<PAGE>   1



                    FORM 10-Q FOR PERIOD ENDED JUNE 30, 1998
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549


                                    FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    AND EXCHANGE ACT OF 1934
    FOR THE QUARTERLY PERIOD ENDING JUNE 30, 1998
         
                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    AND EXCHANGE ACT OF 1934
    FOR THE TRANSITION PERIOD FROM _____ TO _____

                         Commission File Number 0-24457



                            SOFTWARE.NET CORPORATION
             (Exact name of Registrant as specified in its charter)


<TABLE>
<C>                                     <C>
                Delaware                               94-3212136
        (State of Incorporation)         (I.R.S. Employer Identification Number)

 1195 West Fremont Avenue, Sunnyvale, California                94087 
        (Address of principal executive offices)              (Zip Code)
</TABLE>

       Registrant's Telephone Number, including Area Code: (408) 616-4200



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      No  X
                                    ----    ----

The number of shares outstanding of each of the issuer's classes of common
stock as of June 30, 1998:

<TABLE>
<C>                                     <C>
                 Class                              Number of Shares
     Common Stock, par value $0.001                    27,296,452
</TABLE>









<PAGE>   2



PART I.  Financial Information

Item 1.   Financial Statements

                            software.net CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In Thousands, except per share data)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                  Three Months Ended             Six Months Ended
                                                -----------------------      -----------------------
                                                June 30,       June 30,      June 30,       June 30,
                                                  1998           1997          1998          1997
                                                --------       --------      --------       --------
<S>                                             <C>            <C>            <C>           <C>    
Net revenues                                    $  7,577       $  3,434       $13,769       $ 6,592
Cost of revenues                                   6,408          2,892        11,662         5,675
                                                --------       --------       -------       -------
GROSS PROFIT                                       1,169            542         2,107           917

Operating expenses:
   Research and development                        1,120            184         1,723           339
   Sales and marketing                             4,268            332         6,220           597
   General and administrative                      1,178            247         1,813           410
                                                --------       --------       -------       -------
                                                   6,566            763         9,756         1,346
                                                --------       --------       -------       -------

OPERATING LOSS                                    (5,397)          (221)       (7,649)         (429)

Other income (expense):
   Interest income                                    87             32           114            72
   Interest expense                                 (254)            --          (256)           --
                                                --------       --------       -------       -------
                                                    (167)            32          (142)           72
                                                --------       --------       -------       -------
Loss from continuing operations                   (5,564)          (189)       (7,791)         (357)
Loss from discontinued operations                     --           (455)           --        (1,038)
                                                --------       --------       -------       -------
NET LOSS                                        $( 5,564)      $(   644)      $(7,791)      $(1,395)
                                                ========       ========       =======       =======
Accretion of Premium on Preferred Stock              (25)           (25)          (51)          (51)
NET LOSS APPLICABLE TO COMMON                         --             --
SHAREHOLDERS                                    $( 5,589)      $(   669)      $(7,842)      $(1,446)
                                                ========       ========       =======       =======
Basic and Diluted Net Loss Per Share
from Continuing Operations                      $(  0.47)      $(  0.02)      $( 0.75)     $( 0.04)

Basic and Diluted Net Loss Per Share
from Discontinued Operations                     $      -       $  (0.05)            -      $( 0.12)
                                                --------       --------       -------      --------
Basic and diluted loss per share                $(  0.47)      $(  0.07)      $( 0.75)      $( 0.16)
                                                ========       ========       =======       =======
Number of shares used in computing basic
and diluted net loss per share                    11,863          9,000        10,471         9,000
                                                ========       ========       =======       =======
Pro forma basic and diluted net loss
per share from continuing operations            $(  0.25)        $(0.01)    $(    0.37)      $(0.02)

Pro forma basic and diluted net loss              
per share from discontinued operations                --         $(0.03)           --        $(0.06)
                                                --------       --------       -------       -------

Pro forma basic and diluted net loss
per share                                       $(  0.25)      $(  0.04)      $( 0.37)      $( 0.08)
                                                ========       ========       =======       =======
Number of shares used in computing pro forma
basic and diluted net loss per share              22,197         17,045        21,224        17,045
                                                ========       ========       =======       =======
</TABLE>

See notes to consolidated financial statements.


