NETSCAPE COMMUNICATIONS CORP, 10-K, 1998-03-27

NETSCAPE COMMUNICATIONS CORP
10-K, 1998-03-27
PREPACKAGED SOFTWARE

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 0-26310

NETSCAPE COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 94-3200270
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

501 EAST MIDDLEFIELD ROAD, MOUNTAIN VIEW, CALIFORNIA 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

Registrant's telephone number, including area code: (650) 254-1900
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Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, PAR VALUE $.0001 PER SHARE
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _

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

As of March 9, 1998, there were 98,501,803 shares of the Registrant's common
stock outstanding. The aggregate market value of such shares held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on March 9, 1998) was approximately
$1,276,143,576. Shares of the Registrant's common stock held by each executive
officer and director and by each entity that owns 5% or more of the Registrant's
outstanding common stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

DOCUMENTS INCORPORATED BY REFERENCE

Certain sections of the Registrant's definitive Proxy Statement for the 1998
Annual Meeting of Stockholders to be held on May 29, 1998 are incorporated by
reference in Part III of this Form 10-K to the extent stated herein.

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NETSCAPE COMMUNICATIONS CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS

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PAGE
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PART I.
Item 1. Business...................................................................................... 3
Factors Affecting Netscape's Business, Operating Results, and Financial Condition.......................... 20
Item 2. Properties.................................................................................... 36
Item 3. Legal Proceedings............................................................................. 36
Item 4. Submission of Matters to a Vote of Security Holders........................................... 36
Executive Officers of the Registrant....................................................................... 37

PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 39
Item 6. Selected Financial Data....................................................................... 40
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 41
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................... 49
Item 8. Financial Statements and Supplementary Data................................................... 49
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 49

PART III.
Item 10. Directors and Executive Officers of the Registrant............................................ 50
Item 11. Executive Compensation........................................................................ 50
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 50
Item 13. Certain Relationships and Related Transactions................................................ 50

PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 51
Signatures................................................................................................. 85
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PART I

THIS ANNUAL REPORT ON FORM 10-K ("FORM 10-K") FOR NETSCAPE COMMUNICATIONS
CORPORATION ("NETSCAPE") CONTAINS FORWARD-LOOKING STATEMENTS MADE WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE
ACT"). WORDS SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES,"
"SEEKS," "ESTIMATES," AND SIMILAR EXPRESSIONS IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED OR FORECASTED. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE
SECTION ENTITLED "FACTORS AFFECTING NETSCAPE'S BUSINESS, OPERATING RESULTS, AND
FINANCIAL CONDITION" ON PAGES 20 THROUGH 35 IN THIS FORM 10-K. READERS SHOULD
NOT UNDULY RELY ON FORWARD-LOOKING STATEMENTS, WHICH REFLECT ONLY THE OPINION OF
NETSCAPE AS OF THE DATE HEREOF. UNLESS REQUIRED BY LAW, NETSCAPE UNDERTAKES NO
OBLIGATION TO REVISE FORWARD-LOOKING STATEMENTS. READERS SHOULD ALSO CAREFULLY
REVIEW THE RISK FACTORS SET FORTH IN OTHER REPORTS OR DOCUMENTS NETSCAPE FILES
FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION, PARTICULARLY THE
QUARTERLY REPORTS ON FORM 10-Q AND ANY CURRENT REPORTS ON FORM 8-K.

ITEM 1. BUSINESS.

OVERVIEW

Netscape helps individuals and organizations harness the full power of the
Internet. Netscape develops, markets, and supports a broad software suite of
enterprise servers, commercial applications, clients, and development tools,
targeted primarily at corporate intranets and extranets. Netscape's software
allows users to share information, manage networks, and facilitate electronic
commerce. Netscape software is based on industry-standard protocols that can be
deployed across a variety of operating systems, platforms, and databases and
that can be interconnected with traditional client/server applications.
Netscape's Website, one of the most highly trafficked on the World Wide Web (the
"Web"), offers a variety of products and services.

Netscape was incorporated in Delaware in April 1994 and has acquired several
other businesses since its incorporation, some of which were incorporated before
Netscape. Netscape's principal executive office is located at 501 East
Middlefield Road, Mountain View, California 94043, and its telephone number is
(650) 254-1900. Netscape's common stock is listed on the Nasdaq National Market
under the symbol "NSCP." Netscape's home page can be located on the Web at
http://home.netscape.com. Except as otherwise noted herein, all references to
"Netscape" shall mean Netscape Communications Corporation and its consolidated
subsidiaries.

RECENT DEVELOPMENTS

BUSINESS COMBINATIONS AND JOINT VENTURES

BUSINESS COMBINATIONS. In December 1997, Netscape acquired KIVA Software
Corporation ("KIVA"), an enterprise application server software company.
Netscape purchased all of the outstanding capital stock of KIVA and assumed all
of KIVA's outstanding stock options. The KIVA acquisition was accounted for as a
pooling of interests. In June 1997, Netscape acquired Portola Communications,
Inc. ("Portola"), a company with expertise in high-performance messaging
systems, and DigitalStyle Corporation ("DigitalStyle"), a Web graphics tools
vendor. Netscape purchased all of the outstanding capital stock of each of
Portola and DigitalStyle and assumed all of their outstanding stock options. The
Portola and DigitalStyle acquisitions were accounted for as purchase
transactions.

JOINT VENTURES. In December 1997, Netscape acquired all of the membership
interests it had not previously owned in Actra Business Systems, LLC ("Actra"),
a supplier of commerce applications for conducting business-to-business and
business-to-consumer commerce on the Internet and a joint venture between
Netscape and GE Information Services, Inc. ("GEIS"). Netscape has folded Actra
into a new

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commercial applications division at Netscape. The Actra acquisition was
accounted for as a purchase transaction.

In August 1997, Netscape completed the merger of Navio Communications, Inc.
("Navio"), a joint venture of Netscape, with and into Network Computer, Inc.,
("NCI"), a wholly-owned subsidiary of Oracle Corporation ("Oracle"). The
surviving company, NCI, creates software for open standards-based network
computers and other Internet appliances that will be used in homes, businesses,
and schools. Oracle retained majority ownership in NCI, and Netscape retained a
minority equity interest in NCI. In June 1997, Netscape completed the formation
of a joint venture, Novonyx, Inc., ("Novonyx"), with Novell, Inc. ("Novell") to
develop and market certain products and services for networked enterprise
customers building intranet and extranet applications. Netscape acquired for
cash a minority ownership interest in the outstanding capital stock of Novonyx.

Netscape will continue to consider further acquisitions and investments and
to enter into further joint ventures and strategic alliances, some of which may
be material, when it believes such transactions will complement its overall
business strategy. However, such transactions, and in particular the
acquisitions of technology companies, are inherently risky and the recently
completed acquisitions or any such future transactions or joint ventures may not
be successful and could materially adversely affect Netscape's business,
operating results, or financial condition. See "Factors Affecting Netscape's
Business, Operating Results, and Financial Condition--Risks of Acquisitions and
Investments."

CHANGE IN FISCAL YEAR

In February 1998, Netscape announced that its Board of Directors approved a
change in Netscape's fiscal year to November 1 through October 31, effective for
the ten-month period ending October 31, 1998. Netscape previously reported
results on a calendar fiscal year basis of January 1 through December 31. The
Board's action reflects Netscape's increased focus on its enterprise software
and services business and is designed to align Netscape's financial reporting
practices with its business strategy by taking into account the seasonal buying
patterns of enterprise customers. Netscape will file a Quarterly Report on Form
10-Q for the quarter ending April 30, 1998, which will include January operating
results in conjunction with reporting financial results for the quarter ending
April 30, 1998.

DISTRIBUTION ANNOUNCEMENTS

In January 1998, Netscape launched a new software distribution program
called "Unlimited Distribution" to distribute several versions of its
market-leading Internet client software to all users without licensing fees.
Unlimited Distribution allows participants, including Original Equipment
Manufacturers ("OEMs"), Internet Service Providers ("ISPs"), telecommunications
companies, Web content providers, publishers, and software developers, to
distribute Netscape-Registered Trademark- Communicator Standard Edition or
Netscape Navigator-Registered Trademark- Stand-Alone Edition to their customers
and prospects with no licensing fees. An online application and agreement allows
participants to download multiple versions of Netscape Communicator Standard
Edition and Netscape Navigator Stand-Alone Edition. In addition to the standard
distribution plan, Netscape also plans to create a customization program that
allows key participants in the Unlimited Distribution program to create
customized versions of Netscape Navigator or Netscape Communicator for
redistribution to users. Netscape intends to provide customization tools to
qualified partners, which will enable them to add to the product their own logo,
home page, bookmarks, and other customization features. Concurrently with the
Unlimited Distribution program, Netscape permitted individual and business users
to download Netscape Communicator Standard Edition or Netscape Navigator
Stand-Alone Edition with no licensing fees. Although Netscape believes that the
Unlimited Distribution program and the free client initiative will add new users
of Netscape's client software, these programs may not succeed in generating new
users of Netscape's client software and, consequently, there are several risks
related to offering Netscape's client software without licensing fees. See
"Factors Affecting Netscape's Business, Operating Results, and Financial
Condition--Free Client Software."

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REPRICING OF EMPLOYEE STOCK OPTIONS

On January 28, 1998, Netscape gave certain employees, who held outstanding
options to purchase Netscape common stock at prices above the January 28, 1998
market closing price of $16.8125, the opportunity to change the exercise price
of such options to the market closing price on January 28, 1998. Netscape's
Board of Directors, Chief Executive Officer, and Executive Vice Presidents were
not eligible to and did not participate in the repricing. The repriced stock
options are on the same terms as the original options, except that: (1) the
exercise price of the repriced options is $16.8125; (2) the repriced options are
not exercisable (except on an optionee's death, disability, or involuntary
termination other than for cause) before July 28, 1998; and (3) repriced options
that were unvested as of January 28, 1998 will vest over a six-month longer
period than they would have absent their repricing. The Board of Directors
repriced these options in view of the intensely competitive environment for
obtaining, retaining, and motivating qualified employees in the technology
sector. Netscape's Board of Directors determined that the continued services to
Netscape of the participants in the option repricing program, the six-month
limitation of exercisability, and the six-month increase in the vesting period
described above constituted appropriate consideration for the option repricing
program.

RESTRUCTURING OF OPERATIONS

In December 1997, Netscape implemented a restructuring plan aimed at
reducing its cost structure, improving its competitiveness, and restoring
sustainable profitability. The restructuring plan resulted from decreased
revenue associated with certain Netscape products and Netscape's adoption of a
new strategic direction. The restructuring included reduction in workforce,
closure of certain facilities, write-down of operating assets to be disposed,
and payments on canceled third-party royalty contracts. Netscape incurred a
$23.0 million charge related to the restructuring in the fourth quarter of 1997.
At December 31, 1997, Netscape had approximately $3.7 million of accrued
restructuring costs, representing estimated facility and third-party royalty
payments to be paid in 1998. Additionally, Netscape incurred approximately $12.0
million for severance costs in January 1998, mostly related to the reduction of
the worldwide workforce of approximately 400 employees, or approximately 13% of
its workforce.

ROYALTY-FREE SOURCE CODE

Netscape announced in January 1998 that it plans to make publicly available
for royalty-free licensing on the Internet an early developer release of
Netscape Communicator 5.0 source code by March 31, 1998 and will make
subsequently developed source code available on the same terms. Netscape
anticipates that programmers outside of Netscape will contribute to the
development of the public source code base, which it expects will continue to be
the basis of Netscape's branded client products. While Netscape seeks to
accelerate development and free distribution of future versions of Netscape
Communicator to individuals and business customers, there are several risks
related to releasing this source code and Netscape's strategy may not succeed.
See "Factors Affecting Netscape's Business, Operating Results, and Financial
Condition--Royalty Free Source Code." Netscape will handle free source code
distribution with a license that allows source code modification and
redistribution and provides for free availability of source code versions.
However, the source code will not include third-party source code that Netscape
has licensed for inclusion in Netscape Communicator and it will not include
encryption code because of government restrictions. Netscape intends to create a
special Website known as mozilla.org where all interested parties can download
the source code, post their enhancements, take part in news-group discussions,
and obtain and share Netscape Communicator-related information with others in
the Internet community. Netscape will also continue to develop new technologies
and periodically offer certified and supported releases of its Netscape
Communicator and Netscape Navigator products, incorporating some of the best
features created by this community.

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RECENT PRONOUNCEMENTS REGARDING SOFTWARE REVENUE RECOGNITION

Statement of Position ("SOP") 97-2 "Software Revenue Recognition" was issued
in October 1997 by the American Institute of Certified Public Accountants.
Statement of Position 98-4 was issued in March 1998 which delays for one year
the implementation of a narrow provision of SOP 97-2. SOP 97-2 supersedes SOP
91-1 and is effective for transactions entered into for fiscal years beginning
after December 15, 1997. SOP 97-2 addresses software revenue recognition matters
primarily from a conceptual level and does not include specific interpretive and
implementation guidance. Once available, such detailed interpretive and
implementation guidance could lead to unanticipated changes in Netscape's
current revenue accounting practices, and such changes could be material to
Netscape's revenues and earnings. For example, certain product license
agreements executed by Netscape may not meet the revenue recognition criteria
under SOP 97-2 in the quarter in which such agreements are executed. As a
result, Netscape may meet or exceed its forecast of aggregate contracting
activity, but not meet its forecast for license revenues.

PRODUCTS

Netscape develops, markets, and supports a broad software suite of
enterprise servers, commercial applications, clients, and development tools,
targeted primarily at corporate intranets and extranets. Netscape's software
allows users to share information, manage networks, and facilitate electronic
commerce. Netscape software is based on industry-standard protocols that can be
deployed across a variety of operating systems, platforms, and databases and can
be interconnected with traditional client/server applications. Netscape's
open-network environment ("Netscape ONE-Registered Trademark-") facilitates the
building, deployment, and operation of crossware: on-demand applications that
run across networks and operating systems and that can be extended to external
partners and customers. Netscape ONE promotes a standards-based approach to
managing distributed objects on the network and serves as an alternative to
platform-specific application development. Netscape ONE incorporates
technologies such as JavaScript, HyperText Transfer Protocol ("HTTP"), and
HyperText Transfer Markup Language ("HTML"), among others, and, in combination
with the Common Object Request Broker Architecture ("CORBA"), permits developers
to write distributed applications and integrate information systems running on a
broad range of operating systems.

NETSCAPE SERVER SOFTWARE

NETSCAPE-REGISTERED TRADEMARK- SUITESPOT. Netscape SuiteSpot is a family of
award-winning server products that together with Netscape Communicator provide
enterprise customers with an integrated solution for publishing and managing
information, messaging and collaboration, and administering Internet
applications. Netscape currently markets its server products individually or
collectively through the Netscape SuiteSpot server software bundle, including
Netscape-Registered Trademark- SuiteSpot Standard Edition, Netscape-Registered
Trademark- SuiteSpot Professional Edition, and Netscape-Registered Trademark-
SuiteSpot Hosting Edition.

NETSCAPE SUITESPOT STANDARD EDITION. Netscape SuiteSpot Standard Edition is
designed to be an enterprise solution for Web publishing and content management,
messaging and collaboration, and administration and security. The following
server products and tools collectively comprise Netscape SuiteSpot Standard
Edition:

NETSCAPE-REGISTERED TRADEMARK- ENTERPRISE SERVER AND
NETSCAPE-REGISTERED TRADEMARK- ENTERPRISE SERVER PRO. This information
management server allows organizations to manage and publish
information. By supporting multiple platforms, databases, and document
types, Netscape Enterprise Server leverages existing investments in
hardware, applications, and information. Services such as Internet-based
access controls, automatic link management, and revision control are
built into Netscape Enterprise Server to allow workgroups to publish and
share documents. Netscape Enterprise Server Pro allows a comprehensive
platform for building and deploying database applications on an
intranet. It is a crossware application platform that lets developers
access Informix Corporation, Oracle,

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Sybase, Inc., DB2, and Open Data Base Connectivity ("ODBC")-enabled
databases using database access capabilities that are built on native
drivers.

NETSCAPE-REGISTERED TRADEMARK- MESSAGING SERVER. This server allows
users to deliver encrypted email messages with embedded sound, graphics,
video files, HTML forms, Java applets, and desktop applications.
Netscape Messaging Server is integrated with Netscape Communicator
software and dozens of other messaging clients, creating a messaging
system for corporate intranets and communications across the enterprise.

NETSCAPE-REGISTERED TRADEMARK- COLLABRA-REGISTERED TRADEMARK-
SERVER. This open standards-based discussion server allows group
collaboration and knowledge-sharing among teams both inside and outside
an organization. Users can create their own discussion groups to share
product development ideas, allow customers to discuss problems and
request information, check the status of requests and billing
information, track and distribute competitive information from the
field, and develop communities of interest around products and services.

NETSCAPE-REGISTERED TRADEMARK- CALENDAR SERVER. This server allows
a user to schedule meetings, appointments, and resources for a large
number of users. Updating information in real time enables users to view
a current calendar. Support for Internet mail enables users to receive
meeting notifications through email. Netscape Calendar Server provides
organizations with a scalable architecture enabling organizations to
support a large number of users per server and multiple networked
servers for even greater scalability.

NETSCAPE-REGISTERED TRADEMARK- DIRECTORY SERVER. This server allows
organizations to manage information shared across applications, such as
users, groups, and preferences. Advanced features such as selective
replication, strong authentication, and support for international
character-sets help organizations build effective and protected
extranets. Netscape Directory Server's support for Lightweight Directory
Access Protocol enables organizations to collaborate effectively both
within intranets and on extranets.

NETSCAPE SUITESPOT PROFESSIONAL EDITION. Netscape SuiteSpot Professional
Edition is designed to provide all the product features of Netscape SuiteSpot
Standard Edition plus the following management services, security features, and
search and replication capabilities:

NETSCAPE-REGISTERED TRADEMARK- CERTIFICATE SERVER. This server
allows security services such as single sign-on, message privacy, and
access control designed to safeguard intellectual property and ensure
confidential communications. Netscape Certificate Server integrates with
other Netscape products, enabling information technology professionals
to create and manage a public-key infrastructure that authenticates both
clients and servers using open standards-based digital certificates.

NETSCAPE-REGISTERED TRADEMARK- COMPASS SERVER. This server provides
a comprehensive set of tools that helps administrators gather and
organize the resources scattered across enterprise intranets so that
users can more easily find and retrieve information, whenever it is
needed. Netscape Compass Server also allows users to identify topics of
interest and receive a newsletter summary of relevant information from
an intranet and the Internet on a daily basis.

NETSCAPE-REGISTERED TRADEMARK- PROXY SERVER. This server provides
an industrial-strength infrastructure for caching and filtering Web
content. Organizations can reduce network traffic and user wait times by
using Netscape Proxy Server to distribute and manage information.
Netscape Proxy Server can help relieve bandwidth congestion at network
bottlenecks and enable users to productively access network resources.

NETSCAPE SUITESPOT HOSTING EDITION. Netscape SuiteSpot Hosting Edition is
designed to be a scalable, integrated suite of server software products that
allows ISPs and telecommunications companies to host a

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set of services including email, Internet browsing, Web publishing, and
discussion groups for individuals and organizations. Each Netscape SuiteSpot
Hosting Edition server is a product that is integrated with the rest of the
suite using open-standard protocols. It provides a scalable platform for
delivering new, premium services while simultaneously limiting the
infrastructural and maintenance costs associated with supporting an
ever-increasing customer base. The Netscape SuiteSpot Hosting Edition product
line is as follows: (a) Netscape Enterprise Server Hosting Edition, a Web
hosting server that facilitates creating, managing, and intelligently
distributing content and running intranet and Internet applications; (b)
Netscape Messaging Server Hosting Edition, a scalable hosting server that
facilitates sending, receiving, and managing email messages and that provides
centralized administration, scalability, performance, security, and remote
connectivity; (c) Netscape Collabra Server Hosting Edition, a hosting server
that facilitates news and collaboration by letting individuals and corporations
create, publish, and maintain news feeds and private and public discussion
groups; (d) Netscape Proxy Server Hosting Edition, a server that caches and
filters Web content, allowing ISPs and telecommunications companies to ease
network congestion, protect network content and infrastructure, and control
access to network resources; (e) Netscape Directory Server Hosting Edition, a
server that provides a single point from which service providers can add,
change, and delete user information and manage customers, servers, and services;
and (f) Netscape Mission Control Desktop, an application that allows service
provider system administrators centralized control over client configuration and
other system management functions. See "Netscape Client Software--Mission
Control Desktop."

