<PAGE>

                                 UNITED STATES

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-Q

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

                 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000

                                      OR

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

                       COMMISSION FILE NUMBER 000-26367
  -----------------------------------------------------------------------------

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

            DELAWARE                                        94-3232772
 (State or other jurisdiction of                         (I.R.S. Employer
 incorporation or organization)                         Identification No.)

                              3333 OCTAVIUS DRIVE
                         SANTA CLARA, CALIFORNIA 95054
              (Address of principal executive offices) (Zip Code)

      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 988-0414
  -----------------------------------------------------------------------------

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 [ ]

As of July 31, 2000 there were 26,270,053 shares of the registrant's Common
Stock outstanding.
-----------------------------------------------------------------------------

                                       1
<PAGE>

                             ACTIVE SOFTWARE, INC.

                                   FORM 10-Q
                      FOR THE QUARTER ENDED JUNE 30, 2000

                               TABLE OF CONTENTS


                                PAGE NUMBERING
                                 IN SEQUENTIAL
                               NUMBERING SYSTEM

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


PART I.   FINANCIAL INFORMATION


Item 1.   Condensed Consolidated Financial Statements

          Condensed Consolidated Balance Sheets as of
              June 30, 2000 and December 31, 1999                          3

          Condensed Consolidated Statements of Operations -
              Three and Six Months Ended June 30, 2000 and 1999            4

          Condensed Consolidated Statements of Cash Flows -
              Three and Six Months Ended June 30, 2000 and 1999            5

          Notes to Condensed Consolidated Financial Statements             6

Item 2.   Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                   10

Item 3.   Quantitative and Qualitative Disclosures about Market Risk      15


PART II.  OTHER INFORMATION


Item 2.   Changes in Securities and Use of Proceeds                       27

Item 6.   Exhibits and Reports on Form 8-K                                27

          Signatures                                                      27

                                       2
<PAGE>

                             ACTIVE SOFTWARE, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                        June 30,      December 31,
                                                                          2000          1999 (1)
                                                                      ------------    ------------
<S>                                                                   <C>             <C>
ASSETS
Current assets:
     Cash and cash equivalents.....................................   $      3,720    $     17,299
     Short-term investments........................................         18,360          19,906
     Accounts receivable (net of allowances of $593 and $493)......         18,943           9,486
     Prepaid expenses and other current assets.....................          3,118             953
                                                                      ------------    ------------
        Total current assets.......................................         44,141          47,644
Property and equipment, net........................................          3,410           1,951
Convertible subordinated promissory note receivable................             --           2,000
Goodwill and acquired intangibles, net.............................        125,464              --
Other assets.......................................................          4,960             227
                                                                      ------------    ------------
        Total assets...............................................   $    177,975    $     51,822
                                                                      ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable..............................................   $      1,256    $      1,424
     Accrued compensation and related benefits.....................          3,615           3,039
     Deferred revenue..............................................          8,672           4,006
     Accrued royalties.............................................            720             400
     Other accrued liabilities.....................................          2,572           1,617
     Current portion of long-term obligations......................            157             109
                                                                      ------------    ------------
        Total current liabilities..................................         16,992          10,595
                                                                      ------------    ------------
Long-term obligations, less current portion........................             17              --
                                                                      ------------    ------------

Stockholders' equity:
     Preferred stock, $0.001 par value: authorized
      5,000,000 shares; none outstanding...........................             --              --
     Common stock..................................................        210,920          71,900
     Deferred stock compensation...................................         (2,925)         (3,530)
     Notes receivable from stockholders............................             --              (2)
     Accumulated other comprehensive loss..........................            (31)            (32)
     Accumulated deficit...........................................        (46,998)        (27,109)
                                                                      ------------    ------------
        Total stockholders' equity.................................        160,966          41,227
                                                                      ------------    ------------
        Total liabilities and stockholders' equity.................   $    177,975    $     51,822
                                                                      ============    ============
</TABLE>

(1) Derived from December 31, 1999 audited  balance  sheet  included in the 1999
    Annual Report on Form 10-K of Active Software, Inc.

                                       3
<PAGE>

                             ACTIVE SOFTWARE, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                   (in thousands, except per share amounts)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                               Three Months Ended          Six Months Ended
                                                                    June 30,                   June 30,
                                                            ------------------------    ------------------------
                                                               2000          1999          2000          1999
                                                            ----------    ----------    ----------    ----------
<S>                                                         <C>           <C>           <C>           <C>
Revenues:
   License..............................................    $   13,609    $    3,558    $   23,779    $    5,922
   Service..............................................    $    4,927         1,548    $    8,352         2,746
                                                            ----------    ----------    ----------    ----------
     Total revenues.....................................        18,536         5,106        32,131         8,668
                                                            ----------    ----------    ----------    ----------
Cost of revenues:
   License..............................................    $      725           313    $    1,129           465
   Service..............................................    $    3,908         1,577    $    6,474         2,804
                                                            ----------    ----------    ----------    ----------
     Total cost of revenues.............................         4,633         1,890         7,603         3,269
                                                            ----------    ----------    ----------    ----------
Gross profit............................................        13,903         3,216        24,528         5,399
Operating expenses:
   Research and development.............................         3,678         1,216         6,318         2,276
   Sales and marketing..................................         8,624         3,810        16,615         6,956
   General and administrative...........................         1,541           517         2,753           993
   Amortization of deferred stock compensation..........           303           302           605           565
   Amortization of goodwill and acquired intangibles....        11,829            --        13,847            --
   Purchased in-process technology......................         2,311            --         5,048            --
                                                            ----------    ----------    ----------    ----------
     Total operating expenses...........................        28,286         5,845        45,186        10,790
                                                            ----------    ----------    ----------    ----------
Loss from operations....................................       (14,383)       (2,629)      (20,658)       (5,391)
Other income (expense):
   Interest income......................................           394            34           927            96
   Interest expense and other...........................          (105)           (6)         (158)          (47)
                                                            ----------    ----------    ----------    ----------
     Total other income, net............................           289            28           769            49
                                                            ----------    ----------    ----------    ----------
Net loss................................................    $  (14,094)   $   (2,601)   $  (19,889)   $   (5,342)
                                                            ==========    ==========    ==========    ==========
Basic and diluted net loss per share....................    $    (0.58)   $    (0.52)   $    (0.83)   $    (1.12)
                                                            ==========    ==========    ==========    ==========
Shares used in calculating basic and diluted net
   loss per share.......................................        24,226         4,962        23,893         4,753
                                                            ==========    ==========    ==========    ==========
</TABLE>

See notes to condensed consolidated financial statements.

                                       4
<PAGE>

                             ACTIVE SOFTWARE, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                          Six Months Ended
                                                                                               June 30,
                                                                                     ----------------------------
                                                                                         2000            1999
                                                                                     ------------    ------------
<S>                                                                                  <C>             <C>
Cash flows from operating activities:
  Net loss.......................................................................    $    (19,889)   $     (5,342)
  Adjustments to reconcile net loss to net cash in operating activities:
     Depreciation and amortization...............................................             585             296
     Amortization of goodwill and acquired intangibles...........................          13,847              --
     Amortization of deferred stock compensation.................................             605             565
     Purchased in-process technology.............................................           5,048              --

     Changes in assets and liabilities, net of effects of acquisitions:
        Accounts receivable......................................................          (8,852)           (727)
        Prepaid expenses and other current assets................................          (2,029)            (12)
        Accounts payable.........................................................            (327)            678
        Accrued compensation and related benefits................................             457             476
        Accrued royalties........................................................             320             111
        Other accrued liabilities................................................             742            (154)
        Deferred revenues........................................................           4,164             899
                                                                                     ------------    ------------
           Net cash used in operating activities.................................          (5,329)         (3,210)
                                                                                     ------------    ------------

Cash flows from investing activities:
  Property and equipment additions...............................................          (1,771)         (1,086)
  Proceeds from sale of fixed assets.............................................              --              10
  Purchases of short-term and long-term investments..............................         (10,256)             --
  Maturities & sales of short-term investments...................................          11,802              --
  Acquisition of a businesses, net of cash acquired..............................          (6,516)             --
  Other assets...................................................................          (3,427)           (126)
                                                                                     ------------    ------------
           Net cash used in investing activities.................................         (10,168)         (1,202)
                                                                                     ------------    ------------

Cash flows from financing activities:
  Sale of common stock...........................................................           2,744             440
  Repurchase of common stock.....................................................              --              (3)
  Borrowings under line of credit................................................              --           3,294
  Repayment of notes receivable from stockholders................................               2              --
  Repayment of long-term obligations.............................................            (828)            (51)
                                                                                     ------------    ------------
           Net cash provided by financing activities.............................           1,918           3,680
                                                                                     ------------    ------------

Net decrease in cash and cash equivalents........................................         (13,579)           (732)
Cash and cash equivalents--beginning of period...................................          17,299           7,461
                                                                                     ------------    ------------

Cash and cash equivalents--end of period.........................................    $      3,720    $      6,729
                                                                                     ============    ============

Supplemental disclosure of cash flow information:
   Cash paid during the period for interest......................................    $         72    $         15
                                                                                     ============    ============

   Deferred stock compensation...................................................    $         --    $      1,761
                                                                                     ============    ============

Supplemental schedule of noncash investing and financing transactions:
   Issuance of common stock and options for business acquisitions................    $    136,276    $         --
                                                                                     ============    ============
</TABLE>

See notes to condensed consolidated financial statements.

