LIBERATE TECHNOLOGIES, S-1/A, 2000-02-16

LIBERATE TECHNOLOGIES
S-1/A, 2000-02-16
PREPACKAGED SOFTWARE

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 16, 2000.

REGISTRATION NO. 333-95139
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2 TO
FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LIBERATE TECHNOLOGIES

(Exact name of Registrant as specified in its charter)
------------------------------

<TABLE>
<S> <C> <C>
DELAWARE 7372 94-3245315
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

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

MITCHELL E. KERTZMAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
LIBERATE TECHNOLOGIES
2 CIRCLE STAR WAY
SAN CARLOS, CALIFORNIA 94070-6200
(650) 701-4000
------------------------------

COPIES TO:

<TABLE>
<S> <C>
ROBERT V. GUNDERSON, JR., ESQ. MARK A. BERTELSEN, ESQ.
BROOKS STOUGH, ESQ. JOSE F. MACIAS, ESQ.
ANTHONY J. MCCUSKER, ESQ. DON S. WILLIAMS, ESQ.
RICHARD H. ZAMBOLDI, ESQ. MELISSA V. HOLLATZ, ESQ.
GUNDERSON DETTMER STOUGH ELISE M. BRINCK, ESQ.
VILLENEUVE FRANKLIN & HACHIGIAN, LLP WILSON SONSINI GOODRICH & ROSATI
155 CONSTITUTION DRIVE PROFESSIONAL CORPORATION
MENLO PARK, CALIFORNIA 94025 650 PAGE MILL ROAD
(650) 321-2400 PALO ALTO, CALIFORNIA 94304
(650) 493-9300
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ____________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________

If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.

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<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING OFFERS TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>

SUBJECT TO COMPLETION, DATED FEBRUARY 16, 2000

8,500,000 Shares

[LIBERATE TECHNOLOGIES LOGO]

Common Stock
-----------

We are selling 2,890,000 shares of common stock and the selling stockholders
are selling 5,610,000 shares of common stock. We will not receive any of the
proceeds from shares of common stock sold by the selling stockholders.

Our common stock is listed on The Nasdaq Stock Market's National Market
under the symbol "LBRT." On February 1, 2000, the last reported sale price of
our common stock was $78.00 per share.

The underwriters have an option to purchase a maximum of 1,275,000
additional shares to cover over-allotments of shares.

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6.

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO PROCEEDS TO
PRICE TO DISCOUNTS AND LIBERATE SELLING
PUBLIC COMMISSIONS TECHNOLOGIES STOCKHOLDERS
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Per Share............................ $ $ $ $
Total................................ $ $ $ $
</TABLE>

Delivery of the shares of common stock will be made on or about ,
2000.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

CREDIT SUISSE FIRST BOSTON

CHASE H&Q

DAIN RAUSCHER WESSELS

U.S. BANCORP PIPER JAFFRAY

The date of this prospectus is , 2000.
<PAGE>
--------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUMMARY.................... 3

RISK FACTORS.......................... 6

SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS.................. 17

USE OF PROCEEDS....................... 18

DIVIDEND POLICY....................... 18

PRICE RANGE OF COMMON STOCK........... 18

CAPITALIZATION........................ 19

DILUTION.............................. 20

SELECTED CONSOLIDATED
FINANCIAL DATA...................... 21

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 23

BUSINESS.............................. 40
</TABLE>

MANAGEMENT............................ 51

RELATED PARTY TRANSACTIONS............ 61

PRINCIPAL AND SELLING STOCKHOLDERS.... 66

DESCRIPTION OF CAPITAL STOCK.......... 69

SHARES ELIGIBLE FOR FUTURE SALE....... 72

UNDERWRITING.......................... 74

NOTICE TO CANADIAN RESIDENTS.......... 76

LEGAL MATTERS......................... 77

EXPERTS............................... 77

WHERE YOU CAN FIND MORE INFORMATION... 77

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
</TABLE>

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

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
<PAGE>
PROSPECTUS SUMMARY

YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND OUR FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN
THIS PROSPECTUS.

LIBERATE TECHNOLOGIES

We are a leading provider of a comprehensive software platform for
delivering Internet-enhanced content and applications to information
appliances, such as television set-top boxes, game consoles, smart phones
and personal digital assistants. Our software allows network operators, such
as telecommunications companies, cable and satellite television operators
and Internet service providers, or ISPs, and information appliance
manufacturers to provide consumers access to Internet-based applications and
services from anywhere at anytime.

Network operators are investing billions of dollars to deliver high
speed Internet access to their customers so that they can deliver new and
enhanced voice, video and data services. As a result, the number of U.S.
households with access to high speed networks is expected to grow
significantly. At the same time, network operators seek to deliver these
services to an increasing number of electronic devices being adopted by
consumers. These "information appliances," a new category of low-cost
devices used for everyday activities that are designed to be connected to
the Internet, are becoming increasingly popular with consumers. In
particular, network operators have identified the television as the most
attractive device for the delivery of these new services because it has
powerful sound and display capabilities and is so broadly owned.

We provide network operators and information appliance manufacturers
with a software platform that manages the delivery of Internet content and
applications to a large number of consumers employing many different
information appliances. Our platform includes server and client software and
adheres to Internet standards. Our server software is designed to allow
network operators to offer these services to millions of subscribers. Using
our client software, information appliance manufacturers can enhance their
products, even those with limited memory and computing resources, by adding
Internet capability. Our open platform also creates a uniform environment
for developers to enhance existing content and create new Internet
applications and services.

As of December 31, 1999, we have licensed our server and client software
to over 30 network operators and information appliance manufacturers. Our
network operator customers include America Online, Cable & Wireless,
Comcast, Cox Communications, MediaOne, NTL, STAR TV, Shaw Communications and
U S WEST. Our information appliance manufacturer customers include Acer,
General Instrument, Hughes Network Systems, Pace Micro Technology and
Philips Electronics. In addition, we have developed strategic alliances with
leading technology vendors such as Cisco Systems, Inktomi, Lucent
Technologies, Netscape, Oracle, Sun Microsystems and TiVo.

Our principal executive offices are located at 2 Circle Star Way, San
Carlos, California 94070 and our telephone number is (650) 701-4000. Our
World Wide Web address is www.liberate.com. Information on our web site does
not constitute part of this prospectus.

RECENT DEVELOPMENT

In January 2000, we entered into a Merger Agreement and Plan of
Reorganization to acquire SourceSuite for approximately 1,772,000 shares of
our common stock, or approximately $190.5 million based on a common stock
price of $107.53. The acquisition will be accounted for as a purchase. We
intend to hire various individuals who provide services to SourceSuite. Also
in connection with the acquisition, we expect to expense up to $4.0 million
of acquired in-process research and development, which in the opinion of our
management, has not reached technological feasibility and has no alternative
future use. We also expect to record goodwill and other intangibles of up to
$200.0 million to be amortized over an estimated economic life of three
years.

3
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THE OFFERING

<S> <C>
Common stock offered by Liberate..................... 2,890,000 shares
Common stock offered by the selling stockholders..... 5,610,000 shares
Common stock to be outstanding after
this offering...................................... 86,493,312 shares
Use of proceeds...................................... For general corporate purposes,
including the expansion of our
research and development and services
capabilities and other working capital
requirements. See "Use of Proceeds."
Nasdaq National Market symbol........................ LBRT
</TABLE>

The table above is based on shares outstanding as of December 31, 1999
as adjusted to give effect to our two-for-one stock split effected on
January 14, 2000. This table excludes:

- 14,404,351 shares of common stock issuable upon the exercise of stock
options outstanding under our stock option plans, and 2,120,266
additional shares of common stock available for issuance under these
stock option plans;

- 1,666,666 shares of common stock available for issuance under our 1999
employee stock purchase plan;

- 1,536,662 shares of common stock issuable upon the exercise of warrants
that have been earned by network operators;

- Warrants to purchase up to an aggregate of 3,063,330 shares of our
common stock that may be issued in the future if particular network
operator customers satisfy commercial milestones; and

- 1,772,000 shares of common stock to be issued in connection with the
closing of our pending acquisition of SourceSuite.

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

Except as otherwise indicated, information in this prospectus is based
on the following assumptions:

- A two-for-one stock split of all outstanding shares of our common stock
effected on January 14, 2000; and

- No exercise of the underwriters' option to acquire additional shares to
cover over-allotments of shares.

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

Our logo and certain titles and logos of our products mentioned in this
prospectus are our service marks or trademarks. Each trademark, trade name
or service mark of any other company appearing in this prospectus belongs to
its holder.

4
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
YEARS ENDED MAY 31, (UNAUDITED)
------------------------------------------ -------------------------------
1997 1998 1999 1998 1999
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ACTUAL PRO FORMA ACTUAL PRO FORMA
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<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenues........... $ 275 $ 10,272 $ 17,313 $ 17,313 $ 7,709 $ 11,362 $ 11,362
Gross margin............. 275 4,263 6,787 6,787 3,522 (439) (439)
Total operating
expenses............... 30,549 100,679 40,485 109,376 18,219 26,880 61,115
Loss from operations..... (30,274) (96,416) (33,698) (102,589) (14,697) (27,319) (61,554)
Net loss................. (18,989) (94,391) (33,053) (101,944) (13,990) (25,030) (59,265)
Pro forma basic net loss
per share.............. $ (0.58) $ (1.75) $ (0.25) $ (0.32) $ (0.75)
Shares used in computing
pro forma basic net
loss per share......... 56,586 58,358 55,286 77,776 79,548
</TABLE>

<TABLE>
<CAPTION>
NOVEMBER 30, 1999
(UNAUDITED)
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 40,947 $ 40,947 $255,349
Working capital......................................... 85,859 81,970 296,372
Total assets............................................ 154,433 346,932 561,334
Deferred revenues....................................... 34,350 34,350 34,350
Total stockholders' equity.............................. 105,585 294,130 508,532
</TABLE>

See Note 2 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used in computing
per share data.

The pro forma financial information reflects the acquisition of
SourceSuite and is derived from, and should be read in conjunction with, the
unaudited pro forma combined condensed financial statements of Liberate and
SourceSuite and the corresponding notes, which are included elsewhere in
this prospectus. In preparing the pro forma combined statement of operations
data, the SourceSuite results of operations have been included as if the
acquisition had occurred at the beginning of the earliest period presented.
The pro forma combined balance sheet data has been prepared as if the
acquisition had occurred as of November 30, 1999. The unaudited pro forma
information is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that
would have actually occurred if the acquisition had been consummated as of
the beginning of the earliest period presented or at November 30, 1999, nor
is it necessarily indicative of future operating results or our financial
position following the acquisition of SourceSuite.

The pro forma as adjusted consolidated balance sheet data gives effect
to the net proceeds from the sale of the 2,890,000 shares of common stock
offered in this offering by us, after deducting the underwriting discounts
and commissions and estimated offering expenses.

5
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RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE BUYING OUR COMMON
STOCK. THE RISKS DESCRIBED BELOW ARE INTENDED TO HIGHLIGHT RISKS THAT ARE
SPECIFIC TO US AND ARE NOT THE ONLY ONES THAT WE FACE. ADDITIONAL RISKS AND
UNCERTAINTIES, SUCH AS THOSE THAT GENERALLY APPLY TO OUR INDUSTRY OR TO
COMPANIES THAT HAVE RECENTLY UNDERTAKEN INITIAL PUBLIC OFFERINGS, ALSO MAY
IMPAIR OUR BUSINESS OPERATIONS. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION
SET FORTH IN THIS PROSPECTUS, INCLUDING THE DISCUSSIONS SET FORTH IN "SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS
WELL AS OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES. YOU SHOULD
RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT AUTHORIZED
ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.

THIS PROSPECTUS ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF FACTORS THAT ARE
DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS. SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS."

WE HAVE A LIMITED OPERATING HISTORY THAT MAKES AN EVALUATION OF OUR BUSINESS
DIFFICULT

We were incorporated in April 1996 and began shipping our initial products
to customers in the last quarter of fiscal 1997. Our limited operating history
makes evaluation of our business and prospects difficult. Companies in an early
stage of development frequently encounter heightened risks and unexpected
expenses and difficulties. For us, these risks include the:

- Limited number of network operators that have deployed products and
services incorporating our technology;

- Limited number of information appliance manufacturers that have
incorporated our technology into their products;

- Delays in deployment of high speed networks and Internet-enhanced services
and applications by our network operator customers; and

- Our unproven long-term business model, which depends on generating the
majority of our revenues from royalty fees paid by network operators and
information appliance manufacturers.

These risks, expenses and difficulties apply particularly to us because our
market, the information appliance software market, is new and rapidly evolving.

WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE

We incurred net losses of approximately $3.3 million in fiscal 1996, $19.0
million in fiscal 1997, $94.4 million in fiscal 1998, $33.1 million in fiscal
1999 and $25.0 million during the six months ended November 30, 1999. Our net
losses of $94.4 million in fiscal 1998 included a $58.1 million charge related
to acquired in-process research and development. As of November 30, 1999, we had
an accumulated deficit of approximately $174.7 million. Since our inception, we
have not had a profitable quarter and may never achieve or sustain
profitability. Although our revenues increased from fiscal 1997 to fiscal 1998
and from fiscal 1998 to fiscal 1999, we may not be able to sustain our
historical revenue growth rates. We also expect to continue to incur increasing
cost of revenues, research and development, sales and marketing and general and
administrative expenses. If we are to achieve profitability given our planned
expenditure levels, we will need to generate and sustain substantially increased
license and royalty revenues; however, we are unlikely to be able to do so for
the foreseeable future. As a result, we expect to incur significant and
increasing losses and negative cash flows for the foreseeable future. In
addition, from the beginning of fiscal 1997 through November 30, 1999,
approximately 66% of our revenues have been derived from services provided by us
and not from

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license and royalty fees paid by network operators and information appliance
manufacturers in conjunction with the deployment of products and services
incorporating our software products. If we are unable to derive a greater
proportion of our revenues from these license and royalty fees, our losses will
likely continue indefinitely.

OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR
STOCK PRICE TO FLUCTUATE

Our quarterly operating results have varied in the past and are likely to
vary significantly from quarter to quarter. As a result, we believe that
period-to-period comparisons of our operating results are not a good indication
of our future performance. Moreover, we expect to derive substantially all of
our revenues for the near term from license fees and related consulting and
support services. Over the longer term, to the extent deployments increase, we
expect to derive an increasing portion of our revenues from royalties paid by
network operators and information appliance manufacturers. If deployments do not
increase or this transition otherwise does not occur, we are unlikely to be able
to generate or sustain substantially increased revenue and our operating results
will be seriously harmed.

In the short term, we expect our quarterly revenues to be significantly
dependent on a small number of relatively large orders for our products and
services, which generally have a long sales cycle. As a result, our quarterly
operating results may fluctuate significantly if we are unable to complete one
or more substantial sales in any given quarter. In many cases, we recognize
revenues from services on a percentage of completion basis. Our ability to
recognize these revenues may be delayed if we are unable to meet service
milestones on a timely basis. Moreover, because our expenses are relatively
fixed in the near term, any shortfall from anticipated revenues could result in
losses for the quarter.

Although we have limited historical financial data, in the past we have
experienced seasonality in our quarter ending August 31. These seasonal trends
may continue to affect our quarter-to-quarter revenues.

THE MARKET FOR INFORMATION APPLIANCES IS NEW AND MAY NOT DEVELOP AS WE
ANTICIPATE

Because the information appliance market is newly emerging, the potential
size of this new market opportunity and the timing of its development are
uncertain. As a result, our profit potential is unproven. We are dependent upon
the commercialization and broad acceptance by consumers and businesses of a wide
variety of information appliances including, among others, television set-top
boxes, game consoles, smart phones and personal digital assistants. Initial
commercialization efforts in this industry have been primarily focused on
television set-top boxes. Broad acceptance of all information appliances,
particularly television set-top boxes, will depend on many factors. These
factors include:

- The willingness of large numbers of consumers to use devices other than
personal computers to access the Internet;

- The development of content and applications for information appliances;
and

- The emergence of industry standards that facilitate the distribution of
content over the Internet to these devices.

If the market for information appliances does not develop or develops more
slowly than we anticipate, our revenues will not grow as fast as anticipated, if
at all.

OUR SUCCESS DEPENDS ON NETWORK OPERATORS INTRODUCING, MARKETING AND PROMOTING
PRODUCTS AND SERVICES FOR INFORMATION APPLIANCES BASED ON OUR TECHNOLOGY

Our success depends on large network operators introducing, marketing and
promoting products and services based on our technology. There are, however,
only a limited number of large network

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operators worldwide. Moreover, only a limited number of network operators have
introduced or are in the process of deploying products and services
incorporating our technology and services for information appliances. In
addition, none of our network operator customers is contractually obligated to
introduce, market or promote products and services incorporating our technology,
nor are any of our network operator customers contractually required to achieve
any specific introduction schedule. Accordingly, even if a network operator
initiates a customer trial of products incorporating our technology, that
operator is under no obligation to continue its relationship with us or to
launch a full-scale deployment of these products. Further, our agreements with
network operators are not exclusive, so network operators with whom we have
agreements may enter into similar license agreements with one or more of our
competitors.

Moreover, because the large scale deployment of products and services
incorporating our technology by network operators is complex, time consuming and
expensive, each deployment of these products and services requires our expertise
to tailor our technology to the customer's particular product offering. This
customization process requires a lengthy and significant commitment of resources
by our customers and us. This commitment of resources may slow deployment, which
could, in turn, delay market acceptance of these products and services. Unless
network operators introduce, market and promote products and services
incorporating our technology in a successful and timely manner, our software
platform will not achieve widespread acceptance, information appliance
manufacturers will not use our software in their products and our revenues will
not grow as fast as anticipated, if at all.

IF INFORMATION APPLIANCE MANUFACTURERS DO NOT MANUFACTURE PRODUCTS THAT
INCORPORATE OUR TECHNOLOGY, OR IF THESE PRODUCTS DO NOT ACHIEVE ACCEPTANCE, WE
MAY NOT BE ABLE TO SUSTAIN OR GROW OUR BUSINESS

We do not manufacture hardware components that incorporate our technology.
Rather, we license software technology to information appliance manufacturers.
Accordingly, our success will depend, in part, upon our ability to convince a
number of information appliance manufacturers to manufacture products
incorporating our technology and the successful introduction and commercial
acceptance of these products. Our efforts in this regard are significantly
dependent on network operators deploying services using our server software.

While we have entered into a number of agreements with information appliance
manufacturers, none of these manufacturers is contractually obligated to
introduce or market information appliances incorporating our technology, nor is
any of them contractually required to achieve any specific production schedule.
Moreover, our agreements with information appliance manufacturers are not
exclusive, so information appliance manufacturers with whom we have agreements
may enter into similar license agreements with one or more of our competitors.
Our failure to convince information appliance manufacturers to incorporate our
software platform into their products, or the failure of these products to
achieve broad acceptance with consumers and businesses, will result in revenues
that do not grow as fast as expected, if at all.

COMPETITION FROM BIGGER, BETTER CAPITALIZED COMPETITORS COULD RESULT IN PRICE
REDUCTIONS, REDUCED GROSS MARGINS AND LOSS OF MARKET SHARE

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Many of our existing and potential competitors, particularly Microsoft, have
longer operating histories, a larger customer base, greater name recognition and
significantly greater financial, technical, sales and marketing and other
resources than we do. This may place us at a disadvantage in responding to our
competitors' pricing strategies, technological advances, advertising campaigns,
strategic partnerships and other initiatives. In addition, many of our
competitors have well-established relationships with our current and potential
customers. Moreover, some of our competitors, particularly Microsoft, have
significant financial resources, which have enabled them in the past and may
enable them in the future to make large strategic investments in our current and
potential customers. Such investments may enable competitors to strengthen
existing relationships or quickly establish new relationships with our current
or potential customers. For example, as a result of an investment in AT&T,
Microsoft obtained a nonexclusive licensing agreement under which AT&T will
purchase at least 7.5 million licenses of Microsoft software for television set
top boxes. Investments such as this may discourage our potential or current
customers who receive the investment from deploying our information appliance
software, regardless of their views of the relative merits of our products and
services.

ORACLE'S OWNERSHIP OF OUR STOCK AND OTHER RELATIONSHIPS WITH US COULD LIMIT THE
ABILITY OF OTHER STOCKHOLDERS TO INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND
OTHER TRANSACTIONS SUBMITTED FOR A VOTE OF OUR STOCKHOLDERS

Based on 86,493,312 shares outstanding on December 31, 1999, as adjusted for
the 2,890,000 shares to be offered by us in this offering, Oracle will
beneficially own 35,375,921 shares, approximately 40.9% of our outstanding
common stock following this offering. In addition, in May 1999, we entered into
a voting agreement with Oracle, Comcast, Cox Communications and MediaOne. Under
this agreement, among other things, Comcast, Cox and MediaOne have agreed to
vote the shares of our common stock held by them in order to elect a
representative designated by Oracle to our board of directors. Currently, two of
our seven directors are directors and officers of Oracle. As a result, Oracle,
acting both through our board of directors and through its ownership of our
capital stock, may exert significant influence over us. This concentration of
ownership could also have the effect of delaying or preventing a third party
from acquiring control over us at a premium over the then current market price
of our common stock.

In addition, Oracle provides us with a distribution channel for our products
in Asia/Pacific and assists us in providing our customers with support. We have
also entered into several commercial, technological and financial arrangements
with Oracle on which our business depends. If Oracle terminates these
arrangements, if Oracle does not fulfill its obligations under these
arrangements, if Oracle ever acts in a way that is adverse to our interests, or
if we are no longer eligible to receive the benefits of these arrangements, we
may need to find alternative distribution channel partners, seek alternative
technologies for our products and services and find alternative financial
resources.

WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON A LIMITED NUMBER OF CUSTOMERS
FOR A SIGNIFICANT PORTION OF OUR REVENUES

We currently derive, and we expect to continue to derive, a significant
portion of our revenues from a limited number of customers. For the six months
ended November 30, 1999, our five largest customers accounted for approximately
54% of our revenues, with Wind River Systems accounting for 18% of our total
revenues and Cable & Wireless accounting for 14% of our total revenues. For the
six months ended November 30, 1998, our five largest customers accounted for
approximately 61% of our total revenues, with Wind River Systems accounting for
26% of our total revenues and Nintendo accounting for 11% of our total revenues.
We expect that we will continue to be dependent upon a limited number of
customers for a significant portion of our revenues in future periods, although
the customers may vary from period to period. As a result, if we fail to
successfully sell our products and

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services to one or more customers in any particular period, or a large customer
purchases less of our products or services, defers or cancels orders, or
terminates its relationship with us, our revenues could decline significantly.

OUR LENGTHY SALES CYCLE MAY CAUSE FLUCTUATIONS IN OUR OPERATING RESULTS, WHICH
COULD CAUSE OUR STOCK PRICE TO DECLINE

We believe that the purchase of our products and services involves a
significant commitment of capital and other resources by a customer. In many
cases, the decision for our customers to use our products and services requires
them to change their established business practices and conduct their business
in new ways. As a result, we may need to educate our potential customers on the
use and benefits of our products and services. In addition, our customers
generally must consider a wide range of other issues before committing to
purchase and incorporate our technology into their offerings. As a result of
these and other factors, including the approval at a number of levels of
management within a customer's organization, our sales cycle averages from six
to twelve months and may sometimes be significantly longer. Because of the
length of our sales cycle, we have a limited ability to forecast the timing and
amount of specific sales.

In addition, we base our quarterly revenue projections, in part, upon our
expectation that specific sales will occur in a particular quarter. In the past,
our sales have occurred in quarters other than those anticipated by us. If our
expectations, and thus our revenue projections, are not accurate for a
particular quarter, our actual operating results for that quarter could fall
below the expectations of financial analysts and investors.

DEMAND FOR OUR PRODUCTS AND SERVICES WILL DECLINE SIGNIFICANTLY IF OUR SOFTWARE
CANNOT SUPPORT AND MANAGE A SUBSTANTIAL NUMBER OF USERS

Despite frequent testing of our software's scalability in a laboratory
environment, the ability of our software platform to support and manage a
substantial number of users in an actual deployment is uncertain. If our
software platform does not efficiently scale to support and manage a substantial
number of users while maintaining a high level of performance, demand for our
products and services and our ability to sell additional products to our
existing customers will be significantly reduced.

INTERNATIONAL REVENUES ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUES;
ACCORDINGLY, IF WE ARE UNABLE TO EXPAND OUR INTERNATIONAL OPERATIONS IN A TIMELY
MANNER, OUR GROWTH IN INTERNATIONAL REVENUES WILL BE LIMITED

International revenues accounted for approximately 48% of our total revenues
for the six months ended November 30, 1999, and approximately 55% for the six
months ended November 30, 1998. We anticipate that a significant portion of our
revenues for the foreseeable future will be derived from sources outside the
United States, especially as we increase our sales and marketing activities with
respect to international licensing of our technology. Accordingly, our success
will depend, in part, upon international economic conditions and upon our
ability to manage international sales and marketing operations. To successfully
expand international sales, we must establish additional foreign operations,
hire additional personnel and increase our foreign direct and indirect sales
forces. This expansion will require significant management attention and
resources, which could divert attention from other aspects of our business. To
the extent we are unable to expand our international operations in a timely
manner, our growth in international sales, if any, will be limited.

Moreover, substantially all of our revenues and costs to date have been
denominated in U.S. dollars. However, expanded international operations may
result in increased foreign currency payables. Although we may from time to time
undertake foreign exchange hedging transactions to cover a portion of our
foreign currency transaction exposure, we do not currently attempt to cover
potential

10
<PAGE>
foreign currency exposure. Accordingly, any fluctuation in the value of foreign
currency could seriously harm our ability to increase international revenues.

WE MAY HAVE TO CEASE OR DELAY PRODUCT SHIPMENTS IF WE ARE UNABLE TO OBTAIN KEY
TECHNOLOGY FROM THIRD PARTIES

We rely on technology licensed from third parties, including applications
that are integrated with internally developed software and used in our products.
Most notably, we license certain Java and Jini technologies from Sun
Microsystems, VxWorks real time operating system from Wind River Systems, font
technology from BitStream and multimedia architecture from RealNetworks. These
third party technology licenses may not continue to be available to us on
commercially reasonable terms, or at all, and we may not be able to obtain
licenses for other existing or future technologies that we desire to integrate
into our products. If we cannot maintain existing third party technology
licenses or enter into licenses for other existing or future technologies needed
for our products we would be required to cease or delay product shipments while
we seek to develop alternative technologies.

WE DO NOT CURRENTLY HAVE LIABILITY INSURANCE TO PROTECT AGAINST THIRD PARTY
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT COULD BE EXPENSIVE TO DEFEND

We expect that, like other software product developers, we will increasingly
be subject to infringement claims as the number of products and competitors
developing information appliance software grows and the functionality of
products in different industry segments overlaps. From time to time, we hire or
retain employees or external consultants who have worked for independent
software vendors or other companies developing products similar to those offered
by us. These prior employers may claim that our products are based on their
products and that we have misappropriated their intellectual property. We cannot
guarantee that:

- An infringement claim will not be asserted against us in the future;

- The assertion of such a claim will not result in litigation;

- We would prevail in such litigation; or

- We would be able to obtain a license for the use of any infringed
intellectual property from a third party on commercially reasonable terms,
or at all.

We currently do not have liability insurance to protect against the risk
that licensed third party technology infringes the intellectual property of
others. Any claims relating to our intellectual property, regardless of their
merit, could seriously harm our ability to develop and market our products and
manage our day-to-day operations because they could:

- Be time consuming and costly to defend;

- Divert management's attention and resources;

- Cause product shipment delays;

- Require us to redesign our products; or

- Require us to enter into royalty or licensing agreements.

WE COULD SUFFER LOSSES AND NEGATIVE PUBLICITY IF OUR TECHNOLOGY CAUSES A FAILURE
OF OUR NETWORK OPERATOR CUSTOMERS' SYSTEMS

Our technology is integrated into the products and services of our network
operator customers. Accordingly, a defect, error or performance problem with our
technology could cause our customers' telecommunication, cable and satellite
television or Internet service systems to fail for a period of time.

11
<PAGE>
Any such failure will cause severe customer service and public relations
problems for our customers. As a result, any failure of our network operator
customers' systems caused by our technology could result in:

- Delayed or lost revenue due to adverse customer reaction;

- Negative publicity regarding us and our products and services; and

- Claims for substantial damages against us, regardless of our
responsibility for such failure.

Any claim could be expensive and require the expenditure of a significant amount
of resources regardless of whether we prevail. We currently do not have
liability insurance to protect against this risk.

OUR SUCCESS DEPENDS ON OUR ABILITY TO KEEP PACE WITH THE LATEST TECHNOLOGICAL
CHANGES BUT WE HAVE EXPERIENCED AND MAY IN THE FUTURE EXPERIENCE DELAYS IN
COMPLETING DEVELOPMENT AND INTRODUCTION OF NEW SOFTWARE PRODUCTS

The market for information appliance software is characterized by evolving
industry standards, rapid technological change and frequent new product
introductions and enhancements. Our technology enables network operators to
deliver content and applications to information appliances over the Internet.
Accordingly, our success will depend in large part upon our ability to adhere to
and adapt our products to evolving Internet protocols and standards. Therefore,
we will need to develop and introduce new products that meet changing customer
requirements and emerging industry standards on a timely basis. In the past, we
have experienced delays in completing the development and introduction of new
software products. We may encounter such delays in the development and
introduction of future products as well. In addition, we may:

- Fail to design our current or future products to meet customer
requirements;

- Fail to develop and market products and services that respond to
technological changes or evolving industry standards in a timely or cost
effective manner; and

- Encounter products, capabilities or technologies developed by others that
render our products and services obsolete or noncompetitive or that
shorten the life cycles of our existing products and services.

OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
MAY HARM OUR COMPETITIVENESS

Our ability to compete and continue to provide technological innovation is
substantially dependent upon internally developed technology. We rely primarily
on a combination of patents, trademark laws, copyright laws, trade secrets,
confidentiality procedures and contractual provisions to protect our proprietary
technology. In addition, we have been awarded two patents and have 17 patent
applications pending in the U. S. Patent & Trademark Office. Patents may not be
issued from these or any future applications. Even if they are issued, these
patents may not survive a legal challenge to their validity or provide
significant protection for us.

The steps we have taken to protect our proprietary rights may not be
adequate to prevent misappropriation of our proprietary information. Further, we
may not be able to detect unauthorized use of, or take appropriate steps to
enforce, our intellectual property rights. Our competitors may also
independently develop similar technology. In addition, the laws of many
countries do not protect our proprietary rights to as great an extent as do the
laws of the United States. Any failure by us to meaningfully protect our
intellectual property could result in competitors offering products that
incorporate our most technologically advanced features, which could seriously
reduce demand for our products and services.

12
<PAGE>
FAILURE TO MANAGE OUR GROWTH MAY SERIOUSLY HARM OUR ABILITY TO DELIVER PRODUCTS
IN A TIMELY MANNER, FULFILL EXISTING CUSTOMER COMMITMENTS AND ATTRACT AND RETAIN
NEW CUSTOMERS

Our rapid growth has placed, and is expected to continue to place, a
significant strain on our managerial, operational and financial resources,
especially as more network operators and information appliance manufacturers
incorporate our software into their products and services. This potential for
rapid growth is particularly significant in light of the large customer bases of
network operators and information appliance manufacturers and the frequent need
to tailor our products and services to our customers' unique needs. To the
extent we add several customers simultaneously or add customers whose product
needs require extensive customization, we may need to significantly expand our
operations. Moreover, we expect to significantly expand our domestic and
international operations by, among other things, expanding the number of
employees in professional services, research and development and sales and
marketing.

This additional growth will place a significant strain on our limited
personnel, financial and other resources. Our future success will depend, in
part, upon the ability of our senior management to manage growth effectively.
This will require us to implement additional management information systems, to
further develop our operating, administrative, financial and accounting systems
and controls, to hire additional personnel, to develop additional levels of
management within the corporation, to locate additional office space in the
United States and internationally and to maintain close coordination among our
development, accounting, finance, sales and marketing, consulting services and
customer service and support organizations. Failure to accomplish any of these
requirements would seriously harm our ability to deliver products in a timely
fashion, fulfill existing customer commitments and attract and retain new
customers.

THE LOSS OF ANY OF OUR KEY PERSONNEL WOULD HARM OUR COMPETITIVENESS

We believe that our success will depend on the continued employment of our
senior management team and key technical personnel, none of whom, except
Mitchell E. Kertzman, our President and Chief Executive Officer, and Coleman
Sisson, our Chief Operating Officer, has an employment agreement with us. If one
or more members of our senior management team or key technical personnel were
unable or unwilling to continue in their present positions, these individuals
would be very difficult to replace and our ability to manage day-to-day
operations, develop and deliver new technologies, attract and retain customers,
attract and retain other employees and generate revenues, would be seriously
harmed.

OUR PLANNED EXPANSION OF OUR INDIRECT DISTRIBUTION CHANNELS WILL BE EXPENSIVE
AND MAY NOT SUCCEED

To date, we have sold our products and services principally through our
direct sales force. In the future, we intend to expand the number and reach of
our indirect channel partners, primarily overseas, through distribution
agreements similar to the one we have with Oracle. The development of these
indirect channels will require the investment of significant company resources,
which could seriously harm our business if our efforts do not generate
significant revenues. Moreover, we may not be able to attract indirect channel
partners that will be able to effectively market our products and services. The
failure to recruit indirect channel partners that are able to successfully
market our products and services could seriously hinder the growth of our
business.

WE MAY NEED TO MAKE ACQUISITIONS IN ORDER TO REMAIN COMPETITIVE IN OUR MARKET
AND ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS AND
DILUTE STOCKHOLDER VALUE

In addition to our pending acquisition of SourceSuite, we may acquire other
businesses in the future in order to remain competitive or to acquire new
technologies. As a result of future acquisitions,

13
<PAGE>
we may need to integrate product lines, technologies, widely dispersed
operations and distinct corporate cultures. In addition, the product lines or
technologies of future acquisitions may need to be altered or redesigned in
order to be made compatible with our software products or the software
architecture of our customers. These integration efforts may not succeed or may
distract our management from operating our existing business. Our failure to
successfully manage future acquisitions could seriously harm our operating
results. In addition, our stockholders would be diluted if we finance
acquisitions by incurring convertible debt or issuing equity securities.

WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE SOURCESUITE INTO OUR BUSINESS OR
ACHIEVE THE EXPECTED BENEFITS OF THE SOURCESUITE ACQUISITION

Our acquisition of SourceSuite, if completed, will require integrating our
business with theirs, including integrating product lines, technologies, widely
dispersed operations and distinct corporate cultures. We may not be able to
successfully assimilate the personnel, operations and customers of SourceSuite
into our business. Additionally, we may fail to achieve the anticipated
synergies from the acquisition of SourceSuite, including product development and
other operational synergies. The integration process may further strain our
existing financial and managerial controls and reporting systems and procedures.
This may result in the diversion of management and financial resources from our
core business objectives. In addition, we are not experienced in managing
significant facilities or operations in geographically distant areas. We may not
be able to retain various individuals who provide services to SourceSuite that
we intend to hire in connection with this acquisition. Our failure to
successfully manage the SourceSuite acquisition could seriously harm our
operating results. In addition, the issuance of 1,772,000 shares of our common
stock in connection with the closing of the SourceSuite acquisition will result
in dilution to existing stockholders.

WE MAY INCUR NET LOSSES OR INCREASED NET LOSSES IF WE ARE REQUIRED TO RECORD A
SIGNIFICANT ACCOUNTING EXPENSE RELATED TO THE ISSUANCE OF WARRANTS

Under letter agreements with several network operators entered into in
April and May 1999, we agreed to issue warrants to purchase up to an aggregate
of 4,599,992 shares of our common stock that are exercisable if those network
operators satisfy commercial milestones. In the event the milestones are met, we
will be required to record a significant non-cash accounting expense over the
estimated economic life of the arrangements with the network operators, which
would be equal to the value of the warrants at the time the milestones are
satisfied. If we are required to record non-cash accounting expenses related to
these warrants, we could incur net losses or increased net losses for a given
period and this could seriously harm our operating results and stock price. As
of November 30, 1999, warrants to purchase up to 749,998 shares of our common
stock were earned by four network operators for signing license agreements. In
connection with these warrants, approximately $18,000 was recorded as a charge
to operations during fiscal 1999 and approximately $1.1 million was recorded as
a charge to operations during the first six months of fiscal 2000.

In December 1999, additional warrants to purchase 786,664 shares of common
stock at $6.90 per share were earned by two network operators in connection with
their payment of prepaid royalty fees. The fair value of these warrants is
estimated to be approximately $100.0 million, which will be amortized over the
estimated economic life of these arrangements. A portion of these fully vested
warrants, valued at approximately $27.5 million, was exercised in January 2000.

DEMAND FOR OUR PRODUCTS AND SERVICES WILL NOT INCREASE IF THE INTERNET DOES NOT
CONTINUE TO GROW AND IMPROVE

Acceptance of our software platform depends substantially upon the
widespread adoption of the Internet for commerce, communications and
entertainment. As is typical in the case of an emerging industry characterized
by rapidly changing technology, evolving industry standards and frequent new

14
<PAGE>
product and service introductions, demand for and acceptance of recently
introduced Internet products and services are subject to a high level of
uncertainty. In addition, critical issues concerning the commercial use of the
Internet remain unresolved and may affect the growth of Internet use, especially
in the consumer markets we target. The adoption of the Internet for commerce,
communications and access to content and applications, particularly by those
that have historically relied upon alternative means of commerce, communications
and access to content and applications, generally requires understanding and
acceptance of a new way of conducting business and exchanging information.
Moreover, widespread application of the Internet outside of the United States
will require reductions in the cost of Internet access to prices affordable to
the average consumer.

To the extent that the Internet continues to experience an increase in
users, an increase in frequency of use or an increase in the amount of data
transmitted by users, we cannot guarantee that the Internet infrastructure will
be able to support the demands placed upon it. In addition, the Internet could
lose its viability as a commercial medium due to delays in development or
adoption of new standards or protocols required to handle increased levels of
Internet activity, or due to increased government regulation. Changes in, or
insufficient availability of, telecommunications or similar services to support
the Internet could also result in slower response times and could adversely
impact use of the Internet generally. If use of the Internet does not continue
to grow or grows more slowly than expected, or if the Internet infrastructure,
standards, protocols or complementary products, services or facilities do not
effectively support any growth that may occur, demand for our products and
services will decline significantly.

INCREASING GOVERNMENT REGULATION COULD CAUSE DEMAND FOR OUR PRODUCTS AND
SERVICES TO DECLINE SIGNIFICANTLY

We are subject not only to regulations applicable to businesses generally,
but also laws and regulations directly applicable to the Internet. Although
there are currently few such laws and regulations, state, federal and foreign
governments may adopt a number of these laws and regulations governing any of
the following issues:

- User privacy;

- Copyrights;

- Consumer protection;

- Taxation of e-commerce;

- The online distribution of specific material or content; and

- The characteristics and quality of online products and services.

We do not engage in e-commerce, nor do we distribute content over the
Internet. However, one or more states or the federal government could enact
regulations aimed at companies, like us, which provide software that facilitates
e-commerce and the distribution of content over the Internet. The likelihood of
such regulation being enacted will increase as the Internet becomes more
pervasive and extends to more people's daily lives. Any such legislation or
regulation could dampen the growth of the Internet and decrease its acceptance
as a communications and commercial medium. If such a reduction in growth occurs,
demand for our products and services will decline significantly.

WE EXPECT OUR OPERATIONS TO CONTINUE TO PRODUCE NEGATIVE CASH FLOW;
CONSEQUENTLY, IF WE CANNOT RAISE ADDITIONAL CAPITAL, WE MAY NOT BE ABLE TO FUND
OUR CONTINUED OPERATIONS

Since our inception, cash used in our operations has substantially exceeded
cash received from our operations, and we expect this trend to continue for the
foreseeable future. We expect that the net proceeds from this offering and our
initial public offering will be sufficient to meet our working capital

15
<PAGE>
and capital expenditure needs for at least the 12 months following this
offering. After that, we may need to raise additional funds, and we cannot be
certain that we will be able to obtain additional financing on favorable terms,
or at all. If we need additional capital and cannot raise it on acceptable
terms, we may not be able to, among other things:

- Develop or enhance our products and services;

- Acquire complementary technologies, products or businesses;

- Open new offices, in the United States or internationally;

- Hire, train and retain employees; or

- Respond to competitive pressures or unanticipated requirements.

PROVISIONS OF OUR CORPORATE DOCUMENTS AND DELAWARE LAW COULD DETER TAKEOVERS AND
PREVENT YOU FROM RECEIVING A PREMIUM FOR YOUR SHARES

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

WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK
PRICE VOLATILITY

In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. This risk is especially acute for us because technology companies
have experienced greater than average stock price volatility in recent years
and, as a result, have been subject to, on average, a greater number of
securities class action claims than companies in other industries. Due to the
potential volatility of our stock price, we may in the future be the target of
similar litigation. Securities litigation could result in substantial costs and
divert management's attention and resources.

OUR STOCK PRICE COULD DECLINE BY SHARES BECOMING AVAILABLE FOR SALE IN THE
FUTURE

A substantial number of shares of our common stock will become available for
sale on the date of this prospectus, or within 90 days thereafter. For a more
detailed discussion of shares becoming available for sale in the future, see
"Shares Eligible for Future Sale."

16
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements in "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks outlined
under "Risk Factors," that may cause our or our industry's actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels or activity, performance or achievements expressed or
implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform these statements to actual results.

17
<PAGE>
USE OF PROCEEDS

The net proceeds to us from the sale of the 2,890,000 shares of common stock
in this offering are approximately $214.4 million assuming an offering price per
share of $78.00, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses. We will receive no proceeds from
the exercise of the underwriters' over-allotment option. We will not receive any
proceeds from the sale of shares by the selling stockholders.

We intend to use the proceeds from this offering for general corporate
purposes, including the expansion of our research and development and service
capabilities and other working capital requirements. However, we currently have
no specific plan for any of the proceeds. A portion of the proceeds may also be
used to acquire or invest in complementary businesses or products or to obtain
the right to use complementary technologies. We have no specific understandings,
commitments or agreements with respect to any such acquisition or investment.
Pending such uses, we will invest the proceeds of this offering in short-term,
interest-bearing, investment-grade securities, certificates of deposit or direct
or guaranteed obligations of the United States.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.

PRICE RANGE OF COMMON STOCK

Our common stock began trading publicly on the Nasdaq National Market under
the symbol "LBRT" on July 28, 1999. The following table shows the high and low
per share closing prices of our common stock for the periods indicated.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 2000
First Fiscal Quarter (beginning July 28, 1999)............ 13.50 7.69
Second Fiscal Quarter..................................... 84.19 13.63
Third Fiscal Quarter (through February 1, 2000)........... 128.53 69.06
</TABLE>

On February 1, 2000, the last reported sale price for our common stock on
the Nasdaq National Market was $78.00 per share. On December 31, 1999, there
were approximately 253 holders of record of the common stock.

18
<PAGE>
CAPITALIZATION

The following table sets forth the following information:

- Our actual capitalization as of November 30, 1999;

- The pro forma capitalization of Liberate as of November 30, 1999, giving
effect to the pending acquisition of SourceSuite; and

- Our pro forma as adjusted capitalization to give effect to the sale of
2,890,000 shares of common stock by us at an assumed public offering price
of $78.00 per share, less the underwriting discounts and commissions and
estimated offering expenses.

<TABLE>
<CAPTION>
AS OF NOVEMBER 30, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term portion of capital leases......................... $ 486 $ 502 $ 502
--------- --------- ---------
Stockholders' equity:
Convertible preferred stock, $.01 par value per share,
20,000,000 shares authorized, no shares outstanding
actual, pro forma and pro forma as adjusted............. -- -- --
Common stock, $.01 par value per share,
200,000,000 shares authorized, 83,583,854 shares
outstanding actual; 85,355,854 shares outstanding pro
forma; 88,245,854 shares outstanding pro forma as
adjusted................................................ 836 854 882
Contributed and paid-in capital........................... 282,885 473,412 687,786
Deferred stock compensation............................... (6,858) (6,858) (6,858)
Warrants.................................................. 3,687 3,687 3,687
Stockholder notes receivable.............................. (198) (198) (198)
Accumulated comprehensive income.......................... (25) (25) (25)
Accumulated deficit....................................... (174,742) (176,742) (176,742)
--------- --------- ---------
Total stockholders' equity.............................. 105,585 294,130 508,532
--------- --------- ---------
Total capitalization.................................. $ 106,071 $ 294,632 $ 509,034
========= ========= =========
</TABLE>

This table excludes the following shares:

- 14,324,842 shares of common stock issuable upon the exercise of stock
options outstanding under our stock option plans, and 2,239,166 additional
shares of common stock available for issuance under these stock option
plans;

- 1,666,666 shares of common stock available for issuance under our 1999
employee stock purchase plan;

- 749,998 shares of common stock issuable upon exercise of warrants that
have been earned by network operators; and

- Warrants to purchase up to an aggregate of an additional 3,849,994 shares
of our common stock that may be issued if particular network operator
customers satisfy commercial milestones.