<PAGE>   3
 
                            software.net Corporation
                           CONSOLIDATED BALANCE SHEETS
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                    June 30,     December 31,
                                                      1998           1997
                                                   -----------   ------------
                                                   (unaudited)      (note)
<S>                                                 <C>            <C>     
ASSETS
Current Assets
     Cash and cash equivalents                      $ 47,045       $  2,571
     Accounts receivable less allowances of
          $500 in 1998 and $400 in 1997                1,906          1,181
     Prepaid partnership agreements                    5,271            396
     Other Prepaid expenses and current assets           437            120
     Cost of deferred revenue                             81          4,938
                                                    --------       --------
               Total current assets                   54,740          9,206
     Property and equipment, net                       1,155            380
     Deposits and other non-current assets             1,162             --
     Intangible assets                                   956             --
                                                    --------       --------
               Total assets                         $ 58,013       $  9,586
                                                    ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
     Current note payable                           $  4,800       $     --
     Accounts payable                                  3,484          2,256
     Other accrued liabilities                         2,166            270
     Current obligation under capital leases              11             18
     Deferred revenue                                    395          5,569
                                                    --------       --------
                Total current liabilities             10,856          8,113
Note payable to a shareholder and director                --             60
Non-current obligations under capital leases              33             39
Commitments:
Redeemable Convertible Preferred Stock                    --         12,565
Stockholders' Equity: (Net Capital Deficiency)
     Common stock                                     69,502             47
     Deferred compensation                            (3,298)            --
     Accumulated deficit                             (19,080)       (11,238)
                                                    --------       --------
                Total stockholders' equity            47,124        (11,191)
                                                    --------       --------
                Total liabilities and stockholders
                 equity (net capital deficiency)    $ 58,013       $  9,586
                                                    ========       ========
</TABLE>

Note:   The balance sheet at December 31, 1997 has been derived from the
        audited financial statements at that date.

See notes to consolidated financial statements.


<PAGE>   4

                            software.net Corporation
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                    Six Months Ended
                                                                -----------------------
                                                                June 30,       June 30,
                                                                  1998          1997
                                                                --------       --------
<S>                                                             <C>            <C>     
OPERATING ACTIVITIES
    Net loss                                                    $(7,791)       $(1,396)
    Adjustments to reconcile net loss to         
      net cash provided by operating activities:
       Depreciation and amortization                                 237            27
       Amortization of deferred compensation                         494            --
       Net loss of discontinued operations                            --         1,038
    Changes in operating assets and liabilities:
       Accounts receivable                                          (725)         (798)
       Prepaid expenses, deposits, and other assets               (6,354)          (62)
       Cost of deferred revenue                                    4,857           272
       Accounts payable                                            1,228           563
         Other accrued liabilities                                 1,896           (57)
       Deferred revenue                                           (5,174)         (322)
       Cash used in discontinued operations                           --          (312)
                                                                --------       -------
               Net cash used in operating activities             (11,332)       (1,047)

INVESTING ACTIVITIES
    Acquisition of property and equipment                           (894)          (95)
    Cash used in discontinued operations                             --          (910)
                                                                --------       -------
               Net cash used in investing activities                (894)       (1,005)

FINANCING ACTIVITIES
    Proceeds from short-term note payable                          4,800            --
    Repayment of note payable to shareholder and director            (60)           --
    Repayment of capital leases                                      (13)           (7)
    Net proceeds from sale of redeemable convertible
        preferred stock                                            2,950            --
    Net proceeds from sale of common stock                        49,023            --
                                                                --------       -------
               Net cash provided by financing activities          56,700            (7)
                                                                --------       -------
    Increase (decrease) in cash and equivalents                   44,474        (2,060)
    Cash and cash equivalents at beginning of period               2,571         3,737
                                                                --------       -------
    Cash and cash equivalents at end of period                  $ 47,045       $ 1,677
                                                                ========       =======
</TABLE>

See notes to consolidated financial statements.

<PAGE>   5



                            software.net Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                  JUNE 30, 1998


NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of Management, all adjustments (consisting primarily of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three- and six-month periods ended June 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's prospectus
dated June 17, 1998 comprising part of the Company's Registration Statement Form
S-1 filed with the Securities and Exchange Commission.

The Company completed an initial public offering of its common stock on June 22,
1998 (the "IPO"). A total of 5,750,000 shares of common stock was sold by the
Company to the public at a price of $9.00 per share. The underwriting discount
was $0.63 per share.