                                       5
<PAGE>

                             ACTIVE SOFTWARE, INC.

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2000
                                  (UNAUDITED)

1.   BASIS OF PRESENTATION

     The accompanying condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles. However,
certain information or footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed, or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission for interim financial statements. In the
opinion of management, the statements include all adjustments necessary for
interim financial statements (which are of a normal and recurring nature) for
the fair presentation of the results of the interim periods presented. The
results of operations for such periods are not necessarily indicative of results
to be expected for the entire current year or other future interim periods.

     The condensed consolidated financial statements and related disclosures
have been prepared with the presumption that users of the interim financial
information have read or have access to the audited consolidated financial
statements for the preceding fiscal year. Accordingly, these condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and related notes thereto included in the
Company Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
The consolidated results of operations for the three months and six months ended
June 30, 2000, are not necessarily indicative of the results to be expected for
any subsequent period or for the entire fiscal year ending December 31, 2000.

2.   ACQUISITION

     In February 2000, the Company acquired Alier, Inc. (Alier). On April 7,
2000 the Company acquired TransLink Software, Inc. (TransLink). On April 25,
2000 the Company acquired Premier Software Technologies (Premier).

     Alier provides enterprise application integration solutions to financial
institutions. In connection with this transaction, all outstanding shares of
capital stock of Alier were exchanged for 390,875 shares of our common stock
valued at $31.3 million and cash of $2.0 million. In addition, the outstanding
options to purchase Alier capital stock were converted into options to purchase
158,277 shares of our common stock valued at $12.4 million. The company assumed
certain liabilities of Alier and incurred approximately $316,000 in transaction
costs. The acquisition was accounted for as a purchase and, accordingly, the
results of operations of Alier have been included in the Company's financial
statements from the date of acquisition. In connection with the acquisition, the
purchase price was allocated, based on an independent valuation, to goodwill and
acquired intangibles of $44.3 million and purchased in-process technology of
$2.7 million. For the six months ended June 30, 2000, the Company recorded $5.8
million for amortization of goodwill and acquired intangibles, which are
amortized over their useful lives of one to three years, and $2.7 million for
the purchased in- process technology.

     TransLink provides high performance mainframe integration solutions for
eBusiness. In connection with this transaction, all outstanding shares of
capital stock of TransLink were exchanged for 796,363 shares of our common stock
valued at $76.1 million and cash of $4.5 million. In addition, the outstanding
options to purchase TransLink capital stock were converted into options to
purchase 43,041 shares of our common stock valued at $3.6 million. The company
assumed certain liabilities of TransLink and incurred approximately $248,000 in
transaction costs. The acquisition was accounted for as a purchase and,
accordingly, the results of operations of TransLink have been included in the
Company's financial statements from the date of acquisition. In connection with
the acquisition, the purchase price was allocated, based on an independent
valuation, to goodwill and acquired intangibles of $81.6 million and purchased
in-process technology of $2.3 million. For the second quarter of fiscal 2000,
the Company recorded $7.1 million for amortization of goodwill and acquired
intangibles, which are amortized over their

                                       6
<PAGE>

useful lives of one to four years, and $2.3 million for the purchased in-process
technology.

     Premier provides integration products and services for eCommerce. In
connection with this transaction, all outstanding shares of capital stock of
Premier were exchanged for 121,308 shares of our common stock valued at $11.9
million and cash of $0.5 million. In addition, the outstanding options to
purchase Premier capital stock were converted into options to purchase 11,548
shares of our common stock valued at $1.1 million. The company assumed certain
liabilities of Premier and incurred approximately $166,000 in transaction costs.
The acquisition was accounted for as a purchase and, accordingly, the results of
operations of Premier have been included in the Company's financial statements
from the date of acquisition. In connection with the acquisition, the purchase
price was allocated, based on an independent valuation, to goodwill and acquired
intangibles of $13.4 million. For the second quarter of fiscal 2000, the Company
recorded $1.0 million for amortization of goodwill and acquired intangibles,
which are amortized over their useful lives of one to three years.

     In connection with the acquisition, net assets acquired were as follows (in
thousands):

                                                Alier     TransLink    Premier
                                               --------   ---------   --------

     Current assets........................... $    259   $     655   $    353
     Property and equipment, net..............       24         225         22
     Goodwill and acquired intangible assets..   44,275      81,602     13,435
     Current liabilities assumed..............   (1,373)       (366)      (151)
     Transaction costs........................     (316)       (248)      (166)
     Purchased in-process technology..........    2,737       2,311         --
                                               --------   ---------   --------
     Net assets acquired...................... $ 45,606   $  84,179   $ 13,493
                                               ========   =========   ========

     The following unaudited pro forma summary results of operations data have
been prepared assuming that the TransLink and Premier acquisitions had occurred
at the beginning of the periods presented. The consolidated results are not
necessarily indicative of results of future operations nor of results that would
have occurred had the acquisitions been consummated as of the beginning of the
periods presented. The pro forma information excludes the impact of the one-time
charges related to purchased in-process technology of $2.3 million recorded in
the quarter ended June 30, 2000 (in thousands, except per share amount):


                                       Three Months Ended     Six Months Ended
                                             June 30,             June 30,
                                       -------------------   ------------------
                                         2000       1999       2000      1999
                                       --------   --------   --------  --------

Net revenue........................... $ 18,536   $  5,449   $ 32,637  $  9,286
                                       ========   ========   ========  ========

Net loss.............................. $(14,094)  $(12,367)  $(38,161) $(24,879)
                                       ========   ========   ========  ========

Basic and diluted net loss per share.. $  (0.58)  $  (2.10)  $  (1.54) $  (4.39)
                                       ========   ========   ========  ========


3.   NET LOSS PER SHARE

     Basic and diluted net loss per share are computed using the weighted
average number of common shares outstanding. Options, warrants and shares
subject to repurchase were not included in the computation of diluted net loss
per share because the effect would be anti-dilutive.

     The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except per share
amounts):

                                       7
<PAGE>

<TABLE>
<CAPTION>
                                                                          Three Months Ended            Six Months Ended
                                                                               June 30,                     June 30,
                                                                      --------------------------    --------------------------
                                                                          2000          1999            2000          1999
                                                                      -----------    -----------    -----------    -----------
<S>                                                                   <C>            <C>            <C>            <C>
Net loss...........................................................   $   (14,094)   $    (2,601)   $   (19,889)   $    (5,342)
                                                                      ===========    ===========    ===========    ===========
  Basic and diluted
     Weighted average shares of common stock outstanding...........        24,825          6,297         24,516          6,142
     Less: weighted average common shares subject to repurchase....          (599)        (1,335)          (623)        (1,389)
                                                                      -----------    -----------    -----------    -----------
  Denominator for diluted net loss per share.......................        24,226          4,962         23,893          4,753
                                                                      ===========    ===========    ===========    ===========
Basic net loss per share...........................................   $     (0.58)   $     (0.52)   $     (0.83)   $     (1.12)
                                                                      ===========    ===========    ===========    ===========
</TABLE>

4.   COMPREHENSIVE INCOME

     In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income," which establishes standards for reporting
and displaying comprehensive income and its components in the financial
statements. The only item included in other comprehensive loss is unrealized
loss on investments.

