NETWORK SOLUTIONS INC /DE/, 10-K, 1999-03-30

NETWORK SOLUTIONS INC /DE/
10-K, 1999-03-30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

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

COMMISSION FILE NUMBER 0-22967

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NETWORK SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)

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DELAWARE 52-1146119
State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization
505 HUNTMAR PARK DRIVE 20170
HERNDON, VIRGINIA (Zip Code)
(Address of principal executive offices)
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(703) 742-0400
Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.001 Par Value

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 at least the past 90 days. YES [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $2,029,595,706 on March 12, 1999 based on the
last sale price as reported by the Nasdaq National Market System.

As of March 12, 1999, the registrant had 18,384,634 shares of Class A
common stock, $0.001 par value per share, issued and outstanding, and 14,850,000
shares of Class B common stock, $0.001 par value per share, issued and
outstanding which is not publicly traded.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for the annual
meeting of shareholders to be held on May 18, 1999, which will be filed with the
Commission within 120 days after the end of the registrant's fiscal year ended
December 31, 1998, are incorporated by reference into Part III of this Form
10-K.

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TABLE OF CONTENTS

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PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 20
Item 3. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders......... 22

PART II
Item 5. Market for Registrant's Common Equity Stock and Related
Stockholder Matters......................................... 24
Item 6. Selected Financial Data..................................... 25
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................... 28
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 42
Item 8. Financial Statements and Supplementary Data................. 42
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 43

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 43
Item 11. Executive Compensation...................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 43
Item 13. Certain Relationships and Related Transactions.............. 43

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 44
Signatures.................................................. 46
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PART I

THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT
HAVE BEEN MADE PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON MANAGEMENT'S
CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS, BELIEFS AND ASSUMPTIONS. WORDS
SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS,"
"ESTIMATES," VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND
ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT; THEREFORE, ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE EXPRESSED OR FORECASTED IN ANY SUCH FORWARD-LOOKING
STATEMENTS. THESE RISKS AND UNCERTAINTIES INCLUDE THOSE DISCUSSED BELOW UNDER
"BUSINESS -- RISK FACTORS" ON PAGES 11 THROUGH 20 AND ELSEWHERE IN THIS FORM
10-K. UNLESS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. HOWEVER, READERS SHOULD CAREFULLY REVIEW THE FACTORS
DISCUSSED IN OTHER REPORTS OR DOCUMENTS THAT WE FILE FROM TIME TO TIME WITH THE
SECURITIES AND EXCHANGE COMMISSION, PARTICULARLY THE QUARTERLY REPORTS ON FORM
10-Q AND ANY CURRENT REPORTS ON FORM 8-K.

ITEM 1. BUSINESS

OVERVIEW

We are the leading Internet domain name registration service provider
worldwide. We currently act as the exclusive registry and registrar for second
level domain names within the .com, .org, .net and .edu top level domains under
a cooperative agreement with the Department of Commerce. We also facilitate
global registration of domain names in other existing top level domains
including country code top level domains.

By registering Internet domain names, we enable businesses, other
organizations and individuals to establish a unique Internet presence from which
to communicate and conduct commerce. An Internet domain name is made up of a top
level domain and a second level domain. For example, in the domain name
"companyX.com," "companyX" is the second level domain and ".com" is the top
level domain. As a registry, we maintain the master database of second level
domain names for our top level domains. As a registrar, we enter new second
level domain names into the master database maintained by us, as registry, and
process modifications, transfers, re-registrations and deletions for existing
second level domain names.

We have agreed with the Department of Commerce to transition to a shared,
or competitive, registration system in which multiple registrars may register
second level domain names with us, as registry, in the .com, .net and .org top
level domains. This transition will occur in a phased approach with limited
competition scheduled to begin April 26, 1999.

In 1998, we introduced a portfolio of Internet-based products and services.
We also provide Internet technology consulting services that focus on network
engineering, network and systems security and network management.

On December 31, 1998, our Board of Directors approved a two-for-one stock
split of the shares of our Class A common stock and Class B common stock, that
was effected in the form of a 100%

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stock dividend distributed on March 23, 1999 on shares of our Class A common
stock and Class B common stock outstanding on February 26, 1999. Except as noted
otherwise, all share or per share information in this Annual Report on Form 10-K
has been adjusted to reflect the two-for-one stock split.

We were incorporated in Washington, D.C. in 1979 as Network Solutions
Incorporated. We were acquired by Science Applications International
Corporation, or SAIC, an employee-owned, diversified professional and technical
services company that designs, develops and manufactures high-technology
products, on March 10, 1995, and were reincorporated as Network Solutions, Inc.
in Delaware in November 1996. We completed our initial public offering of
3,795,000 shares (pre-split) of our Class A common stock, $.001 par value, on
October 1, 1997. As of March 12, 1999, SAIC owned 100% of our Class B common
stock, $.001 par value, representing approximately 45% of the economic interest
of our outstanding common stock, $.001 par value, and approximately 89% of the
combined voting power of our outstanding Class A and Class B common stock. Our
principal executive offices are located at 505 Huntmar Park Drive, Herndon,
Virginia 20170, our telephone number is (703)742-0400 and our Class A common
stock is traded on the Nasdaq National Market under the ticker symbol NSOL.

OUR BUSINESS

We provide the following:

- Domain name registration services,

- Internet-based products and services, and

- Internet technology services.

Domain Name Registration Services

Registration services are our core business. We have been performing these
services since 1993 under the Cooperative Agreement. We register second level
domain names in the .com, .org, .net and .edu top level domains. Our customers
apply to register second level domain names either directly through our web
sites and e-mail-based registration templates or indirectly through Internet
access providers and others.

Our InterNIC registration service is an e-mail based registration template
application process for the registration of second level domain names. Our
customers submit registration applications via e-mail through the Internet. We
process the application and either register the requested domain name in the
requested top level domain or reject the application. Upon registration or
rejection, we notify the customer via e-mail. For domain names which are
registered, we invoice the customers and permit them to pay the registration
services fee after the domain name is registered. We perform internally our core
proprietary automated registration process and associated security functions.

On December 1, 1997, we began to offer a suite of enhanced domain name
registration services geared toward small businesses. On January 14, 1998, we
introduced RegistrationPlus, the first such service. The RegistrationPlus
service offering is a web-based transaction process that is intended to simplify
the registration process. The RegistrationPlus five step registration process
allows users to reserve a second level domain name, and activate it later by
providing domain name record hosting, either through our web site or by calling
a toll-free number. The RegistrationPlus service also validates and accepts
credit card payments, providing a customer confirmation number, via our secure
web-based online payment system.

On March 20, 1999, we consolidated into a single web site our InterNIC
informational web site and our RegistrationPlus web site. Now, through the new
web site, users can reserve a second level

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domain name through our RegistrationPlus service or register a second level
domain name through our InterNIC service using the same processes that were
available under the separate web sites. Our customers currently pay a two-year
service fee of $119 for the initial reservation of a domain name and $70 for the
initial registration of a domain name and $35 per year for re-registrations of a
domain name.

Through our 1998 acquisition of Internet Domain Names, Inc., or idNames, we
now offer search and registration services for domain names in country code top
level domains around the world.

Internet-Based Products and Services

We have introduced a portfolio of Internet-based products and services and
intend to develop additional Internet-based products and services, which may
include directory and other Internet identity services. In 1998, we introduced
the following Internet-based products and services:

- DOT COM MAIL. In August 1998, we launched dot com mail, a portable,
personalized e-mail service designed primarily for small businesses. The
dot com mail service is hosted by our outsourcing vendor, Critical Path,
Inc., and enables a business to use its unique domain name for its e-mail
address instead of the domain name of its Internet access provider.
Currently, the dot com mail service is available only to customers who
reserve a domain name which we host.

- DOT COM TOOLKIT. In September 1998, we launched the dot com toolkit, a
small business resource center that provides access to tools and services
for setting up a web site and conducting business on the Internet. The
dot com toolkit resource center is available on our web site and offers
tools and services categorized into four areas:

- starting a business on-line,

- setting up an Internet presence,

- managing a business online, and

- promoting a business online.

Within each category, the resource center visitor has the ability to
purchase services from a select group of companies that have contracted with us
to be included in the resource center. We receive referral fees from certain
purchases made by our customers from links in the dot com toolkit resource
center.

- DOT COM PROMOTIONS. In August 1998, we launched our dot com promotions
service through a joint marketing agreement with LinkExchange, Inc.
Through dot com promotions, a domain name registrant can link to and
subscribe to various LinkExchange services which include:

- registering a web site with over 400 Internet search engines by
subscribing to the Submit It! Service,

- monitoring its rank in the search engines through the PositionAgent
service,

- participating in a competitive advertising network that allows users
to promote their web sites and track success through the Banner
Network service, and

- buying targeted advertising space on affordable web sites through
the LinkExchange Express service.

We receive referral fees from certain purchases made by our customers from
links from the dot com promotions service.

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Internet Technology Services

We deliver Internet technology consulting services to businesses that are
utilizing Internet technologies for their internal enterprise networks, or
intranets.

- NETWORK ENGINEERING. We offer a line of services to help develop and
integrate enterprise network solutions in a manner tailored to individual
clients' needs.

- NETWORK AND SYSTEM SECURITY. We provide a range of security consulting
services to allow clients to protect their data and systems. We develop
access and protection controls that permit internal and remote users to
access computer systems, databases and applications on the network, while
protecting against unauthorized access to information or misuse of
systems.

- NETWORK MANAGEMENT. We provide a range of services that allow clients to
monitor, control and improve their network performance. We also provide
planning and analysis to implement disaster recovery and contingencies
for network system failures.

During 1998, we provided Internet technology consulting services to more
than 20 large companies. Our Internet technology consulting services are
generally provided to clients on a time and expense basis. We also perform a
limited number of engagements on a fixed-price basis.

MARKETING AND DISTRIBUTION RELATIONSHIPS

We are establishing and expanding marketing and distribution relationships
with companies worldwide.

Strategic Programs with Internet Access Providers and Others

We have entered into agreements to provide enhanced services to certain
Internet access providers, including Internet service providers, or "ISPs," both
in the United States and in other countries, who register a significant number
of second-level domain names with us on behalf of their customers.

- PREMIER PROGRAM. Our Premier Domain Registration Service Program
provides participating Internet access providers with personalized
account management, customized billing and financial reports, private
e-mail boxes and other customized features. As of March 12, 1999, we had
entered into agreements with 165 companies under the Premier Program
which include agreements with 71 companies located in the United States
and 94 companies located in Canada, Australia, New Zealand and the
European, South American and Asia-Pacific regions.

- ALLIANCE PROGRAM. The Alliance Program is available to members of the
Premier Program who have participated in the program for a minimum of one
year and who have registered a significant number of second-level domain
names with us. The Alliance Program is designed to enable us and our
participating companies to provide reciprocal links and referrals to the
other party's distribution channels for each other's complementary
services.

- AFFILIATE PROGRAM. In September 1998, we launched our Affiliate Program.
This program provides a way for small Internet access providers and other
companies and individuals to establish a link to our RegistrationPlus
domain name registration process. The Affiliate Program is designed for
participation by Internet access providers, web hosting companies, and
web site design companies that currently register their customers' domain
names through us, as well as other companies and individuals who could
benefit from providing this service to their customers. As of March 12,
1999, approximately 4,375 Affiliates were part of the program.

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Distribution Channel Marketing Agreements

We are developing co-marketing programs with channel partners.

DOMESTIC AGREEMENTS. In 1998, we entered into agreements with Dun &
Bradstreet Corporation, Inc. Online, infoUSA and Centraal Corporation for the
marketing and development of products and services.

- Our agreement with D&B makes it possible for businesses to register an
Internet domain name and apply for a D&B D-U-N-S Number from either the
D&B web site or our web site. As part of the agreement, we and D&B placed
a hyperlink on each other's web site that will allow businesses and
individuals registering a domain name to complete that task and then
apply for their D&B D-U-N-S Number or vice versa.

- Under our agreement with Inc., we are sponsoring Inc.'s "Guide to the
Internet" web site. In the "Guide to the Internet," Inc. helps
small-to-midsize companies navigate through the information and decisions
needed to choose systems, tie them together, get employees to embrace
them and apply them to strategic goals. From Inc.'s web site, small
businesses and individuals can hyperlink to our web site where they can
register or reserve a domain name using our RegistrationPlus services.

- Under our agreement with infoUSA, we and infoUSA are providing reciprocal
links and referrals to each other's products and services so that our
customers can purchase infoUSA's sales leads and mailing lists services
and receive information on businesses for marketing or credit purposes.
InfoUSA's customers can register a domain name through our
RegistrationPlus service from the infoUSA home page or purchase any other
service offered through our web site.

- Under our agreement with Centraal, we market, sell and service Centraal's
"RealName" subscription orders to domain name holders, directly and
through our channels worldwide. The RealName service is a web navigation
service that enables users to navigate to specific Web pages and is
complementary to our domain name registration services. As part of the
agreement, Centraal placed a hyperlink on its web site that allows
Centraal customers to register a domain name with us.

INTERNATIONAL AGREEMENTS. We have also established distribution channels
in Beijing, China through the Computer Network Information Center, or "CNIC,"
and in Japan through ASCII Corporation, or "ASCII".

- Under our agreement with CNIC, CNIC is promoting in China our domain name
registration services in the .com, .org and .net top level domains
through a joint marketing campaign with us in Chinese publications, web
sites and other media, and by providing seminars in China on registering
domain names with us. Under the agreement, we are promoting domain name
registration in .cn, the China country code top-level domain, under which
CNIC is the registry.

- In October 1998, we launched a Japanese language version of our
RegistrationPlus service, through a strategic agreement with ASCII.
Through this relationship, we will make our RegistrationPlus service
available to Japanese Internet users in the Japanese language, with a
Japanese call center customer support help desk and through an
advertising and marketing campaign in Japanese publications, Japanese web
sites and through other media.

Advertising

In December 1997, we launched our first significant marketing campaign, a
targeted print and on-line advertising campaign for our registration services.
This campaign was focused on small

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businesses. We also launched several major multi-piece direct mail, print and
web site banner advertising campaigns announcing our new products and services,
such as RegistrationPlus and dot com mail. In addition, we have run two national
cable television ad campaigns.

In December 1998, we entered into two separate global marketing agreements
with Yahoo Inc. and Netscape Communications Corporation under which we purchased
advertising to promote our domain name registration services and other services
on certain Yahoo! and Netscape web sites during 1999.

Direct Sales

We market and distribute our services directly through our Internet home
pages. In addition, we are continuing to develop our product management,
marketing and sales force to target channel and distribution partners to offer
our registration services electronically through existing web sites and through
other direct channels, such as direct mail and telemarketing.

ONGOING PRIVATIZATION OF INTERNET ADMINISTRATION

The Internet is not bound by geography and neither the U.S. Government nor
any organization or entity currently has formal authority over all aspects of
the Internet. There is, however, a requirement for central policy decisions
surrounding the coordination of the administrative services required for the
registration, allocation and use of top level domains and Internet Protocol
numbers, and for the effective global operation of the Internet. This role has
been generally filled through mutual cooperation and interrelated informal
agreements, historical leadership from an unincorporated entity called the
Internet Assigned Numbers Authority and involvement from the U.S. Government.
With the onset of increased commercial growth of the Internet, the U.S.
Government initiated an activity directed at increased privatization of the
policy making and central administration of the Internet. Without authoritative
policy making, it has become more difficult to achieve consensus in the
historical manner. Failure to achieve consensus among the various groups who now
informally administer the Internet could disrupt Internet operations or delay
infrastructure improvements or changes in operations needed to maintain and
expand the Internet.

Within the U.S. Government, leadership for the continued privatization of
Internet administration is currently provided by the Department of Commerce.
After a series of draft proposals and public comment periods, on June 10, 1998,
the Department of Commerce published in the Federal Register a plan referred to
as the Statement of Policy or "White Paper," calling for the formation of a
not-for-profit corporation to assume responsibilities relating to the domain
name system, but not to perform actual registration of domain names either as a
registrar or registry. The Statement of Policy invites private sector Internet
stakeholders to work together to form a new private, not-for-profit corporation
to oversee policy for the Internet name and address system and provides that:

- the not-for-profit corporation should be headquartered and incorporated
in the United States and have a board of directors from around the world;

- in making a decision to devolve U.S. government oversight of the domain
name system to the not-for-profit corporation, the U.S. government will
be guided by, and consider the entity's commitment to, the principles of
stability, competition, private bottom-up coordination and
representation;

- to the extent that the not-for-profit corporation is established and
operationally stable, transition to the private sector of domain name
system administration will be phased in by September 30, 2000; and

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- the not-for-profit corporation ultimately should have the authority to:

- set policy for and direct allocation of Internet protocol number
blocks to regional Internet number registries;

- oversee operation of the authoritative Internet root server system;

- oversee policy for determining the circumstances under which any new
top level domains are added to the domain name system; and

- coordinate the assignment of other Internet technical parameters as
needed to maintain universal connectivity on the Internet.

The Statement of Policy distinguishes between the registry and registrar
functions of the domain name system, both of which functions are currently
performed exclusively by us in the .com, .org, .net and .edu top level domains,
and calls for increased competition. The current technical structure of the
Internet will permit only one registry for each top level domain. A registrar
acts as the interface between the registry and the end-user domain name holders.
Registrars submit to the registry information and other data for each of their
customers that has a second level domain name in that top level domain. A
registrar can provide value-added products and services in addition to its basic
registration service. Numerous registrars will be able to operate within each
top level domain.

As part of the process initiated by the Statement of Policy, several
proposals were put forward to the Department of Commerce on the establishment
and governance of the not-for-profit corporation. The proposals differed in
several respects including, among others, their approaches to the following
issues: place and form of incorporation; method for selection of the interim and
permanent board of directors; who should be eligible to become a member and on
what questions should the members vote; what authority should be granted to the
board of directors and what authority should be reserved to the members, if any;
and whether there should be separate supporting organizations and, if so, what
authority these organizations should have. A U.S. based private not-for-profit
corporation with an international board of directors, denoted the Internet
Corporation for Assigned Names and Numbers, or "ICANN," submitted various
proposals which formed the basis of discussion at a number of public and private
meetings. As a result of these and other meetings and private negotiations, the
process initiated by the Statement of Policy has resulted in the entry by the
U.S. Government into a Memorandum of Understanding, or "MOU," with ICANN. Under
the MOU, the parties will jointly design, develop and test the mechanisms,
methods and procedures that should be in place and the steps necessary to
transition management responsibility for certain domain name system functions to
a private-sector not-for-profit entity. The MOU provides that once testing is
successfully completed, it is contemplated that management of certain domain
name system functions will be transitioned to the mechanisms, methods and
procedures designed and developed in this joint project. The U.S. Government has
sent us a letter directing us to treat ICANN as the not-for-profit corporation
identified in the October amendment to the Cooperative Agreement described below
under "-- Status of Cooperative Agreement," in the performance of ICANN's
obligations under the MOU and until such time as the MOU is terminated. We have
not yet responded to that letter.

ICANN's bylaws call for the creation of supporting organizations that will
select some ICANN board members and provide policy recommendations in particular
areas. ICANN called for submission by February 5, 1999 of applications from
groups urging "recognition" of a domain name supporting organization that would
be charged with developing recommendations for policies ICANN might apply when,
and if, it begins exercising responsibility over certain domain name system
matters. Those responsibilities could include entering into contracts with
registries for all top level domains and eventually adding new top level
domains. We submitted comments regarding the structure and function of such a
domain name supporting organization. On March 4, 1999, the ICANN Board adopted a
domain name supporting organization formation concept statement reflecting some,
but not

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all of our comments. On March 15, 1999, ICANN released a staff draft of
amendments to its bylaws based on the formation concept statement to establish a
domain name supporting organization that will first meet in May 1999.

We cannot be sure that ICANN will take positions favorable to us in the
adoption or implementation of the final bylaws or in its further policy
development or contract formation.

STATUS OF COOPERATIVE AGREEMENT

On January 1, 1993, we initiated phase-in of a Cooperative Agreement with
the National Science Foundation. The three-month phase-in was followed by a
five-year operations period, commencing April 1, 1993 and ending March 31, 1998,
and a six-month flexibility period through September 1998. Effective in
September 1998, the responsibility for the Cooperative Agreement was transferred
to the Department of Commerce. In October 1998, the Cooperative Agreement was
amended to extend the flexibility period through September 30, 2000 and to
transition to a shared registration system.

In this transition, we will operationally separate our registry business
from our registrar business. Additional, competing registrars will be able to
market registrations in the .com, .net and .org top level domains through the
registry that we maintain for each of those top level domains. Accordingly,
persons registering second level domain names will be able to choose among a
number of different registrars, including us. As the registry, we will have
contracts with these competing registrars allowing them to register names in our
registry database. Our registry services will be subject to a price cap, the
details of which are currently under discussion with the Department of Commerce.
Registrar services, once competitive, may be priced in different ways by us and
competing registrars.