19
<PAGE>
DILUTION

On a pro forma basis as of November 30, 1999, after giving effect to the
pending acquisition of SourceSuite, the pro forma net tangible book value of our
common stock was approximately $94.9 million, or approximately $1.11 per share.
Pro forma net tangible book value per share represents the amount of our total
tangible assets less total liabilities, divided by the number of shares of
common stock outstanding. Dilution in pro forma net tangible book value per
share represents the difference between the amount per share paid by purchasers
of shares of common stock in this offering and the net tangible book value per
share of our common stock immediately afterwards. After giving effect to our
sale of 2,890,000 shares of common stock offered by this prospectus and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable, our net tangible book value at November 30, 1999
would have been approximately $309.3 million, or $3.51 per share. This
represents an immediate increase in net tangible book value of $2.40 per share
to existing stockholders and immediate dilution in net tangible book value of
$74.49 per share to new investors purchasing shares of common stock in this
offering. The following table illustrates this dilution:

<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $78.00
Pro forma net tangible book value per share as of November
30, 1999................................................ $1.11
Increase per share attributable to new investors.......... 2.40
-----
Pro forma net tangible book value per share after this
offering.................................................. 3.51
------
Dilution in pro forma net tangible book value per share to
new investors............................................. $74.49
======
</TABLE>

This table excludes options to purchase 14,324,842 shares of our common
stock and warrants to purchase 749,998 shares of our common stock that were
earned prior to November 30, 1999 and will remain outstanding upon the
completion of this offering. The exercise of outstanding options and warrants
having an exercise price less than the offering price would increase the
dilutive effect to new investors.

20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial data included elsewhere in this prospectus. The
consolidated statement of operations data for the years ended May 31, 1997, 1998
and 1999 and the consolidated balance sheet data at May 31, 1998 and 1999, are
derived from audited consolidated financial statements included elsewhere in
this prospectus. The consolidated statements of operations data for the period
from our inception on December 1, 1995 to May 31, 1996, and the consolidated
balance sheet data at May 31, 1996 and 1997, are derived from audited
consolidated financial statements not included in this prospectus. The
consolidated financial statements as of and for the year ended May 31, 1998,
have been restated to give retroactive effect to the change in accounting for
our acquisition of Navio Communications, as explained in Note 3 to the
Consolidated Financial Statements. The selected consolidated financial data at
November 30, 1999 and for the six months ended November 30, 1998 and 1999 have
been derived from unaudited condensed consolidated financial statements also
included elsewhere in this prospectus and which, in the opinion of management,
include all adjustments, consisting of only normal recurring adjustments,
necessary for a fair statement of results for the unaudited periods. The
historical results are not necessarily indicative of results to be expected in
any future period.

<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
INCEPTION YEARS ENDED MAY 31, NOVEMBER 30,
(DECEMBER 1, 1995) --------------------------------- -------------------------
TO MAY 31, 1996 1997 1998 1999 1998 1999
------------------- -------- ---------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License and royalty...................... $ -- $ 231 $ 4,162 $ 5,281 $ 2,537 $ 3,482
Service.................................. -- 44 6,110 12,032 5,172 7,880
------- -------- ---------- --------- ----------- -----------
Total revenues......................... -- 275 10,272 17,313 7,709 11,362

Cost of revenues:
License and royalty...................... -- -- 3,779 2,279 1,316 1,108
Service.................................. -- -- 2,230 8,247 2,871 10,693
------- -------- ---------- --------- ----------- -----------
Total cost of revenues................. -- -- 6,009 10,526 4,187 11,801
------- -------- ---------- --------- ----------- -----------
Gross margin............................... -- 275 4,263 6,787 3,522 (439)
Operating expenses:
Research and development................. 5,479 21,721 19,981 18,171 8,055 11,642
Sales and marketing...................... -- 7,805 14,407 11,730 5,403 6,918
General and administrative............... -- 1,023 2,453 3,975 1,608 3,180
Amortization of purchased intangibles.... -- -- 4,563 6,084 3,042 3,042
Amortization of warrants................. -- -- -- 18 -- 1,069
Restructuring charge..................... -- -- 1,175 -- -- --
Amortization of deferred stock
compensation........................... -- -- -- 507 111 1,029
Acquired in-process research and
development............................ -- -- 58,100 -- -- --
------- -------- ---------- --------- ----------- -----------
Total operating expenses............... 5,479 30,549 100,679 40,485 18,219 26,880
------- -------- ---------- --------- ----------- -----------
Loss from operations....................... (5,479) (30,274) (96,416) (33,698) (14,697) (27,319)
Interest and other income (expense), net... -- (465) 10 59 149 2,338
------- -------- ---------- --------- ----------- -----------
Loss before income tax provision
(benefit)................................ (5,479) (30,739) (96,406) (33,639) (14,548) (24,981)
Income tax provision (benefit)............. (2,200) (11,750) (2,015) (586) (558) 49
------- -------- ---------- --------- ----------- -----------
Net loss................................... $(3,279) $(18,989) $ (94,391) $ (33,053) $ (13,990) $ (25,030)
======= ======== ========== ========= =========== ===========
Basic net loss per share................... $ -- $ -- $ (890.48) $ (56.60) $ (30.81) $ (0.46)
Shares used in computing basic net loss per
share.................................... -- -- 106 584 454 54,780
Pro forma basic net loss per share......... $ (0.58) $ (0.25) $ (0.32)
Shares used in computing pro forma basic
net loss per share....................... 56,586 55,286 77,776
</TABLE>

21
<PAGE>

<TABLE>
<CAPTION>
NOVEMBER
MAY 31, 30,
------------------------------------------- -----------
1996 1997 1998 1999 1999
-------- -------- --------- --------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ -- $ 245 $ 12,138 $ 33,657 $ 40,947
Working capital (deficit)................................... (412) (23,180) (18,275) 6,308 85,859
Total assets................................................ 487 4,441 30,812 68,182 154,433
Deferred revenues........................................... -- 45 23,868 38,787 34,350
Long-term debt and long-term portion of capital leases...... -- -- 4,115 4,315 486
Accumulated deficit......................................... (3,279) (22,268) (116,659) (149,712) (174,742)
Total stockholders' equity (deficit)........................ 75 (19,256) (6,136) 12,226 105,585
</TABLE>

22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH "SELECTED CONSOLIDATED
FINANCIAL DATA" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION AND ANALYSIS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS.
OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT
LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.

OVERVIEW

Liberate is a leading provider of a comprehensive software platform for
delivering Internet-enhanced content and applications to a broad range of
information appliances, such as television set-top boxes, game consoles, smart
phones and personal digital assistants. We began operations in December 1995 as
a division of Oracle to develop server and client software for the consumer,
corporate and educational markets. In April 1996, we were incorporated as a
Delaware corporation. In August 1997, we acquired Navio Communications.

Navio was a development stage company involved in designing Internet
application and server software for the consumer market. In connection with the
acquisition, we changed our strategic direction and restructured our operations.
Prior to the acquisition, we focused on selling software to original equipment
manufacturers of network computer products for corporate customers. Following
the acquisition, we focused our development and marketing efforts on fewer
products targeted primarily at the consumer information appliance market and
aggressively pursued sales to a limited number of large network operators and
information appliance manufacturers. As a result of this strategic shift, we
significantly reduced our sales and engineering operations for corporate
products and increased investment in the development of client and server
software for the consumer market. In connection with the acquisition, we wrote
off approximately $58.1 million of acquired in-process research and development
in fiscal 1998. Purchased intangibles of approximately $18.3 million were
recorded in connection with the acquisition and are being amortized on a
straight-line basis over a useful life of three years. See "--Valuation of
In-Process Research and Development."

To more closely align our product offerings with this strategic shift in
direction, we entered into an agreement with Sun Microsystems in May 1999 to
transfer our NC Navigator and NC Administration Server technology to Sun while
retaining the right to ship, support and maintain these products for existing
customers using this technology. As part of this agreement, we will try to
assign our existing agreements relating to this technology to Sun. If Sun
chooses to assume these contracts and continues shipping the NC Navigator or NC
Desktop products under these contracts, we will receive a commission on sales of
these products. In addition, we have agreed not to compete in the corporate
network computer market and, specifically, network computers intended to
displace personal computers or terminals until May 2002. However, outside of
this market, we intend to continue developing new products based on network
computer technology. In fiscal 1999, sales of NC Navigator and NC Desktop
products and related services accounted for $2.5 million of our total revenues.
For the six months ended November 30, 1999, sales of NC Navigator and
NC Desktop products and related services accounted for $1.5 million of our total
revenues.

We have also agreed with Sun to co-develop television set-top box
technology. We will distribute the co-developed technology pursuant to a
non-exclusive license with Sun. In addition, under this license, we have agreed
to incorporate Sun's PersonalJava technology, television interface software and
Jini technology in our software products and to pay Sun a royalty. Sun has also
agreed to promote us as one of its preferred channel partners within the TV
devices market. We believe this relationship will result in co-marketing and
co-selling efforts with Sun of the jointly-developed technology on a worldwide
basis.

23
<PAGE>
We began shipping our initial products and generating revenues in the last
quarter of fiscal 1997. We generate revenues by licensing our server and client
products and providing related services to network operators and information
appliance manufacturers. Network operators generally pay up-front license fees
for our server software. We recognize server license revenues upon final
delivery of the licensed product, when collection is probable and when the fair
market value and the fee for each element of the transaction is fixed and
determinable. We also generate service revenues from maintenance provided in
connection with server licenses. Maintenance fees typically represent a
percentage of associated license fees.

We license our client software and provide related services to both network
operators and information appliance manufacturers. Information appliance
manufacturers pay us royalties on a per unit basis. Typically, we recognize
these royalty fees upon shipment of the device by the manufacturer. Network
operators also pay per-subscriber royalty fees when information appliance owners
activate the operators' service. Generally, network operators pay these royalty
fees upon activation, either in the form of an up-front payment or on a
subscription basis. Up-front royalty fees are recognized when a network operator
reports to us that a user has activated the service. These network operators pay
an additional per subscriber maintenance fee typically on an annual basis for
the duration of the activation period. Subscription-based royalty fees are
recognized quarterly when reported by the network operators. A portion of this
subscription-based royalty fee is allocated to service revenues as maintenance
and is also recognized quarterly. We generally negotiate the amount of up-front
fees paid by network operators and royalties paid by information appliance
manufacturers on a case-by-case basis. Our maintenance fees typically range from
17% to 30% of annual license fees and activation royalties.

In addition to the maintenance services we offer in connection with our
software licenses, which include upgrades and technical support, we provide
comprehensive consulting, engineering and training services to network operators
and information appliance manufacturers. Revenues generated from these services
generally are recognized as the services are performed while maintenance fees
are recognized ratably over the term of the maintenance contract. During the
first six months of fiscal 2000, total service revenues were $7.9 million,
representing 69% of our total revenues. We expect service revenues to continue
to account for a significant portion of total revenues until customers begin
deploying services and information appliances incorporating our software on a
large scale. Any volume deployments should increase the portion of total
revenues derived from the payment of royalty fees.

In fiscal 1998, Wind River accounted for 16% of our total revenues and
Thomson Multimedia accounted for 10% of our total revenues. In fiscal 1999, Wind
River accounted for 23% of our total revenues and Cable & Wireless accounted for
10% of total revenues. During the first six months of fiscal 2000, Wind River
accounted for 18% of our total revenues and Cable & Wireless accounted for 14%
of total revenues. Revenues attributable to Wind River relate to a source code
license we granted Wind River in December 1997. Wind River paid us a license fee
of $10.0 million for this license which was recorded as deferred revenues and is
being amortized over a 30-month period as license and royalty revenues and
service revenues. Wind River has integrated this source code into their
HTMLWorks and eNavigator products. Revenues attributable to Cable & Wireless in
fiscal 1999 and for the first six months of fiscal 2000 relate to consulting
services and training. Revenues from Thomson Multimedia related to a one-time
paid-up software license. We expect that we will continue to be dependent upon a
limited number of customers for a significant portion of our revenues in future
periods, although the customers may vary from period to period.

Deferred revenues consist primarily of payments received from customers for
prepaid license and royalty fees and prepaid services for undelivered product
and services. Deferred revenues increased from $45,000 at May 31, 1997 to
$34.4 million at November 30, 1999. This increase resulted in part from our
license to Wind River and prepayments from network operators. Other than the
deferred

24
<PAGE>
revenues from the source code license to Wind River, deferred revenues can
fluctuate significantly. These fluctuations are the result of:

- When we record deferred revenues, which depends on the timing of large
prepaid license and royalty fees and service contracts; and

- When we recognize deferred revenues, which depends on when services are
performed and when network operators and information appliance
manufacturers deploy products and services based on our technology.

International revenues accounted for approximately 77% of our total revenues
in fiscal 1997, 50% of our total revenues in fiscal 1998, 51% of our total
revenues in fiscal 1999 and 48% of our total revenues during the first six
months of fiscal 2000. We anticipate international revenues to continue to
represent a significant portion of total revenues.

Since inception, we have incurred net losses of $174.7 million. These losses
include a write-off of $58.1 million of acquired in-process research and
development related to the Navio acquisition and $77.0 million of research and
development expenditures. We anticipate incurring significant operating losses
for the foreseeable future as we:

- continue to invest in research and development and professional and
engineering services to support new devices for our software platform and
large-scale deployments by our network operator customers; and

- record non-cash expenses related to the amortization of goodwill
associated with our acquisition of SourceSuite and amortization of warrant
expense associated with the issuance of performance warrants to various
network operators.

In January 2000, we entered into a Merger Agreement and Plan of
Reorganization to acquire SourceSuite for approximately 1,772,000 shares of our
common stock, or approximately $190.5 million based on a common stock price of
$107.53. The acquisition will be accounted for as a purchase. We intend to hire
various individuals who provide services to SourceSuite. Also in connection with
the acquisition, we expect to expense up to $4.0 million of acquired in-process
research and development, which in the opinion of our management, has not
reached technological feasibility and has no alternative future use. We also
expect to record goodwill and other intangibles of up to $200.0 million to be
amortized over an estimated economic life of three years. In addition, in
January 2000, we terminated negotiations involving our proposed acquisition of
another company. Expenses related to this terminated acquisition are currently
estimated to range from approximately $700,000 to $1.3 million and will be
recorded in the third quarter of fiscal 2000.

25
<PAGE>
RESULTS OF OPERATIONS

Because we did not begin shipping products until the last quarter of fiscal
1997 and implemented significant changes in our operations following our
restructuring in December 1997, we believe that annual and quarterly
period-to-period comparisons of our operating results involving periods prior to
May 31, 1998 are less meaningful than an analysis of recent annual and quarterly
operating results. Accordingly, we are providing a discussion and analysis of
our operating results that is primarily focused upon fiscal 1998, fiscal 1999
and the first six months of fiscal 2000. The following table lists, for the
periods indicated, each line item as a percentage of total revenues:

<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
MAY 31, NOVEMBER 30,
------------------------------ -------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
License and royalty........................... 84% 41% 31% 33% 31%
Service....................................... 16 59 69 67 69
------- ------- ------- ------- -------
Total revenues.............................. 100 100 100 100 100
------- ------- ------- ------- -------
Cost of revenues:
License and royalty........................... -- 37 13 17 10
Service....................................... -- 22 48 37 94
------- ------- ------- ------- -------
Total cost of revenues...................... -- 59 61 54 104
------- ------- ------- ------- -------
Gross margin.................................... 100 41 39 46 (4)
Operating expenses:
Research and development...................... 7,899 195 105 104 102
Sales and marketing........................... 2,838 140 68 70 61
General and administrative.................... 372 24 23 21 28
Amortization of purchased intangibles......... -- 44 35 39 27
Amortization of warrants...................... -- -- -- -- 9
Restructuring charge.......................... -- 11 -- -- --
Amortization of deferred stock compensation... -- -- 3 1 9
Acquired in-process research and
development................................. -- 566 -- -- --
------- ------- ------- ------- -------
Total operating expenses.................... 11,109 980 234 235 236
------- ------- ------- ------- -------
Loss from operations............................ (11,009) (939) (195) (189) (240)
Interest and other income (expense), net........ (169) -- -- 2 21
------- ------- ------- ------- -------
Loss before income tax provision (benefit)...... (11,178) (939) (195) (187) (219)
Income tax provision (benefit).................. (4,273) (20) (3) (7) --
------- ------- ------- ------- -------
Net loss........................................ (6,905)% (919)% (192)% (180)% (219)%
======= ======= ======= ======= =======
</TABLE>

SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1999

REVENUES

Total revenues increased 47% from $7.7 million for the six months ended
November 30, 1998 to $11.4 million for the six months ended November 30, 1999.

LICENSE AND ROYALTY. License and royalty revenues increased 37% from $2.5
million in the six months ended November 30, 1998 to $3.5 million six months
ended November 30, 1999. This increase was due primarily to increased royalty
revenues from network operators reflecting the initial trial and deployment of
services based on our technology, as well as an increase in our customer base.

26
<PAGE>
SERVICE. Service revenues increased 52% from $5.2 million in the six months
ended November 30, 1998 to $7.9 million in the six months ended November 30,
1999. This increase was due primarily to the continued expansion of our
professional services organization created in the beginning of fiscal 1999. To a
lesser extent, the increase was due to the overall increase in the level of
billable custom-development projects.

COST OF REVENUES

Total cost of revenues increased 182% from $4.2 million in the six months
ended November 30, 1998 to $11.8 million in the six months ended November 30,
1999. We anticipate that total cost of revenues will increase in dollar amounts
in future periods as we provide continued services to support customer
implementations and as we experience higher third party license costs as
deployments increase.

LICENSE AND ROYALTY. Cost of license and royalty revenues decreased 16%
from $1.3 million in the six months ended November 30, 1998 to $1.1 million six
months ended November 30, 1999. These amounts represented 52% and 32% of license
and royalty revenues over the respective periods. The decrease in cost of
license and royalty revenues in dollar amounts was due primarily to the full
amortization of certain prepaid inbound licenses. We expect the cost of license
and royalty revenues, as a percentage of license and royalty revenues, to
fluctuate in future periods, but with a general decreasing trend. Amortization
of certain third party costs will have the effect of decreasing license and
royalty costs as a percentage of related revenues. However, introduction of new
third party technology may offset the effect of the amortized costs or increase
license and royalty cost as a percentage of related revenues.

SERVICE. Cost of service revenues increased 272% from $2.9 million in the
six months ended November 30, 1998 to $10.7 million in the six months ended
November 30, 1999. These amounts represented 56% and 136% of service revenues
over the respective periods. The increase in dollar amounts and as a percentage
of service revenues was due primarily to our continued investment in our
professional service organization, increased reliance on third party
consultants, as well as an increase in the level of billable custom development
projects, which were necessary to meet the growth in customer installation,
training and deployment of our products. We expect cost of service revenues to
increase in dollar amounts to the extent existing and new customers install and
deploy our products. We also expect the cost of service revenues, as a
percentage of service revenues, to fluctuate in future periods. These costs may
increase in the near-term due to continued expansion of services as existing and
new customers install and deploy our products and we continue to provide and
support limited trial installations of our products at discounted prices to
network operators in order to continue to increase our market share.

OPERATING EXPENSES

RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salary and other related costs for personnel and external
consultants as well as costs related to outsourced development projects to
support product development. Research and development expenses increased 45%
from $8.1 million in the six months ended November 30, 1998 to $11.6 million in
the six months ended November 30, 1999. These amounts represented 104% and 102%
of total revenues over the respective periods. The increase in dollar amounts
and as a percentage of total revenues was due primarily to higher personnel and
related expenses resulting from increased staffing and an increase in outsourced
development projects, in particular a project with General Instrument. During
this period, research and development expenses associated with billable custom
development projects and classified as cost of service revenues also increased.
The classification of costs between research and development and cost of service
revenues may fluctuate between categories depending on the level of projects
that are billable at any point in time. We believe that continued investment in
research and development is critical to attaining our strategic objectives.
Consequently, we expect research and development

27
<PAGE>
expenses to increase significantly in dollar amounts in future periods. However,
if revenues increase, we expect research and development expenses to decline as
a percentage of total revenues in the long-term.

SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries and other related costs for sales and marketing personnel, sales
commissions, travel, facilities for regional offices, public relations,
marketing materials and tradeshows. Sales and marketing expenses increased 28%
from $5.4 million in the six months ended November 30, 1998 to $6.9 million in
the six months ended November 30, 1999. These amounts represented 70% and 61% of
total revenues over the respective periods. The increase in dollar amounts was
due primarily to increased employee-related expenses as well as marketing
communications and professional recruitment. We believe these expenses will
increase in dollar amounts in future periods as we expand our direct sales and
marketing efforts domestically and abroad. However, if revenues increase, we
expect these costs to decrease as a percentage of total revenues in the
long-term.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and other related costs for legal, corporate development,
human resource and finance employees, as well as attorney and other professional
fees. General and administrative expenses increased 98% from $1.6 million in the
six months ended November 30, 1998 to $3.2 million in the six months ended
November 30, 1999. These amounts represented 21% and 28% of total revenues over
the respective periods. The increase in dollar amounts and as a percentage of
total revenues was due primarily to increased staffing, including the formation
of our corporate development organization and the establishment of the
infrastructure necessary to support our obligations as a public company. In
addition, we increased spending for legal and accounting services. We believe
these expenses will increase in dollar amounts as we continue to add personnel.
However if revenues increase, we expect these costs to decrease as a percentage
of total revenues in the long-term.

AMORTIZATION OF PURCHASED INTANGIBLES. Purchased intangibles represent the
purchase price of Navio in excess of identified tangible and intangible assets
and is amortized over three years. In August 1997, we recorded approximately
$18.3 million of purchased intangibles, which is being amortized on a
straight-line basis over an estimated useful life of three years. We recorded
approximately $3.0 million of amortization expense for each of the six months
ended November 30, 1999 and 1998.

AMORTIZATION OF WARRANTS. Warrant expense represents the amortization of
warrants based on their estimated fair value, as determined using the
Black-Scholes model, at the earlier of the grant date or the date it becomes
probable that the warrants will be earned. In accordance with the Emerging
Issues Task Force No. 96-18, the warrants will continue to be revalued in
situations where they are granted prior to establishment of a performance
commitment. In April and May 1999, we entered into agreements with several
network operators that require us to issue warrants to purchase up to an
aggregate of 4,599,992 shares of common stock if the network operators satisfy
commercial milestones. As of November 30, 1999, we recorded warrants to purchase
up to 749,998 shares of common stock as being earned by four network operators
for signing license agreements. These warrants are expensed over their
respective amortization periods. Amortization expense for the first six months
of fiscal 2000 was $1.1 million. No amortization expense was recorded during the
first six months of fiscal 1999. As of November 30, 1999, approximately $3.7
million of prepaid warrants have been recorded on the consolidated balance
sheet, net of accumulated amortization of $1.1 million. We expect amortization
expense for warrants to increase significantly as additional warrants are
earned.

AMORTIZATION OF DEFERRED STOCK COMPENSATION. Deferred stock compensation
represents the difference between the estimated fair value of our common stock
for accounting purposes and the option exercise price of such options at the
grant date. In fiscal 1999, we began recording deferred stock compensation for
stock options granted to employees and others. These amounts are amortized on a
straight-line basis over the 48-month vesting period of such options.
Amortization of deferred

28
<PAGE>
stock compensation was approximately $1.0 million for the six months ended
November 30, 1999, compared to amortization of deferred stock compensation of
$111,000 for the six months ended November 30, 1998. The majority of the stock
option grants being amortized were granted in the latter half of fiscal 1999. As
of November 30, 1999, we recorded deferred stock compensation related to
additional stock option grants of approximately $1.3 million, net of
terminations. We anticipate that deferred stock compensation expense will remain
relatively stable from year to year, with decreases resulting from the effect of
employee terminations. Beginning in fiscal 2003, we expect deferred stock
compensation expense to decrease ratably from year to year through the first
quarter of fiscal 2004.

INTEREST AND OTHER INCOME, NET

Net interest and other income includes interest income (net of interest
expense) on our cash, cash equivalents and short-term investments partially
offset by bank charges and losses on disposals of fixed assets. Net interest and
other income increased from approximately $149,000 for the six months ended
November 30, 1998, to $2.3 million for the six months ended November 30, 1999.
Interest income on proceeds from our private placement offerings and initial
public offering of common stock in the first half of fiscal 2000 was offset
slightly by losses on disposals of fixed assets.

INCOME TAX PROVISION (BENEFIT)

Income tax provision (benefit) includes income tax benefit and foreign
withholding tax expense. Income tax provision of approximately $49,000 for the
six months ended November 30, 1999, consisted primarily of foreign withholding
tax expense for royalty revenue. Income tax benefit of approximately $558,000
for the six months ended November 30, 1998 was comprised of the benefits
received under a tax-sharing agreement with Oracle that provides for our
consolidation into Oracle's tax group for certain state income tax payment
purposes. Since the effective date of our initial public offering, upon which
Oracle's ownership percentage was reduced to less than 50%, our results are no
longer included in any of Oracle's consolidated state tax returns and we will no
longer receive a tax benefit from Oracle. See Note 9 to Consolidated Financial
Statements.

FISCAL YEARS ENDED MAY 31, 1998 AND 1999

REVENUES

Total revenues increased 69% from $10.3 million in fiscal 1998 to
$17.3 million in fiscal 1999.

LICENSE AND ROYALTY. License and royalty revenues increased 27% from $4.2
million in fiscal 1998 to $5.3 million in fiscal 1999. This increase was due
primarily to revenues related to our source code license agreement with Wind
River increasing by $1.4 million in fiscal 1999 compared to fiscal 1998. To a
lesser extent, this increase was due to a larger number of information
appliances shipped by our licensees, which increased revenues by $1.2 million in
fiscal 1999. This license and royalty increase was partially offset by decreased
license revenues from other sources.

SERVICE. Service revenues increased 97% from $6.1 million in fiscal 1998 to
$12.0 million in fiscal 1999. Approximately $4.9 million of this increase was
due to the creation of our professional services organization and an increase in
engineering services provided to new and existing customers. To a lesser extent,
the increase was due to higher maintenance revenues as a result of a larger
number of server and client licensees.

COST OF REVENUES

Total cost of revenues increased 75% from $6.0 million in fiscal 1998 to
$10.5 million in fiscal 1999.

29
<PAGE>
LICENSE AND ROYALTY. Cost of license and royalty revenues decreased 40%
from $3.8 million in fiscal 1998 to $2.3 million in fiscal 1999. These amounts
represented 91% of license and royalty revenues in fiscal 1998 and 43% of
license and royalty revenues in fiscal 1999. The decrease in cost of license and
royalty revenues in dollar amounts was due primarily to isolated costs of
approximately $980,000 incurred in fiscal 1998 relating to payments made to
support third-party sales of television set-top boxes and smart cards. In
addition, several prepaid licenses were fully amortized during fiscal 1998.

SERVICE. Cost of service revenues increased 270% from $2.2 million in
fiscal 1998 to $8.2 million in fiscal 1999. These amounts represented 36% and
69% of service revenues over the respective periods. The increase in dollar
amounts and as a percentage of cost of service revenues was due primarily to
expenses of $3.6 million associated with the establishment and expansion of our
professional services organization. To a lesser extent, the increase was due to
increased expenses related to engineering services provided to new and existing
customers and expenses associated with the establishment and expansion of our
customer support organization.

OPERATING EXPENSES

RESEARCH AND DEVELOPMENT. Research and development expenses decreased 9%
from $20.0 million in fiscal 1998 to $18.2 million in fiscal 1999. Our efforts
following the Navio acquisition to focus on the development of fewer products
resulted in lower average headcount which led to a decrease in expenses. To a
lesser extent, research and development expenses decreased because we outsourced
fewer development projects. Nevertheless, during this period, we also incurred
expenses associated with the development of our core products. In May 1999, we
entered into an agreement with General Instrument where we committed to pay up
to $10.0 million over a three-year period for development services to be
performed by General Instrument.

SALES AND MARKETING. Sales and marketing expenses decreased 19% from
$14.4 million in fiscal 1998 to $11.7 million in fiscal 1999. In connection with
the refocusing of our product line as discussed above, we also realigned our
sales efforts which resulted in a significant reduction in the number of sales
and marketing personnel which reduced expenses.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
62% from $2.5 million in fiscal 1998 to $4.0 million in fiscal 1999. The
increase was primarily due to increased staffing which resulted in higher
expenses. To a lesser extent, the increase was due to higher legal and
professional fees.

RESTRUCTURING CHARGE. In the third quarter of fiscal 1998, we recognized a
restructuring charge of $1.2 million resulting primarily from a reduction in
workforce. This charge consisted primarily of severance payments and the
accelerated vesting of options. At May 31, 1999, we had $266,000 remaining in
accrued restructuring, related to severance payments that have not been paid
out.

AMORTIZATION OF WARRANTS. As of May 31, 1999, we issued or committed to
issue warrants to purchase up to 416,666 shares of common stock to two network
operators for satisfying commercial milestones. The fair value of the warrants
was $1,522,000, of which $18,000 was charged to operations. The remaining
balance of $1,504,000 has been recorded as an asset in the consolidated balance
sheet and will be amortized over the greater of the warrants' respective
performance periods, or as the royalties are earned under the license agreements
between us and the network operators.

AMORTIZATION OF DEFERRED STOCK COMPENSATION. Deferred stock compensation
represents the difference between the estimated fair value of the common stock
for accounting purposes and the option exercise price of such options at the
date of grant. In fiscal 1999, we recorded total deferred stock compensation of
$7.1 million, net of terminations, in connection with stock options granted to
employees and others. These amounts are amortized on a straight-line basis over
the 48-month vesting period of such options. Approximately $507,000 of
amortization expense was recorded during fiscal

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<PAGE>
1999. In June 1999, we recorded approximately $1.6 million of deferred stock
compensation. No deferred stock compensation expense was recorded in fiscal
1998.

ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the Navio
acquisition we expensed $58.1 million of acquired in-process research and
development which, in the opinion of management, had not reached technological
feasibility and had no alternative future use. See "--Valuation of In-Process
Research and Development."

INTEREST AND OTHER INCOME (EXPENSE), NET

Net interest income increased from $10,000 in fiscal 1998 to $59,000 in
fiscal 1999. Net interest income increased as a result of higher average cash
balances.

INCOME TAX PROVISION (BENEFIT)

Our income tax benefit was $2.0 million in fiscal 1998 and $586,000 in
fiscal 1999. The benefit for fiscal 1999 represents the estimated cash benefit
we will receive from Oracle related to their utilization in the consolidated
Oracle state tax returns of our state operating losses for fiscal 1999. The
benefit was calculated pursuant to a tax allocation and indemnity agreement with
Oracle which was effective after the Navio acquisition on August 11, 1997.
Pursuant to this agreement, Oracle agreed to pay us the cash attributable to the
tax savings from utilization of our operating losses.

The benefit for fiscal 1998 consists of the estimated cash benefit pursuant
to the above agreement plus the estimated assumed federal and state tax benefit
Oracle received for the period from June 1, 1997 through August 11, 1997.

As of May 31, 1999, we had federal and state net operating loss
carryforwards of approximately $24.4 million which will expire at various dates,
from 2003 to 2019, if not utilized. The Tax Reform Act of 1986 imposes
substantial restrictions on the utilization of net operating losses and tax
credits in the event of an "ownership change" of a corporation. Our ability to
utilize net operating loss carryforwards on an annual basis will be limited as a
result of a prior "ownership change" in connection with private sales of equity
securities. We have provided a full valuation allowance on the deferred tax
asset because of the uncertainty regarding its realization. Our accounting for
deferred taxes under Statement of Financial Accounting Standards No. 109
involves the evaluation of a number of factors concerning the realizability of
our deferred tax assets. In concluding that a full valuation allowance was
required, management primarily considered factors such as our history of
operating losses and expected future losses and the nature of our deferred tax
assets.

FISCAL YEARS ENDED MAY 31, 1997 AND 1998

REVENUES

Total revenues increased from $275,000 for fiscal 1997 to $10.3 million for
fiscal 1998.

LICENSE AND ROYALTY. License and royalty revenues increased from $231,000
for fiscal 1997 to $4.2 million for fiscal 1998. The increase in license and
royalty revenues was due primarily to increased shipments of our initial
products. We commenced shipment of our initial products in the last quarter of
fiscal 1997.

SERVICE. Service revenues increased from $44,000 for fiscal 1997 to
$6.1 million for fiscal 1998. The increase was due primarily to an increase in
services provided to network operators and information appliance manufacturers
as a result of the introduction of our initial products in the last quarter of
fiscal 1997.

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<PAGE>
COST OF REVENUES

There were no cost of revenues in fiscal 1997. Total cost of revenues
increased to $6.0 million for fiscal 1998.

LICENSE AND ROYALTY. Cost of license and royalty revenues was $3.8 million
in fiscal 1998, representing 91% of license revenues. The increase in cost of
license and royalty revenues in absolute dollars was due primarily to costs of
$2.1 million associated with the initial amortization of prepaid third party
license and support costs. To a lesser extent, the increase was due to isolated
costs of approximately $980,000 incurred in fiscal 1998 relating to payments
made to support third party sales of television set-top boxes and smart cards.

SERVICE. Cost of service revenues was $2.2 million in fiscal 1998,
representing 36% of service revenues. Although modest service revenues of
$44,000 were recorded in fiscal 1997, related costs were not material. The
increase in cost of service revenues was due to the creation of our customer
support and engineering service organizations.

OPERATING EXPENSES

RESEARCH AND DEVELOPMENT. Research and development expenses decreased 8%
from $21.7 million for fiscal 1997 to $20.0 million for fiscal 1998. The
decrease in expenses in fiscal 1998 was due primarily to fewer outsourced
development projects.

SALES AND MARKETING. Sales and marketing expenses increased 85% from
$7.8 million for fiscal 1997 to $14.4 million for fiscal 1998. The increase was
primarily due to increased headcount and resulting salaries and, to a lesser
extent, to other employee related expenses.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
140% from $1.0 million for fiscal 1997 to $2.5 million for fiscal 1998. The
increase was primarily due to expenses related to increased personnel and
employee-related costs following the acquisition of Navio and, to a lesser
extent, costs incurred for legal and other professional service fees in fiscal
1998.

INTEREST AND OTHER INCOME (EXPENSE), NET

Net interest and other expense in fiscal 1997 of $465,000 was primarily
attributable to interest payments to Oracle on inter-company advances. The
conversion of these outstanding balances into equity in the first quarter of
fiscal 1998, and higher average cash balances during the period, resulted in net
interest income of $10,000 in fiscal 1998.

INCOME TAX PROVISION (BENEFIT)

Our income tax benefit was $11.8 million for fiscal 1997 and $2.0 million
for fiscal 1998. The benefit for fiscal 1997 represents Oracle's assumed
estimated federal and state tax benefit for the entire fiscal year. The benefit
for fiscal 1998 represents amounts to be refunded to us from Oracle under the
tax allocation and indemnity agreement and the estimated assumed federal and
state tax benefit Oracle received for the period from June 1, 1997 to the date
of the tax allocation and indemnity agreement. See Note 9 of Notes to
Consolidated Financial Statements.

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QUARTERLY RESULTS OF OPERATIONS

The following tables set forth certain unaudited consolidated statements of
operations data for each of our last six quarters. This data has been derived
from unaudited consolidated financial statements that have been prepared on the
same basis as the annual audited consolidated financial statements and, in our
opinion, include all normally recurring adjustments necessary for a fair
presentation of such information. These unaudited quarterly results should be
read in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this prospectus. The consolidated results of operations
for any quarter are not necessarily indicative of the results for any future
period.

<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------------------
AUG. 31 NOV. 30, FEB. 28, MAY 31, AUG. 31, NOV. 30,
1998 1998 1999 1999 1999 1999
-------- --------- --------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License and royalty.................... $ 1,139 $ 1,398 $ 1,525 $ 1,219 $ 1,482 $ 2,000
Service................................ 2,169 3,003 2,956 3,904 3,806 4,074
------- ------- ------- -------- -------- --------
Total revenues....................... 3,308 4,401 4,481 5,123 5,288 6,074
------- ------- ------- -------- -------- --------
Cost of revenues:
License and royalty.................... 600 716 638 325 522 586
Service................................ 1,199 1,672 1,827 3,549 5,562 5,131
------- ------- ------- -------- -------- --------
Total cost of revenues............... 1,799 2,388 2,465 3,874 6,084 5,717
------- ------- ------- -------- -------- --------
Gross margin............................. 1,509 2,013 2,016 1,249 (796) 357
------- ------- ------- -------- -------- --------
Operating expenses:
Research and development............... 4,041 4,014 4,834 5,282 5,342 6,300
Sales and marketing.................... 2,145 3,258 2,673 3,654 3,216 3,702
General and administrative............. 814 794 952 1,415 1,424 1,756
Amortization of purchased
intangibles.......................... 1,521 1,521 1,521 1,521 1,521 1,521
Amortization of warrants............... -- -- -- 18 359 710
Amortization of deferred stock
compensation......................... 7 104 282 114 504 525
------- ------- ------- -------- -------- --------
Total operating expenses............. 8,528 9,691 10,262 12,004 12,366 14,514
------- ------- ------- -------- -------- --------
Loss from operations..................... (7,019) (7,678) (8,246) (10,755) (13,162) (14,157)
Interest and other income (expense),
net.................................... 81 68 (10) (80) 697 1,641
------- ------- ------- -------- -------- --------
Loss before income tax provision
(benefit).............................. (6,938) (7,610) (8,256) (10,835) (12,465) (12,516)
Income tax provision (benefit)........... (271) (287) (329) 301 41 8
------- ------- ------- -------- -------- --------
Net loss................................. $(6,667) $(7,323) $(7,927) $(11,136) $(12,506) $(12,524)
======= ======= ======= ======== ======== ========
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
License and royalty.................... 34% 32% 34% 24% 28% 33%
Service................................ 66 68 66 76 72 67
------- ------- ------- -------- -------- --------
Total revenues....................... 100 100 100 100 100 100
------- ------- ------- -------- -------- --------
Cost of revenues:
License and royalty.................... 18 16 14 7 10 10
Service................................ 36 38 41 69 105 84
------- ------- ------- -------- -------- --------
Total cost of revenues............... 54 54 55 76 115 94
------- ------- ------- -------- -------- --------
Gross margin............................. 46 46 45 24 (15) 6
------- ------- ------- -------- -------- --------
Operating expenses:
Research and development............... 122 91 108 103 101 104
Sales and marketing.................... 65 74 60 71 61 61
General and administrative............. 25 18 21 28 27 29
Amortization of purchased
intangibles.......................... 46 35 34 30 29 25
Amortization of warrants............... -- -- -- -- 7 12
Amortization of deferred stock
compensation......................... -- 2 6 2 10 9
------- ------- ------- -------- -------- --------
Total operating expenses............. 258 220 229 234 235 240
------- ------- ------- -------- -------- --------
Loss from operations..................... (212) (174) (184) (210) (250) (234)
Interest and other income (expense),
net.................................... 2 2 -- (2) 13 27
------- ------- ------- -------- -------- --------
Loss before income tax provision
(benefit).............................. (210) (172) (184) (212) (237) (207)
Income tax provision (benefit)........... (8) (7) (7) 6 1 --
------- ------- ------- -------- -------- --------
Net loss................................. (202)% (165)% (177)% (218)% (238)% (207)%
======= ======= ======= ======== ======== ========
</TABLE>

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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

Prior to the Navio acquisition, Oracle funded our operations primarily
through inter-company advances, capital contributions and the purchase of equity
securities. In connection with the acquisition of Navio, Oracle converted
approximately $18.0 million of outstanding inter-company payables into Liberate
equity. Following the Navio acquisition, we funded operations primarily through
sales of convertible debt, sales of equity securities and prepaid customer
licenses.

Cash used in operating activities was $9.4 million for fiscal 1997,
$2.2 million for fiscal 1998 and $6.5 million for fiscal 1999. Cash used in
fiscal 1997 was primarily attributable to a net loss of $19.0 million, offset in
part by an increase in accounts payable to Oracle of $18.7 million. Cash used in
fiscal 1998 was primarily attributable to a net loss of $94.4 million, offset in
part by an increase of $20.8 million in deferred revenues and $6.1 million in
amortization and depreciation expenses and a $58.1 million write-off of
in-process research and development related to our acquisition of Navio. Cash
used in operating activities during fiscal 1999 was primarily due to a net loss
of $33.1 million, offset in part by $7.4 million in amortization and
depreciation expenses and an increase of $14.9 million in deferred revenues.

Cash used in operations was approximately $34.0 million for the six months
ended November 30, 1999. This increase was primarily due to a higher net loss,
related primarily to increased staffing; an increase in restricted cash,
accounts receivable and prepaid expenses and other current assets; and a
decrease in deferred revenues for the six months ended November 30, 1999.

We used $1.7 million of cash in investing activities during fiscal 1997 and
$21.4 million of cash in investing activities during fiscal 1999. This cash was
used primarily to fund capital expenditures and purchase short-term investments.
Cash provided by investing activities of $1.2 million in fiscal 1998 consisted
primarily of cash acquired in the acquisition of Navio, offset in part by
purchases of property and equipment.

Net cash used in investing activities was approximately $69.6 million for
the six months ended November 30, 1999. This increase was primarily due to the
purchase of short-term investments combined with purchases of property and and
equipment for our new facilities.

Net cash provided by financing activities was $11.4 million for fiscal 1997,
$12.8 million for fiscal 1998 and $49.4 million for fiscal 1999. Cash provided
by financing activities in fiscal 1997 and 1998 related primarily to proceeds
from capital contributions from Oracle and from issuances of preferred stock and
convertible notes payable. Cash generated from financing activities in fiscal
1999 is primarily related to the Series E preferred stock financing which
occurred in May 1999.

Net cash provided by financing activities was approximately $110.9 million
for the six months ended November 30, 1999. The initial public offering and the
private stock placement contributed $110.1 million of the increase in cash
generated by financing activities since May 31, 1999.

At November 30, 1999, we had $40.9 million in cash and cash equivalents and
did not have any material commitments for capital expenditures. At November 30,
1999 we also had $84.8 million in short-term investments and $8.8 million in
restricted cash. Under a development agreement entered into with General
Instrument in April 1999, we are committed to pay $10.0 million in development
fees for certain services to be performed by General Instrument. These fees will
be paid out in quarterly installments over a three year period. During the first
quarter of fiscal 2000, we signed an amendment to the Technology License and
Distribution Agreement with Sun Microsystems. This amendment called for us to
pay certain minimum royalties in exchange for the right to certain Sun
technology and to maintain the status as a preferred vendor of Sun. Minimum
guaranteed royalties of approximately $3.8 million are to be paid to Sun through
the period ended December 31, 2004. Approximately $225,000 of expense related to
this agreement was recorded for the six months ended November 30, 1999.

34
<PAGE>
We believe that the net proceeds of this offering and our initial public
offering, together with cash and cash equivalents generated from operations,
will be sufficient to meet our working capital requirements for at least the
next 12 months. If our cash balances and cash generated from operations is
insufficient to satisfy our liquidity requirements, we may seek to raise such
additional funds through public or private equity or debt financings. If
additional funds are raised through the issuance of debt securities, these
securities could have certain rights, preferences, and privileges senior to
holders of common stock, and the terms of such debt could impose restrictions on
our operations. The sale of additional equity or debt securities could result in
additional dilution to our stockholders. Additional financing may not be
available at all and, if available, such financing may not be obtainable on
terms favorable to us. If we are unable to obtain this additional financing, we
may be required to reduce the scope of our planned product development and
marketing efforts, which could seriously harm our business.

VALUATION OF IN-PROCESS RESEARCH AND DEVELOPMENT

OVERALL VALUATION METHODOLOGY. We performed a valuation of Navio which was
used as an aid in determining the fair value of the identifiable assets and in
allocating the purchase price among the acquired assets, including the portion
of the purchase price attributed to in-process research and development. Assets
identified generally included in-process research and development, developed
technology, assembled workforce, installed customer base and goodwill.

The valuation technique employed in the appraisal was designed to properly
reflect all intellectual property rights in the intangible assets, including
core technology. The value of the developed technology was derived from direct
sales of existing products including their contribution to in-process research
and development. In this way, value was properly attributed to the engineering
know-how embedded in the existing product that will be used in developmental
products. The appraisal also considered the fact that the existing know-how
diminishes in value over time as new technologies are developed and changes in
market conditions render current products and methodologies obsolete.

Assets were identified through on-site interviews with management and a
review of data provided by Navio's and our management concerning the acquired
assets, technologies in development, costs necessary to complete the in-process
research and development, market potential, historical financial performance,
estimates of future performance and the assumptions underlying these estimates.