NETSCAPE-REGISTERED TRADEMARK- APPLICATION SERVER. With the acquisition of
KIVA in December 1997, Netscape became a provider of application server software
for enterprise-class intranet, extranet, and Internet applications. See "Recent
Developments--Business Combinations and Joint Ventures." Netscape Application
Server is designed to provide the performance, availability, rapid development,
legacy integration, and manageability enterprises need to build and deploy
scalable intranet, extranet, and Internet business-critical solutions. Netscape
offers Netscape Application Server to Netscape customers developing and
deploying business-critical applications that reach beyond the company to
include partners, customers, and suppliers. The Netscape Application Server
product line includes the Netscape-Registered Trademark- Application Builder, a
development environment for building Java and business-critical applications,
and Netscape-Registered Trademark- Extension Builder, a tool-kit for building
server extensions to access legacy systems, client-server applications, and
third-party Internet services.

NETSCAPE-REGISTERED TRADEMARK- FASTTRACK SERVER. Netscape FastTrack Server
is designed to allow users to create, publish, and serve Web documents without
the complexity of a large Website. Netscape FastTrack Server provides a
crossware application platform that allows developers to access ODBC-enabled
databases using powerful relational database access capabilities. By supporting
Netscape ONE, Netscape FastTrack Server enables deployment of Web applications
that combine static and dynamic content, database access, and messaging.
Netscape FastTrack Server includes Netscape Communicator client software,
allowing users to create, edit, and publish Web documents. The Netscape
FastTrack Server also offers encryption features to restrict access to server
resources (such as applications, documents, and administrative tools), as well
as to encrypt the information that flows between the server and client. Flexible
access control allows users to select which resources to protect.

NETSCAPE COMMERCIAL APPLICATIONS. The Netscape-Registered Trademark-
CommerceXpert product family of electronic commerce solutions was developed by
Actra, a joint venture funded by Netscape and GEIS. In December 1997, Netscape
purchased from GEIS all of the outstanding membership interests in Actra not
owned by Netscape. See "Recent Developments--Business Combinations and Joint
Ventures." The Netscape CommerceXpert product family is designed to provide a
wide range of tools and a comprehensive architecture designed to help
organizations market, sell, service, and distribute products and services
online. The Netscape CommerceXpert solutions are based on the same open
protocols and scalable security architecture used for communications on the
Internet. These solutions enable organizations to create more secure Internet
commerce sites, such as online stores, malls, catalogs, publications, customer

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support centers, financial service sites, or entertainment sites. Moreover,
Netscape's electronic commerce products can interoperate with Electronic Data
Interchange ("EDI") networks and private value-added networks ("VANs") so that
even companies with proprietary systems can take advantage of online commerce.
The Netscape CommerceXpert product family includes the following commerce
application products:

NETSCAPE-REGISTERED TRADEMARK- ECXPERT. With Netscape ECXpert Internet
commerce software, companies are able to communicate and exchange information
within and beyond the networked enterprise. Netscape ECXpert is a solution for
business-to-business electronic commerce that is designed to safeguard data
communications over private and public networks as well as to provide flexible
integration with internal business applications. Netscape ECXpert provides
gateway facilities to EDI network vendors, allowing enterprises to expand their
EDI programs. This enables companies to take advantage of the Internet without
having to immediately migrate from the commerce systems they already use
throughout their supply chains.

NETSCAPE-REGISTERED TRADEMARK- SELLERXPERT. Netscape SellerXpert is a
comprehensive solution that integrates catalog, ordering, and payment
technology, plus a complete system for business-to-business commerce. Netscape
SellerXpert allows businesses to establish an online selling presence for their
corporation to sell products to existing and new customers, improve customer
service, and lower costs using online catalogs and automated sales-order
processing. Netscape SellerXpert provides order creation and tracking (which can
be customized to each business' policies and procedures), product catalogs for
rapid product searching and personalized views, and tiered membership services
for authenticating users and defining business organization members'
relationships and individual spending limits.

NETSCAPE-REGISTERED TRADEMARK- BUYERXPERT. Netscape BuyerXpert enables
purchasing professionals to set up an electronic collection of approved vendor
catalogs so that employees have one central resource for products and services.
While preserving corporate controls, Netscape BuyerXpert makes employee
self-service ordering a reality by giving employees the means to create,
approve, and track orders from their Web browser. It enables purchasing
professionals to improve productivity, reduce order processing costs, minimize
order cycle time, and take full advantage of volume discounts. Netscape
BuyerXpert is currently available in a public beta version and is planned to be
commercially released as a stand-alone product in the quarter ending April 30,
1998.

NETSCAPE-REGISTERED TRADEMARK- PUBLISHINGXPERT. Netscape PublishingXpert is
an integrated commerce-based solution that enables companies to quickly deploy
large-scale publishing, extranet, and multi-hosting applications. With Netscape
PublishingXpert, organizations are able to expand their presence on the Web to
sell, deliver, and manage premium content through an advanced set of
personalized content-management services. In addition, an integrated, open
standards-based architecture provides the flexibility to adapt and grow with
business needs.

NETSCAPE-REGISTERED TRADEMARK- MERCHANT SYSTEM. Netscape Merchant System
provides online retail management services. Netscape Merchant System helps
merchants set up and operate online storefronts or host multiple storefronts in
an Internet mall. Merchandising capabilities enable merchants to display
thousands of products and change product displays. A powerful underlying
framework efficiently handles critical transactions, order delivery, and
inventory management and can scale to handle hundreds of transactions
simultaneously. As a stand-alone storefront, part of an Internet mall, or an
integrated component of an organization's existing sales and order processing
systems, Netscape Merchant System can be tailored to match an organization's
requirements for handling transactions, shipping and sales tax charges, order
delivery, and purchase returns.

Licenses of Netscape's Server Software and Commercial Applications Software
accounted for 29.4%, 27.1%, and 36.4% of Netscape's total revenues in the years
ended December 31, 1995, 1996, and 1997, respectively.

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NETSCAPE CLIENT SOFTWARE

NETSCAPE NAVIGATOR-REGISTERED TRADEMARK-. Netscape Navigator is designed to
allow users to access information on intranets and the Internet. See "--Netscape
Communicator--Netscape Navigator." Netscape Navigator is now available either as
part of a set of enterprise components, collectively called Netscape
Communicator, or separately in a Stand-Alone Edition, each of which may be
downloaded from Netscape's Website without licensing fees. See "Recent
Developments--Distribution Announcements."

NETSCAPE-REGISTERED TRADEMARK- COMMUNICATOR. Netscape Communicator is
designed to be a components suite of open HTML-based client software that
integrates messaging, authoring, groupware, calendaring, and Web browsing tools
enabling users to communicate, share, and access information on intranets,
extranets, and the Internet. Netscape currently markets three versions of its
Netscape Communicator client software, Netscape Communicator Standard Edition,
Netscape Communicator Professional Edition, and Netscape Communicator Enhanced
Edition. The Netscape Communicator product line is as follows:

NETSCAPE COMMUNICATOR STANDARD EDITION. Netscape Communicator Standard
Edition is designed to allow users to send and receive email, participate in
discussion groups, use online conferencing, compose Web pages, and send instant
messages. In January 1998, Netscape announced that the Netscape Communicator
Standard Edition may be downloaded from Netscape's Website without licensing
fees. See "Recent Developments--Distribution Announcements." The following
components collectively comprise the Netscape Communicator Standard Edition:

NETSCAPE NAVIGATOR. This component allows access to information and
network applications on intranets, extranets, and the Internet. Netscape
Navigator offers a point-and-click graphical user interface that allows
users to browse the Internet's vast array of network resources and
participate in commerce across extranets and the Internet.

NETSCAPE-REGISTERED TRADEMARK- MESSENGER. This component allows
users to exchange email messages with virtually anyone on the Internet.
Netscape Messenger is integrated with Netscape Composer, allowing users
to create email messages that look like Web pages, complete with
graphics, images and even Java applets.

NETSCAPE-REGISTERED TRADEMARK- COLLABRA-REGISTERED TRADEMARK-. This
component allows users to have online discussions and collaborate on key
issues or solicit input from colleagues, reducing the need for
face-to-face meetings. Netscape Collabra brings the benefits of
newsgroups and online information exchange to workgroups, businesses,
and corporations.

NETSCAPE-REGISTERED TRADEMARK- COMPOSER. This component creates
HTML-based intranet documents, Web pages, and email messages. Because
Netscape Composer is integrated with other Netscape Communicator
components, Netscape Composer documents can be sent or displayed using
Netscape Messenger, Netscape Conference, and Netscape Collabra. Netscape
Composer allows users to publish documents to an intranet or Internet
document server with a single button click.

NETSCAPE-REGISTERED TRADEMARK- NETCASTER. This component allows
"push" delivery of intranet and Internet information to user desktops.
With Netscape Netcaster, users are able to subscribe to a content
"channel"--a content source much like a broadcast TV or radio
channel--and receive content that they can view offline. Netscape
Netcaster's broadcast, or "push," capabilities allow users to receive
information updates in the background while they work on other tasks.

NETSCAPE-REGISTERED TRADEMARK- CONFERENCE. This component allows
users to hold a conference call, share a whiteboard, or conduct a
text-based discussion as easily as they can send email or read newsgroup
postings. Netscape Conference is a real-time multimedia communications
tool for intranet and Internet users.

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NETSCAPE AOL INSTANT MESSENGER. This component allows Netscape
Communicator and America Online users to communicate in real time. With
the Netscape AOL Instant Messenger service, users in the workplace and
at home are able to send and respond quickly to personalized messages
without mail server delays.

NETSCAPE COMMUNICATOR PROFESSIONAL EDITION. Netscape Communicator
Professional Edition is designed for organizations that want to use open
standards-based software to coordinate scheduling of people and resources and
have centralized control of clients and servers in an enterprise environment.
Netscape Communicator Professional Edition is available on CD-ROM or from
Netscape's Website for a licensing fee. It includes the components of Netscape
Communicator Standard Edition as well as the following productivity components
for boosting organizational efficiency and reducing the cost of ownership of
intranets and extranets:

NETSCAPE-REGISTERED TRADEMARK- CALENDAR. This component allows
enterprise-wide calendaring and scheduling. With Netscape Calendar,
users can schedule meetings and reserve conference rooms or other
resources, all in real time across local and remote servers.

NETSCAPE-REGISTERED TRADEMARK- AUTOADMIN. This component allows
centralized management to install, deploy, and configure Netscape
Communicator. It allows central configuration of Netscape Communicator
client preferences; automatic downloads, installations, upgrades of
Netscape Communicator plug-ins and components; and the ability to
restrict the downloading of such components to those authorized.

NETSCAPE IBM HOST ON-DEMAND. This component uses the
industry-standard 3270 telnet protocol to provide Netscape Communicator
clients with intranet or Internet access to International Business
Machines ("IBM") host information. Co-developed by IBM and Netscape, IBM
Host On-Demand is a cross-platform, Java-based application that provides
intranet and Internet clients with 3270 access to applications and data
stores on IBM host systems.

NETSCAPE COMMUNICATOR ENHANCED EDITIONS. Each of the following products
integrate Netscape Communicator Standard Edition with utilities, plug-ins, or
account setup and connection software needed for modem-based access to the
Internet. The enhanced editions are available on CD-ROM for a licensing fee.
Netscape-Registered Trademark- Communicator Internet Access Edition allows home
or small business users to choose from a variety of ISPs to access the Internet.
Netscape-Registered Trademark- Communicator Deluxe Edition combines Netscape
Communicator Internet Access Edition with Norton AntiVirus Internet Scanner,
Net.Medic SE, JackHammer, Net-It Now! SE, Excite PAL, and several other
utilities and plug-ins to improve Internet communications for home or small
business users. Netscape-Registered Trademark- Communicator Publishing Suite
combines Netscape Communicator Deluxe Edition with NetObjects Fusion PE, Jasc
Paint Shop Pro, and Nova Web Explosion Sampler to give users the ability to
create and publish entire Websites.

NETSCAPE-REGISTERED TRADEMARK- MISSION CONTROL DESKTOP. Netscape Mission
Control Desktop allows administrators to build custom Netscape Communicator or
Navigator clients tailored to an organization's requirements and deploy them
throughout the enterprise. When used in conjunction with Netscape Communicator
Professional Edition, Netscape Mission Control Desktop allows administrators to
centrally manage client configurations and distribute new software through a
server-side configuration file. All of these capabilities are built on open
standards-based technologies such as JavaScript, HTTP, and Java Archive to allow
for widespread deployment.

Licenses of Netscape's client software accounted for 61.4%, 57.0%, and 35.1%
of Netscape's total revenues in the years ended December 31, 1995, 1996, and
1997, respectively.

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SERVICES

NETSCAPE NETCENTER

In 1994, Netscape developed and refined an innovative new way of
distributing software when it made the first copies of the Netscape Navigator
client software available for download over Netscape's Website. Today,
Netscape's Website, which now features Netscape Netcenter, is one of the most
heavily trafficked Websites in the world. Designed to provide information,
showcase products and services, and form the basis of an electronic marketplace,
Netscape's Website consists of multiple pages of information, each identified by
a Universal Resource Locator, or URL. Netscape Netcenter offers a variety of
products and services including access to: news and information, Netcenter
Commerce (where goods and services can be purchased), directories of interesting
sites on the Internet, Netscape and third-party software, a variety of product
and technical support information, and current news about Netscape and its
products. Netcenter consists of four main categories:

COMMERCE. Netcenter Commerce allows Netcenter subscribers to shop
conveniently from their desktops with many leading online merchants today.

SOFTWARE. Netcenter Software allows customers to purchase the latest
Netscape and partner software, related publications, and logo products.
Netscape's SmartUpdate program remembers which components subscribers have
installed and suggests new components to enhance their systems.

CONTENT. Netcenter Content is a resource for accessing information on the
Internet. Netcenter Content includes the following services: (i) Netscape
Business Journal, a one-stop source for industry news, resources, and research,
(ii) Netcaster Channel Finder, a service that brings the latest news and
information to the user's desktop, (iii) In-Box Direct, a service that brings
free subscriptions to electronic versions of leading newspapers and magazines,
(iv) Netsearch, a search and directory service, and (v) Netscape Guide by
Yahoo!, an Internet information navigation service.

COMMUNITY. Netcenter Community enables individuals and business
professionals to build relationships by communicating and exchanging information
on the Internet. Netcenter Professional Connections lets users participate in
discussion forums to learn about Web culture, online commerce, initial public
offerings, informative sites, and techniques for using the latest Web
technologies. Netscape AOL Instant Messenger, a component of the most recent
version of Netscape Communicator, lets users send messages that appear
instantaneously on another user's computer screen. Users can create a
personalized "Buddy List" to find out which of their friends, family, and
co-workers are online and exchange electronic messages. Netscape Virtual Office
lets users use the Internet to bring their business to the world with a
tailored, private, and security-enhanced intranet solution.

Revenues from Netscape's Website are derived from fees for Website
transactions, which include Web advertising, search and directory services,
trademark licensing, and other Web services. Netscape allows advertisers to
display their logo or message on a hyperlinked button with access to their
Websites. Netscape charges a fee for the advertising spots on its Website, which
varies depending on the specific page location and the number of visits to the
page.

Revenues from Netscape's Website accounted for 2.1%, 6.7%, and 17.8% of
Netscape's total revenues in the years ended December 31, 1995, 1996, and 1997,
respectively.

SUPPORT PROGRAMS

Netscape seeks to provide timely, high-quality technical support to meet the
diverse needs of its customers and partners and to facilitate the adoption and
use of its products.

Netscape SupportEdge is designed to provide customers worldwide with a suite
of technical support offerings. Customers can choose the Netscape SupportEdge
offering that best meets their needs, based on

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the size of their support staff and the expertise of their in-house team.
Payment options range from pay-as-you-go, incident-based support, to unlimited
annual support. Additionally, if an organization needs support for in-house
applications being developed on Netscape technology or for integrating Netscape
products into existing technology, the developer support option (available as
part of certain service programs) provides advice on coding approaches and
detailed help with Netscape ONE technologies. A technical support engineer gives
customers sample code and reviews a test case to help identify problems.

Netscape DevEdge-Registered Trademark- is designed to provide technical
information and marketing support developers need to stay competitive. Netscape
DevEdge offers memberships for developers creating software products, building
intranets, extranets, Websites, or simply trying to keep up with the latest
Web-based technologies. The Netscape DevEdge program is a developer's link to
Netscape and the community of developers building on the Netscape ONE platform.

PROFESSIONAL SERVICES

Netscape Professional Services provides end-to-end project management,
technology consulting and application development expertise to Netscape
customers. Established to deliver business solutions to organizations seeking an
innovative approach to the use of new technologies, Netscape Professional
Services offers architecture and design, infrastructure system implementation,
systems integration, and application development services. These solutions are
designed to address a client's technology and business requirements while
providing the training and knowledge required to create self-sufficiency. With
core competencies in information architecture and design, Internet commerce,
electronic messaging, and security services, Netscape Professional Services
works with Netscape engineering, product marketing, technical support, and
business partners to offer customers comprehensive Web-based solutions.

TRAINING

Netscape offers hands-on training courses and materials to resellers and
end-users covering software installation, configuration, and troubleshooting.
Netscape also offers multi-media courses and materials that cover Network and
Systems Administration, discussing the implementation and administration of Web
servers, the implementation of security for Websites, and networking
fundamentals. Other courses and materials cover Content and Site Development,
discussing fundamental and advanced HTML Website development techniques and
fundamental and advanced Java programming training designed to help developers
create interactive applications.

MARKETING AND DISTRIBUTION

MARKETING

Netscape uses a variety of marketing programs designed to stimulate demand
for its products and services to support the direct and indirect sales channels.
The key elements of Netscape's marketing strategy include:

MARKETING ON THE INTERNET. Netscape makes its products available for
evaluation and purchase through Netscape Netcenter. Certain customer information
is collected electronically through an automated registration process, creating
the basis for ongoing marketing of upgrades, new products, add-on products, and
merchandise. Netscape is also involved in various forms of electronic
advertising and electronic promotions on the Internet.

TARGET MARKETING. Netscape focuses direct marketing efforts on decision
makers in large organizations. Netscape addresses these customers through
profiling key accounts and identifying prospects with similar attributes. The
goal of these efforts is to identify potential buyers of Netscape's enterprise
software and services, create awareness of Netscape's product offerings
(including clients, servers, applications, and services), and generate leads for
follow-on sales.

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MARKETING TO PC USERS. Client products are marketed widely to PC users in
both the business and home PC market segments. In January 1998, Netscape
launched Unlimited Distribution, a program designed to distribute several
versions of its market-leading Internet client software to all users without
licensing fees. Unlimited Distribution allows participants including OEMs, ISPs,
telecommunications companies, Web content providers, publishers, and software
developers, to distribute Netscape Communicator Standard Edition or Netscape
Navigator Stand-Alone Edition to their customers and prospects with no licensing
fees. See "Recent Developments--Distribution Announcements."

DISTRIBUTION

Netscape has designed its distribution strategy to address the particular
requirements of its diverse enterprise and individual target customers. Netscape
distributes its products directly through a direct sales force, a telesales
force and Netscape Netcenter. Netscape distributes its products indirectly
through OEMs, Value Added Resellers ("VARs"), systems integrators, and software
retailers.

DIRECT SALES. Netscape's direct sales force targets primarily large
organizations, including telecommunications companies, manufacturers, retailers,
publishers, and financial service companies. Netscape believes that these
organizations are most likely to become the electronic merchants and information
publishers for commerce on the Internet. In addition, these organizations have a
substantial installed base of intranets and have been widely deploying Web
servers for internal enterprise applications. In certain instances, Netscape's
direct sales force works with complementary hardware OEMs, VARs, and systems
integrators to deliver complete solutions for major customers.