On March 12, 1999, the Cooperative Agreement was amended to, among other
things, delay the schedule for the development and deployment of the shared
registration system, due to the fact that the MOU was not signed until November
25, 1998, or 25 days later than had been assumed when the milestones were
established. The following summarizes certain terms of the October 1998
amendment to the Cooperative Agreement, as amended by the March amendment:

- We will develop a protocol and associated software to support a shared
registration system which will permit multiple registrars to provide
registration services within the top level domains for which we now act
as exclusive registry and registrar. Implementation of the shared
registration system will reflect an agreed-upon time line, which assumes
that the U.S. Government does not request changes in the specifications,
including the following dates:

- By April 26, 1999, we will initially deploy the shared registration
system by establishing a test bed supporting actual registrations in
.com, .org and .net by five registrars accredited by the
not-for-profit corporation;

- By June 25, 1999, we will deploy the shared registration system and
make it available to support multiple licensed and accredited
registrars within the top level domains for which we act as registry;

- By October 25, 1999, we will complete reengineering of our
registry/registrar interface and back end systems so as to assure that
we, acting as registry, will give all licensed and accredited
registrars equivalent access to registry services through the shared
registration system;

- We and other accredited entities will function as domain name registrars
through the shared registration system. The shared registration system
will, among other things, permit second level domain name holders to
change registrars within the same registry without changing domain names;

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- We will also continue in our role as the registry of .com, .org and .net
top level domains. Commencing upon the initial deployment of the shared
registration system, our price for registry services in the top level
domains for which we now act as registry will be no more than a dollar
amount per registration, per year, agreed upon with the U.S. Government
and reflecting our costs and a reasonable return on our investment;

- Commencing upon the initial deployment of the shared registration system,
for a period of 18 months, we will permit any customer with whom we have
an exclusive contract as registrar to obtain registration services from
other registrars;

- From the date of the October 1998 amendment and for a period of 18 months
after initial deployment of the shared registration system, we may not
enter into any agreement that limits a party's ability to serve as a
registrar or operate a registry;

- We agreed to submit to the U.S. Government an electronic copy of all
software and data, and a copy of documentation therefor, generated under
the Cooperative Agreement through September 30, 1998. The U.S. Government
agreed to take appropriate measures to protect the security and
confidentiality of such data, software and documentation; and

- We have agreed to continue to function as the administrator and operator
for root zone servers A and J until such time as the U.S. Government
instructs us to transfer either or both of those functions to the
not-for-profit corporation or a specific alternate entity.

As the U.S. Government transitions certain responsibilities for the domain
name system to the not-for-profit corporation, corresponding obligations under
the Cooperative Agreement may be terminated and, as appropriate, covered in a
contract between the not-for-profit corporation and us. The U.S. Government has
directed us to treat ICANN as the not-for-profit corporation for the purposes
described above, but we have not yet reached agreement with the U.S. Government
or ICANN with respect to the terms of such transition. We may not be able to
reach agreement and either ICANN or the U.S. Government may take positions that
adversely affect us.

We have held two meetings of a focused technical advisory group to comment
on and participate in testing of our shared registration system. The group
included members suggested by ICANN to the Department of Commerce and other
individuals. ICANN has issued accreditation standards for competing registrars
and methods for selection of the initial five registrars to participate in the
test bed under the shared registration system. Under the ICANN approach each
accredited registrar will enter into an accreditation contract with ICANN. The
proposed accreditation contract would require payment of fees to ICANN and would
impose special restrictions on a registrar also acting as the registry. We filed
substantial comments with ICANN objecting to various aspects of the proposed
accreditation approach. We are currently in discussions with ICANN and the U.S.
Government regarding implementation of the shared registration system and a wide
range of contractual issues. We cannot be sure that these discussions will
result in agreements or outcomes that are favorable to us.

OPERATIONS

The functioning of the domain name system depends on a hierarchy of
specialized software programs resident in network computers called domain name
servers. The top level of this hierarchy consists of 13 globally distributed
domain name servers, called root zone servers. The root zone servers contain the
master directory of all top level domains in the Internet. Below the root zone
servers in the hierarchy are the top level domain zone servers. The top level
domain zone servers contain the database of active second-level domain names and
corresponding Internet protocol numbers registered in each top level domain.

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The location and control of the root zone and top level domain zone servers
historically has been determined by consensus of various members of the Internet
community. We currently administer and operate two of the 13 root zone servers,
specifically root zone servers A and J, and four top level domain zone servers.
The other root zone and top level domain zone servers that we do not administer
and operate are administered and operated by independent operators on a
volunteer basis. Every night we update root zone server A with a file that
contains the current list of top level domains and the Internet protocol numbers
of the top level domain zone servers. The other top level domain zone servers
then copy that file.

To register a domain name within the .com, .org, .net and .edu top level
domains, our customer or the customer's Internet access provider on behalf of
the customer, completes a registration application which is submitted to us via
e-mail or submits a web-based registration application through our web site.
Once the customer is registered, the domain name is included in the top level
domain master database that is updated nightly.

Eleven high-speed data communications line links connected to eight
Internet service providers support our registration services. By connecting to
eight different Internet service providers, we seek redundancy to maintain
constant access to the Internet should any given Internet service provider or
link develop complications. We believe our current network is adequate and that
any additional capacity will be available in the future as needed.

Portions of our internally developed registration software have been
custom-developed and are proprietary. Our internally developed registration
software includes an automated registration capability that currently processes
in excess of 90% of all new registration requests without human intervention.

We have an operating facility to support our current registration
operations and customer support needs. The facility includes a call center, a
training center equipped for both computer and telephone training and a new
computer room with expanded systems and telecommunications services. We contract
for a back-up facility at a third party's secure facility in California to
provide redundancy and enhanced reliability for our Internet root zone
administration.

Recently, our systems have been subject to unusually large numbers of
speculative and repetitive e-mail domain name registration and modification
requests from domain name speculators and other abusers. Such abuses of our
systems have resulted in processing delays. We have taken, and are continuing to
take, actions to combat these delays and abusive e-mails by accelerating the
implementation of planned hardware upgrades to our systems and by taking other
actions, including imposing certain restrictions on access to our customer
database, to minimize the impact of such system abuses.

RESEARCH AND DEVELOPMENT

In 1996, our research and development expenses were $680,000 or 3.6% of net
revenue. In 1997, our research and development expenses were $1,653,000 or 3.6%
of net revenues. In 1998, our research and development expenses were $4,821,000
or 5.1% of net revenues. We expect that the level of research and development
expenses will continue to increase in the near future in terms of absolute
dollars as we invest in developing new service offerings.

COMPETITION

COMPETITION IN THE REGISTRATION BUSINESS

A principal objective expressed in the Statement of Policy is the
introduction of competition and global participation in the management of
Internet names and addresses including, among other things, competition among
registrars within a single top level domain and competition among existing

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and new top level domains. This objective is embodied, in part, in the October
1998 amendment to the Cooperative Agreement. Many aspects of how competition
will work in the domain name system, however, remain unsettled and could be
impacted by, among other things, actions of the not-for-profit corporation. We
currently face competition in the domain name registration business from
registries for country code top level domains, third level domain name providers
such as Internet access providers and registrars and registries of top level
domains other than those top level domains that we currently administer. A
number of entities have already begun to offer competing registration services
using other top level domains.

In developing and distributing future products and services for the
Internet-based services markets, we face intense competition and expect to have
multiple competitors for each of the products or services, if any, which we
develop or sell. Furthermore, the industry in which we intend to compete is
characterized by rapid changes and frequent product and service introductions.
If a competitor were to successfully introduce certain products or services
before us, it could cause our business to suffer.

COMPETITION IN THE INTERNET TECHNOLOGY SERVICES BUSINESS

Companies with Internet expertise are current or potential competitors to
our Internet Technology Services business. These companies include systems
integrators and consulting firms, such as Andersen Consulting, IBM Global
Services and International Network Services. We also compete with certain
companies that have developed products that automate the management of IP
addresses and name maps throughout enterprise-wide intranets, and with companies
with internally-developed systems integration efforts. A number of these
competitors and potential competitors have longer operating histories and
greater name recognition and significantly greater financial, technical,
marketing, distribution and other resources than we do. We may not be able to
successfully compete in the Internet Technology Services area.

INTELLECTUAL PROPERTY RIGHTS

Our principal intellectual property consists of, and our success is
dependent upon, our proprietary software used in our registration service
business and certain methodologies and technical expertise we use in both the
design and implementation of our current and future registration services and
Internet-based products and services businesses. Some of the software and
protocols we use in our registration services are in the public domain or are
otherwise available to our competitors. We also have compiled a database of
information relating to customers in our registration business. While a portion
of this database is available to the public in the form of a directory service,
we believe that we have certain ownership rights in this database and we intend
to protect such rights. We have no patents but our proprietary materials are
protected by trade secret laws. We also own or have rights to various
copyrights, trademarks and trade names in our business.

EMPLOYEES

As of December 31, 1998, we had approximately 385 full-time employees. None
of our employees are covered by collective bargaining agreements. We believe
that our relations with our employees are good.

RISK FACTORS

IN ADDITION TO OTHER INFORMATION IN THIS FORM 10-K, THE FOLLOWING RISK
FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING US AND OUR BUSINESS BECAUSE
SUCH FACTORS CURRENTLY HAVE A SIGNIFICANT IMPACT OR MAY HAVE A SIGNIFICANT
IMPACT ON OUR BUSINESS, OPERATING

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RESULTS OR FINANCIAL CONDITION. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-K AS
A RESULT OF THE RISK FACTORS DISCUSSED BELOW AND ELSEWHERE IN THIS FORM 10-K.

INDUSTRY RISKS

Ongoing privatization of Internet administration could harm our registration
business

The Statement of Policy or "White Paper," calls for a phased transition of
the Department of Commerce's responsibilities for the domain name system to a
not-for-profit corporation by September 30, 2000. The domain name system is the
system by which Internet names and addresses are registered, allocated and used.
We face risks from this transition, including:

- failure to achieve consensus on the many issues relating to the
functioning and governance of the not-for-profit corporation could result
in instability in domain name system administration,

- the not-for-profit corporation could fail to gain legitimacy resulting in
instability in domain name system administration,

- the U.S. Government could refuse to transfer certain responsibilities for
domain name system administration to the not-for-profit corporation due
to security, stability or other reasons resulting in fragmentation or
other instability in domain name system administration, and

- the not-for-profit corporation could adopt or promote policies,
procedures or programs that are unfavorable to our role in the
registration of domain names or that are not consistent with our current
or future plans.

As the U.S. Government transitions certain responsibilities for domain name
system administration to the not-for-profit corporation, corresponding
obligations under our Cooperative Agreement with the Department of Commerce may
be terminated and, as appropriate, covered in a contract between the
not-for-profit corporation and us. We might not reach an acceptable contractual
agreement with the not-for-profit corporation for our continuing role in the
registration of domain names.

The U.S. Government has sent us a letter directing us to treat ICANN as the
not-for-profit corporation identified in the October amendment to the
Cooperative Agreement described above, in the performance of its obligations
under the MOU and until such time as the MOU is terminated. We have not yet
responded to that letter. We are currently in discussions with ICANN and the
U.S. Government regarding implementation of the shared registration system and a
wide range of contractual issues. We cannot be sure that these discussions will
result in agreements favorable to us.

Despite the significant efforts undertaken to date, it is impossible to
predict at this time whether or when the process initiated by the Statement of
Policy will result in the full transition to the not-for-profit corporation of
domain name system responsibilities as and to the extent contemplated in the
White Paper and, if it does, the effect on us of such transition. See
"-- Ongoing Privatization of Internet Administration."

Changes to or disputes under the cooperative agreement could harm our business

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<PAGE> 15

could lead to disputes between us and the Department of Commerce or the
not-for-profit corporation, which may or may not be resolved in our favor.
Certain aspects of implementation of the Cooperative Agreement also remain to be
fully negotiated, including the maximum price we will charge for registry
services in the top level domains for which we now act as registry. If we are
unsuccessful in negotiating acceptable terms of implementation, the costs of
implementation of the Cooperative Agreement, our relationship with the
not-for-profit corporation and other matters affecting our position in a more
competitive domain name system environment could be harmed. See "-- Status of
Cooperative Agreement."

Challenges to authority over domain name administration could harm our business

Withdrawal of or challenges to the U.S. Government's sponsorship or
authorization of certain functions that we perform could create a public
perception or result in a legal finding that we lack authority to continue in
our current role as registry or registrar within the .com, .org, .net and .edu
top level domains. The legal authority underlying the roles of the Department of
Commerce and the not-for-profit corporation with regard to the domain name
system also could be challenged. The impact, if any, of any such public
perception or finding is unknown, but it could be harmful to our business.

We may not be able to compete effectively due to increased competition in the
domain name registration business

The introduction of additional competition into the domain name
registration business could be harmful to our business. This includes, in
particular, competition among registrars within a single top level domain, like
.com, and competition among registrars and registries of existing and potential
new top level domains. In addition, we currently face competition in the domain
name registration business from registries for country code top level domains,
third level domain name providers such as Internet access providers and
registrars and registries of top level domains other than those top level
domains which we currently register. A number of entities have already begun to
offer competing registration services using other top level domains and when the
shared registration system takes effect we will no longer be the exclusive
registrar in the .com, .org and .net top level domains.

Future competition in the domain name registration business as a registry
or registrar could come from many different companies, including:

- domain name registration resellers,

- country code registries,

- Internet access providers, and

- major telecommunications firms.

Many of these entities have core capabilities to deliver registry and/or
registrar services, such as help desks, billing services and network management,
along with strong name recognition and Internet industry experience. Our revenue
could be reduced due to increased competition, pricing pressures or a
modification of billing practices. For example, other entities may bundle domain
name registrations with other products or services. See "-- Competition in the
Registration Business."

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We depend on future growth of the Internet and Internet infrastructure

Our future success substantially depends on the continued growth in the use
of the Internet. If the use of and interest in the Internet does not continue to
grow, our business would be harmed. Continued growth of the Internet could be
slowed by:

- inadequate infrastructure,

- lack of availability of cost-effective, high speed systems and service,

- delays in developing or adopting new standards and protocols to handle
increased levels of Internet activity, or

- government regulation.

We rely on third parties who maintain and control root zone and top level domain
zone servers

We currently administer and operate only two of the 13 root zone servers
and four top level domain zone servers. The others are administered and operated
by independent operators on a volunteer basis. Because of the importance to the
functioning of the Internet of these root zone servers and top level domain zone
servers, our registration business could be harmed if these volunteer operators
fail to properly maintain such servers or abandon such servers.

Further, our registration business could be harmed if any of these
volunteer operators fail to include or provide accessibility to the data that we
maintain in the root zone servers and the top level domain zone servers that we
control. See "-- Operations."

We rely on Internet service providers

Our registration business could be harmed if enough Internet service
providers decided not to route Internet communications to or from domain names
registered by us or if enough Internet service providers decided to provide
routing to a set of domain name servers which did not point to our top level
domain zone servers.

System failure or interruption, security breaches or our failure to meet
increasing demands on our systems could harm our business

Any significant problem with our systems or operations could result in lost
revenue, customer dissatisfaction or lawsuits against us. A failure in the
operation of our registration system could result in deletion of one or more
domain names from the Internet for a period of time. A failure in the operation
or update of the master database that we maintain could result in deletion of
one or more top level domains from the Internet and the discontinuation of
second level domain names in those top level domains for a period of time. The
inability of our registration system and telecommunications systems to meet the
demands of the increasing number of domain name registration requests and
corresponding customer e-mails and telephone calls could result in substantial
degradation in our customer support service and our ability to process
registration requests in a timely manner.

Our operations depend on our ability to maintain our computer and
telecommunications equipment in effective working order and to reasonably
protect our systems against interruption. The root zone servers and top level
domain zone servers that we operate are critical hardware to our operations.
Interruptions could result from:

- fire, natural disaster, sabotage, power loss, telecommunication failure,
human error or similar events,

- computer viruses, hackers or similar disruptive problems caused by
employees, customers or other Internet users, and

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<PAGE> 17

- systems strain caused by the growth of our customer base and our
inability to sufficiently maintain or upgrade our systems.

See "-- Operations."

We may lose revenue or incur significant costs if Year 2000 compliance issues
are not properly addressed

- significant and protracted interruption of electrical power to data and
call-center operations in our engineering facility,

- significant and protracted interruption of telecommunications and data
network services in either of our headquarters or engineering facilities,

- the failure of components of our current back office and domain name
registration related systems, and

- the occurrence of a Year 2000 problem with respect to third-party
suppliers', vendors' and outsourcing service providers' products and
services.

If we fail to solve a Year 2000 compliance problem with our mission
critical business systems and processes, including the domain name servers under
our control, telecommunications systems, facilities, data-networking
infrastructure, commercial-off-the-shelf hardware, software and components used
by our employees, the result could be a failure of or interruption to normal
business operations. Furthermore, our business depends on the continued
operation of, and widespread access to, the Internet. This, in turn, depends to
a large extent on the software and systems of third parties on which our systems
rely or to which they are connected. These third parties include, among others,
Internet-related companies, including Internet web hosting companies, Internet
access providers and Internet domain name server operators.

We have no responsibility for, nor control over, other Internet domain name
server operators that are critical to the efficient operation of the Internet.
We do not know whether such domain name server operators have hardware, software
or firmware that is Year 2000 compliant.

See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Compliance."

COMPANY RISKS

Our search for a new chief executive officer presents risks and uncertainties

On November 16, 1998, we announced the resignation of Gabriel A. Battista
from his positions as Chief Executive Officer and director. We cannot reasonably
estimate at this time the potential impact on us of the hiring of a new Chief
Executive Officer. While we conduct a search for a new Chief Executive Officer,
Michael A. Daniels, our Chairman of the Board, is acting as the Chief Executive
Officer and assuming the executive responsibilities previously performed by Mr.
Battista. In addition, Robert J. Korzeniewski, our Chief Financial Officer, is
also acting as our Chief Operating Officer, assuming responsibility for
day-to-day operations. We cannot be certain of the timing of our hiring of a new
Chief Executive Officer or the effect of any delays in our hiring of a new Chief
Executive Officer on the development or implementation of our strategic plan.

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We must attract, integrate, train and retain key personnel knowledgeable about
our business

Given the relative "newness" and rapid growth of the Internet, there is
intense competition for the limited supply of people qualified to work for us.
Our future success depends on the continued service of key engineering, sales,
marketing, executive and administrative personnel, and our ability to attract,
hire, integrate, train and retain such personnel. Competition for engineering,
sales, marketing and executive personnel is intense, particularly in the
technology and Internet sectors and in the regions where our facilities are
located. We cannot be certain that we will be able to retain existing personnel
or attract, hire or retain additional qualified personnel. The loss of the
services of any of our senior management team or other key employees or our
failure to attract, integrate, train and retain additional key employees could
harm our business.

Our near term success depends on the growth of our domain name registration
business

We may not be able to sustain the revenue growth we have experienced in
recent periods. In addition, past revenue growth may not be indicative of future
operating results. If we do not successfully maintain our current position as a
leading provider of domain name registration services or develop or market
additional services, our business could be harmed.

- the continued increase in domain name registrations,

- re-registration rates of our customers,

- our ability to maintain our current position as a leading registrar of
domain names, and

- the successful development, introduction and market acceptance of new
services that address the demands of Internet users.

We must effectively manage our marketing organization and establish and maintain
distribution channels

We will need to effectively manage our growing sales and marketing
organization if we want to achieve future revenue growth. We do not know if we
will be able to identify, attract and retain experienced sales and marketing
personnel with relevant experience. Further, our sales and marketing
organization may not be able to successfully compete against the significantly
more extensive and well-funded sales and marketing operations of our current or
potential competitors for registration or consulting services.

Our ability to achieve future revenue growth will also depend on our
ability to continue to establish direct sales channels and to develop multiple
distribution channels. To do this we must maintain relationships with Internet
access providers and other third parties.

We have a high level of uncollectible receivables

Because of our high level of uncollectible receivables, we continually
review our billing practices. Any modifications that we implement as a result of
these reviews could have unanticipated harmful consequences to our business. We
believe we have experienced a high level of uncollectible receivables due to,
among other factors, the large number of individuals and corporations that have
registered multiple domain names with the apparent intention of transferring
such names at a profit. Our experience has been that such resellers have a
greater tendency than other customers to default on their services fees. We have
established a provision for uncollectible accounts which we believe to be
adequate to cover anticipated uncollectible receivables; however, actual results
could differ from

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our estimates. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 3 of Notes to Financial Statements.

We are party to several legal proceedings which could have a negative financial
impact on us

We are involved in several legal proceedings. We cannot reasonably estimate
the potential impact of any of these proceedings. An adverse determination in
any of these proceedings, however, could harm our business. Legal proceedings in
which we are involved are expensive and divert our personnel. See "Item
3 -- Legal Proceedings."

We may not be able to protect our intellectual property rights and proprietary
information

We rely on a combination of nondisclosure and other contractual
arrangements with the U.S. Government, our employees and third parties, and
privacy and trade secret laws to protect and limit the distribution of our
proprietary customer data, software, documentation and processes we have
developed in connection with our domain name registration business. If we fail
to adequately protect our intellectual property rights and proprietary
information or if we become involved in litigation relating to our intellectual
property rights, proprietary information or access to our customer data, our
business could be harmed. Any actions we take may not be adequate to protect our
proprietary rights and other companies may develop technologies that are similar
or superior to our proprietary technology. The U.S. Government or ICANN could
take positions adverse to our claims regarding proprietary rights or could
attempt to require us to enter into agreements limiting such claims. Although we
believe that our services do not infringe on the intellectual property rights of
others and that we have all rights needed to use the intellectual property
employed in our business, it is possible that we could become subject to claims
alleging infringement of third party intellectual property rights. Any claims
could subject us to costly litigation, and may require us to pay damages and
develop non-infringing intellectual property or acquire licenses to the
intellectual property that is the subject of the alleged infringement.

Unsuccessful future acquisitions and investments could decrease operating
income, cause operational problems or otherwise disrupt our business

We evaluate potential acquisitions and investments on an ongoing basis for
various reasons including, among others, diversification of our domain name
registration and consulting businesses. Our acquisition and investment strategy
poses many risks, including:

- we may not be able to compete successfully for available acquisition
candidates, complete future acquisitions and investments or accurately
estimate the financial effect on our company of any businesses we acquire
or investments we make,

- future acquisitions and investments may require us to spend significant
cash amounts or may decrease our operating income,

- we may have trouble integrating the acquired business and retaining
personnel,

- acquisitions or investments may disrupt our business and distract our
management from other responsibilities, and

- to the extent that any of the companies which we acquire or in which we
invest fail, our business could be harmed.

Whether or when pooling of interests accounting for acquisitions might
become available to us depends on many factors beyond our control.

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We face increasing risks associated with our international business

While substantially all of our operations, facilities, and personnel are
located within the United States, our revenues from sources outside the U.S.
have increased significantly and may continue to increase in the future. As a
result, we are subject to the risks of conducting business internationally,
including unexpected changes in regulatory requirements, fluctuations in the
U.S. dollar, tariffs and other barriers and restrictions and the burdens of
complying with a variety of foreign laws. We do not know what the impact of such
regulatory, geopolitical and other factors will be on our business in the future
or if we will have to modify our business practice. In addition, the laws of
certain foreign countries may not protect our proprietary rights to the same
extent as do the laws of the United States.

