-1 (File No. 333-76263) as declared
          effective in the Securities and Exchange Commission on June 22,
          1999).

   4.3   Amended and Restated Registration Rights Agreement, dated February 10,
          1997, as amended, by and among the Registrant and the purchasers of
          the Registrant's Series A Preferred Stock, Series B Preferred Stock,
          Series C Preferred Stock and Series D Preferred Stock (incorporated
          by reference to the Registrant's Registration Statement on Form S-1
          (File No. 333-76263) as declared effective in the Securities and
          Exchange Commission on June 22, 1999).

   4.4   Warrant to purchase Common Stock dated August 10, 1998 issued by the
          Registrant to Coast Business Credit (incorporated by reference to the
          Registrant's Registration Statement on Form S-1 (File No. 333-76263)
          as declared effective in the Securities and Exchange Commission on
          June 22, 1999).

   4.5   Share Purchase Agreement between the Registrant, Mobility.Net
          Corporation and Michael Machado dated April 3, 1999 (incorporated by
          reference to the Registrant's Registration Statement on Form S-1
          (File No. 333-76263) as declared effective in the Securities and
          Exchange Commission on June 22, 1999).

   4.6   Agreement and Plan of Reorganization among the Registrant,
          Software.com Acquisition, Inc., Telarc, Inc. and Thomas Gleason dated
          October 20, 1999 (incorporated by reference to the Registrant's
          Current Report on Form 8-K dated November 1, 1999).

   4.7   Agreement and Plan of Merger among the Registrant, Software.com
          Wireless, Inc., and AtMobile.com, Inc. dated March 8, 2000.

  10.1   Form of Indemnification Agreement between the Registrant and each of
          its directors and officers. (incorporated by reference to the
          Registrant's Registration Statement on Form S-1 (File No. 333-76263)
          as declared effective in the Securities and Exchange Commission on
          June 22, 1999).

  10.2*  1995 Stock Plan, as amended and restated (incorporated by reference to
          the Registrant's Registration Statement on Form S-1 (File No. 333-
          76263) as declared effective in the Securities and Exchange
          Commission on June 22, 1999).

  10.3*  1999 Employee Stock Purchase Plan (incorporated by reference to the
          Registrant's Registration Statement on Form S-1 (File No. 333-76263)
          as declared effective in the Securities and Exchange Commission on
          June 22, 1999).

  10.4*  Mobility.Net Corporation 1999 Stock Option Plan, and form of
          agreements thereunder (incorporated by reference to the Registrant's
          Registration Statement on Form S-1 (File No. 333-76263) as declared
          effective in the Securities and Exchange Commission on June 22,
          1999).
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
 10.5*   Form of Severance Agreement in the Event of a Change of Control
          entered into between the Registrant and certain executive officers
          (incorporated by reference to the Registrant's Registration Statement
          on Form S-1 (File No. 333-76263) as declared effective in the
          Securities and Exchange Commission on June 22, 1999).

 10.6*   Severance Agreement in the Event of a Change of Control, dated
          February 3, 1999 between the Registrant and John S. Ingalls
          (incorporated by reference to the Registrant's Registration Statement
          on Form S-1 (File No. 333-76263) as declared effective in the
          Securities and Exchange Commission on June 22, 1999).

 10.7    Lease Agreement dated February 21, 1996 between the Registrant and 525
          Anacapa LLC (incorporated by reference to the Registrant's
          Registration Statement on Form S-1 (File No. 333-76263) as declared
          effective in the Securities and Exchange Commission on June 22,
          1999).

 10.8    Lease Agreement dated November 22, 1996 between the Registrant and
          Cito Corporation (incorporated by reference to the Registrant's
          Registration Statement on Form S-1 (File No. 333-76263) as declared
          effective in the Securities and Exchange Commission on June 22,
          1999).

 10.9    Lease Agreement dated September 11, 1996 between the Registrant and 91
          Hartwell Avenue Trust (incorporated by reference to the Registrant's
          Registration Statement on Form S-1 (File No. 333-76263) as declared
          effective in the Securities and Exchange Commission on June 22,
          1999).

 10.10   Lease Agreement dated May 24, 1999 between the Registrant and 10
          Maguire Road LLC (incorporated by reference to the Registrant's
          Registration Statement on Form S-1 (File No. 333-76263) as declared
          effective in the Securities and Exchange Commission on June 22,
          1999).

 10.11*  2000 Nonstatutory Stock Option Plan.

 21.1    List of Subsidiaries.

 23.1    Consent of Ernst & Young LLP, Independent Auditors.

 24.1    Power of Attorney (see page 38).

 27.1    Financial Data Schedule.
</TABLE>
--------
*  Indicates management compensatory plan, contract or arrangement.