TELESALES. Netscape's telesales organization, based in Mountain View,
California, receives customer orders and proactively contacts potential
customers.

INTERNET SALES. Netscape offers its products and services electronically
via Netscape Netcenter.

OEMS. Netscape has established OEM relationships to leverage its sales
efforts. For example, Netscape has OEM reseller agreements with several leading
systems vendors to bundle Netscape's server or client software with certain of
their product offerings.

VARS AND SYSTEM INTEGRATORS. VARs and systems integrators customize,
configure, and install Netscape's software products with complementary hardware,
software, and services. In combining these products and services, these
resellers are able to deliver more complete Netscape-based solutions to address
specific customer needs. Netscape may also help these VARs and systems
integrators design customized applications to meet the unique requirements of
these customers.

RETAIL DISTRIBUTION. Netscape currently distributes its retail products
through a network of retail distributors in North America.

INTERNATIONAL

Netscape believes it is important to have an international presence and
intends to continue to conduct business in markets outside the United States
through a combination of subsidiaries and distributors. Netscape intends to
address this market through a variety of distribution and service partners.

PROPRIETARY RIGHTS

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products. Netscape generally enters into confidentiality or license agreements
with its employees, consultants, and vendors, and generally controls access to
and distribution of its software, documentation, and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use Netscape's products or technology without
authorization or to develop similar technology independently. In addition,
effective patent, trademark, trade secret, and copyright protection may be
unavailable or limited in certain foreign countries. To license its products,
Netscape relies in part on "shrink wrap" licenses that are not signed by the
end-user and, therefore, may be unenforceable under the laws of certain
jurisdictions. Despite Netscape's efforts to protect its proprietary rights,
unauthorized parties may copy aspects of Netscape's products or obtain and use
information that Netscape regards as proprietary. Policing unauthorized use of
Netscape's products is difficult and the steps taken by Netscape may not prevent
the misappropriation of its technology. In addition, litigation may be necessary
in the future to enforce Netscape's intellectual property rights, to defend the
validity of any Netscape patents, to protect Netscape's trade secrets, or to
determine the validity and scope of the proprietary rights of others. Such
misappropriation or litigation could result in substantial costs and diversion
of resources and the potential loss of intellectual property rights, which could
have a material adverse effect on Netscape's business, operating results, or
financial condition.

Netscape has received, and may continue to receive, notice of claims of
infringement of other parties' proprietary rights. Such claims may involve
Netscape's internally developed technology or technology and enhancements that
Netscape licenses from third parties, including enhancements incorporated into
Netscape Communicator in connection with the Royalty-Free Source Code program.
See "Factors Affecting Netscape's Business, Operating Results, and Financial
Condition--Royalty-Free Source Code" and
"--Uncertain Protection of Intellectual Property; Risks Associated with Licensed
Third-Party Technology." Any such claims could require Netscape to spend time
and money defending against them, and, if they were decided adversely to
Netscape, could cause Netscape to pay damages, to be subject to injunctions, or
to halt distribution of its products while it re-engineered them or sought
licenses to necessary technology (which might not be available on reasonable
terms). Any of these factors could materially adversely affect Netscape's
business, operating results, or financial condition. Moreover, Netscape could
also be subject to claims for indemnification resulting from infringement claims
made against its customers, which could increase its defense costs and potential
damages. Although Netscape is sometimes indemnified by third parties against
claims that licensed third-party technology infringes the proprietary rights of
others, indemnity may be limited, unavailable, or, where the third party lacks
sufficient assets or insurance, ineffectual. Netscape does not currently have
liability insurance to protect against the risk that its technology or licensed
third-party technology infringes the proprietary rights of others.

Netscape relies on technology that it licenses from third parties, including
software integrated with internally developed software and used in Netscape's
products to perform key functions. These third-party technology licenses may not
continue to be available to Netscape on commercially reasonable terms. The loss
of any of these technology licenses could delay or reduce product shipments
until equivalent technology could be identified, licensed, and integrated. Any
such delays or reductions in product shipments could materially adversely affect
Netscape's business, operating results, or financial condition.

COMPETITION

The market for software and services for intranets, extranets, and the
Internet is relatively new, intensely competitive, rapidly evolving, and subject
to rapid technological change. Netscape expects competition to continue and
increase in the future. Such competition could materially adversely affect
Netscape's business, operating results, or financial condition.

Netscape's current and potential competitors can be divided into three
groups: (i) Microsoft, (ii) other software competitors, and (iii) other Website
Competitors. See "Factors Affecting Netscape's Business, Operating Results, and
Financial Condition--Competition."

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MICROSOFT. Microsoft has a longer operating history, a much larger overall
installed customer base, a much larger number of employees, greater brand
recognition, and much greater financial, technical, marketing, public relations,
and distribution resources than does Netscape. Microsoft is developing and
selling products and services in both Internet-oriented software and Website
services.

INTERNET-ORIENTED SOFTWARE. Netscape's current products are designed around
certain open standards, and industry acceptance of competing standards advocated
by Microsoft and others could decrease the demand for Netscape's products.
Moreover, Microsoft actively promotes technologies and standards incompatible
with Netscape's products and other open-standards-based products. For example,
Microsoft is promoting its proprietary ActiveX technology as a method of writing
Windows-specific Websites viewable only in Internet Explorer. Microsoft is also
promoting an alternative to the 100% pure Java programming language for Internet
applications that are optimized for exclusive use with Microsoft products. If
Microsoft is successful in promoting widespread adoption of ActiveX, widespread
adoption of proprietary extensions of Java, or other proprietary standards,
Netscape's business, operating results, or financial condition could be
materially adversely affected.

Regarding both server and desktop software, Netscape believes that Microsoft
has used, and will continue to use, its dominant position to secure preferential
distribution and bundling contracts with third parties such as ISPs, online
service providers, VARs, and OEMs including third parties with whom Netscape has
relationships. Such preferential arrangements could reduce Netscape's market
share for both server and client software and materially adversely affect
Netscape's business, operating results, or financial condition.

INTERNET-ORIENTED SERVER SOFTWARE. Microsoft has been aggressively
developing and shipping its Windows NT server operating system ("Windows NT" or
"NT"), while adding Internet and intranet capabilities. Microsoft bundles its
Internet Information Server ("IIS") with Windows NT at no separately stated
additional cost to the purchaser. Further, Microsoft has made IIS available for
download from the Internet with no licensing fees. The next version of NT is
expected to include a Directory Server, a Proxy server, and an improved
Application Server, each of which would compete with Netscape servers and which
Microsoft may provide at no apparent additional cost to the purchaser.

Microsoft is also offering products in the commercial applications software
area, including products that compete with the Netscape CommerceXpert family of
products. The availability of such commercial applications products and NT
server products may cause price pressure on Netscape's CommerceXpert family of
products and may reduce Netscape's commercial application market share. Further,
Microsoft has released server products for ISPs and content providers to set up
Web servers and related services. The availability of such server products
targeted for sale to the ISP market is causing price pressure on Netscape's
SuiteSpot Hosting Edition family of products and may reduce Netscape's ISP
market share. Microsoft also offers Microsoft Exchange ("Exchange"), an email
and groupware server that operates in conjunction with Microsoft's Back Office
and Internet Explorer products. Although the retail list price of Exchange is
substantial, Microsoft has stated that it intends to take "non-economic returns"
on Exchange in order to build market share for Windows NT. In this vein,
Microsoft has been offering Exchange at little or no separately stated cost to
corporate customers and may choose to include Exchange as a free bundle in
upcoming versions of NT. These email and groupware products and pricing
practices are causing and may continue to cause pricing pressure on Netscape's
server products and client/server bundles and may reduce Netscape's market share
for such products. In addition, Microsoft is investing significantly in
localizing its enterprise software in non-English languages, which may be a
competitive threat as Netscape attempts to expand its international business.
All of the above Microsoft products and practices may materially adversely
affect Netscape's business, operating results, and financial condition.

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access to Microsoft's operating systems could be impeded, particularly if such
competitors do not obtain the application programming interfaces or other
technical information necessary to access Microsoft's operating systems in a
timely and effective fashion. Microsoft may also use other means to attempt to
restrict access to its operating systems. For example, Microsoft has asserted
and may continue to assert licensing or other restrictions that could restrict
access by competitors to its operating systems. In particular, Microsoft has
asserted that its Windows NT Workstation operating system is not meant to be
used as a server operating system for a Website. If Microsoft is successful in
restricting access to its operating systems, sales of Netscape's products and
Netscape's business, operating results, or financial condition could be
materially adversely affected.

INTERNET-ORIENTED DESKTOP SOFTWARE. Microsoft Windows ("Windows") is the
desktop operating system of approximately 90% of the desktop personal computers
now in use and is shipped with approximately 95% of new personal computers. As a
precondition of licensing Windows, Microsoft has required computer manufacturers
to accept and ship its Internet Explorer browser ("Internet Explorer"), which
competes with Netscape's Navigator and Communicator products. The United States
Department of Justice is currently challenging this licensing practice.
Microsoft also allows Internet Explorer to be downloaded for free over the
Internet, and offers Internet Explorer as a free product to distributors and
end-users, including distributors and end-users of Netscape's products.
Microsoft has also required installation and use of Internet Explorer in order
to use certain of its development tools, such as Visual C++, and its premium
groupware client, Outlook 98. Internet Explorer is also shipped with its
Microsoft Office suite of productivity applications, which also has a market
share of approximately 90% of the desktop office-suite market. Microsoft has
announced that future versions of its Microsoft Office Applications suite will
offer enhanced Internet and intranet capability that may depend on certain
functions of Internet Explorer. Microsoft is also preparing to ship Windows 98,
a version of its desktop operating system whose marketing is likely to heavily
feature the bundled Internet Explorer browser and other Internet client
software. If Microsoft's browser products are more tightly integrated with
Microsoft's operating systems, the ability of Microsoft's competitors, including
Netscape, to obtain effective access to Microsoft's operating systems could be
impeded, particularly if such competitors are not able to obtain the application
programming interfaces or other technical information necessary to access
Microsoft's operating systems in a timely and effective fashion. Even if such
access can be obtained, performance of such competitive products may be
hampered. Microsoft may also use other means to promote distribution of its
browser. For example, Microsoft may assert licensing or other restrictions that
could restrict access by competitors to its operating systems. Microsoft has
also entered into certain product licenses that have contained restrictions on
the licensees' rights to contract with Netscape and offered monetary and other
valuable incentives, such as presence on the Windows desktop, to licensees of
its browser. Such actions, together with Microsoft's aggressive marketing of
Internet Explorer, have reduced and may continue to reduce Netscape's share of
the browser market, which could materially adversely affect Netscape's business,
operating results, or financial condition. Specifically, a significant decline
in Netscape's share of the browser market could reduce not only Netscape's
remaining browser revenues, but also reduce demand for Netscape's server
products and the traffic to Netscape's Website.

WEBSITE SERVICES. Netscape Netcenter competes with various Microsoft-owned
Websites that Microsoft has indicated it may unite into a single site under a
program called "Microsoft Start." Microsoft Start may become the opening screen
for Windows users or operate in some other fashion that promotes Microsoft's
products and Website. In addition, Netscape believes that Microsoft may be using
co-marketing funds and other inducements to have Websites developed exclusively
for Internet Explorer or using technology that may only be accessed by Internet
Explorer. Internet Explorer also includes a desktop Internet portal including
links to a variety of Web content and commerce sites, which is activated and
viewable only by the user of a computer using Internet Explorer. The links
include not only Microsoft content (such as the Microsoft Network), but content
from third party providers who may be limited in their rights to contract with
Netscape as a condition of such linking. Such actions may materially adversely
affect Netscape's business, operating results, or financial condition.

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OTHER SOFTWARE COMPETITORS. In addition to Microsoft, several other
companies are also currently offering software products and services that
compete directly with Netscape's server products and Website services.

The competition in the Internet server market is broad across all classes of
server software. In addition to Microsoft, companies offering competing Web and
application server products for the Internet include IBM, Sun Microsystems, Inc.
("Sun"), Oracle, and NetDynamics. Other companies offering competing messaging
server products include Lotus (a subsidiary of IBM), which sells a Web server
based on its popular Notes group software program, and Novell, which sells
Groupwise based on its popular server operating system. Other companies that
offer or will offer competing directory server products include Sun, Novell,
IBM, and Oracle. Oracle's server products operate with its large installed base
of database software. Sun's products operate on its Solaris server operating
system. Other companies that offer server and client products that are or can be
bundled with operating systems or databases are particularly formidable
competition in the market for enterprise software. IBM is, in many cases,
willing to provide this server and client software to large customers at nearly
no charge as a way to win hardware and services business.

The competition in the electronic commerce ("e-commerce") market is also
intense. The Netscape CommerceXpert family of products facilitates the creation
and maintenance of online commerce Websites. Other companies that offer products
that compete with the Netscape CommerceXpert family of products include IBM,
Oracle, GEIS, Open Market, Inc., Ariba, CommerceOne, Sterling Commerce, Inc.,
BroadVision, Inc., Connect, Inc., and a wide variety of smaller competitors. In
particular, IBM is investing heavily in marketing, research and development for
e-commerce applications. It is likely that IBM will be willing to provide this
functionality to large customers at nearly no charge as a way to win hardware
and services business. Any of the above factors could materially adversely
affect Netscape's business, operating results, and financial condition.

Competitive factors in the market for enterprise software and services
include core technology, breadth of product features, product quality, marketing
and distribution resources, pricing, and customer service and support. Except as
set forth above, Netscape believes it presently competes favorably with respect
to each of these factors. The market and competition are still new and rapidly
emerging, especially the enterprise software market, and Netscape may not be
able to compete successfully against current or future competitors. Moreover,
this competition could result in price reductions of Netscape's products, loss
of market share, or other material adverse effects on Netscape's business,
operating results, or financial condition.

OTHER WEBSITE COMPETITORS. Netscape expects the market for Web-based
services, to the extent it continues to develop, to be intensely competitive.
Netscape Netcenter offers a variety of Web-based services. See
"Services--Netscape Netcenter." In addition to the Microsoft Websites, Netcenter
competes with Yahoo!, Inc., Excite, Inc., Infoseek Corporation, America Online,
Inc., and other entities that sponsor or maintain high-traffic Websites, online
services, or Web navigation services. Many of these companies offer
informational and community features, such as news, stock quotes, sports
coverage, Yellow Pages and e-mail listings, weather news, and bulletin board
listings, that compete with the services offered by Netscape Netcenter.

Netscape believes that the principal competitive factors in the Website
markets are brand recognition, ease of accessibility and use, comprehensiveness,
independence, dependability, and quality and variety of content. Except as set
forth above, Netscape believes it competes favorably with respect to many of
these factors. In the future, Netscape Netcenter expects to face competition in
various special interest, demographic, and geographic markets. Netscape
Netcenter's competitors may develop Web-based services that are superior to
those of Netscape Netcenter or they may achieve greater market acceptance than
Netscape Netcenter. Competition among Web-based service providers could result
in significant price competition
and reductions in Web-based revenues. Moreover, several of Netscape's current
and potential competitors

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in this market have greater financial, technical, marketing, and managerial
resources than Netscape. Accordingly, Netscape may not be able to compete
successfully, which could materially adversely affect Netscape's business,
operating results, and financial condition.

In addition to the Web-based service providers, Netscape also competes with
traditional forms of offline media such as television, radio, and print for a
share of companies' total marketing and advertising budgets. The intense
competition in the sale of Web-based advertising makes it difficult to project
future levels of Web-based advertising revenues that will be realized generally
or by any specific company. Competition among current and future suppliers of
Internet services or Websites, as well as competition with traditional media for
marketing functionality, could result in significant price competition and
reductions in Netscape's Web-based service revenues, materially adversely
affecting Netscape's business, operating results, and financial condition.

RESEARCH AND DEVELOPMENT

Netscape's current research and development efforts are focused on new
products, product enhancements, and adaptations of existing products to new
operating systems. Netscape has addressed the need to develop new products,
enhancements, and adaptations through its internal development efforts, as well
as through acquisitions of other companies and the licensing of third-party
technology. However, such new products, product enhancements, or product
adaptations may not be made commercially available as planned or otherwise on a
timely and cost-effective basis, and if introduced, may not achieve market
acceptance. See "Factors Affecting Netscape's Business, Operating Results, and
Financial Condition-- Product Development and Technological Change." Netscape
believes that significant investments in research and development are required
for it to remain competitive. While Netscape intends to continue to invest a
significant percentage of its total revenues in research and development, a
number of Netscape's competitors are in a position to expend substantially more
absolute dollars on research and development than Netscape. Netscape's research
and development expenditures were $26.8 million, $83.9 million, and $129.9
million in the years ended December 31, 1995, 1996, and 1997, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Research and Development" and "--Purchased In-Process Research and
Development and Merger Related Charges."

EMPLOYEES

As of February 28, 1998, Netscape had approximately 2,310 regular employees,
and approximately 175 temporary or part-time employees and contractors. None of
Netscape's employees is represented by a labor union. Netscape has not
experienced any work stoppages and considers its relations with its employees to
be good.

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FACTORS AFFECTING NETSCAPE'S
BUSINESS, OPERATING RESULTS, AND FINANCIAL CONDITION

IN ADDITION TO OTHER INFORMATION IN THIS FORM 10-K THE FOLLOWING RISK
FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING NETSCAPE AND ITS BUSINESS
BECAUSE SUCH FACTORS CURRENTLY MAY HAVE A SIGNIFICANT IMPACT ON NETSCAPE'S
BUSINESS, OPERATING RESULTS, AND FINANCIAL CONDITION. AS A RESULT OF THE RISK
FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS FORM 10-K, ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE PROJECTED IN ANY FORWARD-LOOKING STATEMENTS.

POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS

As a result of Netscape's relatively limited operating history and recent
acquisitions, Netscape does not have relevant historical financial data for a
significant number of periods on which to base planned operating expenses.
Accordingly, Netscape's expense levels, which are to a large extent fixed, are
based in part on its expectations as to future revenues. In addition, Netscape
typically operates with minimal backlog, therefore, quarterly sales and
operating results generally depend on the volume, timing, and fulfillment of
orders received within the quarter, which are difficult to forecast. Netscape
typically recognizes the majority of its revenues toward the end of each
quarter. Accordingly, Netscape may not be able to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall, such as the
unexpected revenue shortfall Netscape experienced in the fourth quarter of 1997.
As it has previously stated, while Netscape expects to incur short-term
operating losses as it realigns its business model, Netscape believes it is well
positioned to return to profitability. In the future, any significant shortfall
of demand for Netscape's products and services in relation to Netscape's
expectations would have an immediate material adverse effect on Netscape's
business, operating results, and financial condition. Moreover, Netscape may:
(i) increase its operating expenses to exploit the market opportunity for its
products and services, fund greater levels of research and development, increase
its sales and marketing operations, develop new distribution channels, improve
its operational and financial systems, and broaden its customer support
capabilities and (ii) continue to incur significant merger-related charges and
other increases in operating expenses associated with recently completed and
future acquisitions. To the extent that such expenses precede or are not
subsequently followed by increased revenues, Netscape's business, operating
results, and financial condition will be materially adversely affected.

Netscape expects to experience significant fluctuations in operating results
that may be caused by a variety of factors, including: (i) varying demand for
Netscape's products and services, (ii) increasing complexity of products with
higher prices and longer sales cycles, (iii) the timing of the introduction or
enhancement of products and services by Netscape, Microsoft, or other
competitors, (iv) market acceptance of new products and services, (v) the timing
and size of individual license transactions (particularly to enterprise
customers who may attempt to delay closing transactions until the end of a
fiscal quarter as a negotiating tactic), (vi) price changes by Netscape,
Microsoft, or other competitors (such as the free client initiative announced by
Netscape in January 1998), (vii) the timing, size, and number of Website
transactions, (viii) seasonal trends in Internet usage and advertising
placements, (ix) the addition or loss of Website advertisers, (x) the level of
user traffic on Netscape's Website, (xi) the amount and timing of capital
expenditures and other costs relating to the expansion of Netscape's operations,
(xii) the mix of distribution channels through which products are sold, (xiii)
the mix of products and services sold, (xiv) the mix of international and North
American revenues, (xv) litigation-related costs, and (xvi) general economic
conditions. In 1997, fourth quarter operating results were adversely impacted by
lower than expected revenues associated with certain of Netscape's enterprise
software products (some of which was attributable to competition and longer
sales cycles associated with more complex products).