     The following is a calculation of comprehensive loss (in thousands):

<TABLE>
<CAPTION>
                                                                          Three Months Ended            Six Months Ended
                                                                               June 30,                     June 30,
                                                                      --------------------------    --------------------------
                                                                          2000          1999            2000          1999
                                                                      -----------    -----------    -----------    -----------
<S>                                                                   <C>            <C>            <C>            <C>
Net loss..........................................................    $   (14,094)   $    (2,601)   $   (19,889)   $    (5,342)

Other comprehensive loss:
Unrealized gain on investments....................................              8              -              1              -
                                                                      -----------    -----------    -----------    -----------
Comprehensive loss................................................    $   (14,086)   $    (2,601)   $   (19,888)   $    (5,342)
                                                                      ===========    ===========    ===========    ===========
</TABLE>

                                       8
<PAGE>

5.   INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION

     The Company operates in one reportable segment, the development and
marketing of software products for businesses that allow integration of
incompatible software applications across their extended enterprises of
customers, suppliers and partners. The Company principally operates in the U.S.
with small European offices to support sales and marketing. The following is a
summary of operations within geographic areas (in thousands):

<TABLE>
<CAPTION>
                                                       Three Months Ended           Six Months Ended
                                                             June 30,                   June 30,
                                                       ------------------           --------------------
                                                        2000        1999            2000          1999
                                                       ------       -----           -------       ------
<S>                                                  <C>          <C>             <C>          <C>
Revenues(1):
United States.....................................   $  14,225    $   4,921       $  26,678         8291
Europe............................................       4,311          185           5,453          377
                                                     ---------    ---------       ---------    ---------
    Total revenues................................   $  18,536    $   5,106       $  32,131    $   8,668
                                                     =========    =========       =========    =========
</TABLE>

--------

(1)  Revenues are broken out geographically by the ship-to location of the
     customer.

     The Company has no significant  long-lived  assets deployed  outside of the
U.S.

6.   SUBSEQUENT EVENTS

     In May 2000, the Company entered into an agreement to be acquired by
webMethods, Inc. pursuant to which the Company will become a wholly owned
subsidiary of webMethods. Upon the closing of the acquisition, which is expected
to occur in the third quarter of 2000, each outstanding share of the Company's
common stock will be converted into the right to receive 0.527 shares of common
stock of webMethods.

                                       9
<PAGE>

Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     The following discussion of the financial condition and results of
operations of Active Software, Inc. ("ASWX" or the "Company") should be read in
conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations and the Consolidated Financial Statements and the
Notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999. This quarterly report on Form 10-Q contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates" and similar expressions identify such
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those indicated in the forward-looking statements. Factors which could
cause actual results to differ materially include those set forth in the
following discussion, and, in particular, the risks discussed below under the
subheading "Factors that May Affect Future Results." Unless required by law, the
Company undertakes no obligation to update publicly any forward-looking
statements.

Overview

     We are a provider of eBusiness infrastructure software products that
provides our customers with a platform to automate end-to-end business processes
inside their enterprise, with business-to-business (B2B) trading partners and
with customers over the Internet. Our ActiveWorks(TM) Integration System enables
our customers to accelerate their time to market for products and services,
enhance their relationships with customers, suppliers and partners and
substantially reduce their operating and information technology costs. Our
customers use our platform to automate business processes without costly and
time-consuming custom programming, enabling them to quickly and cost-effectively
compete in today's rapidly changing network economy. We have designed the
ActiveWorks Integration System to provide a highly flexible and adaptable
eBusiness infrastructure that can be deployed quickly and changed easily in
response to evolving business requirements. In addition, we partner with a broad
range of system integrators and hardware, software and service providers in
order to offer our customers a comprehensive eBusiness solution.

     We generate revenue principally from licenses of our ActiveWorks software
products and, to a lesser extent, from services such as maintenance and support,
as well as consulting and training. License revenues comprised 74% and 68% of
our total revenues for the six months ended June 30, 2000 and 1999 respectively,
while service revenues comprised 26% and 32% of our total revenues in the same
periods. We recognize license revenues upon shipment of the software if
collection of the resulting receivable is probable, an agreement has been
signed, the fee is fixed or determinable and we have no significant obligations
remaining. A customer purchasing the ActiveWorks Integration System will, at a
minimum, purchase at least one Information Broker and one or more Adapters to
connect the Information Broker to the customer's various enterprise software
applications. In addition, the customer may purchase optional features such as
the Multi-Broker option, High-Availability option, Secure Socket Layer option
and integration agents. Revenues from maintenance and support are recognized
ratably over the period of the contract, which is typically one year, while
revenues from consulting and training services are recognized as the services
are performed. Payments received in advance of services rendered are recorded as
deferred revenues, and these balances were $8.7 million and $4.0 million as of
June 30, 2000 and December 31, 1999, respectively. Substantially all of our
customers enter into maintenance and support contracts when they purchase their
initial ActiveWorks software products.

     We promote and sell our ActiveWorks software products through our direct
sales force and through indirect channels. We have derived, and expect to
continue to derive, a significant portion of our sales in both channels from
customers that have significant relationships with third-party system
integrators. Our current relationships with these system integrators typically
are structured as co-marketing arrangements in which the customer is referred by
the system integrator to license the software directly from us. As a result

                                       10
<PAGE>

there is no revenue sharing arrangement between the system integrator and us,
and our current arrangements with these system integrators generally do not
impose any limitations on our ability to sell our products. In addition, we have
entered into a limited number of reseller arrangements in which our products are
embedded in the reseller's products, for which we receive a royalty from the
reseller. To date, revenues from these reseller arrangements have been
insignificant. Since the first quarter of 1999, we expanded our presence in
international markets by opening sales offices in the United Kingdom, in the
Netherlands in Singapore, in Germany and in France and by establishing
relationships with system integrators and resellers in other international
markets. Revenues derived from international sales represented 17% and 4% of
total revenues for the six months ended June 30, 2000 and 1999, respectively. We
expect that international sales will account for an increasing portion of our
revenues, although the percentage of our total revenues derived from
international sales may vary.

     Since inception, we have incurred substantial research and development
costs and have invested heavily in the expansion of our sales and marketing and
professional services organizations to build an infrastructure to support our
long-term growth strategy. Our full-time employees increased to 287 as of June
30, 2000 from 163 as of December 31, 1999. As a result of these investments, we
have incurred net losses in each fiscal quarter since inception and, as of June
30, 2000, had an accumulated deficit of $47.0 million. We anticipate that our
operating expenses will continue to increase for the foreseeable future, as we
expand our product development and sales and marketing efforts. In addition, we
expect to incur additional expenses associated with being a public company.
Accordingly, we expect to incur net losses for the foreseeable future.

     We believe that period-to-period comparisons of our historical operating
results are not necessarily meaningful and should not be relied upon as being
indicative of future performance, which must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in early
stages of development, particularly companies in new and rapidly evolving
markets like ours. Although we recently have experienced significant revenue
growth, this trend may not continue. Furthermore, we may not achieve or maintain
profitability in the future.

     In February 2000, we completed the acquisition of Alier, Inc., a provider
of enterprise application integration software. In connection with this
transaction, pursuant to which Alier became a wholly owned subsidiary of Active
Software, all outstanding shares of capital stock of Alier were exchanged for
390,875 shares of our common stock valued at $31.3 million and cash of $2.0
million. In addition, the outstanding options to purchase Alier capital stock
were converted into options to purchase 158,277 shares of our common stock
valued at $12.4 million. The merger was accounted for as a purchase transaction.
Of the 390,875 shares of our common stock issued in the transaction, a total of
38,685 shares are being held in escrow for the purpose of indemnifying us
against certain liabilities of Alier. This escrow will expire on February 11,
2001.

     In April 2000, we completed the acquisition of TransLink Software, Inc., a
provider of high performance mainframe integration solutions for eBusiness. In
connection with this transaction, pursuant to which TransLink became a wholly
owned subsidiary of Active Software, all outstanding shares of capital stock of
TransLink were exchanged for 796,363 shares of our common stock valued at $76.1
million and cash of $4.5 million. In addition, the outstanding options to
purchase TransLink capital stock were converted into options to purchase 43,041
shares of our common stock valued at $3.6 million. The merger was accounted for
as a purchase transaction.

     In April 2000, we completed the acquisition of Premier Software
Technologies, Inc., a provider of integration products and services for
eCommerce. In connection with this transaction, pursuant to which Premier became
a wholly owned subsidiary of Active Software, all outstanding shares of capital
stock of Premier were exchanged for 121,308 shares of our common stock valued at
$11.9 million and cash of $0.5 million. In addition, the outstanding options to
purchase Premier capital stock were converted into options to purchase 11,548
shares of our common stock valued at $1.1 million. The merger was accounted for
as a purchase transaction.

