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

                        Commission file number 000-26981

                           SILVERSTREAM SOFTWARE, INC.

             (Exact name of registrant as specified in its charter)

                      Delaware                              04-3318325
          (State or other jurisdiction of                (I.R.S. Employer
           incorporation or organization)             Identification Number)


                         One Burlington Woods, Suite 200

                         Burlington, Massachusetts 01803

                                 (781) 238-5400

    (Address, Including Zip Code, and Telephone Number, Including Area Code,
                  of Registrant's Principal Executive Offices)
                                 ---------------

     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. [ ]

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the  registrant's  definitive  proxy statement to be filed with
the Securities and Exchange  Commission relative to the registrant's 2000 Annual
Meeting of  Stockholders  are  incorporated  by  reference  into Part III of the
Annual Report on Form 10-K.

     As of March 16,  2000  there  were  19,603,961  shares of the  registrant's
common stock outstanding.

     The   aggregate   market   value  of  the  voting   Common  Stock  held  by
non-affiliates  of the  registrant was  approximately  $920 million based on the
last  reported  sale  price  of the  Common  Stock  on the  Nasdaq  consolidated
transaction reporting system on March 16, 2000.


                                      -1-
<PAGE>


                           SILVERSTREAM SOFTWARE, INC.
                     FISCAL YEAR 1999 FORM 10K ANNUAL REPORT

                                TABLE OF CONTENTS

<TABLE>
         <S>                <C>                                                                                         `  <C>
                                                                                                                           PAGE

         PART I

             Item 1.        Business.................................................................................         3
             Item 2.        Properties...............................................................................        15
             Item 3.        Legal Proceedings........................................................................        15
             Item 4.        Submission of Matters to a Vote of Security Holders......................................        15
         PART II

             Item 5.        Market for Registrant's Common Equity and Related Stockholders Matters...................        16
             Item 6.        Selected Financial Data..................................................................        17
             Item 7.        Management's Discussion and Analysis of Financial Position and Results of Operations.....        19
             Item 7A.       Quantitative and Qualitative Disclosures about Market Risk...............................        25
             Item 8.        Financial Statements and Supplementary Data..............................................        26
             Item 9.        Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....        44
         PART III

             Item 10.       Directors and Officers of the Registrant.................................................        44
             Item 11.       Executive Compensation...................................................................        44
             Item 12.       Security Ownership of Certain Beneficial Owners and Management...........................        44
             Item 13.       Certain Relationships and Related Transactions...........................................        44
         PART IV

             Item 14.       Exhibits, Financial Statement Schedules and Reports on Form 8-K..........................        44
         Signatures..................................................................................................        47

</TABLE>



                                      -2-
<PAGE>



                                     PART I

ITEM 1. BUSINESS

OVERVIEW

    SilverStream  is a global  provider of  software  and  services  that enable
businesses and other large  organizations to create,  deploy and manage software
programs for intranets,  extranets and the Internet. The advantages of Web-based
technology are driving the creation of a new generation of business-transforming
software programs. These powerful Web-based programs, or Web applications,  link
a broad  universe of customers,  vendors,  employees and partners with multiple,
diverse data sources.  In addition,  organizations can design their applications
to include the rules that govern the operation of these applications in a manner
consistent  with their  business  policies.  These  rules are known as  business
logic.  We believe our  products  and  services  help our  customers  to rapidly
develop Web  applications  that are  scalable,  reliable  and secure.  Using our
products  and  services,   organizations   can  create  and  deploy  robust  Web
applications in diverse areas such as e-commerce, business-to-business commerce,
enterprise portals, employee self-service,  supply chain management and customer
service.

    Our  products  consist  of an  application  server,  an  integrated  set  of
development  tools and enterprise data  connectors.  An application  server is a
software product that provides access to various forms of electronic information
and communicates,  usually in the form of a Web application,  with the computers
of users accessing the information.  The SilverStream Application Server tightly
integrates data sources, business logic and presentation of content to the user.
Using our Application  Server,  our customers can seamlessly access  information
and data from  diverse  sources.  Our products  allow the  business  logic to be
maintained centrally and therefore easily changed and instantly implemented. The
SilverStream Application Server maintains the presentation, or look and feel, of
the application centrally and presents content to the user locally,  without the
need to install application  software on the user's remote computer.  We believe
our development  tools shorten the development time and simplify the development
process  required  to  build  complex  Web  applications.  Our  enterprise  data
connectors  facilitate  access to data sources  associated with some third-party
business  applications,  such as inventory or employee  information  systems. We
also offer comprehensive application engineering,  implementation,  training and
support services to help ensure the successful development and implementation of
Web applications by our customers.

    We have recently  announced two important future strategic  additions to our
product offerings.  Through our recent acquisition of GemLogic, we plan to offer
an Extensible  Markup Language,  or XML,  integration  server in addition to our
Application  Server  to enable  customers  to more  easily  develop  and  deploy
business-to-business  e-commerce  applications.  XML is an emerging standard for
sharing data over the Internet,  enabling data to be exchanged  among  different
software, database packages and legacy systems.

    We have also  announced the formation of an  e-Business  Solutions  group to
deliver pre-built  application  frameworks.  These frameworks provide pre-built,
reusable   software   components   and  tools  that  provide  some  of  the  key
functionality   common  across  Web   applications   without   sacrificing   the
customization  necessary to preserve competitive advantage and meet a customer's
business needs. Our first planned product from our e-Business Solutions group is
a framework for enterprise  portals,  which are Web applications that provide an
integrated,  personalized  view of all the  applications and information that an
individual employee, customer or partner needs on a regular basis. Both of these
additions  to our  product  and  service  offerings  will be build on top of our
Application  Server,  leveraging its  performance and scalability as well as our
integrated development tools.

    We market our products and services  globally through our direct sales force
and a  network  of  independent  software  vendors,  value-added  resellers  and
consulting  partners.  To date,  we have licensed the  SilverStream  Application
Server  to  over  500  customers  in a wide  variety  of  industries,  including
communication,  financial  services,  government,  manufacturing,  oil and  gas,
pharmaceutical, technology and transportation.

THE SILVERSTREAM SOLUTION

    SilverStream  is a global  provider of  software  and  services  that enable
businesses and other large  organizations to create,  deploy and manage software
programs  for  intranets,  extranets  and the  Internet.  Organizations  use our
products for such diverse Web applications as e-commerce, employee self-service,
supply  chain  management  and  customer  service.  We believe our  products and
services provide the following benefits:

    Enable  Creation  and  Deployment  of  Business-Focused   Web  Applications.
Business-focused Web applications enable the dynamic delivery of information and
transactional  capabilities to a broad group of users. Our products enable large
organizations  to manage  scalable,  reliable  and secure Web  applications  and
address the  unpredictable  traffic  volumes and patterns  and other  challenges
faced by Web applications. By addressing performance,  connectivity and security
issues,  our products allow  customers to focus their  resources on the business
elements of their Web  applications  such as reaching new customers,  developing
new businesses,  providing  superior customer service,  shortening supply cycles
and improving the flow of information.

                                      -3-
<PAGE>

    Extend Reach of Applications and Simplify  Administration.  The SilverStream
Application  Server  allows  organizations  to leverage the  advantages  of thin
client  computing,  which  eliminates  the need for  application  software to be
installed on the user's computer.  Our Application Server allows users to access
Web  applications  through common,  easy-to-use Web browsers and other graphical
interfaces.  The central location of Web applications  permits  organizations to
rapidly  modify  and  deploy  applications,  enabling  organizations  to respond
quickly to evolving business requirements. These benefits allow organizations to
extend Web applications to a broader audience and assist these  organizations in
reducing their administrative and maintenance costs.

    Enable Creation of Applications  that Access Multiple  Information  Sources.
The existence of diverse systems,  information and data sources often results in
stand-alone   applications  that  are  unable  to  interact  with  one  another.
SilverStream's  products allow Web  applications to access  information and data
seamlessly from various sources,  such as databases,  software applications that
run on mainframe computers, and manufacturing, accounting, inventory, purchasing
and document management  systems. By using our products,  customers can focus on
the  design  and   functionality   of  strategic  Web   applications  to  create
comprehensive solutions while preserving their investments in legacy systems.

    Reduce  the  Complexity  of  Developing  Web  Applications.   SilverStream's
integrated set of development tools provide a common development environment and
a consistent look and feel that span multiple, diverse technologies, such as the
language  used to describe  Web pages known as  Hyper-Text  Markup  Language and
commonly referred to as HTML, a widely used programming  language known as Java,
and reusable software  objects.  We provide a consistent  development  interface
that is familiar to application  developers  and we offer  powerful  development
functionality.  Our  products  and  related  consulting,  education  and support
services  enhance the productivity of Web application  developers,  allowing our
customers to leverage the existing capabilities of their development staff in an
environment where skilled Web application developers are in short supply.

PRODUCTS AND SERVICES

PRODUCTS

    Our product offerings are summarized below:
<TABLE>
<S>                          <C>                                                          <C>

---------------------------- ------------------------------------------------------------ -------------------------------
          Product                                    Description                                  Shipment Dates

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

  Application Server         Application server for the creation, deployment and          Version 3.0 shipped in March
                             management of Web applications.                              2000. First version shipped
                                                                                          in November 1997.

                             Available   for  Windows   NT,   Solaris  or  HP-UX
                             operating systems.

                             Licensed  on a per  processor  basis for  unlimited
                             users with no per seat or per connection charges.

  Single  Developer  Pack    A complete set of development and testing  software          Version 2.5 shipped in May 1999.
  Group Developer  Pack      products for creating Web  applications  integrated          First  version  shipped in
  (5  or 10 Developers)      with  the SilverStream Application Server.                   November 1997.

                             The  Single   Developer   Pack  is  for  standalone
                             development on a single Windows NT machine.

                             The Group  Developer Packs are for teams of up to 5
                             or 10  developers  to work  both  independently  on
                             their own computers and as a group. Includes 5 or10
                             Single   Developer   Packs  and  a  5-  or  10-user
                             SilverStream  Application  Server for group testing
                             on Windows NT, Solaris or HP-UX operating systems.

                             Each of the  Developer  Packs  is  priced  and sold
                             separately.

   Enterprise Data           Products  that  provide  connections  to SAP, Lotus          First shipped in April 1999.
   Connectors                Notes and PeopleSoft applications.

                             Each  Enterprise  Data Connector is priced and sold
                             separately.

---------------------------- ------------------------------------------------------------ -------------------------------
</TABLE>

                                      -4-
<PAGE>

   SERVICES

    As part of our ongoing  commitment  to provide a complete  solution  for our
customers,  we offer comprehensive  consulting,  education and technical support
services that  complement  our product  offerings.  As of December 31, 1999, our
services organization comprised 100 professionals.

    To complement our service organization, we train and promote a broad network
of SilverStream partners,  ranging from international  consulting firms to local
consultants that offer consulting, education and technical support services. Our
customers are encouraged to engage consultants, instructors and developers whose
proficiency  with our  products  has  been  certified  by us and who  have  been
designated  Certified  SilverStream  Developers or Certified  SilverStream Field
Application Engineers.

    CONSULTING SERVICES.  We provide application  engineering and implementation
services to assist our customers in developing and implementing Web applications
using our products. Consulting services include advisory,  prototyping,  design,
test and  configuration,  deployment and tuning services,  and technical account
management services.  We generally provide our consulting services on a time and
materials basis.

    EDUCATION  SERVICES.  We offer our customers and partners  introductory  and
advanced training in the use of our software products.  Our employees as well as
Certified  SilverStream Trainers offer our training classes around the world. We
price these services by course.

    TECHNICAL  SUPPORT  SERVICES.  We  believe  that a high  level of  technical
support  services  is  critical  to our  customers'  success  and  an  important
competitive advantage. We offer technical support to our customers, ranging from
dedicated  on-site support  personnel,  to telephone support from our Burlington
and Belgium  offices during normal  business  hours,  to 24-hour on-line support
available  through our Website.  The pricing of our technical  support  services
varies according to the level of support required.

SALES, MARKETING AND DISTRIBUTION

    We market our  products  through a worldwide  combination  of a direct sales
force,  partners  and  distributors.  As of  December  31,  1999,  our sales and
marketing organization consisted of 114 employees, of whom:

    o  39 are located in our headquarters in Burlington, Massachusetts,

    o  33 are located in sales offices in North America, and

    o  42 are located in sales offices in the United Kingdom,  The  Netherlands,
       Belgium, Germany, Norway, the Czech Republic, France, Hong Kong,
       Singapore and Taiwan.

    We have three  types of  partners  that either  sell,  or help us sell,  our
products:

    o  Value added reseller partners, or VAR partners, resell our products to
       customers;

    o  Consulting partners introduce new potential customers to us and provide
       consulting services to our customers; and

    o  Independent software vendor partners, or ISV partners, use our products
       to create their own software products.

    We enter into partnership agreements with our partners which include some or
all of the following terms and conditions:

    o  Term of agreement is generally one year with subsequent one-year
       renewals;

    o  Grant of license to demonstrate, use and resell SilverStream products;

    o  Grant of license to include SilverStream products in partner products;

    o  Grant of license to use SilverStream trademarks;

    o  Payment to SilverStream of initial and annual partnership fees; and

    o SilverStream  product  discounts for value added resellers and independent
software vendors.

                                      -5-
<PAGE>

    As of December 31, 1999, we had approximately 300 partners.

    Our products are also sold in Japan,  South Africa,  South America and Spain
through distributors who sell our products and provide consulting,  training and
educational  courses to customers in those countries.  In Japan, our distributor
has translated our products into Kanji.  Our products allow  customers to create
applications in different languages.

    We also have marketing  relationships with other companies who have products
that  work  well  with our  products.  Our  SilverNet  technology  partners  are
comprised of companies who have created commercial products which complement our
products or who market and sell these complementary products. As of December 31,
1999,  we  had  69  SilverNet  technology  partners,   including  Actuate,  IBM,
PeopleSoft,  Rational and SAP. We work with  SilverNet  partners to help make it
easier for customers to use our products with the SilverNet partners' products.

    Our marketing  programs are designed to attract potential  customers so that
we, or one of our partners,  can demonstrate our products  directly to potential
customers.  We hold many seminars,  some with our partners, send out direct mail
and attend  trade  shows,  and  provide  information  about our  company and our
products on our Web site. We also conduct public relations activities, including
interviews and demonstrations for industry analysts and product reviewers.

RESEARCH AND DEVELOPMENT

    As of  December  31,  1999,  we had 68  employees  responsible  for  product
development,  quality assurance and documentation.  Our research and development
organization   is  divided  into  five  teams:   server,   client,   application
development, quality assurance and documentation.

    We  are  very  focused  on  enhancing  the   scalability,   performance  and
reliability of our Application  Server.  Our quality assurance  department has a
dedicated  performance and tuning laboratory designed to improve the performance
of  customers'  Web-based  applications.  This  laboratory  has the  ability  to
simulate  up  to  12,000  simultaneous  users  communicating  with  SilverStream
Application  Servers  running on as many as 24  processors  on a  dedicated  100
megabits per second network.

    We have  made,  and will  continue  to make,  a  substantial  investment  in
research and development. Research and development expenses were $2.6 million in
1997,  $5.1  million  in 1998 and $7.1  million  in  1999.  All of our  software
development costs have been expensed as incurred.

    While we have  developed,  and  expect  to  continue  to  develop,  most new
products and  enhancements  to existing  products  internally,  we have licensed
software technology from third parties.

Competition

    The  market  for   application   server   software   products  is  intensely
competitive, subject to rapid technological change and significantly affected by
new product introductions and other market activities of industry  participants.
We expect  competition  to persist and  intensify  in the future.  We  encounter
current or potential competition from a number of sources, including:

    o  Vendors of application server products and services;

    o  Internally developed applications; and

    o Companies that market business application software.

    Our Application  Server competes with application server products from other
vendors,   including:   IBM's  WebSphere  and  Domino  server   solutions;   Sun
Microsystems' NetDynamics and Netscape Application Server;  Microsoft's Internet
Information Server, Active Server pages,  Transaction Server and COM technology;
BEA  Systems'  Weblogic,  Oracle's  Application  Server,  Allaire's  Cold Fusion
product and  Bluestone's  Sapphire/Web  product.  In  addition,  we compete with
various methods of application  distribution  and management,  including the web
browser,  and with  application  server vendors and others that have  introduced
software distribution capabilities into their products.

    Potential   competitors   may  bundle  their   products  or  incorporate  an
application server component into existing products in a manner that discourages
users from  purchasing our products.  Furthermore,  new competitors or alliances
among competitors may emerge and rapidly acquire  significant  market share. Our
competitors may be able to respond more quickly to new or emerging  technologies
and changes in customer requirements than we can.

                                      -6-
<PAGE>

    We  believe  the  primary  factors  upon which we  compete  with  vendors of
application server software and services are:

    o Product performance and functionality;

    o Ease of use of our products;

    o Ability of our products to handle large volumes of users and transactions;

    o The extent to which our products adhere to industry standards;

    o The ability of our products to run on computer hardware from various
      manufacturers;

    o The ability of our products to connect to various data sources;

    o Price; and

    o Customer service.

    In  addition,   we  believe  our  products  and  services   provide  shorter
development  time  and  lower  cost  of  ownership  in  comparison  to  in-house
development efforts.

PROPRIETARY RIGHTS AND LICENSING

    Our success and ability to compete are  dependent  on our ability to develop
and maintain  the  proprietary  aspects of our  technology  and operate  without
infringing on the  proprietary  rights of others.  We rely on a  combination  of
patent, trademark,  trade secret and copyright laws and contractual restrictions
to protect the proprietary  aspects of our technology.  These legal  protections
afford only limited protection for our technology. We presently have five patent
applications  pending in the United  States.  We cannot  predict  whether any of
these  applications will result in any issued patents or, if patents are issued,
any meaningful protection.  We seek to protect our source code for our software,
documentation and other written materials under trade secret and copyright laws.
We license our  software  pursuant to  "shrinkwrap"  and, in some cases,  signed
license  agreements,  which impose  restrictions  on the  licensee's  ability to
utilize the software.  Finally,  we seek to limit disclosure of our intellectual
property by requiring  employees and consultants  with access to our proprietary
information  to execute  confidentiality  agreements  with us and by restricting
access to our source code. Due to rapid  technological  change,  we believe that
factors such as the  technological  and creative  skills of our  personnel,  new
product  developments and  enhancements to existing  products are more important
than the  various  legal  protections  of our  technology  to  establishing  and
maintaining a technology leadership position.

    Despite our efforts to protect our proprietary rights,  unauthorized parties
may attempt to copy  aspects of our  products  or to obtain and use  information
that we regard as  proprietary.  Policing  unauthorized  use of our  products is
difficult and while we are unable to determine the extent to which piracy of our
software exists,  software piracy can be expected to be a persistent problem. In
addition, the laws of many countries do not protect our proprietary rights to as
great an extent as do the laws of the United States. Litigation may be necessary
in the future to enforce our intellectual  property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of others
or to defend against claims of  infringement  or invalidity.  Any such resulting
litigation  could result in  substantial  costs and  diversion of resources  and
could have a material  adverse  effect on our  business,  operating  results and
financial condition.  There can be no assurance that our means of protecting our
proprietary   rights  will  be  adequate  or  that  our  competitors   will  not
independently  develop  similar  technology.  Any failure by us to  meaningfully
protect  our  property  could have a material  adverse  effect on our  business,
operating results and financial condition.