Our quarterly operating results may fluctuate; our future revenue and
profitability are uncertain

Our quarterly operating results may fluctuate significantly in the future
due to a variety of factors, some of which are beyond our control. Factors that
may affect our revenue include:

- variations in the number of requests for domain name registrations or
demand for our services,

- termination or completion of contracts in our Internet Technology
Services business or failure to obtain additional contracts in that
business, and

- market acceptance of new service offerings.

In addition, we expect a significant increase in our operating expenses as
we:

- increase our sales and marketing operations and activities, and

- continue to update our systems and infrastructure.

If the increase in our expenses is not followed by an increase in our
revenue, our operating results will be harmed. The fact that in the past our
revenues have increased and we have been profitable on a quarterly and annual
basis is not indicative of whether our revenues will increase or whether we will
be profitable on a quarterly or annual basis in the future. See "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

INVESTMENT RISKS

Our stock price, like that of many Internet companies, is highly volatile

The market price of our Class A common stock has been and is likely to
continue to be highly volatile and significantly affected by factors such as:

- general market conditions and market conditions affecting technology and
Internet stocks generally,

- actual or anticipated fluctuations in our quarterly or annual
registrations or operating results,

- announcements of technological innovations, acquisitions or investments,
developments in Internet governance or corporate actions such as stock
splits, and

- industry conditions and trends.

The stock market has experienced significant price and volume fluctuations
that have particularly affected the market prices of the stocks of technology
companies, especially Internet-related companies. These broad market or
technology or Internet sector fluctuations may adversely affect the market price
of our Class A common stock. Recently, the market price of our Class A common
stock, like that of many Internet-related companies, has experienced significant
fluctuations. For instance, from January 1, 1999 through March 12, 1999, the
reported sales price for our Class A

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common stock ranged from $128.0625 per share to $260.375 per share on a
pre-split basis. On March 12, 1999, the reported last sale price of our Class A
common stock was $222 per share on a pre-split basis.

The market price of our Class A common stock also has been and is likely to
continue to be significantly affected by expectations of analysts and investors.
Reports and statements of analysts do not necessarily reflect our views. The
fact that we have in the past met or exceeded analyst or investor expectations
does not necessarily mean that we will do so in the future.

In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought. Such litigation could result in substantial costs and a diversion
of our management's attention and resources.

See "Item 5 -- Market for Registrant's Common Equity and Related
Stockholder Matters."

Future sales of common stock could affect our stock price

SAIC owns 14,850,000 of the outstanding shares of our common stock. A
decision by SAIC to sell such stock could depress the market price of the Class
A common stock.

SAIC may maintain significant influence over us

Because it holds a significant number of shares of our Class B common
stock, which have ten votes per share, SAIC controls 89% of the combined voting
power of the Class A and Class B common stock and, therefore, effectively
controls all matters requiring approval by our stockholders including the
election of members of our board of directors, changes in the size and
composition of the board of directors and a change in control. We do not have an
agreement with SAIC which restricts its rights to convert, distribute or sell
its shares of our common stock.

If SAIC converts all of its remaining shares of Class B common stock into
Class A common stock its economic interest and voting power will be below 50% of
the total economic interest and voting power of our common stock after such
conversion. Nonetheless, SAIC will remain our largest stockholder and may be
able to exercise significant influence over us.

Certain directors may have conflicts of interest

Certain of our directors currently serve as directors, officers and
employees of SAIC. Therefore, there may be various conflicts of interest or
conflicting duties for these individuals. Since our directors and officers may
also own stock of SAIC, there may be conflicts of interest when directors and
officers are faced with decisions that could have different implications for us
and SAIC.

We rely on SAIC for certain corporate services and employee benefits

We currently receive corporate services under an agreement with SAIC. Were
SAIC to terminate these services, we may not be able to secure alternative
sources for such services or such services may only be available to us at prices
higher than those charged by SAIC.

Our employees are currently eligible to participate in certain SAIC
employee benefit plans. If SAIC converts its remaining shares of Class B common
stock to Class A common stock, we will

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have to establish certain employee benefit plans of our own which could result
in incremental costs to us.

Our certificate of incorporation contains provisions relating to SAIC that may
adversely affect us or our stockholders

Our certificate of incorporation includes provisions relating to
competition by SAIC with us, allocations of corporate opportunities,
transactions with interested parties and intercompany agreements and provisions
limiting the liability of certain people. It is unclear whether such provisions
are enforceable under Delaware corporate law. Our certificate of incorporation
provides that any person purchasing or acquiring an interest in shares of our
capital stock shall be deemed to have consented to the provisions in the
certificate of incorporation relating to competition with SAIC, conflicts of
interest, corporate opportunities and intercompany agreements, and such consent
may restrict such person's ability to challenge transactions carried out in
compliance with such provisions. The corporate charter of SAIC does not include
similar provisions. Therefore, persons who are directors and/or officers of ours
and who are also directors and/or officers of SAIC may choose to take action in
reliance on such provisions rather than act in a manner that might be favorable
to us but adverse to SAIC.

ITEM 2. PROPERTIES

Our principal executive office is located in 45,000 square feet of a
facility in Herndon, Virginia, under a space usage arrangement with SAIC. SAIC's
lease for this facility expires in November 2002. We also lease an additional
40,000 square feet in a facility in Herndon, Virginia under a lease expiring in
July 2002. We also have offices located in a 10,000 square foot facility, also
in Herndon, under a space usage arrangement with SAIC. SAIC's lease for this
facility expires in October 1999. Additionally, our Internet Technology Services
division has offices located in: approximately 2,900 square feet in a facility
in Charlotte, North Carolina, under a space usage arrangement with SAIC;
approximately 3,700 square feet in a facility in Duluth, Georgia, under a
sublease; approximately 220 square feet in a facility in Thousand Oaks,
California, under a space usage arrangement with SAIC; and, approximately 5,000
square feet in a facility located in New York, New York. SAIC's leases with
respect to the Charlotte and Thousand Oaks facilities expire in July 2002 and
May 1999, respectively. Our sublease in Duluth and our lease in New York expire
in January 2000 and December 2002, respectively. We recently entered into a
lease to rent an additional 60,000 square foot facility in Herndon, Virginia
commencing April 1, 1999 and ending March 31, 2004. We believe that our current
facilities will be adequate for the next 12 months and that any additional
facilities will be available in the future as needed on commercially reasonable
terms.

ITEM 3. LEGAL PROCEEDINGS

As of March 12, 1999, we were a defendant in two active lawsuits involving
domain name disputes between trademark owners and domain name holders. We are
drawn into such disputes, in part, as a result of claims by trademark owners
that we are legally required, upon request by a trademark owner, to terminate
the right we granted to a domain name holder to register a domain name which is
alleged to be similar to the trademark in question. The holders of the domain
name registrations in dispute have, in turn, questioned our right, absent a
court order, to take any action which suspends their use of the domain names in
question. Although 48 out of approximately 6,000 of these situations have
resulted in suits actually naming us as a defendant, as of March 12, 1999, no
adverse judgment has been rendered and no award of damages has ever been made
against us. We believe that we have meritorious defenses and vigorously defend
ourselves against these claims.

On March 20, 1997, PG Media, Inc., a New York-based corporation filed a
lawsuit against us in the United States District Court, Southern District of New
York alleging that we had restricted
20
<PAGE> 23

access to the Internet by not adding PG Media's requested top level domains to
the Internet root zone system in violation of the Sherman Act. In its complaint,
PG Media, in addition to requesting damages, asked that we be ordered to include
reference to PG Media's top level domains and name servers in the root zone file
administered by us under the Cooperative Agreement. In June 1997, we received
written direction from the National Science Foundation not to take any action
which would create additional top level domains or to add any new top level
domains to the Internet root zone until the National Science Foundation provides
further guidance. On September 17, 1997, PG Media filed a Second Amended
Complaint adding the National Science Foundation as a defendant. On May 14,
1998, PG Media served us with a motion for a preliminary injunction against both
defendants to compel both defendants to add PG Media's top level domains to the
Internet root zone within 30 days. In response, both defendants filed
cross-motions for summary judgment against PG Media. On July 20, 1998, a hearing
on all parties' motions occurred. The basic issue before the court is the
National Science Foundation's authority to control the Internet's root zone
system. On March 16, 1999, the court granted both our and the National Science
Foundation's motions for summary judgment, holding that the National Science
Foundation does have authority over the root zone system and that the federal
instrumentality immunity doctrine immunizes us against liability under both
sections 1 and 2 of the Sherman Act.

On October 17, 1997, a group of six plaintiffs filed the Thomas suit
against us and the National Science Foundation in the United States District
Court, District of Columbia, challenging the legality of fees defendants charge
for the registration of domain names on the Internet and seeking restitution of
fees collected from domain name registrants in an amount in excess of $100
million, damages, and injunctive and other relief. Plaintiffs alleged violations
of the Sherman Act, the U.S. Constitution, the Administrative Procedures Act and
the Independent Offices Appropriations Act. On February 10, 1998, the plaintiffs
filed a motion for preliminary injunction against us seeking several items of
relief. On April 6, 1998, the Court issued its opinion granting summary judgment
in favor of the plaintiffs on the Intellectual Infrastructure Fund, ruling it an
"unlawful tax." The court also granted our motion to dismiss all other counts
(II through X) and simultaneously denied the plaintiffs' preliminary injunction
motion against us. On April 30, 1998, Congress passed H.R. 3579 which was signed
into law by the President on May 1, 1998. Section 8003 of H.R. 3579 legalized,
ratified and confirmed the entire Intellectual Infrastructure Fund and
authorized and directed the National Science Foundation to deposit the entire
fund into the U.S. Treasury. On August 28, 1998, the District Court dismissed
the entire case, issuing a final judgment in the matter. In October 1998, the
plaintiffs appealed the court's dismissal of their claims, and oral argument
occurred on February 25, 1999. We are awaiting the decision of the Court of
Appeals.

On October 20, 1998, we were included as a defendant in a suit brought by
the Pennsylvania Attorney General's office against a domain name holder who was
alleged to have used his domain name in connection with a web site promoting
white supremacy and threatening certain state employees. The Pennsylvania
Attorney General named all of the communications companies in any way connected
with the domain name or web site. The Pennsylvania Attorney General seeks to
permanently enjoin these entities, including us, from providing services to this
domain name holder in the event that the domain name holder fails to comply with
the order of the court. We have answered the complaint denying any knowledge or
participation in the actions of the primary defendant. No motions are pending
and we expect to be dismissed from the matter.

While we cannot reasonably estimate the potential impact of the claims
advanced in the PG Media, Thomas or Pennsylvania Attorney General suits, a
successful claim against us in any of these proceedings could harm our business.

On June 27, 1997, SAIC received a Civil Investigative Demand, or "CID,"
from the U.S. Department of Justice issued in connection with an investigation
to determine whether there is,

21
<PAGE> 24

has been, or may be any antitrust violation under the Sherman Act relating to
Internet registration products and services. The CID seeks documents and
information from SAIC and us relating to our Internet registration business. We
cannot reasonably estimate the potential impact of the investigation nor can we
predict whether a civil action may ultimately be filed by the Department of
Justice or the form of relief that might be sought. Any such relief from such a
suit could have a harmful effect on our business.

On August 17, 1998, we received notice from the Commission of the European
Communities, or "EC," of an investigation concerning the Company's Premier
Program agreements in Europe. The EC requested production of these agreements
and related materials for review and we complied. We cannot reasonably estimate
the potential impact of the investigation nor can we predict whether an action
will ultimately be brought by the EC or the form of relief that might be sought.
Any such relief could harm our business.

We are involved in various other investigations, claims and lawsuits
arising in the normal conduct of our business, none of which, in our opinion
will harm our business.

Legal proceedings in which we are involved have resulted and likely will
result in, and any future legal proceedings can be expected to result in,
substantial legal and other expenses and a diversion of the efforts of our
personnel.

See "Item 1 -- Business -- Risk Factors -- We are Party to Several Legal
Proceedings Which Could Have a Negative Financial Impact on Us."

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

No matters were submitted to a vote of security holders during the fourth
quarter of 1998.

EXECUTIVE OFFICERS OF THE REGISTRANT

Pursuant to General Instruction G(3) of the General Instructions to Form
10-K, the following information is included as an unnumbered Item in Part I of
this Form 10-K. Set forth below is a list of the names and ages (as of March 12,
1999) of all executive officers of Network Solutions, all positions and offices
with the Company held by each such person and each such person's principal
occupation or employment during at least the past five years. All such persons
have been appointed to serve until their successors are appointed or until their
earlier resignation or retirement.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael A. Daniels................ 53 Chairman of the Board and Acting Chief Executive
Officer
Robert J. Korzeniewski............ 42 Chief Financial Officer and Acting Chief
Operating Officer
Bruce L. Chovnick................. 39 Senior Vice President and General Manager,
Internet Technology Services
Jonathan W. Emery................. 47 Senior Vice President, General Counsel and
Secretary
David H. Holtzman................. 42 Senior Vice President, Engineering
Donald N. Telage.................. 54 Senior Vice President, Internet Relations and
Special Programs and Director
Douglas L. Wolford................ 37 Senior Vice President, Marketing and Sales
Charles A. Gomes.................. 52 Vice President, Customer Programs
Michael G. Voslow................. 39 Vice President, Finance and Treasurer
</TABLE>

22
<PAGE> 25

MICHAEL A. DANIELS has served as Chairman of the Board of Network Solutions
since 1995 and as Acting Chief Executive Officer of Network Solutions since
November 1998. Since 1986, Mr. Daniels has served in various positions with SAIC
and has served as a Sector Vice President and Sector Manager for the Technology
Applications Sector of SAIC since 1993. Prior thereto, Mr. Daniels served as a
Group Senior Vice President of SAIC from 1991 to 1993. Mr. Daniels received a
B.S. and an M.A. from Northwestern University and received a J.D. from the
University of Missouri School of Law.

ROBERT J. KORZENIEWSKI has served as Chief Financial Officer of Network
Solutions since March 1996 and as Acting Chief Operating Officer of Network
Solutions since November 1998. From 1987 until October 1997, Mr. Korzeniewski
held a variety of senior financial positions with SAIC and served as a Corporate
Vice President for Administration of SAIC from 1989 until 1997. Mr. Korzeniewski
is a Certified Public Accountant and received a B.S. in Business Administration
from Salem State College.

BRUCE L. CHOVNICK has served as Senior Vice President and General Manager,
Internet Technology Services of Network Solutions since September 1997. From
October 1993 until September 1997, Mr. Chovnick served in various executive
leadership roles with General Electric Information Services, Inc., an electronic
commerce company, and, most recently, he served as Vice President of its Global
Internet Solutions business. Prior to that he was a Senior Manager of IBM
Corporation, a computer systems, software, networking systems and storage
devices manufacturer, from January 1984 to September 1993. Mr. Chovnick received
a B.S. in Computer Science from the University of Florida.

JONATHAN W. EMERY has served as Senior Vice President, General Counsel and
Secretary of Network Solutions since December 1997. From 1986 until 1997, Mr.
Emery held a variety of positions with Tambrands Inc., a consumer products
company, most recently as Vice President, Senior Counsel and Assistant
Secretary. Prior thereto, from 1977 until 1986, Mr. Emery was an Associate with
the law firm of Brown & Wood. Mr. Emery received a B.A. from Trinity College,
Hartford, Connecticut, and a J.D. from Boston University School of Law.

DAVID H. HOLTZMAN has served as Senior Vice President, Engineering of
Network Solutions since February 1997. From September 1995 until January 1997,
he served as Business Development Manager, Development Manager and Chief
Scientist, Internet Information Technology (InfoMarket) group of IBM
Corporation, a computer systems, software, networking systems and storage
devices manufacturer. Prior thereto, from May 1992 to 1994, he served as a
Senior Associate at Booz-Allen & Hamilton, a management consulting firm. Mr.
Holtzman received a B.A. in Philosophy from the University of Pittsburgh and a
B.S. in Computer Science from the University of Maryland.

DONALD N. TELAGE has served as a director of Network Solutions since May
1995 and as Senior Vice President, Internet Relations and Special Programs of
Network Solutions since February 1997. Dr. Telage also served as President and
Chief Operating Officer of Network Solutions from May 1995 to February 1997.
Since 1986, Dr. Telage has served in various positions with SAIC and has served
as a Group Senior Vice President of SAIC since 1993. Prior thereto, Dr. Telage
served as a Corporate Vice President of SAIC from 1992 to 1993. Dr. Telage
received his B.A. in Psychology from the University of Connecticut and received
an M.A. and a Ph.D. in Mathematics from Clark University.

DOUGLAS L. WOLFORD has served as Senior Vice President, Marketing and Sales
of Network Solutions since December 1997. From December 1994 to November 1997,
Mr. Wolford was employed by General Electric Information Services, Inc., an
electronic commerce company, during which tenure he progressed to the position
of General Manager -- Marketing (Americas). Prior thereto, he was employed from
March 1989 to December 1994 by the National Academy of

23
<PAGE> 26

Engineering, most recently as Director, Development and Public Affairs. Mr.
Wolford received a B.S. in Mechanical Engineering from North Carolina State
University, a Certificat de Langue Francaise from Sorbonne University and an
M.B.A. in Marketing from the University of Maryland.

CHARLES A. GOMES has served as Vice President, Customer Programs of Network
Solutions since March 1998. Mr. Gomes has been part of Network Solutions'
management team since 1984. From October 1995 to March 1998, Mr. Gomes served as
Director of Customer Programs. Prior to assuming his current responsibilities,
Mr. Gomes managed various programs and projects at Network Solutions involving
delivery of technical services to various federal and state government agencies.
Mr. Gomes received a B.A. in Mathematics from the University of California,
Davis, and a Master's of Education from Boston University.

MICHAEL G. VOSLOW has served as Vice President, Finance and Treasurer since
March 1998 and as Treasurer of Network Solutions since January 1997. From
January 1995 to January 1997, Mr. Voslow was Vice President and Corporate
Controller for MAXM Systems Corporation, a worldwide provider of computer
software and professional services. Prior to joining MAXM, Mr. Voslow was a
Senior Manager at Price Waterhouse where he served from August 1983 to January
1995. Mr. Voslow is a Certified Public Accountant and received a B.S. in
Business Administration from Miami University (Ohio) and an M.B.A. in Finance
from Duke University.

PART II

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

Our Registration Statement on Form S-1 (Registration No. 333-30705) was
declared effective September 25, 1997 by the Securities and Exchange Commission.
Our Class A common stock began trading publicly on the Nasdaq National Market on
September 26, 1997 under the symbol NSOL. Prior to that date, there was no
public market for the Class A common stock.

The managing underwriters of the Class A common stock offering commencing
September 26, 1997 were Hambrecht & Quist, J.P. Morgan & Co. and PaineWebber
Incorporated. We registered and sold 3,220,000 shares on a pre-split basis for
our own account at an aggregate price of $57,960,000 and SAIC registered and
sold 575,000 shares on a pre-split basis for its account at an aggregate price
of $10,350,000, for a combined total of 3,795,000 shares on a pre-split basis at
an aggregate price of $68,310,000. The offering has since terminated.

The total amount of expenses incurred for our account in connection with
the offering was $5,555,200, which was comprised of $4,057,200 for underwriting
discounts and commissions and $1,498,000 of other expenses. No expenses were
paid to directors, officers or persons owning more than ten percent of any class
of our equity securities. Our resultant net offering proceeds were $52,404,800.
The net proceeds to SAIC for its account were $9,625,500 after deducting the
associated underwriting discounts and commissions of $724,500.

On October 1, 1997, we received the offering proceeds from which a
$10,000,000 dividend was paid to SAIC. SAIC owns ten percent or more of a class
of our equity securities and is an affiliate of ours. The remaining proceeds
have been invested in investment grade government discount notes, commercial
paper and corporate bonds.

On December 31, 1998, our Board of Directors approved a 2-for-1 stock split
of the shares of our Class A common stock and Class B common stock, that was
effected in the form of a 100% stock dividend on March 23, 1999 on shares of our
Class A common stock and Class B common stock outstanding on February 26, 1999.
The following table sets forth the range of high and low last reported last
sales prices of the Class A common stock on the Nasdaq National Market, adjusted
to

24
<PAGE> 27

retroactively reflect the stock split, for the period from September 26, 1997
through December 31, 1998.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Year Ended December 31, 1997:
Fourth Quarter from September 26, 1997.................... $13 3/8 $ 5 7/8
Year Ended December 31, 1998:
First Quarter............................................. 18 9/16 6 15/32
Second Quarter............................................ 27 1/2 16 1/4
Third Quarter............................................. 23 5/32 12 7/8
Fourth Quarter............................................ 82 23/64 14 3/16
</TABLE>

As of March 19, 1999, there were 105 holders of record of Network Solutions
Class A common stock. Because many of our shares of common stock are held by
brokers and other institutions on behalf of beneficial stockholders, we are
unable to determine the exact number of beneficial stockholders represented by
these record holders.