Purchased incomplete research and development projects were identified
through extensive interviews and detailed analysis of development plans provided
by management concerning the following:

- Uniqueness of developmental work and the costs incurred;

- Critical tasks required to complete the project;

- Opportunities which were expected to arise from the project;

- Degree of leverage of the new technology on legacy technology;

- Risks associated with project completion;

- Assessment of types of efforts involved, for example software development;

- Length of time project was expected to be useful; and

- Timing related to completion of projects and resources allocated to
completion, including associated expenses.

None of the in-process research and development value was associated with
routine on-going efforts to enhance or otherwise improve on the qualities of the
existing products. Navio's engineers

35
<PAGE>
were developing advanced, next generation technologies that involved creating
product designs and disparate technologies to form superior products. The
in-process research and development value was determined by estimating the costs
to develop the purchased in-process technology into commercially viable
products, estimating the resulting net cash flows from such projects and
discounting the net cash flows back to their present value. The discount rate of
37.5% considers the uncertainty surrounding the successful development of the
purchased in-process technology, the useful life of such technology, the
profitability levels of such technology, and the uncertainty of technological
advances that were indeterminable at that time.

NATURE AND DESCRIPTION. The purchased in-process research and development
consisted of three projects: NC Navigator, TV Navigator and DTV Navigator. The
fair value assigned to each of these projects is as follows:

<TABLE>
<S> <C>
NC Navigator................................................ $13,700,000

TV Navigator................................................ $32,600,000

DTV Navigator............................................... $11,800,000
</TABLE>

The NC Navigator project was aimed at the development of Internet client
software for network computers targeted at the corporate marketplace. NC
Navigator was intended to allow network computers to access the Internet with
the same look and feel of a Netscape web browser for personal computers. TV
Navigator was focused on the development of a software product that was to
enable the integration of the Internet with devices such as television set-top
boxes, satellite systems and game consoles. DTV Navigator was intended to
develop a software server that would allow television networks to provide
Internet software and applications to consumers. This system also would enable
television networks to broadcast Internet content. Each of these research and
development projects was dependent on the development of unproven Internet
technologies.

STAGE OF COMPLETION. The appraisal included the valuation of each specific
research and development project underway at the acquisition date. In the months
leading up to the purchase, Navio had made significant progress in their
research and development programs. However, due to the substantial time and
effort necessary to produce these products in accordance with functional
specifications, technological feasibility of the research and development
projects had not yet been achieved. The acquired projects included Navio's
Internet browser software. The efforts required to develop the purchased
in-process technology of Navio into commercially viable products principally
related to the completion of planning, designing, prototyping, verification and
testing activities that were necessary to establish that the software could be
produced to meet its design specifications, including functions, features and
technical performance requirements. Anticipated completion dates for the
projects in-process was approximately three to 36 months, at which time Navio
expected to begin selling the developed software products. The primary risks of
the research and development projects involved functionality, scalability and
compatibility with software standards. The costs to complete NC Navigator, TV
Navigator and DTV Navigator were estimated at $8 million, $19 million and
$7 million, respectively.

The resulting net cash flows from such projects were based on management's
estimates of product revenues, operating expenses, research and development
costs, and income taxes from such projects. The revenue projections used to
value the in-process research and development were based on estimates of
relevant market sizes and growth factors, expected trends in technology and the
nature and expected timing of new product introductions by us and our
competitors. Our projections may ultimately prove to be incomplete or
inaccurate, and unanticipated events and circumstances are likely to occur. As a
result, the underlying assumptions used to forecast revenues and costs to
develop such projects may not transpire as estimated.

36
<PAGE>
Navio's development team had made significant technological and creative
strides in the development of its experimental Internet technologies as of
August 1997. Since its inception in February 1996, Navio incurred research and
development costs of $2 million for NC Navigator, $5 million for TV Navigator
and $2 million for DTV Navigator. As of the acquisition date, Navio was a
development stage company with minimal product revenues and large net losses.
Navio was entering the testing phase for two of its developmental products, NC
Navigator 3.0 and TV Navigator 1.1. Historical revenues represented services and
limited sales of a Netscape product sold as a test network computer browser on
an experimental basis. This product was superseded by NC Navigator 3.0.

ALTERNATIVE FUTURE USE. Before we made the decision not to capitalize the
value ascribed to in-process research and development, the projects were
evaluated individually to determine if technological feasibility had been
achieved and if there were any alternative future uses. Such evaluation
consisted of a specific review of the efforts, including the overall objectives
of the project, progress toward the objectives and uniqueness of the development
efforts.

Navio's technical activities were concentrated on the development of new
product knowledge having specific commercial objectives, and efforts were
focused on translating those applied research findings and other scientific
know-how into commercially viable software products. The acquired research and
development was related to developing experimental Internet technologies for
which no market existed at the time of the acquisition. Due to its specialized
nature, the in-process research and development project had no alternative
future use, either for re-deployment elsewhere in the business or in
liquidation, in the event the project failed.

CONTINUING EFFORTS. We expect that the remaining acquired in-process
research and development will be successfully developed. However, we cannot
guarantee that commercial viability of this project will be achieved. If this
project is not successfully developed, our future revenues and profitability may
be seriously harmed and the value of the intangible assets relating to the
acquisition may become impaired. Commercial results will also be subject to
uncertain market events and risks that are beyond our control, such as trends in
technology, government regulations, market size and growth, and product
introduction or other actions by competitors. Since acquiring Navio, we do not
believe there have been significant departures from the planned efforts of the
in-process research and development.

RECENT ACCOUNTING PRONOUNCEMENTS

In fiscal 1999, we adopted Statement of Financial Accounting Standards, or
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires
disclosures of total non-stockholder changes in equity in interim periods and
additional disclosures of components of non-stockholder changes in equity on an
annual basis. The adoption of SFAS No. 130 did not have a material effect on our
financial disclosures.

In fiscal 1999, we adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The adoption of SFAS No. 131 did not have a
material effect on our financial disclosures.

Effective June 1, 1999, we adopted Statement of Position, or SOP 98-5,
"Reporting on the Costs of Start-Up Activities." The adoption of SOP 98-5 did
not have a material impact on our consolidated financial statements.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which requires
us to value derivative financial instruments, including those used for hedging
foreign currency exposures, at current market value with the impact of any
change in market value being charged against earnings in each period. SFAS
No. 133 will be effective for and adopted by us in the first quarter of the
fiscal year ending May 31, 2001. We anticipate that SFAS No. 133 will not have a
material impact on our consolidated financial statements.

37
<PAGE>
MARKET RISK DISCLOSURE

INTEREST RATE RISK. As of November 30, 1999, our investments consisted of
$10.6 million of short-term money market securities and $110.8 million of debt
securities. These securities, like all fixed income instruments, are subject to
interest rate risk and will fall in value if market interest rates increase. If
market interest rates were to increase immediately and uniformly by 10% from
levels as of November 30, 1999, the decline of the fair value of the portfolio
would not be material.

FOREIGN CURRENCY. We transact business in various foreign currencies and,
accordingly, we are subject to exposure from adverse movements in foreign
currency exchange rates. To date, the effect of changes in foreign currency
exchange rates on revenues and operating expenses have not been material.
Substantially all of our revenues are earned in U.S. dollars. Operating expenses
incurred by our foreign subsidiaries are denominated primarily in European
currencies. We currently do not use financial instruments to hedge these
operating expenses. We intend to assess the need to utilize financial
instruments to hedge currency exposures on an ongoing basis.

YEAR 2000 READINESS DISCLOSURE

On January 1, 2000, computer systems and software products that were not
upgraded to comply with "Year 2000" requirements could have failed or
malfunctioned because they were not able to distinguish 21st century dates from
20th century dates. The scope of our Year 2000 readiness program included the
review and evaluation of our IT and non-IT systems and the evaluation of the
readiness of third parties and our client and server software products.

Under our Year 2000 readiness program, we inventoried and tested our
principal internal information technology systems for Year 2000 compliance.
Although we continue to test our internal systems, we have experienced no
material problems as a result of the Year 2000 changeover. However, because we
and our customers are substantially dependent upon the proper functioning of our
computer systems, a failure of our systems to be Year 2000 compliant could
materially disrupt our operations, which could seriously harm our business.

Under our Year 2000 readiness program, we also tested our client and server
products to ensure that, when configured and used in accordance with the related
documentation and our customer's hardware platform, they would not experience
any problems as a result of the Year 2000 changeover. To date, we have not
received any reports from our customers that they have experienced any material
problems with our client and server software products as a result of the Year
2000 changeover.

The Year 2000 problem may also affect third party software products that are
incorporated into our client and server tools, applications and other software
products that we modify and license to our customers. When we incorporate third
party software products into our products, we generally discuss Year 2000 issues
with these third parties and sometimes perform internal testing on their
products. We do not, however, as a general matter guarantee or certify that the
software licensed by these suppliers is Year 2000 compliant. Any failure by
third parties to provide Year 2000 compliant software products that we
incorporate into our products could result in financial loss, harm to our
reputation, and liability to others and could seriously harm our business. To
date, we have not encountered any material problems resulting from third party
software products incorporated into our client and server products related to
the Year 2000 changeover.

As part of our Year 2000 readiness program, we inquired as to the Year 2000
readiness of our customers from time to time. Although we do not currently have
extensive information concerning the Year 2000 compliance status of our
customers, we have not received any reports from our customers of any material
problems experienced by them on account of the Year 2000 changeover. Our current
or potential customers may incur significant expense to achieve Year 2000
compliance. If our customers are not Year 2000 compliant, they may experience
material costs to remedy problems, or they may face

38
<PAGE>
litigation costs. In either case, Year 2000 issues could reduce or eliminate the
budgets that current or potential customers could have to license our products.

Because our Year 2000 compliance efforts were part of ongoing system
upgrades, we have funded our Year 2000 plan from operating cash flows and have
not separately accounted for these costs in the past. To date, these costs have
not been material. While we may incur additional costs related to Year 2000
compliance for administrative personnel to manage the continued testing, review
and remediation, and outside vendor and contractor assistance, if necessary, we
currently do not expect future Year 2000 compliance costs to be material. If we
were to experience material problems and costs with Year 2000 compliance, such
problems could seriously harm our business, including:

- Operational disruptions and inefficiencies for us, our customers and
vendors that provide us with internal systems that will divert
management's time and attention and financial and human resources from
ordinary business activities;

- Business disputes and claims for pricing adjustments by our customers,
some of which could result in litigation or contract termination; and

- Harm to our reputation to the extent that our customer's products
experience errors or interruptions of service.

39
<PAGE>
BUSINESS

THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH
FORWARD-LOOKING STATEMENTS. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS."

OVERVIEW

Liberate is a leading provider of a comprehensive software platform for
delivering Internet-enhanced content and applications to a broad range of
information appliances. Information appliances, which include television set-top
boxes, game consoles, smart phones and personal digital assistants, are devices
that are enhanced by Internet capability. Network operators, such as
telecommunications companies, cable and satellite television operators and
Internet service providers, or ISPs, can use our server software to deliver
Internet-enhanced services to numerous information appliances and millions of
consumers. Information appliance manufacturers can use our client software to
Internet-enable their products. Our open platform also provides a uniform
environment for developers to enhance existing content and create new Internet
applications and services for delivery on multiple platforms. Our software
platform is designed to enable network operators to provide consumers with
universal access to these Internet-enhanced applications and services. To extend
the functionality of our software platform, we have also developed strategic
alliances with leading technology vendors such as Cisco Systems, Inktomi, Lucent
Technologies, Netscape, Oracle, Sun Microsystems and TiVo. We also have
established commercial relationships with several large network operators, such
as America Online, Cable & Wireless, Comcast, Cox Communications, MediaOne, NTL,
STAR TV, Shaw Communications and U S WEST.

INDUSTRY BACKGROUND

GROWTH OF THE INTERNET

The Internet is a global network of interconnected public and private
networks that enables millions of people to communicate, collaborate, access
information and conduct business electronically. International Data Corporation,
or IDC, estimates that there were approximately 159 million worldwide users of
the Internet at the end of 1998 and that the number of users will grow to
approximately 410 million by the end of 2002. This growth encourages development
of information and content on the Internet. Furthermore, additional users on the
Internet increase the number of network connections. This increased connection
among parties creates a more robust communications environment that enables new
ways of interaction. Networked applications for information access and
entertainment, such as e-mail and e-commerce, have already become an integral
part of the daily lives of millions of consumers. The Internet has the potential
to become even more pervasive among consumers and businesses worldwide, as new
infrastructure technologies emerge to enable more universally available and
higher speed communications and richer, more interactive services.

NETWORK OPERATORS SEEK TO LEVERAGE THE GROWTH OF THE INTERNET

Network operators seek to capitalize on revenue opportunities offered by
rapidly growing Internet traffic across worldwide communications networks. To
date, a limiting factor in consumer Internet usage has been the low transmission
speeds associated with analog modems and standard phone lines. With the
increasing availability of high speed technologies such as cable modems, high
speed telecommunications networks and digital broadcast satellite, network
operators can now offer transmission speeds over 50 times faster than standard
analog modems. As the Internet challenges traditional channels of communications
and media, network operators are investing billions of dollars to construct high
speed network infrastructures. According to Paul Kagan Associates, the number of
U.S. households with access to high speed delivery will grow from 19 million in
1998 to 51 million in 2002. Network operators intend to attract consumers by
offering new voice, video and data services over these high speed networks. The
richer Internet content and range of additional services that can be offered by
network operators are expected to significantly improve user experiences and
accelerate the adoption of the Internet among casual consumers.

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THE NEED FOR INCREASED ACCESSIBILITY TO THE INTERNET

Since its inception, the Internet has been accessed primarily through
personal computers, which are relatively complex and expensive. While the
personal computer remains an important access device, Liberate believes users
are increasingly looking to access the Internet from multiple, alternative
devices. At the same time, network operators are seeking to provide greater
Internet access to increase the value of traditional phone, satellite and
cable-based services. In response to these needs, information appliances, a new
category of low-cost devices designed to combine everyday user activities with
Internet access, have been developed. These devices are characterized by their
ease of use and flexible form factors, such as size, weight, shape, portability
or mobility. Specific examples of information appliances include television
set-top boxes, game consoles, smart phones and personal digital assistants.
Liberate believes that in the short term, information appliances will be
extensions of common consumer electronics products such as television sets and
game consoles. Liberate expects that over the longer term, many new information
appliances will be introduced, some of which will be derivatives of existing
products while others may represent radically new designs. IDC estimates that
the worldwide market for information appliances will grow at a compound annual
growth rate of approximately 62% to become a $15 billion market by 2002.

EMERGENCE OF THE TELEVISION AS A PLATFORM FOR INTERNET-ENABLED SERVICES

Television provides one of the most attractive devices for network operators
to deliver new Internet-enabled services. The television set has become a
ubiquitous consumer product that people are comfortable using for entertainment
and information. According to IDC, at the end of 1998, over 99 million out of
101 million households in the United States had at least one television set and
many had multiple television sets. The display and sound capabilities of the
television also make it ideally suited for Internet-enhanced, rich media
services such as interactive program guides, e-commerce, communications,
including e-mail and online discussion groups, and multi-user gaming. Cable,
satellite and telecommunications operators are already aggressively expanding
their high-speed digital networks to provide many new services to their
subscribers through the television. IDC estimated that 15 million U.S.
households had digital television service in 1998, and IDC expects that number
to rise to over 37 million in 2002. Forrester Research projects that the market
for enhanced television will be $11 billion in advertising and $7 billion in
commerce by 2004.

MARKET OPPORTUNITY FOR A COMPREHENSIVE SOFTWARE PLATFORM THAT ADHERES TO
INDUSTRY STANDARDS

Just as the development of the Internet required an infrastructure built
upon a commonly accepted set of technology standards that linked personal
computers to Web servers and other personal computers, the emerging convergence
of voice, data, the Internet and related enhanced services requires a similar
open infrastructure. A server software platform that adheres to industry
standards enables network operators to expand their service offerings to a
greater number of people and enables information appliance manufacturers to
deliver a wide range of devices to network operators and consumers. Both network
operators and information appliance manufacturers require a software platform
that manages the delivery of Internet content and services to a large number of
users employing many different devices. This software platform must consist of
server software that is deployed throughout the network infrastructure and
client software that can effectively operate over a wide range of low-cost
devices that may be optimized for size, weight and power consumption. The
software platform's ability to deliver new kinds of Internet-enabled services to
any type of information appliance increases the value of the subscriber to the
network operator.

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THE LIBERATE SOLUTION

Liberate provides a comprehensive software platform that enables the
delivery of Internet-enhanced content and applications to a broad range of
information appliances. Using the Liberate software platform, network operators
can deliver a new generation of interactive digital content and applications to
their subscribers. Manufacturers of information appliances use our software to
add Internet capability to their products. In addition, network operators and
information appliance manufacturers use the Liberate open platform cooperatively
to create a uniform environment for developers to enhance existing content and
create new Internet applications and services for delivery on multiple
information appliances. Subscribers will be able to access these
Internet-enhanced applications and services from anywhere at anytime.

Our open software platform includes server and client products. Our software
is designed to manage delivery of Internet content and applications to millions
of users and allows the network operators to support a broad range of appliances
using a single server software platform. Liberate's open server architecture can
seamlessly integrate into major databases and existing billing systems,
facilitating the deployment and maintenance of Internet services for a range of
information appliances. Our client software is based on the Netscape Navigator
source code and has been designed to run Internet applications on information
appliances. Our client software can be implemented in many access devices, even
ones that have limited memory and computing resources. In addition, it is highly
portable, which enables it to run on many devices with differing capabilities.
Also embedded in the client software is proprietary technology that enables
information appliance manufacturers to deliver a high quality picture on a wide
range of displays.

[The graphic shows four icons of information appliances: an "Analog TV
Set-top Box" with "TV Navigator," a "Digital Cable TV Set-top Box" with "TV
Navigator," a "Game Console" with "eNavigator" and a "PDA" with "eNavigator."
These icons are connected to a picture of the Connect Server by four lines.
These lines are labeled "POTs," "Cable/Satellite," "xDSL" and "Wireless." The
other side of the Connect Server is attached to a circle with "Internet" inside.
The circle is connected by lines to three computer icons labeled: "Additional
Content (news, ATVEF)," "Network Operator and third-party applications (program
guide, VOD, e-commerce)" and "Liberate Applications (TV Mail, TV Chat)."]

Key benefits of our platform for network operators include the following:

OPPORTUNITY FOR INCREASED REVENUE AND PROFITABILITY PER
SUBSCRIBER. Liberate's platform allows network operators to maintain direct
contact with their subscribers, giving network operators control over the value
of their brand, the look and feel of their user interface and identity of their
service. Network operators can generate additional revenues by offering enhanced
voice and video services over their existing infrastructure. The deployment and
maintenance of information appliances can generate

42
<PAGE>
incremental revenue from new services such as Internet-enhanced television,
e-commerce, multi-user gaming and others yet to be developed. These
differentiated services help reduce subscriber turnover and create a competitive
advantage over other operators.

ACCELERATED TIME TO REVENUE. Using the Liberate platform, network operators
can quickly deploy Internet-enhanced services. Our products easily integrate
into the network operators' existing subscriber management systems allowing for
rapid installation. Liberate has developed several applications that network
operators can use to rapidly introduce new services. In addition, Liberate
provides comprehensive systems integration and implementation services and
customer support to complement the flexible architecture of our server software.

Key benefits of our platform for information appliance manufacturers include
the following:

POTENTIAL FOR LOWER COST DEVICES. Liberate's client software is designed to
work efficiently in many types of information appliances. Our source code has
been optimized to reduce the system resources required to run the client
software. As a result, information appliance manufacturers can lower the cost of
producing information appliances by using less powerful microprocessors, less
memory and other more cost-effective components.

MORE DESIGN FLEXIBILITY. Our client software is a highly flexible solution
for the information appliance manufacturer. It is portable and currently
supports five microprocessor architectures, eight operating systems and a wide
variety of display technologies. In addition, our software can operate with
multiple transport software protocols and run across multiple high and low speed
networks. By using our client software, manufacturers can create new information
appliances or turn existing devices into information appliances.

STRATEGY

Our objective is to be the leading provider of a comprehensive software
platform that enables the delivery of Internet content and applications to
information appliances. In order to achieve this goal, Liberate must:

EXTEND MARKET LEADERSHIP. We intend to continue targeting network operators
that have large subscriber bases and information appliance manufacturers that
are leaders in their markets. Our initial efforts have focused on achieving
early design wins with operators of multiple cable and satellite television
systems, ISPs, telecommunications companies and information appliance
manufacturers in the television marketplace. We believe that these early design
wins have helped to establish us as a market leader and will allow us to extend
the platform to other markets.

INVEST AGGRESSIVELY IN TECHNOLOGY. As of November 30, 1999, we have spent
approximately $77.0 million on research and development to create our current
software platform. Our software products are designed to be highly scalable, are
portable and support a wide range of devices. We have built extensive expertise
in technology for devices with limited memory and computing resources, Internet
content display algorithms, scalable and server software components and
multi-platform development. We intend to continue investing heavily in research
and development to meet the network operators' and information appliance
manufacturers' needs for more devices, and additional features and
functionality.

LEVERAGE AND EXPAND STRATEGIC ALLIANCES. We believe that forging
relationships with key vendors is critical to promoting open standards and
delivering a comprehensive solution to network operators and information
appliance manufacturers. We work closely with major technology companies such as
Netscape, Oracle and Sun Microsystems for the integration of core Internet
browser and server components. In addition, we work with companies such as Cisco
Systems, Inktomi and Lucent Technologies to ensure compatibility within the
network operator's current and future network

43
<PAGE>
infrastructure. We are also working with companies such as General Instrument,
Pace Micro Technology, Philips Electronics and Scientific Atlanta on integrating
our software with digital set-top boxes, Web boxes and digital satellite
architectures. We also integrate Internet technologies from other companies such
as RealNetworks, TwoWay TV and Wink Communications. We intend to seek additional
relationships to expand the scope of our customer reach and functionality.

PROMOTE THE DEVELOPMENT OF INTERNET-ENHANCED SERVICES. We intend to
continue developing additional core applications and are actively encouraging
developers to build new content and applications using our software platform. In
connection with this activity, we run a developer program called PopTV that
provides our content and applications development kit to developers free of
charge. Companies currently using our tools to develop content and applications
include America Online, Discovery Channel, E! Entertainment, Excite@Home, NBC,
Sony and The Weather Channel.

DEVELOP, MAINTAIN AND ADHERE TO INDUSTRY STANDARDS. We are a recognized
leader in developing and setting the next generation of standards for the
information appliance infrastructure. We adhere to industry standards throughout
our product line and we believe that support for standards strengthens our
market position. In addition to incorporating existing standards such as Java,
hypertext mark-up language, or HTML, and JavaScript, we have led industry
consortiums to develop standards for information appliance services such as
enhanced television, home networking and smartcards. Our active participation in
setting these and other standards allows us to play an important role in
defining and supporting standards for new market opportunities as they develop.

PRODUCTS AND TECHNOLOGY

Liberate's information appliance software platform includes a full range of
client and server products, tools and applications. Liberate offers network
operators a suite of server solutions tailored to the cable, satellite,
telecommunications and ISP markets. Liberate delivers three client products
targeted for the needs of information appliance manufacturers in the television
and embedded markets. Our tools and pre-configured applications allow network
operators and information appliance manufacturers to offer a fully customizable
client and server platform.

The Liberate client and server software platform incorporates proprietary
technology that we have developed to address the needs of network operators and
information appliance manufacturers. This technology includes:

- OPTIMIZED CLIENT TECHNOLOGY. Starting at 700Kb, Liberate offers one of the
smallest, most efficient HTML and JavaScript engines available, which
allows it to be used in a wide variety of information appliances.

- PORTABLE CLIENT ARCHITECTURE. We have developed our client software with
the flexibility to operate on a wide variety of information appliances.
Our client software currently supports processors from, among others, ARM,
Hitachi, IBM, Intel, MIPS and Sun Microsystems, and runs on multiple
operating systems from, among others, Microsoft, Scientific Atlanta and
Wind River Systems, as well as Linux.

- INNOVATIVE DISPLAY TECHNOLOGY. Liberate has developed a proprietary
display software called IQView. IQView optimizes Internet content for
delivery on virtually any display device, without specialized graphics
hardware.

- EXPERTISE IN INTERNET TECHNOLOGY. Liberate has spent over two years
developing fundamental expertise in working with Internet browser and
server software. This enables Liberate to easily modify and enhance its
client software with critical third-party technologies such as Java and
Real Audio while maintaining compatibility with Internet standards.

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The following table provides a list of our principal products and a brief
description of the features and benefits to our customers of each.

<TABLE>
<S> <C> <C>
- -------------------------------
PRODUCT FEATURES BENEFITS
- ---------------------------------------------------------------------------------------------------------------
LIBERATE SERVER PRODUCTS
LIBERATE CONNECT Subscriber and application management Network operators can control
subscriber access to applications and
services and can access subscriber data
for efficient customer support
Internet standard security Network operators can offer subscribers
and external e-commerce providers
highly secure transactions
Open standards integration interfaces Network operators can seamlessly
integrate Liberate servers with
existing subscriber management systems
Device management tools Network operators can distribute
software updates automatically and
efficiently to all network devices and
restore services rapidly in case of
client or network failure
Highly scalable architecture Network operators can scale networks to
support millions of subscribers by
simply installing more servers on the
system
LIBERATE MEDIACAST Content and application broadcasting Network operators can utilize existing
network infrastructure to broadcast
Internet content and interactive
applications
Multiple transport stream capability Network operators can more fully
utilize infrastructure assets by
transmitting data over different
networks
LIBERATE TRANSCODER Reduced processing and memory load Network operators can deliver rich
Internet content and applications to a
broad range of information appliances
Internet content error checking Network operators can ensure accurate
rendering of HTML, image and audio
content
LIBERATE SYSTEM MANAGER Server and applications management Network operators can manage and
monitor all Liberate client and server
systems throughout their network from a
centralized workstation
Internet browser-based interface Network operators can manage their
complete network from any Internet
connected workstation
- ---------------------------------------------------------------------------------------------------------------
LIBERATE APPLICATIONS
LIBERATE TV INFO XML-based architecture receives, Network operators can combine and
integrates and exports multiple TV deliver TV program data and Internet
and Internet data sources to multiple data to various applications, including
clients and applications interactive program guides, channel
bars and pay-per-view applications
LIBERATE TV MAIL TV-based e-mail application Network operators can offer customized
e-mail services using existing
infrastructure
Picture and video e-mail Network operators are able to offer
rich multimedia content which enhances
the e-mail experience
LIBERATE TV CHAT Online discussion application Network operators can promote
integrated with TV programming subscriber communities by supplementing
existing TV programming with
interactive online discussion
capabilities
</TABLE>

45
<PAGE>
<TABLE>
<S> <C> <C>
- -------------------------------
PRODUCT FEATURES BENEFITS
- ---------------------------------------------------------------------------------------------------------------
LIBERATE CLIENT PRODUCTS
LIBERATE TV NAVIGATOR FOR DTV Small memory requirement, 700Kb Information appliance manufacturers can
reduce costs by reducing memory and
processing component costs. Software
runs on memory-constrained devices,
including digital set-top boxes
Integrated video and data path Network operators can use existing high
speed video delivery systems to deliver
Internet-based interactive television
content and applications, such as
TV-based browsers and e-mail
HTML and JavaScript support Network operators can deliver standard
Internet applications, content and
services to their customer base
Highly portable Information appliance manufacturers can
easily add the Liberate software
platform to a variety of existing and
next-generation information appliances
Customizable user interface Network operators and information
appliance manufacturers can brand and
control the user interface associated
with the service and of applications
offered
LIBERATE TV NAVIGATOR FOR ISP INCLUDES ALL OF THE FEATURES FOR TV
NAVIGATOR FOR DTV LISTED ABOVE PLUS
THESE FEATURES:
Transport independent Network operators can deliver services
through, among others, standard
telephone, cable television and other
telecommunications networks
Broad language localization Network operators can deliver services
to a number of international markets
including the Japanese and Chinese
markets
LIBERATE ENAVIGATOR Small memory requirements Information appliance manufacturers can
add a feature-rich Internet-based
communications platform to highly
memory-constrained information
appliances, such as smart phones and
personal digital assistants
Rich development environment Developers can rapidly integrate
modular components to develop Internet
applications for numerous devices
HTML and JavaScript support, rich Information appliance manufacturers can
graphics engines and extensive font enhance the interactivity of embedded
libraries systems by utilizing proprietary
hardware-independent graphics display
capabilities
- ---------------------------------------------------------------------------------------------------------------
LIBERATE TOOLS
LIBERATE CONTENT DEVELOPMENT Tools and tutorials for creating Developers can rapidly develop Internet
KIT applications content and applications targeted to a
television audience
LIBERATE TV NAVIGATOR FOR DTV Real time emulator running on Developers can avoid investing in
SET-TOP EMULATOR Windows 98 expensive prototypes during the design
and testing of applications
Suite of integrated debugging tools Developers can debug JavaScript and
HTML-based code in an easy-to-use
development environment
</TABLE>

46
<PAGE>
SERVICES

Liberate provides a comprehensive set of consulting and engineering services
to its customers. The deployment by network operators of Internet-enhanced
services and the development by information appliance manufacturers of new
products require a high level of customer service and support. We believe that
our consulting and engineering services organizations are critical to the
successful sale and deployment of our products. We typically charge customers on
a time and materials basis for our services.

CONSULTING SERVICES. As of November 30, 1999, Liberate's consulting
services organization consisted of 14 full-time employees. This organization
provides project management support, which includes service implementation
guidance, product customization and product configuration support. To help
ensure seamless product deployments, this organization works closely, often on
site, with network operators to integrate, install and maintain our software.

ENGINEERING SERVICES. As of November 30, 1999, Liberate's engineering
services organization consisted of 49 full-time engineers. This organization
provides project management and engineering assistance to information appliance
manufacturers. In addition, this organization provides assistance with custom
application development. We typically retain the rights to intellectual property
developed by our engineering services organization.

CUSTOMER SERVICE, SUPPORT AND TRAINING. As of November 30, 1999, Liberate's
service and support organization consisted of 19 full-time employees that
provide worldwide support and services. Outside of the United States, we often
work with Oracle to augment our service capability. Liberate runs a worldwide
technical training program for customers and developers. Curriculum and training
classes are available for most Liberate products. See "Related Party
Transactions--Transactions with Oracle."

SALES AND MARKETING

Liberate sells products through its direct sales force and indirectly
through Oracle and Wind River Systems. We intend to increase the number of
indirect distribution partners. Our sales force, which consisted of 28
individuals on November 30, 1999, is organized into teams consisting of sales
representatives and systems engineers. Currently, direct sales professionals are
located in North America, Europe and Asia/Pacific. Liberate uses its direct
sales force to target the customers that it believes provide the highest
potential for service deployment and revenues.

More specifically, Liberate sells its server products either directly to
network operators or to system integrators who then resell to the network
operators. Liberate sells its client products directly to information appliance
manufacturers or to embedded operating system vendors who resell the client
software to information appliance manufacturers. Information appliances
containing our software platform are then distributed by the manufacturer to the
end user either through a retail channel or through network operators.

47
<PAGE>
To complement the direct sales and distribution efforts, Liberate utilizes
an integrated marketing approach focused on identifying customer needs, defining
products and stimulating demand. Liberate participates in trade shows worldwide,
arranges speaking engagements for key personnel, sponsors conferences and runs a
developers program. An internal creative production group supports the marketing
effort by helping to define the next generation of interfaces for Liberate
products. Market research is used to test Liberate prototypes and products to
help ensure ease-of-use and a high degree of customer satisfaction.

[The graphic shows a box with "Liberate" inside. The box has arrows pointing
left to a box with "Embedded OS Vendors" inside and another box with "Info.
Appliance Manufacturers" inside. This box has arrows pointing right to a box
with "Network Operators" inside and down to a box with "Channel" inside. This
box has an arrow pointing down to a box with "End User" inside. The box with
"Liberate" also has arrows pointing right to a box with "System Integrators"
inside and the box with "Network Operators" inside. This box has an arrow
pointing down to the box with "End User" in it.]

48
<PAGE>
CUSTOMERS

As of November 30, 1999, Liberate has achieved over 20 network operator
design wins and information appliance manufacturers have shipped over 339,000
units that incorporate Liberate software. Liberate software is localized for a
number of international markets and languages, including Chinese and Japanese.
The following is a partial list of our customers, grouped according to industry,
that we believe is representative of our overall customer base:

NETWORK OPERATORS

CABLE AND SATELLITE
Cable & Wireless
Comcast
Cox Communications
MediaOne
Shaw Communications
STAR TV

HOTEL INTERACTIVE SERVICES
Guestlink International
LodgeNet Entertainment

INTERNET SERVICE PROVIDERS
America Online
DTI (Mitsubishi)

TELECOMMUNICATIONS
NTL
NTT
U S WEST

INFORMATION APPLIANCE MANUFACTURERS

WEB BOXES
Acer
Boca Research
Philips Electronics

DIGITAL SET-TOP BOXES
General Instrument
Hughes Network Systems
Next Level Communications
Pace Micro Technology
TiVo

COMPETITION

Competition in the information appliance software market is intense. Our
principal competitors on the client software side include Microsoft, OpenTV and
Spyglass. On the server side, our primary competitor is Microsoft. We also
expect additional competition from other established and emerging companies. We
expect competition to persist and intensify as the information appliance market
develops and competitors focus on additional product and service offerings. We
believe that the principal competitive factors in our industry are the quality
and breadth of product and service offerings, the ease and speed with which a
product can be integrated into network operators' existing internal systems and
deployed to network operators' customers, whether the software platform operates
efficiently with numerous information appliances, financial resources, price,
time-to-market and the effectiveness of sales and marketing efforts. We believe
that we presently compete favorably with our competitors in these areas.
However, the market for information appliances is evolving and we cannot be
certain that we will compete successfully in the future. See "Risk
Factors--Competition from Bigger, Better Capitalized Competitors Could Result in
Price Reductions, Reduced Gross Margins and Loss of Market Share."

INTELLECTUAL PROPERTY

Liberate seeks to protect its proprietary rights and its other intellectual
property through a combination of copyrights, trademarks, patents and trade
secret protection, as well as through contractual protections such as
proprietary information agreements and nondisclosure agreements. However, we
cannot guarantee that the steps we have taken to protect our proprietary rights
will be adequate to deter misappropriation of our proprietary information, and
we may not be able to detect unauthorized use and take appropriate steps to
enforce our intellectual property rights. See "Risk

49
<PAGE>
Factors--Our Limited Ability to Protect Our Intellectual Property and
Proprietary Rights May Harm Our Competitiveness."

EMPLOYEES

As of November 30, 1999, we had 269 employees, including 103 in engineering,
55 in sales and marketing, 82 in services and 29 in administration. None of our
employees is represented by a collective bargaining agreement. We have never
experienced a work stoppage, and we consider our relations with our employees to
be good.

Our future operating results depend in significant part on the continued
service of our key technical, sales and senior management personnel, none of
whom, except Mitchell E. Kertzman and Coleman Sisson, are party to an employment
agreement. Our future success also depends on our continuing ability to attract
and retain highly qualified technical, sales and senior management personnel.
Competition for these personnel is intense, and we may not be able to retain the
key members of our technical, sales and senior management staff or attract these
personnel in the future. We have experienced difficulty in recruiting qualified
technical, sales and senior management personnel, and we expect to experience
these difficulties in the future. If we are unable to hire and retain qualified
personnel in the future, our business could be seriously harmed.

FACILITIES

Liberate leases approximately 78,000 square feet of office space for our
headquarters in San Carlos, California, approximately 5,000 square feet of
office space in Salt Lake City, Utah and an office suite in a business center in
Bellevue, Washington. In connection with the relocation of our headquarters to
San Carlos, California, we exercised our option to lease an additional 103,000
square feet of office space in San Carlos, California. We plan to sublease up to
51,000 square feet of this headquarters office space. In addition, Liberate
leases approximately 1,100 square feet in London for its United Kingdom sales
office. Liberate also leases approximately 45,000 square feet in Sunnyvale,
California, which it subleases.

LITIGATION

In December 1998, one of our former employees filed an action in the
California Superior Court for the County of San Mateo against us for, among
other things, unpaid commissions of approximately $1.5 million, constructive
employment termination, intentional misrepresentation and negligent
misrepresentation. In October 1999, the plaintiff amended his complaint against
us, adding claims for damages for failure to pay wages under the California
Labor Code and common law retaliation, and sought to impose a constructive trust
on the allegedly withheld commissions and any enhancement in value of that
money. We have conducted extensive discovery on these claims, which we believe
to be without merit. In December 1999, we filed a motion for summary
judgment/summary adjudication to dismiss all of the claims brought by the
plaintiff. In January 2000, the Court dismissed eight of the ten claims brought
against us leaving only the claims of intentional and negligent
misrepresentation for trial. We continue to believe that these claims are
without merit and that we have strong defenses to them. We intend to continue to
vigorously defend this action as to the remaining claims.

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<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors and other key employees of Liberate,
and their ages as of December 31, 1999, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Mitchell E. Kertzman...................... 50 President, Chief Executive Officer and Director
Nancy J. Hilker........................... 42 Vice President and Chief Financial Officer
David A. Limp............................. 33 Senior Vice President of Corporate Development
Coleman Sisson............................ 42 Chief Operating Officer
Charles G. Tritschler..................... 34 Vice President of Marketing
Philip A. Vachon.......................... 42 Senior Vice President of Worldwide Sales
Steven Weinstein.......................... 44 Senior Vice President of Strategic Initiatives
Gordon T. Yamate.......................... 44 Vice President, General Counsel and Secretary
David J. Roux (1)(2)...................... 43 Chairman of the Board of Directors
James L. Barksdale(3)..................... 56 Director
Charles Corfield(1)(3).................... 40 Director
Lawrence J. Ellison....................... 55 Director
Jeffrey O. Henley (1)(2).................. 55 Director
Thomas F. Nagel........................... 36 Director
</TABLE>

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

(1) Member of finance and audit committee.

(2) Member of compensation committee.

(3) Member of independent directors committee.

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

MITCHELL E. KERTZMAN has been President, Chief Executive Officer and a
director of Liberate since November 1998. Prior to joining Liberate,
Mr. Kertzman was a member of the board of directors of Sybase, a database
company, from February 1995 until he joined Liberate. He served as Chairman of
Sybase's board of directors since July 1997. Between February 1998 and August
1998, he also served as Co-Chief Executive Officer of Sybase. From July 1996
until February 1997 Mr. Kertzman served as Chief Executive Officer of Sybase and
from July 1996 until July 1997 he also served as President of Sybase. Between
February 1995 and July 1996, he served as an Executive Vice President of Sybase.
In February 1995, Sybase merged with Powersoft Corporation, a provider of
application development tools. Mr. Kertzman had served as Chief Executive
Officer and a director of Powersoft since he founded it in 1974. He also served
as President of Powersoft from April 1974 to June 1992. Mr. Kertzman also serves
as a director of CNET.

NANCY J. HILKER has been Vice President and Chief Financial Officer of
Liberate since its merger with Navio in August 1997. Prior to the merger, she
had served as Vice President and Secretary of Navio since July 1996. Prior to
joining Navio, Ms. Hilker served in various capacities at IntelliCorp, a
software company, from June 1991 to July 1996, most recently as Chief Financial
Officer and Secretary. From October 1979 to June 1991, Ms. Hilker held various
positions at Deloitte & Touche, an accounting firm, as a manufacturing and high
technology specialist in the emerging business services group. Ms. Hilker is a
Certified Public Accountant.

DAVID A. LIMP has been Senior Vice President of Corporate Development since
January 1999. Mr. Limp was our Vice President of Marketing from August 1997 to
January 1999. From December 1996 to August 1997, Mr. Limp was Vice President of
Marketing of Navio. Prior to joining Navio,

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<PAGE>
Mr. Limp served in various capacities at Apple Computer from July 1987 to
November 1996, most recently as director of its North and South American
PowerBook division.

COLEMAN SISSON has been our Chief Operating Officer since November 1999.
Prior to joining Liberate, Mr. Sisson was President and Chief Operating Officer
of CyberSafe, a network security company, from July 1997 to November 1999. From
August 1995 to July 1997, Mr. Sisson served as Senior Vice President and General
Manager, Education Services Group, at Vanstar, a technology product and services
company. From June 1992 to August 1995, Mr. Sisson served as Vice President,
Worldwide Customer Services, at Powersoft, a provider of application development
tools.

CHARLES G. TRITSCHLER has been Vice President of Marketing since January
1999. Mr. Tritschler was our Director of Product Marketing from August 1997 to
January 1999. From April 1997 to August 1997, Mr. Tritschler was Director of
Product Marketing of Navio. Prior to joining Navio, Mr. Tritschler served in
various capacities at Apple Computer from July 1988 to April 1997, most recently
as Product Line Manager.

PHILIP A. VACHON has been Senior Vice President of Worldwide Sales since
January 1999. Before that he served as our Senior Vice President of Americas
Sales from June 1997 to January 1999. Prior to joining Liberate, Mr. Vachon
served in various capacities at Oracle, from March 1987 to June 1997, most
recently as Vice President of Alliances. Prior to joining Oracle, Mr. Vachon
worked at Applied Data Research, a database software company, from February 1984
to December 1986 in various sales and technical positions.

STEVEN WEINSTEIN has been Senior Vice President of Strategic Initiatives
since November 1999. Before that he served as our Senior Vice President of
Product Development from March 1999 to November 1999. From August 1997 to March
1999, Mr. Weinstein was our Vice President of Product Development. From
September 1996 to August 1997, Mr. Weinstein was Vice President of Product
Development of Navio. Prior to joining Navio, Mr. Weinstein was the General
Manager and Vice President of Production at Spectrum HoloByte/MicroProse, a
computer game manufacturer, from July 1992 to September 1996. Prior to that,
Mr. Weinstein served as Vice President of Software Engineering at Electronics
for Imaging, a hardware and software company, from August 1991 to August 1992.

GORDON T. YAMATE has been Vice President and General Counsel since March
1999 and has been Secretary since May 1999. Prior to joining Liberate,
Mr. Yamate was associated with the law firm of McCutchen, Doyle, Brown &
Enersen, LLP since September 1983, and had been a partner since June 1988.

DAVID J. ROUX has been a director of Liberate since May 1996 and Chairman of
the Board of Directors since October 1998. He previously served as our Chairman
from October 1996 to September 1997. From February 1998 to November 1998, he
served as the Chief Executive Officer and President of Liberate. Mr. Roux is
currently a general partner of Silver Lake Partners, a private equity firm.
Mr. Roux held various management positions with Oracle from September 1994 until
December 1998, most recently as Executive Vice President of Corporate
Development. Before joining Oracle, Mr. Roux served as Senior Vice President,
Marketing and Business Development at Central Point Software from April 1992 to
July 1994. From October 1987 to April 1992, Mr. Roux served in various
capacities at Lotus, a software company, most recently as Senior Vice President
of the Portable Computing Group. Before joining Lotus, Mr. Roux co-founded and
served as the Chief Executive Officer of Datext, a CD ROM publishing company,
from June 1984 to October 1987.

JAMES L. BARKSDALE has been a director of Liberate since August 1997, when
Liberate acquired Navio. Mr. Barksdale served as a director of Navio from July
1996 until the merger with Liberate. Mr. Barksdale is currently a partner at The
Barksdale Group. Mr. Barksdale served at Netscape from January 1995 to March
1999 as President and Chief Executive Officer. From January 1992 to January
1995, Mr. Barksdale served as President and Chief Operating Officer, and, as of
September 1994, Chief

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<PAGE>
Executive Officer, of AT&T Wireless Services, formerly, McCaw Cellular
Communications, a cellular telecommunications company. From April 1983 to
January 1992, Mr. Barksdale served as Executive Vice President and Chief
Operating Officer of Federal Express. Mr. Barksdale also serves as a director of
3Com, America Online, Robert Mondavi and Sun Microsystems.

CHARLES CORFIELD has been a director of Liberate since December 1998.
Mr. Corfield has been a partner at both Whitman Capital and Mercury Capital,
each a venture capital firm, since 1996. Mr. Corfield co-founded Frame
Technology, a software company, in 1986 and served as a member of its board of
directors and as its Chief Technology Officer until it was acquired by Adobe
Systems in 1995.

LAWRENCE J. ELLISON has been a director of Liberate since August 1997.
Mr. Ellison previously served as Liberate's Chairman from September 1997 to
October 1998. Mr. Ellison has been Chief Executive Officer and a director of
Oracle since he co-founded it in May 1977, and was President of Oracle until
June 1996. Mr. Ellison has been Chairman of the Board of Oracle since June 1995
and was previously Chairman of the Board of Oracle from April 1990 until
September 1992. Mr. Ellison also serves as a director of Apple Computer,
SuperGen and Spring Group.