As Netscape becomes increasingly focused on larger sales of enterprise
software products, including Netscape Application Server, the Netscape
CommerceXpert family of products, and Netscape's other enterprise software
products, quarterly operating results may fluctuate due to the timing of revenue
from

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such large sales. See "--Need to Manage Evolving Market; Product Introductions
and Transitions." While Netscape intends to pursue multiple sales opportunities
with respect to these enterprise products, if single, large sales of these
products become a larger percentage of revenue, the loss or deferral of one or
more significant sales could have a material adverse effect on Netscape's
business, results of operations, or financial condition, as it did in the fourth
quarter of 1997.

In addition, as a strategic response to changes in the competitive
environment, Netscape may from time to time make certain pricing or marketing
decisions (such as the free client initiative announced in January 1998) or
enter into business combinations (such as the Portola, DigitalStyle, Actra, and
KIVA business combinations) that could have a material adverse effect on
Netscape's business, operating results, or financial condition. See "--Free
Client Software" and "--Risks of Acquisitions and Investments." As a result,
Netscape believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as any indication
of future performance. Netscape's revenues are also likely to fluctuate due to
factors that impact the organizations that are prospective customers of
Netscape's enterprise products. Expenditures by these organizations tend to vary
in cycles that reflect overall economic conditions and budgeting and buying
patterns. See "--Year 2000." Netscape's business would be adversely affected by
a decline in the economic prospects of its customers or the economy generally,
which could alter current or prospective customers' capital spending priorities
or budget cycles or extend Netscape's sales cycle with respect to certain
customers. In addition, many large organizations defer capital expenditures
beyond the first calendar quarter, meaning that Netscape may realize lower
revenue from sales in its first two fiscal quarters than in later quarters of
the year. For these reasons, among others, Netscape may not be able to attain
profitability on a quarter-to-quarter basis. Because of all of the foregoing
factors, it is likely that in some future quarters Netscape's operating results
will again be below the expectations of public market analysts and investors,
likely reducing the price of Netscape's common stock.

FREE CLIENT SOFTWARE

In January 1998, Netscape launched a program to distribute Netscape
Communicator Standard Edition and Netscape Navigator Stand-Alone Edition with no
licensing fees. See "Recent Developments-- Distribution Announcements." Although
Netscape believes that the free client distribution program will increase the
number of new users of Netscape's client software, there are risks associated
with providing Netscape's client software without licensing fees. For example,
Netscape's stand-alone client revenues have decreased as a percentage of total
revenues in each of the last three years and will likely continue to decrease
substantially in future periods as a result of the free client distribution
program, which will increase the importance of growth in other areas of
Netscape's business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Client Stand-Alone Revenues." Additionally,
as part of Netscape's software distribution program, qualified partners are able
to customize certain aspects of Netscape Communicator, including removing or
changing default URLs in Netscape Communicator, which currently drive user
traffic to Netscape Netcenter. See "Recent Developments--Distribution
Announcements." If such qualified partners remove or change the defaults to
non-Netscape URLs, Netscape Netcenter may experience a reduced amount of user
traffic and such reduction in traffic could have a material adverse effect on
Netscape's business, operating results, or financial condition. See
"--Reliance on Website Revenues; Uncertain Adoption of Web as an Advertising
Medium."

Netscape has experienced and may continue to experience greater difficulty
and longer collection cycles with respect to certain accounts receivable that
were outstanding prior to the announcement of the free client initiative.
Netscape has spent and may continue to spend time and resources collecting those
accounts receivable. Netscape has increased its allowance for bad debt and
believes its reserves are sufficient. However, the preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions, including the bad debt reserve,
that affect the amounts in the financial statements. Actual results could differ
from those estimates.

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ROYALTY-FREE SOURCE CODE

Netscape announced in January 1998 that it plans to make publicly available
over the Internet for licensing on a royalty-free basis an early developer
release of Netscape Communicator 5.0 source code and that it will make
subsequently developed source code available on the same terms. See "Recent
Developments--Royalty-Free Source Code." Through this action, Netscape seeks to
accelerate development and free distribution of future versions of Netscape
Communicator to individuals and business customers. Netscape anticipates that
programmers outside of Netscape will contribute to the development of the public
source code base, which it expects will continue to be the basis of Netscape's
branded client products. Netscape's decision to make its source code available
for royalty-free licensing is, however, unparalleled in the revenue-producing
software community, and thus involves risks that cannot be fully known at this
time. For example, only a limited number of developers may design enhancements
to the source code, developers may not contribute such enhancements to the
public source code base, proposed enhancements may not meet Netscape's quality
specifications, proposed enhancements may not address Netscape's design goals
for Netscape Communicator, the free source code may lead to a proliferation of
incompatible or competitive products (potentially creating brand and market
confusion), or Netscape's competitors may attempt to incorporate certain
competitive design advantages of Netscape Communicator into their own products.
If any of the foregoing were to occur, the demand for Netscape Communicator and
Netscape's other enterprise software products may decrease and Netscape's
ability to maintain a commercial licensing program could be adversely impacted,
which could have a material adverse effect on Netscape's business, results of
operations, or financial condition.

Netscape's engineering organizations may have difficulties adjusting to the
engineering practices required to prosper under a development model based on a
public source code base, which differs from Netscape's previous model of
developing software internally. Netscape may also incur various expenses
administering the public source code base and reviewing and performing
quality-assurance tests on proposed enhancements. Further, if Netscape were to
fail to maintain the public source code base in a form attractive to the
majority of the developer community, alternative versions of that source code
base could become the focus of outside developers' efforts, which could reduce
the market share of Netscape Communicator and Netscape's other enterprise
software products, increase demand for modifications to Netscape's other
products to make them compatible with alternative versions, or adversely impact
Netscape's ability to maintain a commercial licensing program. Any of the
foregoing factors could materially adversely affect Netscape's business, results
of operations, or financial condition.

Netscape will initiate source code distribution under a license agreement,
that allows source code modification and redistribution and provides for free
availability of source code versions. See "Recent Developments--Royalty-Free
Source Code." As Netscape accepts code enhancements from the development
community and ultimately incorporates such enhancements into Netscape
Communicator, there is a risk that such enhancements will infringe the
proprietary rights of third parties. Although Netscape's license requires
contributing developers to disclose known third-party claims, intellectual
property claims may still be made against Netscape, for which Netscape may not
be indemnified. See "--Uncertain Protection of Intellectual Property; Risks
Associated with Licensed Third Party Technology." Additionally, while Netscape
does not believe that its products infringe the proprietary rights of any third
parties, disclosure of the source code may provide a useful discovery tool for
individuals or organizations interested in initiating an intellectual property
claim against Netscape. Irrespective of the merits of such claims, Netscape
could spend significant time and money defending such claims, which could have a
material adverse effect on its business, operating results, or financial
condition. See "--Uncertain Protection of Intellectual Property; Risks
Associated with Licensed Third Party Technology."

COMPETITION

The market for software and services for intranets, extranets, and the
Internet is relatively new, intensely competitive, rapidly evolving, and subject
to rapid technological change. Netscape expects

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competition to continue and increase in the future. Such competition could
materially adversely affect Netscape's business, operating results, or financial
condition.

Netscape's current and potential competitors can be divided into three
groups: (i) Microsoft, (ii) other software competitors, and (iii) other Website
Competitors.

MICROSOFT. Microsoft has a longer operating history, a much larger overall
installed customer base, a much larger number of employees, greater brand
recognition, and much greater financial, technical, marketing, public relations,
and distribution resources than does Netscape. Microsoft is developing and
selling products and services in both Internet-oriented software and Website
services.

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attempts to expand its international business. All of the above Microsoft
products and practices may materially adversely affect Netscape's business,
operating results, and financial condition.

Netscape believes that Microsoft has also created competitive advantages for
its server products by bundling these products with its operating systems. If
Microsoft more tightly integrates its server products with its operating
systems, the ability of Microsoft's competitors, including Netscape, to obtain
effective access to Microsoft's operating systems could be impeded, particularly
if such competitors do not obtain the application programming interfaces or
other technical information necessary to access Microsoft's operating systems in
a timely and effective fashion. Microsoft may also use other means to attempt to
restrict access to its operating systems. For example, Microsoft has asserted
and may continue to assert licensing or other restrictions that could restrict
access by competitors to its operating systems. In particular, Microsoft has
asserted that its Windows NT Workstation operating system is not meant to be
used as a server operating system for a Website. If Microsoft is successful in
restricting access to its operating systems, sales of Netscape's products and
Netscape's business, operating results, or financial condition could be
materially adversely affected.

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using technology that may only be accessed by Internet Explorer. Internet
Explorer also includes a desktop Internet portal including links to a variety of
Web content and commerce sites, which is activated and viewable only by the user
of a computer using Internet Explorer. The links include not only Microsoft
content (such as the Microsoft Network), but content from third party providers
who may be limited in their rights to contract with Netscape as a condition of
such linking. Such actions may materially adversely affect Netscape's business,
operating results, or financial condition.

OTHER SOFTWARE COMPETITORS. In addition to Microsoft, several other
companies are also currently offering software products and services that
compete directly with Netscape's server products and Website services.

OTHER WEBSITE COMPETITORS. Netscape expects the market for Web-based
services, to the extent it continues to develop, to be intensely competitive.
Netscape Netcenter offers a variety of Web-based services. See
"Services--Netscape Netcenter." In addition to the Microsoft Websites, Netscape
Netcenter competes with Yahoo!, Inc., Excite, Inc., Infoseek Corporation,
America Online, Inc., and other entities that sponsor or maintain high-traffic
Websites, online services, or Web navigation services. Many of these companies
offer informational and community features, such as news, stock quotes, sports
coverage, Yellow Pages and e-mail listings, weather news, and bulletin board
listings, that compete with the services offered by Netscape Netcenter.

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content. Except as set forth above, Netscape believes it competes favorably with
respect to many of these factors. In the future, Netscape Netcenter expects to
face competition in various special interest, demographic, and geographic
markets. Netscape Netcenter's competitors may develop Web-based services that
are superior to those of Netscape Netcenter or they may achieve greater market
acceptance than Netscape Netcenter. Competition among Web-based service
providers could result in significant price competition and reductions in
Web-based revenues. Moreover, several of Netscape's current and potential
competitors in this market have greater financial, technical, marketing, and
managerial resources than Netscape. Accordingly, Netscape may not be able to
compete successfully, which could materially adversely affect Netscape's
business, operating results, and financial condition.

NEED TO MANAGE EVOLVING MARKET; PRODUCT INTRODUCTIONS AND TRANSITIONS

Netscape's software business initially was characterized by relatively short
sales cycles, relatively small initial sales orders, relatively simple uses for
its software, short product development cycles, and low aggregate royalty
payments to third parties for embedded technology. However, Netscape has evolved
and expanded its product lines to focus on sales to enterprise software
customers. In the second quarter of 1997, Netscape released Netscape
Communicator and Netscape SuiteSpot, both of which were targeted for the
enterprise software market. In September 1997, Netscape initiated commercial
distribution of the Netscape CommerceXpert family of software, an integrated
family of Internet commerce application solutions for linking people and
businesses over extranets and the Internet. The Netscape CommerceXpert family
includes Netscape ECXpert, Netscape SellerXpert, Netscape BuyerXpert, Netscape
MerchantXpert, and Netscape PublishingXpert (collectively, "Netscape
CommerceXpert"). See "Netscape Server Software--Netscape Commercial
Applications." In February 1998, Netscape initiated commercial distribution of
Netscape Application Server software, a scalable Internet application server for
deploying business-critical applications on intranets, extranets, and the
Internet. See "Netscape Server Software--Netscape Application Server." As a
result of these new product introductions, Netscape's business has been, and
will continue to be, characterized by longer sales cycles, larger initial sales
orders, more complex uses of its software, longer product development cycles,
and higher aggregate royalty payments to third parties for embedded technology.
Netscape has relatively limited experience with these types of sales, and
Netscape may not be able to successfully manage this evolution in its business.
Failure to successfully manage this evolution could have a material adverse
effect on Netscape's business, operating results, or financial condition.
Although Netscape Application Server and Netscape CommerceXpert complement
Netscape's existing product lines, these new products and Netscape's enterprise
software products represent a significant product transition for Netscape. There
are several risks inherent in such a product transition:

POSSIBLE PRODUCT DEFECTS. Enterprise software products as complex as
Netscape Application Server, Netscape CommerceXpert, and Netscape's other
enterprise software products frequently contain errors or bugs, especially when
first made commercially available. Although Netscape conducts extensive product
testing, Netscape has in the past released products that contain such defects.
Despite testing by Netscape and by current and potential customers, errors or
bugs may be discovered after Netscape Application Server, Netscape
CommerceXpert, and Netscape's other enterprise software products are installed
and used by customers, which could result in delay or loss of revenue, delay in
market acceptance, diversion of development resources, damage to Netscape's
reputation, or increased service and warranty costs, any of which could have a
material adverse effect on Netscape's business, operating results, or financial
condition.

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RISKS REGARDING MARKET ACCEPTANCE. Netscape Application Server, Netscape
CommerceXpert, and Netscape's other enterprise software products may not achieve
market acceptance or become widely adopted. The market for enterprise software
products has only recently begun to develop, is evolving rapidly, and is
characterized by an increasing number of market entrants who have introduced or
developed products and services for communication, collaboration and commerce
over intranets, extranets, and the Internet. Demand for recently introduced
products and services is subject to a high level of uncertainty. Moreover,
Netscape has less name recognition in the enterprise software product markets
than most of its competitors and has less experience than its competitors in
selling to this market. Market acceptance of Netscape Application Server,
Netscape CommerceXpert, and Netscape's other enterprise software products could
also be limited by how Netscape prices and supports these products. Netscape has
hired and will likely continue to hire and extensively train sales and support
personnel for these products, which require specialized support Netscape has not
previously been required to provide. Netscape may not be able to hire and train
such personnel or otherwise provide appropriate support.

NEED TO EXECUTE NEW AND DIFFICULT TYPE OF SALE. In order for Netscape
Application Server, Netscape CommerceXpert, and Netscape's other enterprise
software products to achieve market acceptance, Netscape will need to continue
to adjust to longer sales cycles and execute a different type of sale than it
has historically. Sales of these products are expected to be made predominately
to large companies, institutions, and government entities. These types of
customers generally commit significant resources to an evaluation of enterprise
software and require the vendor to expend substantial time, effort, and money
educating them about the value of the vendor's solution. As a result, sales to
these types of customers generally require an extensive sales effort throughout
the organization, and often require final approval by an executive officer or
senior level employee. Netscape has experienced and will likely continue to
experience delays following initial contact with a prospective customer and
expend substantial funds and management effort in connection with these sales.
In the fourth quarter of 1997, these longer, more complex sales contributed to
lower than anticipated revenues in the quarter. Netscape has very little
experience with these types of sales, and Netscape may not be able to execute
such sales. In order to accomplish these new, difficult, and lengthy sales,
Netscape will be required to restructure its direct sales force, extensively
train and effectively manage its sales personnel, invest greater resources in
the sales effort, and educate the indirect channels. Netscape may not be able to
accomplish any of the foregoing on a timely and cost-effective basis. Failure to
do so could have a material adverse effect on Netscape's business, operating
results, or financial condition. Netscape will need to add trained technical
personnel to help it implement solutions for its enterprise software customers
relating to Netscape Application Server, Netscape CommerceXpert, and Netscape's
other enterprise software products. Personnel with the sufficient level of
expertise and experience for these positions are in great demand, and Netscape
may not be able to hire and retain a sufficient number of qualified personnel
for these purposes. Failure to do so could have a material adverse effect on
Netscape's business, operating results, or financial condition.

FLUCTUATIONS IN OPERATING RESULTS FROM ENTERPRISE SOFTWARE SALES. Revenues
from sales of Netscape Application Server, Netscape CommerceXpert, and
Netscape's other enterprise software products are expected to continue to
fluctuate substantially from quarter to quarter as a result of the timing of
significant orders. Moreover, because the procurement process of Netscape's
customers generally takes a significant amount of time from initial contact to
order placement and may involve competing capital budget considerations, sales
of Netscape's enterprise software products will continue to be difficult to
predict. If single, large sales of these products become a larger percentage of
revenue, the loss or deferral of one or more significant sales could have a
material adverse effect on quarterly results of operations as in the fourth
quarter of 1997, particularly if there are significant sales and marketing
expenses associated with the deferred sale. While Netscape intends to pursue
multiple sales opportunities with respect to these enterprise software products,
Netscape may experience fluctuations in revenue. See
"--Potential Fluctuations in Quarterly Results."

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COMPETITION; MANAGEMENT OF OPERATIONS. With the introduction of Netscape
Application Server and Netscape CommerceXpert, Netscape will face new
competition from providers of similar products, many of whom have longer
operating histories, larger installed customer bases, existing relationships
with prospective enterprise customers and significantly greater financial,
technical, marketing, public relations, and distribution resources than
Netscape. Netscape's future success will depend to a large degree upon its
ability to address the increasingly sophisticated needs of its customers in the
face of such intense competition, and Netscape may not be able to compete
successfully in this market, particularly given the advantages of many of its
competitors. See "--Competition." Moreover, Netscape's focus on new product
lines could reduce the focus on existing products, which could result in lower
sales of such products. If this were to occur, it could have a material adverse
effect on Netscape's business, operating results, or financial condition. In
addition, expansion of Netscape's product line will require more management
attention. This may place a significant strain on Netscape's management and
operations. Netscape's inability to effectively compete or manage its expanding
product line would have a material adverse effect on Netscape's business,
results of operations, and financial condition.

PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE

Netscape has derived and expects to continue to derive the majority of its
total revenues from licensing its software and selling associated services.
Accordingly, broad acceptance of Netscape's software products and services by
customers is critical to Netscape's future success. Netscape's future success
will depend on its ability to design, develop, test, and support new software
products and enhancements that meet changing customer needs and respond to
technological developments and emerging industry standards on a timely and
cost-effective basis. Netscape may not successfully identify new product
opportunities and develop and bring new products to market in a timely and
cost-effective manner. Further, products or technologies developed by others may
render Netscape's products or technologies obsolete or noncompetitive. Netscape
has addressed the need to develop new products and enhancements through its
internal development efforts and through acquisitions of other companies and the
licensing of third-party technology. See "Recent Developments--Business
Combinations and Joint Ventures." Acquiring other companies and licensing
third-party technology involve numerous risks. See "--Risks of Acquisitions and
Investments" and "--Uncertain Protection of Intellectual Property; Risks
Associated with Licensed Third Party Technology."

The failure of Netscape's new product development efforts could have a
material adverse effect on Netscape's business, operating results, or financial
condition. Netscape's current products are designed around certain standards and
current and future sales of Netscape's products will partly depend on widespread
adoption of such standards by enterprises, consumers, developers, and other
software providers. Widespread adoption of a standard not supported by Netscape
could have a material adverse effect on Netscape's business, operating results,
or financial condition. In addition, Netscape may experience difficulties that
could delay or prevent the successful development, introduction, or marketing of
new products and enhancements, such as Netscape Application Server and Netscape
CommerceXpert. Despite testing by Netscape and by current and potential
customers, errors may be found in Netscape's products and may not be corrected
in a timely and cost-effective manner. If Netscape cannot develop on schedule
new software products, enhancements to existing products, or error corrections,
or if such new products or enhancements do not achieve market acceptance,
Netscape's business, operating results, and financial condition will be
materially adversely affected. See "--Need to Manage Evolving Markets; Product
Introductions and Transitions."