                                       11
<PAGE>

REVENUE

     Total revenues for the six months ended June 30, 2000 increased to $32.1
million from $8.7 million for the six months ended June 30, 1999, an increase of
271%.

     License revenues increased to $23.8 million in the six months ended June
30, 2000 from $5.9 million in the six months ended June 30, 1999, an increase of
302%. The increase in license revenue was due to an increase of $5.0 million in
sales of additional ActiveWorks products and features to existing customers and
to an increase of $12.9 million in sales of our products to new customers.

     Service revenues increased 204% to $8.4 million in the six months ended
June 30, 2000 from $2.7 million in the six months ended June 30, 1999. The
increase in service revenue was due primarily to an increase in maintenance and
support fees of $2.2 million in connection with the growth of our customer base
and an increase in consulting fees of $3.5 million.

     International revenues increased 1,359% to $5.5 million in the six months
ended June 30, 2000 from $377,000 in the six months ended June 30, 1999.
International revenues accounted for 17% and 4% of the total revenue for the six
months ended June 30, 2000 and 1999, respectively. The increase in absolute
dollars was the result of continued expansion of the Company's international
sales force and an increase in license revenue to the European region.

COST OF REVENUE

     Total cost of revenues increased to $7.6 million in the six months ended
June 30, 2000 from $3.3 million in the six months ended June 30, 1999.

     Cost of license revenues consists primarily of third-party license and
support fees and, to a lesser extent, costs of duplicating media and
documentation. Cost of license revenues increased to $1.1 million in the six
months ended June 30, 2000 from $465,000 in the six months ended June 30, 1999.
The growth in cost of license revenues was attributable primarily to the
increase in license revenues. As a percentage of license revenues, cost of
license revenues was 5% and 8% for the six months ended June 30, 2000 and 1999,
respectively. We anticipate that the cost of license revenues will increase in
absolute dollars as we license additional products, although cost of license
revenues will vary as a percentage of license revenues from period to period.

     Cost of service revenues consists of compensation and related overhead
costs for personnel engaged in consulting, training, maintenance and support
services for our customers. Cost of service revenues increased to $6.5 million
in the six months ended June 30, 2000 from $2.8 million in the six months ended
June 30, 1999. The growth in cost of service revenues was attributable primarily
to an increase in personnel dedicated to support a larger number of customers.
As a percentage of service revenues, cost of service revenues was 78% and 102%
for the six months ended June 30, 2000 and 1999, respectively. The decrease in
percentage of service revenues was attributable primarily to the increases in
the service revenue base. We anticipate that the cost of service revenues will
increase in absolute dollars as we continue to expand our services offering,
although cost of service revenues may vary as a percentage of service revenues
from period to period.

     Because the gross margin on license revenues is higher than the gross
margin on service  revenues,  gross profit as a percentage of total  revenues is
affected  by the mix of license and  service  revenues.  We expect that this mix
will fluctuate from quarter to quarter.

OPERATING EXPENSES

     Research and Development. Research and development expenses consist
primarily of compensation and related costs for research and development
employees and contractors. Research and development expenses increased to $6.3
million in the six months ended June 30, 2000, from $2.3 million in the six
months ended June 30, 1999. The increase was attributable primarily to the
addition of personnel in our research and development organization associated
with product development. As a percentage of total revenues, research and
development expenses

                                       12
<PAGE>

were 20% and 26% in the six months ended June 30, 2000 and 1999, respectively.
The decrease in percentage of revenues is due primarily to the fact that
revenues have increased faster than research and development expenses in those
periods. We expect to continue to make substantial investments in research and
development and anticipate that research and development expenses will continue
to increase in absolute dollars, but may vary as a percentage of total revenues
from period to period.

     Sales and Marketing. Sales and marketing expenses consist primarily of
compensation and related costs for sales and marketing personnel, sales
commissions, public relations, industry tradeshows and promotional expenditures.
Sales and marketing expenses increased to $16.6 million from $7.0 million in the
six months ended June 30, 2000 and 1999, respectively. The increase was
attributable primarily to the expansion of our direct sales force and increased
promotional activity. The increase during this period was attributable primarily
to the addition of 41 employees in sales and marketing in the six months ended
June 30, 2000, and to increased commissions related to increased revenues and,
to a lesser extent, to costs associated with increased efforts to develop market
awareness of our products and services. As a percentage of total revenues, sales
and marketing expenses for the six months ended June 30, 2000 and 1999
represented 52% and 80%, respectively. The decrease in sales and marketing
expenses as a percentage of revenues is primarily due to the fact that revenues
have increased faster than sales and marketing expenses in those periods. We
expect to continue increasing our marketing and promotional efforts and to hire
additional sales personnel. Accordingly, we anticipate that sales and marketing
expenses will increase in absolute dollars, but may vary as a percentage of
total revenues from period to period.

     General and Administrative. General and administrative expenses consist
primarily of personnel expenses, legal and accounting expenses and other general
corporate expenses. General and administrative expenses increased to $2.8
million in the six months ended June 30, 2000 from $993,000 in the six months
ended June 30, 1999. The increase was due primarily to the addition of financial
and management personnel, as well as costs associated with operating as a public
company. As a percentage of total revenues, general and administrative expenses
were 9% and 11% of total revenues for the six months ended June 30, 2000 and
1999, respectively. The decrease in percentage of revenues was attributable
primarily to the increases in the revenue base. We expect that general and
administrative expenses will continue to increase in absolute dollars as we add
personnel and incur additional costs related to the anticipated growth of our
business and operation.

     Amortization of Deferred Stock Compensation. Options granted in the first
quarter of 1999 have been considered to be compensatory as the estimated fair
value for accounting purposes was greater than the exercise price as determined
by the board of directors on the date of grant. The total deferred stock
compensation, net of amortization associated with these options as of June 30,
2000 and December 31, 1999 amounted to $2.9 million and $3.5 million,
respectively. These amounts are being amortized over the respective vesting
periods of these equity arrangements, generally 50 months. Of the total deferred
stock compensation, approximately $605,000 and $565,000 was amortized in the six
months ended June 30, 2000 and 1999, respectively. We expect amortization of
approximately $1,208,000 in 2000, $1,208,000 in 2001, $993,000 in 2002 and
$121,000 in 2003 related to these options.

     Amortization of goodwill and other intangibles. Amortization of goodwill
and other intangibles was $13.8 million in the six months ended June 30, 2000.
The estimated useful life of the goodwill and the other intangibles is 3 years
for trained and assembled workforce, one year for license agreements, 2 years
for non-compete agreements, 3 years for goodwill and 4 years for favorable lease
terms, and we expect amortization of approximately $39,667,000 in 2000,
$46,678,000 in 2001, $43,205,000 in 2002 and $9,752,000 in 2003 related to
goodwill and other intangibles.

     Purchased in-process technology. Purchased in-process technology was $5.0
million in the six months ended June 30, 2000. This amount represents one-time
charge of $2.7 million and $2.3 million recorded upon the acquisition of Alier
and TransLink, in February 2000 and in April 2000, respectively.

                                       13
<PAGE>

OTHER INCOME (NET)

     Other income consists primarily of interest income from cash and cash
equivalents and short-term investments offset by interest expense related to
long-term obligations. For the six months ended June 30, 2000, net interest
income was approximately $927,000, as compared to $96,000 for the six months
ended June 30, 1999. The increase in the six months ended June 30, 2000 was
attributable primarily to higher cash balances resulting from the initial public
offering of our common stock in August 1999.

LIQUIDITY AND CAPITAL RESOURCES

     In August 1999, we completed the initial public offering of our common
stock, which resulted in net proceeds of approximately $40 million. As of June
30, 2000, we had $22.1 million of cash and cash equivalents and short-term
investments.

     Net cash used in operating activities was $5.3 million in the six months
ended June 30, 2000, attributable primarily to a net loss of $19.9 million, an
increase in accounts receivable of $8.9 million and an increase in prepaid and
other current assets of $2.0 million, offset in part by amortization of deferred
stock compensation of $605,000, amortization of goodwill and acquired
intangibles of $13.8 million and purchased in-process technology of $5.0
million, an increase in other accrued liabilities of $742,000 million and an
increase in deferred revenue of $4.2 million. For the six months ended June 30,
1999, net cash used in operating activities was $3.2 million attributable
primarily to a net loss of $5.3 million and an increase in accounts receivable
of $727,000, offset in part by an increase in accounts payable of $678,000 and
an increase in deferred revenue of $899,000. Our sales cycle is lengthy and
unpredictable, and could cause our quarterly revenues and operating results to
fluctuate. Any change in our sales cycle could adversely affect the amount of
cash provided by our operating activities.