Pursuant to a Common Stock and Warrants Subscription Agreement entered into in
March 1998 and as a result of the Company's IPO, the Company issued a warrant
(the "IPO Warrant") and made $2,000,000 in common stock available to America
Online, Inc.("AOL"). The IPO Warrant was issued for the purchase of 358,422
shares of common stock at an exercise price per share of $8.37. The shares
subject to the IPO Warrant are exercisable ratably over a 36 month period
commencing March 1, 1998 and are non-forfeitable. The Company has determined the
value of the IPO Warrant to be approximately $1,075,000 and has recorded this
amount as additional purchase price for the marketing rights under the marketing
agreement entered into with AOL. The value of the Warrant is being amortized on
a consistent basis with the marketing rights associated with the marketing
agreement. AOL also purchased $2,000,000 of common stock at the closing of the
IPO at the price paid by the Underwriters in the IPO.

Additionally, at the time of the IPO each share of the Company's redeemable
convertible preferred stock was converted into shares of the Company's common
stock as specified in the Company's Certificate of Incorporation. Each
outstanding share of Series A, B, C, and D redeemable convertible preferred
stock was converted into 2.00, 2.00, 1.00, and 1.00 shares of common stock,
respectively.


<PAGE>   6
On April 4, 1998, the Company's Board of Directors and stockholders adopted the
1998 Stock Option Plan and reserved an aggregate of 2,000,000 shares of Common
Stock for grants of stock options under such plan. In connection with certain
stock options granted in the three and six months ended June 30, 1998, the
Company recorded deferred compensation for the estimated difference between the
exercise price of the options and the deemed fair value of approximately $1.4
million and $3.8 million respectively which will be amortized over the four year
vesting period of the options.

In May 1998, the Company repaid Internet Commerce Services Corporation (also
know as CyberSource Corporation) $400,000 plus accrued interest for a loan
memorialized in a promissory note issued by the Company to Internet Commerce
Services, which provided for repayment in a lump sum on or before September 18,
1998 and bearing interest at a rate of 5.32% compounded semi-annually.

No provision for income taxes has been recorded due to operating losses with no
current tax benefit.

The Company entered into a credit agreement (the "Credit Agreement") with
Deutsche Bank AG ("Deutsche Bank")in May 1998. Pursuant to the Credit Agreement,
on May 21, 1998, Deutsche Bank issued a standby letter of credit to the Company
in the amount of $600,000 (the "Credit Facility") and loaned the Company an
additional $4,200,000 (the "Loan"). To date the Company has used the funds made
available under these arrangements to: (i) make a down-payment on a lease
entered into by the Company in May of 1998; (ii) meet rental obligations under
that lease; (iii) dispose of liabilities of the Company accrued in the ordinary
course of business; and (iv) support other working capital needs of the Company.
The Loan bears interest at a rate equal to the higher of (i) the daily Federal
Funds Rate plus 0.5% per annum or (ii) Deutsche Bank daily prime lending rate
("Base Rate"), plus 3.0%, per annum (approximately 12% at June 30, 1998).
Interest is payable quarterly, in arrears, during the term of the Credit
Agreement. The Company is also required to pay a standby letter of credit fee
equal to a percentage of the face amount of the Credit Facility equal to the
Base Rate plus 3% less the LIBOR rate for a three-month loan. In conjunction
with the Credit Agreement, the Company is required to pay to Deutsche Bank (i)
an upfront fee of $120,000 and (ii) a credit line fee equal to 7.50% of the
amount by which the Company's gross revenues during the term of the Credit
Agreement exceed certain agreed upon thresholds, subject to maximum payments of
$337,500 in the aggregate. All amounts borrowed under the Credit Agreement are
due on November 16, 1998. The Company is presently in full compliance with the
terms of the Credit Agreement and does not anticipate a change to such status
with respect to such terms. In connection with the Credit Agreement, Deutsche
Bank has received a first priority lien on all of the Company's assets,
including intellectual property. Pursuant to the terms of the Credit Agreement,
the Company is subject to certain financial and non-financial covenants
including limitations on payments of dividends, additional borrowings,
acquisitions and disposition of assets and maintenance of maximum operating cash
flow deficiencies and minimum quick ratios.