With the exception of the $10,000,000 dividend paid to SAIC on October 1,
1997, we have neither declared nor paid cash dividends on our common stock. We
currently intend to retain our earnings, if any, for future growth and do not
anticipate paying any dividends in the foreseeable future. Our Board of
Directors will determine our future dividend policy on the basis of various
factors, including our results of operations, financial condition, capital
requirements and investment opportunities.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial and operating data of
Network Solutions for the periods indicated and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Financial Statements and the Notes related thereto included
elsewhere and incorporated by reference in this Form 10-K. The selected
financial data for the years ended December 31, 1996, 1997 and 1998 were derived
from Network Solutions' audited financial statements included elsewhere in this
Form 10-K. The information for the year ended December 31, 1994 is derived from
Network Solutions' unaudited financial statements which, in the opinion of
management, reflect all adjustments (consisting only of normal recurring items)
necessary to present fairly the financial position and results of operations for
the periods then ended. The selected financial data for the year ended December
31, 1995 were derived by combining Network Solutions' Results of Operations for
the period January 1, 1995 through March 10, 1995 and the period March 11, 1995
through December 31, 1995, both as derived from Network Solutions' audited
financial statements. Comparability of pre-acquisition periods to
post-acquisition periods is

25
<PAGE> 28

limited because the financial statements have been prepared on differing bases
of accounting as a result of the acquisition by SAIC.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
IN THOUSANDS, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue................................. $ 5,029 $ 6,486 $18,862 $45,326 $93,652
Cost of revenue............................. 3,073 5,704 14,666 25,798 38,530
------- ------- ------- ------- -------
Gross profit................................ 1,956 782 4,196 19,528 55,122
Research and development expenses........... -- -- 680 1,653 4,821
Selling, general and administrative
expenses.................................. 1,544 2,394 6,280 12,268 37,144
Interest income............................. -- -- (496) (2,211) (6,303)
Other expenses.............................. 109 61 -- 116 116
------- ------- ------- ------- -------
Income (loss) from continuing operations
before income taxes....................... 303 (1,673) (2,268) 7,702 19,344
Provision (benefit) for income taxes........ 114 (239) (643) 3,471 8,109
------- ------- ------- ------- -------
Income (loss) from continuing operations.... 189 (1,434) (1,625) 4,231 11,235
Loss from discontinued operations, net of
income taxes.............................. (1,169) (1,403) -- -- --
------- ------- ------- ------- -------
Net income (loss)........................... $ (980) $(2,837) $(1,625) $ 4,231 $11,235
======= ======= ======= ======= =======
Basic earnings per share(1):
Income (loss) from continuing
operations............................. $ 0.09 $ (0.07) $ (0.07) $ 0.16 $ 0.35
Loss from discontinued operations......... (0.56) (0.07) -- -- --
------- ------- ------- ------- -------
Net income (loss)......................... $ (0.47) $ (0.14) $ (0.07) $ 0.16 $ 0.35
======= ======= ======= ======= =======
Weighted average shares..................... 2,084 20,670 25,000 26,610 31,957
Diluted earnings per share(1):
Income (loss) from continuing
operations............................. $ 0.09 $ (0.07) $ (0.07) $ 0.16 $ 0.34
Loss from discontinued operations......... (.56) (0.07) -- -- --
------- ------- ------- ------- -------
Net income (loss)......................... $ (0.47) $ (0.14) $ (0.07) $ 0.16 $ 0.34
======= ======= ======= ======= =======
Weighted average shares..................... 2,084 20,670 25,000 26,966 33,397
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ----- -----
IN THOUSANDS
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA (2):
Net new registrations.............................. 24 141 489 960 1,911
Registrations not renewed.......................... -- 1 39 46 90
Net registrations as of period end................. 37 177 627 1,541 3,362
</TABLE>

26
<PAGE> 29

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1995 1996 1997 1998
------ ------- ------- -------- --------
IN THOUSANDS
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 136 $ 5 $15,540 $ 41,146 $ 12,862
Total marketable securities........................ -- -- -- 40,200 128,098
Working capital.................................... 1,340 (559) 1,362 50,947 65,791
Total assets....................................... 2,448 11,748 66,118 149,620 243,867
Restricted assets included in total assets......... -- 1,408 17,453 25,873 -0-
Deferred revenue, net.............................. 137 3,346 29,352 61,451 129,194
Long-term obligations, excluding current portion... 81 1,353 9,440 18,743 35,721
Total stockholders' equity......................... 252 3,062 1,437 47,655 75,130
</TABLE>

- ---------------
(1) All share and per share data reflect the two-for-one stock split in March
1999.

(2) Net new registrations for each period include gross new registrations less
an estimate of registrations that are uncollectible. Net registrations
include net new registrations less an estimate of registrations not renewed.
Prior to September 14, 1995, net registrations equaled gross registrations
because Network Solutions was reimbursed by the National Science Foundation
for all registrations under a cost plus fixed-fee contract.

27
<PAGE> 30

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

The following discussion and analysis should be read in conjunction with
"Item 6 -- Selected Financial Data" and Network Solutions' Financial Statements
and Notes thereto included elsewhere and incorporated by reference in this Form
10-K. Except for the historical information contained herein and incorporated
herein by reference, the discussion in this Form 10-K contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of Network Solutions' plans, objectives, expectations and intentions.
The cautionary statements made in this Form 10-K should be read as being
applicable to all related forward-looking statements wherever they appear in
this Form 10-K. Network Solutions' actual results may differ materially from the
results discussed in the forward-looking statements as a result of certain
factors, including, but not limited to, those discussed in "Item
1 -- Business -- Risk Factors" and elsewhere in this Form 10-K and from time to
time in Network Solutions' periodic reports.

OVERVIEW

Network Solutions currently acts as the exclusive registry and registrar of
Internet domain names within the .com, .org, .net and .edu top level domains
pursuant to the Cooperative Agreement with the Department of Commerce. Domain
names are used to identify a unique site or presence on the Internet. As
registry and registrar for these top level domains, Network Solutions registers
new domain names and is responsible for the maintenance of the master file of
domain names through daily updates to the Internet. Network Solutions also
provides Internet Technology Services, focusing on network engineering, network
and systems security and network management solutions.

Cumulative net registrations (gross registrations less management's
estimate of uncollectible registrations and of non-re-registrations) within the
top level domains administered by Network Solutions increased by 118%, from
1,541,000 domain names registered at December 31, 1997 to 3,362,000 domain names
registered at December 31, 1998. Net registrations in the .com top level domain
represent 84% of Network Solutions' total net registrations at December 31,
1998. Of the 3,362,000 cumulative net registrations at December 31, 1998,
1,453,000 registrations will be up for annual re-registration during the next
twelve months based upon their respective anniversaries of initial registration.
International registrations accounted for 28% of net new registrations during
1998 and 26% of net new registrations during 1997. Net revenue from registration
services accounted for 91.5% of Network Solutions' net revenue for the year
ended December 31, 1998.

Network Solutions delivers Internet Technology Services to large companies
that desire to establish or enhance their Internet presence or re-engineer
legacy network infrastructures to accommodate the integration of both Internet
connectivity and internal enterprise network, or intranet, technology into their
information technology base. Our Internet Technology Services include network
engineering, network and systems security and network management. During the
year ended December 31, 1998, Network Solutions provided Internet Technology
Services to more than 20 companies. Net revenue from Internet Technology
Services accounted for 8.5% of Network Solutions' net revenue for the year ended
December 31, 1998.

Registration Services

28
<PAGE> 31

effective January 1, 1993. It included a three-month phase-in period, a
five-year operational period, commencing April 1, 1993 and ending March 31,
1998, and a six-month flexibility period through September 30, 1998. Effective
September 9, 1998, the Department of Commerce took over the administration of
the Cooperative Agreement from the National Science Foundation. In October 1998,
the Cooperative Agreement was amended to extend the flexibility period until
September 30, 2000.

The original terms of the Cooperative Agreement provided for a cost
reimbursement plus fixed-fee contract (with an initial fee of 8%). Effective
September 14, 1995, the National Science Foundation and Network Solutions
amended the Cooperative Agreement to require Network Solutions to begin charging
end users a services fee of $50 per year for each domain name in the .com, .org
and .net top level domains. Until April 1, 1998, registrants paid a services fee
of $100 for two years of domain name services upon each initial registration and
an annual re-registration fee of $50 per year thereafter. The National Science
Foundation paid the registration fees for domain names within the .edu and .gov
top level domains through March 31, 1997. Commencing April 1, 1997, Network
Solutions agreed with the National Science Foundation to provide domain name
services within the .edu and .gov top level domains free of charge. As of
October 1, 1997, Network Solutions no longer registers or administers domain
names in the .gov top level domain.

Under the terms of the September 14, 1995 amendment to the Cooperative
Agreement, 30% of the registration fees collected by Network Solutions was
required to be set aside for the enhancement of the intellectual infrastructure
of the Internet (set aside funds) and, as such, was not recognized as revenue by
the Company. Network Solutions has reflected these set aside funds, along with
the appropriate percentage of net accounts receivable, as restricted assets and
has recorded an equivalent, related current liability. Network Solutions
maintained the cash received relating to the set aside funds in a separate
interest bearing account. The set aside funds, plus any interest earned, were
disbursed at the direction of the National Science Foundation. As of December
31, 1998, the Company had cumulatively disbursed all set aside funds collected
and associated interest earned for a total of $62.3 million to the National
Science Foundation at their direction. The restricted cash at December 31, 1997
and 1998 was approximately $23,512,000 and $0, respectively.

On March 12, 1998, the National Science Foundation and Network Solutions
amended the Cooperative Agreement to eliminate the 30% set aside requirement
effective April 1, 1998 and to reduce the registration fees by a corresponding
amount. Initial registrations on and after April 1, 1998 are charged $70 for two
years of registration services and an annual re-registration fee of $35 per year
thereafter. This amendment had no effect on the revenue currently recognized on
each registration, $70 for initial registrations and $35 for re-registrations,
since Network Solutions previously did not recognize revenue on the 30% set
aside funds. Accordingly, while the revenue to Network Solutions on a per
registration basis does not change, the amount charged to customers declined.

In order to provide prompt access to new domain names on the Internet,
Network Solutions generally invoices customers and permits them to pay their
registration fees after their domain names are registered. Network Solutions'
experience has been that, for the period from September 1995 through December
1998, approximately 31% of new registrations have ultimately been deactivated
for non-payment. Network Solutions believes that this level of uncollectible
receivables is due to, among other factors, the large number of individuals and
corporations that have registered multiple domain names with the apparent
intention of transferring registration for such names at a profit. Such
resellers have a greater tendency than other customers to default on their
registration fees. As a consequence, Network Solutions has recorded a comparable
provision for uncollectible accounts in determining net registration revenue.
This provision averaged 30% in 1996 and 1997 and 32% in 1998 and is considered
adequate by Network Solutions.

29
<PAGE> 32

Registration fees charged to customers for registration services are
recognized as revenue evenly over the registration term. For example, Network
Solutions recognizes $70 on a straight-line basis over the two-year service
period for each $70 initial domain name registration, equivalent to $35 per
year. Annual re-registrations of domain names are recorded as revenue based upon
$35 recognized on a straight-line basis over the one-year service period. This
subscription-based model defers revenue recognition until Network Solutions
provides the registration services, including maintenance of and unlimited
modifications to individual domain name records, over the respective
registration terms. At December 31, 1998, Network Solutions had net deferred
revenue of $129.2 million.

Expenses for Network Solutions increased each quarter during 1996, 1997 and
1998 as a result of increased business activities, primarily attributable to
subscriber growth for Network Solutions' registration services business. Network
Solutions believes continued investments in its back office infrastructure as
well as significant expansion of its sales and marketing and product development
activities are critical to the achievement of its goals and anticipates that
costs and expenses will continue to increase in each quarter for the foreseeable
future.

Internet Technology Services

Substantially all of Network Solutions' Internet Technology Services
revenue is derived from professional services which are generally provided to
clients on a time and expense basis and is recognized as services are performed.

The majority of Network Solutions' Internet Technology Services are
provided to customers in the financial services industry. Bank of America,
formerly NationsBanc, is currently Network Solutions' largest Internet
Technology Services client, accounting for 40% of Network Solutions' Internet
Technology Services business net revenue and 3% of Network Solutions' total net
revenue for the year ended December 31, 1998. NationsBanc originally contracted
with Network Solutions in 1993 and Network Solutions currently provides network
design and engineering services as well as a variety of project specific
services under the contract.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage
relationship to net revenue of certain items in Network Solutions' Statements of
Operations.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
PERCENTAGE OF NET REVENUE:
Net revenue............................................. 100.0% 100.0% 100.0%
Cost of revenue......................................... 77.8 56.9 41.1
----- ----- -----
Gross profit............................................ 22.2 43.1 58.9
Research and development expenses....................... 3.6 3.6 5.1
Selling, general and administrative expenses............ 33.3 27.1 39.7
Interest and other expense (income)..................... (2.7) (4.6) (6.6)
----- ----- -----
Income (loss) before income taxes....................... (12.0) 17.0 20.7
Provision (benefit) for income taxes.................... (3.4) 7.7 8.7
----- ----- -----
NET INCOME (LOSS)....................................... (8.6)% 9.3% 12.0%
===== ===== =====
</TABLE>

30
<PAGE> 33

COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1998

Net Revenue

Net revenue increased 107% from $45.3 million for the year ended December
31, 1997 to $93.7 million for the year ended December 31,1998. This increase in
net revenue was primarily attributable to the increase in the number of domain
name registrations, principally in the .com top level domain. Net revenue from
registration services increased 121% from $38.8 million for the year ended
December 31, 1997 to $85.7 million for the year ended December 31, 1998. Net new
registrations increased 99% from 960,000 for the year ended December 31, 1997 to
1,911,000 for the year ended December 31, 1998. Growth in net registrations
continues to be driven by the widespread use and adoption by businesses of the
Internet and intranets on a global basis. Cumulative net registrations as of
December 31, 1997 were 1,541,000 as compared to 3,362,000 as of December 31,
1998 for a 118% increase.

Additionally, net new registrations increased 137% from 262,000 for the
three months ended December 31, 1997 to 621,000 for the three months ended
December 31, 1998. This also represents a 23% increase over the 507,000 net new
registrations for the three months ended September 30, 1998. The growth in
cumulative net registrations was a 21% increase in Network Solutions' entire
customer base since September 30, 1998.

Net revenue from Internet Technology Services increased 22% from $6.5
million for the year ended December 31, 1997 to $8.0 million for the year ended
December 31, 1998. Further, the fourth quarter reflected an increase of 117%
over the same quarter last year and a 47% increase over the third quarter of
1998. NationsBanc accounted for $1.9 million or 4% of Network Solutions' total
net revenue for the year ended December 31, 1997 and $3.2 million or 3% for the
year ended December 31, 1998.

During the year ended December 31, 1998, the Internet Technology Services
division added new leadership in sales and operations and hired additional
technical consultants. In addition, the division continued to emphasize its
efforts targeted at lead generation and regional sales and marketing programs by
opening offices in New York City and Atlanta, Georgia.

Cost of Revenue

Cost of revenue consists primarily of salaries and employee benefits, fees
paid to subcontractors for work performed in connection with revenue producing
projects, depreciation and equipment costs, lease costs of the operations
infrastructure and the associated operating overhead. Cost of revenue increased
from $25.8 million for the year ended December 31, 1997 to $38.5 million for the
year ended December 31, 1998. This 49% increase was driven by a $3.0 million
increase in labor, a $6.4 million increase in outsourcing costs and $2.7 million
in additional depreciation charges and equipment expenditures primarily
associated with supporting the growth of Network Solutions' registration
services business. In the near term, the continued investment in the back office
infrastructure and provision of customer service is expected to partially offset
future margin improvements arising from economies of scale.

As a percentage of net revenue, cost of revenue decreased from 56.9% for
the year ended December 31, 1997 to 41.1% for the year ended December 31, 1998
principally reflecting economies of scale and other operational efficiencies
achieved in Network Solutions' registration business.

Research and Development Expenses

Research and development expenses consist primarily of compensation and
consultant expenses to support the creation, development and enhancement of
Network Solutions' products, services and technologies. Research and development
expenses increased 192% from $1.7 million for the year

31
<PAGE> 34

ended December 31, 1997 to $4.8 million for the year ended December 31, 1998. As
a percentage of net revenue, research and development expenses increased from
3.6% for the year ended December 31, 1997 to 5.1% for the year ended December
31, 1998. All significant research and development costs have been expensed as
incurred. Network Solutions expects that the level of research and development
expenses will continue to increase in the near future in terms of absolute
dollars as Network Solutions invests in developing new service offerings.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of salaries
of business development, general management, administrative and financial
personnel, marketing expenses, corporate services from SAIC, legal and other
professional costs and amortization of goodwill associated with Network
Solutions' 1995 acquisition by SAIC. Selling, general and administrative
expenses increased 203% from $12.3 million for the year ended December 31, 1997
to $37.1 million for the year ended December 31, 1998. The increase was
attributable to a $16.9 million increase in marketing and business development
expenses including television, Internet banner advertising and targeted direct
mail campaigns, increased staffing expenses of $1.8 million and an increase in
legal and other professional costs of $2.6 million. As a percentage of net
revenue, selling, general and administrative expenses increased from 27.1% for
the year ended December 31, 1997 to 39.7% for the year ended December 31, 1998.
Network Solutions expects that the level of selling, general and administrative
expenses will continue to increase significantly in the near future in terms of
absolute dollars as operations continue to expand. In particular, sales,
marketing and business development expenses will increase as Network Solutions
continues to promote the value of a .com web address and other new
Internet-based value-added services. Network Solutions also plans to continue to
develop its distribution channels, both domestically and internationally.

Interest Income

Network Solutions had net interest income of $2.2 million for the year
ended December 31, 1997 as compared to $6.3 million for the year ended December
31, 1998. The increase is attributable to the investment of the positive cash
flow resulting primarily from increasing domain name registrations and the net
proceeds of Network Solutions' initial public offering.

Income Taxes

The provision for income taxes was 45% of pretax earnings, or $3.5 million
for the year ended December 31, 1997, and 42%, or $8.1 million for the year
ended December 31, 1998. The difference between the effective rates for both
periods presented is principally attributable to the relative impact that
non-deductible goodwill had on pretax operating income. Goodwill is being
amortized by Network Solutions over five years and is associated with the
acquisition of Network Solutions by SAIC in 1995.

COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1997

Net Revenue

Net revenue increased 140% from $18.9 million in 1996 to $45.3 million in
1997. This increase in net revenue was primarily attributable to the increase in
the number of domain name registrations, principally in the .com top level
domain. Net revenue from registration services increased 246% from $11.2 million
in 1996 to $38.8 million in 1997. Net new registrations increased 96% from
489,000 during 1996 to 960,000 during 1997. Growth in registrations was driven
by the widespread use and adoption by businesses of the Internet and intranets
on a global basis. Cumulative net registrations as

32
<PAGE> 35

of December 31, 1996 were 627,000 as compared to 1,541,000 as of December 31,
1997, for a 146% increase.

Net revenue from Internet Technology Services decreased 16% from $7.7
million in 1996 to $6.5 million in 1997. This decrease was primarily
attributable to a decrease in business from NationsBanc. NationsBanc, Network
Solutions' largest Internet Technology Services client, accounted for $3.7
million or 20% of Network Solutions' total net revenue in 1996 and $1.9 million
or 4% of Network Solutions' total net revenue in 1997.

Cost of Revenue

Cost of revenue increased 76% from $14.7 million in 1996 to $25.8 million
in 1997. The increase was primarily driven by the growth of Network Solutions'
registration business which experienced additional labor costs of $4.2 million
and additional outsourcing costs of $1.6 million in support of Network
Solutions' invoicing, collection and processing activities. In June 1997,
Network Solutions opened a 31,200 square foot facility to support its Internet
business operations and in January 1998, Network Solutions signed an agreement
to lease an additional 9,100 square feet at the same location.

As a percentage of net revenue, cost of revenue decreased from 77.8% in
1996 to 56.9% in 1997. This decrease primarily reflects economies of scale that
Network Solutions achieved due to the growth of its subscription-based domain
name registration business.

Research and Development Expenses

Research and development expenses increased 150% from $680,000 in 1996 to
$1.7 million in 1997. All of Network Solutions' research and development costs
have been expensed as incurred. As a percentage of net revenue, research and
development expenses were 3.6% for both 1996 and 1997.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 95% from $6.3
million in 1996 to $12.3 million in 1997. The increase is primarily attributable
to increased management and administrative labor expenses of $1.8 million,
business development expenses of $1.3 million and an increase in legal costs of
$1.0 million.

As a percentage of net revenue, selling, general and administrative
expenses decreased from 33.3% in 1996 to 27.1% in 1997. The decrease in
percentage of net revenue reflects economies of scale Network Solutions achieved
due primarily to the growth of its domain name registration business.

Interest Income

Network Solutions had net interest income of $496,000 in 1996 as compared
to $2.1 million in 1997. The increase is attributable to the investment of the
net proceeds of Network Solutions' stock offering as well as improved cash flow
resulting from the increase in domain name registrations.

Income Taxes (Benefit)

The income tax benefit was $643,000 in 1996 as compared to an income tax
expense of $3.5 million in 1997. The effective tax rate changed from 28% in 1996
to 45% in 1997. The difference between the effective rates is principally
attributable to the relative impact that non-deductible goodwill had on pretax
operating income or loss for the year. Goodwill is being amortized by Network
Solutions over five years and is associated with the acquisition of Network
Solutions by SAIC in 1995.

33
<PAGE> 36

FACTORS AFFECTING OPERATING RESULTS

The Department of Commerce has adopted a plan, referred to as the Statement
of Policy or "White Paper," calling for a phased transition of the Department's
responsibilities for the domain name system to a not-for-profit corporation by
September 30, 2000. The domain name system is the system by which Internet names
and addresses are registered, allocated and used. We face risks from this
transition. As the U.S. Government transitions certain responsibilities for
domain name system administration to the not-for-profit corporation,
corresponding obligations under our Cooperative Agreement with the Department of
Commerce may be terminated and, as appropriate, covered in a contract between
the not-for-profit corporation and us. We might not reach an acceptable
contractual agreement with the not-for-profit corporation for our continuing
role in the registration of domain names. The U.S. Government has sent us a
letter directing us to treat ICANN as the not-for-profit corporation identified
in the October amendment to the Cooperative Agreement described above, in the
performance of its obligations under the MOU and until such time as the MOU is
terminated. We have not yet responded to that letter. We are currently in
discussions with ICANN and the U.S. Government regarding implementation of the
shared registration system and a wide range of contractual issues. We cannot be
sure that these discussions will result in agreements favorable to us. Despite
the significant efforts undertaken to date, it is impossible to predict at this
time whether or when the process initiated by the Statement of Policy will
result in the full transition to the not-for-profit corporation of domain name
system responsibilities as and to the extent contemplated in the White Paper
and, if it does, the effect on us of such transition. See "Business -- Ongoing
Privatization of Internet Administration."