    There can be no assurance  that third  parties  will not claim  infringement
with respect to our current or future  products.  We expect that  developers  of
Web-based   application  software  products  will  increasingly  be  subject  to
infringement  claims as the number of products and  competitors  in our industry
segment grows and as the functionality of products in different  segments of the
software industry increasingly overlaps. Any such claims, with or without merit,
could  be  time-consuming  to  defend,  result  in  costly  litigation,   divert
management's  attention and resources,  cause product shipment delays or require
us to enter into  royalty or  licensing  agreements.  Such  royalty or licensing
agreements,  if required,  may not be available on terms  acceptable to us or at
all. A successful  infringement claim against us and our failure or inability to
license the infringed  rights or develop or license  technology  with comparable
functionality  could have a material  adverse effect on our business,  financial
condition and operating results.

                                      -7-
<PAGE>

    We  integrate  third-party  software  into our  products.  This  third-party
software may not continue to be available on commercially  reasonable terms. The
third-party  software that we license includes text search software, a database,
a Java compiler, a Java runtime  environment,  an internet browser and an object
request broker.  These licensed  components enhance features in our products but
are not critical to the operation of our products.  Some of these components are
available,  at no charge, to our customers from the supplier but are included in
our  products for customer  convenience.  In cases where the licensed  component
provides an operating  feature,  we believe there are alternative  suppliers for
the technology who may license their software to us. We also license  encryption
technology from RSA Data Security under a perpetual agreement that is terminable
by either  party  upon  default  by the  other.  RSA is the sole  source of this
technology  and  therefore  the loss of this license  would  seriously  harm our
business.  In addition,  if we cannot maintain licenses to the other third-party
software included in our products, distribution of our products could be delayed
until equivalent software could be developed or licensed and integrated into our
products,  which  could  materially  adversely  affect our  business,  operating
results and financial condition.

Employees

    As of December 31, 1999, we had a total of 312 employees of whom:

    o   68 were in research and development;

    o   114 were in sales and marketing;

    o   100 were in customer service and support; and

    o   30 were in finance and administration.

    Our future success will depend in part on our ability to attract, retain and
motivate  highly  qualified  technical  and  management   personnel,   for  whom
competition  is intense.  Our employees are not  represented  by any  collective
bargaining unit. We believe our relations with our employees are good.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

    We believe that this document contains  "forward-looking  statements" within
the  meaning of the  Private  Securities  Litigation  Reform Act of 1995.  These
statements are subject to risks and  uncertainties  and are based on the beliefs
and  assumptions of management of the Company,  based on  information  currently
available  to  the  Company's  management.  Use of  words  such  as  "believes,"
"expects," "anticipates," "intends," "plans," "estimates," "should," "likely" or
similar  expressions,  indicate  a  forward-looking  statement.  Forward-looking
statements  involve  risks,  uncertainties  and  assumptions.   Certain  of  the
information   contained  in  this  Annual   Report  on  Form  10-K  consists  of
forward-looking statements. Important factors that could cause actual results to
differ materially from the forward-looking statements include the following:

RISKS RELATED TO OUR BUSINESS

   WE HAVE INCURRED SUBSTANTIAL LOSSES, WE EXPECT CONTINUED LOSSES AND CONTINUED
LOSSES WILL HARM OUR BUSINESS.

    We have never been  profitable.  Our failure to  significantly  increase our
revenue  would  seriously  harm our  business  and  operating  results.  We have
experienced operating losses in each quarterly and annual period since inception
and we expect to incur significant  losses in the future. We incurred net losses
of $952,000  for the period ended  December 31, 1996,  $8.3 million for the year
ended December 31, 1997,  $12.9 million for the year ended December 31, 1998 and
$22.3 million for the year ended  December 31, 1999. As of December 31, 1999, we
had an accumulated deficit of $44.2 million. We expect to significantly increase
our research and development, sales and marketing and general and administrative
expenses in future periods. As a result, we will need to significantly  increase
our  quarterly  revenue to achieve and  maintain  profitability.  If our revenue
grows more slowly than we anticipate or if our operating  expenses increase more
than we expect or cannot be reduced in the event of lower revenue,  our business
will be materially and adversely affected.

   WE EXPECT TO  DEPEND ON OUR  APPLICATION  SERVER  AND  RELATED  SERVICES  FOR
SUBSTANTIALLY  ALL  OF  OUR  REVENUE  FOR  THE  FORESEEABLE  FUTURE  AND  IF OUR
APPLICATION SERVER DOES NOT ACHIEVE  WIDESPREAD MARKET ACCEPTANCE,  OUR BUSINESS
AND RESULTS OF OPERATIONS WILL SUFFER.

                                      -8-
<PAGE>

    We expect to continue to derive  substantially  all of our revenue  from our
SilverStream  Application  Server and related products and services.  Failure to
achieve broad market  acceptance of the SilverStream  Application  Server,  or a
decline in the price of, or demand  for,  our  Application  Server  and  related
products and services would  seriously harm our business and operating  results.
We cannot  predict  the  level of market  acceptance  that will be  achieved  or
maintained by our products and services.

   OUR BUSINESS WILL SUFFER IF WE DO NOT SUCCESSFULLY  INTRODUCE ENHANCEMENTS TO
OUR APPLICATION SERVER.

   Our future financial  performance  will depend  significantly on revenue from
future enhancements to the SilverStream Application Server that we are currently
developing and plan to develop.  Any delay or difficulties  in completing  these
enhancements  would seriously harm our business and operating  results.  We have
recently  released  Version 3.0 of our  Application  Server,  which includes new
functionality  including improvements to the programming  environment as well as
support for computing  standards,  such as Enterprise  JavaBeans and Java2,  and
third-party  development tools. In December 1999, we acquired GemLogic,  Inc., a
developer of Extensible Markup Language (XML) integration server technology. XML
is an emerging  standard  for sharing  data over the Internet and is designed to
support business-to-business commerce over the Internet. The acquired technology
will require significant additional development before release of any commercial
product and we cannot predict the time required to complete development, testing
and integration with our Application  Server or the date of commercial  release.
In addition,  we cannot be certain that  enhanced  versions of the  SilverStream
Application  Server or new and enhanced versions of complementary  products will
meet  customer  performance  needs  or  expectations  when  shipped  or that new
versions will be free of significant software defects or bugs.

   WE HAVE ONLY BEEN IN BUSINESS  FOR A SHORT  PERIOD OF TIME AND YOUR BASIS FOR
EVALUATING US IS LIMITED.

    We began  commercial  shipments of our first  software  products in November
1997.  You must  consider the risks,  expenses and  uncertainties  that an early
stage  company  like ours faces,  particularly  in the new and rapidly  evolving
Internet market.  Because we have only recently commenced  commercial sales, our
past results and rates of growth may not be  meaningful  and you should not rely
on them as an indication of our future performance.

   OUR LIMITED OPERATING HISTORY MAKES FORECASTING  DIFFICULT AND THE FAILURE TO
MEET EXPECTATIONS COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.

    As a result of our limited  operating  history,  it is difficult to forecast
accurately our revenues,  and we have limited  meaningful  historical  financial
data upon which to base  planned  operating  expenses.  If we do not achieve our
expected revenues,  our operating results will be below our expectations and the
expectations  of investors and market  analysts,  which could cause the price of
our common  stock to decline.  Specifically,  we were  founded in May 1996,  and
began shipping our first products,  the SilverStream  Application Server 1.0 and
related software development tools, in November 1997. Our operating expenses are
largely  based  on  anticipated  revenue  trends  and a high  percentage  of our
expenses are and will  continue to be fixed in the  short-term.  The revenue and
income  potential  of our products and business are unproven and the market that
we are addressing is rapidly evolving.

   THE MARKET FOR OUR PRODUCTS IS EMERGING  AND OUR  BUSINESS  WILL SUFFER IF IT
DOES NOT DEVELOP AS WE EXPECT.

    The market for Web  application  server  software has only recently begun to
develop,  is rapidly  evolving  and will  likely  have an  increasing  number of
competitors.  We cannot be certain that a viable  market for our  products  will
emerge or be sustainable.  If the application server market fails to develop, or
develops more slowly than expected,  our business and operating results would be
seriously harmed.

   THE  UNPREDICTABILITY OF OUR QUARTERLY OPERATING RESULTS MAY ADVERSELY AFFECT
THE TRADING PRICE OF OUR COMMON STOCK.

    Our quarterly  operating  results have varied  significantly in the past and
will likely vary  significantly  in the future,  making it  difficult to predict
future  performance.  These variations result from a number of factors,  many of
which are  outside of our  control.  Because of this  difficulty  in  predicting
future   performance,   our  operating   results  will  likely  fall  below  the
expectations  of  securities  analysts or  investors  in some future  quarter or
quarters.  Our failure to meet these  expectations would likely adversely affect
the market price of our common stock.

    Although we have  limited  historical  financial  data,  we believe that our
quarterly operating results may experience seasonal fluctuations.  For instance,
quarterly  results may fluctuate  based on our clients'  calendar year budgeting
cycles,  deferral of customer orders in anticipation of product  enhancements or
new products,  slow summer  purchasing  patterns in Europe and our  compensation
policies that tend to compensate sales  personnel,  typically in the latter half
of the year, for achieving annual quotas.

   WE DEPEND ON INCREASED  BUSINESS FROM OUR CURRENT AND NEW CUSTOMERS AND IF WE
FAIL TO GROW OUR  CUSTOMER  BASE OR  GENERATE  REPEAT  BUSINESS,  OUR  OPERATING
RESULTS COULD BE HARMED.

                                      -9-
<PAGE>

    If we  fail to grow  our  customer  base or  generate  repeat  and  expanded
business from our current and new customers,  our business and operating results
would be  seriously  harmed.  Most of our  customers  initially  make a  limited
purchase  of our  products  and  services  for  pilot  programs.  Many of  these
customers may not choose to purchase  additional licenses to expand their use of
our products. Many of these customers have not yet developed or deployed initial
applications  based on our  products.  If these  customers  do not  successfully
develop and deploy such  initial  applications,  they may choose not to purchase
deployment  licenses or  additional  development  licenses.  Our business  model
depends on the expanded use of our products within our customers' organizations.

    In addition,  as we introduce  new versions of our products or new products,
our current  customers may not require the functionality of our new products and
may  not  ultimately  license  these  products.  Because  the  total  amount  of
maintenance  and support fees we receive in any period  depends in large part on
the size and number of licenses that we have  previously  sold,  any downturn in
our  software  license  revenue  would  negatively  impact our  future  services
revenue.  In  addition,  if  customers  elect  not to  renew  their  maintenance
agreements, our services revenue could be significantly adversely affected.

   OUR MARKETS ARE HIGHLY  COMPETITIVE  AND OUR FAILURE TO COMPETE  SUCCESSFULLY
WILL LIMIT OUR ABILITY TO RETAIN AND INCREASE OUR MARKET SHARE.

    Our markets are new, rapidly evolving and highly competitive,  and we expect
this competition to persist and intensify in the future. Our failure to maintain
and  enhance  our  competitive  position  will  limit our  ability to retain and
increase  our  market  share  resulting  in  serious  harm to our  business  and
operating results.

    Some of our competitors  have longer operating  histories and  significantly
greater financial,  technical, marketing and other resources than we do. Many of
these   companies  have  more  extensive   customer  bases,   broader   customer
relationships and broader industry alliances that they could leverage, including
relationships with many of our current and potential customers.  These companies
also have  significantly  more  established  customer  support and  professional
services  organizations.  In  addition,  these  companies  may adopt  aggressive
pricing  policies,  may bundle their  competitive  products with broader product
offerings or may introduce new products and enhancements.

   OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT TO PREDICT OUR QUARTERLY RESULTS.

    A  customer's  decision  to  purchase  our  products  typically  involves  a
significant decision by the prospective customer's senior information technology
managers,  as the  customer  applications  to be built  and  deployed  using our
products are generally  critical to the  customer's  business.  In addition,  we
generally  need to educate  potential  customers  on the use and  benefits of an
application  server  and  on  the  performance   features  of  the  SilverStream
Application  Server.  Our long sales  cycle  makes it  difficult  to predict the
quarter in which sales may occur.  The sale of our  products is also  subject to
delays from the lengthy budgeting, approval and competitive evaluation processes
that  typically  accompany   significant   information   technology   purchasing
decisions. For example, customers frequently begin by evaluating our products on
a limited  basis and devote time and  resources to testing our  products  before
they decide whether or not to purchase a license for  deployment.  Customers may
also  defer  orders as a result  of  anticipated  releases  of new  products  or
enhancements by us or our competitors.

   FAILURE TO DEVELOP AND EXPAND OUR SALES AND MARKETING CAPABILITIES WOULD HARM
OUR BUSINESS.

    We need to expand our sales and  marketing  operations  in order to increase
market awareness of our products,  market the SilverStream Application Server to
a greater  number of  organizations  and generate  increased  revenue.  However,
competition  for qualified  sales personnel is intense and we may not be able to
hire enough qualified  individuals in the future. If we are unable to attract or
retain such qualified sales personnel,  our business and operating results would
be seriously  harmed.  Our products and services  require a sophisticated  sales
effort targeted at senior information  technology  management of our prospective
customers.  New hires require extensive  training and typically require at least
six months to achieve full productivity.  We have limited experience  managing a
large,  expanding and geographically  dispersed direct sales force. In addition,
we have limited  experience  marketing our products broadly to a large number of
potential customers.

   FAILURE  TO  MAINTAIN  EXISTING,  OR  INCREASE  THE  NUMBER  OF,  THIRD-PARTY
DISTRIBUTION RELATIONSHIPS MAY LIMIT OUR ABILITY TO PENETRATE THE MARKET.

    We have a limited number of third-party  distribution  agreements and we may
not be able to increase the number of our distribution relationships or maintain
our  existing  relationships.   Our  failure  to  increase  the  number  of  our
distribution  relationships or maintain our existing relationships may limit our
ability to penetrate the market.  Our current  agreements with our  distribution
partners  do  not  prevent  these  companies  from  selling  products  of  other
companies,  including  products that may compete with our  products,  and do not
generally require these partners to purchase minimum quantities of our products.
These distributors could give higher priority to the products of other companies
or to their own products,  than they give to our products. As a result, the loss
of,  or a  significant  reduction  in sales  volume  to our  current  or  future
distribution partners could seriously harm our revenue and operating results. In
addition,  a significant  increase in sales through  these  channels  could also
negatively impact our gross margins,  as sales through these channels  generally
have lower revenue per unit than direct sales.

                                      -10-
<PAGE>

   FAILURE TO EXPAND OUR SERVICES OFFERINGS WOULD HARM OUR BUSINESS.

    We believe  that  growth in our  product  sales  depends  on our  ability to
provide  our  customers  with  comprehensive  services,   including  application
engineering,  implementation,  training and support,  and to educate third-party
resellers, instructors and consultants on how to provide similar services. If we
fail to  attract,  train and  retain  the  skilled  persons  who  deliver  these
services,  our  business  and  operating  results  would be  harmed.  We plan to
increase  the number of our services  personnel  to meet these  needs.  However,
competition for qualified service personnel is intense and we may not be able to
attract,  train or retain the number of highly qualified  service personnel that
our business needs.

    We expect our services  revenue to increase in dollar  amount as we continue
to provide consulting,  education and technical support services that complement
our products and as our installed base of customers  grows. To date, our cost of
services revenue has been significantly higher than our services revenue, and we
expect to continue to incur losses from our services business in the future.

   WE FACE RISKS  ASSOCIATED  WITH  INTERNATIONAL OPERATIONS THAT COULD HARM OUR
BUSINESS.

    To be successful,  we believe we must expand our  international  operations.
Therefore, we expect to commit significant resources to expand our international
sales and  marketing  activities.  However,  we may not be able to  maintain  or
increase  market  demand for our products  which may harm our  business.  We are
increasingly subject to a number of risks associated with international business
activities  which may increase  our costs,  lengthen our sales cycle and require
significant management attention. These risks generally include:

    o Increased expenses associated with customizing products for foreign
      countries;

    o General economic conditions in our international markets;

    o Currency exchange rate fluctuations;

    o Unexpected changes in regulatory requirements resulting in unanticipated
      costs and delays;

    o Tariffs, export controls and other trade barriers;

    o Longer accounts receivable payment cycles and difficulties in collecting
      accounts receivable;

    o Potentially adverse tax consequences, including restrictions on the
      repatriation of earnings; and

    o The risks related to the recent  global  economic  turbulence  and adverse
      economic circumstances in Asia.

   OUR FUTURE  SUCCESS  DEPENDS ON  CONTINUED  USE OF THE INTERNET AND GROWTH OF
ELECTRONIC BUSINESS.

    Our future  success  depends  heavily on the  acceptance and wide use of the
Internet for electronic  business.  If electronic  business does not continue to
grow or grows more slowly than  expected,  demand for our  products and services
will be reduced.  Consumers and  businesses  may reject the Internet as a viable
commercial  medium for a number of  reasons,  including  potentially  inadequate
network infrastructure, slow development of enabling technologies,  insufficient
commercial support or privacy concerns. The Internet's infrastructure may not be
able to support the demands placed on it by increased usage. In addition, delays
in the development or adoption of new standards and protocols required to handle
increased levels of Internet  activity,  or increased  governmental  regulation,
could cause the Internet to lose its viability as a commercial  medium.  Even if
the required  infrastructure,  standards,  protocols and complementary products,
services or facilities are developed, we may incur substantial expenses adapting
our solutions to changing or emerging technologies.

   IF WE FAIL TO RESPOND TO RAPID  TECHNOLOGICAL  CHANGE AND  EVOLVING  INDUSTRY
STANDARDS, OUR PRODUCTS MAY BECOME OBSOLETE.

    The markets for our products and services are marked by rapid  technological
change,  frequent new product introductions and enhancements,  uncertain product
life cycles,  changes in customer demands and evolving industry  standards.  New
products based on new technologies or new industry  standards may quickly render
an existing  product  obsolete  and  unmarketable.  Any delays in our ability to
develop and release  enhanced or new products could  seriously harm our business
and operating results.  Our technology is complex,  and new products and product
enhancements can require long  development and testing  periods.  Our failure to
conform to prevailing standards could have a negative effect on our business and
operating results.

                                      -11-
<PAGE>

   IN ORDER TO MANAGE  OUR  GROWTH AND  EXPANSION,  WE WILL NEED TO IMPROVE  OUR
MANAGEMENT AND OPERATIONAL SYSTEMS ON A TIMELY BASIS.

    We have  expanded  our  operations  rapidly  since  inception.  We intend to
continue to expand in the  foreseeable  future to pursue  existing and potential
market  opportunities.   This  rapid  growth  places  a  significant  demand  on
management  and  operational  resources.  To be  successful,  we  will  need  to
implement  additional  management  information  systems,  improve our operating,
administrative, financial and accounting systems, procedures and controls, train
new employees and maintain close coordination among our executive,  engineering,
professional  services,  accounting,  finance,  marketing,  sales and operations
organizations.  In addition, our growth has resulted, and any future growth will
result, in increased responsibilities for management personnel.