JEFFREY O. HENLEY has been a director of Liberate since May 1996.
Mr. Henley has been Executive Vice President and Chief Financial Officer of
Oracle since March 1991 and has been a director of Oracle since June 1995. Prior
to joining Oracle, he served as Executive Vice President and Chief Financial
Officer of Pacific Holding Company, a privately-held company with diversified
interests in manufacturing and real estate, from August 1986 to February 1991.

THOMAS F. NAGEL has been a director of Liberate since January 2000.
Mr. Nagel has served in various capacities at Cox Communications, formerly Cox
Entertainment, most recently as Vice President, Business Development, since
September 1993.

BOARD OF DIRECTORS

Liberate currently has authorized seven directors. The officers serve at the
discretion of the Board. There are no family relationships among the directors
and officers of Liberate.

BOARD COMMITTEES

The finance and audit committee consists of Messrs. Corfield, Henley and
Roux. The finance and audit committee makes recommendations to the board of
directors regarding the selection of independent accountants, reviews the
results and scope of audit and other services provided by our independent
accountants and reviews and evaluates our audit and control functions. The
compensation committee consists of Messrs. Henley and Roux. The compensation
committee administers our stock plans and makes decisions concerning salaries
and incentive compensation for our employees. The independent directors
committee consists of Messrs. Barksdale and Corfield. The independent directors
committee considers and reviews all agreements between us and Oracle.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the compensation committee is currently an officer or employee
of Liberate. Mr. Henley has not, at any time since the formation of Liberate,
been an officer or employee of Liberate. Although Mr. Roux was formerly an
officer of Liberate, he has not served as an officer or employee of Liberate at
any time while serving on our compensation committee. Except for Mr. Henley, no
member of our compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee.

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<PAGE>
DIRECTOR COMPENSATION

We do not currently provide our directors with cash compensation for their
services as members of the board of directors, although members are reimbursed
for some expenses in connection with attendance at board and committee meetings.
On December 11, 1998, we granted Messrs. Barksdale and Corfield each an option
to purchase 83,332 shares of our common stock at an exercise price of $2.55 per
share. At each annual stockholders' meeting, non-employee directors will receive
automatic option grants under our 1999 equity incentive plan. See "Employee
Stock Plans--1999 Equity Incentive Plan."

INDEMNIFICATION

We have entered into indemnification agreements with each of our directors
and executive officers. The form of indemnity agreement provides that we will
indemnify against any and all expenses of the director or executive officer who
incurred such expenses because of his or her status as a director or executive
officer, to the fullest extent permitted by Delaware law, our certificate of
incorporation and our bylaws.

Our certificate of incorporation and bylaws contain certain provisions
relating to the limitation of liability and indemnification of directors and
officers. The certificate of incorporation provides that our directors shall not
be personally liable to Liberate or its stockholders for monetary damages for
any breach of fiduciary duty as a director, except for liability:

- For any breach of the director's duty of loyalty to us or our
stockholders;

- For acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

- In respect of certain unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law; or

- For any transaction from which the director derives any improper personal
benefit.

Our certificate of incorporation also provides that if Delaware law is
amended after the approval by our stockholders of the certificate of
incorporation to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of our directors shall be
eliminated or limited to the fullest extent permitted by Delaware law. The
foregoing provisions of the certificate of incorporation are not intended to
limit the liability of directors or officers for any violation of applicable
federal securities laws. In addition, as permitted by Section 145 of the
Delaware General Corporation Law, our bylaws provide that:

- We are required to indemnify our directors and executive officers to the
fullest extent permitted by Delaware law;

- We may, in our discretion, indemnify other officers, employees and agents
as provided by Delaware law;

- To the fullest extent permitted by Delaware law, but subject to various
exceptions, we are required to advance all expenses incurred by our
directors and executive officers in connection with a legal proceeding;

- The rights conferred in the bylaws are not exclusive;

- We are authorized to enter into indemnification agreements with our
directors, officers, employees and agents; and

- We may not retroactively amend the bylaw provisions relating to indemnity.

Our bylaws provide that we shall indemnify our directors to the fullest
extent permitted by Delaware law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law.

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<PAGE>
EXECUTIVE COMPENSATION

The following table sets forth information regarding compensation for the
fiscal year ended May 31, 1999 that we paid for services rendered by our current
Chief Executive Officer, our four other executive officers who earned more than
$100,000 during the fiscal year ended May 31, 1999 and a former executive
officer.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------------
AWARDS
ANNUAL COMPENSATION ----------------------
---------------------- SECURITIES ALL OTHER
SALARY ($) BONUS ($) UNDERLYING OPTIONS (#) COMPENSATION ($)
---------- --------- ---------------------- ----------------
<S> <C> <C> <C> <C>
Mitchell E. Kertzman(1)............... $162,611 -- 3,333,332 --
President and Chief Executive Officer

Nancy J. Hilker....................... 187,600 $30,000 116,664 --
Vice President and Chief Financial
Officer

David A. Limp......................... 189,683 30,000 166,666 --
Senior Vice President of Corporate
Development

Philip A. Vachon...................... 512,282(2) -- 199,998 --
Senior Vice President of Worldwide
Sales

Steven Weinstein...................... 190,517 10,000 50,000 --
Senior Vice President of Strategic
Initiatives

David J. Roux(3)...................... 210,417 58,437 1,666,666 $2,600(4)
Former Chief Executive Officer
</TABLE>

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

(1) Mr. Kertzman became our President and Chief Executive Officer on
November 16, 1998. His current annual salary is $300,000.

(2) Includes $313,537 in commissions.

(3) Mr. Roux was our Chief Executive Officer from February 1998 to November
1998, and all compensation in this table represents payments made by Oracle
to Mr. Roux for this period for his services as an officer of Oracle and
Liberate.

(4) Represents matching contributions to Mr. Roux's 401(k) plan account.

55
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth each grant of stock options during the fiscal
year ended May 31, 1999, to each of the executive officers named in the Summary
Compensation Table. No stock appreciation rights were granted during this
period.

The exercise price of each option was equal to the fair market value of our
common stock as valued by the board of directors on the date of grant. The
exercise price may be paid in cash, in shares of our common stock valued at fair
market value on the exercise date or through a cashless exercise procedure
involving a same-day sale of the purchased shares. We may also finance the
option exercise by loaning the optionee sufficient funds to pay the exercise
price for the purchased shares, together with any federal and state income tax
liability incurred by the optionee in connection with such exercise. The fair
market value of our common stock was estimated by the board of directors on the
basis of the purchase price paid by investors for shares of our preferred stock,
the liquidation preferences and other rights, privileges and preferences
associated with the preferred stock and an evaluation by the board of our
revenues, operating history and prospects.

The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. Stock price appreciation of 5% and 10% is
assumed in accordance with rules promulgated by the Securities and Exchange
Commission and does not represent our prediction of our stock price performance.
The potential realizable values at 5% and 10% appreciation are calculated by
assuming that the estimated fair market value on the date of grant appreciates
at the indicated rate for the entire term of the option and that the option is
exercised at the exercise price and sold on the last day of its term at the
appreciated price. The price in this offering is higher than the estimated fair
market value on the date of grant, and the potential realizable value of the
option grants could be significantly higher than the numbers shown in the table
if future stock prices were projected to the end of the option term by applying
the same annual rates of stock price appreciation to the price in this offering.

The shares listed in the following table under "Number of Securities
Underlying Options Granted" are subject to vesting. Upon completion of
12 months of service from the vesting start date, 25% of the option shares vest
and the balance vest in a series of equal monthly installments over the next
three years of service. Each of the options has a ten-year term, subject to
earlier termination if the optionee's service with us ceases.

Percentages shown under "Percent of Total Options Granted to Employees in
the Last Fiscal Year" are based on an aggregate of 9,303,456 options granted to
employees of Liberate under its 1996 Stock Option Plan and outside of this plan
during the fiscal year ended May 31, 1999.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL RATES OF
SECURITIES PERCENT OF TOTAL STOCK PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN THE PRICE EXPIRATION ------------------------------
NAME GRANTED LAST FISCAL YEAR ($/SHARE) DATE 5% 10%
- ---- ----------- ------------------ --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Mitchell E.
Kertzman........... 3,333,332 35.8% $2.55 10/15/08 $5,345,062 $13,546,805
Nancy J. Hilker...... 33,332 0.4 2.25 07/09/08 47,165 119,526
83,332 0.9 3.75 04/02/09 196,526 498,037
David A. Limp........ 166,666 1.8 3.75 04/02/09 393,058 996,085
Philip A. Vachon..... 116,666 1.3 2.55 01/04/09 187,075 474,136
83,332 0.9 3.75 04/02/09 196,526 498,037
Steven Weinstein..... 50,000 0.5 3.75 04/02/09 117,918 298,827
David J. Roux........ 1,666,666 17.9 2.55 10/15/08 2,672,801 6,773,403
</TABLE>

56
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES

The following table sets forth options exercised by each of the executive
officers named in the Summary Compensation Table during the fiscal year ended
May 31, 1999, and the number and value of securities underlying unexercised
options that are held by these executive officers as of May 31, 1999.

Amounts shown under the column "Value Realized" are equal to the fair market
value of the purchased shares on the option exercise date, less the exercise
price paid for such shares.

Amounts shown under the column "Value of Unexercised In-the-Money Options at
Fiscal Year End" are based on the fair market value of our common stock at
May 31, 1999 as determined by our board of directors, $4.50 per share, less the
exercise price payable for such shares. The fair market value of our common
stock at May 31, 1999 was estimated by the board of directors on the basis of
the purchase price paid by investors for shares of our preferred stock, taking
into account the liquidation preferences and other rights, privileges and
preferences associated with the preferred stock, and an evaluation by the board
of our revenues, operating history and prospects. The price in this offering is
higher than the estimated fair market value on May 31, 1999, and the value of
unexercised options would be higher than the numbers shown in the table if the
value were calculated by subtracting the exercise price from the price in this
offering.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR END FISCAL YEAR END
ACQUIRED VALUE ----------------------------- -----------------------------
NAME ON EXERCISE REALIZED EXERCISEABLE UNEXERCISEABLE EXERCISEABLE UNEXERCISEABLE
- ---- ----------- -------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Mitchell E. Kertzman.... -- -- -- 3,333,332 -- $6,499,997
Nancy J. Hilker......... 4,400 $ 13,948 136,798 151,040 $526,387 225,155
David A. Limp........... 83,332 264,162 85,282 235,416 313,106 300,312
Philip A. Vachon........ 18,750 50,063 29,856 268,056 93,047 502,817
Steven Weinstein........ 19,936 63,086 200,828 84,376 766,183 125,159
David J. Roux........... 451,388 135,446 69,444 1,145,834 135,416 2,234,376
</TABLE>

EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS

We entered into an employment agreement, dated October 12, 1998, with
Mitchell E. Kertzman, our President and Chief Executive Officer. Mr. Kertzman's
annual salary is $300,000, and he is eligible for an annual bonus of up to
$200,000. His bonus for the first year of employment was guaranteed to be
$200,000. We granted him an option to purchase 3,333,332 shares of our common
stock. Upon his completion of 12 months of service, 25% of the option shares
vested, and the balance of the option shares will vest in a series of equal
monthly installments upon his completion of each of the following 36 months. If
we experience a change in control, 50% of any unvested option shares will become
vested upon the effective date of the change in control.

EMPLOYEE STOCK PLANS

1999 EQUITY INCENTIVE PLAN

SHARE RESERVE. Our board of directors adopted our 1999 equity incentive
plan on May 17, 1999. Our stockholders have also approved this plan. The initial
reserve under the 1999 equity incentive plan is equal to the number of shares of
our common stock that remained available under our 1996 stock option plan at the
time of our initial public offering (approximately 3,051,498 shares). On June 1
of each year, starting in 2000, the number of shares in the reserve will
automatically increase by 5% of the total number of shares of common stock that
are outstanding at that time or, if less, by 6,000,000 shares. In general, if
options or shares awarded under the 1999 equity incentive plan are forfeited,
then those options or shares will again become available for awards.

57
<PAGE>
ADMINISTRATION. A committee appointed by our board of directors will
administer the 1999 equity incentive plan. The committee has complete discretion
to make all decisions relating to the interpretation and operation of our 1999
equity incentive plan. The committee has discretion to determine who will
receive an award, what type of award it will be, how many shares will be covered
by the award, what the vesting requirements will be, if any, and what the other
features and conditions of each award will be. The committee may also reprice
outstanding options and modify outstanding awards in other ways.

ELIGIBILITY. The following groups of individuals are eligible to
participate in the 1999 equity incentive plan:

- Employees;

- Members of our board of directors who are not employees; and

- Consultants.

TYPES OF AWARDS. The 1999 equity incentive plan provides for the following
types of awards:

- Options to purchase shares of our common stock;

- Stock appreciation rights;

- Restricted shares of our common stock; and

- Stock units, sometimes called phantom shares.

OPTIONS AND STOCK APPRECIATION RIGHTS. Options may be incentive stock
options or nonstatutory stock options. An optionee who exercises an incentive
stock option may qualify for favorable tax treatment under Section 422 of the
Internal Revenue Code of 1986. On the other hand, nonstatutory stock options do
not qualify for such favorable tax treatment. The exercise price for all
incentive stock options and nonstatutory stock options granted under the 1999
equity incentive plan may not be less than 100% and 85%, respectively, of the
fair market value of our common stock on the option grant date. At the
discretion of the committee, optionees may pay the exercise price by using:

- Cash;

- Shares of common stock that the optionee already owns;

- A full-recourse promissory note, except that the par value of newly issued
shares must be paid in cash;

- An immediate sale of the option shares through a broker designated by us;
or

- A loan from a broker designated by us, secured by the option shares.

Options and stock appreciation rights vest at the time or times determined
by the compensation committee. In most cases, our options vest over the
four-year period following the date of grant. Options and stock appreciation
rights generally expire 10 years after they are granted, except that they
generally expire earlier if the optionee's service terminates earlier. The 1999
equity incentive plan provides that no participant may receive options or stock
appreciation rights covering more than 1,500,000 shares in the same year, except
that a newly hired employee may receive options or stock appreciation rights
covering up to 3,000,000 shares in the first year of employment.

58
<PAGE>
RESTRICTED SHARES. Restricted shares may be awarded under the 1999 equity
incentive plan in return for:

- Cash;

- A full-recourse promissory note, except that the par value of newly issued
shares must be paid in cash;

- Services already provided to us; and

- In the case of treasury shares only, services to be provided to us in the
future.

Restricted shares and stock units vest at the time or times determined by
the compensation committee.

AUTOMATIC OPTION GRANTS. The non-employee members of our board of directors
will be eligible for option grants under the automatic option grant program. At
the time of each of our annual stockholders' meetings, beginning in 2000, each
non-employee director who will continue to serve as a board member following the
meeting will automatically be granted a fully-vested option for 10,000 shares of
our common stock. The exercise price of each option will be equal to the fair
market value of our common stock on the option grant date. A director may pay
the exercise price by using cash, shares of common stock that the director
already owns, an immediate sale of the option shares through a broker designated
by us or a loan from a broker designated by us, secured by the option shares.
The options have a 10-year term, except that they expire 12 months after a
director leaves the board of directors, if earlier.

CHANGE IN CONTROL. If a change in control of Liberate occurs, the board of
directors or the compensation committee has discretion to accelerate vesting of
options and other awards. A change in control includes:

- A merger of Liberate after which our own stockholders own 50% or less of
the surviving corporation, or its parent company, and a stockholder who
did not own any shares of Liberate immediately before the change in
control owns 50% or more of Liberate after the change in control;

- A sale of all or substantially all of our assets;

- A proxy contest that results in the replacement of more than one-half of
our directors over a 24-month period; or

- An acquisition of 50% or more of our outstanding stock by any person or
group, other than a person related to Liberate, such as a holding company
owned by our stockholders.

However, Oracle's disposition of its securities, such that it holds less than
50% of Liberate, and/or its later increase in ownership to at least 50% of
Liberate, will not in itself be deemed a change in control.

AMENDMENTS OR TERMINATION. Our board of directors may amend or terminate
the 1999 equity incentive plan at any time. If our board of directors amends the
plan, stockholder approval will only be sought if required by an applicable law.
The 1999 equity incentive plan will continue in effect indefinitely unless the
board of directors decides to terminate the plan.

1999 EMPLOYEE STOCK PURCHASE PLAN

SHARE RESERVE AND ADMINISTRATION. Our board of directors adopted our 1999
employee stock purchase plan on May 17, 1999. Our stockholders have also
approved this plan. Our 1999 employee stock purchase plan is intended to qualify
under Section 423 of the Internal Revenue Code. We have reserved 1,666,666
shares of our common stock for issuance under the plan. On June 1 of each year,

59
<PAGE>
starting in 2000, the number of shares in the reserve will automatically
increase by 2% of the total number of shares of common stock then outstanding
or, if less, 1,666,666 shares. The compensation committee of our board of
directors will administer the plan.

ELIGIBILITY. All of our employees are eligible to participate, if they are
employed by us for more than 20 hours per week and for more than five months per
year. Eligible employees may begin participating in the 1999 employee stock
purchase plan at the start of any offering period. Each offering period lasts
six months. Overlapping offering periods start on April 1 and October 1 of each
year. However, the first offering period started on the date of our initial
public offering, July 27, 1999, and will end on March 31, 2000.

AMOUNT OF CONTRIBUTIONS. Our 1999 employee stock purchase plan permits each
eligible employee to purchase common stock through payroll deductions. Each
employee's payroll deductions may not exceed 15% of the employee's cash
compensation. Purchases of our common stock will occur on March 31 and
September 30 of each year. Each participant may purchase up to 1,500 shares on
any purchase date, 3,000 shares per year. But the value of the shares purchased
in any calendar year, measured as of the beginning of the offering period, may
not exceed $25,000.

PURCHASE PRICE. The price of each share of common stock purchased under our
1999 employee stock purchase plan will be 85% of the lower of:

- The fair market value per share of common stock on the date immediately
before the first day of the applicable offering period; or

- The fair market value per share of common stock on the purchase date.

In the case of the first offering period, the price per share under the plan
will be 85% of the lower of:

- The price per share to the public in our initial public offering, $8 per
share; or

- The fair market value per share of common stock on the purchase date.

OTHER PROVISIONS. Employees may end their participation in the 1999
employee stock purchase plan at any time. Participation ends automatically upon
termination of employment with Liberate. If a change in control of Liberate
occurs, our 1999 employee stock purchase plan will end and shares will be
purchased with the payroll deductions accumulated to date by participating
employees, unless the plan is assumed by the surviving corporation or its
parent. Our board of directors may amend or terminate the 1999 employee stock
purchase plan at any time. If our board of directors increases the number of
shares of common stock reserved for issuance under the plan, except for the
automatic increases described above, it must seek the approval of our
stockholders.

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<PAGE>
RELATED PARTY TRANSACTIONS

TRANSACTIONS WITH ORACLE

From our inception until our acquisition of Navio Communications in August
1997, we were a wholly-owned subsidiary of Oracle. Following the Navio
acquisition, Oracle remained our majority stockholder. After this offering,
Oracle will beneficially own approximately 40.9% of our outstanding stock. In
addition, two of our directors, Messrs. Ellison and Henley, are executive
officers and directors of Oracle. We have entered into numerous transactions and
arrangements with Oracle, including the following:

FINANCINGS, LOANS AND INTER-COMPANY ARRANGEMENTS

In May 1996, we sold 32 shares of our common stock to Oracle and in October
1996, we sold 28,333,300 shares of our Series A preferred stock to Oracle. The
shares of preferred stock converted into an equal number of shares of our common
stock upon the closing of our initial public offering. In exchange, we received
an inter-company transfer of approximately $10.0 million and all of the tangible
assets and some of the intangible assets of Oracle's network computer division,
including the right to hire the employees of the division, intellectual property
rights associated with the division and contractual relationships with
suppliers, customers and contractors of the division. The aggregate value of the
transfer, including cash, was estimated by our board of directors to be
approximately $85 million.

In May 1996, Oracle forgave an inter-company payable balance of
approximately $5 million.

In November 1996, Oracle transferred the assets, liabilities and personnel
of a corporate division to us. At the time of this assignment, the assets and
liabilities had a net book value of approximately $79,000. In July 1997, we
transferred the assets, liabilities and personnel of this corporate division
back to Oracle. At the time of this transfer, the assets and liabilities had a
net book value of approximately $90,000.

In July 1997, we entered into a convertible note purchase agreement with
Oracle. Under this agreement, Oracle agreed to provide up to $10.0 million to us
for general working capital purposes, as needed, in the form of convertible
notes, and up to $19.2 million to fund our obligations under the put/ call and
voting agreement, as discussed below. The convertible notes bear annual interest
at 8% and are convertible, at Oracle's option, into shares of our stock. As of
May 31, 1999, we had borrowed approximately $10.0 million under this arrangement
and Oracle had converted $5.0 million of the indebtedness into 1,515,150 shares
of our Series A-1 preferred stock. The shares of preferred stock converted into
an equal number of shares of our common stock upon the closing of our initial
public offering. In May 1999, we repaid the outstanding portion of the
indebtedness, totalling approximately $5.0 million. We do not currently intend
to borrow additional funds under this arrangement.

From our inception until August 1997, Oracle funded our operations through
an inter-company payable account. In connection with our acquisition of Navio in
August 1997, Oracle converted approximately $18 million of outstanding
inter-company payables into 5,454,544 shares of our Series A-1 preferred stock.
The shares of preferred stock converted into an equal number of shares of our
common stock upon the closing of our initial public offering. From inception
until June 1, 1998, from time to time in the ordinary course of business, we and
Oracle entered into inter-company transactions. Additionally, in fiscal 1998,
Oracle contributed capital of approximately $8.1 million to us.

In August 1997, we entered into a tax allocation and indemnity agreement
with Oracle. This agreement provides for our consolidation into Oracle's tax
group for income tax payment purposes. Under the agreement, our tax liability is
computed as if we had filed a separate return for amounts due in certain state
and local jurisdictions. As a member of Oracle's tax group, we are allocated our
share of the aggregate tax liability of the group. The agreement provides that
Oracle will indemnify us for penalties or other damages attributed to the
failure of Oracle to make timely filings or to make timely or full payments,
provided that we pay our allocated share and provide necessary information on a

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timely basis. Under the agreement, Oracle owes us, as of November 30, 1999,
approximately $788,000 for use of tax losses related to fiscal 1998 and
approximately $781,000 for use of tax losses related to fiscal 1999. Since the
effective date of our initial public offering, upon which Oracle's ownership
percentage was reduced to less than 50%, our results are no longer included in
any of Oracle's consolidated state tax returns and we will no longer receive a
tax benefit from Oracle.

In August 1997, in connection with our acquisition of Navio, we entered into
a put/call and voting agreement with Oracle and former Navio stockholders,
including Netscape. Among other things, this agreement granted the former Navio
stockholders the right, for a period of 60 days following the closing of the
acquisition, to compel Oracle to purchase up to 50% of the shares received by
them in the acquisition or 50% of the shares issuable under stock options
assumed by us in the acquisition. As a result of the exercise of these put
rights, Oracle purchased a total of 3,671,138 shares of our Series C preferred
stock. Oracle subsequently converted these shares into shares of our Series C-1
preferred stock. The shares of preferred stock converted into an equal number of
shares of our common stock upon the closing of our initial public offering.

In May 1999, Wei Yen, our former president, sold 1,515,150 shares of our
Series C preferred stock to Oracle for $3.30 per share, or an aggregate of
approximately $5.0 million. Immediately after purchasing these shares from
Dr. Yen, Oracle sold the shares to General Instrument for $3.30 per share, or an
aggregate of approximately $5.0 million, under a purchase agreement among us,
Oracle and General Instrument. The shares of preferred stock converted into an
equal number of shares of our common stock upon the closing of our initial
public offering.

SERVICE ARRANGEMENTS

From our inception until September 1997, Oracle performed various tax,
treasury, risk management, employee benefits, legal, accounting and other
general corporate services for us. The costs of these services were allocated to
us, and had a value of approximately $1.3 million. We ceased obtaining these
services from Oracle in September 1997.

In December 1997, Oracle provided services to us in connection with
development of our products. We paid Oracle approximately $62,000 for services
provided under this arrangement.

From December 1997 through November 1999, we have incurred expenses payable
to Oracle of approximately $368,000 for services provided to us by a salesperson
in Taiwan.

From November 1997 to March 1998, we paid Oracle approximately $127,000 for
services provided to us by two members of the Oracle North American sales force.

In March 1998, we entered into a services agreement with Oracle. Under this
agreement, Oracle provides professional services to some of our customers. As of
November 30, 1999, we have incurred expenses totalling approximately $704,000
for services provided under the agreement.

In August 1998, we entered into a technical support services agreement with
Oracle. We amended this agreement in January 1999. Under this agreement, we and
Oracle provide each other worldwide technical support services. We have made no
payments to Oracle under the agreement, and have received, as of November 30,
1999, $63,000 from Oracle for services rendered pursuant to the agreement.

Since inception, we have paid Oracle approximately $157,000 for services
performed by Oracle to localize our products for the Japanese market.

In a joint representation and defense agreement, we agreed with Oracle to
jointly defend ourselves in a trademark infringement and unfair competition
lawsuit brought by Network Computers against Oracle and us. In April 1998, our
motion for summary judgment was granted and the case was dismissed. We paid
Oracle approximately $105,000 for legal services in connection with our defense.

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TECHNOLOGY AGREEMENTS

In September 1998, we entered into a technology license agreement with
Oracle. Pursuant to the agreement, Oracle may promote, market and distribute
sublicenses of our products through its worldwide distribution channels for a
period of three years. As of November 30, 1999, we have been paid license fees
totalling approximately $447,000 under the agreement.

In fiscal 1999, we paid $243,000 for commissions due to Oracle Japan in
conjunction with a sale of our software to Fujitsu. In addition, we paid
$107,000 for commissions due to Oracle Belgium relating to a trial deployment
agreement with Belgacom, one of our network operator customers.

We have an agreement with Oracle pursuant to which we distribute our
products under an OEM license agreement between Oracle and Netscape discussed
below in "Transactions with Netscape and America Online."

LEASES

We previously leased office space in Redwood Shores, California from Oracle
under a lease that provided for monthly payments of approximately $124,000. We
terminated the lease in September 1999. We also previously leased furniture and
equipment for our Redwood Shores office from Oracle under a lease entered into
in September 1997, as amended, that obligated us to make monthly payments to
Oracle of approximately $57,000. In addition, we previously contracted for
Oracle to perform maintenance and repair services at our Redwood Shores office.
Under the maintenance and repair services agreement, we incurred expenses for
maintenance and repair services totalling approximately $318,000, $375,000, and
$95,000 in fiscal 1998, 1999 and 2000, respectively. The furniture and equipment
lease and the maintenance and repair services agreement were terminated
simultaneously with the office lease.

We previously leased office space in Salt Lake City, Utah from Oracle under
a lease that provided for monthly payments of approximately $4,000. The lease
terminated in February 1999. In April 1999, we entered into a new lease for
office space in Salt Lake City, Utah with a third party. We will continue to
lease furniture and equipment for our Salt Lake City office from Oracle under a
new furniture lease that we signed with Oracle in March 1999, that provides for
monthly payments of approximately $750.

We lease office space in London, England from Oracle under a lease that
provides for monthly payments of approximately $4,200. The lease terminates in
October 2000.

During the fourth quarter of fiscal 1999, we entered into a lease for our
office space in San Carlos, California. In connection with us entering into this
lease, Oracle provided a $10 million guaranty to our landlord. The guaranty was
terminated after the closing of our initial public offering on July 27, 1999.

TRANSACTIONS WITH NETSCAPE AND AMERICA ONLINE

After this offering, America Online will beneficially own approximately 7.9%
of our outstanding stock. Netscape became a wholly-owned subsidiary of America
Online, one of our customers, in March 1999. In connection with this merger, one
of our directors, Mr. Barksdale, became a director of America Online.

Prior to our acquisition of Navio, Navio's predecessor, TVSoft, sold shares
of its common stock to Netscape in July 1996. In exchange for these shares of
common stock, TVSoft entered into a source code license agreement with Netscape.
We amended this agreement in April 1998 and September 1998. Under this
agreement, Netscape granted a worldwide, nonexclusive, fully paid-up and
nontransferable license to TVSoft for certain Netscape software, including
Netscape Navigator. In connection with our acquisition of Navio, and under a
letter agreement entered into in May 1997, Netscape consented to the assignment
of this license from Navio to us. As a result of our acquisition of Navio in
August 1997,

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Netscape's shares of Navio common stock converted into 7,625,350 shares of our
Series C preferred stock. The shares of preferred stock converted into an equal
number of shares of our common stock upon the closing of our initial public
offering.

Under the letter agreement described in the preceding paragraph, Netscape
and Oracle also agreed that our products would be distributed pursuant to an OEM
license agreement between Netscape and Oracle. Under an amendment to the letter
agreement, we have the right to use approximately $1.0 million in prepaid
royalties with Netscape. As of November 30, 1999, we have used approximately
$40,000 of these royalties. In addition, through November 30, 1999, we have paid
Netscape approximately $325,000 in support fees under the letter agreement.

Under a letter agreement executed in December 1997 in connection with the
source code license agreement with Netscape and the April 1998 amendment to the
source code license agreement, as of November 30, 1999, we have paid Netscape
approximately $200,000 for the purchase of rights and licenses.

We are co-sublessors of office space located in Sunnyvale, California with
Netscape. Netscape and Navio originally leased the space in November 1996.
Navio's rights and duties under the lease were assigned to us in connection with
our acquisition of Navio. Subsequently, the property was subleased to a third
party. The monthly lease payments are approximately $68,000 and we receive
approximately $72,000 from our subtenant each month. The lease and sublease
terminate in November 2001.

We entered into a trial license and support agreement with America Online in
July 1998, which terminated upon the execution of a technology license and
support agreement entered into in August 1998. We also entered into a source
code access agreement in August 1998, which also terminated upon the execution
of the technology license and support agreement. In addition, we entered into a
consulting services agreement in February 1999 with America Online, under which
we are developing new features for our products. As of November 30, 1999, we
have received payments from America Online under all of these agreements
aggregating approximately $6.5 million.

OTHER TRANSACTIONS

In May 1999, we sold 10,416,652 shares of our Series E preferred stock for
$47.5 million, net of expenses, to several investors, including Comcast, Cox
Communications and MediaOne. The shares of preferred stock converted into an
equal number of shares of our common stock upon the closing of our initial
public offering. In connection with this sale of stock, we entered into a voting
agreement with Comcast, Cox Communications, MediaOne and Oracle. Pursuant to the
voting agreement, Comcast, Cox Communications, MediaOne and Oracle agreed to
vote the shares of our common stock held by them to elect a representative
designated by Oracle and a single representative designated by Comcast, Cox
Communications and MediaOne to our board of directors. In the voting agreement,
we also agreed to create a three member advisory board to our board of directors
consisting of one representative of each of Comcast, Cox Communications and
MediaOne. The voting agreement will terminate on the earlier of:

- A change in control of us;

- July 27, 2002; or

- The date on which Comcast, Cox Communications and MediaOne own less than
50% of the common stock issued upon conversion of the Series E preferred
stock originally sold to each of them.

In addition, we have entered into commercial agreements with Comcast, Cox
Communications and MediaOne for the license of our software products. The
agreements further provide that these network operators will have the right to
test our software free of charge and without any commitment to deploy services
using our technology. In addition, the agreements provide that, if certain
commercial

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milestones are satisfied, we will issue each of these network operators warrants
to purchase up to 2,799,996 shares of our common stock. As of November 30, 1999,
we issued or committed to issue warrants to purchase up to 499,998 shares of
common stock related to these agreements for achieving commercial milestones. In
addition, under these agreements, these network operators are entitled to
receive the benefits of any more favorable terms and conditions that we may
grant to any other North American network operator in the future.

In November 1999, Thomas F. Nagel was appointed to our board of directors.
Mr. Nagel is currently Vice President of Business Development of Cox
Communications. We entered into a license agreement with Cox Communications in
July 1999 which includes a provision in which we agreed to grant Cox
Communications warrants to purchase Liberate common stock as discussed above.

TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS

We entered into an employment offer letter, dated November 5, 1999, with
Coleman Sisson, our Chief Operating Officer. This letter provides for the
acceleration of vesting of 25% of the options granted to Mr. Sisson in the event
that Liberate is acquired and Mr. Sisson is terminated without cause within
twelve months of his hire date. In addition, the letter agreement provides for
six months severance if Mr. Sisson's employment is terminated for any reason
other than gross misconduct.

We entered into an employment offer letter, dated March 12, 1999, with
Gordon Yamate, our Vice President, General Counsel and Secretary, that provides
for the acceleration of vesting of 25% of his unvested options if we experience
a change in control before March 15, 2000.

We entered into a settlement agreement, dated March 16, 1998, with Jerry W.
Baker, our former Chief Executive Officer. Under this agreement, we paid
Mr. Baker a severance amount of $180,000, which represented six months of his
base salary. In consideration for the severance payment, Mr. Baker agreed to
release all claims against us.

In October 1997, we entered into an employment agreement, as amended in
February 1998, with Wei Yen, our former President. The amendment provided for
the resignation of Dr. Yen from Liberate. Pursuant to the agreement, we agreed
to terminate our right of repurchase as to his shares of Series C preferred
stock. In addition, Dr. Yen received a severance payment of $820,000, payable in
24 equal monthly installments, beginning on February 27, 1998, and the
forgiveness of indebtedness amounting to $576,000. In consideration for the
severance payment and the loan forgiveness, Dr. Yen agreed to release all claims
that he may have against us.

We have granted options to our executive officers and directors. See
"Management--Option Grants in Last Fiscal Year" and "Principal Stockholders."

We have entered into an indemnification agreement with each of our executive
officers and directors described in the "Management" section.
------------------------

We believe that the terms of all of the agreements and transactions
discussed in this section were at least as favorable to us as those that could
have been obtained or secured in arm's-length transactions.

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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information, as of December 31, 1999, with
respect to shares beneficially owned by:

- Each person who we know to be the beneficial owner of more than five
percent of our outstanding shares of common stock;

- Each of the executive officers named in the Summary Compensation Table;

- Each of our directors;

- All current executive officers and directors as a group; and

- All other selling stockholders.

The number of shares shown as beneficially owned by each stockholder is
adjusted to reflect the sale of shares offered in this offering. Beneficial
ownership has been determined in accordance with Rule 13d-3 under the Exchange
Act. Under this rule, certain shares may be deemed to be beneficially owned by
more than one person if, for example, persons share the power to vote or the
power to dispose of the shares. In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire shares
within sixty days of the date as of which the information is provided, for
example, upon exercise of an option or warrant. In computing the percentage
ownership of any person, the number of shares is deemed to include the amount of
shares beneficially owned by such person, and only that person, by reason of
such acquisition rights. As a result, the percentage of outstanding shares of
any person as shown in the following table does not necessarily reflect the
person's actual voting power at any particular date.

The percentage of beneficial ownership for the following table is based on
83,603,312 shares of common stock outstanding as of December 31, 1999 and
86,493,312 shares of common stock outstanding after the completion of this
offering.

The columns in the table below entitled "Number of Shares Being Offered" and
"Shares Beneficially Owned After Offering" do not assume exercise of the
underwriters' option to acquire additional shares to cover over-allotments of
shares. We currently anticipate that the over-allotment option, if exercised,
will consist solely of shares contributed by Comcast, Lucent Technologies,
Netscape, Oracle, and Wind River. In addition, if the size of this offering is
increased, we currently anticipate that any additional shares sold in this
offering will be sold by Comcast, Lucent Technologies, Netscape, Oracle, and
Wind River. The sale of additional shares by these selling stockholders upon the
exercise of the over-allotment option or as a result of an increase in the size
of this offering would further decrease the beneficial ownership of these
stockholders in Liberate.

Unless otherwise indicated, the address for each listed stockholder is:
c/o Liberate Technologies, 2 Circle Star Way, San Carlos, California, 94070. To
our knowledge, except as indicated in the footnotes to this table or pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to the shares of common stock
indicated.

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<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR NUMBER SHARES BENEFICIALLY
TO OFFERING OF SHARES OWNED AFTER OFFERING
--------------------- BEING ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------ ---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Delphi Asset Management Corporation(1).... 39,649,546 47.4% 4,273,625 35,375,921 40.9%
Lawrence J. Ellison
Jeffrey O. Henley
c/o Oracle Corporation
500 Oracle Parkway
Redwood Shores, California 94065

Netscape Communications Corporation(2).... 7,649,655 9.1 824,328 6,825,327 7.9
James L. Barksdale
c/o America Online
22000 AOL Way
Dulles, Virginia 20166

Mitchell E. Kertzman(3)................... 1,041,665 1.2 104,166 937,499 1.1

David J. Roux(4).......................... 833,332 1.0 83,333 749,999 *

Steven Weinstein(5)....................... 226,864 * -- 226,864 *

David A. Limp(6).......................... 187,364 * 13,843 173,521 *

Nancy J. Hilker(7)........................ 163,767 * 11,517 152,250 *

Philip A. Vachon(8)....................... 102,079 * -- 102,079 *

Charles G. Tritschler(9).................. 58,589 * 5,411 53,178 *

Charles Corfield(10)...................... 24,305 * -- 24,305 *

Thomas Nagel.............................. 2,000 * -- 2,000 *

Coleman Sisson(11)........................ -- * -- -- *

Gordon T. Yamate(12)...................... -- * -- -- *

All executive officers and directors as a 49,939,166 58.4 5,316,222 44,622,944 50.5
group (14 persons)......................

Comcast Corporation(13)................... 1,208,332 1.4 112,276 1,096,056 1.3
1500 Market Street
Philadelphia, Pennsylvania 19102

Lucent Technologies Inc................... 2,669,270 3.2 112,276 2,556,994 3.0
600 Mountain Avenue
Murray Hill, NJ 07974

Wind River Systems, Inc................... 416,666 * 44,910 371,756 *
600 Wind River Way
Alameda, California 94501

Additional selling stockholders, each 359,528 * 24,315 335,213 *
holding less than 1% of the outstanding
common stock prior to this
offering(14)............................
</TABLE>

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

* Represents beneficial ownership of less than 1% of the outstanding shares of
our common stock.

(1) Delphi Asset Management Corporation is a wholly owned subsidiary of Oracle.
Mr. Ellison, one of our directors, is the chief executive officer and
chairman of the board of directors of Oracle.

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Mr. Henley, one of our directors, is an executive officer and a director of
Oracle. Messrs. Ellison and Henley disclaim beneficial ownership of Delphi's
shares.

(2) Amount shown prior to the offering includes 7,625,350 shares held of record
by Netscape, and 24,305 shares issuable upon the exercise of stock options
held by Mr. Barksdale exercisable within 60 days of December 31, 1999. In
March 1999, Netscape became a wholly-owned subsidiary of America Online, one
of our customers. In connection with the merger, Mr. Barksdale was elected
to the board of directors of America Online. Mr. Barksdale disclaims
beneficial ownership of the 7,625,350 shares held of record by Netscape.
America Online has no pecuniary interest in any of the shares subject to
options held by Mr. Barksdale. Amounts to be sold in this offering includes
821,898 shares to be sold by Netscape and 2,430 shares to be sold by Mr.
Barksdale.

(3) Consists of shares issuable upon exercise of stock options exercisable
within 60 days of December 31, 1999.

(4) Includes 243,056 shares issuable upon the exercise of stock options
exercisable within 60 days of December 31, 1999.

(5) Includes 210,204 shares issuable upon the exercise of stock options
exercisable within 60 days of December 31, 1999. Of these amounts,
Mr. Weinstein has transferred 4,000 shares to certain of his immediate
family and other relatives and disclaims beneficial ownership of these
shares.

(6) Includes 104,032 shares issuable upon exercise of stock options exercisable
within 60 days of December 31, 1999.

(7) Includes 159,367 shares issuable upon exercise of stock options exercisable
within 60 days of December 31, 1999. Of these amounts, Ms. Hilker has
transferred 4,400 shares to certain of her immediate family members and
disclaims beneficial ownership of these shares.

(8) Includes 83,329 shares issuable upon the exercise of stock options
exercisable within 60 days of December 31, 1999. Of these amounts,
Mr. Vachon has transferred 18,750 shares to certain of his immediate family
and other relatives and disclaims beneficial ownership of these shares.

(9) Includes 39,195 shares issuable upon exercise of stock options exercisable
within 60 days of December 31, 1999.

(10) Consists of shares issuable upon exercise of stock options exercisable
within 60 days of December 31, 1999.

(11) On November 5, 1999 Mr. Sisson was granted an option to purchase 450,000
shares. This option is not yet exercisable.

(12) On April 2, 1999, Mr. Yamate was granted an option to purchase 125,000
shares. This option is not yet exercisable.

(13) Includes 166,666 shares issuable upon exercise of a warrant.

(14) Includes 305,054 shares issuable upon exercise of stock options exercisable
within 60 days of December 31, 1999.

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DESCRIPTION OF CAPITAL STOCK

On the closing of this offering, our authorized capital stock will consist
of 200,000,000 shares of common stock, $0.01 par value, and 20,000,000 shares of
preferred stock, $0.01 par value. The following description is intended to be a
summary and does not describe all provisions of our certificate of incorporation
or bylaws or Delaware law applicable to Liberate. For a more thorough
understanding of the terms of our capital stock, you should refer to our
certificate of incorporation and bylaws, which are included as exhibits to the
registration statement of which this prospectus is part.

COMMON STOCK

As of December 31, 1999, there were 83,603,312 shares of common stock
outstanding that were held of record by approximately 253 stockholders. As of
December 31, 1999, there are 14,404,351 shares of common stock subject to
outstanding options, 4,172,537 of which were then exercisable. There will be
86,493,312 shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option and assuming no exercise, after
December 31, 1999, of outstanding options or warrants, after giving effect to
the sale of the shares of common stock to the public in this offering. The
holders of common stock are entitled to one vote per share on all matters to be
voted on by the stockholders. Subject to preferences that may be applicable to
any outstanding preferred stock, the holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the board of directors out of legally available funds. In the event of the
liquidation, dissolution, or winding up of Liberate, the holders of common stock
are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of preferred stock, if any,
then outstanding. The common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable, and the shares of common stock to be issued on
completion of this offering will be fully paid and nonassessable. See "Dividend
Policy."

PREFERRED STOCK

On the closing of this offering, 20,000,000 shares of preferred stock will
be authorized and no shares will be outstanding. The board of directors has the
authority to issue the preferred stock in one or more series and to fix its
rights, preferences, privileges and restrictions, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series, without further vote or action by
the stockholders. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of Liberate without
further action by the stockholders and may adversely affect the voting and other
rights of the holders of common stock. The issuance of preferred stock with
voting and conversion rights may adversely affect the voting power of the
holders of common stock, including the loss of voting control to others. We
currently do not plan to issue any of the preferred stock.

REGISTRATION RIGHTS

After this offering, the holders of approximately 63,061,897 shares of our
common stock and rights to acquire common stock will be entitled to rights with
respect to the registration of such shares under the Securities Act. Under the
terms of the agreement between us and the holders of these registrable
securities, if we propose to register any of our securities under the Securities
Act, either for our own account or for the account of other security holders
exercising registration rights, these holders are entitled to notice of such
registration and are entitled to include shares of common stock in the
registration. Additionally, if we meet certain revenue and income milestones,
some of these holders are also entitled to demand registration rights, which
allow them to require us on one occasion to file a

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registration statement under the Securities Act at our expense with respect to
their shares of common stock, and we are required to use all reasonable efforts
to effect such registration. In addition, if the holders of at least 40% of our
common stock issued upon conversion of our Series E preferred stock so request,
they will have two rights to demand registration, provided that such offering is
for an aggregate offering of at least $20 million. Further, holders may require
us to file an unlimited number of additional registration statements on
Form S-3 at our expense. All of these registration rights terminate in August
2004 and are subject to certain conditions and limitations, among them the right
of the underwriters of an offering to limit the number of shares included in
such registration and our right not to effect a requested registration within
180 days following an offering of our securities, including this offering.

WARRANTS

In April and May 1999, we entered into letter agreements with several
network operators that require us to issue warrants to purchase up to an
aggregate of 4,599,992 shares of our common stock that are exercisable if those
network operators satisfy commercial milestones. As of December 31, 1999, we
have issued or committed to issue warrants to purchase up to 1,536,662 shares of
common stock to six network operators for achieving commercial milestones. As of
December 31, 1999, warrants to purchase 3,063,330 shares of our common stock can
still be earned under the terms of the letter agreements with the network
operators. The warrants, if issued, will terminate on various dates, between May
31, 2000, for the earliest warrants, and a date five years from the vesting date
of the warrants for the latest warrants, which vesting date is contingent upon
different prepayment or deployment milestones.

CONVERTIBLE PROMISSORY NOTE

In November 1997, we entered into a cooperation agreement with Intel and a
convertible promissory note purchase agreement with Middlefield Ventures, an
affiliate of Intel. Pursuant to the convertible note purchase agreement, we
issued a promissory note to Middlefield in the amount of $4.0 million in
November 1997. The note bore interest at 5% per year. This note converted into
843,880 shares of our common stock upon the closing of our initial public
offering. If we meet specific development milestones in connection with the
cooperation agreement, Middlefield will fund two additional notes under the
agreement, each with principal of $4.0 million.

ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW

CERTIFICATE OF INCORPORATION AND BYLAWS. The certificate of incorporation
provides that all stockholder actions must be effected at a duly called meeting
and not by a consent in writing. The vote of at least 75% of the voting power of
our capital stock is required to amend certain of the provisions of our
certificate of incorporation. In addition, the bylaws provide that our
stockholders may call a special meeting of stockholders only upon a request of
stockholders owning at least 50% of our capital stock. These provisions of the
certificate of incorporation and bylaws may have the effect of deterring hostile
takeovers or delaying changes in our management.

DELAWARE TAKEOVER STATUTE. We are subject to Section 203 of the Delaware
General Corporation Law, which regulates corporate acquisitions. Section 203
prevents Delaware corporations, such as us, whose securities are listed on the
Nasdaq National Market from engaging in a "business combination" with any
"interested stockholder" for three years following the date that such
stockholder became an "interested stockholder." For purposes of Section 203, a
"business combination" includes a merger or consolidation involving Liberate and
the interested stockholder and the sale of 10% or more of Liberate's assets. In
general, Section 203 defines an "interested stockholder" as any entity or person
beneficially owning 15% or more of the outstanding voting stock of Liberate and
any entity or person affiliated with or controlling or controlled by such entity
or person. A Delaware corporation may "opt

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out" of Section 203 with an express provision in its original certificate of
incorporation or an express provision in its certificate of incorporation or
bylaws resulting from amendments approved by the holders of at least a majority
of the corporation's outstanding voting shares. We have not "opted out" of the
provisions of Section 203.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the common stock is BankBoston, N.A.

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SHARES ELIGIBLE FOR FUTURE SALE

Future sales of substantial amounts of our common stock in the public
market, including shares issued upon exercise of outstanding options and
warrants, or the possibility of these sales occurring, could adversely affect
prevailing market prices for our common stock or our future ability to raise
capital through an offering of equity securities.

Upon completion of this offering, we will have outstanding
86,493,312 shares of common stock, based on shares outstanding as of
December 31, 1999, as well as the 1,772,000 shares to be issued in connection
with our acquisition of SourceSuite, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants prior
to completion of this offering. Of these shares, 8,500,000 shares to be sold by
us and the selling stockholders in this offering, 9,775,000 shares if the
underwriters' over-allotment option is exercised in full, as well as the
13,402,100 shares sold in our initial public offering, are freely tradable in
the public market without restriction under the Securities Act, unless the
shares are held by "affiliates" of Liberate, as that term is defined in
Rule 144 under the Securities Act.

The remaining 64,591,212 shares outstanding upon completion of this offering
will be "restricted securities" as that term is defined under Rule 144. We
issued and sold these restricted securities in private transactions in reliance
on exemptions from registration under the Securities Act. Restricted securities
may be sold in the public market only if they are registered or if they qualify
for an exemption from registration under Rule 144 or Rule 701 under the
Securities Act, as summarized below.

Pursuant to "lock-up" agreements entered into in connection with our initial
public offering in July 1999, all the executive officers, directors and
stockholders of Liberate agreed not to dispose of their shares for a period of
180 days following the initial public offering, which period expired on
January 24, 2000; provided, however, that Credit Suisse First Boston Corporation
had the right, in its sole discretion, to release all or any portion of the
shares subject to the lock-up agreements at any time and without notice. For
example, in January 2000, Credit Suisse First Boston Corporation released a
portion of these shares, which were held by some of our employees, from the
lock-up agreements. As of January 18, 2000, an aggregate of approximately
352,825 shares had been so released from the lock-up agreements, none of which
were held by Mitchell E. Kertzman, our Chief Executive Officer. All of the
employee stockholders participating in this partial release of the lock-up
agreements have entered into additional lock-up agreements under which they have
agreed not to offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of any shares of our common stock, other than the shares to be
sold by these stockholders in this offering, prior to April 17, 2000. In
addition, the other selling stockholders in this offering have also entered into
lock-up agreements that extend for a period ending 90 days from the date of this
prospectus. Credit Suisse First Boston Corporation may in its sole discretion,
at any time without notice, release all or any portion of the shares subject to
these lock-up agreements.

Taking into account the lock-up agreements, and assuming Credit Suisse First
Boston Corporation does not release stockholders from these agreements, the
following shares will be eligible for sale in the public market at the following
times:

- Upon completion of this offering, the 8,500,000 shares sold in the
offering, as well as approximately 31,004,980 shares outstanding prior to
the offering, will be immediately available for sale in the public market,
subject, in certain cases, to volume, manner of sale and other limitations
under Rule 144.

- On April 17, 2000, approximately 1,400,000 shares will be eligible for
sale upon the expiration of the 90-day lock-up period in connection with
the early release of the lock-up from the initial public offering, subject
in some cases, to volume, manner of sale and other limitations under

72
<PAGE>
Rule 144. This number includes at least 358,543 shares outstanding as of
December 31, 1999, as well as options that were exerciseable and vested as
of January 18, 2000 held by participants in the early release.

- On July 27, 2000, 1,627,604 shares will be eligible for sale pursuant to
Rule 144, upon satisfaction of the Rule 144 one year holding period.

- The remaining 45,002,185 shares will be eligible for sale upon the
expiration of the 90-day lock-up period following this offering, subject,
in certain cases, to volume, manner of sale and other limitations under
Rule 144.

Except as indicated, amounts shown above assume no exercise of outstanding
options or warrants.

Following the expiration of the lock-up periods, shares issued upon exercise
of options we granted prior to the date of this prospectus will also be
available for sale in the public market pursuant to Rule 701 under the
Securities Act. In general, under Rule 144, after the expiration of the lock-up
periods, a person who has beneficially owned restricted securities for at least
one year would be entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of:

- 1% of the then-outstanding shares of common stock, or

- the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.

Sales under Rule 144 are also subject to manner of sale and notice
requirements and to the availability of current public information about
Liberate. Under Rule 144(k), a person who has not been our affiliate at any time
during the three months before a sale and who has beneficially owned the shares
proposed to be sold for at least two years can sell these shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.

We have filed, a registration statement on Form S-8 to register
approximately 20,948,102 shares of common stock reserved for issuance under the
Navio 1996 stock plan, the Liberate 1996 stock option plan, the 1999 equity
incentive plan, the 1999 employee stock purchase plan and certain additional
option agreements. Shares issued under the foregoing stock and option plans,
after the filing of the registration statement on Form S-8, may be sold in the
open market, subject, in the case of some holders, to the Rule 144 limitations
applicable to affiliates, the lock-up agreements and vesting restrictions
imposed by us.

In addition, following this offering, the holders of approximately
63,061,897 shares of outstanding common stock will, under some circumstances,
have rights to require us to register their shares for future sale. For a
description of the registration rights we have granted see "Description of
Capital Stock--Registration Rights."

73
<PAGE>
UNDERWRITING

Under the terms and subject to the conditions contained in the underwriting
agreement dated , 2000, we and the selling stockholders have agreed
to sell to the underwriters named below, for whom Credit Suisse First Boston
Corporation, Chase H&Q, Dain Rauscher Incorporated and U.S. Bancorp Piper
Jaffray Inc. are acting as representatives, the following respective number of
shares of common stock:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Chase H&Q...................................................
Dain Rauscher Incorporated..................................
U.S. Bancorp Piper Jaffray Inc..............................
---------
Total................................................... 8,500,000
=========
</TABLE>

The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.

Several of the selling stockholders have granted to the underwriters a
30-day option to purchase on a pro rata basis up to 1,275,000 additional shares
from them at the public offering price less the underwriting discounts and
commissions. This option may be exercised only to cover any over-allotments of
common stock.

The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share on
sales to other broker/dealers. After the public offering, the offering price and
concession and discount to dealers may be changed by the representatives.

The following table summarizes the compensation and estimated expenses we
and the selling stockholders will pay.

<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid by us................ $ $ $ $
Expenses payable by us.................. $ $ $ $
Underwriting discounts and commissions
paid by the selling stockholders...... $ $ $ $
</TABLE>

We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to any shares of our common stock or securities convertible into or exchangeable
or exercisable for any shares of our common stock, or publicly disclose the
intention to make any such offer, sale, pledge, disposition or filing, without
the prior consent of Credit Suisse First Boston Corporation for a period of
90 days after the date of this prospectus. These restrictions do not prohibit us
from issuing employee stock options and common stock issuable upon the exercise
of employee

74
<PAGE>
stock options outstanding on the date of this prospectus or from issuing common
stock pursuant to our employee stock purchase plan.

Our officers, directors and non-employee selling stockholders have agreed
that they will not offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, enter into a transaction which would have the same effect, or enter into
any swap, hedge or other arrangement that transfers, in whole or in part, any of
the economic consequences of ownership of our common stock, whether any such
aforementioned transaction is to be settled by delivery of our common stock or
such other securities, in cash or otherwise, or publicly disclose the intention
to make any such offer, sale, pledge or disposition, or to enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 90
days after the date of this prospectus. In addition, all but two of our officers
and the employee selling stockholders have entered into similar lock-up
agreements for a period of 90 days from January 18, 2000.

We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the Securities Act, or contribute to payments which
the underwriters may be required to make in that respect.

Our common stock is traded on The Nasdaq National Market under the symbol
"LBRT."

The representatives on behalf of the underwriters may engage in
over-allotment, stabilizing transactions, syndicate covering transactions,
penalty bids and "passive" market making in accordance with Regulation M under
the Securities Exchange Act of 1934.

- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.

- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.

- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.

- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions.

- In "passive" market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to certain
limitations, make bids for or purchases of the common stock until the
time, if any, at which a stabilizing bid is made.

These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of such transactions. These transactions may be effected on The
Nasdaq Stock Market's National Market or otherwise and, if commenced, may be
discontinued at any time.

In May 1999, individuals and entities affiliated with Chase H&Q purchased an
aggregate of 43,744 shares of our Series E preferred stock for a total purchase
price of approximately $210,000, or $4.80 per share, and have agreed not to
sell, pledge, transfer or hypothecate their shares before July 27, 2000. The
shares of preferred stock converted into an equal number of shares of common
stock upon the closing of our initial public offering. In May 1999, a venture
capital fund managed by an entity affiliated with Chase H&Q also purchased an
aggregate of 164,582 shares of our Series E preferred stock for a total purchase
price of approximately $790,000, or $4.80 per share, and has agreed not to sell,
pledge, transfer or hypothecate 1,646 shares of such Series E preferred stock
before July 27, 2000. The shares of preferred stock converted into an equal
number of shares of common stock upon the closing of our initial public
offering.

75
<PAGE>
NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we and the selling
stockholders prepare and file a prospectus with the securities regulatory
authorities in each province where trades of common stock are effected.
Accordingly, any resale of the common stock in Canada must be made in accordance
with applicable securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made in accordance with
available statutory exemptions or pursuant to a discretionary exemption granted
by the applicable Canadian securities regulatory authority. Purchasers are
advised to seek legal advice prior to any resale of the common stock.

REPRESENTATIONS OF PURCHASERS

Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us, the selling stockholders and the
dealer from whom the purchase confirmation is received that (i) the purchaser is
entitled under applicable provincial securities laws to purchase the common
stock without the benefit of a prospectus qualified under these securities laws,
(ii) where required by law, that the purchaser is purchasing as principal and
not as agent, and (iii) the purchaser has reviewed the text above under "Resale
Restrictions."

RIGHTS OF ACTION (ONTARIO PURCHASERS)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.

ENFORCEMENT OF LEGAL RIGHTS

All of the issuer's directors and officers as well as the experts named
herein and the selling stockholders may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or such persons. All or a substantial
portion of the issuer and such persons may be located outside of Canada and, as
a result, it may not be possible to satisfy a judgment against the issuer or
such persons in Canada or to enforce a judgment obtained in Canadian courts
against such issuer or such persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of common stock to whom the SECURITIES ACT (British Columbia)
applies is advised that a purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. This report must be in
the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.

TAXATION AND ELIGIBILITY FOR INVESTMENT

Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.

76
<PAGE>
LEGAL MATTERS

The validity of the issuance of the common stock offered by us in this
offering will be passed upon for us by Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, Menlo Park, California. The underwriters have been
represented by Wilson Sonsini Goodrich & Rosati, Palo Alto, California.

EXPERTS

The consolidated financial statements and schedule of Liberate Technologies
and its subsidiaries included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, and are included in this prospectus in reliance upon the
authority of Arthur Andersen LLP as experts in accounting and auditing.
Reference is made to the report of Arthur Andersen LLP, which includes an
explanatory paragraph with respect to the change in accounting for the
acquisition of Navio as discussed in note 3 of the notes to the consolidated
financial statements.

Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1996, and for the period from inception,
February 12, 1996, to December 31, 1996, as set forth in their report, which
contains an explanatory paragraph describing conditions that raise substantial
doubt about the Company's ability to continue as a going concern as described in
Note 1 to the financial statements. We have included our financial statements in
the prospectus and elsewhere in the registration statement in reliance on Ernst
& Young LLP's report, given on their authority as experts in accounting and
auditing.

The combined financial statements of the Virtual Modem Business of Source
Media at December 31, 1998 and 1997, and for the years then ended, appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered by us in this offering. This prospectus,
which constitutes a part of the registration statement, does not contain all of
the information set forth in the registration statement or the exhibits and
schedules to the registration statement. For further information with respect to
us and the common stock offered by us in this offering, reference is made to the
registration statement and the exhibits and schedules filed as a part of the
registration statement. Statements contained in this prospectus concerning the
contents of any contract or any other document referred to are not necessarily
complete; reference is made in each instance to the copy of such contract or
document filed as an exhibit to the registration statement. Each such statement
is qualified in all respects by such reference to such exhibit. The registration
statement and the exhibits and schedules filed with the registration statement
may be inspected without charge at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center,
13th Floor, New York, NY 10048, and at the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, IL 60661. Copies of all or any part of the
registration statement may be obtained from such office after payment of fees
prescribed by the Commission. These reports and other information may also be
obtained without charge at a Web site maintained by the Commission. The address
of the site is http://www.sec.gov.

77
<PAGE>
LIBERATE TECHNOLOGIES
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
LIBERATE TECHNOLOGIES
AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations and Comprehensive
Loss...................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet........................ F-27
Condensed Consolidated Statements of Operations............. F-28
Condensed Consolidated Statements of Cash Flows............. F-29
Notes to Condensed Consolidated Financial Statements........ F-30
VIRTUAL MODEM BUSINESS OF SOURCE MEDIA, INC.
Report of Independent Auditors.............................. F-34
Combined Balance Sheets as of December 31, 1998 and 1997 and
September 30, 1999 (unaudited)............................ F-35
Combined Statements of Operations and Comprehensive Income
for the years ended December 31, 1998 and 1997 and the
nine months ended September 30, 1999 (unaudited).......... F-36
Combined Statements of Cash Flows for the years ended
December 31, 1998 and 1997 and the nine months ended
September 30, 1999 (unaudited)............................ F-37
Combined Statements of Intercompany Equity for the years
ended December 31, 1998 and 1997 and the nine months ended
September 30, 1999 (unaudited)............................ F-38
Notes to Combined Financial Statements...................... F-39
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
OF LIBERATE TECHNOLOGIES AND SOURCESUITE (VIRTUAL MODEM).... F-46
NAVIO COMMUNICATIONS, INC.
AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors.............................. F-52
Balance Sheets.............................................. F-53
Statement of Operations..................................... F-54
Statement of Stockholders' Equity........................... F-55
Statement of Cash Flows..................................... F-56
Notes to Financial Statements............................... F-57

UNAUDITED INTERIM FINANCIAL STATEMENTS...................... F-66

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
OF LIBERATE TECHNOLOGIES AND NAVIO COMMUNICATIONS, INC...... F-70
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Liberate Technologies:

We have audited the accompanying consolidated balance sheets of Liberate
Technologies (a Delaware corporation, formerly known as Network Computer, Inc.)
and subsidiaries as of May 31, 1998 and 1999, and the related consolidated
statements of operations and comprehensive loss, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended May 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Liberate Technologies and
subsidiaries as of May 31, 1998 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
1999 in conformity with generally accepted accounting principles.

As explained in Note 3 to the consolidated financial statements, the Company
has given retroactive effect to the change in accounting for its acquisition of
Navio Communications, Inc.

ARTHUR ANDERSEN LLP

San Jose, California
June 24, 1999 (except with
respect to the matters
discussed in Note 13, as to
which the date is July 26, 1999)

F-2
<PAGE>
LIBERATE TECHNOLOGIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
MAY 31,
---------------------
1998 1999
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 12,138 $ 33,657
Short-term investments.................................... -- 19,751
Accounts receivable, net of allowance for doubtful
accounts of $278 in 1998 and $247 in 1999............... 820 644
Receivable from affiliate................................. -- 482
Prepaid expenses and other current assets................. 1,600 3,415
--------- ---------
Total current assets.................................... 14,558 57,949
PROPERTY AND EQUIPMENT, net................................. 1,915 2,269
OTHER ASSETS:
Advanced royalties........................................ 570 279
Purchased intangibles, net................................ 13,691 7,606
Other..................................................... 78 79
--------- ---------
Total assets............................................ $ 30,812 $ 68,182
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,455 $ 1,643
Accounts payable to affiliate............................. 1,252 --
Accrued liabilities....................................... 4,411 8,911
Accrued payroll and related expenses...................... 1,795 2,248
Deferred revenues......................................... 23,868 38,787
Note payable to affiliate................................. 52 52
--------- ---------
Total current liabilities............................... 32,833 51,641
LONG-TERM DEBT.............................................. 4,115 4,315
--------- ---------
Total liabilities....................................... 36,948 55,956
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 5)

STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock, $0.01 par value, aggregate
liquidation preferences of $186,182 at May 31, 1999
Authorized--259,749,900 shares
Outstanding--53,997,646 shares and 65,955,398 shares at
May 31, 1998 and 1999, respectively;.................. 540 660
Common stock, $0.01 par value
Authorized--407,500,000 shares
Outstanding--426,656 shares and 1,234,344 shares at
May 31, 1998 and 1999, respectively................... 4 12
Contributed and paid-in-capital........................... 109,990 166,643
Deferred stock compensation............................... -- (6,579)
Warrants.................................................. -- 1,522
Stockholder notes receivable.............................. (26) (348)
Accumulated other comprehensive income.................... 15 28
Accumulated deficit....................................... (116,659) (149,712)
--------- ---------
Total stockholders' equity (deficit).................... (6,136) 12,226
--------- ---------
Total liabilities and stockholders' equity (deficit).... $ 30,812 $ 68,182
========= =========
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.

F-3
<PAGE>
LIBERATE TECHNOLOGIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------------
1997 1998 1999
-------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
License and royalty....................................... $ 231 $ 4,162 $ 5,281
Service................................................... 44 6,110 12,032
-------- ---------- ----------
Total revenues........................................ 275 10,272 17,313
-------- ---------- ----------
COST OF REVENUES:
License and royalty....................................... -- 3,779 2,279
Service................................................... -- 2,230 8,247
-------- ---------- ----------
Total cost of revenues................................ -- 6,009 10,526
-------- ---------- ----------
Gross margin.......................................... 275 4,263 6,787
-------- ---------- ----------
OPERATING EXPENSES:
Research and development.................................. 21,721 19,981 18,171
Sales and marketing....................................... 7,805 14,407 11,730
General and administrative................................ 1,023 2,453 3,975
Amortization of purchased intangibles..................... -- 4,563 6,084
Amortization of warrants.................................. -- -- 18
Amortization of deferred stock compensation............... -- -- 507
Restructuring charge...................................... -- 1,175 --
Acquired in-process research and development.............. -- 58,100 --
-------- ---------- ----------
Total operating expenses.............................. 30,549 100,679 40,485
-------- ---------- ----------
Loss from operations.................................. (30,274) (96,416) (33,698)
INTEREST AND OTHER INCOME (EXPENSE), net.................. (465) 10 59
-------- ---------- ----------
Loss before income tax benefit........................ (30,739) (96,406) (33,639)
INCOME TAX BENEFIT........................................ (11,750) (2,015) (586)
-------- ---------- ----------
Net loss.............................................. (18,989) (94,391) (33,053)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT................... (4) 19 13
-------- ---------- ----------
Comprehensive loss.................................... $(18,993) $ (94,372) $ (33,040)
======== ========== ==========
BASIC NET LOSS PER SHARE.................................. $ -- $ (890.48) $ (56.60)
======== ========== ==========
SHARES USED IN COMPUTING BASIC NET LOSS PER SHARE......... -- 106 584
======== ========== ==========
PRO FORMA BASIC NET LOSS PER SHARE........................ $ (0.58)
==========
SHARES USED IN COMPUTING PRO FORMA BASIC NET LOSS
PER SHARE............................................... 56,586
==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-4
<PAGE>
LIBERATE TECHNOLOGIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK CONTRIBUTED DEFERRED
---------------------- -------------------- AND PAID-IN STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION WARRANTS
----------- -------- --------- -------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MAY 31, 1996........... -- $-- 32 $-- $ 3,354 $-- $ --
Issuance of convertible
preferred stock to
affiliate................... 28,333,300 284 -- -- 11,128 -- --
Translation loss.............. -- -- -- -- -- -- --
Refund of contributed
capital..................... -- -- -- -- (11,750) -- --
Net loss...................... -- -- -- -- -- -- --
----------- ------ --------- ----- -------- ------- -------
BALANCE, MAY 31, 1997........... 28,333,300 284 32 -- 2,732 -- --
Value of options assumed in
acquisition................. -- -- -- -- 18,234 -- --
Issuance of convertible
preferred stock............. 24,411,020 244 -- -- 81,491 -- --
Contribution of capital from
affiliate................... -- -- -- -- 8,080 -- --
Stock options exercised....... 1,253,326 12 426,624 4 590 -- --
Acceleration of option
vesting..................... -- -- -- -- 365 -- --
Stockholder note repayment.... -- -- -- -- -- -- --
Translation gain.............. -- -- -- -- -- -- --
Refund of contributed
capital..................... -- -- -- -- (1,502) -- --
Net loss...................... -- -- -- -- -- -- --
----------- ------ --------- ----- -------- ------- -------
BALANCE, MAY 31, 1998........... 53,997,646 540 426,656 4 109,990 -- --
Stock options exercised....... 1,541,100 16 807,688 8 2,181 -- --
Issuance of convertible
preferred stock, net of
issuance costs of $2,510.... 10,416,652 104 -- -- 47,386 -- --
Deferred stock compensation
related to stock options.... -- -- -- -- 7,086 (7,086) --
Amortization of deferred stock
compensation................ -- -- -- -- -- 507 --
Issuance of warrants.......... -- -- -- -- -- -- 1,522
Translation gain.............. -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- --
----------- ------ --------- ----- -------- ------- -------
BALANCE, MAY 31, 1999........... 65,955,398 $ 660 1,234,344 $ 12 $166,643 $(6,579) $ 1,522
=========== ====== ========= ===== ======== ======= =======

<CAPTION>
TOTAL
STOCKHOLDER ACCUMULATED OTHER STOCKHOLDERS'
NOTES COMPREHENSIVE ACCUMULATED EQUITY
RECEIVABLE INCOME (LOSS) DEFICIT (DEFICIT)
----------- ------------------ ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, MAY 31, 1996........... $ -- $-- $ (3,279) $ 75
Issuance of convertible
preferred stock to
affiliate................... -- -- -- 11,412
Translation loss.............. -- (4) -- (4)
Refund of contributed
capital..................... -- -- -- (11,750)
Net loss...................... -- -- (18,989) (18,989)
-------- -------- --------- --------
BALANCE, MAY 31, 1997........... -- (4) (22,268) (19,256)
Value of options assumed in
acquisition................. -- -- -- 18,234
Issuance of convertible
preferred stock............. (34) -- -- 81,701
Contribution of capital from
affiliate................... -- -- -- 8,080
Stock options exercised....... (2) -- -- 604
Acceleration of option
vesting..................... -- -- -- 365
Stockholder note repayment.... 10 -- -- 10
Translation gain.............. -- 19 -- 19
Refund of contributed
capital..................... -- -- -- (1,502)
Net loss...................... -- -- (94,391) (94,391)
-------- -------- --------- --------
BALANCE, MAY 31, 1998........... (26) 15 (116,659) (6,136)
Stock options exercised....... (322) -- -- 1,883
Issuance of convertible
preferred stock, net of
issuance costs of $2,510.... -- -- -- 47,490
Deferred stock compensation
related to stock options.... -- -- -- --
Amortization of deferred stock
compensation................ -- -- -- 507
Issuance of warrants.......... -- -- -- 1,522
Translation gain.............. -- 13 -- 13
Net loss...................... -- -- (33,053) (33,053)
-------- -------- --------- --------
BALANCE, MAY 31, 1999........... $ (348) $ 28 $(149,712) $ 12,226
======== ======== ========= ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-5
<PAGE>
LIBERATE TECHNOLOGIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(18,989) $(94,391) $(33,053)
Adjustments to reconcile net loss to net cash used in
operating activities:
Write-off of acquired in-process research
and development..................................... -- 58,100 --
Depreciation and amortization......................... 470 6,070 7,367
Amortization of warrants.............................. -- -- 18
Provision for doubtful accounts....................... 1 329 220
Loss on disposal of fixed assets...................... -- 71 --
Non-cash compensation expense......................... -- 365 507
Non-cash tax benefit.................................. (11,750) (1,502) --
Changes in operating assets and liabilities,
net of acquisition:
(Increase) decrease in accounts receivable........ (255) 9 (45)
Increase in prepaid expenses and other
current assets.................................. (18) (957) (311)
(Increase) decrease in other assets............... (2,168) 1,601 290
Increase in accounts payable...................... 1,040 141 188
Increase (decrease) in accounts payable to
affiliate....................................... 18,723 5,529 (1,734)
Increase in accrued liabilities................... 2,591 961 4,500
Increase in accrued payroll and related
expenses........................................ 886 586 453
Increase in deferred revenues..................... 45 20,786 14,919
Increase in interest payable...................... -- 115 200
-------- -------- --------
Net cash used in operating activities........... (9,424) (2,187) (6,481)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (1,739) (923) (1,635)
Purchase of short-term investments........................ -- -- (19,751)
Proceeds from sale of fixed assets........................ -- 170 --
Cash acquired in Navio acquisition........................ -- 1,970 --
-------- -------- --------
Net cash provided by (used in) investing
activities.................................... (1,739) 1,217 (21,386)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net............... -- 161 1,535
Proceeds from issuance of convertible preferred stock,
net..................................................... 11,000 603 47,838
Contribution of capital................................... 412 8,080 --
Proceeds from notes payable............................... -- 4,000 5,000
Repayment of note payable................................. -- -- (5,000)
-------- -------- --------
Net cash provided by financing activities....... 11,412 12,844 49,373
-------- -------- --------
EFFECT OF EXCHANGE RATES ON CASH............................ (4) 19 13
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 245 11,893 21,519
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. -- 245 12,138
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 245 $ 12,138 $ 33,657
======== ======== ========
SUPPLEMENTAL NON-CASH ACTIVITIES:
Conversion of intercompany payable to convertible
preferred stock......................................... $ -- $ 23,000 $ --
======== ======== ========
Deferred stock compensation............................... $ -- $ -- $ 7,086
======== ======== ========
Stockholder notes receivable.............................. $ -- $ 36 $ 322
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-6
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND OPERATIONS OF THE COMPANY:

Liberate Technologies (the "Company"), formerly known as Network
Computer, Inc., was incorporated on April 24, 1996, and is a provider of a
comprehensive software platform for delivering internet-enhanced content and
applications to a broad range of information appliances, such as television
set-top boxes, game consoles, smart phones and personal digital assistants. In
December 1995, the Company began operations as a division of Oracle Corporation
("Oracle") developing technology for use in the network computer. On May 31,
1999, Oracle owned 58% of the outstanding shares of the Company and the Company
was a consolidated entity of Oracle.

On August 11, 1997, the Company completed the acquisition of Navio
Communications, Inc. ("Navio"), a development stage entity which was in the
process of developing consumer Internet applications software (the
"acquisition"). The acquisition was recorded under the purchase method of
accounting and, therefore, the results of operations of Navio and the fair value
of the acquired assets and liabilities were included in the Company's
consolidated financial statements beginning on the acquisition date (see
Note 3).

During fiscal 1998, the Company commenced shipment of its principal products
and emerged from the development stage. Although the Company is no longer in the
development stage, the Company continues to be subject to the risks and
challenges associated with companies in a comparable stage of development,
including: dependence on key individuals; key suppliers and customers;
competition from substitute products and from larger companies; successful
marketing of its products and acceptance of its technology; successful
development of product enhancements on a continuing basis; and the need for
adequate financing to support future growth.

In May 1999, the Company entered into an agreement with Sun Microsystems
("Sun") to transfer their NC Navigator and NC Administration Server software to
Sun while retaining the right to ship, support and maintain these products for
existing customers using this technology. Although the Company does not intend
to actively pursue new sales opportunities in the corporate network computer
market, outside of this market they intend to continue developing new products
based on this technology. For the year ended May 31, 1999, sales of these
products and related services accounted for $2.5 million of total revenues. Sun
has also agreed to co-develop television set-top box technology with the
Company, which will be distributed pursuant to a non-exclusive license with Sun.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

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

RECLASSIFICATIONS

We reclassified certain amounts for previous years to conform with the
fiscal 1999 presentation.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements

F-7
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

For purposes of the statement of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents. Cash equivalents consist principally of money market
accounts.

SHORT-TERM INVESTMENTS

The Company classifies its short-term investments as "held-to-maturity"
given the Company's positive intent and ability to hold the investments to
maturity. Held-to-maturity securities are carried at amortized cost, which
approximates the fair market value. As of May 31, 1999, short-term investments
consisted entirely of commercial paper, maturing at various dates through August
1999.

CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to a
concentration of credit risk principally consist of accounts receivable. As of
May 31, 1998 and 1999, approximately 85% and 80% of accounts receivable were
concentrated with four and two customers, respectively. The Company performs
ongoing credit evaluations of its customers' financial condition, and the risk
of loss with respect to its accounts receivables is further mitigated by the
fact that the Company's customer base is comprised of well established
companies. The Company provides reserves for credit losses which, to date, have
been insignificant.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets of three
to five years. Leasehold improvements are amortized over the shorter of the
remaining lease term or the estimated useful lives of the improvements using the
straight-line method.

FOREIGN CURRENCY TRANSLATION

The functional currency of the Company's subsidiaries is the local currency.
Accordingly, all assets and liabilities are translated into U.S. dollars at the
current exchange rate as of the applicable balance sheet date. Revenues and
expenses are translated at the average exchange rate prevailing during the
period. Gains and losses resulting from the translation of the financial
statements are reported as a separate component of stockholders' equity.

Foreign currency transaction gains and losses are included in other income
(expense) and have not been material.

SOFTWARE DEVELOPMENT COSTS

Under the criteria set forth in Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed," capitalization of software development costs
begins upon the establishment of technological feasibility

F-8
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

of the product, which the Company has defined as the completion of beta testing
of a working product. The establishment of technological feasibility and the
ongoing assessment of the recoverability of these costs require considerable
judgment by management with respect to certain external factors, including, but
not limited to, anticipated future gross product revenues, estimated economic
life and changes in software and hardware technology. Amounts that could have
been capitalized under this statement after consideration of the above factors
were immaterial and, therefore, no software development costs have been
capitalized by the Company to date.

REVENUE RECOGNITION

Effective June 1, 1998, the Company adopted Statement of Position ("SOP")
97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on applying
generally accepted accounting principles for recognizing revenue on software
transactions. The adoption of SOP 97-2 did not have a material impact on the
Company's financial position, results of operations or cash flows. In December
1998, the American Institute of Certified Public Accountants issued SOP 98-9
"Modification of SOP 97-2. Software Revenue Recognition With Respect to Certain
Transactions." SOP 98-9 is effective for fiscal years beginning on or before
March 15, 1999. The Company believes that the adoption of SOP 98-9 will not have
a material effect on the Company's results of operations or financial condition.

License revenues consist principally of up front license fees earned from
the licensing of the Company's software and royalty fees earned upon the
shipment of, or activation of products which incorporate, the Company's
software. Revenues from up front software license agreements are recognized when
delivery has occurred, collection of the receivable is probable, the fee is
fixed or determinable and vendor-specific objective evidence exists to allocate
the total fee to all delivered and undelivered elements of the arrangement.
Revenue is deferred in cases where the license arrangement calls for the future
delivery of products or services for which the Company does not have vendor-
specific objective evidence to allocate a portion of the total fee to the
undelivered element. In such cases, revenue is recognized when the undelivered
elements are delivered or vendor-specific objective evidence of the undelivered
elements becomes available. If license arrangements include the rights to
unspecified future products, revenue is recognized over the contractual or
estimated economic term of the arrangement. Royalty revenues are recognized when
reported to the Company after shipment of or activation of the related products.
Prepaid royalties are deferred and recognized when reported.

Service revenues consist of consulting services, training and maintenance,
which includes updates and technical support. Consulting service and training
revenues are generally recognized as services are performed. Maintenance revenue
is recognized ratably over the term of the agreement. In instances where
software license agreements include a combination of consulting services,
training, and maintenance, these separate elements are unbundled from the
arrangement based on the element's relative fair value.

F-9
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

The percentage of sales to significant customers is as follows:

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Customer A................................ * 16% 23%
Customer B................................ * * 10%
Customer C................................ * 10% *
Customer D................................ 16% * *
</TABLE>

* Less than 10%

DEFERRED REVENUES

Deferred revenues consists principally of payments received from customers
for future services, prepaid royalties and license fees for undelivered product.

COMPREHENSIVE INCOME

In fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires companies to report a new, additional measure of
income on the income statement or to create a new financial statement that shows
the new measure of income. Comprehensive income includes foreign currency
translation gains and losses and unrealized gains and losses on equity
securities that have been previously excluded from net income and reflected
instead in equity. The Company has reported the components of comprehensive
income on its statement of operations.

SEGMENT REPORTING

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS 131
changes the way companies report selected segment information in annual
financial statements and requires companies to report selected segment
information in interim financial reports to stockholders. SFAS 131 is effective
for Liberate's year ending May 31, 1999. Liberate operates solely in one
segment, the development, manufacturing and sale of information appliance
software for consumer, corporate and educational marketplaces. As of May 31,
1998 and 1999, the Company's long-term assets are located primarily in the
United States. The Company's revenues by geographic area are as follows (in
thousands):

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
United States...................................... $ 62 $ 5,137 $ 8,542
Japan.............................................. 17 3,280 4,393
England............................................ 10 682 2,517
Canada............................................. 82 346 587
Other.............................................. 104 827 1,274
---- ------- -------
Consolidated....................................... $275 $10,272 $17,313
==== ======= =======
</TABLE>

Export sales consist of sales to customers in foreign countries. During the
years ended May 31, 1997, 1998 and 1999, export sales were 77%, 50% and 51% of
total revenues, respectively.

F-10
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

COMPUTATION OF BASIC NET LOSS PER SHARE AND PRO FORMA BASIC NET LOSS PER SHARE

Historical net loss per share has been calculated under SFAS No. 128
"Earnings per Share." Basic net loss per share on a historical basis is computed
using the weighted average number of shares of common stock outstanding. No
diluted loss per share information has been presented in the accompanying
consolidated statements of operations since potential common shares from
conversion of preferred stock, stock options, and warrants are antidilutive.

Pro forma basic net loss per share has been calculated assuming the
conversion of preferred stock into an equivalent number of common shares, as if
the shares had converted on the dates of their issuance. It also assumes the
conversion of the outstanding convertible long-term debt (see Note 11) into
common stock, as if the debt had converted upon its original issuance date.

RESTRUCTURING CHARGE

A restructuring charge of $1.2 million was recorded in the fiscal year ended
May 31, 1998. Approximately $1 million of this charge related to severance
payments associated with the termination of two executive officers. The
remaining charge of approximately $200,000 was for severance payments and the
acceleration of stock option vesting related to the termination of 20 employees,
primarily in the sales group. All terminations and termination benefits were
communicated to the affected employees prior to period end. At May 31, 1999,
$266,000 was remaining in accrued liabilities in the accompanying balance sheet
which will be paid out in fiscal 2000. All other severance payments have been
made and actual payments made approximated the original estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." The statement is effective for fiscal years beginning
after December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. The Company is required to adopt
SOP 98-5 for the year ended May 31, 2000. The adoption of SOP 98-5 is not
expected to have a material impact on the Company's consolidated financial
statements.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which requires
companies to value derivative financial instruments, including those used for
hedging foreign currency exposures, at current market value with the impact of
any change in market value being charged against earnings in each period. SFAS
No. 133 will be effective for and adopted by the Company in the first quarter of
the fiscal year ending May 31, 2001. The Company anticipates that SFAS No. 133
will not have a material impact on its consolidated financial statements.

3. ACQUISITION OF NAVIO COMMUNICATIONS, INC.:

Effective August 11, 1997, the Company acquired Navio. In connection with
the acquisition, the Company issued 17,441,322 shares Series B and C convertible
preferred stock and stock options to acquire 6,315,780 shares Series C
convertible preferred stock in exchange for all of the outstanding common stock,
preferred stock and options to purchase shares of Navio common stock. The
acquisition was accounted for as a purchase and, accordingly, the results of
operations of Navio have been

F-11
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. ACQUISITION OF NAVIO COMMUNICATIONS, INC.: (CONTINUED)

included in the consolidated financial statements commencing on the date of
acquisition. The fair market value of the equity securities issued in the
acquisition was approximately $77.1 million.

In connection with the acquisition, the Company originally wrote off
approximately $75.6 million of acquired in-process research and development
(IPR&D) which, in the opinion of management, had not reached technological
feasibility and had no alternative future use. Subsequent to the Securities and
Exchange Commission's letter to the American Institute of Certified Public
Accountants, dated September 9, 1998, regarding its views on IPR&D, the Company
has revised the purchase price allocations and restated its financial
statements. As a result, the Company has made adjustments to decrease the
amounts previously expensed as IPR&D in fiscal 1998 and increase purchased
intangibles by a similar amount.

The effect of this adjustment on the previously reported May 31, 1998
consolidated financial statements is as follows (in thousands):

<TABLE>
<CAPTION>
AS REPORTED AS RESTATED
----------- -----------
<S> <C> <C>
Amortization of purchased intangibles................. $ 200 $ 4,563
Acquired in-process research and development.......... $ 75,554 $58,100
Loss before income tax benefit........................ $ 109,772 $96,406
</TABLE>

The adjustment had no impact on the reported income tax benefit.

After the adjustment discussed above, the Company wrote off approximately
$58.1 million of acquired in-process research and development which, in the
opinion of management, had not reached technological feasibility and had no
alternative future use. Purchased intangibles, representing purchase price in
excess of identified tangible and intangible assets, of approximately
$18.3 million were recorded and are being amortized on a straight-line basis
over a useful life of three years. Accumulated amortization was approximately
$4.6 million and $10.7 million at May 31, 1998 and 1999, respectively.

The value assigned to acquired in-process research and development was
determined by identifying research projects in areas for which technological
feasibility has not been established. The value was determined by estimating the
costs to develop the acquired in-process technology into commercially viable
products, estimating the resulting net cash flows from such projects, and
discounting the net cash flows back to their present values. The discount rate
includes a factor that takes into account the uncertainty surrounding the
successful development of the acquired in-process technology. If these projects
are not successfully developed, future revenue and profitability of the Company
may be adversely affected. Additionally, the value of the other purchased
intangible assets may be impaired.

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

<TABLE>
<S> <C>
Purchased intangibles, including in-process technology...... $76,354
Property, plant and equipment and other noncurrent assets... 1,752
Cash, receivables and other current assets.................. 3,715
Current liabilities assumed................................. (4,133)
-------
Net assets acquired....................................... $77,688
=======
</TABLE>

F-12
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. ACQUISITION OF NAVIO COMMUNICATIONS, INC.: (CONTINUED)

In connection with the acquisition, for up to 60 days after the closing
date, certain former common stockholders of Navio had the right to put to Oracle
up to 50% of the preferred shares they received, and shares issuable under stock
options assumed by the Company in the acquisition, for a price of $3.35 per
share. A total of 3,818,496 shares of Series C convertible preferred stock for
approximately $12.8 million in proceeds were put to Oracle under this
arrangement.

Additionally, there is a call option held by Oracle to purchase all of the
Series B and Series C convertible preferred stock at a to-be-determined buy-out
price. The buy-out price is determined as follows: (1) if exercised prior to
December 31, 1999, the price would be 120% of the per share price determined by
an independent third party valuation of the Company's shares, or (2) if
exercised after December 31, 1999, the per share price determined by an
independent third party valuation of the Company's shares. The option must be
exercised in whole for all shares of Series B and Series C preferred stock
subject to such call option.

The call option will terminate upon a change in control of the Company or
upon an initial public offering of at least $20.0 million.

The following table presents the unaudited pro forma results assuming that
the Company had merged with Navio at the beginning of fiscal year 1997. Net
income has been adjusted to exclude the write-off of acquired in-process
research and development of $58.1 million and includes amortization of purchased
intangibles of approximately $6.1 million for both of the years ended May 31,
1997 and 1998. This information may not necessarily be indicative of the future
combined results of operations of the Company.

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------
1997 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Revenues............................................. $ 1,090 $ 11,065
Net loss............................................. $(35,300) $ (42,227)
Basic net loss per share............................. $ -- $ (398.37)
</TABLE>

4. PROPERTY AND EQUIPMENT:

At May 31, 1998 and 1999, property and equipment consisted of the following
(in thousands):

<TABLE>
<CAPTION>
MAY 31,
---------------------
1998 1999
--------- ---------
<S> <C> <C>
Computer equipment................................... $ 2,881 $ 4,060
Software............................................. 561 816
Furniture and equipment.............................. 209 225
Leasehold improvements............................... 280 465
------- -------
3,931 5,566
Less: Accumulated depreciation and amortization...... (2,016) (3,297)
------- -------
$ 1,915 $ 2,269
======= =======
</TABLE>

F-13
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES

The Company has various operating leases (including building, furniture and
equipment and maintenance agreements) that expire at various times through 2009.
Future minimum lease payments relating to these agreements as of May 31, 1999,
are as follows (in thousands):

<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
2000............................................ $ 4,260
2001............................................ 4,699
2002............................................ 4,784
2003............................................ 3,377
2004............................................ 2,733
Thereafter...................................... 15,487
-------
$35,340
=======
</TABLE>

Rent expense under the Company's operating leases for the years ended
May 31, 1997, 1998 and 1999 were approximately $582,000, $2,031,000 and
$2,240,000 respectively. The above future minimum lease payments include a
commitment of approximately $72,000 per month expiring on November 30, 2001,
which has been sub-leased at an amount greater than the monthly commitment and
is offset against rent expenses in the consolidated statements of operations.

On April 27, 1999, the Company entered into a ten-year facility lease for
its new corporate headquarters. Total commitments over the 10-year operating
lease life are approximately $28.0 million. Oracle has provided a $10.0 million
guarantee to the landlord. The guarantee can be terminated upon the Company
completing an IPO with net proceeds of at least $40.0 million and providing an
Irrevocable Letter of Credit covering ten months rent and operating costs. Also,
the Company can eliminate the Irrevocable Letter of Credit by achieving certain
financial benchmarks. The Company has also entered into an agreement for
non-penalty, early termination of the Company's current facility and equipment
leases with Oracle Corporation, due to expire on September 17, 2002. Commitments
under the Oracle leases, subsequent to May 31, 1999, total approximately
$7.2 million.

GENERAL INSTRUMENT CORPORATION

In April 1999, the Company entered into a Manufacturer's Representative
Agreement and a Development Agreement with General Instrument Corporation
("GI"). Under the developer's agreement, the Company committed to pay GI
$10.0 million in development fees for certain services to be performed by GI.
These fees will be paid out in quarterly installments over a three-year period.
Under the manufacturer's agreement, the Company agreed to pay to GI a
"commission" on all GI terminals deployed by network operators with the
Company's products on them. However, the commissions only become effective after
specific sales thresholds are met. Prior to attaining those thresholds, no
commissions are due to GI on these sales. In connection with this commission, GI
has committed to the Company that certain volumes of GI terminals will be sold.
After the three year period is over, GI may be required to pay the Company for
any shortfall of terminal sales below committed volume levels. In addition to
this arrangement, the Company has also entered into a Series C Preferred Stock
Purchase Agreement dated by and between the Company, GI and Oracle pursuant to
which Oracle sold GI 1,515,150 shares of the Company's Series C Preferred Stock.

F-14
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. COMMITMENTS AND CONTINGENCIES: (CONTINUED)

LEGAL MATTERS

The Company is a defendant in various legal matters arising in the normal
course of business. In the opinion of management, after consultation with legal
counsel, the ultimate resolution of these matters is not expected to have a
material effect on these consolidated financial statements.