Termination, or a change in the terms, of the Cooperative Agreement could
harm our business. While the Cooperative Agreement by its terms expires in
September 2000, it may be terminated earlier. The Department of Commerce's
interpretation of certain provisions of the Cooperative Agreement could differ
from ours. For example, the Department of Commerce has publicly expressed
concerns about our consolidation into a single web site the web sites through
which our InterNIC registration services and our RegistrationPlus services were
offered. These differences in interpretation could lead to disputes between us
and the Department of Commerce or the not-for-profit corporation, which may or
may not be resolved in our favor. Certain aspects of implementation of the
Cooperative Agreement also remain to be fully negotiated, including the maximum
price we will charge for registry services in the top level domains for which we
now act as registry. If we are unsuccessful in negotiating acceptable terms of
implementation, the costs of implementation of the Cooperative Agreement, our
relationship with the not-for-profit corporation and other matters affecting our
position in a more competitive domain name system environment could be harmed.
See "Business -- Status of Cooperative Agreement."

34
<PAGE> 37

competing registration services using other top level domains and when the
shared registration system takes effect we will no longer be the exclusive
registrar in the .com, .org and .net top level domains. Our revenue could be
reduced due to increased competition, pricing pressures or a modification of
billing practices. For example, other entities may bundle domain name
registrations with other products or services. See "Business -- Competition in
the Registration Business."

Our future success substantially depends on the continued growth in the use
of the Internet. If the use of and interest in the Internet does not continue to
grow, our business would be harmed.

Our failure, or the failure of third parties on which we rely, to
adequately address Year 2000 compliance issues may cause us to lose revenue or
to incur significant costs. The primary risks that we face with regard to Year
2000 failures are those which impact our domain name registration business. If
we fail to solve a Year 2000 compliance problem with our mission critical
business systems and processes, including the domain name servers under our
control, telecommunications systems, facilities, data-networking infrastructure,
commercial-off-the-shelf hardware, software and components used by our
employees, the result could be a failure of or interruption to normal business
operations.

On November 16, 1998, we announced the resignation of Gabriel A. Battista
from his positions as Chief Executive Officer and Director. We cannot reasonably
estimate at this time the potential impact on us of the hiring of a new Chief
Executive Officer. We cannot be certain of the timing of our hiring of a new
Chief Executive Officer or the effect of any delays in our hiring of a new Chief
Executive Officer on the development or implementation of our strategic plan.

Our domain name registration services business generates over 90% of our
revenue and is expected to continue to account for a very significant portion of
our revenue in at least the near term. Our ability to achieve future revenue
growth will also depend on our ability to continue to establish direct sales
channels and to develop multiple distribution channels. To do this we must
maintain relationships with Internet access providers and other third parties.

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<PAGE> 38

Because of our high level of uncollectible receivables, we continually
review our billing practices. Any modifications that we implement as a result of
these reviews could have unanticipated harmful consequences to our business. We
have established a provision for uncollectible accounts which we believe to be
adequate to cover anticipated uncollectible receivables; however, actual results
could differ from our estimates.

Our quarterly operating results may fluctuate significantly in the future
due to a variety of factors, some of which are beyond our control. In addition,
we expect a significant increase in our operating expenses. If the increase in
our expenses is not followed by an increase in our revenue, our operating
results will be harmed. The fact that in the past our revenues have increased
and we have been profitable on a quarterly and annual basis is not indicative of
whether our revenues will increase or whether we will be profitable on a
quarterly or annual basis in the future.

SELECTED QUARTERLY RESULTS OF OPERATIONS

The following tables set forth certain unaudited quarterly financial
information for each of the eight quarters in the years ended December 31, 1997
and 1998. In the opinion of management, this information has been presented on
the same basis as the audited financial statements referenced in this Form 10-K,
and all necessary adjustments (consisting only of normal recurring adjustments)
have been included in the amounts stated below to present fairly the unaudited
quarterly results when read in conjunction with the audited financial statements
of Network Solutions and notes thereto. The operating results for any quarter
are not necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue................. $8,655 $10,069 $12,172 $14,430 $16,492 $20,476 $25,427 $31,257
Cost of revenue............. 5,294 6,141 7,033 7,330 7,348 8,791 10,312 12,079
------ ------- ------- ------- ------- ------- ------- -------
Gross profit................ 3,361 3,928 5,139 7,100 9,144 11,685 15,115 19,178
Research and development
expenses.................. 311 407 377 558 725 815 1,353 1,928
Selling, general and
administrative expenses... 2,301 2,487 3,105 4,375 6,182 8,008 10,248 12,706
Interest income............. (149) (335) (570) (1,041) (1,292) (1,384) (1,654) (1,857)
------ ------- ------- ------- ------- ------- ------- -------
Income before income
taxes..................... 898 1,369 2,227 3,208 3,529 4,246 5,168 6,401
Provision for income
taxes..................... 382 629 995 1,465 1,480 1,783 2,163 2,683
------ ------- ------- ------- ------- ------- ------- -------
Net income.................. $ 516 $ 740 $ 1,232 $ 1,743 $ 2,049 $ 2,463 $ 3,005 $ 3,718
====== ======= ======= ======= ======= ======= ======= =======
Basic EPS (1)............... $ 0.02 $ 0.03 $ 0.05 $ 0.06 $ 0.07 $ 0.08 $ 0.09 $ 0.11
====== ======= ======= ======= ======= ======= ======= =======
Diluted EPS (1)............. $ 0.02 $ 0.03 $ 0.05 $ 0.05 $ 0.06 $ 0.07 $ 0.09 $ 0.11
====== ======= ======= ======= ======= ======= ======= =======
</TABLE>

- ---------------
(1) All per share data reflect the two-for-one stock split in March, 1999. Since
there are changes in the weighted average number of shares outstanding each
quarter, the sum of the quarterly basic and diluted EPS amounts may not
equal the basic and diluted EPS for calendar years 1997 and 1998.

36
<PAGE> 39

<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(AS A PERCENTAGE OF NET REVENUE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue.............. 61.2 61.0 57.8 50.8 44.6 42.9 40.6 38.6
----- ----- ----- ----- ----- ----- ----- -----
Gross profit................. 38.8 39.0 42.2 49.2 55.4 57.1 59.4 61.4
Research and development
expenses................... 3.5 4.0 3.1 3.9 4.4 4.0 5.3 6.1
Selling, general and
administrative expenses.... 26.6 24.7 25.5 30.3 37.4 39.1 40.3 40.7
Interest income.............. (1.7) (3.2) (4.7) (7.2) (7.8) (6.7) (6.5) (5.9)
----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes... 10.4 13.5 18.3 22.2 21.4 20.7 20.3 20.5
Provision for income taxes... 4.4 6.2 8.2 10.1 9.0 8.7 8.5 8.6
----- ----- ----- ----- ----- ----- ----- -----
Net income................... 6.0% 7.3% 10.1% 12.1% 12.4% 12.0% 11.8% 11.9%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>

Network Solutions has experienced quarterly fluctuations in operating
results and anticipates that such fluctuations will continue. These fluctuations
may be caused by, among other things, increases in legal and marketing expenses,
market acceptance of new products, competitive pricing pressures and general
economic conditions. As a result of the foregoing and other factors, Network
Solutions believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied on as
indications of future performance. See "Factors Affecting Operating Results" and
"Item 1 -- Business -- Risk Factors -- Our Quarterly Operating Results May
Fluctuate; Our Future Revenue and Profitability are Uncertain."

Network Solutions' net revenue increased each quarter presented primarily
due to an increase in the number of cumulative net registrations in each of
those quarters. Network Solutions currently expects registration services
revenue for the first quarter of 1999 to show continued growth based upon its
existing registration base and net new registrations during the quarter.
However, there can be no assurance that net registration revenue will continue
to increase at historical rates, or at all, or not decrease in the future,
especially when the Cooperative Agreement is terminated or if there is a change
in Network Solutions' status as the exclusive registry and registrar for domain
names in the .com, .net and .org top level domains, particularly as a
significant portion of Network Solutions' net revenue is attributable to
registrations in the .com top level domains. Notwithstanding the $129.2 million
of deferred revenue at December 31, 1998, of which $93.7 million will be
recognized as revenue in 1999, Network Solutions' revenue is dependent in large
part on the continued growth of the Internet, Network Solutions' ability to
maintain its position as the leading Internet domain name registration service
provider worldwide and the evolving nature of Network Solutions' services,
products and other factors.

Operating expenses have generally increased in absolute dollars in each
quarter shown as Network Solutions has increased staffing and related
infrastructure costs in its back office, selling and marketing, and
administrative functions. Quarter-to-quarter growth in cost of revenue was
primarily attributable to increased staffing levels and increased outsourcing
costs which are a function of the number of registrants. Quarter-to-quarter
growth in selling, general and administrative expenses are attributable to
increased staffing at the management level, continuing legal expenses and
marketing costs associated with the introduction of new services and products.

LIQUIDITY AND CAPITAL RESOURCES

From the time of its acquisition by SAIC in March 1995 until December 1996,
Network Solutions participated in SAIC's centralized cash management system
whereby cash received from operations was transferred to SAIC's centralized cash
accounts and cash disbursements were funded

37
<PAGE> 40

from such centralized cash accounts. Accordingly, cash requirements for
operating purposes and for capital expenditures were met from this source.
Beginning in 1997, Network Solutions implemented its own cash management system.

At December 31, 1998, Network Solutions' principal source of liquidity was
its cash and cash equivalents of $12.9 million and its short-term investments of
$118.8 million, which when combined represent an increase of $50.3 million from
the December 31, 1997 balance in those accounts. Network Solutions also has $9.4
million of marketable securities held as long term investments as of December
31, 1998.

At December 31, 1998, Network Solutions' cumulative net obligation to SAIC
for intercompany activity was $4.8 million, a net increase of $3.5 million from
December 31, 1997. Intercompany activity is primarily comprised of salaries and
benefits paid by SAIC on behalf of Network Solutions. Network Solutions
currently reimburses SAIC for intercompany activity on a monthly basis. Pursuant
to a tax sharing agreement with SAIC dated September 26, 1997, Network Solutions
now generally remits income tax payments directly to tax authorities as it no
longer is part of SAIC's consolidated group for federal income tax purposes.

Cash provided by operations was $63.4 million for the year ended December
31, 1998. This amount is principally attributed to net income plus the increase
in deferred revenue reflecting cash collected in advance of registration
services revenue recognition which occurs ratably over the two-and one-year
registration terms. Partially offsetting this amount is an increase in deferred
tax assets resulting from accelerated revenue recognition for tax purposes and
the associated tax liabilities.

Investing activities totaled $104.7 million for the year ended December 31,
1998, of which $78.0 million was net purchases of short-term investments and
$13.6 million of long-term investments. These investments are primarily
comprised of commercial investment grade securities.

Capital expenditures were $3.2 million and $13.1 million for the years
ended December 31, 1997 and December 31, 1998, respectively. These expenditures
were primarily for computer equipment. Network Solutions will continue to invest
in the back office infrastructure in advance of continued growth in domain name
registrations and as Network Solutions designs and builds the shared
registration system in accordance with the Cooperative Agreement.

Network Solutions believes that its existing cash balance, investments and
cash flows expected from future operations will be sufficient to meet Network
Solutions' capital requirements for at least the next 12 months.

YEAR 2000 COMPLIANCE

Network Solutions is continually assessing the potential effects of the
"Year 2000" millennium change on Network Solutions' business systems and
processes, including the Internet domain name servers under Network Solutions'
control, telecommunications systems, facilities, data-networking infrastructure,
commercial-off-the-shelf hardware, software and components used by its employees
and its outsourcing vendors. Network Solutions' Year 2000 project is proceeding
on schedule. The project goal is to ensure that Network Solutions' business is
not impacted by the date transitions associated with the Year 2000.

Network Solutions' Year 2000 project plan is coordinated by a team that
reports directly to senior management. The project team is evaluating the Year
2000 compliance of Network Solutions' business systems and processes, including
the Internet domain name servers under Network Solutions' control,
telecommunications systems, facilities, data-networking infrastructure,
commercial-off-the-shelf hardware, software and components used by its employees
and its outsourcing vendors whom

38
<PAGE> 41

provide services relating to Network Solutions' domain name registration
business. Network Solutions' Year 2000 project is comprised of the following
parallel phases:

- Phase 1 -- Inventory all of Network Solutions' business systems and
processes, including the Internet domain name servers under Network
Solutions' control, telecommunications systems, facilities,
data-networking infrastructure, commercial-off-the-shelf hardware,
software and components used by its employees in order to assign
priorities to potentially impacted systems and services. This phase has
been completed;

- Phase 2 -- Assess the Year 2000 compliance of all inventoried business
systems and processes, including the Internet domain name servers under
Network Solutions' control, telecommunications systems, facilities,
data-networking infrastructure, commercial-off-the-shelf hardware,
software and components used by its employees and determine whether to
renovate or replace any non-Year 2000 compliant systems and services. The
assessment of mission critical systems has been completed however,
assessment continues as a life cycle development activity;

- Phase 3 -- Complete remediation of any non-Year 2000 compliant business
systems and processes, including the Internet domain name servers under
Network Solutions' control, telecommunications systems, facilities,
data-networking infrastructure, commercial-off-the-shelf hardware,
software and components used by its employees. Conduct procurements to
replace any other non-Year 2000 compliant business systems and processes,
telecommunications systems, facilities, data-networking infrastructure,
commercial-off-the-shelf hardware, software and components used by its
employees that won't be remediated. All remediation efforts are expected
to be completed by June 30, 1999;

- Phase 4 -- Test and validate remediated and replacement systems, if any
such remediation or replacement is required, to ensure inter-system
compliance and mission critical system functionality. The testing and
validation efforts, if any are required, are expected to be completed by
August 31, 1999;

- Phase 5 -- Deploy and implement remediated and replacement systems after
the completion of successful testing and validation. The deployment and
implementation of the remediated or replacement systems are expected to
be completed by October 30, 1999; and

- Phase 6 -- Design contingency and business continuation plans in the
event of the failure of business systems and processes,
telecommunications systems, facilities, data-networking infrastructure,
commercial-off-the-shelf hardware, software and components used by
Network Solutions' employees due to the Year 2000 millennium change. The
initial contingency and business continuation plan has been developed.
The final contingency plan will be completed during the second quarter of
1999 and it will be updated throughout the year as appropriate.

Based on its inventory and assessment, Network Solutions has found that
less than one-half of one percent of the software code of its mission critical
systems needs to be remediated to be made Year 2000 compliant. However, Network
Solutions, in its normal course of business, anticipates replacing or upgrading,
prior to the millennium change, portions of these systems with new systems which
will also be Year 2000 compliant. Currently, Network Solutions is enhancing its
"back-office" and registration-related systems and the software relating to its
core domain name registration services business. When complete in 1999, this
enhancement effort will result in replacing portions of the existing
registration-related systems which will be procured from vendors as Year 2000
compliant and will be subjected to both component and end-to-end testing and
validation to determine the Year 2000 compliance of such systems prior to
acceptance and deployment in Network Solutions' business. This enhancement
effort is a function of Network Solutions' business growth and not a Year 2000
remediation effort.

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<PAGE> 42

Based on its inventory and assessment, Network Solutions has found no
material Year 2000 problems with its facilities and telecommunications systems.
Network Solutions has conducted detailed assessments of the components of its
telecommunications infrastructure and is working to identify appropriate system
testing guidelines. In addition, Network Solutions is seeking assurances from
its facilities' landlords and telecommunications equipment vendors and data
circuit providers regarding the Year 2000 compliance of their facilities and
equipment. In the event of electrical power interruption outside of Network
Solutions' control, Network Solutions has deployed back-up power systems capable
of operating its core business indefinitely.

Network Solutions is now in the remediation and testing phases of its
project cycle. At this time, Network Solutions believes that its incremental
remediation costs needed to make its current business systems and processes,
including the Internet domain name servers under Network Solutions' control,
telecommunications systems, facilities, data-networking infrastructure,
commercial-off-the-shelf hardware, software and components used by its employees
Year 2000 compliant are not material. While Network Solutions is incurring some
incremental costs directly relating to staff augmentation for the Year 2000
program management and technical assessment, the costs expended by Network
Solutions through December 31, 1998 are less than $250,000. Network Solutions'
expected total costs, including remediation and replacement costs, are estimated
to be between $1,000,000 and $1,500,000 over the life of the Year 2000 project.
Since portions of the mission critical "back office" and domain name
registration-related systems will generally be replaced as a function of
business growth, the labor and capital costs associated with such replacement
systems are not directly attributed to achieving Year 2000 compliance. Network
Solutions will also incur costs for extending its software testing architecture
which, in addition to testing remediated systems, will be used as a normal
component of Network Solutions quality assurance infrastructure. As such these
costs are not directly categorized as Year 2000 project costs but as normal
business development and engineering costs.

Network Solutions is contacting its hardware and software vendors,
significant suppliers, outsourcing service providers and contracting parties to
determine the extent to which Network Solutions is vulnerable to any such third
party's failure to achieve Year 2000 compliance for their own systems. At the
present time, Network Solutions does not expect Year 2000 issues of any such
third parties to materially affect Network Solutions' business. Furthermore,
Network Solutions' business depends on the continued operation of, and
widespread access to, the Internet. This, in turn, depends to a large extent on
the software and systems of third parties on which Network Solutions' systems
rely or to which they are connected. These third parties include, among others,
Internet-related companies, including Internet web hosting companies, Internet
access providers and Internet domain name server operators. Network Solutions
can give no assurances that the software or systems of such third parties will
be Year 2000 compliant or that the failure of such third parties to achieve Year
2000 compliance will not have a material adverse effect on Network Solutions. To
the extent that the normal operation of the Internet is disrupted by the Year
2000 millennium change, Network Solutions' business, financial condition or
results of operations could be materially and adversely affected.

Should Network Solutions fail to solve a Year 2000 compliance problem to
its mission critical business systems and processes, including the Internet
domain name servers under Network Solutions' control, telecommunications
systems, facilities, data-networking infrastructure, commercial-off-the-shelf
hardware, software and components used by its employees, the result could be a
failure or interruption to normal business operations. Network Solutions
believes that, with the deployment of the new "back office" and domain name
registration related systems in 1999, the potential for significant
interruptions to normal operations should be minimized. Network Solutions'
primary risks

40
<PAGE> 43

with regard to Year 2000 failures are those which impact its domain name
registration business. The reasonably likely worst case risks inherent in
Network Solutions' business are as follows:

- Significant and protracted interruption of electrical power to data and
call-center operations in Network Solutions' engineering facility could
materially and negatively impact Network Solutions' ability to provide
data and call-center operations. To mitigate this risk, Network Solutions
has deployed back-up power systems capable of operating indefinitely.
However, electrical power interruptions that impact Internet connectivity
providers could adversely impact Network Solutions because of Network
Solutions' reliance upon Internet-based operations for its day to day
business.

- Significant and protracted interruption of telecommunications and data
network services in either of Network Solutions' headquarters or
engineering facilities could materially and negatively impact Network
Solutions' ability to provide data and call-center operations. Network
Solutions has conducted detailed assessments of the components of its
telecommunications infrastructure and is working to identify appropriate
system testing guidelines. As part of its technical assessment, Network
Solutions identified the compliance status of its data networking
infrastructure and developed plans for remediation. Finally, Network
Solutions has plans to seek additional assurances and a better
understanding of the compliance programs of its telecommunications and
data circuit providers.

- The failure of components of Network Solutions' current "back office" and
domain name registration related systems could materially and negatively
impact Network Solutions' business. However, as a function of business
growth, these systems are planned to be retired before the end of 1999.
As a contingency planning measure, Network Solutions has conducted a
technical assessment of the current systems and their software
applications in the event that the deployment of the new systems is
delayed beyond December 1999.

- Despite the assurances of Network Solutions' third-party suppliers,
hardware and software vendors, and outsourcing service providers
regarding the Year 2000 compliance of their products and services, the
potential exists that a Year 2000 problem relating to such third-party
suppliers, vendors and outsourcing service providers products and
services could have a material impact on Network Solutions' business.
Network Solutions is conducting monthly discussions with its mission
critical outsourcing service providers to determine the progress of their
Year 2000 compliance programs.

Although Network Solutions has found that it only has to remediate a small
portion of its software code in its internal mission critical systems and
despite Network Solutions' expectation that its enhancement effort will result
in Year 2000 compliant "back-office" and registration-related systems and
software relating to its core domain name registration services business,
Network Solutions is currently developing a business continuation contingency
plan and is performing a test on the existing core registration-related systems
that are being replaced. Network Solutions finalized its initial contingency
plan and completed testing of all existing systems. The final business
continuation plan will be completed during the second quarter of 1999 and will
be updated as appropriate throughout the year.

Although Network Solutions is taking appropriate steps so that Network
Solutions' business is not impacted by the date transitions associated with the
Year 2000, Network Solutions has no responsibility for, nor control over other
Internet domain name server operators or tens of thousands of lower level domain
name system server operators that are critical to the efficient operation of the
Internet. Network Solutions has not determined whether such domain name server
operators or other server operators have hardware, software or firmware that is
Year 2000 compliant. Network Solutions has notified the Department of Commerce
of this issue.

41
<PAGE> 44

Forward-Looking Statements

The foregoing Year 2000 discussion and the information contained herein is
provided as a "Year 2000 Readiness Disclosure" as defined in the Year 2000
Information and Readiness Disclosure Act of 1998 (Public Law 105-271, 112 Stat.
2386) enacted on October 19, 1998 and contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including without limitation, anticipated costs and the dates by
which Network Solutions expects to complete certain actions, are based on
management's best current estimates, which were derived utilizing numerous
assumptions about future events, including the continued availability of certain
resources, representations received from third parties and other factors.
However, there can be no guarantee that these estimates will be achieved, and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
ability to identify and remediate all relevant systems, results of Year 2000
testing, adequate resolution of Year 2000 issues by governmental agencies,
businesses and other third parties who are outsourcing service providers,
suppliers, and vendors of Network Solutions, unanticipated system costs, the
adequacy of and ability to implement contingency plans and similar
uncertainties. The "forward-looking statements" made in the foregoing Year 2000
discussion speak only as of the date on which such statements are made, and
Network Solutions undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Network Solutions is exposed to the impact of interest rate changes and
change in the market values of its investments.