    In addition,  our principal  executive office lease is due to expire in July
2000.  We have  entered  into a lease  for a new  facility  and plan to move our
headquarters  to new office space in the second  quarter of 2000. We will likely
experience  significant  costs,  and we could  experience  a  disruption  in the
development or marketing of our products, in connection with our planned move.

   FAILURE TO RETAIN AND ATTRACT KEY PERSONNEL WOULD HARM OUR BUSINESS.

    Our success depends largely on the skills, experience and performance of the
members  of our  senior  management  and  other  key  personnel,  including  our
Chairman,  David Skok,  and our President  and Chief  Executive  Officer,  David
Litwack. If we lose one or more of the members of our senior management or other
key employees,  our business and operating results could be seriously harmed. In
addition,  our future  success  will  depend  largely on our ability to continue
attracting, training, motivating and retaining highly skilled personnel. None of
our  senior  management  or  other  key  personnel  is  bound  by an  employment
agreement.  Like other software companies in the Boston,  Massachusetts area, we
face intense competition for qualified personnel including software engineering,
service and support, and sales and marketing personnel.

   WE INCLUDE  THIRD-PARTY  SOFTWARE  AND  TECHNOLOGY  IN OUR  PRODUCTS  AND OUR
BUSINESS WOULD BE HARMED IF WE WERE NOT ABLE TO CONTINUE USING THIS  THIRD-PARTY
SOFTWARE AND TECHNOLOGY.

    Our products integrate third-party text search, object middleware, compiler,
encryption,  transaction  processing and  monitoring,  Java virtual  machine and
database technology and products.  There are inherent limitations in the use and
capabilities of much of the technology  that we license from third parties.  Our
business  would be  seriously  harmed  if the  providers  from  whom we  license
software and technology ceased to deliver and support reliable products, enhance
their  current  products  in a timely  fashion or respond to  emerging  industry
standards.  In  addition,  the  third-party  software  may  not  continue  to be
available to us on  commercially  reasonable  terms or at all.  For example,  we
license  some of the  components  of our  products  from  limited or sole source
suppliers,  including  encryption  technology  which  we  license  from RSA Data
Security.  Many of these licenses are subject to periodic renewal.  The loss of,
or inability to maintain or obtain this  software for any reason could result in
significant  shipment delays or reductions.  Furthermore,  we might be forced to
limit the features available in our current or future product offerings.  Either
alternative could seriously harm our business and operating results.

    Almost all of our  products  are written in Java and require a Java  virtual
machine made  available  by Sun  Microsystems  in order to operate.  Sun may not
continue to make the Java virtual machines available at commercially  reasonable
terms or at all.  Furthermore,  if Sun were to make  significant  changes to the
Java  language  or its Java  virtual  machines,  or fail to correct  defects and
limitations in these  products,  our ability to continue to improve and ship our
products  could be impaired.  In the future,  our customers may also require the
ability to deploy our products on  platforms  for which  technically  acceptable
Java  implementations  either do not exist or are not available on  commercially
reasonable terms.

    WE MAY NOT ACHIEVE THE EXPECTED BENEFITS OF OUR RECENT ACQUISITIONS.

    In December  1999,  we acquired  ObjectEra,  a developer  of object  request
broker computer  products,  and GemLogic,  a developer of XML integration server
technology.  Our failure to successfully address the risks associated with these
acquisitions  could have a material adverse effect on our ability to develop and
market products based on the acquired technologies.  We plan to develop enhanced
features  to our  Application  Server and  complementary  products  based on the
acquired  technologies,  and will be devoting  significant  resources to product
development,  sales  and  marketing.  To  date,  GemLogic  has not  developed  a
commercial product and ObjectEra's  products have had limited sales. The success
of these acquisitions will depend on our ability to:

                                      -12-
<PAGE>

o  successfully integrate and manage the acquired operations;

o retain the  software  developers  and other key  employees  of  ObjectEra  and
  GemLogic;

o develop,  integrate and market products and product  enhancements based on the
acquired  technologies;  and

o control  costs and  expenses as well as demands on our  management  associated
with the acquisitions.

     If we are unable to  successfully  develop and market  products and product
enhancements  as a result of these  acquisitions,  we may not  achieve  enhanced
revenue or other anticipated benefits from our acquisitions.

    ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND CONSEQUENTLY HARM
OUR FINANCIAL CONDITION.

     In  order  to  remain  competitive,  we may find it  necessary  to  acquire
additional businesses,  products or technologies.  If we identify an appropriate
acquisition  candidate,  we may  not be  able  to  negotiate  the  terms  of the
acquisition  successfully,  finance the  acquisition,  or integrate the acquired
business,  products or technologies  into our existing  business and operations.
Further, completing a potential acquisition and integrating an acquired business
will cause  significant  diversions  of  management  time and  resources.  If we
consummate  one or more  significant  acquisitions  in which  the  consideration
consists  of stock or  other  securities,  your  equity  could be  significantly
diluted.  If we were to proceed  with one or more  significant  acquisitions  in
which the consideration included cash, we could be required to use a substantial
portion  of our  available  cash,  including  proceeds  from this  offering,  to
consummate  an  acquisition.  Acquisition  financing  may  not be  available  on
favorable  terms,  or at  all.  In  addition,  we may be  required  to  amortize
significant  amounts of goodwill and other intangible  assets in connection with
future acquisitions, which would seriously harm our operating results.

   OUR SOFTWARE PRODUCTS MAY CONTAIN ERRORS OR DEFECTS THAT COULD RESULT IN LOST
REVENUES,  DELAYED OR LIMITED MARKET ACCEPTANCE OR PRODUCT LIABILITY CLAIMS WITH
SUBSTANTIAL LITIGATION COSTS.

    Complex  software   products  like  ours  can  contain  errors  or  defects,
particularly  when first  introduced  or when new versions or  enhancements  are
released.  Defects  or  errors in  current  or future  products,  including  the
SilverStream  Application  Server Version 3.0, could result in lost revenue or a
delay  in  market  acceptance,  which  would  seriously  harm our  business  and
operating  results.  We have in the past  discovered  software errors in our new
releases and new  products  after their  introduction  and expect that this will
continue.  Despite  internal  testing  and  testing  by  current  and  potential
customers, our current and future products may contain serious defects.

    As  many  of  our   customers   use  our  products   for   business-critical
applications,  errors,  defects or other  performance  problems  could result in
financial or other damage to our customers and could significantly  impair their
operations.  Our customers could seek damages for losses related to any of these
issues.  A product  liability  claim brought against us, even if not successful,
would likely be time consuming and costly to defend and could  adversely  affect
our marketing efforts.

    OUR BUSINESS COULD BE ADVERSELY  AFFECTED IF THE SYSTEMS WE USE ARE NOT YEAR
2000 COMPLIANT OR IF OUR CUSTOMERS OR POTENTIAL CUSTOMERS ALTER THEIR PURCHASING
PATTERNS AS A RESULT OF THE YEAR 2000.

    We have attempted to assess,  and we must continue to audit Year 2000 issues
with the computer,  communications  and software  systems that we use to deliver
our  products  and to manage  our  internal  operations.  If our  systems do not
operate properly with respect to date  calculations  involving the Year 2000 and
subsequent dates, we could incur unanticipated  expenses to remedy and problems,
which could seriously harm our business. We may also experience reduced sales of
our  products  as  current or  potential  customers  reduce  their  budgets  for
enterprise software and Internet products due to increased expenditures on their
own Year 2000 compliance efforts.

    The risks posed by Year 2000 issues could adversely affect our business in a
number of significant  ways.  Although we believe that our internally  developed
systems and  technology  are Year 2000  compliant,  our  information  technology
systems nevertheless could be substantially  impaired or cease to operate due to
Year 2000 problems.  Additionally, we rely on information technology supplied by
third  parties,   and  our  other  business  partners,   including   third-party
distributors  and  consultants,   also  are  heavily  dependant  on  information
technology  systems and on their own and third-party  vendor systems.  Year 2000
problems  experienced  by us or any of  these  third  parties  could  materially
adversely  affect our  business.  Prior  versions  of our  products  may contain
technology from third parties that is not Year 2000 compliant. Additionally, the
Internet could face serious disruptions arising from the Year 2000 problems.

                                      -13-
<PAGE>

    We may experience fewer sales if potential  customers delay the purchase and
implementation of our products after January 1, 2000 in order to stabilize their
internal  computer  systems or divert their  information  technology  budgets to
address  Year 2000  issues.  If our  potential  customers  delay  purchasing  or
implementing  our  products  in order to  address  the Year  2000  problem,  our
business would be seriously harmed.

    Given the  pervasive  nature of the Year 2000 problem,  we cannot  guarantee
that  disruptions  in other  industries  and market  segments will not adversely
affect our business.  Moreover, our costs related to Year 2000 compliance, which
thus far have not been material,  could ultimately be significant.  In the event
that we  experience  disruptions  as a result  of the  Year  2000  problem,  our
business could be seriously harmed.  Our efforts to address Year 2000 issues are
described in more detail in  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000 Compliance."

    OUR BUSINESS MAY SUFFER IF WE CANNOT PROTECT OUR INTELLECTUAL PROPERTY.

    We have no  patents,  and  none  may be  issued  from  our  existing  patent
applications.   We   rely   on  a   combination   of   contractual   provisions,
confidentiality  procedures,  and patent, trademark,  trade secret and copyright
laws  to  protect  the  proprietary  aspects  of  our  technology.  These  legal
protections  afford only limited  protection and  competitors may gain access to
our  intellectual  property  which may result in the loss of our  customers.  In
addition,  despite our efforts to protect our proprietary  rights,  unauthorized
parties  may  attempt to copy  aspects of our  products or to obtain and use our
proprietary information. Litigation may be necessary to enforce our intellectual
property rights,  to protect our trade secrets and to determine the validity and
scope of the  proprietary  rights of  others.  Any  litigation  could  result in
substantial  costs and  diversion of resources  with no assurance of success and
could seriously harm our business and operating  results.  In addition,  we sell
our products internationally,  and the laws of many countries do not protect our
proprietary rights as well as the laws of the United States. Our future patents,
if  any,  may be  successfully  challenged  or  may  not  provide  us  with  any
competitive advantages.

    We obtain a major portion of our software license revenue from licensing our
products under  standardized  "shrink wrap" agreements that our customers do not
sign. If any of these agreements were deemed unenforceable,  those customers may
seek to use and copy our technology without appropriate limitations.

   WE COULD INCUR  SUBSTANTIAL  COSTS DEFENDING OUR  INTELLECTUAL  PROPERTY FROM
INFRINGEMENT OR A CLAIM OF INFRINGEMENT.

    Other  companies,  including our  competitors,  may obtain  patents or other
proprietary  rights that would  prevent,  limit or interfere with our ability to
make, use or sell our products.  As a result, we may be found to infringe on the
proprietary rights of others. In the event of a successful claim of infringement
against us and our failure or inability to license the infringed technology, our
business and operating results would be significantly  harmed.  Companies in the
software market and the Internet market are increasingly bringing suits alleging
infringement of their proprietary  rights,  particularly  patent rights. We have
been subject to such claims in the past.  Any  litigation or claims,  whether or
not valid,  could result in substantial costs and diversion of resources with no
assurance of success.  Intellectual property litigation or claims could force us
to do one or more of the following:

    o Cease  selling,   incorporating   or  using  products  or  services  that
      incorporate the challenged intellectual property;

    o Obtain a license from the holder of the  infringed  intellectual  property
      right, which license may not be available on reasonable terms; and

    o Redesign products or services.

   WE MAY INCUR  SIGNIFICANT  COSTS  FROM  CLASS  ACTION  LITIGATION  DUE TO OUR
EXPECTED STOCK PRICE VOLATILITY.

   In the past,  securities  class  action  litigation  has often  been  brought
against a company  following  periods of  volatility  in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert  management's  attention
and resources.

   ANTI-TAKEOVER  PROVISIONS  IN OUR CHARTER  DOCUMENTS  AND  DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY.

    Provisions  of our  certificate  of  incorporation  and  bylaws,  as well as
provisions  of Delaware law,  could make it more  difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders.

    INSIDERS HAVE  SUBSTANTIAL  INFLUENCE OVER  SILVERSTREAM  AND COULD DELAY OR
PREVENT A CHANGE IN CORPORATE CONTROL.

                                      -14-
<PAGE>

    As of March 16,  2000,  our  executive  officers,  directors  and  principal
stockholders  beneficially  owned, in the aggregate,  approximately 41.5% of our
outstanding  common stock. As a result,  these  stockholders have the ability to
exercise  significant  influence over matters  requiring  stockholder  approval,
including  the  election of  directors  and  approval of  significant  corporate
transactions.  This could have the effect of delaying or  preventing a change of
control of SilverStream.

ITEM 2. PROPERTIES

    Our headquarters  are currently  located in a leased facility in Burlington,
Massachusetts,  consisting of approximately  40,000 square feet under a sublease
that  expires in July 2000.  We have also  leased  offices for sales and support
personnel in North  America,  Europe and Asia. In the second quarter of 2000, we
intend  to  relocate  our  headquarters  to  a  leased  facility  in  Billerica,
Massachusetts consisting of approximately 100,000 square feet under a lease that
expires in 2006.

ITEM 3.  LEGAL PROCEEDINGS

    We are not a party to any material legal proceedings.

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

    None.



                                      -15-
<PAGE>


                                     PART II

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

    (a)  Price Range of Common Stock

    Our common  stock is listed on the Nasdaq  National  Market under the symbol
"SSSW." Public trading of our common stock commenced on August 17,1999. Prior to
that,  there was no public market for our common stock.  The following table set
forth, for the periods  indicated,  the high and low sale price per share of the
common stock on the Nasdaq National Market:
<TABLE>
<CAPTION>
                                                     High        Low
<S>                                                 <C>          <C>
Year Ended December 31, 1999:
Third Quarter (From August 17,1999)                  $42.75      $22.56
Fourth Quarter                                       123.00      26.88
</TABLE>


    As of March 16,  2000,  there were  19,603,961  shares of the  Common  Stock
outstanding held by approximately 285 holders of record.

    We have never paid or declared  any cash  dividends  on our common  stock or
other securities and do not anticipate  paying cash dividends in the foreseeable
future.  We currently intend to retain all future  earnings,  if any, for use in
the operations of our business.  Our existing  equipment line of credit and term
loans prohibit the payment of dividends without the consent of the lender.

(b)      Use of Proceeds from Sales of Registered Securities

    On August 20, 1999 the Company  closed the  initial  public  offering of its
Common Stock.  The shares of Common Stock sold in the offering  were  registered
under the  Securities Act of 1933, as amended,  on a  Registration  Statement on
Form S-1 (the  "Registration  Statement")  (Registration No. 333-80553) that was
declared effective by the Securities and Exchange Commission on August 16, 1999.
The 3,000,000  shares  offered by the Company under the  Registration  Statement
were sold at a price of $16.00 per share. Morgan Stanley Dean Witter, BancBoston
Robertson Stephens and SG Cowen, the managing underwriters of the offering, also
exercised an  overallotment  option on August 26, 1999 for 450,000  shares.  The
overallotment  shares  were sold at a price of $16.00 per share.  The  aggregate
proceeds to the Company from the offering were $55.2 million. In connection with
the offering  the Company  paid an  aggregate  of $3.9  million in  underwriting
discounts and commission to the underwriters. In addition, the expenses incurred
in connection  with the offering  were  approximately  $1.7  million,  including
$315,000 in legal  costs,  $410,000 in  accounting  costs,  $293,000 in printing
costs,  $136,000 in  registration,  filing and related costs, and other costs of
$546,000.

    After deducting the underwriting  discounts  and commission and the offering
expenses described above, the Company received net proceeds from the offering of
approximately $49.6 million.  None of the net proceeds of the offering were paid
by the Company,  directly or  indirectly,  to any  director,  officer or general
partner of the Company or any of their associates,  or to any persons owning ten
percent  or  more  of any  class  of the  Company's  equity  securities,  or any
affiliates of the Company.

    The net  proceeds  generated  from the offering have been used  primarily to
fund the Company's working capital,  capital  expenditures and general corporate
needs. In addition,  the Company used $4.2 million as an initial payment related
to the  acquisition  of  ObjectEra,  Inc.  Subsequent  to December  31, 1999 the
Company made a second  payment to ObjectEra,  Inc. of $3.9 million,  as provided
for in the  purchase  and sale  agreement.  Lastly,  the Company  granted a note
receivable to one of its corporate  collaborators  for $2.0 million in December,
1999.

                                      -16-
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

                      SELECTED CONSOLIDATED FINANCIAL DATA

    The  following  selected  consolidated  financial  data  should  be  read in
conjunction  with our  Consolidated  Financial  Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 of this Form 10-K and the consolidated  financial
statements and notes thereto in Item 14 of this Form 10-K.
<TABLE>
<CAPTION>

                                                         Period from
                                                         May 8, 1996
                                                       (inception) to               Years Ended
                                                        December 31,               December 31,
                                                       -------------   ----------------------------------
                                                            1996           1997         1998         1999
                                                       -------------   ------------ ------------ --------
                                                          (in thousands, except share and per share data)
           <S>                                           <C>             <C>         <C>           <C>
           Consolidated Statement of Operations
           Data:
           Revenue:

             Software license....................         $   --         $   249      $  5,983     $ 13,826
             Services............................             --              --           825        9,239
                                                          ------          ------      --------     --------
                     Total revenue...............             --             249         6,808       23,065
           Cost of revenue:
             Software license....................             --              90           767        1,412
             Services............................             --             282         1,414       10,253
                                                          ------          ------      --------     --------
                     Total cost of revenue.......             --             372         2,181       11,665
                                                          ------          ------      --------     --------
           Gross profit (loss)...................             --            (123)        4,627       11,400
           Operating expenses:
             Sales and marketing.................             35           3,854        10,776       20,419
             Research and development............            850           2,622         5,070        7,090
             General and administrative..........            120           1,961         2,141        4,301
             Compensation charge for issuance of
               stock options.....................             --              --            --          439
             Amortization of goodwill............             --              --            --          385
             In-process research and development
               charge............................             --              --            --        1,987
                                                          ------          ------      --------     --------
                     Total operating expenses....          1,005           8,437        17,987       34,621
                                                          ------          ------      --------     --------
           Loss from operations..................         (1,005)         (8,560)      (13,360)     (23,221)
           Other income, net.....................             53             225           475        1,232
                                                          ------          ------      --------     --------
           Net loss..............................         $ (952)        $(8,335)     $(12,885)    $(21,989)
           Beneficial conversion feature in
             Series D preferred stock............             --              --            --         (263)
                                                          ------          ------      --------     --------
           Net loss applicable to common
             stockholders........................         $ (952)        $(8,335)     $(12,885)    $(22,252)
                                                          ======          ======      ========     ========
           Basic and diluted net loss per share
             applicable to common stockholders...         $(5.12)        $(10.61)     $  (4.89)    $  (2.64)
           Weighted-average common shares used
             in computing basic and diluted net
             loss per share......................        185,686         785,548     2,632,496    8,419,116
</TABLE>



                                      -17-
<PAGE>

<TABLE>
<CAPTION>

                                                                     As of December 31,
                                                                     ------------------
                                                            1996        1997       1998       1999
                                                         ---------   ---------  ---------  ---------
                                                                        (in thousands)
                <S>                                      <C>         <C>        <C>        <C>

                Consolidated Balance Sheet Data:

                Cash and cash equivalents..............  $   2,734   $  16,649  $   1,199  $  46,799
                Working capital........................      2,591      16,349      5,119     40,549
                Total assets...........................      3,056      18,956     10,014     80,663
                Long-term debt, less current portion...        189         295        325        509
                Redeemable convertible preferred stock.      3,658      11,638     11,638          -
                Total stockholders' equity (deficit)...       (947)      5,944     (5,048)    63,585
</TABLE>



                                      -18-
<PAGE>

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

    The  following  discussion  should be read  together  with the  Consolidated
Financial  Statements and accompanying Notes thereto appearing elsewhere in this
Annual  Report  on  Form  10-K.   This  Annual  Report  on  Form  10-K  contains
forward-looking statements that involve risks and uncertainties.  Actual results
may differ materially from those indicated in such forward-looking statements as
a result of certain factors including, but not limited to, those set forth under
the heading "Certain Factors that may Affect Future Results."