     The Company entered into a sublease in May 1998 for approximately 75,197
square feet of office space located in Sunnyvale, California (the "Sublease").
The Company intends that this location will serve as the Company's principal
administrative, engineering, marketing and customer service facility. The
Sublease term commenced as of July 1, 1998, and will end sixty-two (62) months
thereafter, unless sooner terminated. Under the terms of the Sublease, the
Company made a security deposit payment of $297,000 cash and issued an


<PAGE>   7

irrevocable letter of credit for $595,000 prior to occupancy and commencement of
the Sublease term. Under the terms of the sublease, the Company is obligated to
make monthly payments of approximately $149,000 increasing to $174,000 over the
term of the Sublease. The Company does not have an option to renew or extend the
term of this Sublease.

Net loss per share is presented under Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (FAS 128). Pro forma net loss per share
has been computed under FAS 128 and also gives effect to the conversion of
redeemable convertible preferred stock not included in net loss per share that
converted upon completion of the IPO.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130). FAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. The Company adopted FAS 130 in the three and six months ended March
31, 1998 and June 30, 1998. There was no impact to the Company as a result of
the adoption of FAS 130, as there is no difference between the Company's net
loss reported and the comprehensive net loss under FAS 130 for the periods
presented.

Accounting standard SOP 98-1 was issued in first quarter, 1998, and is effective
in 1999. It requires capitalization of the development costs of software to be
used internally, e.g., for manufacturing or administrative processes. The
Company, which currently expenses such amounts as incurred, expects to adopt the
standard in the first quarter of 1999 for developmental costs incurred in that
quarter and thereafter.


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


Certain statements in this "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" are forward looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended. When used in this report
or elsewhere by management from time to time, the words "believes,"
"anticipates," "intends," plans," estimates," and similar expressions are
forward looking statements. Such forward looking statements contained herein are
based on current expectations and entail various risks and uncertainties that
could cause actual results to differ materially from those expressed in such
forward looking statements. For a more detailed discussion of these and other
business risks, see the Company's final prospectus filed pursuant to Rule 424 of
the Securities Act of 1933, as amended (File No. 333-51121) dated June 17, 1998,
comprising a part of the Company's Registration Statement on Form S-1, as
amended, filed with the Commission.

OVERVIEW

Software.net is a leading online reseller of commercial off-the-shelf computer
software ("Software") to the consumer, small business, and large enterprise
markets. The company operates its own Web site and delivers Software to its
customers over the Internet through electronic software delivery ("ESD") and
through physical delivery in shrink-wrap packages.

Since inception the Company has experienced increasing net losses on an
annual basis. For the foreseeable future, the Company intends to expend
significant financial and management resources on brand development (including
the possible change of its brand name), marketing and promotion, site content
development, strategic relationships (such as those with AOL, Netscape


<PAGE>   8

Communications Corporation ("Netscape"), and Excite, Inc. ("Excite")), and
technology and operating infrastructure, including ESD capabilities. Because the
Company has relatively low gross margins, achieving profitability given planned
investment levels depends upon the Company's ability to generate and sustain
substantially increased levels of net revenue. As a result, the Company expects
to incur additional losses and continued negative cash flow from operations for
the foreseeable future, and such losses are anticipated to increase
significantly from current levels as marketing and promotion costs increase,
including new and increased expenses on greater staff amounts and expenses on
mass media advertising. There can be no assurance that the Company's revenues
will increase or even continue at their current level or that the Company will
achieve or maintain profitability or generate cash from operations in future
periods. The Company's current and future expense levels are to a large extent
fixed at a significant level primarily due to the marketing agreements, and
these levels are based on its operating plans and estimates of future revenues
which depend on anticipated sales resulting from the marketing agreements and
increased advertising and government sales. Sales and operating results
generally depend on the volume and timing of orders received, which are
difficult to forecast. Further, as noted above, the Company expects these costs
to increase above the fixed minimum. The Company may be unable to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall.
Accordingly, any significant shortfall in revenues would have an immediate
adverse effect on the Company's business, financial condition and results of
operations. In view of the rapidly evolving nature of the Company's business and
its limited operating history in the online Software reselling business, the
Company is unable to accurately forecast its revenues and believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as an indication of future performance.