INTEREST RATE RISK. Network Solutions' exposure to market rate risk for
changes in interest rates relates primarily to the Company's investment
portfolio. Network Solutions has not used derivative financial instruments in
its investment portfolio. Network Solutions invests its excess cash in debt
instruments of the U.S. Government and its agencies, and in high-quality
corporate issuers and, by policy, limits the amount of credit exposure to any
one issuer. The Company protects and preserves its invested funds by limiting
default, market and reinvestment risk.

Investments in both fixed rate and floating rate interest earning
instruments carries a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, the Company's future investment income
may fall short of expectations due to changes in interest rates or the Company
may suffer losses in principal if forced to sell securities which have declined
in market value due to changes in interest rates.

INVESTMENT RISK. The Company has invested in the equity instruments of a
privately-held, information technology company for business and strategic
purposes. This investment is included in other long-term assets and is accounted
for under the cost method which approximates fair value.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this item are set forth in a separate
section of this Annual Report on Form 10-K as indicated in the "Index to
Financial Information" appearing on page F-1 and is incorporated herein by
reference.

The supplementary data required by this item are set forth under the "Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 28 hereof and are incorporated herein by
reference.

42
<PAGE> 45

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

As permitted by General Instruction G(3) to Form 10-K, the information
relating to nominees for election as directors of Network Solutions set forth
under the caption "Election of Directors" in Network Solutions' definitive Proxy
Statement for the annual meeting of stockholders to be held on May 18, 1999,
which Proxy Statement will be filed with the Commission within 120 days after
the end of the Company's fiscal year ended December 31, 1998, is incorporated by
reference.

The information on executive officers set forth under the caption
"Executive Officers of the Registrant" beginning on page 22 hereof is
incorporated herein by reference.

The information relating to compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management -- Section 16(a)
Beneficial Ownership Reporting Compliance" in Network Solutions' definitive
Proxy Statement for the annual meeting of stockholders to be held on May 18,
1999, which Proxy Statement will be filed with the Commission within 120 days
after the end of the Company's fiscal Year ended December 31, 1998, is
incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

As permitted by General Instruction G(3) to Form 10-K, the information
called for by this Item is incorporated by reference from the Sections entitled
"Proposal Number 1 -- Election of Directors -- Compensation of Directors,"
"Executive Compensation" and "Compensation Committee Interlocks and Insider
Participation" in Network Solutions' definitive Proxy Statement for the annual
meeting of stockholders to be held on May 18, 1999, which Proxy Statement will
be filed with the Commission within 120 days after the end of the Company's
fiscal year ended December 31, 1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As permitted by General Instruction G(3) to Form 10-K, the information
called for by this Item is incorporated by reference from the Section entitled
"Security Ownership of Certain Beneficial Owners and Management" in Network
Solutions' definitive Proxy Statement for the annual meeting of stockholders to
be held on May 18, 1999, which Proxy Statement will be filed with the Commission
within 120 days after the end of the Company's fiscal year ended December 31,
1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

As permitted by General Instruction G(3) to Form 10-K, the information
called for by this Item is incorporated by reference from the Section entitled
"Relationship with SAIC and Certain Transactions" in the Company's definitive
Proxy Statement for the annual meeting of stockholders to be held on May 18,
1999, which Proxy Statement will be filed with the Commission with 120 days
after the end of the Company's fiscal year ended December 31, 1998.

43
<PAGE> 46

PART IV

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

(a) Documents filed as part of this report

1. Financial Statements.

The list of financial statements set forth under the caption "Index to
Financial Information" on page F-1 is incorporated herein by reference.

2. Financial Statement Schedules.

The list of financial statement schedules set forth under the caption
"Index to Financial Information" on page F-1 is incorporated herein by
reference. All other schedules have been omitted, as the required information is
inapplicable or the information is presented in the financial statements or
related notes.

3. Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- -----------------------
<C> <S>
*3(i) Second Amended and Restated Certificate of Incorporation.
**3(ii) Second Amended and Restated Bylaws of Network Solutions,
Inc., as amended May 1, 1998.
*4.1 Form of Common Stock Certificate.
*4.2 Reference is made to Exhibits 3(i) and 3(ii).
*10.1 Cooperative Agreement between the National Science
Foundation and Network Solutions, Inc., as amended by
Amendments Nos. 1, 2, 3 and 5.
*10.2 Amendment No. 4 to the Cooperative Agreement dated September
13, 1995.
*10.3 Master Services Agreement for System Management Services
dated January 21, 1997 by and between NationsBanc Services,
Inc. and Network Solutions, Inc.
*+10.4 1996 Stock Incentive Plan and forms of agreements
thereunder.
*10.5 Corporate Services Agreement between Network Solutions, Inc.
and Science Applications International Corporation.
*10.6 Tax Sharing Agreement between Network Solutions, Inc. and
Science Applications International Corporation.
*10.7 Registration Rights Agreement between Network Solutions,
Inc. and Science Applications International Corporation.
*10.8 Noncompetition and Corporate Opportunities Agreement between
Network Solutions, Inc. and Science Applications
International Corporation.
*+10.9 Letter Agreement dated September 16, 1996 between the
Company and Gabriel A. Battista, as amended as of September
23, 1996.
*10.10 Science Applications International Corporation Employee
Stock Ownership Plan and amendments thereto.
*10.11 Science Applications International Corporation 1995 Stock
Option Plan.
*10.12 Letter dated September 13, 1995 regarding Amendment No. 4 to
the Cooperative Agreement.
*10.13 Asset Transfer Agreement between Network Solutions, Inc. and
Science Applications International Corporation.
*10.14 Amendment No. 6 to the Cooperative Agreement dated June 23,
1997.
***+10.15 1997 Employee Stock Purchase Plan.
******10.16 Amendment No. 7 to the Cooperative Agreement dated December
3, 1997.
</TABLE>

44
<PAGE> 47

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- -----------------------
<C> <S>
******10.17 Amendment No. 8 to the Cooperative Agreement dated February
20, 1998.
******10.18 Amendment No. 9 to the Cooperative Agreement dated March 12,
1998.
+10.19 Form of Indemnification Agreement entered into by the
Company and each of its directors and officers at the Vice
President level or above.
******10.20 Deed of Lease By and Between Sugarland Business Park Limited
Partnership and Network Solutions, Inc. dated May 30, 1997
("Lease Agreement").
******10.21 Amendment No. 1 to Lease Agreement dated January 31, 1998.
****10.22 Amendment No. 10 to the Cooperative Agreement dated
September 29, 1998.
*****10.23 Amendment No. 11 to the Cooperative Agreement dated October
6, 1998.
10.24 Amendment No. 12 to the Cooperative Agreement dated March
12, 1999.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule (in electronic format only).
27.2 Restated Financial Data Schedule (in electronic format
only).
27.3 Restated Financial Data Schedule (in electronic format
only).
</TABLE>

- ---------------
* Incorporated by reference from Network Solutions, Inc.'s Registration
Statement on Form S-1 (Registration No. 333-30705).
** Incorporated by reference from Network Solutions, Inc.'s Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1998.
*** Incorporated by reference from Network Solutions, Inc.'s Registration
Statement on Form S-8 (Registration No. 333-43821).
**** Incorporated by reference from Network Solutions, Inc.'s Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1998.
***** Incorporated by reference from Network Solutions, Inc.'s Report on Form
8-K dated October 9, 1998.
****** Incorporated by reference from Network Solutions, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.

+ Executive Compensation Plans and Arrangements.

We own or have rights to various copyrights, trademarks and trade names
used in our business. These include Network Solutions, Inc.(R), WorldNIC(TM),
RegistrationPlus(TM), dot com mail(TM), dot com toolkit(TM), dot com
promotions(TM), dot com people(TM) and dot com family(TM). This Annual Report on
Form 10-K also includes trademarks, service marks and trade names of other
companies.

(b) Reports on Form 8-K

The following reports on Form 8-K were filed during the quarter ended
December 31, 1998:

On October 9, 1998, we filed a report on Form 8-K, pursuant to Item 5 on
such form, to report our entering into Amendment 11 to our Cooperative Agreement
with the United States Department of Commerce. Amendment 11, among other things,
extends the flexibility period of the Cooperative Agreement through September
30, 2000.

On November 20, 1998, we filed a report on Form 8-K, pursuant to Item 5 on
such form, to report the resignation of our Chief Executive Officer and
Director, Gabriel A. Battista.

45
<PAGE> 48

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

NETWORK SOLUTIONS, INC.

By: /s/ MICHAEL A. DANIELS
------------------------------------
MICHAEL A. DANIELS
CHAIRMAN OF THE BOARD AND ACTING
CHIEF EXECUTIVE OFFICER
Dated: March 30, 1999

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON THE DATES INDICATED.

<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>

/s/ MICHAEL A. DANIELS Chairman of the Board and Acting Chief March 30, 1999
- ---------------------------------- Executive Officer
MICHAEL A. DANIELS

/s/ ROBERT J. KORZENIEWSKI Chief Financial Officer (Principal Financial March 30, 1999
- ---------------------------------- Officer) and Acting Chief Operating Officer
ROBERT J. KORZENIEWSKI

/s/ MICHAEL G. VOSLOW Vice President, Finance and Treasurer March 30, 1999
- ---------------------------------- (Principal Accounting Officer)
MICHAEL G. VOSLOW

/s/ J. ROBERT BEYSTER Director March 30, 1999
- ----------------------------------
J. ROBERT BEYSTER

/s/ CRAIG I. FIELDS Director March 30, 1999
- ----------------------------------
CRAIG I. FIELDS

/s/ JOHN E. GLANCY Director March 30, 1999
- ----------------------------------
JOHN E. GLANCY

/s/ J. D. HEIPT Director March 30, 1999
- ----------------------------------
J. DENNIS HEIPT

/s/ W. A. ROPER, JR. Director March 30, 1999
- ----------------------------------
WILLIAM A. ROPER, JR.

/s/ STRATTON D. SCLAVOS Director March 30, 1999
- ----------------------------------
STRATTON D. SCLAVOS

/s/ DONALD N. TELAGE Director March 30, 1999
- ----------------------------------
DONALD N. TELAGE
</TABLE>

46
<PAGE> 49

INDEX TO FINANCIAL INFORMATION

<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Report of Independent Accountants........................... F- 2
1. Financial Statements:
Statements of Financial Position as of December 31, 1997
and 1998............................................... F- 3
Statements of Operations for the Years Ended December 31,
1996, 1997 and 1998.................................... F- 4
Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1996, 1997 and 1998........... F- 5
Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998.................................... F- 6
Notes to Financial Statements............................ F- 7
2. Financial Statement Schedule:
Valuation and Qualifying Accounts and Reserves........... F-23
</TABLE>

F-1
<PAGE> 50

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Network Solutions, Inc.

In our opinion, the financial statements listed in the index appearing on
page F-1 present fairly, in all material respects, the financial position of
Network Solutions, Inc. (a majority-owned subsidiary of Science Applications
International Corporation) at December 31, 1998 and 1997 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP

McLean, VA
February 5, 1999

F-2
<PAGE> 51

NETWORK SOLUTIONS, INC.

STATEMENTS OF FINANCIAL POSITION

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 41,146,000 $ 12,862,000
Short-term investments.................................... 40,200,000 118,808,000
Accounts receivable, net.................................. 5,792,000 22,628,000
Prepaids and other assets................................. 1,005,000 4,001,000
Deferred tax asset........................................ 20,153,000 40,508,000
Restricted assets......................................... 25,873,000 --
------------ ------------
Total current assets.............................. 134,169,000 198,807,000
Furniture and equipment, net................................ 6,146,000 16,005,000
Long-term investments....................................... -- 13,590,000
Deferred tax asset.......................................... 8,128,000 14,831,000
Goodwill, net............................................... 1,177,000 634,000
------------ ------------
Total Assets...................................... $149,620,000 $243,867,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 6,426,000 $ 28,287,000
Due to parent............................................. 1,250,000 4,766,000
Income taxes payable...................................... 5,042,000 5,409,000
Current portion of capital lease obligations.............. 842,000 834,000
Deferred revenue, net..................................... 43,789,000 93,720,000
Internet fund liability................................... 25,873,000 --
------------ ------------
Total current liabilities......................... 83,222,000 133,016,000
Capital lease obligations................................... 1,081,000 247,000
Long-term deferred revenue, net............................. 17,662,000 35,474,000
------------ ------------
Total liabilities................................. 101,965,000 168,737,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, authorized 10,000,000
shares; none issued and outstanding in 1997 and 1998... -- --
Class A common stock, $.001 par value; authorized
100,000,000 shares; 7,590,000 and 9,140,372 issued and
outstanding in 1997 and 1998........................... 4,000 9,000
Class B common stock, $.001 par value; authorized
30,000,000 shares; 23,850,000 issued and outstanding in
1997 and 1998.......................................... 12,000 24,000
Additional paid-in capital................................ 56,451,000 72,331,000
Retained earnings (accumulated deficit)................... (8,812,000) 2,407,000
Accumulated other comprehensive income.................... -- 359,000
------------ ------------
Total stockholders' equity........................ 47,655,000 75,130,000
------------ ------------
Total Liabilities and Stockholders' Equity........ $149,620,000 $243,867,000
============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements

F-3
<PAGE> 52

NETWORK SOLUTIONS, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net revenue....................................... $18,862,000 $45,326,000 $93,652,000
Cost of revenue................................... 14,666,000 25,798,000 38,530,000
----------- ----------- -----------
Gross profit...................................... 4,196,000 19,528,000 55,122,000
Research and development expenses................. 680,000 1,653,000 4,821,000
Selling, general and administrative expenses...... 6,280,000 12,268,000 37,144,000
Interest income................................... (496,000) (2,211,000) (6,303,000)
Other expenses.................................... -- 116,000 116,000
----------- ----------- -----------
Income (loss) before income taxes................. (2,268,000) 7,702,000 19,344,000
Provision (benefit) for income taxes.............. (643,000) 3,471,000 8,109,000
----------- ----------- -----------
Net income (loss)................................. $(1,625,000) $ 4,231,000 $11,235,000
=========== =========== ===========
Earnings (loss) per common share:
Basic........................................... $ (0.07) $ 0.16 $ 0.35
=========== =========== ===========
Diluted......................................... $ (0.07) $ 0.16 $ 0.34
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these financial statements

F-4
<PAGE> 53

NETWORK SOLUTIONS, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
CLASS A CLASS B OTHER
COMMON STOCK COMMON STOCK ADDITIONAL COMPRE- RETAINED
------------------ -------------------- PAID-IN HENSIVE EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (DEFICIT)
--------- ------ ---------- ------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995............... -- $ -- 12,500,000 $12,000 $ 4,468,000 $ -- $ (1,418,000)
Net loss for the year ended December 31,
1996................................... -- -- -- -- -- -- (1,625,000)
--------- ------ ---------- ------- ----------- -------- ------------
Balance, December 31, 1996............... -- -- 12,500,000 12,000 4,468,000 -- (3,043,000)
Declaration of Class B dividend.......... -- -- -- -- -- -- (10,000,000)
Conversion of Class B Common Stock....... 575,000 -- (575,000) -- -- -- --
Issuance of Class A Common Stock......... 3,220,000 4,000 -- -- 51,983,000 -- --
Net income for the year ended December
31, 1997............................... -- -- -- -- -- -- 4,231,000
--------- ------ ---------- ------- ----------- -------- ------------
Balance, December 31, 1997............... 3,795,000 4,000 11,925,000 12,000 56,451,000 -- (8,812,000)
Issuance of common stock pursuant to
stock plans............................ 775,000 1,000 -- -- 10,273,000 -- --
Tax benefit associated with stock
plans.................................. -- -- -- -- 5,607,000 -- --
Two-for-one common stock split effected
in the form of a 100% stock dividend... 4,570,000 4,000 11,925,000 12,000 -- -- (16,000)
Comprehensive Income:
Net income for the year ended December
31, 1998............................. -- -- -- -- -- -- 11,235,000
Other comprehensive income, net of tax;
unrealized gains on securities....... -- -- -- -- -- 359,000 --
Comprehensive income..................... -- -- -- -- -- -- --
--------- ------ ---------- ------- ----------- -------- ------------
Balance, December 31, 1998............... 9,140,000 $9,000 23,850,000 $24,000 $72,331,000 $359,000 $ 2,407,000
========= ====== ========== ======= =========== ======== ============

COMPRE- TOTAL
HENSIVE STOCKHOLDERS'
INCOME EQUITY
----------- -------------
<S> <C> <C>
Balance, December 31, 1995............... $ -- $ 3,062,000
Net loss for the year ended December 31,
1996................................... -- (1,625,000)
----------- ------------
Balance, December 31, 1996............... -- 1,437,000
Declaration of Class B dividend.......... -- (10,000,000)
Conversion of Class B Common Stock....... -- --
Issuance of Class A Common Stock......... -- 51,987,000
Net income for the year ended December
31, 1997............................... -- 4,231,000
----------- ------------
Balance, December 31, 1997............... -- 47,655,000
Issuance of common stock pursuant to
stock plans............................ -- 10,274,000
Tax benefit associated with stock
plans.................................. -- 5,607,000
Two-for-one common stock split effected
in the form of a 100% stock dividend... -- --
Comprehensive Income:
Net income for the year ended December
31, 1998............................. 11,235,000 11,235,000
Other comprehensive income, net of tax;
unrealized gains on securities....... 359,000 359,000
-----------
Comprehensive income..................... $11,594,000 --
=========== ------------
Balance, December 31, 1998............... $ 75,130,000
============
</TABLE>

The accompanying notes are an integral part of these financial statements

F-5
<PAGE> 54

NETWORK SOLUTIONS, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ (1,625,000) $ 4,231,000 $ 11,235,000
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization............ 1,417,000 2,432,000 3,754,000
Provision for uncollectible accounts
receivable............................. 3,597,000 8,082,000 2,247,000
Deferred income taxes.................... (12,834,000) (13,226,000) (27,317,000)
Tax benefit associated with stock
plans.................................. -- -- 5,607,000
Changes in operating assets and
liabilities:
Increase in accounts receivable........ (12,144,000) (1,287,000) (19,083,000)
Increase in prepaids and other
assets.............................. (925,000) (69,000) (2,996,000)
Increase in accounts payable and
accrued liabilities................. 1,226,000 3,845,000 21,861,000
Increase in income taxes payable....... -- 5,042,000 367,000
Increase in deferred revenue........... 26,006,000 32,099,000 67,743,000
------------ ------------ -------------
Net cash provided by operating
activities....................... 4,718,000 41,149,000 63,418,000
------------ ------------ -------------
Cash flows from investing activities:
Purchase of furniture and equipment......... (1,901,000) (3,240,000) (13,070,000)
Purchase of short-term investments, net..... -- (40,200,000) (77,990,000)
Purchase of long-term investments........... -- -- (13,590,000)
Net investment in net assets of discontinued
operations............................... (208,000) -- --
------------ ------------ -------------
Net cash used in investing
activities....................... (2,109,000) (43,440,000) (104,650,000)
------------ ------------ -------------
Cash flows from financing activities:
Net transactions with SAIC.................. 12,926,000 (14,045,000) 3,516,000
Proceeds from issuance of common stock...... -- 52,405,000 --
Dividend paid............................... -- (10,000,000) --
Issuance of common stock pursuant to stock
plans.................................... -- -- 10,274,000
Repayment of capital lease obligations...... -- (463,000) (842,000)
------------ ------------ -------------
Net cash provided by financing
activities....................... 12,926,000 27,897,000 12,948,000
------------ ------------ -------------
Net increase (decrease) in cash and cash
equivalents................................. 15,535,000 25,606,000 (28,284,000)
Cash and cash equivalents, beginning of
year........................................ 5,000 15,540,000 41,146,000
------------ ------------ -------------
Cash and cash equivalents, end of year........ $ 15,540,000 $ 41,146,000 $ 12,862,000
============ ============ =============
</TABLE>

The accompanying notes are an integral part of these financial statements
F-6
<PAGE> 55

NETWORK SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cooperative Agreement

In December 1992, Network Solutions entered into the Cooperative Agreement
with the National Science Foundation under which Network Solutions was to
provide Internet domain name registration services for five top level domains:
.com, .org, .net, .edu and .gov. These registration services include the initial
two year domain name registration and annual re-registration, and throughout the
registration term, maintenance of and unlimited modifications to individual
domain name records and updates to the master file of domain names. The
Cooperative Agreement became effective January 1, 1993. It included a
three-month phase-in period, a five-year operational period, commencing April 1,
1993 and ending March 31, 1998, and a six-month flexibility period through
September 30, 1998. Effective September 9, 1998, the Department of Commerce took
over the administration of the Cooperative Agreement from the National Science
Foundation. In October 1998, the Cooperative Agreement was amended to extend the
flexibility period until September 30, 2000.

Under the terms of the September 14, 1995 amendment to the Cooperative
Agreement, 30% of the registration fees collected by Network Solutions was
required to be set aside for the enhancement of the intellectual infrastructure
of the Internet (set aside funds) and, as such, was not recognized as revenue by
Network Solutions. Network Solutions has reflected these set aside funds, along
with the appropriate percentage of net accounts receivable (Note 3), as
restricted assets and has recorded an equivalent, related current liability.
Network Solutions maintained the cash received relating to the set aside funds
in a separate interest bearing account. The set aside funds, plus any interest
earned, were disbursed at the direction of the National Science Foundation. As
of December 31, 1998, Network Solutions had cumulatively disbursed all set aside
funds collected and associated interest earned for a total of $62.3 million to
the National Science Foundation at their direction. The restricted cash at
December 31, 1997 and 1998 was approximately $23,512,000 and $0, respectively.

F-7
<PAGE> 56
NETWORK SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 1 -- COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
On March 12, 1998, the National Science Foundation and Network Solutions
amended the Cooperative Agreement to eliminate the 30% set aside requirement
effective April 1, 1998 and to reduce the registration fees by a corresponding
amount. Initial registrations on and after April 1, 1998 are charged $70 for two
years of registration services and an annual re-registration fee of $35 per year
thereafter. This amendment had no effect on the revenue currently recognized on
each registration, $70 for initial registrations and $35 for re-registrations,
since Network Solutions previously did not recognize revenue on the 30% set
aside funds. Accordingly, while the revenue to Network Solutions on a per
registration basis does not change, the amount charged to customers declined.