6. CONVERTIBLE PREFERRED STOCK:

On October 1, 1996, the Company issued 28,333,300 shares of Series A
convertible preferred stock to Oracle in exchange for a cash payment of
$10.0 million, a contribution of tangible assets and certain intangible assets
including intellectual property rights and contractual relationships with
suppliers, customers and contractors. The issuance of these shares was recorded
at the carryover basis of the contributed assets plus the cash received.

In connection with the acquisition of Navio (see Note 3), the Company issued
Series B and C convertible preferred stock and authorized the issuance of
Series A-1 and C-1 convertible preferred stock. In addition, on November 12,
1997, the Company obtained financing from a third party investor of $4 million.
The financing was obtained through issuance of convertible notes which are
convertible, at the option of the holder, into Series D preferred stock at $4.74
per share (see Note 11).

In May 1999, the Company issued 10,416,652 shares of Series E convertible
preferred stock at $4.80 per share for net proceeds to the Company of
approximately $47.5 million.

The Company has authorized the total number of shares of each series of
convertible preferred stock with rights, preferences and restrictions described
below:

DESIGNATED AND OUTSTANDING SHARES OF PREFERRED STOCK

<TABLE>
<CAPTION>
OUTSTANDING AT MAY 31, 1999
SHARES -----------------------------
DESIGNATED SHARES AMOUNT
---------- ------------ --------------
<S> <C> <C> <C>
Series A preferred stock............... 84,999,900 28,333,300 $ 11,412,000
Series A-1 preferred stock............. 25,500,000 6,969,694 23,000,000
Series B preferred stock............... 14,000,000 4,641,516 15,663,000
Series C/C-1 preferred stock........... 96,000,000 15,594,236 44,156,000
Series D preferred stock............... 8,000,000 -- --
Series E preferred stock............... 31,250,000 10,416,652 47,490,000
---------- ------------
65,955,398 $141,721,000
========== ============
</TABLE>

RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK

(a) Series A, A-1, B, C, C-1, D and E convertible preferred stock have a
liquidation preference of $3.00, $3.30, $3.30, $0.83, $4.74, and $4.80
per share plus declared but unpaid dividends on each such share,
respectively. Additionally, Series A, A-1, B, D and E convertible
preferred stock are senior in liquidation to Series C and C-1 convertible
preferred stock and common stock. Series C and C-1 convertible preferred
stock are senior in liquidation to common stock.

(b) Each holder of Series A, A-1, B, D and E convertible preferred stock is
entitled to receive non-cumulative dividends at the rate of $0.30, $0.33,
$0.33, $0.47 and $0.48 per share,

F-15
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. CONVERTIBLE PREFERRED STOCK: (CONTINUED)

respectively, per annum, payable quarterly, when and as declared by the
Board of Directors, prior to payment of dividends on common stock,
Series C preferred stock or Series C-1 preferred stock. Holders of
Series C and C-1 convertible preferred stock do not have stated
dividends.

(c) The holder of each share of Series A, A-1, B, C-1, D and E convertible
preferred stock is entitled to the full voting rights and powers and
shall have the right to one vote for each share of common stock into
which such convertible preferred stock could be converted. The holders of
Series C convertible preferred stock do not have the right to vote for
the election or removal of directors of the Company, but may vote on all
other matters.

(d) Each share of Series A, A-1, B, C-1, D and E preferred stock will be
convertible, at the option of the holder, into one share of Series A
common stock. Each share of Series C preferred stock will be convertible,
at the option of the holder, into (i) one share of Series C-1 preferred
stock or (ii) one share of Series A or B common stock. The conversion
ratio is determined by dividing $3.30 for each share of Series A, A-1, B,
C and C-1 preferred stock, $4.74 for each share of Series D preferred
stock and $4.80 for each share of Series E preferred stock by the
conversion price. The initial conversion price for Series A, A-1, B, C
and C-1 preferred stock is $3.30 per share. The initial conversion price
for Series D preferred stock is $4.74 per share, and Series E preferred
stock is $4.80 per share. The conversion rate is subject to adjustment
upon the occurrence of certain events.

(e) Each share of Series A, A-1, B, C-1, D and E preferred stock will be
automatically converted into one share of Series A common stock upon the
sale of Series A common stock in a public offering pursuant to a
registration statement under the Securities Act of 1933, as amended with
net proceeds of greater than $20.0 million and a price to the public of
at least $6.00 per share (as adjusted for stock splits, stock dividends,
combinations and similar events). Each share of Series C preferred stock
will also be automatically converted into one share of Series A common
stock in the same public offering provided that, if the conversion of
such shares would result in a filing requirement on behalf of a holder of
Series C preferred stock pursuant to the Hart-Scott-Rodino Antitrust
Improvement Act of 1976 (the "HSR Act"), as amended, all shares of
Series C preferred stock held by such holder shall automatically be
converted into shares of Series B common stock. Each share of Series A
and A-1 preferred stock shall automatically be converted into shares of
Series A common stock at the conversion price at the time in effect for
each such share of preferred stock on the date specified by written
consent or agreement of the holders of a majority of the then outstanding
shares of Series A and A-1 preferred stock, voting together as a class.
Each share of Series B, C, C-1, D and E preferred stock shall
automatically be converted into shares of Series A common stock at the
conversion price at the time in effect for each such share of preferred
stock on the date specified by written consent or agreement of the
holders of a majority of the then outstanding shares of Series B, C, C-1,
D and E preferred stock, voting together as a class, provided, that no
shares of Series B preferred stock or of Series E preferred stock shall
be so converted without the prior written consent or agreement of
eighty-one percent (81%) of the outstanding shares of the Series B
preferred stock or Series E preferred stock (excluding shares of
Series B preferred stock or Series E preferred stock held by Oracle
Corporation or its affiliates), as the case may be, voting as separate
classes, and provided, further that if the conversion of such shares of
Series C preferred stock would result in a filing requirement on

F-16
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. CONVERTIBLE PREFERRED STOCK: (CONTINUED)

behalf of a holder of Series C preferred stock pursuant to the HSR Act,
all shares of Series C preferred stock held by such holder shall
automatically be converted into shares of Series B common stock.

(f) Holders of a certain number of each class of the preferred stock are
required to consent to any action that: (i) alters or changes the rights,
preferences or privileges of that class of Preferred Stock;
(ii) increases the authorized number of shares of preferred stock;
(iii) creates any class of stock with preferences or priorities superior
to or on a parity with the preferences and priority of the preferred
stock; or (iv) affects the sale of all or substantially all of the assets
of the Company, or any consolidation or merger, or any sale of more than
50% of the Company's capital stock.

7. COMMON STOCK:

The Company has authorized the total number of shares of common stock with
rights, preferences and restrictions described below:

DESIGNATED SHARES OF COMMON STOCK

<TABLE>
<S> <C>
Series A common stock.......................... 365,000,000 shares
Series B common stock.......................... 42,500,000 shares
-----------
407,500,000
===========
</TABLE>

At May 31, 1999, the Company has reserved the following shares of authorized
but unissued shares of common stock for future issuance:

<TABLE>
<S> <C>
Conversion of Series A preferred stock......... 28,333,300
Conversion of Series A-1 preferred stock....... 6,969,694
Conversion of Series B preferred stock......... 4,641,516
Conversion of Series C/C-1 preferred stock..... 15,594,236
Notes convertible into Series D preferred
stock........................................ 2,510,546
Conversion of Series E preferred stock......... 10,416,652
Employee stock purchase plan................... 1,666,666
Warrants....................................... 4,599,992
Stock options.................................. 17,537,796
-----------
92,270,398
===========
</TABLE>

RIGHTS, PREFERENCES AND RESTRICTIONS OF COMMON STOCK

(a) Each share of Series B common stock shall be convertible, at the option
of the holder, into one share of Series A common stock, at any time after
issuance.

(b) Each share of Series B common stock will automatically be converted into
one share of Series A common stock upon the sale of Series A common stock
in a public offering pursuant to a registration statement under the
Securities Act of 1933, with net proceeds of greater than $20.0 million;
provided, that if the conversion of such shares would result in a filing

F-17
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. COMMON STOCK: (CONTINUED)

requirement on behalf of a holder of Series B common stock pursuant to
the HSR Act, such conversion shall not occur unless and until the
expiration or termination of all waiting and review periods (and any
extensions thereof) applicable thereto under the HSR Act at which time
such conversion shall occur.

(c) The holders of each share of Series A and B common stock are entitled to
the full voting rights and powers equal to one vote for each share of
Series A or B common stock held. The holders of Series B common stock do
not have the right to vote for the election or removal of directors of
the Company, but may vote on all other matters.

WARRANT AGREEMENTS

In April and May of 1999, the Company entered into letter agreements with
several network operators that require the Company to issue warrants to purchase
up to an aggregate of approximately 4,599,992 shares of common stock if the
network operators satisfy commercial milestones. Warrants to purchase up to
416,666 shares of common stock have an exercise price of $4.80 per share,
warrants to purchase up to 4,083,326 shares of common stock, if issued, will
have an exercise price of $6.90 per share and warrants to purchase up to 100,000
shares of common stock, if issued, will have an exercise price of either $4.80
or $6.90 per share, depending on whether commitments are made by the warrant
holders. In the event the milestones are met, the Company would be required to
record a significant non-cash expense based upon the value of the warrants at
the time the milestones are satisfied. The value of the warrants will be
estimated using the Black-Scholes model as of the earlier of the grant date or
the date that it becomes probable that the warrants will be earned. Pursuant to
the requirements of Emerging Issues Task Force No. 96-18, the warrants will
continue to be revalued in situations where they are granted prior to
establishment of a performance commitment.

As of May 31, 1999, warrants to purchase 416,666 shares of common stock at
$4.80 per share have been issued under the terms of these agreements, all of
which are fully vested. The fair value of the warrants recorded as of May 31,
1999, was approximately $1,522,000, of which $18,000 was charged to operations
and the remaining balance of $1,504,000 was recorded as an intangible asset and
is included in other current assets in the accompanying consolidated balance
sheet. The asset will be amortized over the greater of the warrants' respective
performance period or as royalties are earned under the respective software
license agreements with the network operators.

8. STOCK PLANS:

OPTIONS ASSUMED FROM NAVIO

In connection with the Company's acquisition of Navio, each outstanding
option to purchase shares of Navio common stock was automatically converted into
an option to purchase Series C convertible preferred stock of the Company based
upon the conversion ratio.

Options assumed are immediately exercisable, and the shares of stock issued
upon exercise are subject to repurchase, at the original purchase price, by the
Company, upon the termination of the option holders service to the Company. The
Company's repurchase right expires generally at the rate of 25% of the original
grant, commencing 12 months after the date of grant or employment, and in
monthly increments over the following 36 months.

At May 31, 1999, 2,105,444 options were outstanding at a weighted average
exercise price of $0.57, of which 901,404 options were vested.

F-18
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. STOCK PLANS: (CONTINUED)

NETWORK COMPUTER, INC. 1996 STOCK OPTION PLAN

On October 1, 1996, the Company adopted the Network Computer, Inc. 1996
Stock Option Plan (the "Plan"). The Plan, as amended, provides for the grant of
both incentive and non-qualified stock options to employees, consultants and
directors for the purchase of up to 11,666,666 shares of Series A common stock.
Incentive stock options may only be granted to employees.

The exercise price of incentive stock options cannot be less than the fair
market value of the common stock on the grant date, as determined by the board
of directors. The Plan also provides for holders of non-qualified options to
purchase shares at not less than 85% of the fair market value on the grant date.
The term of the incentive and non-qualified stock options is generally ten years
from the date of grant or a shorter term as provided in the option agreement.
Options generally vest over four years.

The Company accounts for outstanding stock options under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"). In accordance with APB No. 25, no compensation expense has been
recognized related to options granted to employees except as discussed below in
"Deferred Stock Compensation", as all employee options were granted with an
exercise price equal to the fair market value of the underlying stock. If
compensation cost had been determined consistent with SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's pro forma net loss would have been
as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss--as reported.......................... $(18,989) $(94,391) $(33,053)
======== ======== ========
Net loss--pro forma............................ $(19,013) $(94,415) $(36,446)
======== ======== ========
</TABLE>

Pursuant to the provisions of SFAS No. 123, the fair value of options
granted was estimated on the grant date using the Black-Scholes option pricing
model and the following assumptions:

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Risk-free interest rate................. 5.98% 5.56% 4.75%
Average expected life of option......... 2.83 years 2.83 years 3.97 years
Dividend yield.......................... 0% 0% 0%
Volatility of common stock.............. 0% 0% 70%
Weighted average fair value of options
granted............................... $ 0.02 $ 0.08 $ 4.32
</TABLE>

F-19
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. STOCK PLANS: (CONTINUED)

Stock option activity under the Network Computer, Inc. 1996 Option Plan is
summarized below:

<TABLE>
<CAPTION>
OPTIONS
AVAILABLE OPTIONS WEIGHTED AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
---------- ----------- ----------------
<S> <C> <C> <C>
Balance at May 31, 1996............... -- -- --

Authorized.......................... 5,000,000 -- --
Granted............................. (2,333,264) 2,333,264 $0.30
Cancelled........................... 66,662 (66,662) $0.30
---------- ---------- -----
Balance at May 31, 1997............... 2,733,398 2,266,602 $0.30

Granted............................. (2,631,924) 2,631,924 $1.69
Exercised........................... -- (426,624) $0.38
Cancelled........................... 1,610,492 (1,610,492) $0.60
---------- ---------- -----
Balance at May 31, 1998............... 1,711,966 2,861,410 $1.40

Authorized.......................... 6,666,666 -- --
Granted............................. (4,303,458) 4,303,458 $3.21
Exercised........................... -- (356,300) $1.08
Cancelled........................... 655,612 (655,612) $1.70
---------- ---------- -----
Balance at May 31, 1999............... 4,730,786 6,152,956 $2.65
========== ========== =====
</TABLE>

Additionally, on October 15, 1998, the Company issued non-qualified stock
options outside of the Plan to an executive officer and to an outside director
for the purchase of 4,999,998 shares of the Company's common stock at a price of
$2.55 per share. As of May 31, 1999, options to purchase 451,388 shares had been
exercised and 4,548,610 shares were still outstanding. The options vest over
four years and have a term of ten years.

A summary of all outstanding options, including those assumed in connection
with the Navio acquisition, to purchase common stock and preferred stock at
May 31, 1999 is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- -------------------------------------
WEIGHTED
AVERAGE
RANGE OF NUMBER OUTSTANDING REMAINING WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AS OF MAY 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE AS OF MAY 31, 1999 EXERCISE PRICE
- --------------- ------------------ ---------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
$0.18 $0.30 1,292,868 7.52 $0.22 1,076,684 $0.20
$0.84 $1.08 1,572,038 7.91 $ .90 1,346,096 $ .86
$1.95 $2.25 2,057,142 8.86 $2.08 324,134 $1.97
$2.55 $2.85 5,572,402 9.41 $2.57 87,304 $2.55
$3.75 $4.50 2,312,560 9.85 $3.81 1,500 $3.75
---------- ---- ----- ---------- -----
12,807,010 9.03 $2.21 2,835,718 $ .79
========== ==== ===== ========== =====
</TABLE>

F-20
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. STOCK PLANS: (CONTINUED)

DEFERRED STOCK COMPENSATION

In connection with the grant of certain stock options to employees during
the year ended May 31, 1999, the Company recorded deferred compensation of
$7.1 million, representing the difference between the estimated fair value of
the common stock for accounting purposes and the option exercise price of such
options at the date of grant. Such amount is presented as a reduction of
stockholders' equity and amortized ratably over the vesting period of the
applicable options (generally four years). Approximately $507,000 was expensed
during the year ended May 31, 1999, and the balance will be expensed ratably
over the period the options vest. Compensation expense is decreased in the
period of forfeiture for any accrued but unvested compensation arising from the
early termination of an option holder's services. In addition, the Company will
record additional deferred stock compensation of approximately $1.6 million for
June 1999 stock option grants. This amount will be expensed over the option
vesting period of four years.

1999 EQUITY INCENTIVE PLAN

On May 17, 1999, the board of directors approved the adoption of the
Company's 1999 Equity Incentive Plan (the "1999 Plan"), subject to stockholder
approval. The types of awards that may be made under the 1999 Plan are options
to purchase shares of common stock, stock appreciation rights, restricted shares
and stock units. Any shares not yet issued under the Company's 1996 Stock Option
Plan as of the date of the Company's initial public offering will be available
for grant under the 1999 Plan. The exercise price for incentive stock options
may not be less than 100% of the fair market value of the Company's common stock
on the date of grant (85% for nonstatutory options). No options have been
granted under the 1999 Plan as of May 31, 1999.

1999 EMPLOYEE STOCK PURCHASE PLAN

On May 17, 1999, the board of directors approved the adoption of the
Company's 1999 Employee Stock Purchase (the "1999 Purchase Plan"), subject to
stockholder approval. A total of 1,666,666 shares of common stock has been
reserved for issuance under the 1999 Purchase Plan, plus, commencing on June 1,
2000, annual increases equal to the lesser of 1,666,666 shares, 2% of the
outstanding common shares on such date or a lesser amount determined by the
board of directors. The 1999 Purchase Plan permits eligible employees to acquire
shares of the Company's common stock through periodic payroll deductions of up
to 15% of base cash compensation. No more than 1,500 shares may be purchased by
each employee on any purchase date. Each offering period will have a maximum
duration of 6 months. The price at which the common stock may be purchased is
85% of the lesser of the fair market value of the Company's common stock on the
first day of the applicable offering period or on the last day of the respective
purchase period. The initial offering period will commence on the effectiveness
of the initial public offering and will end on March 31, 2000.

9. INCOME TAXES:

The Company and Oracle have entered into a tax sharing agreement effective
August 12, 1997. Under the terms of the agreement, the Company is responsible
for its share of Oracle's consolidated tax liability, computed as if the Company
had filed a separate return. Further, if the Company would have no tax due on a
separate return basis and the inclusion of the Company's tax operating losses
reduces Oracle's consolidated tax liability, Oracle will pay to the Company the
tax savings generated by

F-21
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. INCOME TAXES: (CONTINUED)

including the Company in its consolidated tax return. Oracle is not required to
reimburse the Company for the tax savings obtained by Oracle prior to
August 12, 1997. Oracle realized a tax savings of approximately $11.8 million
and $1.4 million for the year ended May 31, 1997, and the period from June 1,
1997 to August 11, 1997, respectively. These amounts are reflected as a tax
benefit in the accompanying statement of operations and a corresponding refund
of contributed capital to Oracle in the accompanying consolidated statement of
stockholders' equity (deficit). Subsequent to the acquisition of Navio on
August 12, 1997, the Company is no longer included in Oracle's consolidated
Federal Tax Returns. For the period from August 12, 1997 to May 31, 1998, and
for the fiscal year ended May 31, 1999, Oracle will realize state and local tax
savings of approximately $788,000 and $781,000, respectively. These amounts are
reflected as a receivable from affiliate in the accompanying consolidated
balance sheets.

Income taxes have been calculated on a separate company basis pursuant to
the provisions of SFAS No. 109, "Accounting for Income Taxes". The components of
the benefit for income taxes are as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal................................................... $10,100 $1,303 $--
State..................................................... 1,650 987 781
Foreign................................................... -- (275) (195)
------- ------ ------
Total benefit........................................... $11,750 $2,015 $ 586
======= ====== ======
</TABLE>

The (provision) benefit for income taxes differs from the amounts which
would result by applying the applicable statutory Federal income tax rate to
income before taxes, as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Benefit at Federal statutory rate........................... $10,700 $ 33,755 $ 11,774
State income taxes, net of Federal benefit.................. 1,750 5,500 1,917
Change in valuation allowance............................... (198) (15,162) (10,926)
Nondeductible write-off of in-process research
and development........................................... -- (20,335) --
Nondeductible goodwill amortization......................... -- (1,610) (2,129)
Other....................................................... (502) (133) (50)
------- -------- --------
Total benefit........................................... $11,750 $ 2,015 $ 586
======= ======== ========
</TABLE>

F-22
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. INCOME TAXES: (CONTINUED)

Components of the net deferred tax asset are as follows (in thousands):

<TABLE>
<CAPTION>
MAY 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net operating losses...................... $-- $ 4,573 $ 8,546
Temporary differences..................... 198 9,998 16,306
Tax credits............................... -- 789 1,434
----- -------- --------
Total deferred tax asset.................. 198 15,360 26,286
Valuation allowance....................... (198) (15,360) (26,286)
----- -------- --------
Total net deferred tax asset.............. $-- $ -- $ --
===== ======== ========
</TABLE>

A valuation allowance has been recorded for the entire deferred tax asset as
a result of uncertainties regarding realization of the asset including limited
operating history of the Company, the lack of profitability to date and the
uncertainty over future operating profitability.

At May 31, 1999, the Company had federal net operating loss carryforwards of
approximately $24.4 million and tax credits totaling $1.4 million. The federal
net operating loss carryforwards expire at various dates through 2003 and 2019.
Under current tax law, net operating loss carryforwards available to offset
future operating income in any given year may be limited upon the occurrence of
certain events, including significant changes in ownership interests.

10. RELATED PARTY TRANSACTIONS:

TRANSACTIONS WITH ORACLE

Prior to September 1997, the Company's parent, Oracle, performed certain
services and incurred certain costs for the benefit of the Company. Services
provided included tax, treasury, risk management, employee benefits, legal,
accounting and other general corporate services. The costs of the services
provided by Oracle have been allocated to the Company based upon the relative
headcount of the Company to the total consolidated headcount of Oracle. The
charges for these services totaled approximately $1,000,000 and $250,000 for the
years ended May 31, 1997 and 1998, respectively. In the opinion of management,
the method of allocating the costs is reasonable and the cost of the services
allocated to the Company is not significantly different from the costs that
would have been incurred had the Company performed these functions. Commencing
in September 1997, the Company ceased obtaining these services from Oracle.

Prior to the Company's acquisition of Navio, Oracle had provided cash flow
to fund the Company's operations through an intercompany payable account. In
fiscal 1998, in connection with the acquisition of Navio, Oracle converted
approximately $18.0 million of outstanding intercompany payables into 5,454,544
shares of the Company's Series A-1 preferred stock. Additionally, in fiscal
1998, Oracle contributed capital of approximately $8.1 million to the Company.

The Company has entered into a Convertible Note Purchase Agreement dated
July 23, 1997 with Oracle. Pursuant to the Convertible Note Purchase Agreement,
Oracle agreed to provide up to $10.0 million to the Company for general working
capital purposes, as needed, in the form of convertible notes. The convertible
notes bear interest at 8% per annum and are convertible at Oracle's

F-23
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. RELATED PARTY TRANSACTIONS: (CONTINUED)

option into shares of the Company's Series A-1 preferred stock, which is
currently $3.30 per share. As of May 31, 1999, the Company has drawn down
approximately $10.0 million under such arrangement. During fiscal 1998, Oracle
converted $5.0 million of such indebtedness into 1,515,150 shares of the
Company's Series A-1 Convertible preferred stock. In May 1999, the Company paid
the remaining $5.0 million to Oracle.

The Company has entered into real property leases with Oracle for its
corporate headquarters and for certain of its field offices pursuant to which
the Company is obliged to make monthly rental payments to Oracle of
approximately $124,000 and approximately $4,000, respectively. The Company also
leases furniture and equipment for its corporate headquarters and for its Salt
Lake City facilities from Oracle pursuant to leases that obligate the Company to
make monthly rental payments to Oracle of approximately $57,000 and
approximately $2,700, respectively. In addition, the Company has contracted for
Oracle to perform maintenance at its corporate headquarters. The Company has
also entered into another real property agreement with Oracle for its UK
operations pursuant to which the Company is obligated to make quarterly rental
payments to Oracle of approximately $12,000.

In connection with the Company's acquisition of Navio, the Company, Oracle
and certain of the former Navio stockholders entered into a Put/Call and Voting
Agreement dated August 11, 1997 (the "PCV Agreement"). The PCV Agreement, among
other things, (i) grants Oracle an irrevocable option to purchase all of the
shares of Series B preferred stock and Series C preferred stock of the Company
or securities issuable upon conversion thereof held by the former Navio
stockholders, including Netscape, who are parties to the PCV Agreement,
(ii) contains a tag-along provision that is triggered in certain
change-of-control situations and (iii) contains a voting agreement that provides
for the election of four Oracle designees to the Company's board of directors.

In connection with the acquisition of Navio, certain former Navio
stockholders had the right for a period of 60 days following the closing of the
acquisition to compel Oracle to purchase up to 50% of the shares received by
them in the acquisition or issuable under stock options assumed by the Company
in the acquisition (the "Put"). Pursuant to the Put, a total of 3,818,496 shares
of the Company's Series C preferred stock were put to Oracle for approximately
$12.8 million. Oracle subsequently converted such shares into shares of the
Company's Series C-1 preferred stock.

On November 19, 1997, the Company's Board of Directors waived the Company's
right of first offer with respect to 663,074 shares of Series B preferred stock
offered for sale by Sony Corporation. Subsequently, such shares were acquired by
Oracle.

The Company has entered into a Services Agreement dated March 5, 1998 with
Oracle. Pursuant to the Services Agreement, Oracle provides professional
services to certain of the Company's customers.

The Company has entered into a Technology License Agreement with Oracle in
fiscal 1998. Pursuant to the Technology License Agreement, Oracle may promote,
market and distribute sublicenses of the Company's products through its
worldwide distribution channels for a period of three years.

During fiscal 1999, the Company paid approximately $243,000 for commissions
to Oracle Japan related to license of software.

F-24
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. RELATED PARTY TRANSACTIONS: (CONTINUED)

TRANSACTIONS WITH NETSCAPE

As a result of the acquisition of Navio in August 1997, Netscape became a
stockholder of the Company. As of May 31, 1999, Netscape owned approximately 11%
of the outstanding common and preferred stock of the Company.

Navio entered into a Source Code License Agreement with Netscape ("Netscape
Source Code License") dated July 9, 1996, as amended on April 6, 1998 and
September 28, 1998. In connection with the Company's acquisition of Navio and
pursuant to a letter agreement dated May 16, 1997, Netscape consented to the
assignment of the Netscape Source Code License from Navio to the Company.
Pursuant to such letter agreement, Netscape and Oracle also agreed that the
Company's products would be distributed pursuant to an OEM License Agreement by
and between Netscape and Oracle dated October 17, 1996.

Pursuant to this agreement, the Company has the right to use approximately
$1.0 million in prepaid royalties with Netscape. The Company has also paid
Netscape approximately $200,000 for the purchase of certain rights and licenses.

The Company and Netscape, which has merged with America Online ("AOL"), are
also co-sublessors of real property located in Sunnyvale, California. Netscape
and Navio originally leased the property in November 1996, and Navio's rights
and duties under the lease were assigned to the Company in connection with the
Company's acquisition of Navio. Subsequently, the property was subleased to a
third party. The lease terminates in November 2001.

The Company recognized 1% and 10%, or approximately $139,000 and
$1.7 million of total revenues from revenue transactions with related parties
during the fiscal years ended May 31, 1998 and 1999, respectively. No amounts
were recognized in fiscal 1997.

11. THIRD PARTY FINANCING AGREEMENTS:

On November 12, 1997, the Company entered into a Convertible Promissory Note
(the "Notes") Purchase and Cooperation Agreement (the "Agreement") with a third
party investor (the "Investor").

The Agreement is for the sale of up to three $4.0 million Notes that are
convertible into Series D convertible preferred stock. The Notes bear interest
at the lesser of 5% or the maximum interest rate permitted under applicable
Federal and state laws, which will be converted to stock if the notes are
converted. The principal amount and accrued interest outstanding under each Note
is due five years from the date of issuance unless converted or accelerated in
the event of an initial public offering, a merger or an asset sale. During the
year ended May 31, 1998, the Company sold the first Note of $4.0 million which
is convertible, at the option of the holder (or automatically on the
consummation of an initial public offering), into Series D convertible preferred
stock at $4.74 per share. Should the Company issue the second and third Note,
the conversion price will be the lower of $4.74 or the price of subsequent
preferred stock based on the preceding preferred round.

In the Agreement, the investor agreed to fund $3.0 million of the Company's
non-recurring engineering ("NRE") efforts through December 31, 1999. The Company
recognizes the NRE revenue as services are performed and recognized
approximately $72,000 and $871,000 of revenue during the years ended May 31,
1998 and 1999, respectively. In consideration of the funding, the Company agreed
to pay the investor a royalty for each license of the Company's software
incorporating that technology,

F-25
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. THIRD PARTY FINANCING AGREEMENTS: (CONTINUED)

up to a maximum of $3.9 million. The obligation to pay the royalty terminates
4 years after the first commercial shipment of hardware implementing the
Company's software.

12. RETIREMENT PLAN

The Company has a retirement plan under Section 401(k) of the Internal
Revenue Code. Under the retirement plan, participating employees may defer a
portion of their pretax earnings up to the Internal Revenue Service annual
contribution limit. The Company may make contributions to the plan at the
discretion of the Board of Directors. To date, no such contributions have been
made by the Company.

13. SUBSEQUENT EVENT

REVERSE STOCK SPLIT

In May 1999, the Company's Board of Directors approved a one-for-six reverse
stock split of the Company's outstanding shares of common and preferred stock
which was declared effective on July 26, 1999. All share and per share
information included in the accompanying consolidated financial statements and
notes have been adjusted retroactively to reflect this reverse stock split.

PRIVATE PLACEMENT WITH LUCENT TECHNOLOGIES

In June 1999, the Company entered into a stock purchase agreement with
Lucent Technologies ("Lucent") under which, contingent upon and immediately
following consummation of the sale of shares in the IPO, Lucent agreed to invest
$12.5 million in a private placement of shares of the Company's common stock at
a price per share equal to 96% of the IPO price. Lucent has agreed not to sell,
transfer, encumber or otherwise dispose of any of the shares of common stock
acquired in the private placement in a public or private sale for a period of
180 days following the closing of the IPO.

STOCK SPLIT (UNAUDITED)

On December 21, 1999 the Company announced a two-for-one stock split in the
form of a stock dividend which was declared effective January 14, 2000. The
stock split will increase the number of shares of Liberate's common stock
outstanding to approximately 83,600,000 shares. All share and per share
information included in the accompanying consolidated financial statements and
notes have been adjusted retroactively to reflect the effect of this split.

F-26
<PAGE>
LIBERATE TECHNOLOGIES

CONDENSED CONSOLIDATED BALANCE SHEET

(IN THOUSANDS)

UNAUDITED

<TABLE>
<CAPTION>
NOVEMBER 30,
1999
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 40,947
Short-term investments.................................... 84,829
Accounts receivable, net.................................. 2,031
Receivable from affiliate, net............................ 753
Prepaid warrants.......................................... 2,600
Prepaid expenses and other current assets................. 3,061
---------
Total current assets.................................... 134,221
PROPERTY AND EQUIPMENT, NET................................. 6,106
OTHER ASSETS:
Advanced royalties........................................ 676
Purchased intangibles, net................................ 4,563
Restricted cash........................................... 8,788
Other..................................................... 79
---------
Total assets............................................ $ 154,433
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,316
Accrued payroll and related expenses...................... 2,639
Accrued liabilities....................................... 9,766
Short-term portion of capital leases...................... 239
Note payable to affiliate................................. 52
Deferred revenues......................................... 34,350
---------
Total current liabilities............................... 48,362
Long-term portion of capital leases......................... 486
---------
Total liabilities....................................... 48,848
---------

COMMITMENTS AND CONTINGENCIES (NOTE 5)

STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 200,000,000 shares
authorized, 83,583,854 shares outstanding............... 836
Contributed and paid-in capital........................... 282,885
Deferred stock compensation............................... (6,858)
Warrants.................................................. 3,687
Stockholder notes receivable.............................. (198)
Accumulated other comprehensive income.................... (25)
Accumulated deficit....................................... (174,742)
---------
Total stockholders' equity.............................. 105,585
---------
Total liabilities and stockholders' equity.............. $ 154,433
=========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.

F-27
<PAGE>
LIBERATE TECHNOLOGIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

UNAUDITED

<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
REVENUES:
License and royalty....................................... $ 3,482 $ 2,537
Service................................................... 7,880 5,172
-------- --------
Total revenues.......................................... 11,362 7,709
-------- --------
COST OF REVENUES:
License and royalty....................................... 1,108 1,316
Service................................................... 10,693 2,871
-------- --------
Total cost of revenues.................................. 11,801 4,187
-------- --------
Gross margin............................................ (439) 3,522
-------- --------
OPERATING EXPENSES:
Research and development.................................. 11,642 8,055
Sales and marketing....................................... 6,918 5,403
General and administrative................................ 3,180 1,608
Amortization of purchased intangibles..................... 3,042 3,042
Amortization of warrants.................................. 1,069 --
Amortization of deferred stock compensation............... 1,029 111
-------- --------
Total operating expenses................................ 26,880 18,219
-------- --------
Loss from operations.................................... (27,319) (14,697)
Interest and other income, net.............................. 2,338 149
-------- --------
Loss before income tax provision (benefit).............. (24,981) (14,548)
Income tax provision (benefit).............................. 49 (558)
-------- --------
Net loss................................................ (25,030) (13,990)
Foreign currency translation adjustment..................... (53) (1)
-------- --------
Comprehensive loss...................................... $(25,083) $(13,991)
======== ========

Basic and diluted net loss per share........................ $ (0.46) $ (30.81)
======== ========
Shares used in computing basic and diluted net loss per
share..................................................... 54,780 454
======== ========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.

F-28
<PAGE>
LIBERATE TECHNOLOGIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

UNAUDITED

<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(25,030) $(13,990)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 3,868 3,693
Amortization of warrants................................ 1,069 --
Provision for doubtful accounts......................... 203 180
Loss on disposal of property and equipment.............. 600 --
Non-cash compensation expense........................... 1,029 111
Changes in operating assets and liabilities:............
Increase in accounts receivable....................... (1,590) (338)
Increase in receivable from affiliate, net............ (271) (1,378)
Increase in prepaid expenses and other current
assets............................................... (1,150) (209)
(Increase) decrease in other assets................... (397) 118
Increase in restricted cash........................... (8,788) --
Decrease in accounts payable.......................... (327) (158)
Increase in accrued liabilities....................... 855 1,195
Increase (decrease) in accrued payroll and related
expenses............................................. 391 (575)
Increase (decrease) in deferred revenues.............. (4,437) 4,855
Increase in interest payable.......................... -- 100
-------- --------
Net cash used in operating activities............... (33,975) (6,396)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (4,474) (455)
Purchase of short-term investments........................ (65,078) --
-------- --------
Net cash used in investing activities............... (69,552) (455)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net................ 97,970 --
Proceeds from private placement, net...................... 12,125 --
Proceeds from exercise of stock options................... 838 85
Principal payments on capital lease obligations........... (63) --
-------- --------
Net cash provided by financing activities........... 110,870 85
-------- --------
Effect of exchange rates on cash............................ (53) (1)
-------- --------
Net increase (decrease) in cash and cash equivalents........ 7,290 (6,767)
Cash and cash equivalents, beginning of period.............. 33,657 12,138
-------- --------
Cash and cash equivalents, end of period............ $ 40,947 $ 5,371
======== ========
SUPPLEMENTAL NON-CASH ACTIVITIES:
Conversion of debt and accrued interest to equity....... $ 4,343 $ --
======== ========
Issuance of warrants for common stock in connection with
network operator agreements............................ $ 2,165 $ --
======== ========
Deferred stock compensation............................. $ 1,307 $ 2,530
======== ========
Stockholder notes receivable............................ $ 23 $ 5
======== ========
Equipment acquired under capital leases................. $ 788 $ --
======== ========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.

F-29
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements
include the accounts of Liberate Technologies ("Liberate" or "the Company") and
its wholly owned subsidiary. All intercompany accounts and transactions have
been eliminated. These financial statements have been prepared by Liberate,
without audit, and reflect all adjustments, which in the opinion of management
are necessary to present fairly the financial position and the results of
operation for the interim periods. These financial statements have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission. However, they omit certain information and footnote disclosures
necessary to conform to generally accepted accounting principles. These
statements should be read in conjunction with the audited consolidated financial
statements and notes to consolidated financial statements included elsewhere
herein and subsequent reports on Form 10-Q filed with the Securities and
Exchange Commission since July 27, 1999. The results of operations for such
periods are not necessarily indicative of the results expected for the full
fiscal year or for any future period.

NOTE 2. OFFERINGS OF COMMON STOCK

On August 2, 1999, Liberate completed an initial public offering in which it
sold 12,500,000 shares of common stock at $8 per share. Liberate sold an
additional 902,100 shares of common stock at $8 per share related to the
exercise of the underwriters' overallotment. The total aggregate proceeds from
these transactions were $107.2 million. Underwriters' discounts and other
related costs were $9.2 million, resulting in net proceeds of $98.0 million. The
net proceeds were predominately held in cash equivalents, short-term investments
and restricted cash at November 30, 1999. Shortly before the offering, Liberate
recorded a one-for-six reverse stock split of its outstanding preferred and
common stock. Upon the close of the offering, all of Liberate's preferred stock,
par value $0.01 per share, automatically converted into 66,178,670 shares of
common stock. Immediately following the closing of the offering, Liberate sold
1,627,604 shares of common stock in a private placement to Lucent Technologies
for an aggregate of $12.1 million. In addition, following the closing of the
offering, the Company issued 843,880 shares of common stock to Middlefield
Ventures, an affiliate of Intel, in connection with the cancellation of a
convertible promissory note in the amount of $4.0 million payable by Liberate to
Middlefield. Related to this transaction, the accrued interest on the
convertible promissory note was charged to additional paid-in capital. During
the six months ended November 30, 1999, the Company issued 520,528 shares of
common stock to employees, external consultants and other service providers for
the exercise of stock options.

NOTE 3. SEGMENT INFORMATION

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS 131
changes the way companies report selected segment information in annual
financial statements and requires companies to report selected segment
information in interim financial reports to stockholders. SFAS 131 was effective
for the Company's year ending May 31, 1999. The Company operates solely in one
segment--the development, manufacturing and sale of information appliance
software for consumer, corporate and educational marketplaces. As of
November 30, 1999, the Company's long-term assets were located primarily in the
United States.

F-30
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

UNAUDITED

NOTE 3. SEGMENT INFORMATION (CONTINUED)

The Company's revenues by geographic area are as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
-------------------
1999 1998
(IN THOUSANDS) -------- --------
<S> <C> <C>
United States.............................................. $ 5,904 $3,467
Japan...................................................... 1,812 2,255
England.................................................... 2,167 852
Canada..................................................... 346 443
Other...................................................... 1,133 692
------- ------
Total revenues............................................. $11,362 $7,709
======= ======
</TABLE>

International revenues consist of sales to customers incorporated in foreign
countries. For each of the six months ended November 30, 1999 and 1998
international revenues were 48% and 55% of total revenues.

NOTE 4. CALCULATION OF NET LOSS PER SHARE

Shares used in computing basic and diluted net loss per share are based on
the weighted average shares outstanding in each period. The effect of
outstanding stock options and warrants are excluded from the calculation of
diluted net loss per share, as their inclusion would be antidilutive. Previously
issued preferred stock, which converted to common stock, is weighted from the
time the shares were converted. At November 30, 1999, options to purchase
14,324,842 shares of common stock and warrants to purchase 749,998 shares of
common stock were outstanding and were excluded from the calculation of net loss
per share.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
-------------------
1999 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA) -------- --------
<S> <C> <C>
Net loss................................................ $(25,030) $(13,990)
======== ========
Weighted average shares of common stock outstanding..... 54,780 454
======== ========
Basic and diluted net loss per share.................... $ (0.46) $ (30.81)
======== ========
</TABLE>

NOTE 5. COMMITMENTS AND CONTINGENCIES

CAPITAL LEASES. In August 1999, the Company signed a master lease agreement
for office furniture. In October 1999, the Company initiated the master
agreement by leasing certain furniture and equipment under a non-cancelable
three-year lease agreement. This agreement is accounted for as a capital lease
and is secured by the related furniture and equipment. The Company is required
to maintain liability and property damage insurance for the leased assets. As of
November 30, 1999, furniture and equipment totaling $788,000 has been recorded
as leased property and equipment and accumulated amortization of approximately
$44,000 is included in depreciation expense.

COMMITMENTS. In April 1999, Liberate and General Instrument entered into a
manufacturer's agreement whereby General Instrument will develop hardware using
Liberate's software. Under the

F-31
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

UNAUDITED

NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED)

manufacturer's agreement, Liberate will pay General Instrument $10.0 million for
development over a three-year period. Amounts expensed under this agreement were
approximately $1.8 million for the six months ended November 30, 1999.

During the first quarter of fiscal 2000, the Company signed an amendment to
the Technology License and Distribution Agreement with Sun Microsystems. This
amendment called for Liberate to pay certain minimum royalties in exchange for
the right to certain Sun technology and to maintain the status as a preferred
vendor of Sun. Minimum guaranteed royalties of approximately $3.8 million are to
be paid to Sun through the period ended December 31, 2004. Approximately
$225,000 of expense related to this contract was recorded for the six months
ended November 30, 1999.

The Company previously leased its headquarters, furniture and equipment from
Oracle. By mutual consent, the Company's Redwood Shores, California office
lease, furniture and equipment lease and service agreement was terminated
without penalty in September 1999.

In September 1999, the Company relocated their headquarters to a new
facility of approximately 78,000 square feet in San Carlos, California. The
lease provides for monthly rent payments of approximately $202,000 with annual
increases of three percent and terminates in February 2010. Over the term of the
lease, total payments will be approximately $35.5 million. At the lease signing,
Oracle Corporation provided a $10.0 million guarantee to the Company's landlord.
Oracle's guarantee was subsequently replaced with a security deposit provided by
Liberate in the form of an Irrevocable Letter of Credit for approximately $2.5
million. The letter of credit is secured by a Certificate of Deposit in an
amount equal to the letter of credit.

Simultaneous with the relocation, Liberate exercised its option to lease
additional space of approximately 103,000 square feet in a building under
construction on an adjacent property. The initial monthly rent will be
approximately $268,000, with annual increases of three percent. Over the term of
the lease for this new facility, total payments are expected to be approximately
$45.3 million. The lease will end ten years from the date of occupancy, which is
estimated to be in the first quarter of calendar 2000. The Company's security
deposit increased to $8.8 million for both buildings and is provided for in the
form of an Irrevocable Letter of Credit for the same amount. This letter of
credit is secured by Certificates of Deposit in amounts equal to the letter of
credit.

LITIGATION. In December 1998, one of our former employees filed an action
in the California Superior Court for the County of San Mateo against us for,
among other things, unpaid commissions of approximately $1.5 million,
constructive employment termination, intentional misrepresentation and negligent
misrepresentation. In October 1999, the plaintiff amended his complaint against
us, adding claims for damages for failure to pay wages under the California
Labor Code and common law retaliation, and sought to impose a constructive trust
on the allegedly withheld commissions and any enhancement in value of that
money. We have conducted extensive discovery on these claims, which we believe
to be without merit. In December 1999, we filed a motion for summary
judgment/summary adjudication to dismiss all of the claims brought by the
plaintiff. In January 2000, the Court dismissed eight of the ten claims brought
against us leaving only the claims of intentional and negligent
misrepresentation for trial. We continue to believe that these claims are
without merit and that we have strong defenses to them. We intend to continue to
vigorously defend this action as to the remaining claims.

F-32
<PAGE>
LIBERATE TECHNOLOGIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

UNAUDITED

NOTE 6. SUBSEQUENT EVENTS

WARRANTS. In April and May 1999, the Company entered into agreements with
several network operators that require Liberate to issue warrants to purchase up
to an aggregate of 4,599,992 shares of common stock if those network operators
satisfy commercial milestones. In December 1999, warrants to purchase 786,664
shares of common stock at $6.90 per share were issued to two network operators
under the terms of those agreements in connection with prepaid royalty fees. The
fair market value of these warrants is approximately $100.0 million. Of these
warrants, 466,664 warrants are fully vested with the remaining warrants vesting
as these network operators satisfy certain commercial milestones, but no later
than May 31, 2003. A portion of these fully-vested warrants, valued at
approximately $27.5 million, were exercised in January 2000.

STOCK SPLIT. On December 21, 1999, the Company announced a two-for-one
stock split in the form of a stock dividend, effective after January 14, 2000.
The stock split will increase the number of shares of Liberate's common stock
outstanding to approximately 83,600,000 shares. All share and per share amounts
related to common stock, stock options and warrants herein have been restated to
reflect the effects of this split.

SUBLEASES. In December 1999, the Company signed an agreement with a third
party to sublease approximately 27,000 square feet in the Company's headquarters
building located in San Carlos, California. The sublease is for 18 months and is
estimated to begin upon completion of the building construction in March 2000.
This contract is pending final approval of Liberate's landlord.