The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside of the Company's control. Factors that may adversely affect the
Company's quarterly operating results include: (i) the Company's ability to
retain existing customers, attract new customers and maintain customer
satisfaction; (ii) the announcement or introduction of new sites, services and
products by the Company and its competitors; (iii) price competition; (iv) the
level of use of the Internet and online services and increasing consumer
acceptance of the Internet and other online services for the purchase of
consumer products such as those offered by the Company; (v) the Company's
ability to upgrade and develop its systems and infrastructure and attract new
personnel in a timely and effective manner; (vi) the level of traffic on the
Company's Web site; (vii) the termination of any strategic marketing alliances
such as those with AOL, Excite or Netscape pursuant to which the Company has
exposure to traffic on third party Web sites, or the termination of contracts
with major purchasers, particularly the United States government agencies (the
"U.S. government"); (viii) technical difficulties, system downtime or Internet
brownouts; (ix) the failure of Internet bandwidth to increase significantly over
time and/or an increase in the cost to consumers of exploiting Internet
bandwidth; (x) the amount and timing of operating costs and capital expenditures
relating to expansion of the Company's business, operations and infrastructure;
(xi) the number of popular Software titles introduced during the period; (xii)
certain government regulations; and (xiii) general economic conditions and
economic conditions specific to the Internet, online commerce and the Software
industry. The Company expects that it may experience seasonality in its
business, reflecting a combination of seasonal fluctuations in Internet usage
and traditional retail, governmental and corporate entity seasonal spending
patterns.


<PAGE>   9

     Gross margins may be impacted by a number of different factors, including
the mix of revenues from sales of shrink-wrap products versus revenues from ESD
product sales, the mix of Software products sold, the mix of revenues among
sales to government, corporate and consumer purchasers and the mix of revenues
from strategic partners such as AOL, Excite, Netscape and the Company's Web
site. The Company typically derives higher gross margins from advertising and
promotional revenues than from Software product sales. The Company typically
realizes higher gross margins on ESD Software product sales than on sales of
shrink-wrap Software products and lower gross margins on sales of widely
available commodity Software products than on sales of specialty Software
products. In addition, the Company typically realizes higher gross margins on
sales to consumer purchasers than on sales to government or corporate
purchasers. In addition, the Company also may from time to time offer attractive
pricing programs, which may reduce its gross margins periodically. The Company
believes that the size of new Software products will continue to increase and
that such Software products will not be suitable for ESD in the absence of
significant increases in network bandwidth. This trend may impact the Company's
ability to realize the higher gross margins associated in the ESD Software
product sales in respect of such Software products. Any change in one or more of
the foregoing factors could materially adversely affect the Company's gross
margins and operating results in future periods.

RESULTS OF OPERATIONS: THREE AND SIX MONTHS ENDED JUNE 30, 1998

     Net Revenues. Net revenues increased from $6.6 million in the six months
ended June 30, 1997 to $13.8 million in the six months ended June 30, 1998,
primarily as a result of increased sales to consumer and corporate customers and
as a result of a new U.S. government contract. Net revenues from ESD Software
sales were $8.1 million in the six months ended June 30, 1998.

Net revenues increased from $3.4 million in the quarter ended June 30, 1997 to
$7.6 million in the same quarter of the current year primarily as a result of
new U.S. government contracts and increased sales to consumer and corporate
customers. Net revenues from ESD Software sales were $4.3 million in the quarter
ended June 30, 1998.

     Cost of Revenues. Cost of revenues consists primarily of the costs of
Software and Software licenses sold to consumer and corporate customers and
related credit card processing fees, as well as the costs of Software licenses
and Software updates provided to the U.S. government. Total cost of revenues
increased from $5.7 million in the six months ended June 30, 1997 to $11.7
million in the six months ended June 30, 1998 as a result of increased Software
sales.

Total cost of revenues increased from $2.9 million in the quarter ended June 30,
1997 to $6.4 million in the quarter ended June 30, 1998, as a result of
increased Software sales.

     Gross Margin. Gross margin (gross profit as a percentage of net revenues)
increased from 13.9% in the six months ended June 30, 1997 to 15.3% in the six
months ended June 30, 1998. This increase primarily was due to a shift in the
Company's revenue mix, resulting from an increased percentage of higher margin
advertising and promotional revenues received from Software publishers. The
Company may in the future expand or increase the discounts it offers to its
customers and may otherwise alter its pricing structures and policies. Such
actions may have an adverse impact on gross margin in future periods. In


<PAGE>   10

addition, the Company's gross margin in future periods may decline to the extent
that revenues from sales to the U.S. government or sales to large enterprise
customers increase as a percentage of the Company's total net revenues.