     Net cash used in investing activities was $10.2 million in the six months
ended June 30, 2000, due primarily to the acquisition of Alier, Premier and
TransLink, purchases of investments, other assets and purchases of property and
equipment, offset by maturities and sales of investments. For the six months
ended June 30, 1999, cash used in investing activities was $1.2 million,
attributable primarily to purchases of property and equipment.

     Net cash provided by financing activities was $1.9 million for the six
months ended June 30, 2000 due primarily to proceeds from the issuance of common
stock, offset by repayment of long-term obligations. For the corresponding
period in 1999, cash provided by financing activities was attributable primarily
to proceeds from a line of credit.

     As of June 30, 2000, our principal commitments consisted of obligations
outstanding under operating leases and notes payable. Although we have no
material commitments for capital expenditures, we expect to increase capital
expenditures and lease commitments consistent with our anticipated growth in
operations, infrastructure and personnel. We also may increase our capital
expenditures as we expand into additional international markets.

     We believe that our current cash, cash equivalents and short-term
investments, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next twelve months. If cash
generated from operations is insufficient to satisfy our liquidity requirements,
we may need to raise additional capital by selling additional equity or debt
securities or by obtaining a credit facility. If additional funds are raised
through the issuance of debt securities, these securities could have rights,
preferences and privileges senior to holders of common stock, and the terms of
these securities could impose restrictions on our operations. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders, and we cannot be certain that additional financing
will be available in amounts or on terms acceptable to us, if at all. If we are
unable to obtain this additional financing, we may be required to reduce the
scope of our planned product development and marketing efforts, which could harm
our business, financial position, results of operations or cash flows.

                                       14
<PAGE>

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Active Software is exposed to a variety of risks, including changes in
interest rates affecting the return on its investments and foreign currency
fluctuations. The Company has established policies and procedures to manage its
exposure to fluctuations in interest rates and foreign currency exchange rates.

     Interest Rate Risk. Active Software maintains its funds in money market and
certificate of deposit accounts at banks. The Company's exposure to market risk
due to fluctuations in interest rates relates primarily to its interest earnings
on its cash deposits. These securities are subject to interest rate risk in as
much as their fair value will fall if market interest rates increase. If market
interest rates were to increase immediately and uniformly by 10% from the levels
prevailing as of June 30, 2000, the fair value of the portfolio would not
decline by a material amount. Active Software does not use derivative financial
instruments to mitigate risks. However, it does have an investment policy that
would allow it to invest in short-term and long-term investments such as money
market instruments and corporate debt securities. The Company's policy does
attempt to reduce such risks by typically limiting the maturity date of such
securities to no more than twelve months with a maximum average maturity to its
whole portfolio of such investments at six months, placing its investments with
high credit quality issuers and limiting the amount of credit exposure with any
one issuer.

     Foreign Currency Exchange Rate Risk. Active Software's exposure to market
risk due to fluctuations in foreign currency exchange rates relates primarily to
the intercompany balances with its UK, Netherlands, Singapore, France and
Germany subsidiaries. Although the Company transacts business in various foreign
countries, settlement amounts are usually based on U.S. currency. Transaction
gains or losses have not been significant in the past, and there is no hedging
activity on the pound, guilders or other currencies. The Company would not
experience a material foreign exchange loss based on a hypothetical 10% adverse
change in the price of the pound, guilders, Singapore, French Franc or Dutch
Mark dollars against the U.S. dollar. Consequently, Active Software does not
expect that a reduction in the value of such accounts denominated in foreign
currencies resulting from even a sudden or significant fluctuation in foreign
exchange rates would have a direct material impact on the Company's financial
position, results of operations or cash flows.

     Notwithstanding the foregoing analysis of the direct effects of interest
rate and foreign currency exchange rate fluctuations on the value of certain of
Active Software's investments and accounts, the indirect effects of such
fluctuations could have a material adverse effect on the Company's business,
financial condition and results of operations. For example, international demand
for Active Software's products is affected by foreign currency exchange rates.
In addition, interest rate fluctuations may affect the buying patterns of the
Company's customers. Furthermore, interest rate and currency exchange rate
fluctuations have broad influence on the general condition of the U.S. foreign
and global economics, which could materially adversely affect the Company.

                                       15
<PAGE>

                    FACTORS THAT MAY AFFECT FUTURE RESULTS

     In addition to the other information in this Report, the following factors
should be considered carefully in evaluating the Company's business and
prospects:

We only began selling our products in August 1996 and, as a result, you may have
difficulty evaluating our business and operating results.

     We have a limited operating history and cannot be certain that our business
strategy will be successful. We were incorporated in September 1995 and
commercially released our first software product in August 1996. An investor in
our common stock must consider the risks and difficulties frequently encountered
by early stage companies in new and rapidly evolving markets such as the
electronic business integration software market, including:

     .    our substantial dependence on our ActiveWorks software products,  from
          which we derive  substantially  all of our  revenues  and  which  have
          limited market acceptance to date;

     .    our need to introduce new software products and services to respond to
          technological and competitive developments and customer needs;

     .    our ability to manage our anticipated growth;

     .    our need to expand  our  distribution  capability  through  our direct
          sales  organization  and through third party  distributors  and system
          integrators;

     .    our ability to respond to competitive developments;

     .    the market's acceptance of eBusiness integration; and

     .    our dependence on our current executive officers and key employees.

We have a history of losses, we expect future losses,  and we may not achieve or
maintain profitability.

     Although our revenue has increased in recent quarters, we may not be able
to sustain our growth or obtain sufficient revenue to achieve and sustain
profitability. We incurred net losses of $19.9 million in the six months ended
June 30, 2000, $9.4 million in 1999 and $9.9 million in 1998, and, as of June
30, 2000, we had an accumulated deficit of approximately $47.0 million.

     Since the beginning of fiscal 1999, we have invested significantly in
building our sales and marketing organization and in our technology research and
development. We expect to continue to spend substantial financial and other
resources on expanding our direct sales and marketing activities and developing
and introducing enhancements to our existing products and new software products.
As a result, we need to generate significant revenue to achieve and maintain
profitability. We expect that our sales and marketing expenses and our research
and development expenses will continue to increase in absolute dollars and may
increase as percentages of revenue for the foreseeable future.

Our operating  results are subject to fluctuations  and  seasonality  and, if we
fail to meet the  expectations  of securities  analysts or investors,  our stock
price could decline significantly.

     Our operating results are difficult to predict, and we believe that period-
to-period comparisons of our operating results will not necessarily be
meaningful. As a result, you should not rely upon them as an indication of
future performance. Our future quarterly operating results may fluctuate and may
not meet the expectations of securities analysts or investors. If this occurs,
the price of our stock would likely decline. The factors that may cause
fluctuations of our operating results include the following:

     .    the size, timing and contractual terms of sales of our products and
          services due to the long and unpredictable sales cycle for our
          products;

                                       16
<PAGE>

     .    technical difficulties in our software that could delay product
          shipments or increase the costs of introducing new products;

     .    introductions of new products or new versions of existing products by
          us or our competitors;

     .    changes in the pricing of our products and services or those of our
          competitors;

     .    our ability and the ability of our partners to implement eBusiness
          integration solutions for our customers;

     .    changes in our mix of revenues generated from product sales and
          services;

     .    changes in our mix of sales channels through which our products and
          services are sold; and

     .    the fixed nature of our operating expenses, such as base compensation
          and rent.

     In addition, we expect to experience seasonality in the sales of our
software products. For example, we expect that sales may decline during summer
months, particularly in European markets. We also anticipate that sales may be
lower in our first fiscal quarter due to patterns in the capital budgeting and
purchasing cycles of our current and prospective customers. These seasonal
variations in our sales may lead to fluctuations in our quarterly operating
results. Furthermore, it is difficult for us to evaluate the degree to which
this seasonality may affect our business because our growth may have largely
overshadowed this seasonality in recent periods.

Because our revenues are dependent on sales of our ActiveWorks software
products, our business could be materially harmed by factors that adversely
affect the pricing and demand for these products.

     We currently derive substantially all of our revenues from the sale of our
ActiveWorks Integration System software products and related services. We expect
revenues from this product family to continue to account for substantially all
of our future revenues. As a result, factors adversely affecting the pricing of
or demand for our ActiveWorks software products, such as competition and
technological change, could materially harm our business.

Because a small number of customers account for a substantial portion of our
revenues, our revenues could suffer if we lose a major customer.