OVERVIEW

    SilverStream  is a global  provider of  software  and  services  that enable
businesses and other large  organizations to create,  deploy and manage software
programs for intranets,  extranets and the Internet.  From our  incorporation in
May  1996  through  December  1997,  we  were  considered  a  development  stage
enterprise  and our  activities  were  primarily  focused  on  raising  capital,
conducting research and development,  and establishing  markets and distribution
channels for our products. In November 1997, we began commercial shipment of the
initial version of our Application Server.

    We derive our revenue  from the sale of software  product  licenses and from
professional  consulting,  education and technical support services.  We plan to
generate  future  revenue  from both new and  existing  customers.  As  existing
customers create new software applications based on the SilverStream Application
Server, they may require more application servers to run these applications.  We
plan to  widen  our  customer  base by  selling  licenses  and  services  to new
customers.  We anticipate that we will continue to sell annual update  assurance
and support  agreements to most  customers.  We recognize  our software  license
revenue in accordance with Statement of Position (SOP) 97-2,  "Software  Revenue
Recognition," as amended by SOP 98-4. SOP 97-2 generally requires revenue earned
on software  arrangements  involving  multiple  elements to be allocated to each
element  based  on the  relative  fair  values  of the  elements.  We  generally
recognize  revenue  allocated to software licenses upon delivery of the software
products,  provided that (i) we have no remaining  significant  obligations with
regard to  implementation,  (ii) the  license fee is fixed or  determinable  and
(iii) collection of the fee is probable.  However, when we sell software product
licenses to a reseller,  revenue is not recognized  until the product is shipped
to the  ultimate  customer.  This is because the  reseller is  functioning  as a
distributor and may order products  without a specific  customer.  Our customers
often  contract for update  assurance  which  provides them with new releases of
software for a period of typically  one-year.  These  agreements  are separately
negotiated and priced.  We recognize update assurance  revenue ratably over this
12-month period. We license our software to independent software vendors who use
our  products to create  their own  software  products  for resale.  Independent
software  vendors  typically  pay us a  prepayment  at the  beginning  of  their
contract.  We recognize  this revenue  ratably over the period of the  contract,
typically one year, because the only undelivered  element under these agreements
is service,  for which no pattern of  performance is  discernable.  We also earn
partner fees,  which are deferred and recognized on a straight-line  basis as an
offset to operating expenses over the life of the agreement, typically one year.
We consider such fees to be reimbursement  for costs incurred in connection with
our partner  program.  We recognize  revenue from the sale of technical  support
services  ratably  over  the  maintenance  term  and  revenue  from  the sale of
consulting and education services as the services are performed.

    We record cash receipts and billed  amounts due from  customers in excess of
recognized  revenue as deferred revenue.  The timing and amount of cash receipts
from customers can vary  significantly  depending on specific contract terms and
can therefore have a significant impact on the amount of deferred revenue in any
given period.

    Our cost of software  license  revenue  includes (i)  royalties due to third
parties for  technology  included in our products,  (ii) the cost of manuals and
product documentation,  (iii) media used to deliver our products,  (iv) shipping
and fulfillment  costs and (v) the costs  associated with license  revenues from
independent software vendors. Our cost of services revenue includes (i) salaries
and  related  expenses  for our  consulting,  education  and  technical  support
services  organizations,  (ii)  costs of third  parties  contracted  to  provide
consulting  services to customers  and (iii) an  allocation  of our  facilities,
communications and depreciation expenses.

    Our operating  expenses are classified into five general  categories:  sales
and   marketing,   research  and   development,   general  and   administrative,
compensation  charge for  issuance of stock  options,  and  goodwill.  Sales and
marketing  expenses  consist  primarily of salaries and other  related costs for
sales and marketing  personnel,  sales  commissions,  travel,  public relations,
marketing  materials and tradeshows.  Research and development  expenses consist
primarily  of  personnel  costs to  support  product  development.  General  and
administrative  expenses  consist  primarily of salaries and other related costs
for  operations  and  finance  employees,  legal  and  accounting  services  and
facilities-related  expenses.  Compensation  charge  for the  issuance  of stock
options  represents the difference between the exercise price of options granted
and the estimated fair market value of the  underlying  common stock on the date
of the grant.  Goodwill  represents the  amortization of the goodwill related to
the acquisition of some of the company's former distributors in Europe.

                                      -19-
<PAGE>

    Since our  inception,  we have  incurred  substantial  costs to develop  our
technology  and products,  to recruit and train  personnel for our  engineering,
sales and marketing and professional services  departments,  and to establish an
administrative  organization.  As a result,  we have incurred net losses in each
fiscal quarter since  inception and had an accumulated  deficit of $44.2 million
as of December 31, 1999. We anticipate that our operating expenses will increase
substantially in future quarters as we increase sales and marketing  operations,
expand  distribution  channels,  increase  research  and  development,   broaden
professional  services,  expand facilities and support,  and improve operational
and financial systems. Accordingly, we expect to incur additional losses for the
foreseeable  future.  In  addition,  our  limited  operating  history  makes  it
difficult for us to predict future operating results and, accordingly, there can
be no assurance that we will achieve or sustain revenue growth or profitability.

RESULTS OF OPERATIONS

    The following  table sets forth for the periods  indicated the percentage of
revenues  represented  by  certain  lines  in  our  consolidated  statements  of
operations.
<TABLE>
<CAPTION>
                                                                           Years Ended
                                                                           December 31,
                                                                   ---------------------------
                                                                     1997       1998      1999
                                                                   --------   ------    ------
    <S>                                                            <C>        <C>       <C>
    Revenue:
      Software license.........................................       100.0%    87.9%     59.9%
      Services.................................................         0.0     12.1      40.1
                                                                   --------   ------    ------
              Total revenue....................................       100.0    100.0     100.0
                                                                   --------   ------    ------
    Cost of revenue:
      Software license.........................................        36.2     11.2       6.1
      Services.................................................       113.4     20.8      44.5
                                                                   --------   ------    ------
              Total cost of revenue............................       149.6     32.0      50.6
                                                                   --------   ------    ------
    Gross profit (loss)........................................       (49.6)    68.0      49.4
    Operating expenses:
      Sales and marketing......................................     1,550.7    158.3      88.5
      Research and development.................................     1,055.1     74.5      30.7
      General and administrative...............................       789.1     31.4      18.6
      Compensation charge for issuance of stock options........         0.0      0.0       1.9
      Amortization of goodwill.................................         0.0      0.0       1.7
      In-process research and development charge...............         0.0      0.0       8.7
                                                                   --------   ------    ------
              Total operating expenses.........................     3,394.9    264.2     150.1
                                                                   --------   ------    ------
    Loss from operations.......................................    (3,444.5)  (196.2)   (100.7)
    Other income, net..........................................        90.7      6.9       5.4
                                                                   --------   ------    ------
    Net loss...................................................    (3,353.8)% (189.3)%   (95.3)%
                                                                   ========   ======    ======
</TABLE>

YEAR ENDED DECEMBER 31, 1999 COMPARED TO 1998

   REVENUE

    Total revenue  increased  239% to $23.1 million for the year ended  December
31, 1999 from $6.8 million for the previous  year ended  December 31, 1998.  The
increase is  attributable  to an  increase in our  customer  base  resulting  in
substantial  growth in  software  license and  services  revenue.  Revenue  from
international sales increased to $8.1 million, or 35% of total revenue,  for the
year ended December 31, 1999 from $1.8 million, or 27% of total revenue, for the
year ended December 31, 1998. The increase in  international  sales is primarily
due to increased selling and related activities in The United Kingdom,  Germany,
Belgium, The Netherlands,  The Czech Republic,  Norway, France,  Singapore, Hong
Kong and Taiwan.

    SOFTWARE LICENSE.  Software license  revenue increased 131% to $13.8 million
for the year  ended  December  31,  1999 from $6.0  million  for the year  ended
December 31, 1998. The increase is  attributable  to increased unit sales of our
products following the release of Version 2.0 in October of 1998 and Version 2.5
in May of 1999,  as well as higher  prices  realized for our products in 1999 as
compared to 1998.

    SERVICES.  Services revenue  increased 10,199% to $9.2 million  for the year
ended  December 31, 1999 from $825,000 for the year ended December 31, 1998. The
primary factor for the increase is attributable to the creation and expansion of
our professional  consulting  organization and the provision of a wider range of
consulting  services  to  customers,  as well as an  increase  in the  number of
customers and support contracts.

                                      -20-
<PAGE>

   We believe that growth in our software license revenue depends on our ability
to provide our customers with support, education, and consulting services and to
educate third-party consulting partners on how to use our products. As a result,
we intend to  continue to expand our  services  organization  in the future.  We
expect that revenue from professional  consulting  services will increase in the
future to the extent that  additional  customers  license our products and as we
expand both our  capacity  for the  delivery of these  services,  as well as the
scope of our services  offerings.  We expect that services  revenue from support
agreements  will increase in the future as a result of new and existing  license
agreements.

   COST OF REVENUE

    SOFTWARE  LICENSE.  Cost of software license  revenue  increased 84% to $1.4
million for the year ended  December  31, 1999 from  $767,000 for the year ended
December 31, 1998. Cost of software license revenue decreased as a percentage of
software license revenue to 10% from 13% for the year ended December 31, 1999 as
compared to the previous year ended  December 31, 1998.  The dollar  increase is
attributable to increased product, shipping and third party royalty costs from a
larger  volume of sales  orders  and to costs  associated  with our  independent
software vendors.  In addition,  the dollar increase reflects higher fulfillment
costs associated with the increase in international  orders.  We expect software
license  costs to increase in the future due to additional  customers  licensing
our products, both domestically and internationally, as well as the licensing of
additional  third-party  technology  that we may choose to embed in our  product
offerings.

     SERVICES.  Cost of services revenue increased 625% to $10.3 million for the
year ended  December 31, 1999 from $1.4 million for the year ended  December 31,
1998.  The  increase is due to an increase  in the number of our  education  and
technical  support  personnel  and to the  creation  and rapid  expansion of our
consulting services business in late 1998 and all of 1999. To date, our services
costs have been higher than our services  revenue.  We expect  services costs to
increase in the future to the extent that we continue to generate new  customers
and  associated  software  license and  services  revenue.  Services  costs as a
percentage of services revenue can be expected to vary significantly from period
to period depending on the mix of services we provide, whether such services are
provided by us or third-party contractors, and overall utilization rates.

   OPERATING EXPENSES

    SALES AND MARKETING.  Sales and marketing  expenses  increased  89% to $20.4
million for the year ended  December  31,  1999 from $10.8  million for the year
ended December 31, 1998. The increase is attributable to increases in the number
of sales employees in North America,  as well as the company's  expansion of its
international  sales  operations.   We  believe  these  expenses  will  increase
significantly in future periods as we expect to continue to expand our sales and
marketing  efforts.  We also  anticipate  that sales and marketing  expenses may
fluctuate as a percentage  of a total revenue from period to period as new sales
personnel are hired and begin to achieve productivity.

    RESEARCH AND DEVELOPMENT.  Research  and development  expenses increased 40%
to $7.1  million for the year ended  December 31, 1999 from $5.1 million for the
year ended  December  31,  1998.  The  increase  is  primarily  attributable  to
increases  in the  number of  research  and  development  personnel  to  support
SilverStream's  product  development  activities.   We  believe  that  continued
investment  in research and  development  is critical to attaining our strategic
objectives,  and, as a result,  we expect research and  development  expenses to
increase  significantly  in future  periods.  To date, all software  development
costs have been expensed in the period incurred.

    GENERAL AND ADMINISTRATIVE.  General and administrative  expenses  increased
101% to $4.3 million for the year ended  December 31, 1999 from $2.1 million for
the year ended  December 31, 1998.  The  increase is  attributable  to a growing
number  of  administrative  employees,  as well as an  increase  in the bad debt
reserve as our revenue and  accounts  receivable  grew.  We believe  general and
administrative  expenses will increase, as we expect to add personnel to support
our expanding  operations,  incur  additional costs related to the growth of our
business, and assume the responsibilities of a public company.

    COMPENSATION  CHARGE FOR ISSUANCE OF STOCK OPTIONS.  We incurred a charge of
$439,000  for the year ended  December 31, 1999 related to the issuance of stock
options with exercise prices below fair market value on the date of grant. There
were no such charges for the year ended December 31, 1998.  Additional  unvested
outstanding  options  will  continue to vest over the next four to seven  years,
which will  result in  additional  compensation  expense of  approximately  $7.2
million in the aggregate in periods  subsequent to December 31, 1999, which will
be charged to operations over the next four to seven years.

    AMORTIZATION  OF  GOODWILL.  We incurred a charge of $385,000  for  the year
ended December 31, 1999 related to the amortization of goodwill,  as a result of
the company's  acquisition  of three of its European  distributors  in The Czech
Republic, Norway and France, along with two domestic companies;  ObjectEra, Inc.
and GemLogic,  Inc.  There were no such charges for the year ended  December 31,
1998.  Goodwill of approximately $20.7 million in the aggregate will continue to
be charged to operations ratably over the next five years.

                                      -21-
<PAGE>

   IN-PROCESS  RESEARCH AND DEVELOPMENT  CHARGE.  We incurred  a  charge of $2.0
million for the year ended  December 31, 1999 related to an in-process  research
and development  charge as a result of our  acquisition of GemLogic,  Inc. There
were no such charges for the year ended December 31, 1998.

   OTHER INCOME, NET

    Other  income,  net  increased  159%  to $1.2  million  for the  year  ended
December  31, 1999 from  $475,000  for the year ended  December  31,  1998.  The
increase is  attributable  to an increase in interest  income due to higher cash
balances in the  comparable  years ended  December 31, 1999 versus  December 31,
1998.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997

   REVENUE

    Total revenue increased by approximately  $6.6 million from $249,000 in 1997
to $6.8  million in 1998 due to the release of our initial  products in November
1997 and the ensuing increase in our customer base.  Revenue from  international
sales  increased by  approximately  $1.7 million from  $68,000,  or 27% of total
revenue,  in 1997 to $1.8 million,  or 27% of total revenue,  in 1998 due to the
same factors.

    SOFTWARE LICENSE.  Software license revenue increased by approximately  $5.7
million from $249,000 in 1997 to $6.0 million in 1998.  We first began  shipping
our products in November 1997. The increase in software  license revenue was due
primarily to an increase in the number of customers  resulting  from a full year
of selling in 1998 and the  release of Version  2.0 of our  products  in October
1998.

    SERVICES.  We had no  services  revenue  in 1997  and  services  revenue  of
$825,000 in 1998.  Approximately  71% of our services  revenue in 1998  resulted
from education and support services delivered to an increasing customer base and
the  remainder  resulted  primarily  from  the sale of  professional  consulting
services.

   COST OF REVENUE

    SOFTWARE   LICENSE.   Cost  of  software   license   revenue   increased  by
approximately $677,000 from $90,000 in 1997 to $767,000 in 1998. The increase is
attributable  to increases in software  license revenue and the royalties we pay
on  third-party  software  incorporated  into Version 2.0 of our products  which
began shipping in October 1998.

    SERVICES.  Cost of services revenue increased by approximately  $1.1 million
from $282,000 in 1997 to $1.4 million in 1998. Of this  increase,  approximately
68% was due to an  increase  in our  support  organization  and the  balance was
primarily  due  to  the  creation  of  our  professional   consulting   services
organization in 1998.

   OPERATING EXPENSES

    SALES AND MARKETING. Sales and marketing expenses increased by approximately
$6.9 million from $3.9  million in 1997 to $10.8  million in 1998.  The increase
was due to increases in sales and  marketing  personnel  and  marketing  program
expenditures.  During  1998,  we  expanded  international  sales  and  marketing
operations in Germany, Belgium, The Netherlands, Hong Kong, Singapore and Taiwan
and we increased the number of personnel and offices in North America.

    RESEARCH AND  DEVELOPMENT.  Research and development  expenses  increased by
approximately  $2.4  million  from $2.6 million in 1997 to $5.1 million in 1998.
The increase was primarily due to the hiring of more engineering personnel.

    GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
approximately  $180,000  from $2.0 million in 1997 to $2.1 million in 1998.  The
increase was primarily due to the hiring of more personnel.

   OTHER INCOME, NET

    Other income, net increased by approximately  $250,000 from $225,000 in 1997
to $475,000 in 1998.  The increase was due  primarily to an increase in interest
income earned from cash balances on hand in 1998 compared to 1997. Proceeds from
the  private  sale of  equity  securities  in 1997  and  1998  caused  cash  and
short-term investment balances in 1998 to be higher than those in 1997.

                                      -22-
<PAGE>

NET OPERATING LOSSES AND TAX CREDIT CARRYFORWARDS

    As of December  31,  1999,  we had net  operating  losses and  research  and
development  credit  carryforwards of approximately  $43.0 million and $919,000,
respectively.  The net  operating  loss  and  research  and  development  credit
carryforwards will expire at various dates,  beginning in 2012, if not utilized.
Under the  provisions  of the  Internal  Revenue  Code of 1986,  as amended (the
"Code"),  substantial  changes  in our  ownership  may limit  the  amount of net
operating  loss  carry-forwards  that can be utilized  annually in the future to
offset  taxable  income.  A valuation  allowance has been  established  to fully
reserve  the  potential  benefits  of  these   carryforwards  in  our  financial
statements  to reflect the  uncertainty  of future  taxable  income  required to
utilize available tax loss carryforwards and other deferred tax assets.

LIQUIDITY AND CAPITAL RESOURCES

    Since inception, we have funded our operations primarily through the private
sale of our equity  securities and our initial public offering  resulting in the
aggregate, net proceeds of approximately $115.2 million. We have also funded our
operations  through equipment  financings.  As of December 31, 1998, we had $4.5
million in cash, cash equivalents and marketable securities, and $5.1 million in
working  capital.  As of December 31, 1999, we had $47.0  million in cash,  cash
equivalents and marketable securities,  and $40.5 million in working capital. We
have two term  loans  and a line of  credit  for  amounts  borrowed  to  finance
equipment.  These  term loans and line of credit are from the same bank and bear
interest at the bank's prime rate,  (8.50% at December  31, 1999) plus 0.5%.  At
December  31, 1999,  we had a total of  approximately  $1.0 million  outstanding
under these term loans and the line of credit. Borrowings under these term loans
and the line of credit are secured by substantially  all of our tangible assets.
On  October  31,  1999,  the line of  credit  converted  into a term  loan  with
principal  repayments  commencing  on  November  1,  1999  in 36  equal  monthly
payments.