Gross margin decreased from 15.8% in the quarter ended June 30, 1997 to 15.4% in
the quarter ended June 30, 1998. This decrease primarily was due to a decreased
percentage of total revenue being derived from higher margin advertising and
promotional revenues received from Software publishers.

     Research and Development Expenses. Research and development expenses
primarily consist of personnel and other expenses associated with developing and
enhancing the Company's Web sites, as well as associated facilities-related
expenses. Research and development expenses increased from $339,000 in the six
months ended June 30, 1997 to $1.7 million in the six months ended June 30,
1998. Research and development expenses as a percentage of net revenues
increased from 5.1% in the six months ended June 30, 1997 to 12.5% in the six
months ended June 30, 1998. Research and development expenses increased in
absolute dollars and as a percentage of net revenues primarily due to an
increase in personnel and equipment-related costs.

Research and development expenses increased from $184,000 in the quarter ended
June 30, 1997 to $1.1 million in the quarter ended June 30, 1998. Research and
development expenses as a percentage of net revenues increased from 5.4% in the
quarter ended June 30, 1997 to 14.8% in the quarter ended June 30, 1998.
Research and development expenses increased in absolute dollars and as a
percentage of net revenues primarily due to an increase in personnel and
equipment-related costs. The Company believes that continued investment in
research and development is critical to attaining its strategic objectives and,
as a result, expects research and development expenses to increase significantly
in absolute dollars in future periods.

     Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of personnel and related expenses, promotional expenditures and costs
associated with operating the Company's Web sites. In addition, sales and
marketing expenses include the expenditures associated with the Company's
strategic marketing alliances. Sales and marketing expenses increased from
$597,000 in the six months ended June 30, 1997 to $6.2 million in the six months
ended June 30, 1998. Sales and marketing expenses as a percentage of net
revenues were 9.1% in the six months ended June 30, 1997 and 45.2% in the six
months ended June 30, 1998. Sales and marketing expenses increased in absolute
dollars and as a percentage of net revenues primarily due to costs associated
with the Company's strategic marketing alliances, as well as an increase in
personnel and advertising expenditures.

Sales and marketing expenses increased from $332,000 in the quarter ended June
30, 1997 to $4.3 million in the quarter ended June 30, 1998. Sales and marketing
expenses as a percentage of net revenues were 9.7% in the quarter ended June 30,
1997 and 56.3% in the quarter ended June 30, 1998. Sales and marketing expenses
increased in absolute dollars and as a percentage of net revenues primarily due
to costs associated with the Company's strategic marketing alliances, as well as
an increase in personnel and advertising expenditures. The Company's current
strategic marketing alliances with AOL, Excite and Netscape provide for payments
totaling approximately $26 million over the respective terms of these
agreements. At June 30, 1998 approximately $20 million remained to be paid. The
costs associated with the AOL and Netscape agreements will be expensed ratably
over their respective terms. The costs associated with the Excite agreement will
be expensed as payments become due under the contract terms. The Company may


<PAGE>   11
 enter into similar strategic marketing alliances requiring significant minimum
payments in the future and, as a result, may experience substantial increases in
its sales and marketing expenses. In addition, the Company intends to pursue an
aggressive branding and marketing campaign (including the possible change of its
brand name) and therefore expects sales and marketing expenses to increase
significantly in absolute dollars in future periods.

     General and Administrative Expenses. General and administrative expenses
primarily consist of personnel expenses, legal expenses, and facilities-related
expenses. General and administrative expenses increased from $410,000 in the six
months ended June 30, 1997 to $1.8 million in the six months ended June 30,
1998. General and administrative expenses as a percentage of net revenues were
6.2% in the quarter ended June 30, 1997 and 13.2% in the quarter ended June 30,
1998. General and administrative expenses increased in absolute dollars and as a
percentage of net revenues primarily due to increased personnel-related costs
and facilities-related expenses associated with the hiring of additional
personnel as well as increased reserves associated with the increase in net
revenues.