LEASES. In January 2000, under a Master Equipment Lease dated August 2,
1999, the Company entered into a second office furniture and equipment lease
schedule in the amount of approximately $329,000 with payments to be made over
36 months.

ACQUISITIONS. In January 2000, the Company entered into a Merger Agreement
and Plan of Reorganization to acquire via merger certain assets and technology
of SourceSuite LLC for approximately 1,772,000 shares of Liberate's common
stock. The acquisition will be accounted for as a purchase. As a part of this
transaction, the Company would hire certain employees who provide services to
SourceSuite. Also in connection with the acquisition, the Company expects to
write off up to $4.0 million of acquired in-process research and development,
which in the opinion of management, had not reached technological feasibility
and had no alternative future use. The Company expects to record goodwill and
other intangibles of up to $200.0 million to be amortized over an estimated
economic life of 36 months.

In connection with this acquisition, the Company has agreed to enter into a
Preferred Content Provider Agreement with a subsidiary of Source Media and
Insight Communications. The Company will use commercially reasonable efforts to
introduce the subsidiary's products to the Company's multiple network operator
customers using the technology purchased pursuant to the Agreement and Plan of
Reorganization. In addition, various incentive credits are provided to both
parties if the network operators select the subsidiary's products. The Company
has also agreed to a Programming Services Agreement with the subsidiary where
the Company would continue to develop certain products for the subsidiary.

OTHER. In January 2000, negotiations involving Liberate's proposed
acquisition for another company terminated. Expenses related to this terminated
acquisition are currently estimated to range from approximately $700,000 to
$1.3 million and will be recorded in the third quarter of fiscal 2000.

F-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Source Media, Inc.

We have audited the accompanying combined balance sheets of the Virtual
Modem Business of Source Media, Inc. (as defined in Note 1) as of December 1998
and 1997, and the related combined statements of operations and comprehensive
income, intercompany equity, and cash flows for the years then ended. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Virtual Modem
Business at December 31, 1998 and 1997, and the combined results of its
operations and cash flows for the years then ended in conformity with generally
accepted accounting principles.

Dallas, Texas /s/ Ernst & Young LLP
December 15, 1999 (except for Note 9,
as to which the date is January 14, 2000)

F-34
<PAGE>
VIRTUAL MODEM BUSINESS OF SOURCE MEDIA, INC.

COMBINED BALANCE SHEETS

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1997 1998 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 154 $ 169 $ 82
Accounts receivable....................................... 36 22 54
Inventory................................................. -- -- 22
Prepaid expenses and other current assets................. 50 28 33
------ ------ ------
Total current assets........................................ 240 219 191

Property and equipment:
Computer and production equipment......................... 895 1,010 1,268
Furniture and fixtures.................................... 441 412 421
------ ------ ------
1,336 1,422 1,689
Accumulated depreciation.................................. 823 1,022 1,280
------ ------ ------
Net property and equipment.................................. 513 400 409

Intangible assets:
Patents................................................... 17,955 17,955 17,955
Accumulated amortization.................................. 8,866 11,148 12,868
------ ------ ------
Net intangible assets....................................... 9,089 6,807 5,087
------ ------ ------
Total assets................................................ $9,842 $7,426 $5,687
====== ====== ======

LIABILITIES AND INTERCOMPANY EQUITY

Current Liabilities:
Trade accounts payable.................................... $ 132 $ 175 $ 114
Accrued liabilities....................................... 505 190 218
Due to majority shareholder............................... 467 367 660
------ ------ ------

Total current liabilities................................... 1,104 732 992
------ ------ ------

Intercompany equity......................................... 8,738 6,694 4,695
------ ------ ------
Total liabilities and intercompany equity................... $9,842 $7,426 $5,687
====== ====== ======
</TABLE>

See accompanying Notes.

F-35
<PAGE>
VIRTUAL MODEM BUSINESS OF SOURCE MEDIA, INC.

COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -------------------
1997 1998 1998 1999
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Development funds from parent............................ $ 3,561 $ 2,957 $ 2,221 $ 2,239
Hardware sales to parent................................. 333 348 224 16
------- ------- ------- -------

Total revenues....................................... 3,894 3,305 2,445 2,255

Cost of hardware sales................................... 244 293 203 --
General and administrative expenses...................... 995 2,027 1,334 1,490
Amortization of intangible assets........................ 2,844 2,286 1,713 1,701
Research and development expenses........................ 2,829 2,496 1,880 2,220
------- ------- ------- -------
6,912 7,102 5,130 5,411
------- ------- ------- -------
Operating loss........................................... (3,018) (3,797) (2,685) (3,156)

Interest expense......................................... 576 1,438 1,075 1,080
Interest (income)........................................ (133) (348) (288) (115)
Other (income) expense................................... 2 -- -- --
------- ------- ------- -------

Net loss before extraordinary loss....................... (3,463) (4,887) (3,472) (4,121)
Extraordinary loss--early extinguishment of debt......... 311 -- -- --
------- ------- ------- -------

Net loss................................................. (3,774) (4,887) (3,472) (4,121)

Preferred stock dividends................................ 46 337 260 161
------- ------- ------- -------
Net loss attributable to common stockholders............. $(3,820) $(5,224) $(3,732) $(4,282)
======= ======= ======= =======

Other comprehensive income (loss):
Foreign currency translation........................... 2 35 39 (8)
------- ------- ------- -------
Comprehensive loss....................................... $(3,818) $(5,189) $(3,693) $(4,290)
======= ======= ======= =======
</TABLE>

See accompanying Notes.

F-36
<PAGE>
VIRTUAL MODEM BUSINESS OF SOURCE MEDIA, INC.

COMBINED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -------------------
1997 1998 1998 1999
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................................. $(3,820) $(5,224) $(3,732) $(4,282)
Adjustments to reconcile net loss to net cash used in
operating activities:..................................
Depreciation........................................... 213 199 156 258
Amortization of intangible assets...................... 2,844 2,286 1,713 1,701
Changes in operating assets and liabilities:
Accounts Receivable.................................... 49 14 (3) (32)
Inventory.............................................. 9 -- -- (22)
Prepaid expenses and other current assets.............. 35 22 5 (5)
Trade accounts payable and accrued liabilities......... (166) (372) (136) 260
Other.................................................. 1 56 84 (40)
------- ------- ------- -------
Net cash used in operating activities.................... (835) (3,019) (1,913) (2,162)

INVESTING ACTIVITIES:
Capital expenditures................................... (278) (111) (31) (216)
------- ------- ------- -------
Net cash used in investing activities.................... (278) (111) (31) (216)

FINANCING ACTIVITIES:
Costs funded directly by parent........................ 955 3,145 2,078 2,291
------- ------- ------- -------
Net cash provided by financing activities................ 955 3,145 2,078 2,291
------- ------- ------- -------

Net increase (decrease) in cash.......................... (158) 15 134 (87)
Cash at beginning of period.............................. 312 154 154 169
------- ------- ------- -------

Cash at end of period.................................... $ 154 $ 169 $ 288 $ 82
======= ======= ======= =======
</TABLE>

See accompanying notes.

F-37
<PAGE>
VIRTUAL MODEM BUSINESS OF SOURCE MEDIA, INC.

COMBINED STATEMENTS OF INTERCOMPANY EQUITY

(DOLLARS IN THOUSANDS)

<TABLE>
<S> <C>
BALANCE AT DECEMBER 31, 1996................................ $ 734
Push down allocation of patent valuation from parent........ 10,867
Costs funded directly by parent............................. 955
Foreign currency translation gain........................... 2
Net loss.................................................... (3,820)
-------
BALANCE AT DECEMBER 31, 1997................................ 8,738

Costs funded directly by parent............................. 3,145
Foreign currency translation gain........................... 35
Net loss.................................................... (5,224)
-------
BALANCE AT DECEMBER 31, 1998................................ 6,694

Costs funded directly by parent (unaudited)................. 2,291
Foreign currency translation (loss) (unaudited)............. (8)
Net loss (unaudited)........................................ (4,282)
-------
BALANCE AT SEPTEMBER 30, 1999 (unaudited)................... $ 4,695
=======
</TABLE>

See accompanying notes.

F-38
<PAGE>
VIRTUAL MODEM BUSINESS OF SOURCE MEDIA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS

The Virtual Modem business of Source Media, Inc. ("Virtual Modem") is
comprised of Interactive Channel Technologies Inc. ("ICTI"), a Canadian
subsidiary of Source Media, Inc. and patents used in the Virtual Modem business
that are owned by the Source Media, Inc. control group, that for purposes of
these financial statements, are included as part of the combined Virtual Modem
business. ICTI has designed and is developing proprietary software and
interactive programming services that can enable digital, two-way television
systems equipped with digital (or advanced analog) set-top boxes to deliver
two-way, interactive programming with the touch of a set-top remote or the use
of a wireless keyboard. The Virtual Modem Business is economically dependent on
its parent as the source of funding for its development efforts. The parent
company is committed to funding the operations of the Virtual Modem business.
See Note 9 for Joint Venture with Insight Interactive, LLC and Sale of
SourceSuite LLC to Liberate Technologies.

2. ACCOUNTING POLICIES

BASIS OF PRESENTATION

These U.S. dollar combined financial statements include the accounts of the
Interactive Channel Technologies Inc., Cableshare B.V., Cableshare International
Inc, Cableshare (U.S.) Limited and 1229501 Ontario Inc. subsidiaries and patents
owned by SMI Holdings, Inc., a domestic subsidiary of Source Media, Inc., and
used in the Virtual Modem business.

ICTI owned the patents of the business until October 1998 at which time the
patents were transferred to SMI Holdings, Inc. For the purposes of these
combined financial statements, the patents are included for all periods
presented using SMI Holdings, Inc.'s basis in the patents which reflects the
pushed down cost to the Virtual Modem business. On November 17, 1999 the patents
were transferred to SourceSuite LLC as part of a joint venture with Insight
Interactive LLC. See Note 9 for a description of the Insight transaction and
subsequent Liberate transaction.

Certain corporate expenses such as legal expense, accounting fees and
variable stock based compensation expense are specifically identifiable as
Virtual Modem expenses and are included in the general and administrative
expenses ("G&A") of Virtual Modem. Interest expense, preferred stock dividends,
and the extraordinary loss from the early extinguishment of debt are allocated
based on the actual use of loan proceeds by the Virtual Modem Business. In the
opinion of management, the method of allocation of such charges is reasonable.

Management believes that the accompanying financial statements include all
the necessary costs of conducting the business. However, such costs are not
necessarily indicative of, and it is not practicable for management to estimate,
the nature and level of costs which might have been incurred had Virtual Modem
operated as a stand alone company.

The unaudited interim financial statements as of September 30, 1999 and for
the nine months ended September 30, 1998 and 1999, include the accounts Virtual
Modem prepared in accordance with generally accepted accounting principles for
interim financial information and with Rule 10-01 of Regulation S-X.
Accordingly, they do not include the information and footnotes required by
generally accepted accounting principles for complete financial statements. They
do reflect all adjustments (consisting of only normal recurring entries) which,
in the opinion of management, are necessary for a fair presentation of the
results for the interim periods presented.

F-39
<PAGE>
VIRTUAL MODEM BUSINESS OF SOURCE MEDIA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

2. ACCOUNTING POLICIES (CONTINUED)

USE OF ESTIMATES

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

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets. Computer
and production equipment are depreciated over a life of three to five years.
Furniture and fixtures are depreciated over a seven-year period.

INTANGIBLE ASSETS

Intangible assets are patents which are amortized using the straight-line
method over an estimated useful lives of five years.

The carrying value of intangible assets is reviewed for impairment whenever
events or changes in circumstances indicate that there may be an impairment. If
the review indicates that any of the intangibles will not be recoverable, as
determined by an analysis of undiscounted cash flows, the intangible asset will
be reduced to its estimated fair value.

TRANSLATION OF FOREIGN CURRENCIES

The financial positions and results of operations of ICTI and related
Canadian subsidiaries are measured using local currency (Canadian dollar) as the
functional currency and are translated to U.S. dollars in these combined
financial statements. Assets and liabilities of these subsidiaries are
translated at the exchange rate in effect at each balance sheet date. Statement
of operations accounts are translated at the average rate of exchange prevailing
during the year. Translation adjustments arising from the use of differing
exchange rates from period to period are included in Intercompany deficit.

RESEARCH AND DEVELOPMENT EXPENSE

Research and development costs are expensed as incurred.

REVENUE RECOGNITION

All Virtual Modem business revenues are derived from sales of proprietary
hardware to Interactive Channel, Inc. a subsidiary of Source Media, Inc. Revenue
is recognized as funds are received or hardware is shipped.

3. EMPLOYEE STOCK PURCHASE PLAN AND STOCK OPTION PLANS

Certain employees of Virtual Modem participate in employee benefit plans
sponsored by Source Media, Inc., costs of which are included in these financial
statements.

Source Media, Inc. stock options have been granted to employees in excess of
shares authorized by the shareholders at the date of grant. The portion of
unauthorized options are treated as a variable compensation plan through the
date the shares are authorized by shareholders. Stock compensation expense is
recognized over the vesting period of the related options. Total non-cash stock
based compensation expense for Virtual Modem employees for the year ended
December 31, 1998 and the

F-40
<PAGE>
VIRTUAL MODEM BUSINESS OF SOURCE MEDIA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

3. EMPLOYEE STOCK PURCHASE PLAN AND STOCK OPTION PLANS (CONTINUED)

nine months ended September 30, 1998 and 1999 amounted to $0.3 million,
$0.3 million and $0.1 million, respectively, and is included in G&A.

4. LEASES

Office space is leased under an operating lease. Rent expense was
$0.1 million for each of the years ended December 31, 1997 and 1998, and the
nine months ended September 30, 1998 and 1999.

At December 31, 1998, aggregate amounts of future minimum payments under
operating lease commitments are as follows:

<TABLE>
<CAPTION>
OPERATING
LEASES
(IN MILLIONS)
-------------
<S> <C>
1999........................................................ $0.1
2000........................................................ 0.1
2001........................................................ 0.1
2002........................................................ 0.1
2003........................................................ --
----
Total future minimum lease payments....................... $0.4
====
</TABLE>

5. INCOME TAXES

For the years ended December 31, 1997 and 1998, Virtual Modem had no
provision or benefit for income taxes because the deferred benefit from the
operating losses was offset by changes in the valuation allowance. Certain
expenses of Virtual Modem are filed as part of the consolidated U.S. tax return
of Source Media, Inc. ICTI files a separate Canadian tax return. Significant
components of Virtual Modem's deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards.......................... 1,631 109
Investment tax credits.................................... 802 488
Accrued expenses.......................................... 159 26
------ ----
Total deferred tax assets................................... 2,592 623
Valuation allowance for deferred tax assets................. (2,592) (623)
------ ----
Net deferred tax asset...................................... $ -- $ --
====== ====
</TABLE>

At December 31, 1998, ICTI had net operating loss carryforwards for Canadian
income tax purposes of approximately Cdn $0.7 million, expiring in 1999 through
2003, which may be used to reduce future Canadian taxable income of ICTI. ICTI
also has available at December 31, 1998 investment tax credits totaling Cdn
$0.8 million, expiring in 1999 through 2002. At December 31, 1998, ICTI had net
operating loss carryforwards for Ontario Provincial income tax purposes of
approximately Cdn $0.5 million, expiring in 2002 through 2003, which may be used
to reduce future Ontario taxable income of ICTI. Canadian tax authorities are
currently reviewing certain of ICTI's tax filings; however, no adjustments have
yet been proposed.

F-41
<PAGE>
VIRTUAL MODEM BUSINESS OF SOURCE MEDIA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

5. INCOME TAXES (CONTINUED)

The transfer of patents from ICTI's subsidiaries to ICTI in March 1997
resulted in taxable income of approximately $5.2 million in the United States
and Canada and the utilization of net operating losses in both countries in
1997. The transfer of patents from ICTI to SMI Holdings, Inc. in October 1998
resulted in utilization of approximately Cdn $3.0 million of Canadian net
operating loss carryforwards.

6. RELATED PARTIES

Virtual Modem's primary revenues are amounts received from Source
Media, Inc. as part of a research and development agreement between the parties
for the development of the software platform which enables interactive TV over
cable television systems. Under the terms of the agreement, Source Media, Inc.
pays ICTI at ICTI's cost, as defined, plus 10%. Additionally, Virtual Modem has
revenues associated with the sale of hardware equipment built by ICTI on behalf
of the Interactive Channel, Inc., a subsidiary of Source Media, Inc.

7. COMMITMENTS AND CONTINGENCIES

Interactive Channel Technologies Inc. and SMI Holdings, Inc. filed a patent
infringement suit against Worldgate Communications, Inc. in federal district
court in Delaware in May 1998. In June 1998, Worldgate filed a Counterclaim
against plaintiffs and Source Media, Inc. for, among other things, unfair
competition, interference with contract, and trade secret misappropriation. The
Counterclaim defendants have denied the allegations in the Counterclaim and on
July 27, 1998 filed a motion to dismiss certain of Worldgate's claims. The
motion was denied by Order of the Court dated May 17, 1999.

The Court held a status conference on May 13, 1999. The following deadlines
for the disposition of the case were set by the Court:

<TABLE>
<S> <C>
Joinder of Parties and Amendment of Pleadings December 1, 1999
Close of Fact Discovery May 12, 2000
Close of Expert Discovery July 14, 2000
Deadline for Dispositive Motions July 21, 2000
Trial November 27, 2000
</TABLE>

Pursuant to the Scheduling Order, limited discovery commenced on August 16,
1999. Full-scale discovery commenced on October 1, 1999. Both parties have
propounded and responded to discovery.

On October 6, 1998, Advanced Interactive, Inc. filed a complaint in U.S.
District Court for the Northern District of Illinois, Eastern Division, against
ICTI and the following companies: Matsushita Electric Corporation, Matsushita
Electric Industrial Co., Ltd., Sharp Electronics Corp., Sharp Corp., Thomson
Consumer Electronics, Toshiba Consumer Products, Inc., Toshiba America, Inc.,
Toshiba Corporation, General Instruments Corp., Scientific Atlanta, Inc., ATI
Technologies, Inc., ADS Technologies Inc., Gateway 2000, Inc., STB
Systems, Inc., Hauppauge Computer Works, Inc., WebTV Networks, Inc. and
WorldGate Communications, Inc. (collectively the "Advanced Interactive
Defendants"). Advanced Interactive alleges that ICTI infringed two claims of one
of its patents by manufacturing, using and/or selling or offering to sell
"Sourceware(TM) ChannelLink(TM)". The same allegation is made against each
Advanced Interactive Defendant for its particular product or service. The
Plaintiff seeks damages, but makes no claims against the patents of ICTI or any
other Advanced

F-42
<PAGE>
VIRTUAL MODEM BUSINESS OF SOURCE MEDIA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

7. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Interactive Defendant. ICTI, and each of the Defendants, have filed an Answer
and have collectively joined the Motion for Partial Summary Judgment submitted
by Matsushita Electric Corporation of America, Sharp Electronics Corp., Sharp
Corp. and the Toshiba Defendants. On May 12, 1999 the court denied Advanced
Interactive's Motion for Summary Judgement of Infringement. The court has not
yet considered the Advanced Interactive Defendant's collective Motion for
Partial Summary Judgment. The Company believes this case is totally without
merit and intends to vigorously defend itself.

A total of fourteen class action complaints were filed against Source
Media, Inc. ("SMI") and certain of its officers and directors in the United
States District Court for the Northern District of Texas asserting violations of
sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 of the
accompanying regulations. The fourteen complaints were consolidated by Judge
Buchmeyer into the first filed case, Hartsell, et al. v. Source Media, Inc., et
al., Civil Action No. 398-CV-1980-R (filed August 21, 1998), on October 9, 1998.

Plaintiffs filed a motion for the appointment of lead plaintiff and lead
plaintiffs' counsel on October 20, 1998. Plaintiff proposed the appointment of
three law firms to serve as "Co-Lead Counsel," Weiss & Yourman, Abbey, Gardy &
Squitieri, and Milberg Weiss Bershad Hynes & Lerach, LLC. On November 12, 1998,
defendants filed a statement of non-opposition to the plaintiffs' motion. The
Court granted plaintiffs' motion on January 5, 1999.

Pursuant to an Order entered by the Court on February 24, 1999, plaintiffs'
time for filing the consolidated amended complaint was extended from
February 24, 1999 to March 3, 1999. Plaintiffs filed their amended complaint on
March 3, 1999. Defendants filed a motion to dismiss on April 19,1999, plaintiffs
filed an opposition to the motion on May 24, 1999, and defendants filed a reply
brief on June 12, 1999. A hearing on the motion to dismiss was held on July 15,
1999. By Order dated July 15, 1999, the Court denied defendants' motion.

On July 26, 1999, defendants filed an Application For Immediate Appellate
Review Under 28 U.S.C. Section 1292(b) concerning two issues central to the
Court's denial of defendants' motion to dismiss. Plaintiffs filed an opposition
on or about August 13, 1999. By Order dated August 24, 1999, the Court denied
defendants' motion. The Company believes this case is totally without merit and
intends to vigorously defend itself and its officers and directors.

In addition, Source Media, Inc. is aware of certain claims that have not
developed into litigation, or if they have, are dormant, and in any case are not
expected to have a material adverse affect on the business. Further, Source
Media, Inc. is party to ordinary routine litigation, none of which is expected
to have a material adverse effect on Virtual Modem's results of operations or
its financial condition.

ICTI is a guarantor, jointly and severally, along with all of Source
Media, Inc.'s subsidiaries ("Subsidiary Guarantors"), of the Senior Secured
Notes and Senior PIK Preferred Stock of Source Media, Inc. in the amount of
$100 million and $20 million, respectively. Source Media, Inc. is a highly
leveraged entity which historically has not generated cash flows from operations
sufficient to make non-escrowed interest payments or cash payments on preferred
stock dividends. The company is scheduled to make its first non-escrowed
interest payment on November 1, 2000. The Senior Secured Notes are due on
November 1, 2004 with interest payable semi-annually on May 1 and November 1 of
each year. The Senior PIK Preferred Stock is due on November 1, 2007 with
dividends payable quarterly in cash or by the issuance of additional shares of
Preferred Stock at Source Media Inc.'s

F-43
<PAGE>
VIRTUAL MODEM BUSINESS OF SOURCE MEDIA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

7. COMMITMENTS AND CONTINGENCIES (CONTINUED)

option until November 1, 2002, after which such dividends are payable in cash.
The guarantees are senior obligations of the Subsidiary Guarantors and are
secured by substantially all of the assets of the Subsidiary Guarantors.

8. YEAR 2000 DISCLOSURES (UNAUDITED)

The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of Virtual
Modem's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.

Based on assessments made by Virtual Modem, it was determined that certain
of its software and hardware would be required to be modified or replaced so
that those systems will properly utilize dates beyond December 31, 1999. Virtual
Modem presently believes that all required modifications or replacements of
existing software and certain hardware that have been completed will mitigate
the Year 2000 issue. Although the modifications have been tested, there is no
assurance that all systems will work beyond December 31, 1999.

To date, Virtual Modem is not aware of any external agent with a Year 2000
issue that would materially impact the Company's results of operations,
liquidity, or capital resources. However, Virtual Modem has no means of ensuring
that external agents will be Year 2000 ready. The inability of external agents
to complete their Year 2000 resolution process in a timely manner could
materially impact Virtual Modem. The effect of non-compliance by external agents
is not determinable.

Virtual Modem utilized both internal and external resources to reprogram, or
replace, test, and implement the software and operating equipment for Year 2000
modifications. Cost to Virtual Modem consisted primarily of internal labor as
primarily all software modifications were included under existing maintenance
agreements with suppliers. Hardware replacements were made as part of normal
replacement guidelines.

There can be no assurance that Virtual Modem's efforts to solve its
potential Year 2000 problems will be successful, or even partially successful.
Disruptions in the economy generally resulting from Year 2000 issues could also
materially adversely affect ICTI.

Virtual Modem has contingency plans for certain critical applications and is
working on such plans for others. These contingency plans involve manual
workarounds, telecommunication alternatives, staff adjustments and other
appropriate actions.

9. SUBSEQUENT EVENTS

JOINT VENTURE WITH INSIGHT INTERACTIVE, LLC

On November 17, 1999 Source Media, Inc. conveyed all of the assets of
Virtual Modem and certain assets of "Interactive Channel" products and
businesses to SourceSuite LLC, a Delaware limited liability company in exchange
for a 50% ownership interest in SourceSuite. Insight Interactive, LLC (a
subsidiary of Insight Communications Company, Inc.) contributed $13 million to
SourceSuite in exchange for a 50% interest in SourceSuite.

F-44
<PAGE>
VIRTUAL MODEM BUSINESS OF SOURCE MEDIA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

9. SUBSEQUENT EVENTS (CONTINUED)

SALE OF SOURCESUITE LLC TO LIBERATE TECHNOLOGIES

On January 12, 2000, Source Media, Inc., Insight Communications
Company, Inc. and SourceSuite entered into a definitive agreement with Liberate
Technologies (Liberate) to sell their interests in SourceSuite to Liberate in
exchange for 1,772,000 shares of common stock (post-split) in Liberate. The
agreement with Liberate provides for Source Media, Inc. to receive 886,000
shares of common stock if the transaction with Liberate satisfies an exemption
from Securities Act registration that permits the free transfer the Liberate
shares subject to volume limitations of Rule 144. If the transaction does not
satisfy this exemption, then Source Media, Inc. will receive $15 million of cash
and 757,072 shares of Liberate common stock. Prior to the sale of SourceSuite,
certain assets of SourceSuite will be contributed to a new company,
SourceSuite Acquisition LLC, of which Source Media, Inc. and Insight Interactive
will each own 50%. Source Media, Inc. will also receive, in cash, an amount
equal to 50% of the cash and cash equivalents of SourceSuite at the time of
closing, reduced by a 50% share of the tax liability incurred by
SourceSuite upon the sale of the retained business, as defined below, to
SourceSuite Acquisition LLC. These funds will then be contributed by Source
Media, Inc. to SourceSuite Acquisition LLC. SourceSuite Acquisition LLC will
purchase the retained business which includes the interactive programming guide
and related content business from SourceSuite. Source Media, Inc. will act as a
manager of SourceSuite Acquisition LLC and carry out the interactive programming
guide and related content business. Additionally, Source Media, Inc. will be
required to provide additional funding to SourceSuite Acquisition LLC in the
event of a capital call by SourceSuite Acquisition LLC.

Following the merger, Liberate will provide to SourceSuite Acquisition LLC,
without charge, specific software development services for the Interactive
Channel products under a programming services agreement.
SourceSuite Acquisition LLC will enter into a preferred content provider
agreement with Liberate. This agreement will offer pricing incentives to
Liberate customers that use SourceSuite Acquisition LLC's local content services
with the Virtual Modem products.

F-45
<PAGE>
LIBERATE TECHNOLOGIES AND SOURCESUITE (VIRTUAL MODEM)

PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

On January 12, 2000, Liberate Technologies ("Liberate" or the "Company")
entered into a Merger Agreement and Plan of Reorganization ("Merger") to acquire
SourceSuite LLC ("SourceSuite") for approximately 1,772,000 shares of Liberate's
common stock and cash of approximately $12.6 million. The Merger will be
accounted for as a purchase.

SourceSuite, a Delaware limited liability company, was formed as a joint
venture in November 1999 by Source Media, Inc. ("Source Media") and Insight
Interactive, LLC ("Insight"). In exchange for their 50% ownership interests in
SourceSuite, Source Media contributed all of the assets of their Virtual Modem
business and certain assets of their "Interactive Channel" products, while
Insight contributed $13 million in cash. Included elsewhere herein are the
historical financial statements for the Virtual Modem business of Source Media
which reflect the principal results of operations for SourceSuite prior to the
formation of the joint venture in November 1999.

The following unaudited pro forma condensed combined financial statements
give effect to the proposed Merger and should be read in conjunction with the
historical financial statements and accompanying notes for Liberate and Virtual
Modem, included elsewhere herein. The completion of the Merger is subject to
approval by SourceSuite's shareholders and other conditions.

The unaudited pro forma condensed combined statements of operations give
effect to the proposed Merger as if the acquisition was consummated as of the
beginning of each of the periods presented. The unaudited pro forma condensed
combined statement of operations for the year ended May 31, 1999, combines the
Company's statement of operations for the year ended May 31, 1999, with Virtual
Modem's unaudited statement of operations for the twelve months ended May 31,
1999. The unaudited pro forma condensed combined statement of operations for the
six months ended November 30, 1999, combines the Company's statement of
operations for the six months ended November 30, 1999 with the same period for
SourceSuite/Virtual Modem. Such statements of operations do not include the
estimated effect of the approximately $2.0 million nonrecurring charge for the
write off of in-process research and development costs acquired. It is
anticipated that such amount will be charged to the operations of Liberate in
the first fiscal quarter in which the completion of the proposed Merger
("Closing Date") occurs. The unaudited pro forma condensed combined balance
sheet has been prepared as if the acquisition was consummated as of
November 30, 1999, and, accordingly, reflects the cash contribution of $13
million by Insight in November 1999.

The purchase price allocation and pro forma adjustments for the proposed
Merger reflected in the accompanying pro forma condensed combined financial
statements are based upon currently available information and upon certain
assumptions that we believe are reasonable. There can be no assurances that the
actual effect will not differ significantly from the pro forma adjustments
reflected in the pro forma condensed combined financial statements presented.

This method of combining the historical financial statements for the
preparation of the pro forma condensed combined financial statements is for
presentation only. Actual statements of operations of the companies will be
combined from the Closing Date with no retroactive restatements. The unaudited
pro forma condensed combined financial statements are provided for illustrative
purposes only and are not necessarily indicative of the combined financial
position or combined results of operations that would have been reported had the
Merger occurred on the dates indicated, nor do they represent a forecast of the
combined financial position or results of operations for any future period.

F-46
<PAGE>
LIBERATE TECHNOLOGIES AND SOURCESUITE (VIRTUAL MODEM)

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS

SIX MONTHS ENDED NOVEMBER 30, 1999

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
LIBERATE SOURCESUITE ADJUSTMENTS COMBINED
-------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES:
License and other...................................... $ 3,482 $ 38 $ (38)(a) $ 3,482
Development funds from SourceMedia Inc................. -- 1,496 (1,496)(a) --
Service................................................ 7,880 -- 7,880
-------- ------- --------
Total Revenue........................................ 11,362 1,534 11,362
-------- ------- --------
COST OF REVENUES:
License and other...................................... 1,108 -- 1,108
Service................................................ 10,693 -- 10,693
-------- ------- --------
Total Cost of Revenue................................ 11,801 -- 11,801
-------- ------- --------
GROSS MARGIN............................................. (439) 1,534 (439)
-------- ------- --------
OPERATING EXPENSES:
Research and development............................... 11,642 1,381 13,023
Sales and marketing.................................... 6,918 -- 6,918
General and administrative............................. 3,180 844 4,024
Amortization of purchased intangibles.................. 3,042 1,169 30,841 (b) 35,052
Amortization of warrants............................... 1,069 -- 1,069
Amortization of deferred stock compensation............ 1,029 -- 1,029
-------- ------- --------
Total operating expenses............................. 26,880 3,394 61,115
-------- ------- --------
Loss from operations................................. (27,319) (1,860) (61,554)
INTEREST INCOME (EXPENSE) AND OTHER INCOME, net........ 2,338 (685) 685 (d) 2,338
-------- ------- --------
LOSS BEFORE INCOME TAX PROVISION......................... (24,981) (2,545) (59,216)
INCOME TAX PROVISION..................................... 49 -- 49
-------- ------- --------
NET LOSS................................................. (25,030) (2,545) (59,265)
-------- ------- --------
PREFERRED STOCK DIVIDENDS................................ -- 67 (67)(d) --
-------- ------- --------
NET LOSS ATTRIBUTABLE TO COMMON STOCK HOLDERS............ $(25,030) $(2,612) $(59,265)
======== ======= ========
BASIC AND DILUTED NET LOSS PER SHARE..................... $ (0.46) $ (1.05)
======== ========
SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER
SHARE.................................................. 54,780 1,772 (c) 56,552
======== ========
PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE........... $ (0.32) $ (0.75)
======== ========
SHARES USED IN COMPUTING PRO FORMA BASIC AND DILUTED NET
LOSS PER SHARE......................................... 77,776 1,772 (c) 79,548
======== ========
</TABLE>

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

(a) Elimination of revenues from Source Media that will not be part of the
ongoing operations of the SourceSuite business.

(b) Reflects amortization of the acquired intangibles over an estimated life of
three years.

(d) Elimination of the income and expenses not acquired in the acquisition of
SourceSuite.

F-47
<PAGE>
LIBERATE TECHNOLOGIES AND SOURCESUITE (VIRTUAL MODEM)

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS

YEAR ENDED MAY 31, 1999

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
LIBERATE SOURCESUITE ADJUSTMENTS COMBINED
-------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES:
License and other.................................. $ 5,281 $ 321 $ (321)(a) $ 5,281
Development funds from SourceMedia Inc............. -- 2,965 (2,965)(a) --
Service............................................ 12,032 -- 12,032
-------- ------- ---------
Total Revenue.................................... 17,313 3,286 17,313
-------- ------- ---------
COST OF REVENUES:
License and other.................................. 2,279 263 (263)(a) 2,279
Service............................................ 8,247 -- 8,247
-------- ------- ---------
Total Cost of Revenue............................ 10,526 263 10,526
-------- ------- ---------
GROSS MARGIN......................................... 6,787 3,023 6,787
-------- ------- ---------
OPERATING EXPENSES:
Research and development........................... 18,171 2,635 20,806
Sales and marketing................................ 11,730 -- 11,730
General and administrative......................... 3,975 2,236 6,211
Amortization of purchased intangibles.............. 6,084 2,290 61,730 (b) 70,104
Amortization of warrants........................... 18 -- 18
Amortization of deferred stock compensation........ 507 -- 507
Acquired in-process research and development....... -- -- --
-------- ------- ---------
Total operating expenses......................... 40,485 7,161 109,376
-------- ------- ---------
Loss from operations............................. (33,698) (4,138) (102,589)
INTEREST INCOME (EXPENSE) AND OTHER INCOME (EXPENSE),
net................................................ 59 (1,178) 1,178 (e) 59
-------- ------- ---------
LOSS BEFORE INCOME TAX BENEFIT....................... (33,639) (5,316) (102,530)
INCOME TAX BENEFIT................................... (586) -- (586)
-------- ------- ---------
NET LOSS............................................. (33,053) (5,316) (101,944)
-------- ------- ---------
PREFERRED STOCK DIVIDENDS............................ -- 328 (328)(e) --
-------- ------- ---------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS......... $(33,053) $(5,644) $(101,944)
======== ======= =========
BASIC AND DILUTED NET LOSS PER SHARE................. $ (56.60) $ (43.27)
======== =========
SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS
PER SHARE.......................................... 584 1,772 (c) 2,356
======== =========
PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE....... $ (0.58)(d) $ (1.75)
======== =========
SHARES USED IN COMPUTING PRO FORMA BASIC AND DILUTED
NET LOSS PER SHARE................................. 56,586 (d) 1,772 (c) 58,358
======== =========
</TABLE>

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

(a) Elimination of revenues and cost of revenues from Source Media that will not
be part of the ongoing operations of the SourceSuite business.

(b) Reflects amortization of the acquired intangibles over an estimated life of
three years.

(d) Pro forma shares assume that convertible preferred shares and convertible
long-term debt of Liberate converted into common shares upon their original
issuance dates.

(e) Elimination of income and expenses not acquired in the acquisition of
SourceSuite.

F-48
<PAGE>
LIBERATE TECHNOLOGIES AND SOURCESUITE (VIRTUAL MODEM)

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

NOVEMBER 30, 1999

(IN THOUSANDS)

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
LIBERATE SOURCESUITE ADJUSTMENTS COMBINED
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................. $ 40,947 $13,081 $(13,081) (a,c,f) $ 40,947
Short-term investments................................ 84,829 -- -- 84,829
Accounts receivable, net.............................. 2,031 50 (50) (f) 2,031
Receivable from affiliate............................. 753 -- -- 753
Inventory............................................. -- 23 -- 23
Prepaid warrants...................................... 2,600 -- -- 2,600
Prepaid expenses and other current assets............. 3,061 31 (5) (f) 3,087
--------- ------- -------- --------
Total current assets................................ 134,221 13,185 (13,136) 134,270
PROPERTY AND EQUIPMENT, net............................. 6,106 391 -- 6,497
OTHER ASSETS
Advances Royalties.................................... 676 -- -- 676
Purchased intangibles, net............................ 4,563 14,071 177,988 (a,b,c,d) 196,622
Restricted Cash....................................... 8,788 -- -- 8,788
Other................................................. 79 -- -- 79
--------- ------- -------- --------
Total assets........................................ $ 154,433 $27,647 $164,852 $346,932
========= ======= ======== ========
CURRENT LIABILITIES
Notes payable to affiliate............................ $ 52 $ -- $ -- $ 52
Note payable to SourceMedia Inc....................... -- 367 (367) (e) --
Short-term portion of capital leases.................. 239 -- -- 239
Accounts payable...................................... 1,316 75 (75) (f) 1,316
Accrued payroll and related expenses.................. 2,639 -- -- 2,639
Accrued liabilities................................... 9,766 192 3,746 (b,d,f) 13,704
Deferred taxes........................................ -- 1,793 (1,793) (f) --
Deferred Revenues..................................... 34,350 -- -- 34,350
--------- ------- -------- --------
Total current liabilities........................... 48,362 2,427 1,511 52,300
LONG-TERM DEBT
Long-term portion of capital leases................... 486 16 -- 502
--------- ------- -------- --------
Total liabilities................................... 48,848 2,443 1,511 52,802
--------- ------- -------- --------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock.......................................... 836 -- 18 (a) 854
Contributed and paid-in-capital....................... 282,885 -- 190,527 (a) 473,412
Deferred stock compensation........................... (6,858) -- -- (6,858)
Warrants.............................................. 3,687 -- -- 3,687
Stockholder notes payable/(receivable)................ (198) -- -- (198)
Accumulated other comprehensive income................ (25) -- -- (25)
Accumulated deficit................................... (174,742) 25,204 (27,204) (a,c) (176,742)
--------- ------- -------- --------
Total stockholders' equity.......................... 105,585 25,204 163,341 294,130
--------- ------- -------- --------
Total liabilities and stockholders' equity.......... $ 154,433 $27,647 $164,852 $346,932
========= ======= ======== ========
</TABLE>

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

(a) Reflects the acquisition of SourceSuite. The excess of the purchase price
over the net book value of the assets acquired is approximately $194.1
million.

(b) Reflects estimated transaction costs of the proposed Merger of $3.0 million.

(c) Reflects the write-off of in-process research and development of $2.0
million as it had not reached technological feasibility and had no probable
alternative future use.

(d) Reflects the liability associated with the Programming Services Agreement
between Liberate, Source Media and Insight Communications in the amount of
approximately $0.9 million.

(e) Reflects the payment on the Closing Date of the note payable to Source Media
of approximately $0.4 million.

(f) Eliminates assets and liabilities not assumed as part of the acquisition.

F-49
<PAGE>
LIBERATE TECHNOLOGIES AND SOURCESUITE (VIRTUAL MODEM)

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AND STATEMENTS OF OPERATIONS

(UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

The unaudited pro forma condensed combined financial statements included
herein have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and certain footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However the Company
believes that the disclosures are adequate to make the information presented not
misleading.

NOTE 2. PURCHASE PRICE ALLOCATION

In accordance with Accounting Principles Board Opinion No. 16, the proposed
Merger is to be accounted for as a purchase of SourceSuite by Liberate. The
purchase price will be allocated based upon the fair value of the assets
acquired and liabilities assumed, which approximates book value. The following
table summarizes the components of the total purchase price and the estimated
allocation (in thousands, except share amount):

<S> <C>
Fair value of Liberate common stock (1,772,000 shares)...... $190,545
Cash........................................................ 12,633
Transaction costs........................................... 3,000
--------
Estimated total purchase price............................ 206,178
--------

Assets acquired and liabilities assumed:
Cash...................................................... 13,000
Inventory................................................. 23
Prepaids.................................................. 26
Property and equipment.................................... 391
Notes payable to Source Media, Inc........................ (367)
Capital lease liability................................... (16)
Programming Services Agreement............................ (938)
--------
12,119
--------
Estimated acquired intangibles.............................. $194,059
========
</TABLE>

NOTE 3. OTHER AGREEMENTS

In connection with the Merger, the Company has agreed to enter into a
Preferred Content Provider Agreement with a joint venture of Source Media and
Insight Communications. The Company will use commercially reasonable efforts to
introduce the joint venture's products to the Company's multiple network
operator customers using the technology purchased pursuant to the Merger
Agreement. In addition, various incentive credits are provided to both parties
if the network operators select the joint venture's products. The Company has
also agreed to a Programming Services Agreement with the joint venture where the
Company would continue to develop certain products for the joint venture. Total
estimated costs to complete the development effort are $0.9 million and are
reflected in the pro forma condensed combined balance sheet.

F-50
<PAGE>
LIBERATE TECHNOLOGIES AND SOURCESUITE (VIRTUAL MODEM)

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AND STATEMENTS OF OPERATIONS (CONTINUED)

(UNAUDITED)

NOTE 4. COMMITMENTS AND CONTINGENCIES

As of September 30, 1999, affiliates of SourceSuite were involved in various
litigation matters, as more fully discussed in Note 7 of the Notes to Combined
Financial Statements of the Virtual Modem business. Although ICTI's and SMI
Holdings' claims for patent infringement in the matter involving Worldgate
Communications are being assigned to Liberate as part of the acquisition,
Liberate has not assumed the defense of, and/or any liability for, the
counterclaim by Worldgate, or any liability arising from any other of these
matters. Liberate does not believe that the ultimate resolution of the Worldgate
matter will have a material impact on its financial position or results of
operations.

In addition to the matter discussed above, SourceSuite and its related
entities had other commitments and contingencies prior to the acquisition. These
included, among others, other litigation matters, deferred taxes, payables to
parent, Senior Secured Notes, and Senior PIK Preferred Stock. Liberate did not
assume any liabilities associated with these items as part of the acquisition
and all liabilities remain with the shareholders of SourceSuite.

F-51
<PAGE>
REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Navio Communications, Inc.

We have audited the accompanying balance sheet of Navio
Communications, Inc. (a development stage company) as of December 31, 1996, and
the related statements of operations, stockholders' equity, and cash flows for
the period from inception (February 12, 1996) to December 31, 1996. 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 audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Navio Communications, Inc.
(a development stage company) at December 31, 1996, and the results of its
operations and its cash flows for the period from inception (February 12, 1996)
to December 31, 1996, in conformity with generally accepted accounting
principles.

As more fully described in Note 1 to the financial statements, the Company
is in the development stage, has incurred losses since inception of
approximately $5.6 million and expects to incur substantial and increasing
operating losses in the next year. At December 31, 1996, the Company had working
capital of $8.3 million. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans as to these
matters are described in Note 1. The 1996 financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

Palo Alto, California /s/ ERNST & YOUNG LLP

March 6, 1997, except for
Note 8 as to which the date is
June 5, 1997

F-52
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEET

DECEMBER 31, 1996

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<S> <C>
ASSETS

Current assets:
Cash and cash equivalents................................. $ 8,152
Short-term investments.................................... 2,033
Other current assets...................................... 174
-------
Total current assets........................................ 10,359
Property and equipment, net................................. 1,290
Other assets................................................ 132
-------
$11,781
=======

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable.......................................... $ 316
Accrued compensation and related liabilities.............. 235
Other accrued liabilities................................. 746
Deferred revenues......................................... 675
Short-term note payable, stockholder...................... 51
-------
Total current liabilities................................... 2,023

Commitments and contingencies

Stockholders' equity:
Preferred stock, $0.0001 par value; issuable in series;
7,777,777 shares authorized; 7,777,777 Series A shares
outstanding; aggregate liquidation preference of
$15,556................................................. 15,392
Common stock, $0.0001 par value; 55,555,555 shares
authorized; 21,111,112 shares outstanding............... 154
Note receivable, stockholder.............................. (150)
Deficit accumulated during the development stage.......... (5,638)
-------
Total stockholders' equity.................................. 9,758
-------
$11,781
=======
</TABLE>

SEE ACCOMPANYING NOTES.

F-53
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF OPERATIONS

PERIOD FROM INCEPTION (FEBRUARY 12, 1996) TO DECEMBER 31, 1996

(IN THOUSANDS)

<TABLE>
<S> <C>
Operating expenses:
Research and development.................................. $ 4,559
Sales and marketing....................................... 839
General and administrative................................ 432
-------
Total operating expenses.................................... 5,830
-------
Operating loss.............................................. (5,830)
Interest income, net........................................ 192
-------
Net loss.................................................... $(5,638)
=======
</TABLE>

SEE ACCOMPANYING NOTES.