    Net cash  used in  operating  activities  was $8.0  million  in 1997,  $13.0
million  in 1998 and  $17.2  million  in 1999.  Net cash  flows  from  operating
activities in each period reflect increasing net losses and, to a lesser extent,
accounts  receivable  offset in part by increases in accounts  payable,  accrued
expenses and deferred revenue.

    Net cash used in investing activities was $1.6 million in 1997, $4.3 million
in 1998 and $1.1 million in 1999.  Investing  activities in each period reflects
purchases  of  property  and  equipment,  as  well as  purchases  and  sales  of
short-term  investments.   Investing  activities  in  1999,  also  reflects  the
acquisition of ObjectEra, Inc.

    Net cash provided by financing  activities  was $23.4 million in 1997,  $1.9
million in 1998 and $64.9 million in 1999. Cash provided by financing activities
includes proceeds from the issuance of preferred and common stock, offset by the
payments on long-term  debt in each period,  as well as proceeds from  equipment
financings in 1997, 1998 and 1999.

    Capital  expenditures  were $1.6  million in 1997,  $1.0 million in 1998 and
$2.2  million in 1999.  Our  capital  expenditures  consisted  of  purchases  of
operating  resources to manage our operations,  including  computer hardware and
software,  office furniture and equipment and leasehold improvements.  Purchases
of  computer   equipment   represent  the  largest   component  of  our  capital
expenditures.  We expect this trend to continue as we move our  headquarters  in
the second quarter of 2000, increase the number of employees,  increase the size
of our  development  and quality  assurance  testing  facilities and improve and
expand our information  systems.  We expect that our capital  expenditures  will
continue to increase in the future.  Since  inception,  we have generally funded
capital expenditures either through the use of working capital or with equipment
bank loans.

    On August 20, 1999,  we completed  an initial  public  offering in which the
company  sold  3,000,000  shares of its  common  stock for net  proceeds  to the
Company of $42,940,000. On August 26, 1999, the Company's underwriters exercised
their over-allotment option, which resulted in the sale of an additional 450,000
shares of the Company's stock which generated additional proceeds of $6,696,000,
net of  issuance  costs.  Upon  closing of the  initial  public  offering,  each
outstanding share of the Company's  Redeemable  Convertible  Preferred Stock and
Convertible Preferred Stock was automatically converted into one share of common
stock of the Company  resulting in the  issuance of  8,659,208  shares of common
stock.

    On  November  9, 1999 we entered  into a lease for our  principal  executive
offices.  The term of the lease is from  March 1,  2000 to  February  28,  2006.
Annual lease payments are $800,000 for the first year, $1,200,000 for the second
year and $1,375,000 for each of the remaining years.

                                      -23-
<PAGE>

    On December 13, 1999 we acquired two companies,  GemLogic and ObjectEra. The
total  consideration  for GemLogic and ObjectEra is $20.2 million paid in shares
of our commons stock and cash.  Additional  future  consideration of up to $1.95
million  in cash and up to $6.75  million  in common  stock  will be paid in the
future   depending  on  future  events.   Of  the  cash  portion  of  the  total
consideration,  we paid $4.2 million on December 13, 1999 and subsequent to year
end, we made another cash payment of $3.9 million on February 1, 2000. Employees
of GemLogic were granted  non-qualified stock options at exercise prices ranging
between  approximately  $40 and $60 per  share.  A  compensation  charge for the
issuance  of these  stock  options,  representing  the  difference  between  the
exercise  price  of  options  granted  and  the  fair  market  value,  of  up to
approximately  $5.6 million in the aggregate will be charged to operations based
upon vesting of these options over the next four to seven years.

    On January 31, 2000, we completed a secondary  public  offering in which the
company  sold  1,445,851  shares of its  common  stock for net  proceeds  to the
Company of  $156,136,000.  Also on January 31, 2000, the Company's  underwriters
exercised  their  over-allotment  option,  which  resulted  in  the  sale  of an
additional  330,000  shares of the Company's  stock which  generated  additional
proceeds of $35,739,000, net of issuance costs.

    We expect  to  experience  significant  growth  in our  operating  expenses,
particularly research and development and sales and marketing expenses,  for the
foreseeable  future in order to  execute  our  business  plan.  As a result,  we
anticipate that such operating expenses, as well as planned capital expenditures
and the expansion of our professional services  organization,  will constitute a
material use of our cash resources.  In addition,  we may utilize cash resources
to  fund   acquisitions  of,  or  investments  in,   complementary   businesses,
technologies or product lines. We believe that the net proceeds from the sale of
the common stock in this offering, together with funds generated from operations
and existing cash and cash  equivalents,  will be sufficient to meet our working
capital requirements for at least the next 12 months. Thereafter, we may find it
necessary to obtain additional equity or debt financing. In the event additional
financing is required,  we may not be able to raise it on acceptable terms or at
all.

    We  do  not  believe  that  inflation  has  had a  material  impact  on  our
operations.

YEAR 2000 COMPLIANCE

    The "Year 2000 Issue"  refers  generally to the problems  that some software
may have in determining the correct century for the year. For example,  software
with date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish  whether  "00" means 1900 or 2000.  This could result in failures or
the creation of erroneous results.

    We have defined Year 2000 compliant as the ability to:

    o Correctly  handle date  information  needed for the  December  31, 1999 to
      January 1, 2000 date change;

    o Function  according  to the product  documentation  provided for this date
      change, without changes in operation, assuming correct configuration;

    o Where appropriate,  respond to two-digit date input in a way that resolves
      the  ambiguity  as to century in a  disclosed,  defined and  predetermined
      manner;

    o Store and provide output of date  information in ways that are unambiguous
      as to century if the date elements in interfaces and data storage  specify
      the century; and

    o Recognize year 2000 as a leap year.

    In prior periods, the Company discussed the nature and progress of its plans
to become Year 2000 ready.  In late 1999, the Company  completed its remediation
and  testing  of  systems.  As a result  of those  planning  and  implementation
efforts, the Company experienced no significant  disruptions in mission critical
information technology and non-information technology systems and believes those
systems  successfully  responded  to the Year  2000  date  change.  The  Company
expensed approximately $15,000 during 1999 to remedy its systems. The Company is
not aware of any material problems resulting from Year 2000 issues,  either with
its  products,  its  internal  systems,  or the  products  and services of third
parties.  The Company  will  continue to monitor its mission  critical  computer
applications and those of its suppliers and vendors  throughout the year 2000 to
ensure that any latent Year 2000 matters that may arise are addressed promptly.

                                      -24-
<PAGE>

CONVERSION TO EURO

    Eleven of the 15 common member  countries of the European  Union have agreed
to adopt the Euro as their legal  currency.  We have  arranged for the necessary
modifications  of our  internal  information  technology  and other  systems  to
accommodate Euro-denominated transactions. In addition, our products support the
Euro currency  symbol.  We are also assessing the business  implications  of the
conversion to the Euro,  including  long-term  competitive  implications and the
effect of market  risk  with  respect  to  financial  instruments.  Based on the
foregoing,  we do not  believe  the Euro will have a  significant  effect on our
business,  financial  position,  cash flows or results  of  operations.  We will
continue  to assess  the  impact  of Euro  conversion  issues as the  applicable
accounting, tax, legal and regulatory guidance evolves.

RECENT ACCOUNTING PRONOUNCEMENTS

    In June 1998, the Financial Accounting  Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging  Activities" ("SFAS No. 133") as amended
by SFAS No. 137,  which  establishes  accounting  and  reporting  standards  for
derivative  instruments,  including  derivative  instruments  embedded  in other
contracts, (collectively referred to as derivatives) and for hedging activities.
SFAS No. 133 is  effective  for all fiscal  quarters of fiscal  years  beginning
after June 15, 2000. The Company is presently analyzing the impact, if any, that
the adoption of SFAS No. 133 will have on its financial  condition or results of
operations.

    In December  1999,  the  Securities  and  Exchange  Commission  issued Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements."
The SAB  formalizes  positions  the staff has  expressed in speeches and comment
letters.  SAB 101 is  effective  no later than the first  fiscal  quarter of the
fiscal  year  beginning  after  December  15,  1999.  The  Company is  presently
analyzing  the impact,  if any,  that the  adherence to the SAB will have on its
financial condition or results of operations.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

    SilverStream  does not currently use derivative  financial  instruments.  We
generally  place our  marketable  security  investments  in high credit  quality
instruments,   primarily  U.S.   Government  and  Federal  Agency   obligations,
tax-exempt  municipal  obligations and corporate  obligations  with  contractual
maturities  of ten years or less.  We do not expect any  material  loss from our
marketable  security  investments  and  therefore  believe  that  our  potential
interest rate exposure is not material.

    Internationally,   SilverStream   invoices  customers   primarily  in  local
currency.  We are  exposed  to  foreign  exchange  rate  fluctuations  from when
customers are invoiced in local  currency  until  collection  occurs.  We do not
currently enter into foreign currency hedge  transactions.  Through December 31,
1999,  foreign  currency  fluctuations  have not had a  material  impact  on our
financial position or results of operations.

    Investments   in  both  fixed  rate  and  floating  rate  interest   earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market  value  adversely  impacted  due to a rise in interest  rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors,  our future investment income may fall
short of  expectations  due to changes in interest rates or we may suffer losses
in  principal  if forced to sell  securities  that have seen a decline in market
value due to changes in interest rates. A hypothetical  10% increase or decrease
in interest  rates,  however,  would not have a material  adverse  effect on our
financial condition.

    Interest  income on the Company's  investments  is carried in "Other income,
net." The Company  accounts for cash  equivalents  and marketable  securities in
accordance  with  Statement of Financial  Accounting  Standards  (SFAS) No. 115,
"Accounting  for  Certain  Investments  in Debt  and  Equity  Securities."  Cash
equivalents are short-term,  highly liquid  investments  with original  maturity
dates of three  months or less.  Cash  equivalents  are  carried at cost,  which
approximates  fair  market  value.  The  Company's  marketable   securities  are
classified  as  available-for-sale  and are  recorded  at fair  value  with  any
unrealized  gain  or  loss  recorded  as  an  element  of  stockholder's  equity
(deficit).

                                      -25-
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>

                           SILVERSTREAM SOFTWARE, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
           <S>                                                                                                       <C>
                                                                                                                     Page

           Report of Independent Auditors....................................................................         27
           Consolidated Balance Sheets.......................................................................         28
           Consolidated Statements of Operations.............................................................         29
           Consolidated Statements of Changes in Redeemable Convertible
             Preferred Stock and Stockholders' Equity (Deficit)..............................................         30
           Consolidated Statements of Cash Flows.............................................................         31
           Notes to Consolidated Financial Statements........................................................         32
</TABLE>



                                      -26-
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
SilverStream Software, Inc.

    We have audited the accompanying consolidated balance sheets of SilverStream
Software,  Inc. (the Company) as of December 31, 1998 and 1999,  and the related
consolidated  statements of operations,  redeemable  convertible preferred stock
and stockholders'  equity (deficit),  and cash flows for each of the three years
in the period ended  December  31,  1999.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements 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 SilverStream
Software,  Inc. at December 31, 1998 and 1999, 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.

                                                           /s/ ERNST & YOUNG LLP

Boston, Massachusetts
February 1, 2000,



                                      -27-
<PAGE>

<TABLE>
<CAPTION>
                           SILVERSTREAM SOFTWARE, INC.

                           CONSOLIDATED BALANCE SHEETS

                                                                                             December 31,
                                                                                     --------------------------
                                                                                          1999          1998
                                                                                     ------------  ------------

                                           Assets
         <S>                                                                          <C>          <C>
         Current assets:
           Cash and cash equivalents...............................................   $46,798,806  $  1,198,584
           Marketable securities...................................................       246,690     3,330,603
           Accounts receivable; net of allowances of $763,245 and $475,993 at
             December 31, 1999 and 1998, respectively..............................     6,938,308     3,339,667
           Note receivable.........................................................     2,000,000             -
           Prepaid expenses........................................................     1,130,809       247,413
           Other current assets....................................................         3,263       100,930
                                                                                     ------------  ------------
                  Total current assets.............................................    57,117,876     8,217,197

         Furniture, equipment and leasehold improvements, net......................     2,835,698     1,796,346
         Intangibles, net..........................................................    20,708,961             -
                                                                                     ------------  ------------

                  Total assets.....................................................  $ 80,662,535  $ 10,013,543
                                                                                     ============  ============

                       Liabilities and stockholders' equity (deficit)

         Current liabilities:
           Accounts payable........................................................  $  7,740,194  $  1,176,190
           Accrued expenses........................................................     3,299,570       422,749
           Deferred revenue........................................................     5,078,728     1,063,658
           Current portion of long-term debt.......................................       450,773       435,820
                                                                                     ------------  ------------
                  Total current liabilities........................................    16,569,265     3,098,417

         Long-term debt, less current portion......................................       508,526       324,787
         Redeemable convertible preferred stock:
              Series A redeemable convertible preferred stock, $.001 par value -
               authorized,  issued and outstanding none at December 31, 1999 and
               3,683,050 at December 31, 1998......................................             -     3,658,050
              Series B redeemable convertible preferred stock, $.001 par value -
               authorized 1,600,000 shares; issued and outstanding none at
               December 31, 1999 and 1,500,938 at December 31, 1998................             -     7,980,000
         Stockholders' equity (deficit):
              Series C convertible preferred stock, $.001 par value - authorized
              2,000,000 shares; issued and outstanding none at December 31, 1999
               and 1,922,588 at December 31, 1998..................................             -    16,856,323
              Common stock, $.001 par value - authorized 100,000,000 shares;
               issued and outstanding 17,689,870 at December 31, 1999 and 5,206,779
               at December 31, 1998 ...............................................        17,689         5,207
              Additional paid-in capital...........................................   115,185,253       365,985
              Deferred compensation................................................    (7,213,359)            -
              Accumulated deficit..................................................   (44,161,019)  (22,171,726)
              Other comprehensive loss.............................................      (140,320)            -
              Notes receivable from stockholders...................................      (103,500)     (103,500)
                                                                                     ------------  ------------
                  Total stockholders' equity (deficit).............................    63,584,744    (5,047,711)
                                                                                     ------------  ------------

                  Total liabilities and stockholders' equity (deficit).............  $ 80,662,535  $ 10,013,543
                                                                                     ============  ============
</TABLE>






                             See accompanying notes



                                      -28-
<PAGE>

<TABLE>
<CAPTION>

                           SILVERSTREAM SOFTWARE, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                          Years ended
                                                                          December 31,
                                                          -----------------------------------------
                                                               1999           1998           1997
                                                          ------------   ------------   ------------
<S>                                                       <C>            <C>            <C>
Revenue:
  Software license....................................    $ 13,825,676    $ 5,982,534    $   248,524
  Services............................................       9,238,731        825,365              -
                                                          ------------    -----------    -----------
          Total revenue...............................      23,064,407      6,807,899        248,524
Cost of revenue:
  Software license....................................       1,412,175        767,225         89,997
  Services............................................      10,252,589      1,413,962        281,796
                                                          ------------    -----------    -----------
          Total cost of revenue.......................      11,664,764      2,181,187        371,793
                                                          ------------    -----------    -----------

Gross profit..........................................      11,399,643      4,626,712       (123,269)
Operating expenses:
  Sales and marketing.................................      20,419,430     10,776,396      3,853,766
  Research and development............................       7,090,691      5,069,465      2,622,200
  General and administrative..........................       4,300,713      2,141,187      1,961,205
  Compensation charge for issuance of stock options...         438,594              -              -
  Amortization of goodwill............................         384,729              -              -
  In-process research and development charge..........       1,986,659              -              -
                                                          ------------    -----------    -----------
          Total operating expenses....................      34,620,816     17,987,048      8,437,171
                                                          ------------    -----------    -----------

Loss from operations..................................     (23,221,173)   (13,360,336)    (8,560,440)

Interest and other income.............................       1,421,743        559,495        274,331
Interest expense......................................        (189,863)       (84,206)       (48,986)
                                                          ------------    -----------    -----------
Net loss..............................................    $(21,989,293)  $(12,885,047)   $(8,335,095)

Beneficial conversion feature in Series D preferred
 stock................................................        (263,158)             -              -
                                                          ------------    -----------    -----------
Net loss applicable to common stockholders............    $(22,252,451)  $(12,885,047)   $(8,335,095)
                                                          ============    ===========    ===========
Basic and diluted net loss per share applicable to
common stockholders...................................    $      (2.64)  $      (4.89)   $    (10.61)
                                                          ============    ===========    ===========
Weighted-average common shares used in computing basic
and diluted net loss per share applicable to common
stockholders..........................................       8,419,116      2,632,496        785,548

</TABLE>





                             See accompanying notes

                                      -29-
<PAGE>


                           SILVERSTREAM SOFTWARE, INC.

                      CONSOLIDATED STATEMENTS OF CHANGES IN
    REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT)
<TABLE>
<CAPTION>
                                                               Redeemable
                                                              Convertible               Convertible
                                                            Preferred Stock            Preferred Stock           Common Stock
                                                        ----------------------    -----------------------   ----------------------
                                                          Shares       Amount        Shares      Amount        Shares      Amount
                                                        ---------   ----------    ----------  -----------   -----------  ---------
<S>                                                     <C>         <C>           <C>         <C>           <C>          <C>
Balance at December 31, 1996..........................  3,683,050   $3,658,050                                4,639,367  $   4,639
Issuance of common stock in April, August, November
 and December 1997....................................                                                          577,914        578
Issuance of Series B preferred stock in June and
 September 1997 (net of issuance costs of $20,000)....  1,500,938    7,980,000
Note issued for purchase of common stock in August
 1997.................................................
Repurchase and retirement of common stock in February
 and October 1997.....................................                                                          (130,890)      (131)
Issuance of Series C preferred stock in November and
 December 1997 (net of issuance costs of $20,000).....                            1,728,283    $15,154,325
Net loss..............................................
                                                        ---------   ----------    ----------   -----------   ----------   --------
Balance at December 31, 1997..........................  5,183,988   11,638,050    1,728,283     15,154,325    5,086,391      5,086
Issuance of common stock in January and December 1998.                                                           64,863         65
Issuance of Series C preferred stock in March 1998
 (net of issuance costs of $4,000)....................                              194,305      1,701,998
Exercise of stock options in June through December
 1998.................................................                                                           55,525         56
Net loss..............................................
                                                        ---------   ----------    ----------   -----------   ----------   --------
Balance at December 31, 1998..........................  5,183,988   11,638,050    1,922,588     16,856,323    5,206,779      5,207
Issuance of Series D preferred stock in March, April
 and May 1999 (net of issuance costs of $22,000)......                            1,552,632     14,727,997
Repurchase and retirement of common stock in March                                                              (10,754)       (11)
 1999.................................................
Exercise of stock options.............................                                                          130,181        129
Issuance of Common Stock in June, July, August and
 December 1999........................................                                                        3,704,456      3,705
Conversion of redeemable convertible preferred stock
 in August 1999....................................... (5,183,988) (11,638,050)  (3,475,220)   (31,584,320)   8,659,208      8,659
Deferred Compensation on grant of stock options.......
Amortization of deferred compensation.................
Net loss..............................................
Currency translation adjustment.......................