General and administrative expenses increased from $247,000 in the quarter ended
June 30, 1997 to $1.2 million in the quarter ended June 30, 1998. General and
administrative expenses as a percentage of net revenues were 7.2% in the quarter
ended June 30, 1997 and 15.5% in the quarter ended June 30, 1998. General and
administrative expenses increased in absolute dollars and as a percentage of net
revenues primarily due to increased personnel-related costs and
facilities-related expenses associated with the hiring of additional personnel
as well as increased reserves associated with the increase in net revenues. The
Company expects general and administrative expenses to increase in absolute
dollars as the Company builds its infrastructure and as a result of the costs
associated with being a public company.

     Interest Income (Loss), Net. Interest income (loss), net, consists of
earnings on the Company's cash and cash equivalents, net of interest expense.
Interest income (loss), net, decreased from $72,000 in the six months ended June
30, 1997 to ($142,000) in the six months ended June 30, 1998, primarily as a
result of interest income from higher average cash balances offset by interest
expenses associated with the Company's credit facility.

Interest income (loss), net, decreased from $32,000 in the quarter ended June
30, 1997 to ($167,000) in the quarter ended June 30, 1998, primarily as a result
of interest expenses associated with the Company's credit facility.

     Income Taxes. The Company has recorded a net loss for the six months and
quarters ended June 30, 1997 and June 30, 1998. As a result, no provision for
income taxes has been recorded in either of these quarters.

LIQUIDITY AND CAPITAL RESOURCES

     As of June 30, 1998, the Company had approximately $47 million of cash and
cash equivalents compared with $2.8 million at December 31, 1997. From inception
through June 22, 1998, the Company has financed its operations primarily through
private sales of Preferred Stock through which the Company raised net cash
proceeds totaling $14.8 million. On June 22, 1998, the Company raised net
proceeds of $47.0 million through an initial public offering ("IPO") of
5,750,000 shares of common stock. In addition, the Company raised an additional
$2 million at the closing of the IPO through the sale of common stock to AOL
pursuant to a Common Stock and Warrants Subscription Agreement entered


<PAGE>   12

into in March 1998 and $4.8 million through a credit facility entered into with
Deutsche Bank, A.G. (the "Deutsche Bank Credit Facility") in May 1998. The
Company's current strategic marketing alliances provide for payments of
approximately $1.4 million in the remainder of 1998, approximately $8.3 million
in 1999, approximately $9.0 million in the year 2000 and approximately $500,000
in the year 2001. Additionally, in conjunction with the Deutsche Bank Credit
Facility the Company is required to pay Deutsche Bank a credit line fee equal to
7.50% of the amount by which the Company's gross revenues during the term of the
Credit Facility exceed certain agreed upon thresholds, subject to maximum
payments of $337,500 in the aggregate. All amounts borrowed under the Credit
Facility are due on November 16, 1998.

     The Company currently has no other material commitments other than those
under its operating leases, U.S government contracts, and for certain equipment
leases.

     The Company believes that the net proceeds from its IPO, together with its
current cash and cash equivalents, and the funds borrowed under the Credit
Facility in May 1998, will be sufficient to meet its anticipated cash needs for
working capital and capital expenditures through the next eight months.
Thereafter, if cash generated from operations is insufficient to satisfy the
Company's liquidity requirements, the Company may seek to sell additional equity
or debt securities or to obtain additional credit facilities, in part to fund
its financial obligations to AOL and Excite. The sale of additional equity or
convertible debt securities could result in additional dilution to the Company's
stockholders. There can be no assurance that financing will be available in
amounts or on terms acceptable to the Company, if at all.

     Net cash used in operating activities was $1.0 million for the six months
ended June 30, 1998 and $11.3 million for the six months ended June 30, 1998.
Cash used in operating activities for the six months ended June 30, 1998
resulted from a net loss of $7.8 million, an increase in prepaid expenses,
deposits and other assets of $6.3 million, and a decrease in deferred revenue.
These amounts were offset by a decrease in cost of deferred revenue, and
increases in accounts payable and accrued liabilities. The decrease to both
deferred revenue and cost of deferred revenue was due to the recognition of
revenue and cost of revenue associated with U.S. government contracts. The
increase in prepaid expenses primarily was due to a payment of $5.5 million to
AOL as specified in the Company's marketing agreement with said entity.

     Net cash used in investing activities for the six months ended June 30,
1998 of $894,000 was attributable to purchases of property and equipment.