F-54
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF STOCKHOLDERS' EQUITY

PERIOD FROM INCEPTION (FEBRUARY 12, 1996) TO DECEMBER 31, 1996

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
SERIES A DURING THE TOTAL
PREFERRED COMMON NOTE DEVELOPMENT STOCKHOLDERS'
STOCK STOCK RECEIVABLE STAGE EQUITY
--------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of 21,111,112 shares of common
stock to founders for technology and a
note in July 1996...................... $ -- $150 $(150) $ -- $ --
Issuance of 7,777,777 shares of Series A
preferred stock to investors at $2.00
per share, net of issuance costs of
$163 in July and October 1996.......... 15,392 -- -- -- 15,392
Issuance of options to purchase 201,000
shares of common stock for services
valued at $0.02 per share in November
1996................................... -- 4 -- -- 4
Net loss................................. -- -- -- (5,638) (5,638)
------- ---- ----- ------- -------
Balance at December 31, 1996............. $15,392 $154 $(150) $(5,638) $ 9,758
======= ==== ===== ======= =======
</TABLE>

SEE ACCOMPANYING NOTES.

F-55
<PAGE>
NAVIO COMMUNICATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF CASH FLOWS

PERIOD FROM INCEPTION (FEBRUARY 12, 1996) TO DECEMBER 31, 1996

(IN THOUSANDS)

<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(5,638)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization............................. 153
Issuance of stock for services............................ 4
Changes in assets and liabilities:
Other current assets.................................... (174)
Accounts payable........................................ 316
Accrued compensation and related liabilities............ 235
Other accrued liabilities............................... 746
Deferred revenues....................................... 675
-------
Net cash used in operating activities....................... (3,683)
-------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................ (1,443)
Increase in other assets.................................... (132)
Purchase of short-term investments.......................... (4,008)
Maturities of short-term investments........................ 1,975
-------
Net cash used in investing activities....................... (3,608)
-------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Series A preferred stock, net..... 15,392
Short-term notes payable, stockholder....................... 551
Repayment of short-term notes payable, stockholder.......... (500)
-------
Net cash provided by financing activities................... 15,443
-------
Net increase in cash and cash equivalents................... 8,152
Cash and cash equivalents at beginning of period............ --
-------
Cash and cash equivalents at end of period.................. $ 8,152
=======
</TABLE>

SEE ACCOMPANYING NOTES.

F-56
<PAGE>
NAVIO COMMUNICATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

Navio Communications, Inc. ("Navio" or the "Company"), a development stage
company, was incorporated in the State of Delaware on February 12, 1996. The
Company was organized to develop and market Internet solutions to consumers on
non-PC devices.

DEVELOPMENT STAGE COMPANY

Since inception, the Company has been engaged primarily in research and
development activities in connection with the development of its products. Other
activities to date have included raising capital, recruiting managerial and
technical personnel, establishment of business development and marketing
organizations and execution of various license agreements. Accordingly, the
Company is classified as a development stage enterprise at December 31, 1996.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Since inception, the Company has
incurred cumulative net operating losses of approximately $5.6 million and has
working capital of approximately $8.3 million as of December 31, 1996. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management expects the Company to incur substantial and
increasing operating losses in the next year and recognizes the need for an
infusion of cash during 1997. The Company is actively pursuing various options
which include securing additional equity financing and believes that sufficient
funding will be available to achieve its planned business objectives. However,
if the Company is unable to obtain necessary cash, other more substantial
restructuring options may be necessary, which would have a material adverse
effect on the Company's business, results of operations and prospects. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result.

USE OF ESTIMATES

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

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash and cash equivalents consist of cash on deposit with banks and money
market instruments with original maturities of 90 days or less. Short-term
investments, all of which are classified as available-for-sale, consist of high
quality debt securities with original maturities between 90 days and one year.

F-57
<PAGE>
NAVIO COMMUNICATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The following table details the Company's investments at December 31, 1996
(in thousands):

<TABLE>
<S> <C>
U.S. Government agencies.................................... $4,624
Money market funds.......................................... 2,268
Corporate bonds and notes................................... 3,025
------
$9,917
======
Included in cash and cash equivalents....................... $7,884
Included in short-term investments.......................... 2,033
------
$9,917
======
</TABLE>

The Company invests its excess cash in accordance with a short-term
investment policy set by the board of directors. The policy authorizes
investments in government securities, time deposits and certificates of deposit
in approved financial institutions, commercial paper rated A-1/P-1, and other
money market instruments of similar liquidity and credit quality.

The Company considers its investments in such instruments as
available-for-sale and, in accordance with Financial Accounting Standard
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("FAS 115"), would record its investments at fair value. However, as the
difference between cost and fair value was immaterial, no adjustment was made to
the historical carrying value of the investments and no unrealized gains and
losses have been recorded as a separate component of stockholders' equity.
Realized gains or losses from available-for-sale investments have not been
material.

CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash investments. The Company primarily
invests its excess cash in deposits with major banks, in U.S. Treasury and U.S.
Agency obligations and in money market securities issued by companies with
strong credit ratings and in a variety of industries. Those securities
classified as cash equivalents and short-term investments typically mature
within one year of their purchase date.

PROPERTY AND EQUIPMENT

Property and equipment are depreciated using the straight-line method over
the estimated useful lives of the assets, generally two to five years. Leasehold
improvements are amortized over the lesser of the term of the lease or the
estimated useful life of the underlying asset.

DEFERRED REVENUE

Deferred revenue represents prepayments from customers for future consulting
services and product royalties.

F-58
<PAGE>
NAVIO COMMUNICATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RESEARCH AND DEVELOPMENT

Research and development expenditures are charged to operations as incurred.
Statement of Financial Accounting Standard No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility.

Based on the Company's product development process, technological
feasibility is established upon completion of a working model. To date, all
research and development costs have been expensed.

STOCK-BASED COMPENSATION

In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the
Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations, and to adopt the "disclosure only" alternative described in
FAS 123, in accounting for its employee stock option plans. Under APB 25, if the
exercise price of the Company's employee stock options equals or exceeds the
fair value of the underlying stock on the date of grant as determined by the
Company's board of directors, no compensation expense is recognized.

2. PROPERTY AND EQUIPMENT

Property and equipment, at cost, consists of the following at December 31,
1996 (in thousands):

<TABLE>
<S> <C>
Computer and office equipment............................... $ 595
Purchased computer software................................. 256
Furniture and fixtures...................................... 249
Leasehold improvements...................................... 343
------
Total property and equipment................................ 1,443
Accumulated depreciation and amortization................... (153)
------
Net property and equipment.................................. $1,290
======
</TABLE>

3. SHORT-TERM NOTE PAYABLE, STOCKHOLDER

In July 1996, the Company entered into a note with a stockholder for the
purchase of equipment. The note is noninterest bearing, payable on demand and
secured by the equipment. The stockholder maintains the right, until the note is
repaid, to repurchase the equipment for the original purchase price paid by the
Company.

4. COMMITMENTS

The Company leases facilities, as cotenant with Netscape for its principal
office and research facilities under a noncancelable operating lease agreement
expiring in December 2001. Minimum payments are subject to annual increases
based in part on the consumer price index.

F-59
<PAGE>
NAVIO COMMUNICATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. COMMITMENTS (CONTINUED)

In addition, during 1996, the Company entered into various agreements with
third party vendors requiring minimum royalty and maintenance payments. Certain
third party agreements contain cancelation provisions whereby the Company will
be free of further liability upon cancelation. In addition, certain third party
agreements provide for an irrevocable, worldwide, perpetual license for use in
any application upon payment of the minimum royalty payments.

Future minimum payments as of December 31, 1996 under the lease, net of
sublease income, and under third party royalty and maintenance agreements are as
follows (in thousands):

<TABLE>
<CAPTION>
NONCANCELABLE THIRD-PARTY
OPERATING ROYALTY
LEASE AGREEMENTS
------------- -----------
<S> <C> <C>
1997................................................. $ 736 $ 300
1998................................................. 843 487
1999................................................. 873 200
2000................................................. 904 409
2001 and thereafter.................................. 937 409
------ ------
$4,293 $1,805
====== ======
</TABLE>

Rent expense for the period ending December 31, 1996 was $141,000.

Payments under third party agreements for the period ending December 31,
1996, which have been expensed to research and development, were $874,000.

In addition, in July 1996, the Company entered into an employment agreement
with a founder. The agreement is terminable by either party on 30 days' written
notice, and provides for a base salary, subject to adjustment at the discretion
of the board of directors, with bonuses payable on March 31, 1998, 1999 and
2000, respectively. The agreement obligates the Company to loan money to the
founder for the purchase of a residence, which loan will bear interest at 5% and
be payable 12 months following funding. The loan will be secured by a deed of
trust in favor of the Company in the underlying real property, or other
acceptable collateral. The agreement further provides that in the event that
(i) the Company terminates the employment of the founder other than for "cause,"
as defined therein, (ii) the founder's employment is "constructively
terminated," as defined therein, or (iii) a "Change in Control," as defined
therein, occurs, then the founder will be entitled to (w) a severance payment
equal to 24 months' base salary, payable in 24 equal monthly installments,
(x) cancelation and forgiveness of any outstanding loans from the Company,
(y) termination of the Company's repurchase rights in any common stock held by
the founder and (z) a 24-month consultancy at $1,000 per month, during which
period any options held by the founder would continue to be exercisable. In the
event that the Company terminates the employment of the founder for "cause,"
then the founder will be entitled to receive a severance payment equal to six
months' base salary and in certain circumstances, the benefits prescribed in
(y) and (z) above. In the event the founder voluntarily terminates his
employment with the Company, the founder will be entitled to receive a severance
payment equal to six months' base salary (see Note 8).

F-60
<PAGE>
NAVIO COMMUNICATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. STOCKHOLDERS' EQUITY

PREFERRED STOCK

During 1996, the Company issued 7,777,777 shares of Series A preferred stock
at $2.00 per share. In the event of a liquidation or winding up of the Company,
holders of Series A preferred stock are entitled to a liquidation preference of
$2.00 per share, together with any declared but unpaid dividends, prior and in
preference to the holders of common stock. Series A preferred stockholders are
entitled to noncumulative dividends at an annual rate of $0.0675 per share, when
and as declared by the board of directors, prior and in preference to dividends
on the common stock. No dividends have been declared by the Company.

The holders of Series A preferred stock are entitled to one vote for each
share of common stock into which such preferred stock is convertible. Each share
of Series A preferred stock is convertible, at an option of the holder, into
common stock on a one-for-one basis. Each share of Series A preferred stock
automatically converts into one share of common stock in the event of an
underwritten public offering of the Company's common stock with a price of at
least $4.00 per share and aggregate gross proceeds of at least $10,000,000 (a
"Qualified IPO") or upon the consent of the holders of a majority of the then
outstanding shares of Series A preferred stock. The conversion rate of the
Series A preferred stock is subject to adjustment in the event of, among other
things, certain dilutive issuances of stock, business combinations, stock splits
and stock dividends. The Company has reserved 7,777,777 shares of common stock
for conversion of preferred stock.

COMMON STOCK

In July 1996, 8,333,334 shares of common stock were issued to a founder in
exchange for technology and a $150,000 promissory note. The outstanding shares
are subject to certain transfer restrictions. Certain of these shares are
subject to repurchase, at $0.10 per share, upon the occurrence of certain
events, including termination of employment. The Company's repurchase option
expires as to 1,388,889 shares of common stock on each of February 12, 1997 and
1998. In addition, as to these 2,777,778 shares, the repurchase option will
expire immediately in the event of a Qualified IPO or upon acquisition of the
Company, subject to certain conditions, by a stockholder. As to an additional
2,777,778 shares of common stock, the Company's repurchase option expires based
on the achievement of specified performance objectives. Regardless of product
sold, the repurchase option shall expire on all such performance shares as of
February 12, 2003 (see Note 8).

As to the shares which are not subject to the repurchase option, the shares
are subject to the Company's right to first refusal on sale or transfer of the
shares. The Company's right of first refusal terminates upon the earliest to
occur of (i) a Qualified IPO, (ii) a merger or consolidation of the Company as a
result of which the Company is not the surviving entity, or any sale, conveyance
or other disposition of the assets of the Company as an entirety or
substantially as an entirety, or (iii) the achievement by the Company of
$100,000,000 in annual sales.

In addition, in July 1996, the Company issued to Netscape 12,777,778 shares
of common stock in exchange for the license of certain intellectual property
rights. Such shares are subject to the Company's right of first refusal on sale
or transfer of the shares. The Company's right of first refusal terminates upon
the earliest to occur of (i) the Company's underwritten initial public offering,
(ii) a merger or consolidation of the Company as a result of which the Company
is not the surviving entity or

F-61
<PAGE>
NAVIO COMMUNICATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. STOCKHOLDERS' EQUITY (CONTINUED)

any sale, covenance or other disposition of the assets of the Company as an
entirety or substantially as an entirety; (iii) the achievement by the Company
of $100,000,000 in annual sales or (iv) the expiration of the Company's right of
first refusal with respect to the founder's common stock.

STOCKHOLDER AND VOTING AGREEMENT

The Company has an agreement with Netscape, which along with certain
stockholder rights, provides Netscape with the right and option to acquire
substantially all of the outstanding stock, of the Company at fair market value,
if the Company has not completed an underwritten initial public offering of
shares on or before February 12, 2000, or if, prior to that date, the board of
directors of the Company approves the selection of an investment banking firm
for the purpose of serving as lead manager of the Company's initial public
offering, holders of Series A preferred stock may elect not to sell their shares
in connection with such a transaction (see Note 8).

NOTE RECEIVABLE, STOCKHOLDER

In July 1996, the Company issued a full recourse promissory note in the
original principal amount of $150,000 to a founder. The note bears interest at
6.36% per annum and is payable in installments of $50,000 in principal, plus any
accrued but unpaid interest, on each of July 9, 1998, 2000 and 2002.

WARRANTS

In July 1996, the Company issued a warrant to Netscape to purchase up to
50.5% of the total number of shares of authorized capital stock of the Company,
as amended from time to time. The exercise price for each warrant share is equal
to the fair market value of one share of the Company's common stock on the
exercise date, as determined by the Company's board of directors. The warrant
may be exercised by the holder, in whole or in part, at any time or from
time-to-time until the first to occur of (i) the acquisition by the warrant
holder of all of the outstanding equity securities of the Company pursuant to
the Stockholder and Voting Agreement or (ii) upon the closing of a firm
commitment underwritten initial public offering of the Company's common stock
with respect to which the stockholder has declined to exercise its right to
effect an IPO Buyout, as defined therein. The number of shares purchasable under
the warrant and the exercise price are subject to adjustment in the event, among
other things, of a capital reorganization of the Company or business
combination. The Company has reserved 15,277,778 shares for issuance pursuant to
this warrant (see Note 8).

STOCK OPTION PLAN

During 1996, the board of directors of the Company adopted, and the
stockholders approved, the 1996 Stock Option Plan (the "1996 Plan"), which
provides for the grant of incentive stock options and nonstatutory stock options
to employees and consultants of the Company at prices ranging from 85% to 110%
(depending on the type of grant) of the fair market value of the common stock on
the date of grant as determined by the board of directors. The vesting and
exercise provisions of the option grants are determined by the board of
directors. Options expire no later than 10 years from the date of grant.

Options granted are immediately exercisable, and the shares of common stock
issued to employees upon exercise are subject to repurchase, at the original
purchase price, by the Company, at the

F-62
<PAGE>
NAVIO COMMUNICATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. STOCKHOLDERS' EQUITY (CONTINUED)

discretion of the Company, upon the termination of the individual's employment
or consultancy with the Company. The Company's repurchase right expires
generally at the rate of 25% of the original grant, commencing 12 months after
the date of grant or employment, and in monthly increments over the following
36 months.

STOCK OPTION PLAN

A summary of activity under the 1996 Plan is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES --------------------------------
AVAILABLE NUMBER OF EXERCISE AGGREGATE
FOR GRANT SHARES PRICE PRICE
---------- --------- -------- ---------
<S> <C> <C> <C> <C>
Shares reserved..................... 10,965,000 -- -- $ --
Options granted..................... (4,930,000) 4,930,000 $0.10 493,000
Options canceled.................... -- -- -- --
Options exercised................... -- -- -- --
---------- --------- ----- --------
Balance at December 31, 1996........ 6,035,000 4,930,000 $0.10 $493,000
========== ========= ===== ========
</TABLE>

The weighted-average per share fair value of options and common stock
granted to employees during 1996 was $0.01 and $0.08, respectively.

No options were exercised or repurchased during the period ended
December 31, 1996. The Company has reserved 10,965,000 shares of common stock
for issuance under the Plan.

In the period ended December 31, 1996, the Company granted options, outside
of the 1996 Plan, to certain service providers to purchase 201,000 shares of
common stock at $0.10 per share. The options were recorded at the fair value of
the option at the date of grant ($4,020 in 1996). The options granted are
immediately exercisable and the resulting shares issued are subject to
repurchase by the Company, at the original purchase price, at the discretion of
the Company, upon the termination of the vendor's service with the Company. The
right expires generally at the rate of 25% of the original grant, commencing
12 months after the date of grant or first date of service, and in monthly
increments over the following 36 months.

No options outside of the 1996 Plan were exercised or repurchased during the
period ended December 31, 1996. At December 31, 1996, there were options to
purchase 201,000 shares outstanding outside of the 1996 Plan, of which none were
vested. The Company has reserved 423,888 shares of common stock for current and
future issuance to certain providers of technology and services.

The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and accordingly,
recognizes no compensation expense for stock option grants to employees and
directors.

Companies that continue to apply APB 25 are required to disclose pro forma
results from operations as if the measurement provisions of SFAS 123 had been
adopted in their entirety. The pro forma disclosures include the effects of all
options to employees during the period ended December 31,

F-63
<PAGE>
NAVIO COMMUNICATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. STOCKHOLDERS' EQUITY (CONTINUED)

1996. In management's opinion, existing stock option valuation models do not
provide a reliable single measure of the fair value of employee stock options
because such models were developed for traded options which have no vesting
provisions and are fully transferable. In addition, stock option pricing models
require the input of highly subjective assumptions, including the expected
future stock price volatility.

The fair value of options at the date of grant, estimated using the minimum
value method, contained the following weighted-average 10-year assumptions (in
thousands):

<TABLE>
<CAPTION>
1996
---------
<S> <C>
Expected option term from vest date......................... 4 months
Interest rate............................................... 5.6%
Dividend yield.............................................. 0
</TABLE>

The remaining contractual life of options outstanding at December 31, 1996
was 9.89 years.

For purposes of pro forma disclosures, the estimated fair value of the
options and common stock awards is amortized to pro forma net loss over the
related vesting periods. Pro forma net loss for the period ended December 31,
1996 was $5,988,000.

6. INCOME TAXES

As of December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $4,400,000. The Company also had federal research
and development tax credit carryforwards of approximately $100,000. The net
operating loss and credit carryforwards will expire at various dates in 2011, if
not utilized.

Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.

As of December 31, 1996, the Company had deferred tax assets of
approximately $2,800,000 which have been fully offset by a valuation allowance.
Deferred tax assets relate primarily to net operating loss carryforwards,
research credits and capitalized research and development costs.

7. RELATED PARTY TRANSACTIONS

During 1996, the Company entered into short-term loan arrangements totaling
$500,000 with Netscape. The loans were due on demand, unsecured and bore
interest at 8%. The loans were repaid during 1996.

In addition, during 1996, the Company purchased equipment from two
stockholders totaling $76,000 (see Note 3).

8. SUBSEQUENT EVENTS

On March 19, 1997, the board of directors and stockholders approved an
amendment to the Amended and Restated Certificate of Incorporation (a) to reduce
the number of authorized shares of

F-64
<PAGE>
NAVIO COMMUNICATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. SUBSEQUENT EVENTS (CONTINUED)

preferred stock to 7,777,777, (b) to increase the number of shares of common
stock reserved for issuance under the Company's 1996 Stock Option Plan to
10,965,000, and (c) to reduce the number of shares reserved for issuance to
certain providers of technology and services to 423,888. These changes have been
reflected in the accompanying financial statements and notes.

In January and February 1997, the board of directors granted options to
purchase 1,405,000 shares of common stock at $0.10 per share. In March, the
board of directors granted options to purchase 4,490,000 shares of common stock
at $0.50 per share, pursuant to the 1996 Plan.

On May 16, 1997, the Company signed the Agreement and Plan of Merger (the
"Agreement") with Network Computer, Inc. ("NCI"). In accordance with the
Agreement, NCI proposes to acquire all of the outstanding shares of capital
stock of the Company. The merger will become effective immediately upon approval
by the stockholders of the Company and satisfaction or waiver of all other
conditions precedent in the Agreement. The closing is expected to occur no later
than August 15, 1997. In addition, upon the effective date of the merger, the
Netscape warrant and the Company's Stockholder and Voting Agreement as described
in Note 5 will terminate.

On June 5, 1997, the Company signed a new employment agreement with a
founder that supersedes the agreement described in Note 4 and a previous
agreement signed on May 16, 1997. The June 5, 1997 employment agreement will
become effective upon the earlier of the consummation of the Agreement or the
exercise by the Company of its option in accordance with the Stock Option
Agreement (the "Option") with the founder and Netscape (the "Stockholders"). In
accordance with the Option and upon certain conditions, NCI may elect to pay
either in cash at a price of $2.00 per share or pay in NCI Series C preferred
stock in accordance with the Agreement for the purchase of the Company's stock.
The Option also prevents Netscape from exercising its warrant without prior
consent from NCI. The Option shall expire at the earliest of the effective date
or the termination of the Agreement.

F-65
<PAGE>
NAVIO COMMUNICATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
<S> <C> <C>
(UNAUDITED)
ASSETS

CURRENT ASSETS
Cash and cash equivalents................................. $ 8,152 $ 3,650
Short-term cash investments............................... 2,033 1,014
Accounts receivable, net.................................. -- 396
Other current assets...................................... 174 474
------- -------
Total Current Assets.................................... 10,359 5,534
------- -------
PROPERTY AND EQUIPMENT, net................................. 1,290 1,690
OTHER ASSETS................................................ 132 89
------- -------
Total Assets............................................ $11,781 $ 7,313
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Short-term note payable to stockholder.................... $ 51 $ 51
Accounts payable.......................................... 316 824
Accrued compensation and related liabilities.............. 235 433
Deferred revenues......................................... 675 2,427
Other accrued liabilities................................. 746 698
------- -------
Total Current Liabilities............................... 2,023 4,433
------- -------
STOCKHOLDERS' EQUITY:
Series A Preferred stock; $.0001 par value................ 1 1
Common stock; $.0001 par value............................ 2 2
Paid in capital........................................... 15,543 15,577
Note receivable from stockholder.......................... (150) (184)
Deficit accumulated during the development stage.......... (5,638) (12,516)
------- -------
Total Stockholders' Equity.............................. $ 9,758 $ 2,880
------- -------
Total Liabilities and Stockholders' Equity.............. $11,781 $ 7,313
======= =======
</TABLE>

See notes to condensed financial statements.

F-66
<PAGE>
NAVIO COMMUNICATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
FROM INCEPTION
(FEBRUARY 12, 1996) SIX MONTHS ENDED
TO JUNE 30, 1996 JUNE 30, 1997
-------------------- ----------------
<S> <C> <C>
REVENUES.................................................... $ -- $ 615
----- -------
OPERATING EXPENSES
Cost of revenues.......................................... -- 707
Sales and marketing....................................... -- 1,757
Research and development.................................. 395 4,464
General and administrative................................ 255 762
----- -------
Total Operating Expenses................................ 650 7,690
----- -------
OPERATING LOSS.............................................. (650) (7,075)
Other income (expense), net............................... (4) 197
----- -------
NET LOSS.................................................... $(654) $(6,878)
===== =======
</TABLE>

See notes to condensed financial statements.

F-67
<PAGE>
NAVIO COMMUNICATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
FROM INCEPTION
(FEBRUARY 12, 1996) SIX MONTHS ENDED
TO JUNE 30, 1996 JUNE 30, 1997
------------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $ (654) $(6,878)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... -- 320
Changes in assets and liabilities:
Accounts receivable................................... -- (396)
Other assets.......................................... (420) (257)
Accounts payable...................................... 160 508
Deferred revenues..................................... -- 1,752
Other accrued liabilities............................. 1,456 150
------ -------
Net cash provided by (used in) operating activities....... 542 (4,801)
------ -------

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investments....................... -- 2,093
Purchases of short-term investments..................... -- (1,074)
Capital expenditures.................................... (425) (720)
------ -------
Net cash (used for) provided by investing activities...... (425) 299
------ -------
Net increase in cash and cash equivalents................. 117 (4,502)

CASH AND CASH EQUIVALENTS
Beginning of period....................................... -- 8,152
------ -------
End of period............................................. $ 117 $ 3,650
====== =======
</TABLE>

See notes to condensed financial statements.

F-68
<PAGE>
NAVIO COMMUNICATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying condensed unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulations S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. For further information, refer to the December 31, 1996
audited financial statements and footnotes thereto included in this prospectus.

2. SUBSEQUENT EVENT

On August 11, 1997 the Company entered into an merger agreement (the
"agreement") with Liberate Technologies ("Liberate"), formally known as Network
Computer, Inc. Pursuant to the terms of the agreement, Liberate issued Series B
and C Preferred Stock and stock options to acquire all of the outstanding common
stock, preferred stock and stock options of the Company.

F-69
<PAGE>
LIBERATE TECHNOLOGIES AND NAVIO COMMUNICATIONS, INC.
PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
(UNAUDITED)

On August 11, 1997, Liberate Technologies (the "Company" or "Liberate")
completed the acquisition of Navio Communications, Inc. ("Navio"), a development
stage company in the process of developing internet application software. The
acquisition of Navio has been accounted for as a purchase. Accordingly, the
results of operations of Navio have been included in the consolidated statement
of operations of Liberate commencing on the date of acquisition.

The accompanying pro forma condensed combined statement of operations for
Liberate's fiscal year ended May 31, 1998 assumes that the acquisition took
place as of the beginning of fiscal 1998 and combines Navio's statement of
operations for the period from June 1, 1997 to the date of acquisition
(August 11, 1997) with Liberate's consolidated statements of operations for the
year ended May 31, 1998. The pro forma condensed combined statement of
operations for the fiscal year ended May 31, 1998 does not include the effect of
any nonrecurring charges directly attributed to the acquisition.

The accompanying pro forma condensed combined financial statements should be
read in conjunction with the historical financial statements and related notes
thereto for both Liberate and Navio, which are included in this Prospectus.

F-70
<PAGE>
LIBERATE TECHNOLOGIES AND NAVIO COMMUNICATIONS, INC
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
MAY 31, 1998 JUNE 1 - AUGUST 11, 1997 PRO FORMA PRO FORMA
LIBERATE NAVIO ADJUSTMENTS COMBINED
------------ ------------------------ ----------- ---------
<S> <C> <C> <C> <C>
REVENUES:
License and other.................... $ 4,162 $ 55 $ -- $ 4,217
Service.............................. 6110 738 -- 6,848
---------- ------- -------- --------
Total revenue...................... 10,272 793 -- 11,065
---------- ------- -------- --------
COST OF REVENUES:
License and other.................... 3,779 74 -- 3,853
Service.............................. 2,230 438 -- 2,668
---------- ------- -------- --------
Total cost of revenue.............. 6,009 512 -- 6,521
---------- ------- -------- --------
GROSS MARGIN........................... 4,263 281 -- 4,544
---------- ------- -------- --------
OPERATING EXPENSES:
Research and development............. 19,981 1,610 -- 21,591
Sales and marketing.................. 14,407 1,419 -- 15,826
General and administrative........... 2,453 380 -- 2,833
Amortization of purchased
intangible......................... 4,563 -- 1,517(b) 6,080
Restructuring charges................ 1,175 -- -- 1,175
Acquired in-process research and
development........................ 58,100 -- (58,100)(a) --
---------- ------- -------- --------
Total operating expenses........... 100,679 3,409 (56,583) 47,505
---------- ------- -------- --------
Loss from operations............... (96,416) (3,128) (42,961)
INTEREST AND OTHER INCOME (EXPENSE),
net.................................. 10 41 -- 51
---------- ------- -------- --------
LOSS BEFORE INCOME TAX BENEFIT......... (96,406) (3,087) (42,910)
INCOME TAX BENEFIT..................... 2,015 -- (1,332)(c) 683
---------- ------- --------
NET LOSS............................... $ (94,391) $(3,087) $(42,227)
========== ======= ========
BASIC AND DILUTED NET LOSS PER SHARE... $ (890.48) $(398.37)(d)
========== ========
SHARES USED TO IN COMPUTING BASIC AND
DILUTED NET LOSS PER SHARE........... 106 106(d)
========== ========
</TABLE>

The accompanying notes are an integral part of this condensed combined financial
statement.

F-71
<PAGE>
LIBERATE TECHNOLOGIES AND NAVIO COMMUNICATIONS, INC.

NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. PRO FORMA ADJUSTMENTS

Certain pro forma adjustments have been made to the accompanying pro forma
condensed combined statements of operations as described below:

(a) Eliminates the acquired in-process research and development expense for
approximately $58.1 million associated with the acquisition of Navio.

(b) Reflects amortization for 3 months of the excess of the purchase price over
the fair value of net assets acquired, which is being amortized over
3 years.

(c) Reflects a reduction in the estimated assumed income tax benefit received
from Oracle as a result of inclusion of Liberate's tax operating loss in
Oracles consolidated tax return prior to the acquisition of Navio.

(d) The pro forma basic and diluted net loss per share excludes the preferred
shares of Liberate issued in the acquisition as their inclusion would be
antidilutive.

NOTE 2. PURCHASE PRICE ALLOCATION

In connection with the acquisition, the Company issued Series B and C
convertible preferred stock and stock options to acquire Series C convertible
preferred stock in exchange for all of the outstanding common stock, preferred
stock and options to purchase shares of Navio common stock. The acquisition was
accounted for as a purchase and, accordingly, the results of operations of Navio
have been included in the consolidated financial statements commencing on the
date of acquisition. The fair market value of the equity securities issued in
the acquisition was approximately $77.1 million. In connection with the
acquisition, the Company wrote off approximately $58.1 million of acquired
in-process research and development which, in the opinion of management, had not
reached technological feasibility and had no alternative future use. The
purchased intangible of approximately $18.3 million was recorded and is being
amortized on a straight-line basis over a useful life of three years.

F-72
<PAGE>
[LIBERATE LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of common stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fees.

<TABLE>
<S> <C>
SEC registration fee........................................ $ 221,933
NASD fee.................................................... 30,500
Nasdaq National Market initial listing fee.................. 17,500
Printing and engraving...................................... 200,000
Legal fees and expenses of the Company...................... 400,000
Accounting fees and expenses................................ 150,000
Blue sky fees and expenses.................................. 10,000
Transfer agent fees......................................... 10,000
Miscellaneous............................................... 60,067
----------
Total................................................... $1,100,000
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933
(the "Act"). Article VII of the Registrant's Bylaws provides for mandatory
indemnification of its directors and officers and permissible indemnification of
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. The Registrant's Sixth Amended and Restated Certificate
of Incorporation provides that, pursuant to Delaware law, its directors shall
not be liable for monetary damages for breach of the directors' fiduciary duty
as directors to the Registrant and its stockholders. This provision in the Sixth
Amended and Restated Certificate of Incorporation does not eliminate the
directors' fiduciary duty, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Registrant for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. The Registrant has
entered into Indemnification Agreements with its officers and directors, a form
of which is attached as Exhibit 10.1 hereto and incorporated herein by
reference. The Indemnification Agreements provide the Registrant's officers and
directors with further indemnification to the maximum extent permitted by the
Delaware General Corporation Law. The Registrant maintains liability insurance
for its directors and officers. Reference is also made to Section 7 of the
underwriting agreement contained in Exhibit 1.1 hereto, indemnifying officers
and directors of the Registrant against certain liabilities, and Section 1.10 of
the Stockholders Agreement, as amended contained in Exhibit 10.21 hereto,
indemnifying certain of the Company's stockholders, including controlling
stockholders, against certain liabilities.

II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

(a) Since April 24, 1996 (inception), we have issued and sold the following
unregistered securities, all of which reflect the one-for-six reverse stock
split effected in July 1999 and the two-for-one stock split effected in January
2000:

1. On May 22, 1996, we issued and sold an aggregate of 32 shares of common
stock to Oracle in exchange for a $10 payment from Oracle.

2. On October 1, 1996, we issued and sold an aggregate of 28,333,300 shares
of our Series A preferred stock to Oracle in exchange for a $10 million
cash payment and the transfer of Oracle's network computer division to
us.

3. On July 23, 1997, we entered into a convertible note purchase agreement
with Oracle. During fiscal 1998, we issued 1,515,150 shares of
Series A-1 preferred stock upon Oracle's conversion of $5 million
outstanding under this agreement.

4. On August 11, 1997, we issued an aggregate of 5,454,544 shares of our
Series A-1 preferred stock, 4,641,516 shares of our Series B preferred
stock and 12,799,806 shares of Series C preferred stock to Oracle and the
former stockholders of Navio pursuant to the agreement and plan of
merger.

5. On November 12, 1997, we issued a promissory note convertible into up to
an aggregate of 843,880 shares of our Series D preferred stock to
Middlefield Ventures for an aggregate consideration of $4 million.

6. In April and May 1999, we entered into letter agreements with several
network operators that require us to issue warrants to purchase up to an
aggregate of 4,599,992 shares of our common stock that are exercisable if
those network operators satisfy commercial milestones.

7. On May 12, 1999 we issued an aggregate of 10,416,652 shares of our
Series E preferred stock to a total of 18 investors for $4.80 per share,
or an aggregate of $50 million.

8. On August 2, 1999 we issued and sold 1,627,604 shares of our common
stock to Lucent Technologies for $7.68 per share or an aggregate of
$12,499,998.

9. We issued 2,771,228 shares of Series C preferred stock pursuant to
exercises of options, with exercise prices ranging from $.18 to $0.84,
granted under the Navio 1996 Stock Option Plan.

10. We issued 40,528 shares of Series C preferred stock pursuant to
exercises of options, with exercise prices of $.18, granted pursuant to
Navio non-qualified option grants.

11. We issued 782,924 shares of Series A common stock pursuant to exercises
of options, with exercise prices ranging from $.30 to $4.50, granted
under the Liberate 1996 Stock Plan.

12. We issued 451,388 shares of Series A common stock pursuant to an
exercise of an option, with an exercise price of $2.55 per share, granted
to David J. Roux, our Chairman.

The issuances of the securities described in Items 15(a)(1) through 15(a)(8)
and 15(a)(12) were deemed to be exempt from registration under the Act in
reliance on Section 4(2) of such Act as transactions by an issuer not involving
any public offering. The issuances described in Items 15(a)(9) through 15(a)(11)
were deemed exempt from registration under the Act in reliance upon Rule 701
promulgated under the Act. In addition, the recipients of securities in each
such transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Registrant, to information about the
Registrant.

II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
1.1+ Form of underwriting agreement.

2.1* Agreement and Plan of Merger, dated May 16, 1997, between
Liberate and Navio.

2.2+ Merger Agreement and Plan of Reorganization with SourceSuite
LLC, dated January 12, 2000.

3.1** Amended and Restated Bylaws of Liberate.

3.2*** Sixth Amended and Restated Certificate of Incorporation of
Liberate.

4.1* Specimen Certificate of Liberate's common stock.

5.1+ Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel to Liberate.

9.1* Voting Agreement, dated May 12, 1999, among Liberate,
Oracle, Comcast Technology, Cox Communications and
MediaOne Interactive Services.

10.1* Form of Indemnification Agreement entered into between
Liberate and its directors and executive officers.

10.2* Network Computer, Inc. 1996 Stock Option Plan, and form of
Option Agreement.

10.3* Navio Communications, Inc. 1996 Stock Option Plan and form
of Option Agreement.

10.4* Navio Communications, Inc. 1996 Non-Qualified Option Plan,
and form of Option Agreement.

10.5* 1999 Equity Incentive Plan.

10.6* 1999 Employee Stock Purchase Plan.

10.7+ Employment Agreement between Liberate and Mitchell E.
Kertzman, dated October 12, 1998, as amended on
January 5, 2000.

10.8* Employment Agreement, dated October 17, 1997, with Wei Yen,
as amended.

10.9* Settlement Agreement and Release of Claims, dated
October 8, 1998, with Wei Yen.

10.10* Settlement Agreement and General Release of All Claims,
dated March 16, 1998 between Jerry Baker, Oracle and
Liberate.

10.11* Employment letter between Liberate and Gordon Yamate, dated
March 12, 1999.

10.12* Employment letter between Liberate and Jim Peterson, dated
April 6, 1999.

10.13* OEM License Agreement, dated December 31, 1997, between
Liberate and Wind River Systems, as amended.

10.14* Technology License Agreement, dated September 8, 1998,
between Liberate and Oracle.

10.15* Letter Agreement, dated May 16, 1997, among Liberate, Oracle
and Navio.

10.16* Source Code License Agreement, dated July 9, 1996, between
Netscape and TVSoft, as amended.

10.17* OEM License Agreement, dated October 17, 1996, between
Oracle and Netscape, as amended.

10.18* Cooperation Agreement, dated July 1, 1999, between Liberate
and Intel, as amended.

10.19* Convertible Promissory Note, dated November 12, 1997, issued
to Middlefield Ventures.
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.20* Convertible Promissory Note Purchase Agreement, dated
November 12, 1997, entered into between Liberate and
Middlefield Ventures.

10.21* Stockholders Agreement, dated August 11, 1997, among
Liberate and the investors named therein.

10.22* Admission Agreement, dated November 12, 1997, among Liberate
and the investors named therein.

10.23* Sublease Agreement for Redwood Shores office space, dated
September 17, 1997, between Liberate and Oracle.

10.24* Maintenance Agreement for Redwood Shores office space, dated
September 17, 1997, between Liberate and Oracle.

10.25* Furniture and Equipment Lease for Redwood Shores office
space, dated September 17, 1997, between Liberate and
Oracle.

10.26* Sublease Agreement for Salt Lake City office space, dated
September 17, 1997, between Liberate and Oracle.

10.27* Letter Agreement for London office space, dated December
1998, between Liberate and Oracle.

10.28* Lease Agreement for Sunnyvale office space, dated
November 4, 1996, between Navio and Netscape.

10.29* Circle Star Lease Agreement for San Carlos office space,
dated April 27, 1999.

10.30* Guaranty of Lease for San Carlos office space, dated
April 27, 1999, between Circle Star Center Associates and
Oracle.

10.31* Tax Allocation and Indemnity Agreement, dated August 17,
1997, between Liberate and Oracle.

10.32* Network Computer, Inc. Stock Option Agreement, dated
October 15, 1998, with David Roux.

10.33* Network Computer, Inc. Stock Option Agreement, dated
October 15, 1998, with Mitchell Kertzman.

10.34* Series E Preferred Stock Purchase Agreement, dated May 12,
1999, among Liberate and the investors named therein.

10.35* Stock Purchase Agreement, dated June 30, 1999, among
Liberate and Lucent Technologies Inc.

10.36* Lease Agreement for Salt Lake City, Utah office space, dated
April 1, 1999 between Robert D. Kaufman and Dale E.
Kaufman and Liberate.

10.37**** Master Lease Agreement, dated August 2, 1999, with Steelcase
Financial Services, Inc.

10.38**** Irrevocable Letter of Credit dated September 3, 1999 and
Standby Letter of Credit Agreement.

10.39***** Employment letter between Liberate and Coleman Sisson, dated
November 5, 1999.

21.1* Subsidiary of Liberate.

23.1 Consent of Independent Public Accountants, Arthur Andersen
LLP (see page II-7).

23.2 Consent of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel to Liberate. Reference is made to
Exhibit 5.1.

23.3 Consent of Ernst & Young LLP, Independent Auditors (see
page II-8).
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
23.4 Consent of Ernst & Young LLP, Independent Auditors (see page
II-9).

24.1+ Power of Attorney.

27.1+ Financial Data Schedule.
</TABLE>

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

* Incorporated by reference to similarly numbered exhibit to the
Registration Statement on Form S-1 filed by the Registrant (Reg. No.
333-78781).

** Incorporated by reference to Exhibit 3.4 to the Registration Statement
on Form S-1 filed by the Registrant (Reg. No. 333-78781).

*** Incorporated by reference to Exhibit 3.5 to the Registration Statement
on Form S-1 filed by the Registrant (Reg. No. 333-78781).

**** Incorporated by reference to similarly numbered exhibit to the Form 10-Q
filed by the Registrant on October 13, 1999.

***** Incorporated by reference to Exhibit 10.39 to the Form 10-Q filed by the
Registrant on January 14, 2000.

+ Previously filed.

(b) FINANCIAL STATEMENT SCHEDULE

Schedule II--Valuations and Qualifying Accounts

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

ITEM 17. UNDERTAKINGS

We hereby undertake to provide to the underwriters at the closing specified
in the underwriting agreement, certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to each
purchaser.

Insofar as indemnification for liabilities arising under the Act may be
permitted to our directors, officers and controlling persons pursuant to the
Delaware General Corporation Law, our amended and restated certificate of
incorporation or our bylaws, indemnification agreements entered into between us
and our officers and directors, the underwriting agreement, or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities, other than the payment by us of expenses incurred or paid by a
director, officer, or controlling person of ours in the successful defense of
any action, suit or proceeding, is asserted by such director, officer or
controlling person in connection with the securities being registered hereunder,
we will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

We hereby undertake that:

(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Act shall be deemed to be part of this registration statement as of the time
it was declared effective.

(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.

II-5
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Carlos,
State of California, on this 16th day of February, 2000.

<TABLE>
<S> <C> <C>
LIBERATE TECHNOLOGIES

By: /s/ MITCHELL E. KERTZMAN
-----------------------------------------
Mitchell E. Kertzman
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

<TABLE>
<C> <S> <C>
/s/ MITCHELL E. KERTZMAN President, Chief Executive Officer
--------------------------------- and Director (Principal Executive February 16, 2000
Mitchell E. Kertzman Officer)

*
--------------------------------- Chairman of the Board of Directors February 16, 2000
David J. Roux

/s/ NANCY J. HILKER Vice President and Chief Financial
--------------------------------- Officer (Principal Financial and February 16, 2000
Nancy J. Hilker Accounting Officer)

*
--------------------------------- Director February 16, 2000
James L. Barksdale

*
--------------------------------- Director February 16, 2000
Charles Corfield

*
--------------------------------- Director February 16, 2000
Lawrence J. Ellison

*
--------------------------------- Director February 16, 2000
Jeffrey O. Henley

*
--------------------------------- Director February 16, 2000
Thomas Nagel
</TABLE>

<TABLE>
<S> <C> <C> <C>
*By: /s/ MITCHELL E. KERTZMAN
--------------------------------------
Mitchell E Kertzman
ATTORNEY-IN-FACT
</TABLE>

II-6
<PAGE>
EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made part of this
registration statement.

/s/ ARTHUR ANDERSEN LLP

San Jose, California
February 15, 2000

II-7
<PAGE>
EXHIBIT 23.3

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent the reference to our firm under the caption "Experts" and to the
use of our report dated March 6, 1997, except for Note 8 as to which the date is
June 5, 1997, with respect to the financial statements of Navio Communications,
Inc. as of December 31, 1996 and for the period from inception (February 12,
1996) to December 31, 1996 included in the Registration Statement (Form S-1) and
related prospectus of Liberate Technologies for the registration of shares of
its common stock.

/s/ ERNST & YOUNG LLP

Palo Alto, California
February 15, 2000

II-8
<PAGE>
EXHIBIT 23.4

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated December 15, 1999 (except for Note 9, as to which
the date is January 14, 2000), with respect to the combined financial statements
of the Virtual Modem Business of Source Media, Inc. as of December 31, 1998 and
1997 and the years then ended, included in Amendment No. 2 to the Registration
Statement (Form S-1 No. 333-95139) and related Prospectus of Liberate
Technologies for the registration of shares of its common stock.

Dallas, Texas /s/ Ernst & Young LLP
February 14, 2000

II-9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

To the Board of Directors and Stockholders of
Liberate Technologies:

We have audited in accordance with generally accepted auditing standards,
the financial statements of Liberate Technologies (a Delaware corporation) and
subsidiaries included in this registration statement and have issued our report
thereon dated June 24, 1999. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in the index above is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP

San Jose, California
June 24, 1999

S-1
<PAGE>
LIBERATE TECHNOLOGIES, INC.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DEDUCTIONS,
BALANCE AT ADDITIONS- RETURNS AND BALANCE AT
DESCRIPTION BEGINNING OF YEAR PROVISIONS WRITE-OFFS END OF YEAR
- ----------- ----------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ending May 31, 1999................... $278 $220 $251 $247
Year ending May 31, 1998................... 1 329 52 278
Year ending May 31, 1997................... -- 1 -- 1
</TABLE>

S-2
<PAGE>
INDEX TO EXHIBITS