Comprehensive loss....................................
                                                        ---------   ----------    ----------    ----------   ----------   --------
Balance at December 31, 1999..........................          -            -             -             -   17,689,870   $ 17,689
                                                        =========   ==========    ==========    ==========   ==========   ========
</TABLE>
<TABLE>
<CAPTION>
                                                                                                         Other           Notes
                                                       Additional                                     Comprehensive    Receivable
                                                         Paid-in       Deferred        Accumulated       Income        from Sale
                                                         Capital     Compensation        Deficit         (Loss)         of Stock
                                                      ------------  --------------    ------------   --------------   -----------
<S>                                                   <C>           <C>               <C>            <C>              <C>
Balance at December 31, 1996..........................                                $   (951,584)
Issuance of common stock in April, August, November
 and December 1997....................................$   174,796
Issuance of Series B preferred stock in June and
September 1997 (net of issuance costs of $20,000).....
Note issued for purchase of common stock in August
 1997.................................................                                                               $   (103,500)
Repurchase and retirement of common stock in February
 and October 1997.....................................
Issuance of Series C preferred stock in November and
 December 1997 (net of issuance costs of $20,000).....
Net loss..............................................                                  (8,335,095)
                                                      ------------    ------------    ------------   --------------  ------------
Balance at December 31, 1997..........................     174,796                      (9,286,679)                      (103,500)
Issuance of common stock in January and December 1998.     181,887
Issuance of Series C preferred stock in March 1998
 (net of issuance costs of $4,000)....................
Exercise of stock options in June through December
 1998.................................................       9,302
Net loss..............................................                                 (12,885,047)
                                                      ------------    ------------    ------------   --------------  ------------
Balance at December 31, 1998..........................     365,985                     (22,171,726)                      (103,500)
Issuance of Series D preferred stock in March, April
 and May 1999 (net of issuance costs of $22,000)......
Repurchase and retirement of common stock in March
 1999.................................................
Exercise of stock options.............................     269,852
Issuance of Common Stock in June, July, August and
 December 1999........................................  63,683,752
Conversion of redeemable convertible preferred stock
 in August 1999......................................   43,213,711
Deferred Compensation on grant of stock options.......   7,651,953    $ (7,651,953)
Amortization of deferred compensation.................                     438,594
Net loss..............................................                                 (21,989,293)
Currency translation adjustment.......................                                               $     (140,320)
                                                                                                     --------------
Comprehensive loss....................................
                                                      ------------    ------------     -----------   --------------  ------------
Balance at December 31, 1999..........................$115,185,253    $ (7,213,359)   $(44,161,019)  $     (140,320) $   (103,500)
                                                      ============    ============     ===========   ==============  ============
</TABLE>


<TABLE>
<CAPTION>
                                                           Total
                                                        Stockholders'
                                                          Equity
                                                         (Deficit)
                                                       ------------
<S>                                                    <C>
Balance at December 31, 1996..........................  $  (946,945)
Issuance of common stock in April, August, November
 and December 1997....................................      175,374
Issuance of Series B preferred stock in June and
September 1997 (net of issuance costs of $20,000).....            -
Note issued for purchase of common stock in August
 1997.................................................     (103,500)
Repurchase and retirement of common stock in February
 and October 1997.....................................         (131)
Issuance of Series C preferred stock in November and
 December 1997 (net of issuance costs of $20,000).....   15,154,325
Net loss..............................................   (8,335,095)
                                                       ------------
Balance at December 31, 1997..........................    5,944,028
Issuance of common stock in January and December 1998.      181,952
Issuance of Series C preferred stock in March 1998
 (net of issuance costs of $4,000)....................    1,701,998
Exercise of stock options in June through December
 1998.................................................        9,358
Net loss..............................................  (12,885,047)
                                                       ------------
Balance at December 31, 1998..........................   (5,047,711)
Issuance of Series D preferred stock in March, April
 and May 1999 (net of issuance costs of $22,000)......   14,727,997
Repurchase and retirement of common stock in March
 1999.................................................          (11)
Exercise of stock options.............................      269,981
Issuance of Common Stock in June, July, August and
 December 1999........................................   63,687,457
Conversion of redeemable convertible preferred stock
 in August 1999.......................................            -
Deferred Compensation on grant of stock options.......            -
Amortization of deferred compensation.................      438,594
Net loss..............................................  (21,989,293)
Currency translation adjustment.......................     (140,320)
                                                        ------------
Comprehensive loss....................................  (22,129,613)
                                                       ------------
Balance at December 31, 1999.......................... $ 63,584,744
                                                       ============
</TABLE>
                                      -30-
<PAGE>


                           SILVERSTREAM SOFTWARE, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                         For the Year Ended
                                                                                               December 31,
                                                                           --------------------------------------------
                                                                                1999            1998            1997
                                                                           ------------    ------------    ------------
     <S>                                                                   <C>             <C>             <C>
     Operating activities

     Net loss.........................................................     $(21,989,293)   $(12,885,047)   $ (8,335,095)
     Adjustments to reconcile net loss to net cash used in operating
     activities:
       Depreciation and amortization..................................        1,673,163         724,045         345,494
       Provision for allowances on accounts receivable................          287,252         431,333          44,660
       In-process research and development charge.....................        1,986,659               -               -
       Operating expenses paid with issuance of preferred stock.......                -               -          79,998
       Operating expenses paid with issuance of common stock..........                -         181,952          20,700
       Compensation charge for issuance of stock options..............          438,594               -               -
       Changes in operating assets and liabilities:
         Accounts receivable..........................................       (3,328,390)     (3,577,745)       (237,915)
         Note receivable..............................................       (2,000,000)              -               -
         Prepaid expenses.............................................         (722,227)         69,837        (303,579)
         Other current assets.........................................          167,673         166,824               -
         Accounts payable and accrued expenses........................        3,556,812         870,286         385,486
         Deferred revenue.............................................        2,731,856       1,026,571          37,087
                                                                            -----------    ------------    ------------
     Net cash used in operating activities............................      (17,197,901)    (12,991,944)     (7,963,164)
                                                                            -----------    ------------    ------------

     Investing activities

     Purchase of ObjectEra, Inc., net of cash acquired................       (3,089,598)              -               -
     Purchase of furniture and equipment..............................       (2,208,906)       (992,236)     (1,564,812)
     Cash acquired through acquisitions of subsidiaries...............          255,310               -               -
     Sale (purchase) of available-for-sale securities.................        3,083,913      (3,330,603)              -
                                                                            -----------    ------------    ------------
     Net cash used in investing
       activities.....................................................       (1,959,281)     (4,322,839)     (1,564,812)
                                                                            -----------    ------------    ------------

     Financing activities

     Net proceeds from issuance of preferred stock....................       14,727,997       1,701,998      23,054,327
     Net proceeds from issuance of common stock.......................       50,006,058           9,358          51,043
     Repurchase and retirement of common stock........................              (11)              -               -
     Proceeds from line of credit.....................................          750,000         602,317         513,110
     Payments on long-term debt.......................................         (551,309)       (449,647)       (175,087)
                                                                            -----------    ------------    ------------
     Net cash provided by financing activities........................       64,932,735       1,864,026      23,443,393
                                                                            -----------    ------------    ------------

     Effects of exchange rate on cash and cash equivalents............         (175,331)              -               -

     Net increase (decrease) in cash and cash equivalents.............       45,600,222     (15,450,757)     13,915,417

     Cash and cash equivalents at beginning of period.................        1,198,584      16,649,341       2,733,924
                                                                              ---------    ------------    ------------
     Cash and cash equivalents at end of period.......................      $46,798,806    $  1,198,584    $ 16,649,341
                                                                            ===========    ============    ============
     Supplemental Information Cash paid during the period for:

         Income taxes.................................................      $    21,110    $     14,283    $        456
                                                                            ===========    ============    ============
         Interest.....................................................      $    78,891    $     84,206    $     48,986
                                                                            ===========    ============    ============
</TABLE>







                             See accompanying notes.



                                      -31-
<PAGE>

                           SILVERSTREAM SOFTWARE, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  NATURE OF BUSINESS

    SilverStream  Software,  Inc. (the Company) was incorporated on May 8, 1996.
The Company is a global  provider of  application  server  software and services
that enable  businesses  and other  large  organizations  to create,  deploy and
manage  software  applications  for intranets,  extranets and the Internet.  The
Company  markets  their  software  worldwide and has sales offices in the United
Kingdom, The Netherlands,  Belgium, Germany, Norway, the Czech Republic, France,
Hong Kong, Singapore and Taiwan.

    The  market for  application  server  software  has only  recently  begun to
develop,  is rapidly  evolving  and will  likely  have an  increasing  number of
competitors.  The market is marked by rapid technological  change,  frequent new
product  introductions  and enhancements and evolving  industry  standards.  The
Company's future financial performance will depend on the market's acceptance of
its  application  server  products  and the  Company's  ability to  successfully
introduce  enhancements to their  application  server products and to expand its
operations to meet the evolving customer needs within the industry.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   PRINCIPLES OF CONSOLIDATION

    The consolidated  financial  statements  include the accounts of the Company
and its international  subsidiaries,  all of which are wholly owned,  located in
Europe and Asia. All intercompany accounts and transactions have been eliminated
in consolidation.

    The accompanying  consolidated  financial statements reflect the application
of  certain  significant  accounting  policies  as  described  in this  note and
elsewhere in the accompanying consolidated financial statements and notes.

   USE OF ESTIMATES

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

   CASH EQUIVALENTS AND MARKETABLE SECURITIES

    The Company  accounts for cash  equivalents  and  marketable  securities  in
accordance  with  Statement of Financial  Accounting  Standards  (SFAS) No. 115,
"Accounting  for  Certain  Investments  in Debt  and  Equity  Securities."  Cash
equivalents are short-term,  highly liquid  investments  with original  maturity
dates of three  months or less.  Cash  equivalents  are  carried at cost,  which
approximates  fair  market  value.  The  Company's  marketable   securities  are
classified  as  available-for-sale  and are  recorded  at fair  value  with  any
unrealized gain or loss recorded as a separate component of comprehensive  loss.
As of December  31,  1999,  the Company has a $300,000  restriction  on its cash
balance,  as a result of a secured  Letter of Credit.  This Letter of Credit was
issued by the  Company's  primary  bank to the  landlord  of the  Company's  new
corporate headquarters,  as part of the lease negotiations.  The lease commences
on March 1, 2000 and  expires on  February  28, 2006 at which time the Letter of
Credit will expire,  as well. As of December 31, 1999 the  Company's  marketable
securities consisted of investment-grade corporate bonds.

    As of December 31, 1999,  all of the  Company's  marketable  securities  had
contractual maturities within one year.

   CONCENTRATION OF CREDIT RISK

    Financial  instruments that  potentially  subject the Company to significant
concentrations of credit risk consist of cash and cash  equivalents,  marketable
securities,  accounts receivable and other receivables.  Concentration of credit
risk with respect to cash  equivalents  and marketable  securities is limited as
these assets are primarily  investment-grade  corporate bonds with  high-credit,
quality financial institutions.

                                      -32-
<PAGE>

    Concentration of credit risk with respect to accounts  receivable is limited
due to the large number of companies  comprising  the Company's  customer  base.
On-going credit evaluations of customers'  financial condition are performed and
collateral  is  generally  not  required.  The Company  maintains  reserves  for
potential  credit losses and such losses,  in the  aggregate,  have not exceeded
management's expectations.

   FURNITURE AND EQUIPMENT

    Furniture and equipment is stated at cost.  Depreciation  is computed by use
of the straight-line method over the following estimated useful lives:

    Leasehold improvements........................     Lesser of remaining
                                                       lease-term or useful life
    Furniture and fixtures........................     5 years
    Computer equipment and software...............     3 years
    Telephone equipment...........................     3 years


   ADVERTISING COSTS

    The Company expenses  advertising costs as incurred.  Advertising costs were
$858,000  and  $805,000  for  the  years  ended  December  31,  1998  and  1999,
respectively.

   CAPITALIZED SOFTWARE

    Capitalization  of software  development costs under SFAS No. 86 begins upon
the  establishment of technological  feasibility.  Technological  feasibility is
established  upon the  completion  of a  working  model.  The  establishment  of
technological  feasibility  and the  ongoing  assessment  of  recoverability  of
capitalized  software   development  costs  require  considerable   judgment  by
management with respect to certain external factors,  including, but not limited
to,  technological  feasibility,  anticipated  future gross revenues,  estimated
economic life, and changes in software and hardware technologies. Costs incurred
by the Company between  completion of a working model and the point at which the
product is ready for general release have been insignificant. Therefore, through
December  31,  1998 and 1999,  all  research  and  development  costs  have been
expensed as incurred.

   REVENUE RECOGNITION

    Revenue  recognition  from software  license fees and from sales of software
products is recognized when persuasive evidence of an agreement exists, delivery
of the product has occurred,  no significant  Company obligations with regard to
implementation  remain,  the fee is fixed or determinable and  collectibility is
probable. Update assurance agreements represent the right to receive unspecified
upgrades  on  an  if-and-when   available  basis.  Fees  from  update  assurance
agreements,  which are  separately  negotiated  and  priced,  are  deferred  and
recognized  on a  straight-line  basis over the life of the  related  agreement,
which is typically one year.

    Services  revenue  is  primarily   comprised  of  revenue  from  consulting,
technical support and education  services.  Services revenue from consulting and
education  is billed on a time and  materials  basis  and is  recognized  as the
services are performed.  Technical support revenue is deferred and recognized on
a straight-line basis as service revenue over the life of the related agreement,
which is typically one year.

    Customer advances and billed amounts due from customers in excess of revenue
recognized  are recorded as deferred  revenue and recognized as the services are
delivered.

    Revenue  derived  from  arrangements  with  resellers of our products is not
recognized until the software is shipped to the customer.

    Sales to independent  software vendors (ISVs) are deferred and recognized on
a straight line basis as product  revenue over the life of the agreement,  which
is typically one year, since the only undelivered element under these agreements
is service  for which no  pattern of  performance  is  discernible.  ISV-related
partner fees are deferred and  recognized  on a straight line basis as an offset
to the related  expenses over the life of the agreement,  which is typically one
year,  since  the  Company  considers  such fees to be  reimbursement  for costs
incurred,  primarily  marketing  support,  in  connection  with its ISV  partner
program.

    Customer  returns  are  estimated  and accrued  for as a  percentage  of net
product revenues based upon historical trends.

    The Company  adopted  Statement of Position  (SOP) 97-2,  "Software  Revenue
Recognition" and SOP 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2,  Software  Revenue  Recognition,"  as of January 1, 1998. SOP 97-2 and SOP
98-4  provide  guidance for  recognizing  revenue on software  transactions  and
supersede SOP 91-1.

                                      -33-
<PAGE>

    The Company will adopt SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition,  with Respect to Certain Transactions." SOP 98-9 amends SOP 98-4 to
extend the period of deferral of the application of certain passages of SOP 97-2
provided by SOP 98-4 through fiscal years beginning on or before March 15, 1999.
All other provisions of SOP 97-2 are effective for transactions  entered into in
fiscal years beginning after March 15, 1999.

    The adoption of SOP 97-2 and SOP 98-4 did not have a material  impact on the
Company's financial results. In addition, the Company believes that the adoption
of SOP 98-9 will not have a material impact on the Company's financial results.

   LICENSING AGREEMENTS

    The Company has entered into various  licensing  agreements with third-party
software  and  technology  companies,   primarily  for  encryption   technology,
requiring  royalty  payments  which are based on either a percentage  of product
revenue  or per unit  sales.  Royalty  expenses,  which are  charged  to cost of
revenue under these license  agreements,  totaled  $168,000 and $310,000 for the
years ended December 31, 1998 and 1999, respectively.  Prepaid royalties related
to these  licensing  agreements  were  $113,000 and $399,000 for the years ended
December 31, 1998 and 1999, respectively.

   EARNINGS PER SHARE

    The Company  computes  earnings per share in  accordance  with SFAS No. 128,
"Earnings per Share".  SFAS 128 requires  calculation and  presentation of basic
and diluted earnings per share.  Basic earnings per share is calculated based on
the  weighted  average  number of common  shares  outstanding  and  excludes any
dilutive effects of warrants,  stock options, common stock subject to repurchase
or other type securities.  Diluted earnings per share is calculated based on the
weighted average number of common shares  outstanding and the dilutive effect of
warrants,  stock options,  and related securities  calculated using the treasury
stock method.  Dilutive  securities  are excluded from the diluted  earnings per
share calculation if their effect is anti-dilutive.

   INCOME TAXES

    The Company  provides for income taxes under SFAS No. 109,  "Accounting  for
Income  Taxes." Under SFAS 109, the liability  method is used in accounting  for
income  taxes.  Under this  method,  deferred  tax assets  and  liabilities  are
determined based on differences between the financial reporting and tax basis of
assets and  liabilities  and are  measured  using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.

   FINANCIAL INSTRUMENTS

    The fair value of the Company's  financial  instruments,  which include cash
and  cash  equivalents,   marketable  securities,   accounts  receivable,  other
receivables,  accounts  payable  and long term  debt,  are based on  assumptions
concerning  the amount and timing of  estimated  future  cash flows and  assumed
discount rates reflecting  varying degrees of perceived risk. The carrying value
of these  financial  instruments  approximated  their fair value at December 31,
1998 and 1999 due to the short term nature of these instruments and the variable
interest rate on the long term debt.

   FOREIGN CURRENCY TRANSLATIONS

    Financial  statements  of  foreign  subsidiaries  are  translated  into U.S.
dollars at the exchange rate as of the balance  sheet dates,  with the exception
of revenues, costs and expenses. All revenues, costs and expenses are translated
at a weighted-average  of exchange rates in effect during the year. Net exchange
gains  or  losses  resulting  from  the  translation  of the  foreign  financial
statements  are  recorded  as a  separate  component  of  comprehensive  income.
Transaction adjustments for all foreign subsidiaries are included in income.



                                      -34-
<PAGE>

   ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS

    Long-lived  assets  used in  operations,  such as the  excess  cost over net
assets of businesses acquired, and property, plan and equipment, are included in
impairment  evaluations  when events or  circumstances  exist that  indicate the
carrying  amount  of those  assets  may not be  recoverable.  If the  impairment
evaluation indicates the affected asset is not recoverable, the asset's carrying
value would be reduced to fair value.  No event has  occurred  that would impair
the  value  of  long-lived  assets  recorded  in the  accompanying  consolidated
financial statements.

   STOCK COMPENSATION ARRANGEMENTS

    The  Company  adopted  the  disclosure-only  provisions  of  SFAS  No.  123,
"Accounting  for  Stock-Based  Compensation."  As permitted by SFAS No. 123, the
Company has continued to account for employee  stock options in accordance  with
Accounting  Principles Board Opinion (APB) No. 25,  "Accounting for Stock Issued
to Employees," and has included the pro forma  disclosures  required by SFAS No.
123 for all periods presented.