DEVELOPING MARKET; UNCERTAIN ACCEPTANCE OF NETSCAPE'S PRODUCTS; UNCERTAIN
ADOPTION OF INTRANETS, EXTRANETS, AND THE INTERNET AS A MEDIUM OF
COMMUNICATION, COLLABORATION, AND COMMERCE

The market for Netscape's software and services, especially for its
enterprise software products and services, is relatively new, is rapidly
evolving and is characterized by an increasing number of market

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entrants who have introduced or developed products and services for
communication, collaboration, and commerce over intranets, extranets, and the
Internet. As is typical in the case of a new and rapidly evolving industry,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty. The intranet, extranet, and Internet
software industry is relatively young and has a limited number of proven
products. Moreover, critical issues concerning the use of intranets, extranets,
and the Internet (including security, reliability, cost, ease of deployment and
administration, and quality of service) remain unresolved and may impact the
growth of intranet, extranet, and Internet use. While Netscape believes that its
enterprise software products offer significant advantages for communication,
collaboration, and commerce over intranets, extranets, and the Internet, such
communication, collaboration, and commerce may not become widespread and
Netscape's enterprise software products may not become widely adopted for these
purposes. Failure to do so could materially adversely affect Netscape's
business, operating results, and financial condition.

Moreover, continued market acceptance of Netscape's enterprise software
products substantially depends on the adoption of intranets, extranets, and the
Internet for commerce, collaboration, and communications. This adoption
generally requires the acceptance of a new way of conducting business and
exchanging information. Enterprises that have already invested substantial
resources in other means of conducting commerce, collaboration, and
communication may be particularly reluctant or slow to adopt a new strategy that
may make some or all of their existing information systems technology, software,
and systems obsolete. In addition, individual PC users in businesses or at home
may not adopt or continue to use intranets, extranets, or the Internet for
online commerce, collaboration, or communication. Failure to do so could
materially adversely affect Netscape's business, operating results, and
financial condition.

Because the market for Netscape's products and services, especially its
enterprise software products and services is relatively new and evolving, it is
difficult to predict the future growth rate and size of this market. The market
for Netscape's products and services may not continue to develop. Customers may
not buy Netscape's new products or services, such as Netscape Application Server
and Netscape CommerceXpert or continue to buy Netscape's existing enterprise
software products and services. More generally, intranets, extranets, or the
Internet may not be widely adopted for commerce, collaboration, and
communication. Failure to do so could materially adversely affect Netscape's
business, operating results, and financial condition.

RELIANCE ON WEBSITE REVENUES; UNCERTAIN ADOPTION OF WEB AS AN ADVERTISING MEDIUM

Netscape Netcenter offers a variety of products and services including
access to: news and information, Netcenter Commerce (where goods and services
can be purchased), directories of interesting sites on the Internet, Netscape
and third-party software, a variety of product and technical support
information, and current news about Netscape and its products. See
"Services--Netscape Netcenter." Netscape's ability to continue to generate
Web-based revenues through Netscape Netcenter will depend upon, among other
things, companies' acceptance of the Web as an effective medium to market their
products and services, advertisers' acceptance of the Web as an effective and
sustainable advertising medium, the development of a large base of users of
Netscape Netcenter's services possessing demographic characteristics attractive
to companies and advertisers, the ability of Netscape to continually offer
compelling content and new services (which achieve market acceptance), the
ability of Netscape Netcenter to attract the average Web consumer and draw high
amounts of traffic to the site, the ability of Netscape to develop and sustain
relationships with leading content and service providers, and the ability of
Netscape to develop and deliver an effective Web-based service delivery system.
Certain advertising filter software programs are available that limit or remove
advertising from an Internet user's desktop. Such software, if generally adopted
by users, may have a material adverse effect upon the viability of Web-based
services on the Internet. As a result of these factors, Netscape may not sustain
or increase its current Web-based service revenues. Failure to do so could
materially adversely affect Netscape's business, operating results, or financial
condition. In addition,

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there is intense competition in the sale of Web-based services on the Internet,
including competition from Internet online services as well as other
high-traffic Websites. See "--Competition."

MANAGEMENT OF OPERATIONS

Netscape has a history of rapid growth through new hires and through the
acquisition of companies. Netscape's rapid growth has placed a significant
strain on Netscape's managerial, operational, and financial resources. In
January 1998, Netscape announced the implementation of certain restructuring
actions aimed at reducing its cost structure, improving its competitiveness, and
restoring sustainable profitability. The restructuring plan resulted from
decreased revenue associated with certain Netscape products and Netscape's
adoption of a new strategic direction. The restructuring included reduction in
workforce of approximately 400 employees, closure of certain facilities,
write-down of operating assets to be disposed of, and payments on canceled
third-party royalty contracts. There are several risks inherent in Netscape's
efforts to recognize significant cost savings by restructuring, including the
risk that cost-cutting initiatives will impair Netscape's ability to innovate
and remain competitive in the software industry. Netscape's restructuring
actions may not achieve the desired results, additional restructuring actions
may be necessary in the future, and Netscape's systems, procedures, or controls
may not be adequate to support Netscape's current or future operations. Failure
to effectively manage the current restructuring or any future restructuring in a
timely and cost-effective manner, would materially adversely affect Netscape's
business, operating results, and financial condition.

Netscape's future operating results will depend on management's ability to
forecast revenues and control expenses, improve its operational and financial
systems, retain qualified employees, and manage multiple relationships among
various customers, suppliers, resellers, licensors, strategic partners, and
other third parties. Netscape's systems, procedures, and controls may not be
adequate to support Netscape's current or future operations. Although Netscape
does not currently contemplate significantly expanding its headcount in the
foreseeable future, Netscape may initiate growth, through acquisitions or
otherwise, to respond to market conditions and exploit the market opportunity
for its products and services. Such renewed growth could place a significant
strain on Netscape's managerial, operational, and financial resources. Further,
Netscape's future operating results will also depend on its ability to manage
its expanding product line, restructure its sales and marketing organizations,
implement and manage new distribution channels to penetrate different and
broader markets, including the market for enterprise software, and expand its
support organization commensurate with the increasing base of its installed
products. Netscape's failure to manage current operations and any growth
effectively or to rapidly and effectively take advantage of a market opportunity
for its products and services would materially adversely affect its business,
operating results, and financial condition.

RISKS OF ACQUISITIONS AND INVESTMENTS

In 1997, Netscape completed business combinations with Portola,
DigitalStyle, and KIVA, purchased the membership interests of Actra not owned by
Netscape, merged Navio, a joint venture of Netscape, with and into NCI, and
formed Novonyx, a joint venture with Novell. As part of its overall strategy,
Netscape plans to enter into further business combinations, make significant
investments in complementary companies, products, and technologies, and enter
into joint ventures and strategic alliances with other companies. Any such
transactions would be accompanied by the risks commonly encountered in such
transactions. In particular, business combinations with high-technology
companies include such risks as the difficulty of assimilating the operations
and personnel of the combined companies, the potential disruption of Netscape's
ongoing business, the inability to retain key technical and managerial
personnel, the inability of management to maximize the financial and strategic
position of Netscape through the successful integration of acquired businesses,
the incurrence of additional expenses associated with amortization of acquired
intangible assets, the difficulty of maintaining uniform standards, controls,
procedures, and policies, and the impairment of relationships with employees and
customers as a result of any integration of new

30
<PAGE>
personnel. Netscape may not overcome these risks or any other problems
encountered in connection with such business combinations, investments, and
joint ventures and such transactions may materially adversely affect Netscape's
business, results of operations, and financial condition.

EVOLVING DISTRIBUTION CHANNELS

Netscape sells its enterprise products directly to end-users and certain of
its enterprise products via the Internet. In addition, Netscape offers certain
of its products indirectly through OEMs, VARs, and software retailers. Netscape
intends to continue to develop sales through its indirect channels. Netscape
expects that any material increase in sales through resellers as a percentage of
total revenues, especially any increase in the percentage of sales through OEMs,
VARs, and system integrators, will adversely affect Netscape's average selling
prices and gross margins due to the lower unit prices that are typically charged
when selling through indirect channels. In recent quarters, sales through
indirect channels have increased as a percentage of total revenues, which has
adversely impacted average selling prices; however, gross margins to date have
not decreased due to the large percentage of sales through OEMs, which have
lower associated costs of revenues than other resellers due to the absence of
packaging costs. Other potential adverse consequences of Netscape's focus on
developing sales through resellers are the diversion of management resources and
attention from direct sales, which could adversely affect direct sales revenue
and sales of Netscape Application Server, the Netscape CommerceXpert family of
products, and Netscape's other enterprise software products, and continued
revenue fluctuation of retail revenue, which tends to fluctuate with product
releases and may be subject to seasonality. Moreover, Netscape may not be able
to continue to attract and retain resellers able to effectively market
Netscape's products, particularly resellers of enterprise software products,
such as Netscape Application Server, the Netscape CommerceXpert family of
products, and Netscape's other enterprise software products, and such resellers
may not be qualified to provide timely and cost-effective customer support and
service. Netscape also may not be able to manage conflicts among its resellers.
In addition, Netscape's agreements with resellers typically do not restrict
resellers from distributing competing products, and in many cases may be
terminated by either party without cause. Further, in some cases Netscape has
granted exclusive distribution rights that are limited by territory and in
duration. Consequently, Netscape may be adversely affected should any reseller
fail to adequately penetrate its market segment. The inability to recruit,
manage, educate, or retain important resellers, particularly resellers of
enterprise software products, such as Netscape Application Server, the Netscape
CommerceXpert family of products, and Netscape's other enterprise software
products, or their inability to penetrate their respective market segments,
could materially adversely affect Netscape's business, operating results, or
financial condition.

Netscape will continue to distribute certain of its enterprise software
products electronically through the Internet. Distributing Netscape's enterprise
software products through the Internet makes Netscape's enterprise software more
susceptible than other software to unauthorized copying and use. Netscape has
historically allowed and currently intends to continue to allow potential
customers to electronically download certain of its enterprise software products
for a free evaluation period. Upon expiration of the evaluation period, Netscape
may not be able to collect payment from users that retain a copy of Netscape's
software. In addition, by distributing certain of its products for free
evaluation over the Internet, Netscape may have reduced the future demand for
its products. If, as a result of changing legal interpretations of liability for
unauthorized use of Netscape's software or otherwise, users were to become less
sensitive to avoiding copyright infringement, Netscape's business, operating
results, and financial condition would be materially adversely affected.

SECURITY RISKS AND SYSTEM DISRUPTIONS; LACK OF PRODUCT LIABILITY INSURANCE FOR
PRODUCTS INCORPORATING SECURITY FEATURES

Netscape has included in its products security protocols that operate in
conjunction with encryption and authentication technology licensed from RSA Data
Security Inc. ("RSA"). Despite the existence of these technologies, Netscape's
products and the technology from other software companies incorporated

31
<PAGE>
into Netscape's products have been found to be vulnerable to break-ins and
similar disruptive problems caused by Internet users. In the last three years,
there have been several instances in which weaknesses or vulnerabilities in
Netscape's security implementation were discovered. In each instance in which a
vulnerability or weakness was discovered and verified in Netscape's security
implementation, Netscape attempted to address the vulnerability or weakness by
making the various design changes in its security and reviewing those changes
internally and with a broad set of outside industry experts. The design changes
appear to have resolved known security vulnerabilities and weaknesses in
Netscape's products. Moreover, Netscape's products may be susceptible to other
security flaws, whether in Netscape's products or technologies, or in other
technology incorporated into Netscape's products.

Despite Netscape's attempts to address the vulnerabilities and weaknesses in
its security implementation, Netscape's products and licensed technology
incorporated in such products may continue to have security flaws that make them
vulnerable to break-ins and similar disruptive problems. Further, as is
generally known, weaknesses in the environment in which Netscape products are
used may compromise the security of confidential electronic information
exchanges across intranets, extranets, and the Internet. This includes, but is
not limited to, the security of the physical network, the machines used for the
information transfer, and the operating system on which Netscape products are
running. Any such flaws in intranets, extranets, the Internet, or the end-user
environment or weaknesses or vulnerabilities in Netscape's products or
incorporated technology would jeopardize the security of confidential
information sent over intranets, extranets, and the Internet using Netscape
software, such as credit card numbers and email, and might enable others to
dismantle the special security techniques meant to protect such transactions.

Moreover, the security and privacy concerns of existing and potential
customers, as well as concerns related to computer viruses or other security
problems, may inhibit the growth and commercial development of intranets,
extranets, and the Internet, and Netscape's customer base and revenues. Netscape
attempts to limit its liability to its customers, including liability arising
from failure of the security implementation contained in Netscape's products,
through contractual provisions. However, such limitations may not be available
in some cases or effective. Netscape currently does not have product liability
insurance to protect against risks associated with break-ins or disruptions. Any
security-related problems in Netscape's products or incorporated technology may
require Netscape to expend significant capital and resources to alleviate or
correct such problems, result in lawsuits against Netscape, result in loss of
customers, and interrupt, delay, or stop product shipments to Netscape's
customers, any of which could materially adversely affect Netscape's business,
operating results, or financial condition.

GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES

Netscape is not currently subject to direct government regulation other than
the laws and the regulations that generally apply to publicly owned companies
and to businesses generally. Few laws or regulations specifically apply to
access to or commerce on the Internet. However, due to the increasing popularity
and use of the Internet, it is likely that a number of laws and regulations may
be adopted with respect to the Internet, covering issues such as user privacy
and expression, pricing of products and services, taxation, advertising,
intellectual property rights, information security, and the convergence of
traditional communication services with Internet communications. The adoption of
such laws or regulations, possibly including the taxation of Internet services
and transactions, may decrease the growth of intranets, extranets, and the
Internet, which could in turn decrease the demand for Netscape's products,
increase Netscape's cost of doing business, or have some other material adverse
effect on Netscape's business, operating results, and financial condition. See
"--Developing Market; Uncertain Acceptance of Netscape's Products; Uncertain
Adoption of Intranets, Extranets, and the Internet as a Medium of Communication,
Collaboration, and Commerce." In addition, it is not clear how existing laws
governing issues such as property ownership, copyrights and other intellectual
property issues, taxation, libel, and personal privacy apply to the Internet.
The vast majority of such laws were adopted prior to the advent of the Internet
and related technologies and, as a result, do not contemplate or address the
unique issues of

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the Internet and related technologies. Changes to such laws intended to address
these issues, including some recently proposed changes, could create uncertainty
in the marketplace that could reduce demand for Netscape's products, increase
Netscape's cost of doing business, including as a result of costs of litigation
or increased product development costs, or have some other material adverse
effect on Netscape's business, operating results, or financial condition.

The encryption technology contained in Netscape's products is subject to
U.S. export controls. Such export controls, either in their current form or as
may be subsequently revised, may limit Netscape's ability to distribute certain
encrypted products outside of the United States. While Netscape takes
precautions against unlawful exportation, such exportation may occur from time
to time, subjecting Netscape to potential liability and adverse consequences. In
addition, future legislation or regulation may further limit levels of
encryption or authentication technology that can be included in Netscape's
products. For example, recent proposals at the federal level call for domestic
controls on encryption products and related services. Such new regulation would
alter the design, production, distribution, and use of Netscape's products, and
could reduce demand for Netscape's products as well as general demand for
Internet software and for electronic commerce products and services. See
"--Developing Market; Uncertain Acceptance of Netscape's Products; Uncertain
Adoption of Intranets, Extranets, and the Internet as a Medium of Communication,
Collaboration, and Commerce." In addition, foreign governments have import and
domestic use laws and regulations already in place that may restrict the type of
encryption software that is permitted for distribution in their countries. As a
consequence of such export, import, and use controls, Netscape must develop and
market both domestic and international versions of its products that contain
encryption software, with the version for the U.S. market having a stronger
level of encryption than the version for export to international markets. Along
with the additional costs associated with the duplication of effort and expense
in research, development, manufacturing, and distribution of different versions
of products, Netscape may lose sales from customers who wish to have the same
level of encryption security throughout their organization. Netscape may also
encounter difficulties competing with non-U.S. producers of strong encryption
products, who may both import their products into the United States and sell
products overseas.

Additionally, some countries have enacted import laws requiring the
alteration of Netscape's products in order for the government of such countries
to maintain a level of control over the content of products entering such
countries. In addition to the costs incurred by Netscape in complying with
varying international regulations, alteration of Netscape's products may cause
such products to perform at a level below their intended level and thereby
subject Netscape to potential liability and other adverse consequences. Any such
export restrictions, import restrictions, legislation, regulation, or unlawful
exportation or importation could have a material adverse effect on Netscape's
business, operating results, or financial condition.

UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY; RISKS ASSOCIATED WITH LICENSED
THIRD PARTY TECHNOLOGY

Netscape's success and ability to compete partly depend on its internally
developed technology. While Netscape relies on patent, trademark, trade secret,
and copyright law to protect its technology, the technological and creative
skills of its people, new product developments, frequent product enhancements,
name recognition, and reliable product maintenance are also essential to
establishing and maintaining a technology leadership position. Others may
develop technologies that are similar or superior to Netscape's products.
Netscape generally enters into confidentiality or license agreements with its
employees, consultants, and vendors, and generally controls access to and
distribution of its software, documentation, and other proprietary information.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use Netscape's products or technology without authorization
or to develop similar technology independently. In addition, effective patent,
trademark, trade secret, and copyright protection may be unavailable or limited
in certain foreign countries. To license its products, Netscape relies in part
on "shrink wrap" licenses that are not signed by the end-user and, therefore,
may be unenforceable under the laws of certain jurisdictions. Despite Netscape's
efforts to protect its proprietary rights, unauthorized

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<PAGE>
parties may copy aspects of Netscape's products or obtain and use information
that Netscape regards as proprietary. Policing unauthorized use of Netscape's
products is difficult and the steps taken by Netscape may not prevent the
misappropriation of its technology. In addition, litigation may be necessary in
the future to enforce Netscape's intellectual property rights, to defend the
validity of any Netscape patents, to protect Netscape's trade secrets, or to
determine the validity and scope of the proprietary rights of others. Such
misappropriation or litigation could result in substantial costs and diversion
of resources and the potential loss of intellectual property rights, which could
have a material adverse effect on Netscape's business, operating results, or
financial condition.

Netscape has received, and may continue to receive, notice of claims of
infringement of other parties' proprietary rights. Such claims may involve
Netscape's internally developed technology or technology and enhancements that
Netscape licenses from third parties, including enhancements incorporated into
Netscape Communicator in connection with the Royalty-Free Source Code program.
See "Factors Affecting Netscape's Business, Operating Results, and Financial
Condition--Royalty-Free Source Code." Any such claims could require Netscape to
spend time and money defending against them, and, if they were decided adversely
to Netscape, could cause Netscape to pay damages, to be subject to injunctions,
or to halt distribution of its products while it re-engineered them or sought
licenses to necessary technology (which might not be available on reasonable
terms). Any of these factors could materially adversely affect Netscape's
business, operating results, or financial condition. Moreover, Netscape could
also be subject to claims for indemnification resulting from infringement claims
made against its customers, which could increase its defense costs and potential
damages. Although Netscape is sometimes indemnified by third parties against
claims that licensed third-party technology infringes the proprietary rights of
others, indemnity may be limited, unavailable, or, where the third party lacks
sufficient assets or insurance, ineffectual. Nor does Netscape have liability
insurance to protect against the risk that its technology or licensed
third-party technology infringes the proprietary rights of others.

DEPENDENCE ON KEY PERSONNEL

Netscape's performance depends substantially on the performance of its
executive officers and key employees. Given Netscape's relatively early stage of
development, Netscape also depends on its ability to retain and motivate highly
qualified personnel, especially its management and highly skilled development
teams. Netscape does not have "key person" life insurance policies on any of its
employees. The loss of the services of any of its executive officers or other
key employees could materially adversely affect Netscape's business, operating
results, or financial condition.

Netscape's future success also depends on its continuing ability to
identify, hire, train and retain other highly qualified technical and managerial
personnel, especially software developers. Competition for such personnel is
intense, and Netscape may not be able to attract, assimilate, or retain other
highly qualified technical and managerial personnel in the future. The inability
to attract and retain the necessary technical and managerial personnel could
materially adversely affect Netscape's business, operating results, or financial
condition.