     Net cash provided by financing activities of $56.7 million for the six
months ended June 30, 1998 primarily


<PAGE>   13

consists of proceeds from the Company's IPO, the credit facility with Deutsche
Bank, A.G., and the sale of the Company's Series D redeemable convertible
preferred stock.

The Company utilizes third-party equipment and software that may not be Year
2000 compliant. The Company is in the early stages of conducting an audit of its
third-party suppliers as to the Year 2000 compliance of their systems. Failure
of the Company's internal computer systems or of such third-party equipment or
software, or of systems maintained by the Company's suppliers, to operate
properly with regard to the Year 2000 and thereafter could require the Company
to incur unanticipated expenses to remedy any problems, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, the purchasing patterns of customers or
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct their current systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase products
from the Company, which could have a material adverse effect on the Company's
business, financial condition and results of operations.

PART II. OTHER INFORMATION

        ITEM 1. Legal Proceedings-Not Applicable.

        ITEM 2. Changes in Securities

                  On June 17, 1998, in connection with the Company's initial
          public offering, a Registration Statement on Form S-1 (No. 333-51121)
          was declared effective by the Securities and Exchange Commission,
          pursuant to which 5,750,000 shares of the Company's Common Stock
          (including the underwriters' over-allotment) were offered and sold for
          the account of the Company at a price of $9.00 per share, generating
          gross offering proceeds of $51.75 million. The managing underwriters
          were Deutsche Bank Securities, Inc., Donaldson Lufkin & Jenrette
          Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith
          Incorporated and C.E. Unterberg, Towbin. After deducting approximately
          $3.62 million in underwriting discounts and $1.1 million in other
          related expenses, the net proceeds of the offering were approximately
          $47.0 million. The Company has used $6 million of the net proceeds of
          the offering for a payment to America Online, Inc. ("AOL") under the
          Company's agreement with AOL. The remaining $41 million has been
          invested in investment grade, interest bearing securities. The Company
          intends to use such remaining proceeds for capital expenditures, for
          payment of its obligations to AOL and Excite pursuant to its
          agreements with AOL and Excite, and for general corporate purposes
          including working capital to fund anticipated operating losses.

        ITEM 3. Defaults Upon Senior Securities-Not Applicable.

        ITEM 4. Submission of Matters to a Vote of Security Holders-Not
        Applicable.

        ITEM 5. Other Information-Not Applicable.

        ITEM 6. Exhibits and Reports on Form 8-K

               (a)  EXHIBITS.

<TABLE>
<CAPTION>
               EXHIBIT
               NUMBER                 DESCRIPTION

               <S>       <C>                                                           
                4.1      Common Stock Warrant issued by Registrant to America
                         Online, Inc. 
    
               10.1      Agreement dated as of June 12, 1998, by and between
                         the Registrant and the United States Department of
                         Defense, Defense Logistics Agency (#N00140-98-D-1756).

               10.2      Offer Letter from Registrant to Mala Anand, dated as
                         of June 15, 1998.


               27.1      Financial Data Schedule.
        
               27.2      Financial Data Schedule.

</TABLE>

               (b) Reports on Form 8-K filed during the quarter ended June 30,
               1998: -Not Applicable





<PAGE>   14



                                   SIGNATURES



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



                            software.net Corporation
                                  (Registrant)



DATE:                             BY:  /s/ Michael J. Praisner
       -----------------              --------------------------------------
                                             Michael J. Praisner
                                             Vice President and
                                             Chief Financial Officer

DATE:                             BY: /s/ Mark L. Breier
        -----------------             --------------------------------------
                                              Mark L. Breier
                                              President and
                                              Chief Executive Officer
<PAGE>   15


                               INDEX TO EXHIBITS


<TABLE>
<CAPTION>
EXHIBIT NUMBER                 DESCRIPTION 
------                 -----------

<S>       <C>
 4.1     Common Stock Warrant issued by Registrant to America
         Online, Inc. 
    
10.1      Agreement dated as of June 12, 1998, by and between
          the Registrant and the United States Department of
          Defense, Defense Logistics Agency (#N00140-98-D-1756).

10.2      Offer Letter from Registrant to Mala Anand, dated as
          of June 15, 1998.

27.1      Financial Data Schedule.

27.2      Financial Data Schedule.

</TABLE>