   NON-MONETARY TRANSACTIONS

    The Company has entered into certain non-monetary transactions involving the
issuance of preferred  or common stock in  consideration  for  professional  and
marketing  services  provided to the Company by third  parties.  The Company has
accounted for these  non-monetary  transactions in accordance with SFAS No. 123.
All  transactions  are  accounted  for  based on the fair  value of the goods or
services  received  or on the  fair  value  of the  equity  instruments  issued,
whichever is more  reliably  measurable.  All expenses  related to  non-monetary
transactions were recognized in the period incurred.

   COMPREHENSIVE INCOME

    As of  January  1,  1998,  the  Company  adopted  SFAS No.  130,  "Reporting
Comprehensive Income," which establishes new rules for the reporting and display
of comprehensive  income and its components.  SFAS 130 requires unrealized gains
and  losses  on the  Company's  available-for-sale  securities  and the  foreign
currency  translation  adjustments,   which  prior  to  adoption  were  reported
separately  in  shareholders'  equity,  to be  included  in other  comprehensive
income.  Prior to the year  ended  December  31,  1999,  amounts  pertaining  to
comprehensive  income were not material and have  therefore not been  separately
stated.

   SEGMENT REPORTING

    Effective   January  1,  1998,  the  Company   adopted  the  SFAS  No.  131,
"Disclosures about Segments of an Enterprise and Related  Information." SFAS 131
superseded  SFAS  No.  14,  "Financial  Reporting  for  Segment  of  a  Business
Enterprise."  SFAS 131  establishes  standards for the way that public  business
enterprises  report  information  about operating  segments in interim financial
reports.  The Company  views its  operations  and  manages  its  business as one
segment:  the development  and delivery of application  server  solutions,  that
include software and related products and services. Factors used to identify the
Company's single operating segment include the  organizational  structure of the
Company and the  financial  information  available  for  evaluation by the chief
operating decision maker in making decisions about how to allocate resources and
assess performance. The adoption of SFAS 131 did not affect results of operation
or financial position, but did affect the disclosure of segment information. See
Note 12.

   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

    In March 1998, the Accounting  Standard Executive Committee ("AcSEC") issued
SOP 98-1,  "Accounting of the Costs of Computer  Software  Developed or Obtained
for Internal Use." The adoption of SOP 98-1, which is effective for SilverStream
beginning  January 1, 1999,  did not have a  material  effect on  SilverStream's
financial condition or results of operations.

    In April  1998,  the  AcSEC  issued  SOP  98-5,  "Reporting  on the Costs of
Start-Up  Activities."  SOP 98-5 is effective for  SilverStream's  calendar year
1999  financial  statements  and the adoption did not have a material  effect on
SilverStream financial condition or results of operations.

    In June 1998, the Financial Accounting Standards Board issued  SFAS No. 133,
"Accounting for Derivatives  Instruments and Hedging  Activities," as amended by
SFAS No. 137.  The  Company is  currently  analyzing  the  effect,  if any,  the
standard will have on its financial condition or results of operations. SFAS No.
133 is effective for fiscal years beginning after June 15, 2000.

                                      -35-
<PAGE>

    In December  1999,  the  Securities  and  Exchange  Commission  issued Staff
Accounting   Bulleting   (SAB)  No.  101  "Revenue   Recognition   in  Financial
Statements."  The SAB  formalizes  positions the staff has expressed in speeches
and comment letters. SAB 101 is effective no later than the first fiscal quarter
of the fiscal year  beginning  after December 15, 1999. The Company is presently
analyzing  the impact,  if any,  that the  adherence to the SAB will have on its
financial condition or results of operations.

3.  NOTE RECEIVABLE

    On December 23, 1999, the Company entered into a Convertible Promissory Note
Receivable  with  one of its  corporate  collaborators  for  $2.0  million.  The
principal  sum and all  accrued  interest  (9.00%  per  annum),  of this Note is
payable  in full on the  earlier  of (i)  April  30,  2000 or (ii) the date of a
closing of a subsequent financing for the partner.  SilverStream, at its option,
may elect to convert this note to equity  pursuant to a subsequent  financing by
the  partner.  The  number  of  shares to be  issued  upon  conversion  shall be
determined  by dividing  the  principal  balance of the note and all accrued and
unpaid  interest by the purchase price per share paid by the other  investors in
the partner's subsequent financing.

4.  FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

    Furniture, equipment and leasehold improvements consists of the following:
<TABLE>
<CAPTION>
                                                                      December 31,
                                                                -----------------------
                                                                   1999         1998
                                                                ----------  -----------
              <S>                                               <C>         <C>
              Furniture and fixtures.................           $  763,291  $   502,821
              Computer equipment and software........            4,037,403    2,051,809
              Telephone equipment....................              171,613      162,205
              Leasehold improvements.................              251,114      178,800
                                                                ----------  -----------
                                                                 5,223,421    2,895,635
              Less accumulated depreciation..........           (2,387,723)  (1,099,289)
                                                                ----------  -----------
                                                                $2,835,698  $ 1,796,346
</TABLE>

5.  ACCRUED EXPENSES

    Accrued expenses include the following:
<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                                -----------------------
                                                                                   1999         1998
                                                                                ----------    ---------
                          <S>                                                   <C>           <C>
                          Fringe benefits....................................   $1,372,637    $ 124,337
                          Occupancy..........................................      139,089      130,507
                          Professional fees..................................      130,431       66,387
                          Bonus..............................................      175,000       19,996
                          Sales and VAT taxes payable........................      410,724            -
                          Deferred tax liability.............................      853,000            -
                          Other..............................................      218,689       81,522
                                                                                ----------    ---------
                                                                                $3,299,570    $ 422,749
                                                                                ==========    =========
</TABLE>

6.  DEBT

   LONG-TERM DEBT

    Under the terms of a credit facility,  negotiated in 1996 and expiring March
1, 2000, borrowings of approximately  $501,598 and $295,286 converted fully into
separate  term loans on March 31, 1997 and  September  30,  1997,  respectively.
Principal repayments began April 1, 1997 and October 1, 1997 in 30 equal monthly
payments.  Interest  on the loans  accrues  at prime  rate  plus 0.5%  (9.00% at
December 31, 1999) and is payable monthly in arrears.  The  outstanding  balance
under  the  facility  at  December  31,  1998  and  1999  was  $308,870  and $0,
respectively.

    Under terms of a credit  facility,  negotiated in 1997 and expiring March 1,
2001,  borrowings of approximately  $602,000 converted fully into a term loan on
March 31, 1998.  Principal  repayments  began April 1, 1998 in 36 equal  monthly
payments.  Interest  on the loan  accrues  at prime  rate  plus  0.5%  (9.00% at
December 31, 1999) and is payable monthly in arrears.  The  outstanding  balance
under the  facility at December  31, 1998 and 1999 was  $451,737  and  $250,965,
respectively.

                                      -36-
<PAGE>

    Under terms of a credit facility, negotiated in 1999 and expiring October 1,
2002,  borrowings of approximately  $750,000 converted fully into a term loan on
October  31,  1999.  Principal  repayments  began  November  1, 1999 in 36 equal
monthly payments. Interest on the loan accrues at prime rate plus 0.5% (9.00% at
December 31, 1999) and is payable monthly in arrears.  The  outstanding  balance
under  the  facility  at  December  31,  1998  and  1999  was $0  and  $708,334,
respectively.

    Borrowings  under  the  terms  of  all  credit  facilities  are  secured  by
substantially all the Company's tangible assets.

    The aggregate maturities of long term debt are as follows:

                2000.........................................      450,773
                2001.........................................      500,961
                2002.........................................        7,565
                                                                  --------
                                                                  $959,299

7.  Leases

    The Company leases office space and certain  equipment  under non cancelable
operating  leases expiring  through  February 2006. Some of these leases contain
renewal options.  Future minimum payments under  noncancelable  operating leases
are as follows:

               2000......................................        1,725,041
               2001......................................        1,273,410
               2002......................................        1,383,909
               2003......................................        1,377,415
               2004......................................        1,375,000
               2005 and thereafter.......................        2,750,000
                                                             -------------
               Total minimum lease payments..............    $   9,884,775
                                                             =============

    Rent expense  charged to operations  for the years ended  December 31, 1997,
1998 and 1999 was $336,000, $602,000 and $1,506,000, respectively.

8.  EMPLOYEE BENEFITS

   RESTRICTED STOCK ISSUED TO FOUNDER

    In May and July 1996, the Company sold  1,123,000  shares of common stock to
the founder  pursuant to a founder's  stock  restriction  agreement  at the fair
value of the stock at the date of the  issuance.  The shares  were issued in the
name of the  founder,  who has all rights of a  stockholder,  subject to certain
repurchase and transfer provisions.  If the founder ceases to be employed by the
Company,  the  Company  shall have the option to  repurchase  from the founder a
portion of the shares  based upon a  predetermined  formula.  In  addition,  the
founder  shall not sell any of the shares that are subject to  repurchase by the
Company.

    An aggregate of 168,450  shares of common stock are subject to repurchase at
December 31, 1999.

   1996 FOUNDERS STOCK INCENTIVE PLAN

    In May 1996, the Company adopted the 1996 Founders Stock Incentive Plan (the
1996 Plan) covering all eligible employees,  officers, directors consultants and
advisors.  At inception of the 1996 Plan, the Company authorized the issuance of
up to 3,877,000 shares of common stock. The Company issued and sold an aggregate
of  3,775,031  shares of common  stock under the 1996 Plan  pursuant to founders
stock  restriction  agreements at the fair value of the stock at the date of the
issuance. The shares were issued in the name of the employee, who has all rights
of a stockholder,  subject to certain repurchase and transfer provisions. If the
employee ceases to be employed by the Company, the Company shall have the option
to  repurchase  from  the  employee  a  portion  of  the  shares  based  upon  a
predetermined  formula.  In  addition,  the  employee  shall not sell any of the
shares that are subject to  repurchase  by the Company.  An aggregate of 145,394
shares of common stock have been  repurchased  and retired by the Company  under
the 1996 Plan.

    An aggregate of 681,199  shares of common stock are subject to repurchase at
December 31, 1999.

   1997 STOCK INCENTIVE PLAN

    In February  1997,  the Company  adopted the 1997 Stock  Incentive Plan (the
1997 Plan) covering all eligible employees, officers, directors, consultants and
advisors.  As of December 31, 1998 the Company had reserved  1,305,719 shares of
common stock for issuance  under the 1997 Plan. As of June 30, 1999, the Company
authorized the issuance of up to 3,500,000 shares of common stock under the 1997
Plan.  Under the 1997 Plan,  the  Company  may grant  stock  options to purchase
shares of the Company's common stock,  restricted  common stock awards and other
stock-based  awards  having  terms  and  conditions  at  the  discretion  of the
Company's  Board of Directors.  The prices,  terms and vesting  periods of stock
awards under the 1997 Plan are  determined by the Board of Directors at the date
of the grant.  The 1997 Plan also contains  provisions which stipulate that upon
an acquisition  event the Board of Directors is authorized to determine that any
stock option, restricted stock or other stock-based award granted under the 1997
Plan may become immediately exercisable in full or in part.

                                      -37-
<PAGE>

    The Company  issued and sold an aggregate of 300,000  shares of common stock
under the 1997 Plan  pursuant to founders  stock  restriction  agreements at the
fair  value of the stock at the date of  issuance.  The shares are issued in the
name of the employee,  who has all rights of a  stockholder,  subject to certain
repurchase and transfer provisions. If the employee ceases to be employed by the
Company,  the Company  shall have the option to  repurchase  from the employee a
portion of shares based upon a predetermined  formula. In addition, the employee
shall not sell any of the shares that are subject to repurchase by the Company.

    An aggregate of 89,375  shares of common stock are subject to  repurchase at
December 31, 1999.

    In March 1999,  options to purchase an aggregate of 201,450 shares of common
stock  which vest over a five year  period  were  granted to  employees  with an
exercise  price of $4.00 per  share.  In April  1999,  options  to  purchase  an
aggregate  of 11,600 and 215,450  shares of common  stock which vest over a five
year period were granted to employees  with an exercise price of $6.00 and $8.00
per share, respectively.  Additionally, on April 30, 1999, an option to purchase
an aggregate  of 25,000  shares of common  stock which  vested  immediately  was
granted to a director  with an exercise  price of $8.00 per share.  In May 1999,
options to purchase an  aggregate  of 115,250  shares of common stock which vest
over a five year  period were  granted to  employees  with an exercise  price of
$8.00 per share. In June 1999, options to purchase an aggregate of 27,000 shares
of common  stock which vest over a five-year  period were  granted to  employees
with an  exercise  price of $10.00  per  share.  In  December  1999,  options to
purchase an aggregate of 99,500 shares of common stock which vest over a four to
seven year period were granted to employees at exercise  prices ranging from $40
to $60 per share.

    The Company has recorded  deferred  compensation  of $7,651,953  relating to
these option  grants,  which is being  charged  ratably to  operations  over the
vesting period of the options.

    The Company  holds notes  receivable  totaling  $103,500  from  employees at
December 31, 1998, and 1999.  These notes arose from  transactions  in September
1997 whereby the Company loaned the employees  money to purchase an aggregate of
207,000 shares of the Company's  common stock at the then fair market value. The
notes  receivable  are fully recourse to the employees and are due to be paid in
full, with accrued  interest at the rate of 6.39% per annum, on August 26, 2002.
These notes receivable are shown as a reduction in  stockholders'  equity in the
accompanying balance sheets.

   1999 EMPLOYEE STOCK PURCHASE PLAN

         In accordance  with the 1999 Employee  Stock  Purchase  Plan,  eligible
employees may authorize  payroll  deductions of up to 10% of their  compensation
(not to exceed $12,500 in a six-month period) to purchase shares at the lower of
85% of the fair market value of the  Company's  Common Stock at the beginning or
end of the  six-month  option  period.  During  1999,  no shares  were issued to
employees.  At December 31, 1999, a total of 300,000 shares of Common Stock were
reserved for issuance under the plan.

   401(k) PLAN

    The Company has a 401(k) plan (the Plan),  whereby  eligible  employees  may
contribute up to 15% of their compensation,  subject to limitations  established
by the Internal  Revenue Code. The Company may also  contribute a  discretionary
matching contribution, to each such participant's deferred compensation equal to
a discretionary  percentage  determined by the Company. As of December 31, 1999,
the Company had not made any discretionary  matching contributions in any of the
fiscal periods presented.

   STOCK OPTION DISCLOSURES

    The Company has adopted the disclosure provisions only of SFAS 123. The fair
values for these  options were  estimated at the date of grant using the minimum
value method with the following assumptions:

                                      -38-
<PAGE>

<TABLE>
<CAPTION>
                                                                                      Years Ended
                                                                                      December 31,
                                                                               -------------------------
                                                                                 1997     1998      1999
                                                                               -------  -------   ------

                 <S>                                                             <C>      <C>       <C>
                 Expected life (years).....................................      4.97     5.35      8.94
                 Risk free interest rate...................................      5.66%    4.75%     6.34%
                 Dividend yield............................................        --       --        --
</TABLE>

    For  purposes  of pro forma  disclosures,  the  estimated  fair value of the
options is amortized to expense over the options' vesting period.  The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
                                                                  Years Ended
                                                                  December 31,
                                                    -----------------------------------------
                                                         1997          1998           1999
                                                    -------------  ------------  ------------

          <S>                                       <C>            <C>           <C>
          Pro forma net loss...................     $ (8,351,473)  $(12,996,310) $(26,713,375)
          Pro forma net loss per share.........     $     (10.63)  $      (4.94) $      (3.17)
</TABLE>

    Compensation  expense under SFAS 123 for 1998 and 1999 is not representative
of future expense, as it includes one and two years of expense, respectively. In
future years, the effect of determining  compensation  cost using the fair value
method will include additional vesting and associated expense.

    Option activity under the 1997 Plan is summarized below:
<TABLE>
<CAPTION>
                                                                     Years Ended December 31,
                                                 ----------------------------------------------------------------
                                                         1997                  1998                  1999
                                                 --------------------  --------------------  --------------------
                                                             Weighted              Weighted              Weighted
                                                              Average               Average               Average
                                                             Exercise              Exercise              Exercise
                                                   Options     Price     Options     Price     Options     Price
                                                 ---------    -------   --------    -------   ---------    -------
                 <S>                             <C>          <C>       <C>         <C>       <C>          <C>
                 Outstanding, beginning of
                   year.....................            -          -     607,000     $  .34     895,175     $ 1.15
                 Granted....................      614,000     $  .34     381,950       2.21   1,095,300      23.63
                 Expired or canceled........       (7,000)       .20     (38,250)       .37     (63,325)      6.25
                 Exercised..................            -                (55,525)       .17    (130,181)      2.03
                                                 --------                -------              ---------
                 Outstanding, end of year...      607,000        .34     895,175       1.15   1,796,969      14.61
                                                 ========                =======              =========
                 Exercisable at end of year.            -                159,850                272,599
                 Available for future grants      398,719                 55,019              1,217,325

                 Weighted-average fair value of
                   options granted during year                $  .33                $  2.16                 $23.63
</TABLE>

    The following  table presents  weighted-average  price and life  information
about significant option groups outstanding at December 31, 1999:
<TABLE>
<CAPTION>
                                                      Options Outstanding
                                        --------------------------------------------
                                                         Weighted-
                                                          Average        Weighted-                     Weighted-
                                                         Remaining        Average                       Average
                     Range of             Number        Contractual      Exercise        Number        Exercise
                  Exercise Prices       Outstanding        Life            Price       Exercisable       Price
                 ------------------     -------------   -------------    -----------   ------------    ---------
<S>               <C>        <C>            <C>             <C>          <C>                <C>        <C>
                  $  0.00 - $  5.00           955,194       7.7 Years    $      1.80        248,669    $   1.28
                  $  5.01 - $ 10.00           362,250       9.3 Years           8.07              -           -
                  $ 10.01 - $ 50.00           284,375       9.4 Years          17.51         23,930       15.16
                  $ 50.01 - $ 90.00           107,050       9.9 Years          67.41              -           -
                  $ 90.01 - $119.00            88,100       9.4 Years         106.86              -           -
                 ------------------     -------------   -------------    -----------   ------------    --------
                  $  0.00 - $119.00         1,796,969       8.5 Years    $     14.61        272,599    $   2.50
</TABLE>


9.  PREFERRED STOCK

    In July,  August and November  1996,  the Company sold  3,683,050  shares of
Series A redeemable  convertible  preferred stock, par value $.001, at $1.00 per
share.  Proceeds  to the  Company  were  $3,575,000  (net of $25,000 of issuance
costs).

    In June and September  1997, the Company sold  1,500,938  shares of Series B
redeemable  convertible  preferred  stock,  par value $.001, at $5.33 per share.
Proceeds to the Company were $7,900,002 (net of $20,000 of issuance costs).

                                      -39-
<PAGE>

    In November and December 1997, the Company sold 1,728,283 shares of Series C
convertible  preferred stock,  par value $.001, at $8.78 per share.  Proceeds to
the Company were $15,154,325 (net of $20,000 of issuance costs).

    In March  1998,  the Company  sold  194,305  shares of Series C  convertible
preferred  stock,  par value $.001, at $8.78 per share.  Proceeds to the Company
were $1,701,998 (net of $4,000 of issuance costs).

    In March, April and May of 1999, the Company sold 1,552,632 shares of Series
D Convertible  Preferred Stock, par value $.001, at $9.50 per share. Proceeds to
the Company were $14,727,997 (net of $22,000 of issuance costs).