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

Netscape is currently incurring, and expects to continue to incur,
significant costs in developing, marketing, and distributing a variety of
localized versions of its products. If international revenues are not adequate
to offset the expense of maintaining foreign operations and the costs of
localizing Netscape's

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<PAGE>
products, Netscape's business, operating results, and financial condition could
be materially adversely affected. For example, in the third and fourth quarters
of 1997 Netscape experienced a decline in international revenue growth rates in
part due to the economic crisis in the Asia/Pacific region. Netscape may not be
able to successfully market, sell, and deliver its products in foreign markets.
In addition to the uncertainty as to Netscape's ability to maintain and generate
new revenues from its foreign operations and expand its international presence,
there are certain risks inherent in doing business on an international level,
such as unexpected changes in regulatory requirements, export and import
restrictions, export and import controls relating to encryption technology,
tariffs and other trade barriers, difficulties in staffing and managing foreign
operations, longer payment cycles, problems in collecting accounts receivable,
political instability, fluctuations in currency exchange rates, software piracy,
seasonal reductions in business activity during the summer months in Europe and
elsewhere, and potentially adverse tax consequences, which could adversely
impact the success of Netscape's international operations. One or more of such
factors may have a material adverse effect on Netscape's future international
operations and Netscape's overall business, operating results, and financial
condition.

YEAR 2000

Netscape plans to complete Year 2000 testing on all of its products by the
end of Netscape's 1998 fiscal year. Despite testing by Netscape and by current
and potential customers, Netscape's products may contain undetected errors or
defects associated with Year 2000 date functions, which could result in delay or
loss of revenue, diversion of development resources, damage to Netscape's
reputation, or increased service and warranty costs, any of which could
materially adversely affect Netscape's business, operating results, or financial
condition. Some commentators have predicted significant litigation regarding
Year 2000 compliance issues, and Netscape is aware of at least three of such
lawsuits against other software vendors. Because of the unprecedented nature of
such litigation, it is uncertain whether or to what extent Netscape may be
affected by it. Netscape has initiated a plan to test all of its material
internal systems (including those provided by third parties) and expects to
complete that testing in 1998. Further, to the extent that Netscape is not able
to test the technology provided by third-party vendors, Netscape plans to obtain
assurances from such vendors that their systems are Year 2000 compliant.
Although Netscape is not aware of any material operational issues or costs
associated with preparing its internal systems for the Year 2000, Netscape may
experience material unanticipated problems and costs caused by undetected errors
or defects in the technology used in its internal systems, which include both
Netscape's own software products and third-party software and hardware
technology. Netscape does not currently have any information concerning the Year
2000 compliance status of its customers. As is the case with other similarly
situated software companies, if Netscape's current or future customers fail to
achieve Year 2000 compliance or divert technology expenditures to address Year
2000 compliance problems, Netscape's business, operating results, or financial
condition could be materially adversely effected.

RECENT PRONOUNCEMENTS REGARDING SOFTWARE REVENUE RECOGNITION

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ITEM 2. PROPERTIES.

Netscape leases and occupies various facilities in Mountain View and
Sunnyvale, California, which provide for approximately one million square feet
of office space and contain Netscape's principal executive, administrative,
engineering, sales, marketing, customer support, and research and development
functions. Such leases expire at various dates ranging from 1999 through 2013.
Netscape has executed leases for an additional 250,000 square feet in Mountain
View, California beginning in 1998 and expiring at various times through 2013
for general corporate use. As a result of the restructuring, 421,000 square feet
are, or will be, subleased. Netscape believes that its existing facilities and
facilities subject to lease will be adequate until 1999 and that sufficient
additional space will be available as needed thereafter. Netscape also has
short-term operating leases for sales offices in North America, Europe, Asia,
and Australia.

In addition, Netscape maintains secure computers which contain confidential
information of Netscape and its customers. Netscape's operations are dependent
in part upon its ability to protect its internal network infrastructure against
damage from physical break-ins, natural disasters, operational disruptions, and
other events. Physical break-ins could result in the theft or loss of
confidential or critical business information of Netscape and its customers. Any
such break-in or damage or failure that causes interruptions in Netscape's
operations could materially adversely affect Netscape's business, operating
results, or financial condition.

ITEM 3. LEGAL PROCEEDINGS.

On October 14, 1997, Wang Laboratories filed claims against Netscape and
America OnLine, Inc. ("AOL"), in the United States District Court for the
Eastern District of Virginia, alleging Direct Patent Infringement, Inducement of
Patent Infringement, and Contributory Patent Infringement of U.S. Patent
4,751,669 (" '669 Patent"). The '669 Patent discloses and claims a videotex
decoder apparatus used for locally displaying, storing, retrieving, and printing
digital information received from a central supplier. Wang is seeking injunctive
relief and/or one and nine tenths percent (1.9%) royalties from the sale of
Netscape client software. Netscape has asserted that the '669 Patent is invalid,
noninfringed, and unenforceable due to inequitable conduct. Netscape believes
that it has meritorious defenses and is vigorously defending against this claim.
Netscape believes that the ultimate outcome of this litigation will not
materially adversely affect Netscape's business, operating results, and
financial position. However, an unfavorable resolution of this litigation could
materially affect Netscape's future results of operations or cash flows in a
particular period.

In addition to the Wang Litigation, Netscape is subject to various legal
proceedings and claims, either asserted or unasserted, which arise in the
ordinary course of business. While the outcome of these claims cannot be
predicted with certainty, Netscape does not believe that the outcome of any of
these legal matters will have a material adverse effect on Netscape's business,
operating results, and financial condition.

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

No matters were submitted to a vote of security holders during the fourth
quarter of 1997.

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EXECUTIVE OFFICERS OF NETSCAPE

The executive officers of Netscape and their ages as of March 9, 1998 are as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ----------------------------------------- ----------- ----------------------------------------------------------------
<S> <C> <C>
James H. Clark........................... 53 Chairman of the Board
James L. Barksdale....................... 55 President and Chief Executive Officer
Marc L. Andreessen....................... 26 Executive Vice President, Products
Noreen G. Bergin......................... 38 Senior Vice President, Finance and Corporate Controller
Peter L.S. Currie........................ 41 Executive Vice President and Chief Administrative Officer
Eric A. Hahn............................. 37 Executive Vice President, Chief Technology Officer
Michael J. Homer......................... 40 Executive Vice President, Sales and Marketing
Roberta R. Katz.......................... 50 Senior Vice President, General Counsel and Secretary
</TABLE>

Netscape's executive officers are appointed by, and serve at the discretion
of, the Board of Directors. Each executive officer is a full-time employee of
Netscape. There is no family relationship between any executive officer or
director of Netscape.

Dr. Clark co-founded Netscape in April 1994 and serves as its Chairman of
the Board. From the inception of Netscape to January 1995, Dr. Clark served as
the President and Chief Executive Officer of Netscape. From 1981 to 1994, Dr.
Clark was Chairman of the Board of Directors of Silicon Graphics, a computer
systems company he founded in 1981. Dr. Clark also served as Chief Technical
Officer of Silicon Graphics from 1981 to 1987. Prior to founding Silicon
Graphics, Dr. Clark was an associate professor at Stanford University. Dr. Clark
holds a Ph.D. from the University of Utah and an M.S. and a B.S. from the
University of New Orleans.

Mr. Barksdale joined Netscape in January 1995 as President and Chief
Executive Officer. He has served as a director of Netscape since October 1994.
From January 1992 to January 1995, Mr. Barksdale served as President and Chief
Operating Officer, and, as of September 1994, Chief Executive Officer, of AT&T
Wireless Services (formerly, McCaw Cellular Communications, Inc. (collectively,
"McCaw")), a cellular telecommunications company. From April 1983 to January
1992, Mr. Barksdale served as Executive Vice President and Chief Operating
Officer of Federal Express Corporation ("Federal Express"), an express package
delivery company. From 1979 to 1983, Mr. Barksdale served as Chief Information
Officer of Federal Express. Mr. Barksdale also held various management
positions, including Chief Information Officer, with Cook Industries Inc.,
during the mid-1970s and was employed by IBM from 1965 to 1972. He holds a B.A.
from the University of Mississippi. Mr. Barksdale serves as a director of 3Com
Corporation, Harrah's Entertainment, Inc., Robert Mondavi Corp., @Home
Corporation, and Network Computer, Inc.

Mr. Andreessen co-founded Netscape in April 1994 and has been a director of
Netscape since September 1994. Mr. Andreessen was elected to the position of
Vice President, Technology in September 1994, to the position of Senior Vice
President, Technology in January 1996 and to the position of Executive Vice
President, Products in June 1997. He received a B.S. from the University of
Illinois in December 1993, where he co-authored the original NCSA Mosaic Web
browser.

Ms. Bergin joined Netscape in November 1995 as Vice President and Corporate
Controller. Ms. Bergin was elected to Vice President, Finance and Corporate
Controller in January 1997 and Senior Vice President, Finance and Corporate
Controller in February 1998. From November 1991 to November 1995, Ms. Bergin
served as Vice President, Finance and Corporate Controller of Frame Technology
Corporation, a document publishing software company. Prior to that time, she
served as Corporate Controller of Boole & Babbage, Inc., a mainframe performance
software company for five years. Ms. Bergin holds a B.A. from Santa Clara
University.

Mr. Currie joined Netscape as Vice President and Chief Financial Officer in
April 1995. Mr. Currie was elected to Senior Vice President in January 1996 and
to the position of Executive Vice President and

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Chief Administrative Officer in June 1997. From April 1989 to March 1995, Mr.
Currie held various management positions at McCaw, including Executive Vice
President and Chief Financial Officer, and as of February 1993, Executive Vice
President of Corporate Development. From 1982 to 1989, he held various positions
at Morgan Stanley & Co. Incorporated. Mr. Currie holds an M.B.A. from Stanford
University and a B.A. from Williams College.

Mr. Hahn joined Netscape in November 1995 as Vice President, Enterprise
Technology, in connection with Netscape's acquisition of Collabra Software,
Inc., a collaborative computing software company, where Mr. Hahn served as
President and Chief Executive Officer from February 1993 to November 1995. Mr.
Hahn was elected to Senior Vice President in January 1996, to Senior Vice
President, Enterprise Technology and General Manager of the Server Product
Division in October 1996 and to the position of Executive Vice President, Chief
Technology Officer in June 1997. From September 1992 to February 1993, Mr. Hahn
was employed by Merrill, Pickard, Anderson & Eyre, a venture capital firm. From
June 1990 to August 1992, he served as Vice President, General Manager of the
cc:Mail Division of Lotus, Inc., now a subsidiary of IBM. Prior to that time, he
served as Vice President and General Manager, Server Products Division at
Convergent Technologies/Unisys Corporation. Mr. Hahn holds a B.S. from the
Worcester Polytechnic Institute.

Mr. Homer joined Netscape in October 1994 as Vice President, Marketing. Mr.
Homer was elected to Senior Vice President in January 1996 and to the position
of Executive Vice President, Sales and Marketing in June 1997. From April 1994
to October 1994, Mr. Homer was a consultant. From August 1993 to April 1994, Mr.
Homer served as Vice President, Engineering at EO Corporation, a hand-held
computer manufacturer, and from July 1991 to July 1993, Mr. Homer was Vice
President, Marketing of GO Corporation, a pen-based software company. He had
previously been Director of Product Marketing of Apple, where he held various
technical and marketing positions from 1982 through 1991. Mr. Homer holds a B.S.
from the University of California, Berkeley.

Ms. Katz joined Netscape in May 1995 as Vice President, General Counsel and
Secretary. Ms. Katz was elected to Senior Vice President in January 1996. From
March 1993 until joining Netscape, Ms. Katz served as Senior Vice President and
General Counsel of McCaw. In addition, from March 1992 until joining Netscape,
Ms. Katz served as Senior Vice President and General Counsel of LIN Broadcasting
Corporation, a subsidiary of McCaw. Prior to March 1992, Ms. Katz was in private
legal practice, most recently as a partner in the law firm of Heller, Ehrman,
White & McAuliffe. Ms. Katz is a Senior Fellow of the Discovery Institute and
serves as a member of the Board of Directors of the Information Technology
Association of America, Software Division. Ms. Katz holds a J.D. from the
University of Washington School of Law, a Ph.D. from Columbia University, an
M.A. from New York University, and a B.A. from Stanford University.

38
<PAGE>
PART II

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

(a) Netscape's common stock is listed on the Nasdaq National Market under
the symbol "NSCP." The following table sets forth the high and low sale prices
per share of Netscape's common stock for the periods indicated, as adjusted to
reflect the two-for-one stock split effective January 1996.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1996
First Quarter..................................................................... $ 86.000 $ 34.750
Second Quarter.................................................................... $ 75.250 $ 42.500
Third Quarter..................................................................... $ 65.500 $ 34.500
Fourth Quarter.................................................................... $ 65.000 $ 38.500

1997
First Quarter..................................................................... $ 59.250 $ 25.500
Second Quarter.................................................................... $ 37.875 $ 25.000
Third Quarter..................................................................... $ 49.500 $ 32.188
Fourth Quarter.................................................................... $ 41.500 $ 23.688

1998
First Quarter (through March 9, 1998)............................................. $ 24.575 $ 14.875
</TABLE>

As of March 9, 1998, there were 3,224 holders of record of Netscape's common
stock. Because many of Netscape's shares of common stock are held by brokers and
other institutions on behalf of stockholders, Netscape is unable to estimate the
total number of stockholders represented by these record holders. Netscape has
never declared or paid any cash dividends on its common stock. Since Netscape
currently intends to retain all future earnings to finance future growth, it
does not anticipate paying any cash dividends in the foreseeable future.

(b) In connection with the acquisitions of KIVA and Actra, Netscape issued
an aggregate of 7,236,263 shares of Netscape's Common Stock (the "Acquisition
Shares") of which 5,303,684 Acquisition Shares were issued to the existing
stockholders of KIVA on December 1, 1997 in exchange for all of the outstanding
shares of capital stock of KIVA and 1,932,579 Acquisition Shares were issued to
GEIS on December 15, 1997 in exchange for all of the outstanding membership
interests of Actra not owned by Netscape. In each case, the Acquisition Shares
were issued pursuant to an exemption from the registration requirements of the
Securities Act, afforded by Section 4(2) of the Securities Act. The stockholders
of KIVA and Actra had access to all relevant information regarding Netscape
necessary to evaluate the investment and each stockholder represented that the
Acquisition Shares were being acquired for investment intent. There was no
general solicitation or advertising involved in the acquisitions, and Netscape
used reasonable care to assure that the stockholders of Actra and KIVA were not
underwriters.

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<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total revenues.............................. $ 533,851 $ 346,294 $ 85,387 $ 4,138 $ 1,106
Operating income (loss)..................... (132,267) 20,488 (10,709) (14,067) (1,847)
Net income (loss)........................... (115,496) 19,517 (6,613) (13,830) (1,812)
Basic income (loss) per share............... (1.34) 0.27 (0.16) (2.84) (0.70)
Diluted income (loss) per share............. (1.34) 0.21 (0.16) (2.84) (0.70)
Total assets................................ 632,820 541,325 231,154 16,996 5,093
Short-term debt............................. 535 733 1,326 725 --
Long-term debt.............................. 215 616 1,198 725 --
Stockholders' equity........................ 429,055 394,222 177,387 8,161 4,094
</TABLE>

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

(1) All periods have been restated for the business combination with KIVA,
which has been accounted for as a pooling of interests. See Note 2 of the
Notes to Consolidated Financial Statements.

(2) No dividends have been declared or paid on the common stock of Netscape.

(3) The 1997 operating loss, net loss, basic and diluted loss per share
includes $108.9 million of purchased in-process research and development
and merger related charges, and $23.0 million of restructuring charges.
Excluding these charges, after tax effect, Netscape would have reported
net income of $4.7 million and diluted income per share of $0.05.

40
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, AND
RESULTS OF OPERATIONS.

RESULTS OF OPERATIONS

The following table sets forth operating results, in absolute dollars and as
a percentage of total revenues, for 1997, 1996, and 1995.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenues..................... $ 383,950 71.9% $ 291,183 84.1% $ 77,489 90.8%
Service revenues..................... 149,901 28.1 55,111 15.9 7,898 9.2
--------- --------- --------- --------- --------- ---------
Total revenues..................... 533,851 100.0% 346,294 100.0% 85,387 100.0%

Cost of revenues:
Cost of product revenues............. 50,232 9.4 36,943 10.7 9,177 10.7
Cost of service revenues............. 31,557 5.9 13,124 3.8 2,530 3.0
--------- --------- --------- --------- --------- ---------
Total cost of revenues............. 81,789 15.3 50,067 14.5 11,707 13.7
--------- --------- --------- --------- --------- ---------
Gross profit........................... 452,062 84.7 296,227 85.5 73,680 86.3

Operating expenses:
Research and development............. 129,928 24.4 83,863 24.2 26,841 31.4
Sales and marketing.................. 272,110 51.0 154,545 44.6 43,679 51.1
General and administrative........... 50,356 9.4 30,981 8.9 11,336 13.3
Property rights agreement and related
charges............................ -- -- 250 0.1 500 0.6
Purchased in-process research and
development........................ 103,087 19.3 -- -- -- --
Merger related charges............... 5,848 1.1 6,100 1.8 2,033 2.4
Restructuring charges................ 23,000 4.3 -- -- -- --
--------- --------- --------- --------- --------- ---------
Total operating expenses........... 584,329 109.5 275,739 79.6 84,389 98.8
--------- --------- --------- --------- --------- ---------
Operating income (loss)................ (132,267) (24.8) 20,488 5.9 (10,709) (12.5)
Interest and other income, net......... 10,922 2.1 8,720 2.5 4,594 5.3
Equity in net losses of joint
ventures............................. (5,939) (1.1) (1,928) (0.5) -- --
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes...... (127,284) (23.8) 27,280 7.9 (6,115) (7.2)
Provision (benefit) for income taxes... (11,788) (2.2) 7,763 2.3 498 0.5
--------- --------- --------- --------- --------- ---------
Net income (loss)...................... $(115,496) (21.6)% $ 19,517 5.6% $ (6,613) (7.7)%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Basic income (loss) per share.......... $ (1.34) $ 0.27 $ (0.16)
--------- --------- ---------
--------- --------- ---------
Diluted income (loss) per share........ $ (1.34) $ 0.21 $ (0.16)
--------- --------- ---------
--------- --------- ---------
Shares used in computing basic income
(loss) per share..................... 86,058 72,942 40,627
--------- --------- ---------
--------- --------- ---------
Shares used in computing diluted income
(loss) per share..................... 86,058 90,841 40,627
--------- --------- ---------
--------- --------- ---------
</TABLE>

41
<PAGE>
REVENUES

Netscape derives product revenues from product licensing fees and service
revenues from fees for Website transactions, maintenance and support services,
training, and consulting. In order to enhance an understanding of its business,
Netscape recently decided to track and report its revenue as follows: (i)
revenues from software and services provided to enterprise customers, (ii)
revenues from client software and client-related services on a stand-alone
basis; and (iii) revenues from the Website. Client stand-alone revenues are
primarily from the sale of the client software only and client-related services.
Enterprise revenues are primarily from the sale of client and server suites,
upgrades, and services such as consulting and technical support. Website
revenues are primarily from Web advertising, search and directory services,
trademark licensing, and other Web services. Netscape's fiscal year was based on
the calendar year for 1997, 1996, and 1995.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Enterprise........................ $ 333,204 62.4% $ 142,102 41.0% $ 6,097 7.1%
Website........................... 95,117 17.8 23,039 6.7 1,801 2.1
Client stand-alone................ 105,530 19.8 181,153 52.3 77,489 90.8
--------- --------- --------- --------- --------- ---------
Total revenues.................. $ 533,851 100.0% $ 346,294 100.0% $ 85,387 100.0%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>

TOTAL REVENUES. Total revenues grew 54.2% from 1996 to 1997, and 305.6%
from 1995 to 1996. In general, Netscape has experienced revenue growth in all of
its product lines as a result of an increased number of software licenses and
the introduction of new products, as opposed to higher prices. A significant
portion of revenue for 1997 was attributable to several large product and
Website licensing transactions. In general, Netscape's revenue stream is
comprised of transactions that have increased significantly in average dollar
size over the past year. Such large licensing transactions, including licenses
to OEMs, ISPs, and enterprise customers, are expected to continue to account for
a significant portion of revenue in future periods. The loss or deferral of or
failure to consummate one or more such large product or Website licensing
transactions could materially adversely affect results of operations in future
periods as it did in the fourth quarter of 1997.