     We have generated a substantial portion of our annual and quarterly
historical revenues from a limited number of customers. As a result, if we lose
a major customer, our revenues could suffer. We expect that a small number of
customers will continue to account for a substantial portion of our revenues in
any given quarter for the foreseeable future.

We may be unable to successfully  integrate Alier, Premier or TransLink into our
business or achieve the expected benefits of these acquisitions.

     Our acquisition of Alier, which was completed in February 2000, and our
acquisitions of Premier and TransLink, which were completed in April 2000, will
require integrating the products, business and operations of these companies
with our company. We may not be able to successfully assimilate the personnel,
operations and customers of these companies into our business. Additionally, we
may fail to achieve the anticipated synergies from the acquisitions, including
product integration, marketing, product development, distribution and other
operational synergies. The integration process may further strain our existing
financial and managerial controls and reporting systems and procedures. This may
result in the diversion of management and financial resources from our core
business objectives. In addition, we are not experienced in managing significant
facilities or operations in geographically distant areas. Finally, we cannot be
certain that we will be able to retain these companies' key employees.

                                       17
<PAGE>

Any future acquisitions of companies or technologies may result in disruptions
to our business or the distraction of our management.

     We may acquire or make investments in other complementary businesses and
technologies in the future. We may not be able to identify other future suitable
acquisition or investment candidates, and even if we do identify suitable
candidates, we may not be able to make these acquisitions or investments on
commercially acceptable terms, or at all. If we do acquire or invest in other
companies, we may not be able to realize the benefits we expected to achieve at
the time of entering into the transaction. In any future acquisitions we will
likely face the same risks as discussed above with respect to the integration of
the businesses of Alier, Premier and TransLink. Further, we may have to incur
debt or issue equity securities to pay for any future acquisitions or
investments, the issuance of which could be dilutive to our existing
stockholders.

We need to expand our sales and distribution channels, and, if we fail to do so,
our growth could be limited.

     We will need to significantly expand our direct and indirect sales
operations in order to increase market awareness of our ActiveWorks software
products and to generate increased revenue. We have recently expanded our direct
sales force and plan to recruit additional sales personnel. As of June 30, 2000,
we employed approximately 107 individuals in our sales and marketing
organization. Currently, we believe we will need to continue to expand our sales
organization. New sales personnel will require training and take time to achieve
full productivity. There is strong competition for qualified sales personnel in
our business, and we may not be able to attract and retain sufficient new sales
personnel to expand our operations. In addition, we believe that our future
success is dependent upon expansion of our indirect distribution channel, which
consists of our relationships with a variety of distribution partners such as
system integrators, independent software vendors and value added resellers. To
date, we have relationships with only a limited number of these partners. We
cannot be certain that we will be able to establish relationships with
additional distribution partners on a timely basis, or at all, or that these
distribution partners will devote adequate resources to promoting or selling our
products. In addition, we may also face potential conflicts between our direct
sales force and third-party reselling efforts.

We rely on system integrators and other strategic relationships to implement and
promote our software  products and, if these  relationships  fail,  our business
could be harmed.

     We have entered into relationships with third-party system integrators, as
well as with hardware platform and software applications developers and service
providers. We have derived, and anticipate that we will continue to derive, a
significant portion of our revenues from customers that purchase products or
services from our partners. In most cases, the partner refers the customer to
us, and we enter into a software license agreement directly with the customer.
Our future growth will be limited if we fail to work effectively with our
partners or fail to grow our base of these types of partners.

     Our partners are not required to market or promote our products and
generally are not restricted from working with competing software companies.
Accordingly, our success will depend on their willingness and ability to devote
sufficient resources and efforts to marketing our ActiveWorks software products
rather than the products of others. If these relationships fail, we will have to
devote substantially more resources to the distribution, sales and marketing,
implementation and support of our products than we would otherwise, and our
efforts may not be as effective as those of our partners, which would harm our
business.

The ActiveWorks Integration System must integrate with applications made by
third parties, and, if we lose access to the programming interfaces for these
applications, or if we are unable to modify our products or develop new products
in response to changes in these applications, our business could suffer.

     Our ActiveWorks Integration System uses software components called Adapters
to communicate with our customers' enterprise applications. Our ability to

                                       18
<PAGE>

develop these Adapters is largely dependent on our ability to gain access to the
application programming interfaces, or APIs, for the applications, and we may
not have access to necessary APIs in the future. APIs are written and controlled
by the application provider. Accordingly, if an application provider becomes a
competitor by entering the eBusiness integration market, it could restrict our
access to its APIs for competitive reasons. Our business could suffer if we are
unable to gain access to these APIs. Furthermore, we may need to modify our
ActiveWorks software products or develop new Adapters in the future as new
applications or newer versions of existing applications are introduced. If we
fail to continue to develop Adapters or respond to new applications or newer
versions of existing applications, our business could suffer.

We rely in part on third parties to develop Adapters necessary for the
integration of applications using our ActiveWorks Integration System, and we
cannot be certain that these companies will continue to develop these Adapters
or that these Adapters will be free of defects.

     A core element of our strategy is to enable third parties to develop
Adapters that operate with our ActiveWorks Integration System. If these third
parties are unable or unwilling to develop these Adapters, we may need to
develop them internally, which would require us to divert financial and
technical resources to these efforts. In addition, we cannot be certain that
Adapters developed by third parties will not contain undetected errors or
defects, which could harm our reputation, result in product liability or
decrease the market acceptance of our products.

The eBusiness integration market is in an early stage of development, and
eBusiness integration software products, including our ActiveWorks software
products, may not achieve market acceptance.

     The market for eBusiness integration software is relatively new and rapidly
evolving, and there is a variety of integration methods available. We do not
know if our target markets will widely adopt and deploy eBusiness integration
products such as our ActiveWorks software products. If eBusiness integration
products such as our ActiveWorks software products are not widely adopted by our
target markets, our business will suffer.

     Our products are complex and generally involve significant capital
expenditures by our customers. We do not have a long history of selling our
products and will have to devote substantial resources to educate prospective
customers about the benefits of our ActiveWorks software products. Our efforts
to educate potential customers may not result in our products achieving market
acceptance. In addition, many of these prospective customers have made
significant investments in internally-developed or custom systems and would
incur significant costs in switching to third-party products such as ours.
Furthermore, even if our products are effective, our target customers may not
choose them for technical, cost, support or other reasons. If the market for our
products fails to grow or grows more slowly than we anticipate, our business
could suffer.

Because market participants in some markets have adopted industry-specific
technologies, we may need to expend significant resources in order to address
specific markets.

     Our strategy is to develop our ActiveWorks integration software to be
broadly applicable to many industries. However, in some markets, market
participants have adopted core technologies that are specific to their markets.
For example, many companies in the healthcare and financial services industries
have adopted industry-specific protocols for the interchange of information. In
order to successfully sell our products to companies in these markets, we may
need to expand or enhance our products to adapt to these industry-specific
technologies, which could be costly and require the diversion of engineering
resources.

Competition in the eBusiness integration software market is intense, and, if we
are unable to compete effectively, the demand for, or the prices of, our
products may be reduced.

     The eBusiness integration software market is extremely competitive and

                                       19
<PAGE>

subject to rapid change. We compete with various providers of application
integration solutions, including CrossWorlds, New Era of Networks, Software
Technologies Corporation and Vitria. In addition, a number of other companies
are offering products and services that address specific aspects of application
integration, including IBM, BEA Systems, Inc. and TIBCO Software Inc. We also
face competition for some aspects of our product and service offerings from
major system integrators, both independently and in conjunction with corporate
in-house information technology departments, which have traditionally been the
prevalent resource for application integration. We expect additional competition
from other established and emerging companies. Furthermore, our competitors may
combine with each other, and other companies may enter our markets by acquiring
or entering into strategic relationships with our competitors.

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

Our recent growth has placed a significant strain on our management, systems and
resources, and we may experience difficulties managing our expected growth.

     We have been experiencing a period of rapid growth over recent years. Our
total revenues have grown to approximately $32.1 million for the six-months
period ending June 30, 2000 from $18.5 million for the same period last year.
The number of our employees has grown to 287 at the end of June 30, 2000 from
163 as of December 31, 1999. This growth has placed, and we expect that any
future growth we experience will continue to place, a significant strain on our
management, systems and resources. To manage the anticipated growth of our
operations, we will be required to:

     .    improve existing and implement new operational, financial and
          management information controls, reporting systems and procedures;

     .    hire, train and manage additional qualified personnel; and

     .    manage our relationships with our customers, suppliers and partners.