    On August 20,  1999,  the Company  completed an initial  public  offering in
which the Company sold 3,000,000  shares of its common stock for net proceeds to
the Company of  $44,640,000.  On August 26,  1999,  the  Company's  underwriters
exercised  their  over-allotment  option,  which  resulted  in  the  sale  of an
additional  450,000  shares of the Company's  stock which  generated  additional
proceeds of  $6,696,000,  net of  issuance  costs.  Upon  closing of the initial
public offering,  each outstanding share of the Company's Redeemable Convertible
Preferred Stock and Convertible Preferred Stock was automatically converted into
one share of common stock of the Company  resulting in the issuance of 8,659,208
shares of common stock.

10.  NON-MONETARY TRANSACTIONS

    In August 1996,  the Company issued 83,050 shares of its Series A redeemable
convertible  preferred stock in consideration  for $83,050 of fees for personnel
placement   services.   The   transaction   was  accounted  for  by  recognizing
professional  fees expense of $83,050 and increasing the preferred stock balance
by the same amount.

    In June 1997,  the Company  issued  15,009 shares of its Series B redeemable
convertible  preferred stock in consideration  for $79,998 of fees for marketing
services.  The transaction was accounted for by recognizing marketing expense of
$79,998 and increasing the preferred stock balance by the same amount.

    In September  1997,  the Company  issued  207,000  shares of common stock in
exchange for interest bearing notes of $103,500 and cash of $11,500.

    In November  1997,  the Company  entered  into an  agreement  to issue up to
48,000  shares of its common  stock in  consideration  of software  services and
co-marketing  efforts. The Company has issued 48,000 shares under the agreement.
The  transaction was accounted for by recognizing  marketing  expense of $43,200
and increasing the common stock balance by the same amount.

    In September  1998,  the Company issued 39,863 shares of its common stock in
consideration for $159,452 of fees for marketing services. The transactions were
accounted for by recognizing  total marketing expense of $159,452 and increasing
the common stock balance by the same amount.

    In June and July 1999, the Company acquired three international distributors
by issuing  140,000  shares of common stock,  with a value of $2.0 million.  The
transactions  have been  accounted  for as  purchases  and,  accordingly,  their
results of operations are included in the consolidated financial statements from
the dates of acquisition.  The purchase prices have been allocated to the assets
acquired and liabilities assumed based upon their respective fair values.

11.  INCOME TAXES

    Deferred  income taxes reflect the net tax effects of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
and income tax purposes.  A valuation  allowance has been established to reflect
the  uncertainty  of  future  taxable  income  to  utilize  available  tax  loss
carryforwards  and other  deferred  tax assets.  Significant  components  of the
Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>

                                                                                   Years Ended
                                                                                   December 31,
                                                                            --------------------------
                                                                                1998          1999
                                                                            ------------  ------------
              <S>                                                           <C>           <C>
              Deferred tax assets:
                Net operating loss carryforward........................      $ 8,900,000   $17,187,000
                Research and development credit carryforward...........          350,000       901,000
                Other..................................................          146,000       340,000
              Deferred tax liabilities:
                Depreciation...........................................         (247,000)     (404,000)
                Amortization...........................................                -      (256,000)
                                                                             -----------   -----------
                                                                               9,149,000    17,768,000

                Less valuation allowance for deferred tax assets.......       (9,149,000)  (17,768,000)
                                                                             -----------   -----------
              Total....................................................      $        --   $        --
                                                                             ===========   ===========
</TABLE>

                                      -40-
<PAGE>

    As of December 31, 1999, the  Company has net operating  loss  carryforwards
and research and development tax  carryforwards of  approximately  $43.0 million
and $919,000,  respectively,  available to offset future Federal taxable income.
These  carryforwards  begin to  expire  in 2012 and may be  subject  to  certain
limitations. The valuation allowance increased by $8.6 million during the twelve
months ended December 31, 1999,  due primarily to the  additional  allowance for
the Net Operating Losses incurred.

    The Company  believes  that,  based upon a number of factors,  the available
objective evidence creates sufficient  uncertainty  regarding the realization of
the deferred tax assets such that a full valuation  allowance has been recorded.
The Company will continue to assess the  realization  of the deferred tax assets
based on actual and forecasted operating results.

12.  SEGMENT AND GEOGRAPHIC INFORMATION

    As discussed in Note 2, the Company  operates in one business  segment:  the
development  and delivery of application  server  software and related  software
products and services. In making this determination,  the Company considered the
information which management uses to oversee the Company's operations as well as
the manner in which the business is managed.

    Foreign  operations  in 1998 were  conducted  in four  countries  in Europe.
During  1999,  foreign  operations  were  expanded.   Operations  are  currently
conducted in seven  countries in Europe and three  countries in the Asia Pacific
region.

    Revenues by geographic region are as follows:

                                         Years Ended December 31,
                                 -----------------------------------------
                                    1997          1998             1999
                                 ----------    ----------      -----------

United States...............     $  181,017    $4,999,717      $14,984,459
Europe......................              -       817,556        5,700,391
Other.......................         67,507       990,626        2,379,557
                                 ----------    ----------      -----------
Total.......................     $  248,524    $6,807,899      $23,064,407
                                 ==========    ==========      ===========

    Total long lived assets by geographic region are as follows:

                                        Years Ended December 31,
                                 ----------------------------------------
                                    1997          1998           1999
                                 ----------    ----------     -----------

United States...............     $1,528,155    $1,733,471     $22,907,826
Europe......................              -        62,876         529,440
Other.......................              -             -         107,393
                                 ----------    ----------     -----------
Total.......................     $1,528,155    $1,796,347     $23,544,659
                                 ==========    ==========     ===========






    Net loss by geographic region are as follows:

                                         Years Ended December 31,
                                 -------------------------------------------
                                     1997          1998             1999
                                 -----------   ------------     ------------

United States...............     $(8,335,095)  $(12,421,546)    $(21,840,977)
Foreign subsidiaries........              -        (463,501)        (148,316)
                                 -----------   ------------     ------------
Total.......................     $(8,335,095)  $(12,885,047)    $(21,989,293)
                                 ===========   ============     ============



13.  Loss Per Share

    The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
                                                            Years Ended December 31,
                                                 ---------------------------------------------
                                                     1997             1998             1999
                                                 -------------   --------------    ------------

             <S>                                 <C>              <C>              <C>
             Numerator:
               Net loss.......................   $ (8,335,095)    $(12,885,047)    $(21,989,294)
               Beneficial conversion
                 feature in series D
                 preferred stock..............             --               --         (263,158)
                                                 ------------     ------------     ------------
               Net loss applicable to
                 common stockholders..........     (8,335,095)     (12,885,047)     (22,252,452)
                                                 ============     ============     ============

                                      -41-
<PAGE>

             Denominator:
               Weighted average common

                 shares outstanding...........      5,065,356        5,122,480        9,943,728
               Weighted average common
                 shares subject to repurchase.     (4,279,808)      (2,489,984)      (1,524,612)
                                                 ------------     ------------     ------------
             Denominator for basic and
               diluted loss per share
               applicable to common
               stockholders...................        785,548        2,632,496        8,419,116
                                                 ============     ============     ============
               Basic and diluted net
                 loss per share
                 applicable to common
                 stockholders.................   $     (10.61)    $      (4.89)    $      (2.64)
                                                 ============     ============     ============
</TABLE>

    The Company has excluded all preferred stock,  outstanding stock options and
shares  subject to  repurchase by the Company from the  calculation  of loss per
share because all such securities are  antidilutive  for all periods  presented.
Shares subject to repurchase by the Company will be included in the  computation
of earnings  per share when the  Company's  option to  repurchase  these  shares
expires.  Weighted-average options outstanding to purchase 348,880 and 1,332,992
shares of common stock for the years ended December 31, 1998, and 1999, were not
included in the  computation  of net loss per share  because the effect would be
antidilutive.  Such securities, had they been dilutive, would have been included
in the  computation  of  diluted  net loss per share  using the  treasury  stock
method.

14.  ACQUISITIONS

    On December 13, 1999, the  Company acquired GemLogic,  Inc. GemLogic,  which
was  incorporated in January 1999,  provides XML software to enable customers to
more easily develop and deploy business-to-business e-commerce applications. The
purchase price was  approximately  $12.1 million.  The acquisition was completed
through the issuance of approximately  114,456 shares of common stock. Under the
terms of the  GemLogic  purchase  agreement,  the Company is  committed  to make
additional issuances of common stock, based upon the achievement of future goals
and deliverables. Contingent consideration, which would be added to goodwill and
amortized over the remaining life, may approximate $4.8 million.  In addition we
issued options to purchase common stock to GemLogic employees at exercise prices
ranging from $40 to $60 per share.  These  options may result in a  compensation
charge of up to $5.6  million,  which will be charged to  operations  based upon
vesting of these options over the next four to seven years.  The merger has been
accounted for using the purchase  method of accounting  and the goodwill will be
charged to operations  ratably over the next five years.  GemLogic's  results of
operations for the period  subsequent to the acquisition  date through  December
31,  1999,  have been  included  in  SilverStream's  Consolidated  Statement  of
Operations  for the year ended  December 31, 1999.  The  purchased  research and
development totaling $1.9 million represents the value of numerous projects that
were in  various  stages  of  development,  and had  not  reached  technological
feasibility.  No  alternative  future  uses were  identified  prior to  reaching
technological  feasibility.  The purchased  research and  development was valued
using the income approach.

    On December 13, 1999, the Company acquired ObjectEra, Inc. for $8.1 million.
ObjectEra, which commenced operations in January 1999, developed and distributes
a software  program know as an Object Request Broker (ORB).  $4.2 million of the
purchase price was paid at the closing,  and $3.9 million was paid subsequent to
year  end on  February  1,  2000.  Under  the  terms of the  ObjectEra  purchase
agreement,  SilverStream  is  committed  to  making  additional  payments  in  a
combination of cash and common stock, based upon the achievement of future goals
and deliverables. Contingent consideration, which would be added to goodwill and
amortized over the remaining life, may approximate $3.9 million.  The merger has
been accounted for using the purchase method of accounting and the goodwill will
be charged to operations ratably over the next five years.  ObjectEra's  results
of operations for the period subsequent to the acquisition date through December
31,  1999,  have been  included  in  SilverStream's  Consolidated  Statement  of
Operations for the year ended December 31, 1999.

    In fiscal 1999 the Company  completed  various  acquisitions  of some of its
distributors as well as the acquisitions of GemLogic,  Inc. and ObjectEra,  Inc.
These  acquisitions  were accounted for under the purchase  method of accounting
and,  accordingly,  the  operating  results  are  included  in the  consolidated
statements of income from the date of each respective acquisition.

    The  unaudited  pro forma  information  below for the  twelve  months  ended
December 31, 1999 gives effect to the acquisitions of GemLogic and ObjectEra, as
if they had occurred on January 1, 1999.  The  unaudited  pro forma  information
includes the historical  results of operations of GemLogic and ObjectEra for the
twelve months ended December 31, 1999.

                                      -42-
<PAGE>

                                                               Pro Forma
                                                              December 31,
                                                                 1999

   Revenue................................                   $ 23,251,318
   Net loss applicable to common stockholders                 (27,310,325)
                                                             ============
   Basic and diluted net loss per share applicable
     to common stockholders...............                   $      (3.23)
   Weighted-average common shares used in
     computing basic and diluted net loss per share
     applicable to common stockholders....                      8,462,264
                                                             ============

    The primary pro-forma  adjustment  approximates $3.5 million, and relates to
the amortization of goodwill.

15.  SUBSEQUENT EVENTS

   SECONDARY PUBLIC OFFERING

    On January 31, 2000, the Company  completed a secondary  public  offering in
which the company sold 1,445,851  shares of its common stock for net proceeds to
the  Company  of   $156,136,000.   Also  on  January  31,  2000,  the  Company's
underwriters  exercised their over-allotment  option, which resulted in the sale
of  an  additional  330,000  shares  of  the  Company's  stock  which  generated
additional proceeds of $35,739,000, net of issuance costs.

                                      -43-
<PAGE>

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

    None.

                                    PART III

    Certain  information  required  by Part III is  omitted  from this Form 10-K
because  the  Company  will  file  a  definitive  Proxy  Statement  pursuant  to
Regulation 14A (the "Proxy  Statement") not later than 120 days after the end of
the fiscal year covered by this Form 10K, and certain information to be included
therein is incorporated herein by reference.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The  information  required by this Item is  incorporated by reference to the
Proxy Statement under the section captioned "Election of Directors."

ITEM 11.  EXECUTIVE COMPENSATION

    The  information  required by this Item is  incorporated by reference to the
Proxy Statement under the section captioned "Executive Compensation."

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The  information  required by this Item is  incorporated by reference to the
Proxy  Statement  under the section  captioned  "Security  Ownership  of Certain
Beneficial Owners and Management."

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The  information  required by this Item is  incorporated by reference to the
Proxy Statement under the section captioned  "Certain  Relationships and Related
Transactions."



                                      -44-
<PAGE>

                                     PART IV

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


(a)       Financial Statements, Financial Statement Schedule and Exhibits

1.        Financial Statements - see "Index to Financial Statements."

2.        Financial Statement Schedule for the Years Ended December 31, 1997,
          1998, and 1999:

          Schedule II - Valuation and Qualifying Accounts.

          Report of Independent Auditors on Financial Statement Schedule

          Financial  statement  schedules not included have been omitted because
          of the absence of conditions  under which they are required or because
          the required  information,  where material,  is shown in the financial
          statements or notes

3.        Exhibits:

          Exhibits  submitted  with the Annual Report on Form 10-K as filed with
          the  Securities  and Exchange  Commission  and those  incorporated  by
          reference to other filings are listed on the Exhibit Index.

(b)       Reports on Form 8-K

          On December 27, 1999,  the Company filed a Current  Report on Form 8-K
          to report  under Item 2  (Acquisition  or  Disposition  of Assets) the
          consummation of an Agreement and Plan of Merger for the acquisition of
          GemLogic,  Inc. and the consummation of a Stock Purchase Agreement for
          the acquisition of ObjectEra,  Inc. The financial  statements required
          to be filed  with  such  report  were  filed on  January  25,  2000 on
          Amendment No. 1 to Current Report on Form 8-K/A.

                                      -45-
<PAGE>

                                  Exhibit Index
<TABLE>
<CAPTION>
      Exhibit
        No.                            Description
<S>            <C>
       3.1(1)  Second Amended and Restated Certificate of Incorporation of the Registrant

       3.2(1)  Amended and Restated By-Laws of the Registrant

       4.1(2)  Specimen common stock certificate

       4.2(2)  Third Amended and Restated Investor Rights Agreement dated March 1, 1999, as amended

     *10.1(2)  1996 Founders Stock Incentive Plan

     *10.2(2)  Amended and Restated 1997 Stock Incentive Plan, and forms of agreements thereunder

     *10.3(2)  Amended and Restated 1999 Employee Stock Purchase Plan

     *10.4(2)  Form of Founders Stock Restriction Agreement

      10.5(2)  Sub-Sublease Agreement, dated February 14, 1997, between Rational Software Corporation (as successor to SQA, Inc.)
               and the Registrant

      10.6(2)  First Amendment to Sub-Sublease Agreement, dated April 1998

      10.7(2)  Term Loan Agreement and Commercial Promissory Note, dated March 1, 1999, between Fleet National Bank and the
               Registrant

      10.8(2)  Term Loan Agreement and Commercial Promissory Note, dated August 11, 1997, between Fleet National Bank and the
               Registrant

      10.9(2)  Term Loan Agreement and Commercial Promissory Note, dated November 5, 1996 between Fleet National Bank and the
               Registrant

    +10.10(2)  OEM Master License Agreement between RSA Data Security, Inc. and the Registrant, dated as of September 30, 1997, as
               amended

    +10.11(2)  Support Agreement between RSA Data Security, Inc. and the Registrant, dated as of June 30, 1999

     10.12(2)  Form of VAR Business Partner Agreement

     10.13(2)  Form of ISV Business Partners Agreement

     10.14(2)  Form of Consulting Partner Agreement

      21.1(1)  Subsidiaries of the Registrant

         23.1  Consent of Ernst & Young LLP

         27.1  Financial Data Schedule
</TABLE>

(1)     Incorporated by reference from the Company's Registration Statement on
        Form S-1 (File No. 333-94103).
(2)     Incorporated by reference from the Company's Registration Statement on
        Form S-1 (File No. 333-80553).


*       Management  contract or  compensatory  plan or  arrangement  filed as an
Exhibit to this form pursuant to Items 14(a) and 14(c) of Form 10-K.

+   Confidential treatment requested for certain portions of this Exhibit, which
    portions are omitted and filed  separately  with the Securities and Exchange
    Commission.


                                      -46-
<PAGE>



                                   SIGNATURES

    Pursuant  to the  requirements  of  Section  13 or 15(d)  of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its  behalf  by the  undersigned,  thereunto  duly  authorized,  in  Burlington,
Massachusetts, on this 22nd day of March 2000.

                                           SILVERSTREAM SOFTWARE, INC.


                                           By: /s/ DAVID A. LITWACK
                                           David A. Litwack
                                           President and Chief Executive Officer

    Pursuant to the  requirements  of the Securities  Exchange Act of 1934, this
report has been signed by the  following  persons in the  capacities  and on the
dates indicated.
<TABLE>
<CAPTION>
             Signature                                               Title                                            Date

<S>                                   <C>                                                                        <C>
 /s/ David R. Skok                    Chairman of the Board of Directors                                         March 22, 2000
--------------------------------
David R. Skok

 /s/ David A. Litwack                 President, Chief Executive Officer and Director                            March 22, 2000
--------------------------------
David A. Litwack                      (Principal Executive Officer)


/s/ CRAIG A. DYNES                    Vice President, Chief Financial Officer and Treasurer (Principal           March 22, 2000
--------------------------------
Craig A. Dynes                        Financial and Accounting Officer)


 /s/ Timothy Barrows                  Director                                                                   March 22, 2000
--------------------------------
Timothy Barrows

 /s/ Richard A. D'Amore               Director                                                                   March 22, 2000
--------------------------------
Richard A. D'Amore

 /s/ Paul J. Severino                 Director                                                                   March 22, 2000
--------------------------------
Paul J. Severino
</TABLE>



                                      -47-
<PAGE>



                        VALUATION AND QUALIFYING ACCOUNTS

                           SILVERSTREAM SOFTWARE, INC.
<TABLE>
<CAPTION>
                                                                              Additions
                                                                       -----------------------
                                                          Balance At   Charged To   Charged To                Balance
                                                           Beginning    Costs And      Other                  At End
                             Description                   of Period    Expenses     Accounts   Deductions   of Period
             ----------------------------------------     ----------   ---------    ----------  ----------   ---------
             <S>                                           <C>          <C>          <C>         <C>         <C>
             and Doubtful Accounts...................      $475,993     $355,000     $649,634    $ 717,382   $ 763,245

             December 31, 1998 Allowances for Returns
             and Doubtful Accounts...................       $44,660     $218,614     $592,500    $ 379,781   $ 475,993

             December 31, 1997 Allowances for Returns
             and Doubtful Accounts...................       $    --     $ 44,660           --           --   $  44,660


</TABLE>
                                      S-1