PRODUCT REVENUES. Product revenues for 1997, 1996, and 1995 were $384.0
million, $291.2 million, and $77.5 million, or 71.9%, 84.1%, and 90.8% of total
revenues, respectively. Product revenues increased in absolute dollars but
decreased as a percentage of total revenues in all periods. The increases in
absolute dollars in all periods were due to an expanded product line, increased
unit shipments of existing products, and general growth in the market for
intranet-related software products in the corporate environment. The decreases
as a percentage of total revenues were due to an increase in service revenues
attributable to the growth in Website and professional consulting revenues.
Netscape expects that product revenues as a percentage of total revenues will
fluctuate in future periods depending on the timing of new product
introductions, consumer buying patterns, pricing actions taken by Netscape,
competition, and other factors. See "Factors Affecting Netscape's Business,
Operating Results and Financial Condition--Potential Fluctuations in Quarterly
Results."

SERVICE REVENUES. Service revenues for 1997, 1996, and 1995 were $149.9
million, $55.1 million, and $7.9 million, or 28.1%, 15.9, and 9.2% of total
revenues, respectively. The increases in all periods were due primarily to
increased Website transactions, which include Web advertising, search and
directory services, and trademark licensing, as well as increased professional
consulting services. Netscape expects that service revenues as a percentage of
total revenues will fluctuate in future periods depending on the timing, size,
and number of Website transactions, expansion of Netscape's professional
services consulting organization, and the rate of growth in the installed base
of technical support contracts. See "Factors Affecting Netscape's Business,
Operating Results and Financial Condition--Potential Fluctuations in Quarterly

42
<PAGE>
Results." In particular, Netscape's ability to increase service revenues will
depend in part upon its ability to attract and retain qualified professional
service consulting personnel, who are in short supply in many key geographical
areas.

CLIENT STAND-ALONE REVENUES. Client stand-alone revenues for 1997, 1996,
and 1995 were $105.5 million, $181.2 million, and $77.5 million, or 19.8%,
52.3%, and 90.8% of total revenues, respectively. The decreases in all periods
as a percentage of total revenues as well as the absolute dollar decrease in
1997 were due to increased price pressure from Microsoft Corporation, a
competitor that offers its browser with no licensing fees. In January 1998,
Netscape announced that it would offer its client software for free. As a
result, Netscape does not expect to generate any further significant client
stand-alone revenue. See "Factors Affecting Netscape's Business, Operating
Results, and Financial Condition--Free Client Software."

ENTERPRISE REVENUES. Enterprise revenues for 1997, 1996, and 1995 were
$333.2 million, $142.1 million, and $6.1 million, or 62.4%, 41.0%, and 7.1% of
total revenues, respectively. Enterprise revenues have increased in both
absolute dollars and as a percentage of total revenues in all years due to an
expanded product line, increased unit shipments of existing products, higher
average transaction sizes, expansion of Netscape's professional services
consulting organization, and general growth in the market for intranet-related
software products in the corporate environment.

WEBSITE REVENUES. Website revenues for 1997, 1996, and 1995 were $95.1
million, $23.0 million, and $1.8 million, or 17.8%, 6.7%, and 2.1% of total
revenues, respectively. The increases in both absolute dollars and as a
percentage of total revenues in all years were due to increased Website
transactions which include Web advertising, search and directory services,
trademark licensing, and other Web services. Netscape believes that Website
revenues may fluctuate in future periods as a percentage of total revenues
depending on the timing, size, and number of Website transactions. See "Factors
Affecting Netscape's Business, Operating Results, and Financial Condition--
Potential Fluctuations in Operating Results."

CHANNEL MIX. Netscape distributes its products through a combination of
direct channels, including field sales, Internet-based sales and telesales, and
indirect channels, including OEMs, ISPs, systems integrators, VARs, and software
retailers. Indirect channel revenues for 1997, 1996, and 1995 were 53.5%, 50.2%,
and 49.3% of total revenues, respectively. The increases as a percentage of
total revenues were in all years due to increases in OEM, ISP, system
integrator, and VAR channel revenues, partially offset by a decrease in retail
channel revenues. OEM, ISP, system integrator, and VAR channel revenues as a
whole increased in absolute dollars primarily due to an increase in the number
of OEMs, ISPs, systems integrators, and VARs offering Netscape's products as
well as increased sales through Netscape's preexisting OEMs, ISPs, systems
integrators, and VARs. Retail channel revenues increased in absolute dollars
from 1995 to 1996 due to new product introductions and increased demand for the
Netscape client products, but decreased in absolute dollars from 1996 to 1997
due to price pressure for the same products. In general, the distribution of
revenues among channels will fluctuate in future periods depending on the timing
of new product releases, Netscape's ability to expand its use of OEMs, ISPs and
VARs, the timing of larger enterprise sales in strategic accounts through
Netscape's direct sales force, and customer buying patterns. See "Factors
Affecting Netscape's Business, Operating Results, and Financial Condition--
Evolving Channel Distribution."

GEOGRAPHIC MIX. International revenues (sales outside of North America) for
1997, 1996, and 1995 were 22.1%, 29.3%, and 17.2% of total revenues,
respectively. International revenues increased as a percentage of total revenues
from 1995 to 1996 due to increased sales and marketing efforts in Europe and the
Pacific Rim, partnering with OEMs and VARs throughout the world, and increased
demand for Internet- and intranet-related products in international markets.
International revenues decreased as a percentage of total revenues from 1996 to
1997 due to increased competition in Europe and the Intercontinental region
("ICON"), which includes the Pacific Rim and Latin America, a reduction in the
number of large licensing transactions, and economic instability in the fourth
quarter of 1997 in ICON.

43
<PAGE>
Netscape is continuing to make investments in international markets through
the deployment of sales personnel in several countries in Europe and ICON, and
through partnering with OEMs, ISPs, and VARs throughout the world. Netscape
believes that international revenues may account for a greater percentage of
total revenues in future periods, although this percentage may fluctuate in the
near term as a result of localized product release timing, competition, the
general demand for Internet- and intranet-related products in international
markets, reduced localization of Netscape's products, the timing of large
product and service transactions, and general economic conditions of the
regions.

Netscape generally invoices the customers of its international subsidiaries
predominantly in U.S. dollars for software sales, and in local currencies of its
subsidiaries for service transactions. Netscape has not engaged in foreign
currency hedging activities. To the extent of its local currency invoicing,
Netscape's international revenues are currently subject to currency exchange
fluctuation risk. To the extent that international revenues that are invoiced in
local currencies increase in the future, Netscape's exposure to fluctuations in
currency exchange rates will correspondingly increase. Currency fluctuations may
also effectively increase the cost of Netscape products and services in
countries in which customers are invoiced in U.S. dollars.

GROSS MARGIN

COST OF PRODUCT REVENUES. Cost of product revenues for all periods
presented consisted primarily of the cost of product materials, royalties paid
for licensed technology, and amounts paid to third-party vendors for sales
administration and order fulfillment. Cost of product revenues for 1997, 1996,
and 1995 were $50.2 million, $36.9 million, and $9.2 million, or 13.1%, 12.7%,
and 11.8% of related product revenues, respectively. The increases in both
absolute dollars and as a percentage of related cost of product revenues in all
periods were due to an increase in royalties paid for licensed technology and
amounts paid to third-party vendors.

Netscape believes that the gross margin earned on product revenues will
fluctuate in future periods depending on the composition of costs incurred in
achieving such revenues, including the costs associated with licensed technology
included in both client and server products, and product warranty costs, which
include telephone support for client products.

COST OF SERVICE REVENUES. Cost of service revenues for all periods
presented consisted primarily of outside consulting services and
personnel-related costs incurred in providing customer support and consulting
services, and fees paid to third parties related to NetCenter advertising
revenues. Cost of service revenues for 1997, 1996, and 1995 were $31.6 million,
$13.1 million, and $2.5 million, or 21.1%, 23.8%, and 32.0% of related service
revenues, respectively. The decreases as a percentage of related service
revenues in all periods were due to an increase in Website transaction revenues,
which typically have lower associated costs than other service revenues.

OPERATING EXPENSES

Netscape's total operating expenses for 1997, 1996, and 1995 were $584.3
million, $275.7 million, and $84.4 million, or 109.5%, 79.6%, and 98.8% of total
revenues, respectively. The increase in absolute dollars in 1997 was due to the
purchased in-process research and development charges in the second and fourth
quarters of 1997 relating to the acquisitions of Portola, DigitalStyle, and
Actra as further described in Note 2 to the Notes to Consolidated Financial
Statements, and the restructuring charges in the fourth quarter of 1997 as
further described in Note 3 to the Notes to Consolidated Financial Statements,
and Netscape's growth and expansion in all operating areas.

Total operating expenses, excluding purchased in-process research and
development and merger-related charges and restructuring charges, for 1997,
1996, and 1995 were $452.4 million, $269.6 million, and $82.4 million, or 84.7%,
77.9%, and 96.5% of total revenues, respectively. The increases in absolute
dollars in all years were generally due to Netscape's growth and expansion in
all operating areas. The decrease as

44
<PAGE>
a percentage of total revenues from 1995 to 1996 was due to an increased total
revenue base. The increase as a percentage of total revenue from 1996 to 1997
was due to increased investment in sales personnel and marketing programs for
the expanded product line, as well as lower than anticipated revenues in the
fourth quarter of 1997.

Netscape recorded deferred compensation of $11.1 million for the difference
between the grant price and the deemed fair value of Netscape's common stock for
stock options granted in the first six months of 1995. Operating expenses
include $2.5 million of non-cash charges associated with the amortization of
such deferred compensation for each of the years ended December 31, 1997, 1996,
and 1995. The remaining deferred compensation is being amortized to operating
expense over the related 50-month vesting period of the shares and will,
therefore, continue to adversely affect Netscape's operating results.
Specifically, Netscape will record additional operating expenses of $2.1 million
for ten-month period ending October 31, 1998 related to deferred compensation.
See Note 8 of the Notes to Consolidated Financial Statements.

RESEARCH AND DEVELOPMENT. Research and development expenses consisted
primarily of compensation and consulting fees to support product development.
Research and development expenses for 1997, 1996, and 1995 were $129.9 million,
$83.9 million, and $26.8 million, or 24.4%, 24.2%, and 31.4% of total revenues,
respectively. The increases in absolute dollars in all periods were generally
due to increased staffing and external consultant costs. The decrease as a
percentage of total revenues from 1995 was due to the increase in the total
revenue base.

The capitalizable portion of the software development costs has been
immaterial and, to date, such costs have been expensed as incurred. Netscape
believes that research and development activities are a critical area for
investment. Even with the restructuring, Netscape intends to increase the level
of research and development expenses in future periods, which may cause
increases in such expenses year over year.

SALES AND MARKETING. Sales and marketing expenses consist primarily of
compensation, consulting fees, travel and advertising. Sales and marketing
expenses for 1997, 1996, and 1995 were $272.1 million, $154.5 million, and $43.7
million, or 51.0%, 44.6%, and 51.1% of total revenues, respectively. The
increases in sales and marketing expenses in absolute dollars in all periods
were due to increased staffing, additional marketing programs, costs associated
with opening new sales offices, sales commissions on increased revenues and
continued investment in sales and marketing capabilities in Europe and ICON.
Although Netscape has reduced certain of these operating expenses as a result of
the restructuring, Netscape plans to increase other of these operating expenses
in fiscal 1998, and overall expenses may be higher in fiscal 1998 than they were
during the comparable period of the prior year.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of compensation, fees for professional services, and accounts
receivable allowances. General and administrative expenses for 1997, 1996, and
1995 were $50.4 million, $31.0 million, and $11.3 million, or 9.4%, 8.9%, and
13.3% of total revenues, respectively. The absolute dollar increases in all
periods were primarily attributable to increased staffing, increased fees for
professional services, and higher accounts receivable balances. Although
Netscape has reduced certain of these operating expenses as a result of the
restructuring, Netscape plans to increase other of these operating expenses in
fiscal 1998, and overall expenses may be higher in fiscal 1998 than they were
during the comparable period of the prior year.

PROPERTY RIGHTS AGREEMENT AND RELATED CHARGES. Netscape has segregated
certain expenses totaling none, $250,000 and $500,000 for 1997, 1996 and 1995,
respectively. These expenses relate to an agreement with the University of
Illinois and Spyglass, Inc. and associated costs, including fees for expert and
professional services, trademark search costs, and other related expenses. All
of these expenses have been recorded for financial reporting purposes in
accordance with Statement of Financial Accounting Standards No. 5 ("SFAS 5").
See Note 7 of Notes to Consolidated Financial Statements.

45
<PAGE>
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT AND MERGER RELATED
CHARGES. In 1997, Netscape expensed approximately $108.9 million of purchased
in-process research and development and merger-related charges in connection
with the acquisitions of Portola, DigitalStyle, and Actra, accounted for as
purchase transactions, and KIVA, accounted for as a pooling of interests. The
value attributed to the in-process research and development was determined by an
independent appraisal. In the Portola acquisition work performed in the area of
high-performance messaging systems with an IMAP configuration represented the
acquired in-process research and development technology. For DigitalStyle, the
acquired in-process research and development technology was assigned to the area
of Web graphics tools and Java-based animation. For Actra, it was ascribed to
the design and delivery of next-generation Internet commerce applications.
Netscape may incur additional charges in subsequent quarters to reflect costs
associated with these transactions and may not succeed in its efforts to
integrate the operations and technology of these companies.

In 1996, Netscape incurred certain merger related charges totaling $6.1
million. These expenses related to the acquisitions of InSoft, Inc., Netcode
Corporation and Paper Software, Inc., accounted for as a pooling of interests,
and were primarily associated with fees for investment banking, legal,
accounting, severance costs and other related charges incurred with the
acquisitions. Netscape does not anticipate incurring any future charges
associated with these mergers. However, Netscape may incur additional charges in
the event it undertakes additional acquisitions.

RESTRUCTURING CHARGES. In December 1997, Netscape implemented a
restructuring plan aimed at reducing its cost structure, improving its
competitiveness, and restoring sustainable profitability. The restructuring plan
resulted from decreased revenue associated with certain Netscape products and
Netscape's adoption of a new strategic direction. The restructuring included
reduction in workforce, closure of certain facilities, write-down of operating
assets to be disposed of, and payments on canceled third-party royalty
contracts. Netscape incurred $23.0 million related to the restructuring in the
fourth quarter of 1997. At December 31, 1997, Netscape accrued approximately
$3.7 million in restructuring costs, representing estimated facility and
third-party royalty payments to be paid in 1998. The remaining restructuring
costs were comprised primarily of write-offs of assets to be disposed of in
connection with the restructuring. Additionally, Netscape incurred approximately
$12.0 million for severance costs in January 1998, mostly related to the
termination of approximately 400 employees, or approximately 13% of its
workforce.

INTEREST AND OTHER INCOME, NET

Interest and other income, net, for 1997, 1996, and 1995 was $10.9 million,
$8.7 million, and $4.6 million, respectively. The increase from 1995 to 1996 was
due primarily to higher average cash and investment balances as a result of
Netscape's second public offering in November 1996 and initial public offering
in August 1995. The increase from 1996 to 1997 was due primarily to a gain of
$1.8 million on the sale of an investment in 1997. Pre-tax interest income may
fluctuate in future periods as a result of changes in Netscape's average cash
balances, the structure and duration of the portfolio, and changes in market
interest rates for investments.

EQUITY IN NET LOSSES OF JOINT VENTURES

Equity in net losses of joint ventures for 1997, 1996, and 1995 were $5.9
million, $1.9 million, and none, respectively, reflecting Netscape's share of
the net losses of Netscape's joint ventures under the equity method of
accounting. See Note 11 of Notes to Consolidated Financial Statements.

INCOME TAXES

Netscape recorded an income tax provision (benefit) of $(11.8) million, $7.8
million, and $498,000 for 1997, 1996, and 1995, respectively. The tax benefit
for 1997 was lower than the statutory U.S. federal rate

46
<PAGE>
due primarily to the purchased in-process research and development and merger
related charges, partially offset by the benefit from the research tax credit
and tax exempt interest.

The net deferred tax assets at December 31, 1997 were $43.5 million, net of
a valuation allowance of $23.6 million, of which $17.9 million relates to
certain intangible assets that will be amortized over 15 years for tax purposes.
Realization of Netscape's net deferred tax assets depends on Netscape generating
sufficient taxable income in future years in appropriate tax jurisdictions to
obtain benefit from the reversal of temporary differences and from net operating
loss carryforwards. It is management's assessment that future levels of taxable
income will be sufficient to realize the net deferred tax asset. See Note 10 of
Notes to Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1997, Netscape's principal source of liquidity was $184.6
million in cash, cash equivalents, and short-term investments, representing a
$18.6 million decrease from the December 31, 1996 balance of $203.2 million.
During the same period, long-term investments decreased by $13.8 million from
$90.5 million at December 31, 1996 to $76.7 million at December 31, 1997,
resulting in a net decrease of $32.4 million in cash, cash equivalents, and
short- and long-term investments from December 31, 1996 to December 31, 1997.
Netscape's cash, and short- and long-term investments are managed to be
available for working capital, strategic investment opportunities, or other
potential cash needs in the future. Netscape has no material debt.

In 1997, cash provided by operating activities of $38.9 million was
primarily attributable to increases in deferred revenues, accounts payable,
accrued compensation and related liabilities, and other accrued liabilities,
partially offset by the growth in accounts receivable and deferred income taxes.
Cash used in investing activities of $95.7 million for 1997 related primarily to
capital expenditures of $100.4 million. The capital expenditures primarily
consisted of purchases of computer hardware and software as well as leasehold
improvements and furniture and fixtures related to additional leased facilities.
Netscape anticipates that capital expenditures will increase in future periods.
Cash flows from financing activities of $24.3 million for 1997 was primarily
attributable to proceeds from the issuance of common stock under Netscape's
stock option and employee stock purchase plans.

In 1996 and 1995, cash provided by operating activities of $13.7 million and
$12.0 million, respectively, was primarily attributable to increases in net
income, deferred revenues, accounts payable, accrued compensation and related
liabilities, and other accrued liabilities, partially offset by the growth in
accounts receivable and deferred income taxes. Cash used in investing activities
of $177.5 million and $139.8 million for 1996 and 1995, respectively, related
primarily to net short-term purchases of $89.1 million and $116.4 million,
respectively, as well as capital expenditures of $82.2 million and $20.5
million, respectively. The capital expenditures primarily consisted of purchases
of computer hardware and software as well as leasehold improvements and
furniture and fixtures related to additional leased facilities. Cash flows from
financing activities of $196.9 million for 1996 were primarily attributable to
the net proceeds of $158.3 million from Netscape's second public offering in
November 1996, $23.3 million in tax benefit related to stock options, and, to a
lesser extent, approximately $15.8 million from the issuance of common stock
under Netscape's stock plans. Cash flows from financing activities of $172.8
million for 1995 were primarily attributable to net proceeds of $148.2 million
from Netscape's initial public offering in August 1995, and, to a lesser extent,
$17.3 million from the issuance of Series C Preferred Stock in April 1995.

Deferred revenues primarily consist of the unrecognized portion of product
and service revenues received pursuant to training, consulting, Web advertising
and subscription and support contracts, and the unrecognized portion of
nonrefundable, prepaid license royalties received pursuant to sublicense
agreements. Deferred revenues increased to $106.2 million at December 31, 1997
from $80.3 million at

47
<PAGE>
December 31, 1996 due to an increase in the number of sublicense agreements, the
amount of prepayments received pursuant to sublicense agreements, and, to a
lesser extent, an increase in the number of training, consulting, and Web
advertising and subscription and support contracts.

Netscape's principal commitments as of December 31, 1997 consisted of
obligations under operating leases for monthly rent and operating lease
agreements that include commitments by Netscape to complete the build-out of
certain tenant improvements. The commitments at December 31, 1997 totaled
approximately $10.5 million to be paid over the next year. See Note 6 of Notes
to Consolidated Financial Statements.

Netscape believes existing cash and investments together with cash flows
expected to be generated from operations, if any, will suffice to meet
Netscape's operating requirements for at least the next 12 months.

YEAR 2000

Netscape is not aware of any material operational issues or costs associated
with preparing internal systems for the Year 2000. However, see the discussion
of the potential risks in "Factors Affecting Netscape's Business, Operating
Results, and Financial Condition--Year 2000."