For purposes of Network Solutions' statements of cash flows, amounts
relating to these restricted assets and the Internet fund liability have been
excluded in their entirety.

Revenue Recognition

Registration fees charged to end users for registration services provided
by Network Solutions are recognized on a straight-line basis over the life of
the registration term, two years for initial registrations and one year for
re-registrations. Network Solutions records revenue net of an estimated
provision for uncollectible accounts receivable (Note 3).

One Internet Technology Services' customer contributed approximately 20% of
net revenue for the year ended December 31, 1996. During the years ended
December 31, 1997 and 1998, there were no customers which individually
represented more than 4% of net revenues.

Deferred Revenue

Deferred revenue primarily represents the unearned portion of revenue
related to the unexpired term of registration fees, net of an estimate for
uncollectible accounts receivable (Note 3).

Cash and Cash Equivalents

Network Solutions considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

Short and Long-Term Investments

Short and long-term investments in marketable securities are classified as
available-for-sale. All long-term investments in marketable securities mature
within two years. At December 31, 1997 and 1998, the fair value of short and
long-term investments approximated cost. Fair value is determined based upon the
quoted market prices of the securities as of the balance sheet date.

At December 31, 1998, Network Solutions also held equity interests in a
privately-held, information technology company totaling $4,200,000. This
investment is included in other long-term assets and is accounted for under the
cost method which approximates fair value.

F-8
<PAGE> 57
NETWORK SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 1 -- COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Financial Instruments

The recorded value of Network Solutions' financial instruments, which
include short and long-term investments, accounts receivable and accounts
payable, approximates market value. Concentration of credit risks with respect
to registration receivables is limited due to the wide variety and number of
customers, as well as their dispersion across geographic areas. Network
Solutions has no derivative financial instruments.

Furniture and Equipment

Furniture and equipment are stated at cost. Depreciation on furniture,
office and computer equipment is calculated principally using a
declining-balance method over the useful lives of three to seven years.
Equipment under capital leases is amortized using a declining-balance method
over the shorter of the assets' useful lives or lease term, ranging from two to
three years. Leasehold improvements are amortized using the straight-line method
over the shorter of the lease term or the estimated useful lives of the assets,
generally six years.

Goodwill

Goodwill represents the excess of the purchase cost over the fair value of
net assets acquired in Network Solutions' acquisition by Science Applications
International Corporation, or SAIC, in 1995 and is amortized over five years
using the straight-line method. Amortization expense of $715,000, $686,000 and
$543,000 for years ended December 31, 1996, 1997 and 1998, respectively, was
included in selling, general and administrative expenses. In connection with
Network Solutions' initial public offering during 1997, SAIC sold a portion of
its interest in Network Solutions resulting in a corresponding reduction of
goodwill in the amount of $418,000 which was charged to additional paid-in
capital.

Stock Split

On December 31, 1998, Network Solutions' board of directors approved a
two-for-one stock split of the shares of Class A common stock and Class B common
stock, to be effected in the form of a 100% stock dividend on shares of Class A
common stock and Class B common stock outstanding on February 26, 1999. The
stock dividend will be distributed on March 23, 1999. Share and per share
information for all periods presented in the accompanying financial statements
have been adjusted to reflect the two-for-one stock split.

Software Development Costs

Research and development costs are expensed as incurred. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed", Network
Solutions has not capitalized any significant software development costs as of
December 31, 1998.

Income Taxes

Deferred taxes are accounted for under SFAS No. 109, "Accounting for Income
Taxes," whereby deferred tax assets and liabilities are recognized for the
expected future tax consequences of

F-9
<PAGE> 58
NETWORK SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 1 -- COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
temporary differences between financial statement reporting and income tax
purposes. A valuation allowance is recorded if it is "more likely than not" that
some portion of or all of a deferred tax asset will not be realized.

Until Network Solutions' initial public offering, Network Solutions filed
tax returns as part of SAIC's consolidated tax group. Tax expense during this
period has been determined as if Network Solutions was a separate taxpayer and
was charged to Network Solutions by SAIC. Effective October 1, 1997, Network
Solutions is no longer part of SAIC's consolidated tax group for federal income
tax purposes and prepares its income tax returns as a separate entity.

Stock Based Compensation

Network Solutions accounts for its stock option and employee stock purchase
plans in accordance with the provisions of Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees". No compensation cost
has been recognized by Network Solutions for its employee stock plans. The SFAS
No. 123, "Accounting for Stock-Based Compensation", provides an alternative
accounting method to APB No. 25 and requires additional pro forma disclosures
(Note 11). Network Solutions expects to continue to account for its employee
stock plans in accordance with the provisions of APB No. 25.

Segment Data

During 1998, Network Solutions adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise", replacing
the "industry segment" approach with the "management" approach. The management
approach designates internal reporting that is used by management for making
operating decisions and assessing performance as the source of an entity's
reportable segments. SFAS No. 131 also requires disclosures about products and
services, geographic areas and major customers. The adoption of SFAS No. 131 did
not affect results of operations, financial position or segment information
disclosures of Network Solutions due to the nature and relative magnitude of its
business activities.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make reasonable estimates
and assumptions, based upon all known facts and circumstances that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements. Actual results could
differ from those estimates.

Newly Issued Accounting Standards

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This standard
requires companies to capitalize qualifying computer software costs which are
incurred during the application development stage and amortize them over the
software's estimated useful life. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998.

F-10
<PAGE> 59
NETWORK SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 1 -- COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Network Solutions is currently evaluating the impact of SOP 98-1 on its
financial statements and related disclosures.

NOTE 2 -- RECAPITALIZATION AND INITIAL PUBLIC OFFERING

On June 26, 1997, the Board of Directors amended the Certificate of
Incorporation to provide for two classes of common stock, designated as Class A
and Class B. The holders of Class A and Class B common stock generally have
identical rights except that holders of Class A common stock are entitled to one
vote per share while holders of Class B common stock are entitled to ten votes
per share. Each share of Class B common stock is convertible at the holder's
option into one share of Class A common stock.

On October 1, 1997, Network Solutions completed an initial public offering
of 7,590,000 shares of its $.001 par value Class A common stock, including
990,000 shares resulting from the exercise of certain overallotment provisions.
Network Solutions' net proceeds from the initial public offering, including
overallotment, were $52.5 million based on Network Solutions' direct sale of
6,440,000 shares of Class A common stock.

Prior to the offering, Network Solutions was a wholly-owned subsidiary of
SAIC. In conjunction with the initial public offering, SAIC converted 1,150,000
shares (including 150,000 overallotment shares) of Class B common stock into
1,150,000 shares of Class A common stock and directly sold the shares as a
selling stockholder. Upon completion of the offering, SAIC owned 100% of the
outstanding Class B common stock representing 75.9% of Network Solutions' equity
and 96.9% of the combined voting power of Network Solutions' outstanding Class B
and Class A common stock.

On August 21, 1997, Network Solutions' Board of Directors declared a
$10,000,000 dividend to be paid to SAIC upon consummation of the initial public
offering. This dividend was paid to SAIC on October 1, 1997.

NOTE 3 -- ACCOUNTS RECEIVABLE

Accounts receivable consist of the following amounts as of December 31:

<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Billed................................................ $24,483,000 $42,679,000
Unbilled.............................................. 1,526,000 5,695,000
----------- -----------
Total accounts receivable before
allowances............................... 26,009,000 48,374,000
Less -- Allowance for uncollectible accounts.......... (17,856,000) (25,746,000)
-- Accounts receivable allocable to 30% NSF set
aside (Note 1).............................. (2,361,000) --
----------- -----------
Accounts receivable, net.............................. $ 5,792,000 $22,628,000
=========== ===========
</TABLE>

Unbilled receivables consist of registration fees and time and material
contract costs which have been incurred but which have not yet been billed.

In accounting for registration fees, Network Solutions initially records
the gross amount of the registration fee to accounts receivable and deferred
revenue. The allowance for estimated uncollectible accounts is recorded against
both accounts receivable and deferred revenue balances (see Note 1 for

F-11
<PAGE> 60
NETWORK SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3 -- ACCOUNTS RECEIVABLE -- (CONTINUED)
treatment of the 30% National Science Foundation set aside). From the deferred
revenue and allowance balances, Network Solutions records revenue and its
provision for uncollectible accounts on a straight-line basis over the
registration term. Effective April 1, 1998, Network Solutions consolidates and
then amortizes only the net deferred revenue balance as net revenue over the
registration term.

The provision for uncollectible accounts receivable, which was separately
recorded and deducted from gross registration fees in determining net
registration revenue, was $3,597,000, $7,782,000 and $2,168,000, respectively,
for the years ended December 31, 1996, 1997 and 1998. An additional $300,000 and
$79,000 of bad debt expense was recorded in 1997 and 1998, respectively, for the
write-off of Internet Technology Services receivables. Network Solutions'
allowance for uncollectible accounts receivable is associated solely with its
registration services business. The provision for uncollectible accounts
receivable is primarily due to the large number of individuals and corporations
that have registered multiple domain names with the apparent intention of
transferring registration for such names at a profit. Network Solutions'
experience has been that, in contrast to other registrants, such speculative
resellers have a higher tendency to default on their registration fees,
returning the names into the available pool for subsequent registration.

NOTE 4 -- FURNITURE AND EQUIPMENT

Furniture and equipment consist of the following amounts as of December 31:

<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Furniture and office equipment........................ $ 476,000 $ 833,000
Computer equipment.................................... 8,619,000 19,400,000
Leasehold improvements................................ 288,000 2,018,000
----------- -----------
Furniture and equipment, at cost.................... 9,383,000 22,251,000
Less: Accumulated depreciation and amortization....... (3,237,000) (6,246,000)
----------- -----------
Furniture and equipment, net.......................... $ 6,146,000 $16,005,000
=========== ===========
</TABLE>

Furniture and equipment includes $2,386,000 of computer equipment acquired
during 1997 under capital lease agreements. Amortization expense related to
capital leases totaled $915,000 and $1,028,000 in 1997 and 1998, respectively.
Total depreciation and amortization expense for the years ended December 31,
1996, 1997 and 1998 was $702,000, $1,746,000 and $3,211,000, respectively.

NOTE 5 -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following amounts as
of December 31:

<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Accounts payable........................................ $1,896,000 $ 7,647,000
Accrued expenses........................................ 2,384,000 16,717,000
Accrued payroll......................................... 2,146,000 3,923,000
---------- -----------
Total accounts payable and accrued expenses... $6,426,000 $28,287,000
========== ===========
</TABLE>

F-12
<PAGE> 61
NETWORK SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6 -- LEASES

Future minimum lease payments, including fixed escalation increases for
office space and equipment under capital and operating leases with initial or
remaining noncancelable lease terms in excess of one year as of December 31,
1998 are:

<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31: LEASES LEASES
------------------------ ---------- -----------
<S> <C> <C>
1999.................................................... $ 885,000 $ 3,778,000
2000.................................................... 252,000 3,099,000
2001.................................................... -- 1,935,000
2002.................................................... -- 1,452,000
---------- -----------
Total minimum lease payments.................. 1,137,000 $10,264,000
===========
Less: Amounts representing interest..................... (56,000)
----------
Present value of minimum lease payments................. 1,081,000
Less: Current portion................................... (834,000)
----------
Long-term portion of capital lease obligations.......... $ 247,000
==========
</TABLE>

In December 1992, Network Solutions entered into a lease agreement for
Network Solutions' headquarters in Herndon, Virginia. Subsequent to the
acquisition, SAIC subleased the facilities to Network Solutions under a lease
expiring November 2002. During 1997, Network Solutions leased a second facility
in Herndon whose lease term expires in July 2002.

Operating lease expense for the years ended December 31, 1996, 1997 and
1998 was $924,000, $2,188,000 and $3,533,000, respectively. Network Solutions
generated rental income from subleases of $187,000, $291,000 and $215,000 for
the years ended December 31, 1996, 1997 and 1998, respectively.

NOTE 7 -- INTEREST EXPENSE AND INCOME

For the year ended December 31, 1996, interest income of $496,000 was
allocated by SAIC based upon the cost of capital calculation. From its
acquisition by SAIC in March 1995 until December 1996, Network Solutions
participated in SAIC's centralized cash management system whereby cash received
from operations was transferred to SAIC's centralized cash accounts and cash
disbursements were funded from such centralized cash accounts. Accordingly, the
SAIC cost of capital formula provided for charges and credits to Network
Solutions based upon management of certain assets, including accounts receivable
and fixed assets. Such amounts are not necessarily indicative of the cost that
would have been incurred if Network Solutions had been operated as a separate
entity.

Effective January 1, 1997, Network Solutions was no longer subject to
SAIC's cost of capital calculation in connection with Network Solutions
fulfilling its own treasury function. Interest paid for the years ended December
31, 1996, 1997 and 1998 was $0, $116,000 and $116,000, respectively.

NOTE 8 -- TRANSACTIONS WITH SAIC

Network Solutions was acquired by SAIC on March 10, 1995 in a
stock-for-stock transaction accounted for as a purchase.

F-13
<PAGE> 62
NETWORK SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8 -- TRANSACTIONS WITH SAIC -- (CONTINUED)
The financial statements for the years ended December 31, 1996, 1997 and
1998 include significant transactions with other SAIC business units involving
functions and services (such as cash management, tax administration, accounting,
legal, data processing and employee benefit plans) that were provided to Network
Solutions by centralized SAIC organizations. The costs of these functions and
services have been directly charged and/or allocated to Network Solutions using
methods that SAIC management believes are reasonable; primarily a percentage of
budgeted administrative and overhead costs. Such charges and allocations are not
necessarily indicative of the costs that would have been incurred if Network
Solutions had been a separate entity. Through August 9, 1996, the amounts
allocated by SAIC to Network Solutions included both administrative and overhead
costs which are included in selling, general and administrative expenses and
cost of revenue, respectively. Effective August 10, 1996, SAIC stopped
allocating costs based generally upon pro rata labor and began assessing Network
Solutions for corporate services provided by SAIC at a fee equal to 2.5% of
annual net revenue. The corporate services fee is negotiated annually and was
2.5% and 1.5% during 1997 and 1998, respectively. The agreement may be
terminated by either party upon 180 days' prior written notice.

Amounts charged and allocated to Network Solutions for these functions and
services for the years ended December 31, 1996, 1997 and 1998 were $1,196,000,
$1,126,000 and $1,447,000, respectively, and are principally included in
selling, general and administrative expenses. Additionally, certain interest
credits were allocated by SAIC to Network Solutions (Note 7).

Sales as a subcontractor to SAIC for the years ended December 31, 1996,
1997 and 1998 were $1,505,000, $2,445,000 and $525,000, respectively. In
addition, because Network Solutions was included in SAIC's consolidated tax
returns for periods from acquisition until the initial public offering, Network
Solutions was obligated to make payment for its tax liability to SAIC in
accordance with the tax sharing arrangement (Note 9). The due to parent balance
represents the cumulative net activity of all transactions between Network
Solutions and SAIC. Network Solutions reflects this activity in the statements
of cash flows on a net basis because of the quick turnover, the large amounts
and the short maturities of these related party cash transactions.

NOTE 9 -- PROVISION FOR INCOME TAXES

The results of Network Solutions since its acquisition by SAIC until its
initial public offering were included in SAIC's consolidated tax returns.
Subsequent to the initial public offering, Network Solutions is no longer part
of SAIC's consolidated tax group for federal income tax purposes and prepares
its income tax returns as a separate entity.

F-14
<PAGE> 63
NETWORK SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9 -- PROVISION FOR INCOME TAXES -- (CONTINUED)
The provision for (benefit) from income taxes consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal.............................. $ 10,171,000 $ 13,931,000 $ 29,559,000
State................................ 2,020,000 2,766,000 5,867,000
------------ ------------ ------------
Total current provision...... 12,191,000 16,697,000 35,426,000
------------ ------------ ------------
Deferred:
Federal.............................. (10,716,000) (11,035,000) (22,792,000)
State................................ (2,118,000) (2,191,000) (4,525,000)
------------ ------------ ------------
Total deferred (benefit)..... (12,834,000) (13,226,000) (27,317,000)
------------ ------------ ------------
Provision for (benefit) from income
taxes................................ $ (643,000) $ 3,471,000 $ 8,109,000
============ ============ ============
</TABLE>

Deferred tax assets are comprised of the following temporary differences as
of December 31:

<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Deferred revenue...................................... $26,295,000 $46,943,000
Provision for uncollectible accounts receivable....... 1,841,000 8,409,000
Other................................................. 145,000 (13,000)
----------- -----------
Total deferred tax asset.................... $28,281,000 $55,339,000
=========== ===========
</TABLE>

Although Network Solutions has a past history of net losses, it has not
established a current valuation allowance for its deferred tax assets since, in
the opinion of management, it is more likely than not that all of the deferred
tax assets will be realized. The deferred tax assets relate primarily to
registration fees which are taxable upon initial registration but are recognized
in the financial statements over the next 12 to 24 months, the registration
term.

A reconciliation of the provision for income taxes to the amount computed
by applying the statutory federal income tax rate of 35% to income before income
taxes is provided below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Federal tax at statutory rate................. $(794,000) $2,696,000 $6,771,000
State income taxes, net of federal tax
benefit..................................... (96,000) 374,000 1,015,000
Nondeductible goodwill amortization........... 281,000 240,000 213,000
Other......................................... (34,000) 161,000 110,000
--------- ---------- ----------
Provision for (benefit) from income taxes..... $(643,000) $3,471,000 $8,109,000
========= ========== ==========
</TABLE>

Network Solutions paid income taxes of $31,235,000 during the year ended
December 31, 1998.

F-15
<PAGE> 64
NETWORK SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10 -- COMPUTATION OF EARNINGS (LOSS) PER SHARE

The following is a reconciliation of the numerator and denominator used in
the basic and diluted earnings per share computations:

<TABLE>
<CAPTION>
INCOME (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ---------
<S> <C> <C> <C>
1996 LOSS PER SHARE:
Basic..................................... $(1,625,000) 25,000,000 $(0.07)
======
Dilutive securities:
Outstanding options..................... --
----------- ----------
Diluted................................... $(1,625,000) 25,000,000 $(0.07)
=========== ========== ======
1997 EARNINGS PER SHARE:
Basic..................................... $ 4,231,000 26,610,000 $ 0.16
======
Dilutive securities:
Outstanding options..................... 356,000
----------- ----------
Diluted................................... $ 4,231,000 26,966,000 $ 0.16
=========== ========== ======
1998 EARNINGS PER SHARE:
Basic..................................... $11,235,000 31,957,000 $ 0.35
======
Dilutive securities:
Outstanding options..................... 1,440,000
----------- ----------
Diluted................................... $11,235,000 33,397,000 $ 0.34
=========== ========== ======
</TABLE>

Common shares issued are weighted for the period the shares were
outstanding and incremental shares assumed issued under the treasury stock
method for dilutive earnings per share are weighted for the period the
underlying options were outstanding. Options outstanding in 1996 are not
reflected in the computation of diluted earnings per share because the effects
are anti-dilutive and would increase diluted earnings per share.

NOTE 11 -- EMPLOYEE BENEFIT PLANS

1996 Stock Incentive Plan

The 1996 Stock Incentive Plan, or Incentive Plan, of Network Solutions was
adopted by the Board of Directors on September 18, 1996. The Incentive Plan
provides for awards in the form of restricted shares, stock units, stock
appreciation rights, and stock options (including incentive stock options and
nonstatutory stock options). A total of 4,612,500 shares of Class A Common Stock
have been initially reserved for issuance under the Incentive Plan. The number
of shares are increased by 2% of the total number of common shares of Network
Solutions outstanding at the end of the most recent calendar year, subject to a
cumulative limit of 2,000,000 shares. Through December 31, 1998, an additional
1,789,000 shares were eligible for issuance and have subsequently been reserved
for a combined total of 6,401,000 eligible shares under the Incentive Plan.

F-16
<PAGE> 65
NETWORK SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11 -- EMPLOYEE BENEFIT PLANS -- (CONTINUED)
Following is a summary of activity pursuant to Network Solutions' Incentive
Plan:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Balance at January 1, 1996........................... -- --
Granted.............................................. 2,451,000 $ 6.49
Exercised............................................ -- --
Cancelled............................................ -- --
----------
Balance at December 31, 1996......................... 2,451,000 $ 6.49
Granted.............................................. 1,201,000 $ 7.11
Exercised............................................ -- --
Cancelled............................................ (73,000) $ 7.00
----------
Balance at December 31, 1997......................... 3,579,000 $ 6.68
Granted.............................................. 1,359,000 $21.95
Exercised............................................ (1,520,000) $ 6.51
Cancelled............................................ (707,000) $ 9.26
----------
Balance at December 31, 1998......................... 2,711,000 $13.74
==========
</TABLE>

Granted stock options generally become exercisable one year after the date
of the grant, vest 30%, 30%, 20% and 20%, respectively, on each anniversary date
of the grant and have a term of five years. All options granted to date have
been nonstatutory stock options except for 202,000 incentive stock options
granted in 1996. No restricted shares, stock units or stock appreciation rights
have been granted to date.

The following table summarizes the status of Network Solutions' stock
options outstanding and exercisable at December 31, 1998:

<TABLE>
<CAPTION>
STOCK OPTIONS STOCK OPTIONS
OUTSTANDING EXERCISABLE
---------------------- ------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
--------------- --------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$ 7.00-$ 9.25.................. 1,712,000 3.31 $ 7.29 252,000 $7.16
$15.88-$34.25.................. 918,000 4.58 $21.20 -- --
$65.44-$69.50.................. 81,000 5.00 $65.59 -- --
--------- ---- ------ ------- -----
$ 7.00-$69.50.................. 2,711,000 3.79 $13.74 252,000 $7.16
========= ==== ====== ======= =====
</TABLE>

Employee Stock Purchase Plan

Effective January 7, 1998, Network Solutions adopted an Employee Stock
Purchase Plan to provide substantially all full time employees an opportunity to
purchase shares of its Class A common stock through payroll deductions of up to
10% of eligible compensation. Semiannually, on June 30

F-17
<PAGE> 66
NETWORK SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11 -- EMPLOYEE BENEFIT PLANS -- (CONTINUED)
and December 31, participant account balances are used to purchase stock at the
lesser of 85 percent of the fair market value on the trading day before the
participation period starts or the trading day preceding the day on which the
participation period ends. A total of 500,000 shares were initially reserved for
purchase under the plan. During the year ended December 31, 1998, a total of
30,000 shares were purchased under this plan.