     In the future, we may experience difficulties meeting the demand for our
products and services. The installation and use of our products sometimes
requires implementation services, which are provided to our customers either by
us or by our partners. Our growth could be limited if we or our partners are
unable to provide these implementation services to our customers in a timely
manner. In addition, our management team may not be able to achieve the rapid
execution necessary to fully exploit the market for our products and services.
Any failure to manage growth effectively could materially harm our business.

We rely on the services of our founders and other key personnel, whose knowledge
of our business and technical expertise would be extremely difficult to replace.

     Our future success depends, to a significant degree, on the continued
services of our key management, sales and technical personnel. Our officers and
key employees are not bound by employment agreements, and we do not maintain
life insurance policies on any of our employees. The loss of services of any of
these employees for any reason could harm our business. Given our early stage of
development, we are dependent on our ability to attract, retain and motivate
high caliber personnel, and we may not be able to recruit and retain additional
qualified personnel. Competition for qualified personnel in the software
industry and in the San Francisco Bay area, as well as other markets in which we
recruit, is extremely intense and characterized by rapidly increasing salaries,
which may increase our operating expenses or hinder our ability to recruit
qualified candidates.

Rapid technological  change in the eBusiness  integration  software market could
cause our products to become obsolete or require us to redesign our products.

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<PAGE>

     The eBusiness integration software market is characterized by rapid
technological change, frequent new product introductions, changes in the
enterprise software applications used by our customers and emerging industry
standards, particularly those related to eCommerce. We also expect that the
rapid evolution of Internet-based applications and standards, as well as general
technology trends such as changes in or introductions of operating systems, will
require us to adapt our software products to remain competitive. Our products
could become obsolete and unmarketable if we are unable to adapt to new
technologies or standards.

     To be successful, we will need to develop and introduce new products and
product enhancements that respond to technological changes or evolving industry
standards in a timely manner and on a cost-effective basis. We cannot assure you
that we will successfully develop these types of products and product
enhancements or that our products will achieve broad market acceptance. Our
failure to respond in a timely and cost-effective manner to new and evolving
technologies could adversely impact our business.

Because our products incorporate technology licensed to us from third parties,
the loss of our right to use this licensed technology could harm our business.

     We license technology that is incorporated into our products from third
parties, including security software from SPYRUS. Any significant interruption
in the supply or support of any licensed software could adversely affect our
sales, unless and until we can replace the functionality provided by this
licensed software. Because our products incorporate software developed and
maintained by third parties, we depend on these third parties to deliver and
support reliable products, enhance their current products, develop new products
on a timely and cost-effective basis and respond to emerging industry standards
and other technological changes. The failure of these third parties to meet
these criteria could harm our business.

Our sales cycle is lengthy and unpredictable and may cause our operating results
to fluctuate, which could result in volatility in the price of our stock.

     The typical sales cycle of our ActiveWorks Integration System is lengthy
and unpredictable and involves significant capital investment decisions by
prospective customers, as well as our education of potential customers regarding
the benefits of our ActiveWorks software products. Any delay in sales of our
products could cause our operating results to vary significantly from quarter to
quarter, which could result in volatility in our stock price. Many of our
prospective customers have neither set aside money to purchase eBusiness
integration software nor dedicated specific personnel for the procurement and
implementation of these software products. As a result, before purchasing our
products, our customers spend a substantial amount of time performing internal
reviews and obtaining capital expenditure approvals. Currently, the time to
receive an initial order from a customer from the time we first contact the
customer may range from four to six months, with enterprise-wide deployment
occurring over a longer period of time. This cycle may lengthen in the future.
The emerging and evolving nature of the eBusiness integration software market
may cause prospective customers to postpone their purchase decisions.

Because our strategy to expand our international operations is subject to
uncertainties, we may not be able to enter new international markets or generate
significant revenues from those markets in which we currently operate.

     For the six months ended June 30, 2000, we have generated 17% of our
revenues from sales of our products in international markets and have limited
experience with international operations and localization of our products for
foreign markets. We intend to continue to expand our international operations
and enter new international markets, which will require significant management
attention and financial resources. Our international operations are subject to a
number of risks and uncertainties, including:

     .    the difficulties and costs of staffing and managing foreign
          operations;

     .    our ability to establish relationships with system integrators and

                                       21
<PAGE>

          service, distribution and marketing partners and the performance of
          these partners in selling our products;

     .    the difficulties and costs of localizing products for foreign markets,
          including the development of multilingual capabilities in our
          products;

     .    unexpected changes in regulatory requirements;

     .    legal uncertainties regarding liability, export and import
          restrictions, tariffs and other trade barriers;

     .    reduced protection of intellectual property in other countries;

     .    increased difficulty in collecting delinquent or unpaid accounts;

     .    fluctuations in the value of the U.S. dollar relative to other
          currencies;

     .    potentially adverse tax consequences; and

     .    political and economic instability.

     Any of these factors could impair our ability to expand our international
operations into these markets or to generate significant revenues from those
markets in which we operate.

Our software products are complex and may contain unknown defects that could
harm our reputation, result in product liability or decrease market acceptance
of our products.

     Our software products are complex and include software that is internally
developed and licensed from third parties. These software products may contain
errors or defects, particularly when first introduced or when new versions or
enhancements are released. Although we have not experienced any material
software defects to date, these defects could cause our customers to experience
severe system failures. Because our customers depend on our software for their
critical systems and business functions, any interruptions could:

     .    damage our reputation;

     .    cause our customers to initiate product liability suits against us;

     .    increase our product development costs;

     .    divert our product development resources;

     .    cause us to lose sales; or

     .    delay market acceptance of our products.

     Although we conduct extensive testing, we may not discover software defects
that affect our current or new products or enhancements until after they are
sold. Furthermore, because our ActiveWorks software products are designed to
work in conjunction with a wide variety of applications, we are unable to test
our products with all of these applications.

Because our products could interfere with the operations of our customers' other
software applications, we may be subject to potential product liability and
warranty claims by these customers, which may be costly and may not be
adequately covered by insurance.

     Our ActiveWorks products are integrated with our customers' networks and
software applications. The sale and support of our products may entail the risk
of product liability or warranty claims based on damage to these networks or
applications. In addition, the failure of our products to perform to customer
expectations could give rise to warranty claims. Any of these claims, even if
not meritorious, could result in costly litigation or divert management's
attention and resources. Although we carry general liability insurance, our

                                       22
<PAGE>

current insurance coverage would likely be insufficient to protect us from all
liability that may be imposed under these types of claims.

Our intellectual property could be used by others without our consent because
protection of our intellectual property is limited.

     We rely primarily on a combination of copyrights, trademarks, trade secret
laws and contractual obligations with employees and third parties to protect our
proprietary rights. We do not currently own any issued patents, and other
protection of our intellectual property is limited. Despite our efforts to
protect our proprietary rights, unauthorized parties may copy aspects of our
products and obtain and use information that we regard as proprietary. In
addition, other parties may breach confidentiality agreements or other
protective contracts we have entered into, and we may not be able to enforce our
rights in the event of these breaches. Furthermore, we expect that we will
increase our international operations in the future, and the laws of many
foreign countries do not protect our intellectual property rights to the same
extent as the laws of the United States.

Our products may infringe the intellectual property rights of others, and
resulting claims against us could be costly and require us to enter into
disadvantageous license or royalty arrangements.

     The software industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement
and the violation of other intellectual property rights. Although we attempt to
avoid infringing known proprietary rights of third parties in our product
development efforts, we expect that we may be subject to legal proceedings and
claims for alleged infringement by us or our licensees of third party
proprietary rights, such as patents, trademarks or copyrights, from time to time
in the ordinary course of business. Any claims relating to the infringement of
third party proprietary rights, even if not meritorious, could result in costly
litigation, divert management's attention and resources, or require us to enter
into royalty or license agreements which are not advantageous to us. In
addition, parties making these claims may be able to obtain an injunction, which
could prevent us from selling our products in the United States or abroad. Any
of these results could harm our business. We may increasingly be subject to
infringement claims as the number of products and competitors in our industry
grows and functionalities of products overlap. Furthermore, former employers of
our current and future employees may assert that our employees have improperly
disclosed confidential or proprietary information to us.

Our stock price may be volatile, which could cause investors to lose all or part
of their investments in our stock.

     We expect that the market price of our common stock will fluctuate as a
result of variations in our quarterly operating results. These fluctuations may
be exaggerated if the trading volume of our common stock is low. In addition,
due to the technology-intensive and emerging nature of our business, the market
price of our common stock may rise and fall in response to:

     .    announcements of technological or competitive developments;

     .    acquisitions or strategic alliances by us or our competitors;

     .    the gain or loss of a significant customer or order; and

     .    changes in estimates of our financial performance or changes in
          recommendations by securities analysts.

Our officers, directors and affiliated entities own a large percentage of our
voting stock and could significantly influence the outcome of actions requiring
stockholder approval.

     Our executive officers and directors and their respective affiliates,
currently own a significant portion of our outstanding common stock.
Accordingly, these stockholders may, as a practical matter, be able to exert
significant influence over matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other

                                       23
<PAGE>

business combinations. This concentration could have the effect of delaying or
preventing a change in control.

Our certificate of incorporation, bylaws and Delaware law contain provisions
that could discourage or prevent a takeover, even if an acquisition would be
beneficial to our stockholders.

     Provisions of our certificate of incorporation, bylaws and Delaware law may
discourage, delay or prevent a merger or acquisition that some stockholders may
consider favorable. These provisions include:

     .    authorizing our board of directors to issue additional preferred
          stock;

     .    limiting the persons who may call special meetings of stockholders;

     .    prohibiting stockholder action by written consent;

     .    establishing  advance notice requirements for nominations for election
          of our board of directors or for  proposing  matters that can be acted
          on by stockholders at stockholder meetings;

     .    prohibiting cumulative voting in the election of directors; and

     .    establishing a classified board of directors.

                                       24
<PAGE>

          Risks related to the proposed merger with webMethods, Inc.

Expected benefits of the merger may not be realized.

     If webMethods and Active Software are not able to effectively integrate
their technology, operations and personnel in a timely and efficient manner,
then the benefits of the merger with webMethods will not be realized. In
particular, if the integration is not successful, the combined company's
operating results may be adversely affected and the combined company may lose
key personnel and/or customers. In addition, the attention and effort devoted to
the integration of the two companies will significantly divert management's
attention from other important issues, and could have a material adverse impact
on the combined company.

The market price of webMethods common stock may decline as a result of the
merger.

     If the benefits of the merger with webMethods do not exceed the costs
associated with the merger, including the dilution to webMethods' stockholders
resulting from the issuance of shares in connection with the merger, webMethods'
financial results could be adversely affected. In particular, the market price
of webMethods common stock may decline as a result of the merger if:

     .    the integration of webMethods and Active Software is unsuccessful;

     .    webMethods is unable to market successfully its products and services
          to Active Software's customers or Active Software's products and
          services to webMethods' customers;

     .    webMethods does not achieve the perceived benefits of the merger as
          rapidly as, or to the extent, anticipated by financial or industry
          analysts; or

     .    the effect of the merger on webMethods' financial results is not
          consistent with the expectations of financial or industry analysts.

Failure of the merger to qualify as a poling of interests would negatively
affect combined financial results.

     The failure of the merger with webMethods to qualify for pooling of
interests accounting treatment for financial reporting purposes for any reason
would materially and adversely affect webMethods' reported financial and,
likely, the price of webMethods' common stock. The availability of pooling of
interests accounting treatment for the merger depends upon circumstances and
events occurring before and after the effective time of the merger. For example,
affiliates of webMethods and Active Software must not sell any shares of either
webMethods or Active Software capital stock until the day that webMethods
publicly announces financial results covering at least 30 days of combined
operations of webMethods and Active Software after the merger. If affiliates of
webMethods or Active Software sell their shares of webMethods common stock prior
to that time despite a contractual obligation not to do so, the merger may not
qualify for accounting as a pooling of interests for financial reporting
purposes.

webMethods will face technical, operational and strategic challenges that may
prevent it from successfully integrating Active Software and webMethods.

     The proposed merger involves risks related to the integration and
management of acquired technology, operations and personnel. The integration of
webMethods and Active Software will be a complex, time-consuming and expensive
process and may disrupt webMethods' business if not completed in a timely and
efficient manner. In addition, webMethods must also integrate the operations of
three companies recently acquired by Active Software -- Alier, Premier and
TransLink. Following the merger, webMethods must operate as a combined
organization utilizing common information and communication systems, operating
procedures, financial controls and human resources practices.

     webMethods and Active Software may encounter substantial difficulties,
costs and delays involved in integrating their operations, including:

                                       25
<PAGE>

     .    potential incompatibility of business cultures;

     .    perceived adverse changes in business focus;

     .    potential conflicts in distribution, marketing or other important
          relationships; and

     .    the loss of key employees and the diversion of management's attention
          from other ongoing business concerns.

Active Software faces risks related to the proposed merger.

     If the merger is successfully completed, holders of Active Software's
common stock will become holders of webMethods common stock. webMethods' results
of operations, as well as the price of webMethods common stock, may be affected
by factors different than those affecting Active Software's results of
operations and the price of its common stock before the merger.

Failure to complete the merger could negatively  impact Active  Software's stock
price, future business and operations.

     If the merger is not completed for any reason, Active Software may be
subject to a number of material risks, including the following:

     .    Active Software may be required, under certain circumstances, to pay
          webMethods a termination fee of up to $50 million;

     .    the price of Active Software common stock may decline, to the extent
          that the relevant current market price reflects a market assumption
          that the merger will be completed; and

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

     In addition, Active Software's customers and strategic partners, in
response to the announcement of the merger, may delay or defer decisions
concerning the relevant company. Any delay or deferral in those decisions by
customers, strategic partners or suppliers could have a material adverse effect
on Active Software's business, regardless of whether the merger is ultimately
completed.

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<PAGE>

PART II. OTHER INFORMATION

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

             Use of Proceeds

                 On August 12, 1999, in connection with our initial public
             offering, a Registration Statement on Form S-1 (No. 333-80549) was
             declared effective by the Securities and Exchange Commission,
             pursuant to which 4,025,000 shares of our common stock were offered
             and sold for our account at a price of $11.00 per share, generating
             aggregate gross proceeds of $44.3 million for the account of the
             Company. The managing underwriters were Goldman, Sachs & Co.,
             Lehman Brothers and Dain Rauscher Wessels. After deducting
             approximately $3.1 million in underwriting discounts and $1.2
             million in other related expenses, the net proceeds of the offering
             were approximately $40 million. As of June 30, 2000, $22.1 million
             of the net proceeds were invested in cash and cash equivalents,
             short-term investments and approximately $17.9 million had been
             used for working capital. We intend to use such proceeds for
             capital expenditures and for general corporate purposes, including
             working capital to fund anticipated operating losses.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

         10.1 Agreement of Plan and Merger, dated as of May 20, 2000, among
         webMethods, Inc., Wolf Acquisition, Inc. and the Company. (Incorporated
         herein by reference to the Company's definitive proxy statement filed
         on July 21, 2000).

         10.2 Stockholders Agreement and Irrevocable Proxy, dated as of May 20,
         2000, among webMethods, Inc., Wolf Acquisition, Inc. and the several
         stockholders of Active Software, Inc. named therein. (incorporated
         herein by reference to the Company's definitive proxy statement filed
         on July 21, 2000).

         27.1 Financial Data Schedule

(b)  Reports on Form 8-K

         (1) Current Report on Form 8-K filed on April 21, 2000 with respect to
         Active Software's acquisition of TransLink Software, Inc.

         (2) Current Report on Form 8-K filed on May 3, 2000 with respect to
         Active Software's acquisition of Premier Software Technologies, Inc.

                                  SIGNATURES

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

                                       ACTIVE SOFTWARE, INC.

                                       By: /s/ JON A. BODE
                                       -----------------------------------------
                                       Jon A. Bode
                                       Chief Financial Officer (Principal
                                       Financial and Accounting Officer)

Dated: August 10, 2000

                                       27
<PAGE>

INDEX TO EXHIBITS


Exhibit No.          Document Description
-----------          --------------------

10.1                 Agreement of Plan and Merger, dated as of May 20, 2000,
                     among webMethods, Inc., Wolf Acquisition, Inc. and the
                     Company. (Incorporated herein by reference to the Company's
                     definitive proxy statement filed on July 21, 2000).

10.2                 Stockholders Agreement and Irrevocable Proxy, dated as of
                     May 20, 2000, among webMethods, Inc., Wolf Acquisition,
                     Inc. and the several stockholders of Active Software, Inc.
                     named therein. (incorporated herein by reference to the
                     Company's definitive proxy statement filed on July 21,
                     2000).

27.1                 Financial Data Schedule

                                       28