SAIC Benefit Plans

Employees of Network Solutions participate in various SAIC benefit plans,
including stock, bonus and retirement plans, subject to the applicable
eligibility requirements. SAIC charges Network Solutions directly for the costs
of such employee benefit plans. Charges related to the administration of the
SAIC benefit plans in which employees of Network Solutions participate are
included within SAIC general corporate allocations (Note 8).

SAIC has one principal Cash or Deferred Arrangement plan which allows
eligible participants to defer a portion of their income through payroll
contributions. Such deferrals are fully vested, are not taxable to the
participant until distributed from the Cash or Deferred Arrangement plan upon
termination, retirement, permanent disability or death and may be matched by
SAIC. SAIC also has an SAIC Employee Stock Purchase Plan which allows eligible
employees to purchase shares of SAIC's Class A common stock, with SAIC currently
contributing 10% of the existing fair market value.

SAIC has a Bonus Compensation Plan which provides for bonuses to reward
outstanding performance. Bonuses are paid in the form of cash, fully vested
shares of SAIC Class A common stock or vesting shares of SAIC Class A common
stock. Network Solutions participated in this plan during the period from
acquisition until December 31, 1996.

During the years ended December 31, 1996 and 1997, a total of 53,000 and
11,000 SAIC options were granted to Network Solutions' employees, respectively,
with exercise prices ranging from $19.33 to $22.83 and $25.96 to $34.78 per
share, respectively, with a weighted average price of $20.51 and $28.13,
respectively. These options were granted under the SAIC 1995 Stock Option Plan
to purchase SAIC Class A common stock and vest 20%, 20%, 20% and 40%,
respectively, on each anniversary of the date of grant and have a term of five
years. There were no SAIC options granted to Network Solutions' employees during
1998.

Pro Forma Disclosures

The weighted average fair value of the options granted during the years
ended December 31, 1996 and 1997 under the SAIC Bonus Compensation Plan were
estimated at $4.30 and $7.56, respectively, and $1.38, $2.34 and $14.91, during
1996, 1997 and 1998, respectively, under Network

F-18
<PAGE> 67
NETWORK SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11 -- EMPLOYEE BENEFIT PLANS -- (CONTINUED)
Solutions' Incentive Plan using the Black-Scholes model. The following weighted
average assumptions were used in calculating the option fair values.

<TABLE>
<CAPTION>
NETWORK SOLUTIONS
SAIC STOCK OPTIONS STOCK OPTIONS
---------------------------- ----------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------
1996 1997 1998 1996 1997 1998
---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Expected life (years)......... 4.0 5.0 -- 4.0 4.0 4.0
Risk-free interest rate....... 5.91% 6.30% -- 5.98% 6.25% 5.1%
Volatility.................... 0.00% 0.00% -- 0.00% 20.79% 90.73%
Dividend yield................ 0.00% 0.00% -- 0.00% 0.00% 0.00%
</TABLE>

Under the above models, the total value of SAIC stock options granted
during 1996 and 1997 was approximately $228,000 and $87,000, respectively, and
$3,379,000, $2,809,000 and $20,322,000, respectively, for the Network Solutions'
employee stock purchase program and stock options granted in 1996, 1997 and
1998, all of which would be amortized ratably on a pro forma basis over their
respective option terms. Had Network Solutions recorded compensation costs for
these plans in accordance with SFAS No. 123, Network Solutions' pro forma income
(loss) would have been ($1,763,000), $3,510,000 and $9,236,000, respectively,
for the years ended December 31, 1996, 1997 and 1998. Pro forma earnings (loss)
per share on a diluted basis would have been ($0.07), $0.13 and $0.28,
respectively, for the years ended December 31, 1996, 1997 and 1998.

NOTE 12 -- COMPREHENSIVE INCOME

The changes in the components of accumulated other comprehensive income are
reported net of income taxes for the year ended December 31, 1998 as follows:

<TABLE>
<CAPTION>
UNREALIZED GAINS ACCUMULATED OTHER
ON SECURITIES COMPREHENSIVE INCOME
---------------- --------------------
<S> <C> <C>
Pre-tax amount............................... $618,000 $618,000
Income tax................................... 259,000 259,000
-------- --------
Net of tax amount............................ $359,000 $359,000
======== ========
</TABLE>

NOTE 13 -- COMMITMENTS AND CONTINGENCIES

As of December 31, 1998, Network Solutions was a defendant in two active
lawsuits involving domain name disputes between trademark owners and domain name
holders. Network Solutions is drawn into such disputes, in part, as a result of
claims by trademark owners that Network Solutions is legally required, upon
request by a trademark owner, to terminate the right Network Solutions granted
to a domain name holder to register a domain name which is alleged to be similar
to the trademark in question. The holders of the domain name registrations in
dispute have, in turn, questioned Network Solutions' right, absent a court
order, to take any action which suspends their use of the domain names in
question. Although 46 out of approximately 4,500 of these situations have
resulted in suits actually naming us as a defendant, as of December 31, 1998, no
adverse judgment has been rendered and no award of damages have been made
against Network Solutions.

F-19
<PAGE> 68
NETWORK SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 13 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Network Solutions believes that it has meritorious defenses and vigorously
defends itself against these claims.

On March 20, 1997, PG Media, Inc., a New York-based corporation (PG Media),
filed a lawsuit against Network Solutions in the United States District Court,
Southern District of New York alleging that Network Solutions had restricted
access to the Internet by not adding PG Media's requested top level domains to
the Internet root zone system in violation of the Sherman Act. In its complaint,
PG Media, in addition to requesting damages, asked that Network Solutions be
ordered to include reference to PG Media's top level domains and name servers in
the root zone file administered by Network Solutions under the Cooperative
Agreement. In June 1997, Network Solutions received written direction from the
National Science Foundation not to take any action which would create additional
top level domains or to add any new top level domains to the Internet root zone
until the National Science Foundation provided further guidance. On September
17, 1997, PG Media filed a Second Amended Complaint adding the National Science
Foundation as a defendant. On May 14, 1998, PG Media served Network Solutions
with a motion for a preliminary injunction against both defendants to compel
both defendants to add PG Media's top level domains to the Internet root zone
within 30 days. In response, both defendants filed cross-motions for summary
judgment against PG Media. On July 20, 1998, a hearing on all parties' motions
occurred. The basic issue before the court is the National Science Foundation's
authority to control the Internet's root zone system. The court has taken the
issue under advisement and no date has been indicated for the issuance of a
decision. With the transition of the Cooperative Agreement from the National
Science Foundation to the Department of Commerce, Network Solutions is still
required to request written direction from the U.S. Government before making or
rejecting any modifications, additions or deletions to the root zone file, in
accordance with the October 1998 amendment to the Cooperative Agreement.

On October 17, 1997, a group of six plaintiffs filed a lawsuit (the "Thomas
suit") against Network Solutions and the National Science Foundation in the
United States District Court, District of Columbia, challenging the legality of
fees defendants charge for the registration and renewal of domain names on the
Internet and seeking restitution of fees collected from domain name registrants
in an amount in excess of $100 million, damages, and injunctive and other
relief. Plaintiffs alleged violations of the Sherman Act, the U.S. Constitution,
the Administrative Procedures Act and the Independent Offices Appropriations
Act. On February 10, 1998, the plaintiffs filed a motion for preliminary
injunction against Network Solutions seeking several items of relief. On April
6, 1998, the Court issued its opinion granting summary judgment in favor of the
plaintiffs on the Intellectual Infrastructure Fund, ruling it an "unlawful tax."
The court also granted Network Solutions' motion to dismiss all other counts (II
through X) and simultaneously denied the plaintiffs' preliminary injunction
motion against Network Solutions. On April 30, 1998, Congress passed H.R. 3579
which was signed into law by the President on May 1, 1998. Section 8003 of H.R.
3579 legalized, ratified and confirmed the entire Intellectual Infrastructure
Fund and authorized and directed the National Science Foundation to deposit the
entire fund into the U.S. Treasury. On August 28, 1998, the District Court
dismissed the entire case, issuing a final judgment in the matter. In October
1998, the plaintiffs appealed the court's dismissal of their claims, with oral
argument scheduled for February 25, 1999.

On October 20, 1998, Network Solutions was included as a defendant in a
suit brought by the Pennsylvania Attorney General's office against a domain name
holder who has alleged to have used

F-20
<PAGE> 69
NETWORK SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 13 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
his domain name in connection with a web site promoting white supremacy and
threatening certain state employees. The Pennsylvania Attorney General named all
of the communications companies in any way connected with the domain name or web
site. The Pennsylvania Attorney General seeks to permanently enjoin these
entities, including Network Solutions, from providing services to this domain
name holder in the event that the domain name holder fails to comply with the
order of the court. Network Solutions has answered the complaint denying any
knowledge or participation in the actions of the primary defendant. No motions
are pending and Network Solutions expects to be dismissed from the matter.

Network Solutions believes that it has meritorious defenses and vigorously
defends itself against the claims advanced in the PG Media, Thomas or
Pennsylvania Attorney General suits. While management cannot reasonably estimate
the potential impact of such claims, a successful claim against Network
Solutions in any of these proceedings could have a material adverse effect on
Network Solutions' business, financial condition and results of operations.

On June 27, 1997, SAIC received a Civil Investigative Demand, or "CID" from
the U.S. Department of Justice issued in connection with an investigation to
determine whether there is, has been, or may be an antitrust violation under the
Sherman Act relating to Internet registration products and services. The CID
seeks documents and information from SAIC and Network Solutions relating to
their Internet registration business. Network Solutions cannot reasonably
estimate the potential impact of the investigation nor can it predict whether a
civil action will ultimately be filed by the Department of Justice or the form
of relief that might be sought. Any such relief could have a material adverse
effect on Network Solutions' business, financial condition and results of
operations.

On August 17, 1998, Network Solutions received notice from the Commission
of the European Communities, or "EC," of an investigation concerning Network
Solutions' Premier Program agreements in Europe. The EC requested production of
these agreements and related materials for review. Network Solutions cannot
reasonably estimate the potential impact of the investigation nor can Network
Solutions predict whether an action will ultimately be brought by the EC or the
form of relief that might be sought. Any such relief could harm Network
Solutions' business.

Network Solutions is involved in various other investigations, claims and
lawsuits arising in the normal conduct of business, none of which, in
management's opinion will harm Network Solutions' business.

Legal proceedings in which Network Solutions is involved have resulted and
likely will result in, and any future legal proceedings can be expected to
result in, substantial legal and other expenses and a diversion of the efforts
of Network Solutions' personnel.

NOTE 14 -- SUBSEQUENT EVENTS (UNAUDITED)

Secondary Stock Offering

On February 12, 1999, Network Solutions completed a secondary stock
offering in which a total of 9,160,000 shares of Class A common stock were sold.
Concurrent with the offering, SAIC converted 9,000,000 shares of Class B common
stock into 9,000,000 shares of Class A common stock sold in the offering. The
remaining 160,000 shares of Class A common stock were sold by other selling
stockholders after they exercised the applicable stock options simultaneously
with the closing of the offering. Network Solutions was not a selling
stockholder, and, therefore, did not receive any

F-21
<PAGE> 70
NETWORK SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 14 -- SUBSEQUENT EVENTS (UNAUDITED) -- (CONTINUED)
proceeds from the stock offering other than proceeds from options exercised as
part of the offering. After the offering, SAIC owns approximately 89% of the
combined voting power and approximately 45% of the economic interest of the
outstanding common stock.

By May 31, 1999, SAIC intends to convert all of the remaining Class B
common stock into an identical number of shares of Class A common stock. After
that conversion, Class A common stock will be the only class of common stock
outstanding and SAIC will own approximately 45% of the voting power and economic
interest of Network Solutions' outstanding common stock.

Litigation

On March 16, 1999, the United States District Court ruled in favor of
Network Solutions' and the National Science Foundation's motions for summary
judgment in the PG Media antitrust lawsuit. In the decision, Network Solutions
was found to be immune to antitrust violations of the Sherman Act for its
actions taken pursuant to the Cooperative Agreement.

F-22
<PAGE> 71

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C ADDITIONS COLUMN D COLUMN E
-------- ----------- ------------------------ ------------ -----------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- BALANCE AT
DESCRIPTION OF YEAR EXPENSES DESCRIBE DESCRIBE END OF YEAR
----------- ----------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1996
Allowance for
uncollectible
accounts, continuing
operations............ $ 2,118,000 $3,597,000 $19,270,000(1) $ 9,546,000(2) $15,439,000
Allowance for
uncollectible
accounts, included in
net assets
(liabilities) of
discontinued
operations............ 1,618,000 -- -- 1,618,000(3) --
Year ended December 31,
1997
Allowance for
uncollectible
accounts, continuing
operations............ 15,439,000 8,082,000 35,368,000(1) 41,033,000(2) 17,856,000
Year ended December 31,
1998
Allowance for
uncollectible
accounts, continuing
operations............ $17,856,000 $2,247,000 $68,480,000(1) $62,837,000(2) $25,746,000
</TABLE>

- ---------------
(1) Charged to allowance for deferred revenue (See Notes 1 and 3 of Notes to
Financial Statements).

(2) Amounts are write-offs of uncollectible accounts receivable.

(3) In November 1995 SAIC adopted a plan to transfer Network Solutions'
government-based business to SAIC in order for Network Solutions to focus on
the growth of the commercial business. Such transfer was substantially
completed as of February 1996.

F-23
<PAGE> 72

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.24 Amendment No. 12 to the Cooperative Agreement dated March
12, 1999.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule (in electronic format only).
27.2 Restated Financial Data Schedule (in electronic format
only).
27.3 Restated Financial Data Schedule (in electronic format
only).
</TABLE>

<PAGE> 1
EXHIBIT 10.24
<TABLE>
- ----------------------------------------------------------------------------------------------
<S> <C>
FORM CD-451 U.S. DEPARTMENT OF COMMERCE [ ] GRANT X COOPERATIVE AGREEMENT
(REV 10/98) --------------------------------------
AMENDMENT TO ACCOUNTING CODE
FINANCIAL ASSISTANCE AWARD N/A
--------------------------------------
AWARD NUMBER
NCR 92-18742
- ----------------------------------------------------------------------------------------------
RECIPIENT NAME AMENDMENT NUMBER
Network Solutions, Incorporated Twelve (12)
- ----------------------------------------------------------------------------------------------
STREET ADDRESS EFFECTIVE DATE
506 Huntmar Park Drive Upon Execution
- ----------------------------------------------------------------------------------------------
CITY, STATE, ZIP CODE EXTEND WORK COMPLETION TO
Herndon, Virginia 22070 N/A
- ----------------------------------------------------------------------------------------------
CFDA NO. AND PROJECT TITLE
11.- National Telecommunications and Information Administration
</TABLE>

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------

COSTS ARE REVISED PREVIOUS ADD DEDUCT TOTAL
AS FOLLOWS: N/A ESTIMATED COST ESTIMATED COST
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERAL SHARE OF COST $ $ $ $
- ----------------------------------------------------------------------------------------------
RECIPIENT SHARE OF COST $ $ $ $
- ----------------------------------------------------------------------------------------------
TOTAL ESTIMATED COST $ $ $ $
- ----------------------------------------------------------------------------------------------
</TABLE>

REASON(S) FOR AMENDMENT

To change the Federal Program Officer and Grants Officer stated in Amendment
Number 10, and revise Amendment Number 11, at no additional cost to the
Government, in accordance with the Recipient's December 18, 1998, and February
9, 1999 letters, which are incorporated into the award by reference.

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

This Amendment approved by the Grants Officer is issued in triplicate and
constitutes an obligation of Federal funding. By signing the three documents,
the Recipient agrees to comply with the Amendment provisions checked below and
attached, as well as previous provisions incorporated into the Award. Upon
acceptance by the Recipient, two signed Amendment documents shall be returned to
the Grants Officer and the third document shall be retained by the Recipient.
If not signed and returned without modification by the Recipient within 30 days
of receipt, the Grants Officer may unilaterally terminate this Amendment.

X Special Award Conditions

[ ] Line Item Budget

[ ] Other(s)
-------------------------------------------------------------------

<TABLE>
- ------------------------------------------------------------------------------------------------
<S> <C>
SIGNATURE OF DEPARTMENT OF COMMERCE GRANTS OFFICER DATE
Betty L. Cassidy /s/ BETTY L. CASSIDY 3/1/99
Acting Grants Officer, Office of Executive Assistance Management
- ------------------------------------------------------------------------------------------------
TYPED NAME, TYPED TITLE, AND SIGNATURE OF AUTHORIZED RECIPIENT OFFICIAL DATE
/s/ DM Graves 3/12/99
- ------------------------------------------------------------------------------------------------
</TABLE>

<PAGE> 2

SPECIAL AWARD CONDITIONS
NCR 92-18742
Amendment Number Twelve (12)

1. The Grants Officer's name, address, and telephone number are:

Betty L. Cassidy
Acting Grants Officer
U. S. Department of Commerce
Office of Executive Assistance Management
14th & Constitution Avenue, N.W., Room H6054
Washington, D.C. 20230
202 482-1370

2. The Federal Program Officer's name, address, and telephone number are:

Karen A. Rose
U. S. Department of Commerce
National Telecommunications and Information
Administration
14th Street & Constitution Avenue, N.W., Room H4701
Washington, D.C. 20230
202 482-1304

3. The time line for the development of the Shared Registration System stated
in Amendment Number 11, Shared Registry Section, is revised as follows:

2. BY DECEMBER 28, 1998, NSI shall create a focused input technical
advisory group consisting of not more than 10 individuals designated by
NewCo to comment on the design of and participate in testing of the Shared
Registration System.

3. BY APRIL 26, 1999, NSI will establish a test bed supporting actual
registration in .com, .net and .org by 5 registrars accredited by NewCo
(Accredited Registrars). (Phase 1)

4. BY JUNE 25, 1999, the Shared Registration System will be deployed by
NSI and available to support multiple licensed Accredited Registrars
offering registration services within the gTLDs for which NSI now acts as
a registry. (Phase 2)

5. BY OCTOBER 25, 1999, NSI will have completed reengineering of NSI's
registry/registrar interface and back end systems so as to assure that
NSI, acting as registry,

<PAGE> 3

- 2 -

shall give all licensed Accredited Registrars (including NSI acting as
registrar) equivalent access ("equal access") to registry services through
the Shared Registration System. Phase 3)

4. Except as modified by this amendment, the terms and conditions of this
Cooperative Agreement, as amended, are unchanged.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-43821 and No. 333-45873) of Network Solutions,
Inc. of our report dated February 5, 1999 appearing on page F-2 of this Form
10-K.

/s/PRICEWATERHOUSECOOPERS LLP

PRICEWATERHOUSECOOPERS LLP

McLean, VA
March 26, 1999

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,862
<SECURITIES> 118,808
<RECEIVABLES> 48,374
<ALLOWANCES> (25,746)
<INVENTORY> 0
<CURRENT-ASSETS> 198,807
<PP&E> 22,251
<DEPRECIATION> (6,246)
<TOTAL-ASSETS> 243,867
<CURRENT-LIABILITIES> 133,016
<BONDS> 0
0
0
<COMMON> 33,000
<OTHER-SE> 75,097
<TOTAL-LIABILITY-AND-EQUITY> 243,867
<SALES> 0
<TOTAL-REVENUES> 93,652
<CGS> 0
<TOTAL-COSTS> 38,530
<OTHER-EXPENSES> 35,662
<LOSS-PROVISION> 2,247
<INTEREST-EXPENSE> 116
<INCOME-PRETAX> 19,344
<INCOME-TAX> 8,109
<INCOME-CONTINUING> 11,235
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,235
<EPS-PRIMARY> .35
<EPS-DILUTED> .34

</TABLE>

<ARTICLE> 5
<LEGEND>
Restated Prior Period Financial Data Schedule to Reflect the Two-for-One Stock
Split Effected February 26, 1999.
</LEGEND>
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 41,146
<SECURITIES> 40,200
<RECEIVABLES> 23,648
<ALLOWANCES> (17,856)
<INVENTORY> 0
<CURRENT-ASSETS> 134,169
<PP&E> 9,383
<DEPRECIATION> (3,237)
<TOTAL-ASSETS> 149,620
<CURRENT-LIABILITIES> 83,222
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 47,639
<TOTAL-LIABILITY-AND-EQUITY> 149,620
<SALES> 0
<TOTAL-REVENUES> 45,326
<CGS> 0
<TOTAL-COSTS> 25,798
<OTHER-EXPENSES> 11,826
<LOSS-PROVISION> 8,082
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,702
<INCOME-TAX> 3,471
<INCOME-CONTINUING> 4,231
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,231
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16

</TABLE>

<ARTICLE> 5
<LEGEND>
Restated Prior Period Financial Data Schedule to Reflect the Two-for-One Stock
Split Effected February 26, 1999.
</LEGEND>
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,540
<SECURITIES> 0
<RECEIVABLES> 32,430
<ALLOWANCES> (15,439)
<INVENTORY> 0
<CURRENT-ASSETS> 56,603
<PP&E> 5,146
<DEPRECIATION> (2,880)
<TOTAL-ASSETS> 66,118
<CURRENT-LIABILITIES> 55,241
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 1,425
<TOTAL-LIABILITY-AND-EQUITY> 66,118
<SALES> 0
<TOTAL-REVENUES> 18,862
<CGS> 0
<TOTAL-COSTS> 14,666
<OTHER-EXPENSES> 6,464
<LOSS-PROVISION> 3,597
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,268)
<INCOME-TAX> (643)
<INCOME-CONTINUING> (1,625)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,625)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)

</TABLE>