OTHER RECENT PRONOUNCEMENTS

Statement of Position ("SOP 97-2"), "Software Revenue Recognition" was
issued in October 1997 and addresses software revenue recognition matters
primarily from a conceptual level and does not include specific interpretive and
implementation guidance. Statement of Position 98-4 was issued in March 1998
which delays for one year the implementation of a narrow provision of SOP 97-2.
SOP 97-2 supersedes SOP 91-1 and is effective for transactions entered into for
fiscal years beginning after December 15, 1997. Detailed interpretive and
implementation guidelines for this standard have not yet been issued. Once
available, such detailed interpretive and implementation guidance could lead to
unanticipated changes in Netscape's current revenue accounting practices, and
such changes could be material to Netscape's revenues and earnings.

In 1997, Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income," was issued and is effective for years
commencing after December 15, 1997. Netscape will comply with the requirements
of SFAS 130 in fiscal year 1998.

In 1997, Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information," was
issued and is effective for years commencing after December 15, 1997. Netscape
will comply with the requirements of SFAS 131 in fiscal year 1998.

48
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

INVESTMENT PORTFOLIO

Netscape does not use derivative financial instruments in its investment
portfolio. Netscape places its investments in instruments that meet high credit
quality standards, as specified in Netscape's investment policy guidelines; the
policy also limits the amount of credit exposure to any one issue, issuer, or
type of instrument. Netscape does not expect any material loss with respect to
its investment portfolio.

The table below provides information about Netscape's investment portfolio.
For investment securities, the table presents principal cash flows and related
weighted average fixed interest rates by expected maturity dates. Netscape's
investment policy requires that all investments mature in five years or less.

Principal (Notional) Amounts by Expected Maturity in U.S. Dollars:

<TABLE>
<CAPTION>
FAIR VALUE
AT DECEMBER
FY 1998 FY 1999 FY 2000 FY 2001 TOTAL 31, 1997
---------- --------- ---------- ---------- ---------- ------------
(IN THOUSANDS, EXCEPT INTEREST RATES)
<S> <C> <C> <C> <C> <C> <C>
Cash Equivalents....................... $ 11,534 -- -- -- $ 11,534 $ 11,534
Average Interest Rate................ 4.05% -- -- -- 4.05%
Investments............................ $ 129,470 $ 52,607 -- -- $ 182,077 $ 182,107
Average Interest Rate................ 5.36% 5.97% -- -- 5.54%
Total Portfolio........................ $ 141,004 $ 52,607 -- -- $ 193,611 $ 193,641
Average Interest Rate................ 5.25% 5.97% -- -- 5.45%
</TABLE>

IMPACT OF FOREIGN CURRENCY RATE CHANGES

Netscape invoices the customers of its international subsidiaries
predominantly in U.S. dollars, and, to a lesser extent, in local currencies of
its subsidiaries primarily for service revenues. Netscape has not engaged in
foreign currency hedging activities. To the extent of its local currency
invoicing, its international revenues are currently subject to currency exchange
fluctuation risk. To the extent that international revenues that are invoiced in
local currencies increase in the future, Netscape's exposure to fluctuations in
currency exchange rates will correspondingly increase. Currency fluctuations may
also effectively increase the cost of Netscape products and services in
countries in which customers are invoiced in U.S. dollars.

In the year ended December 31, 1997, most currencies in Europe and Asia
weakened against the U.S. dollar. Consequently, the translation of Netscape's
international subsidiaries' local currency invoiced revenues had a negative
impact, although not material, on the consolidated results of Netscape. This
negative impact was partially offset by local currency denominated intercompany
payables due back to the international subsidiaries as commissions on their
revenue and also on their operating expenses which are also paid in local
currencies. Netscape has no significant foreign debt, and non-U.S. dollar cash
balances held overseas are currently kept at minimum levels to meet current
operating needs.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements required pursuant to this item are included in Part
III, Item 14 of this Form 10-K and are presented beginning on page 54. The
supplementary financial information required by this item is included under the
subsection entitled "Quarterly Results of Operations/Supplementary Financial
Information," beginning on page 84.

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

Not applicable.

49
<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF NETSCAPE.

See the information set forth in the sections entitled "Proposal
One--Election of Directors" and "Compliance with Section 16(a) of the Exchange
Act" in Netscape's Proxy Statement for the 1998 Annual Meeting of Stockholders
to be filed with the Commission within 120 days after the end of Netscape's
fiscal year ended December 31, 1997 (the "1998 Proxy Statement"), which is
incorporated herein by reference, and the information set forth in the section
entitled "Executive Officers of Netscape" at the end of Part I of this Form
10-K.

ITEM 11. EXECUTIVE COMPENSATION.

See the information set forth in the sections entitled "Proposal
One--Election of Directors--Director Compensation" and "Executive Officer
Compensation" in the 1998 Proxy Statement, which is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

See the information set forth in the section entitled "Share Ownership by
Principal Stockholders and Management" in the 1998 Proxy Statement, which is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

See the information set forth in the section entitled "Certain Transactions
with Management" in the 1998 Proxy Statement, which is incorporated herein by
reference.

50
<PAGE>
PART IV

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

(a) 1. FINANCIAL STATEMENTS.

The following consolidated financial statements, and the related notes
thereto, of Netscape and the Report of Independent Auditors are filed as a part
of this Form 10-K.

<TABLE>
<CAPTION>
PAGE NUMBER
-------------
<S> <C>
Report of Ernst &Young, LLP, Independent Auditors............................................. 53

Consolidated Financial Statements:

Consolidated Balance Sheets as of December 31, 1997 and 1996................................ 54

Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and
1995...................................................................................... 55

Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996
and 1995.................................................................................. 56

Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and
1995...................................................................................... 58

Notes to Consolidated Financial Statements.................................................. 59
</TABLE>

2. FINANCIAL STATEMENT SCHEDULES.

The following financial statement schedule of Netscape for each of the years
ended December 31, 1997, 1996 and 1995 is filed as part of this Form 10-K and
should be read in conjunction with the Consolidated Financial Statements, and
related notes thereto, of Netscape.

<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Schedule II--Valuation and Qualifying Accounts................................................ S-1
</TABLE>

Schedules other than those listed above have been omitted since they are
either not required, not applicable, or the information is otherwise included.

3. EXHIBITS.

The exhibits listed on the accompanying index to exhibits immediately
following the financial statement schedule are filed as part of, or incorporated
by reference into, this Form 10-K.

(b) REPORTS ON FORM 8-K.

1. A Current Report on Form 8-K was filed with the Securities and Exchange
Commission (the "Commission") by Netscape on November 28, 1997 to report
the announcement of the signing of a definitive agreement to acquire
KIVA.

2. A Current Report on Form 8-K was filed with the Commission by Netscape
on December 15, 1997 to report the closing of the acquisition of KIVA, as
amended on Form 8-K/A filed on December 16, 1997 to provide certain pro
forma financial information relating to the business combination with
KIVA.

51
<PAGE>
3. A Current Report on Form 8-K was filed with the Commission by Netscape
on December 15, 1997 to report the closing of Netscape's acquisition of
GEIS's membership interests in Actra.

4. A Current Report on Form 8-K was filed with the Commission by Netscape
on January 5, 1998 to report the announcement of preliminary estimates of
results of operations for the quarter ended December 31, 1997.

5. A Current Report on Form 8-K was filed with the Commission by Netscape
on January 22, 1998 to report the announcement of plans to make the
next-generation Netscape Communicator Source Code available without
licensing fees on Netscape's Website.

6. A Current Report on Form 8-K was filed with the Commission by Netscape
on January 28, 1998 to report the announcement for the fourth quarter and
full year ended December 31, 1997 results of operations.

7. A Current Report on Form 8-K was filed with the Commission by Netscape
on February 20, 1998 to report that Netscape gave certain employees who
held outstanding options to purchase Netscape common stock at prices
above the January 28, 1998 market closing price of $16.8125 the
opportunity to change the exercise price of such options to the market
closing price on January 28, 1998.

8. A Current Report on Form 8-K was filed with the Commission by Netscape
on February 25, 1998 to report that Netscape's Board of Directors
approved a resolution to change Netscape's fiscal year to November 1
through October 31, effective immediately.

52
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Netscape Communications Corporation

We have audited the accompanying consolidated balance sheets of Netscape
Communications Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of Netscape's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Netscape Communications Corporation at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

Palo Alto, California
January 23, 1998, except for Note 14,
as to which the date is March 25, 1998

53
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
----------- ----------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 55,172 $ 88,233
Short-term investments.............................................................. 129,426 115,015
Accounts receivable, net of allowances of $8,335 in 1997 and $4,896 in 1996......... 153,191 110,821
Deferred tax assets................................................................. 37,336 20,347
Other current assets................................................................ 19,961 16,928
----------- ----------
Total current assets.............................................................. 395,086 351,344
Property and equipment, net........................................................... 131,093 86,812
Long-term investments................................................................. 76,698 90,504
Other assets.......................................................................... 29,943 12,665
----------- ----------
Total assets...................................................................... $ 632,820 $ 541,325
----------- ----------
----------- ----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 40,081 $ 27,752
Accrued compensation and related liabilities........................................ 23,193 17,175
Other accrued liabilities........................................................... 18,266 12,788
Income taxes payable................................................................ 2,709 7,731
Deferred revenues................................................................... 106,170 80,308
Accrued merger related charges...................................................... 8,911 --
Accrued restructuring charges....................................................... 3,685 --
Current portion of long-term obligations and installment notes payable.............. 535 733
----------- ----------
Total current liabilities......................................................... 203,550 146,487
Long-term obligations and installment notes payable................................... 215 616
Commitments and contingencies.........................................................

Stockholders' equity:
Preferred stock, $0.0001 par value; issuable in series; 5,000,000 shares authorized
no shares issued and outstanding.................................................. -- --
Common stock, $0.0001 par value; 200,000,000 shares authorized, 97,984,300 shares in
1997 and 87,940,820 shares in 1996 issued and outstanding......................... 10 9
Additional paid-in capital.......................................................... 549,186 404,063
Deferred compensation............................................................... (3,671) (6,128)
Accumulated deficit................................................................. (119,201) (3,705)
Unrealized gain on available-for-sale investments................................... 3,433 50
Accumulated translation adjustment.................................................. (702) (67)
----------- ----------
Total stockholders' equity........................................................ 429,055 394,222
----------- ----------
Total liabilities and stockholders' equity........................................ $ 632,820 $ 541,325
----------- ----------
----------- ----------
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

54
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues:
Product revenues........................................... $ 383,950 $ 291,183 $ 77,489
Service revenues........................................... 149,901 55,111 7,898
--------- --------- ---------
Total revenues........................................... 533,851 346,294 85,387
Cost of revenues:
Cost of product revenues................................... 50,232 36,943 9,177
Cost of service revenues................................... 31,557 13,124 2,530
--------- --------- ---------
Total cost of revenues................................... 81,789 50,067 11,707
--------- --------- ---------
Gross profit................................................. 452,062 296,227 73,680
Operating expenses:
Research and development................................... 129,928 83,863 26,841
Sales and marketing........................................ 272,110 154,545 43,679
General and administrative................................. 50,356 30,981 11,336
Property rights agreement and related charges.............. -- 250 500
Purchased in-process research and development.............. 103,087 -- --
Merger related charges..................................... 5,848 6,100 2,033
Restructuring charges...................................... 23,000 -- --
--------- --------- ---------
Total operating expenses................................. 584,329 275,739 84,389
--------- --------- ---------
Operating income (loss)...................................... (132,267) 20,488 (10,709)
Interest and other income, net............................... 10,922 8,720 4,594
Equity in net losses of joint ventures....................... (5,939) (1,928) --
--------- --------- ---------
Income (loss) before income taxes............................ (127,284) 27,280 (6,115)
Provision (benefit) for income taxes......................... (11,788) 7,763 498
--------- --------- ---------
Net income (loss)............................................ $(115,496) $ 19,517 $ (6,613)
--------- --------- ---------
--------- --------- ---------
Basic income (loss) per share................................ $ (1.34) $ 0.27 $ (0.16)
--------- --------- ---------
--------- --------- ---------
Diluted income (loss) per share.............................. $ (1.34) $ 0.21 $ (0.16)
--------- --------- ---------
--------- --------- ---------
Shares used in computing basic income (loss) per share....... 86,058 72,942 40,627
--------- --------- ---------
--------- --------- ---------
Shares used in computing diluted income (loss) per share..... 86,058 90,841 40,627
--------- --------- ---------
--------- --------- ---------
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

55
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL UNREALIZED TRANSLATION TOTAL
PREFERRED COMMON PAID-IN- DEFERRED ACCUMULATED GAIN ADJUSTMENT STOCKHOLDERS'
STOCK STOCK CAPITAL COMPENSATION DEFICIT (LOSS) AND OTHER EQUITY
--------- ------ ---------- ------------ ----------- ---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1994.................... $ 1 $ 1 $ 24,083 $ -- $ (15,924) $ -- $ -- $ 8,161
Issuance of 21,533,159
shares of common stock
primarily on exercise of
stock options, for cash
and notes, net of
repurchases............. -- 2 2,095 -- -- -- (763) 1,334
Issuance of 314,087 shares
of common stock (InSoft
Series B and Series C)
net of issuance costs of
$132 and other.......... -- -- 4,477 -- (179) -- -- 4,298
Issuance of 2,000,000
shares of Series C
convertible preferred
stock at $9.00 per share
for cash, net of
issuance costs of
$700.................... -- -- 17,300 -- -- -- -- 17,300
Deferred compensation
related to grant of
stock options........... -- -- 11,087 (11,087) -- -- -- --
Amortization of deferred
compensation............ -- -- -- 2,503 -- -- -- 2,503
Conversion and split of
9,008,222 shares of
preferred stock to
common stock............ (1) 4 (3) -- -- -- -- --
Issuance of 11,500,000
shares of common stock
upon IPO, net of
offering costs of
$12,850................. -- 1 148,149 -- -- -- -- 148,150
Net unrealized gain on
available-for-sale
securities.............. -- -- -- -- -- 2,157 -- 2,157
Net loss.................. -- -- -- -- (6,613) -- -- (6,613)
Translation gain.......... -- -- -- -- -- -- 97 97
--- ------ ---------- ------------ ----------- ---------- ----- -------------
BALANCE AT DECEMBER 31,
1995.................... -- 8 207,188 (8,584) (22,716) 2,157 (666) 177,387
Issuance of 1,536,364
shares of common stock
primarily upon exercise
of stock options, for
cash and services, net
of repurchases plus cash
received from
stockholders' notes..... -- -- 9,556 -- -- -- 763 10,319
Issuance of 427,689 shares
of common stock (InSoft,
PaperSoftware, and
Netcode) and other...... -- -- 615 -- (419) -- -- 196
</TABLE>

56
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)

<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL UNREALIZED TRANSLATION TOTAL
PREFERRED COMMON PAID-IN- DEFERRED ACCUMULATED GAIN ADJUSTMENT STOCKHOLDERS'
STOCK STOCK CAPITAL COMPENSATION DEFICIT (LOSS) AND OTHER EQUITY
--------- ------ ---------- ------------ ----------- ---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of 3,571,836
shares of common stock
(KIVA), net of issuance
costs of $37 and
other................... -- -- 5,050 -- (87) -- -- 4,963
Amortization of deferred
compensation............ -- -- -- 2,456 -- -- -- 2,456
Issuance of 3,090,000
shares of common stock,
net of offering costs of
$325.................... -- 1 158,314 -- -- -- -- 158,315
Tax benefit related to
stock options........... -- -- 23,340 -- -- -- -- 23,340
Net unrealized loss on
available-for-sale
securities.............. -- -- -- -- -- (2,107) -- (2,107)
Net income................ -- -- -- -- 19,517 -- -- 19,517
Translation loss.......... -- -- -- -- -- -- (164) (164)
--- ------ ---------- ------------ ----------- ---------- ----- -------------
BALANCE AT DECEMBER 31,
1996.................... -- 9 404,063 (6,128) (3,705) 50 (67) 394,222
Issuance of 1,053,667
shares of common stock
primarily upon exercise
of stock options, for
cash and services, net
of repurchases.......... -- -- 15,434 -- -- -- -- 15,434
Issuance of 1,781,489
shares of common stock
in connection with the
purchase of DigitalStyle
and Portola............. -- -- 54,147 -- -- -- -- 54,147
Issuance of 1,731,848
shares of common stock
(KIVA).................. -- 1 9,468 -- -- -- -- 9,469
Issuance of 1,932,579
shares of common stock
in connection with the
purchase of Actra....... -- -- 66,074 -- -- -- -- 66,074
Amortization of deferred
compensation............ -- -- -- 2,457 -- -- -- 2,457
Net unrealized gain on
available-for-sale
securities.............. -- -- -- -- -- 3,383 -- 3,383
Net loss.................. -- -- -- -- (115,496) -- -- (115,496)
Translation loss.......... -- -- -- -- -- -- (635) (635)
--- ------ ---------- ------------ ----------- ---------- ----- -------------
BALANCE AT DECEMBER 31,
1997.................... $-- $10 $ 549,186 $ (3,671) $(119,201) $ 3,433 $(702) $ 429,055
--- ------ ---------- ------------ ----------- ---------- ----- -------------
--- ------ ---------- ------------ ----------- ---------- ----- -------------
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

57
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................................................... $ (115,496) $ 19,517 $ (6,613)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities net of companies acquired:
Purchased in-process research and development.......................... 103,087 -- --
Restructuring charges.................................................. 19,315 -- --
Depreciation and amortization.......................................... 38,681 16,369 3,853
Amortization of deferred compensation.................................. 2,457 2,456 2,553
Deferred income taxes.................................................. (24,227) (23,747) --
Changes in assets and liabilities:
Accounts receivable.................................................... (42,370) (83,719) (24,929)
Other current assets................................................... (2,933) (10,509) (5,989)
Accounts payable....................................................... 12,329 19,069 6,696
Accrued compensation and related liabilities........................... 6,018 10,598 5,877
Other accrued liabilities.............................................. 9,163 6,351 5,133
Accrued taxes.......................................................... 678 7,731 --
Deferred revenues...................................................... 25,862 50,276 26,152
Accrued merger related charges......................................... 6,362 -- --
Long-term obligations.................................................. -- (725) (725)
----------- ----------- -----------
Net cash provided by operating activities.................................. 38,926 13,667 12,008
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures....................................................... (100,368) (82,225) (20,522)
Change in deposits and other assets........................................ 1,934 (6,166) (2,891)
Purchases of investments available-for-sale................................ (217,794) (470,085) (153,311)
Maturities of investments available-for-sale............................... 104,001 239,208 6,208
Sales of investments available-for-sale.................................... 116,571 141,776 30,736
----------- ----------- -----------
Net cash used in investing activities...................................... (95,656) (177,492) (139,780)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of installment notes payable........................ -- -- 2,200
Payments on installment notes payable...................................... (599) (450) (401)
Proceeds from issuance of preferred stock, net............................. -- -- 17,300
Proceeds from issuance of common stock, net................................ 24,903 174,056 153,662
Tax benefit related to stock options....................................... -- 23,340 --
----------- ----------- -----------
Net cash provided by financing activities.................................. 24,304 196,946 172,761
Effect of foreign exchange rate changes on cash and cash equivalents....... (635) (164) 97
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents....................... (33,061) 32,957 45,086
Cash and cash equivalents at beginning of year............................. 88,233 55,276 10,190
----------- ----------- -----------
Cash and cash equivalents at end of year................................... $ 55,172 $ 88,233 $ 55,276
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid.......................................................... $ 11,741 $ 1,241 $ 478
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

58
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NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

Netscape helps individuals and organizations harness the full power of the
Internet. Netscape develops, markets, and supports a broad software suite of
enterprise servers, clients, commercial applications, and development tools,
targeted primarily at corporate intranets and extranets. Netscape's software
allows users to share information, manage networks, and facilitate electronic
commerce. Netscape software is based on industry-standard protocols that can be
deployed across a variety of operating systems, platforms, and databases and
that can be interconnected with traditional client/server applications.
Netscape's Website, one of the most highly trafficked on the World Wide Web (the
"Web"), offers a variety of products and services geared toward business
professionals.

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Netscape and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

On December 1, 1997 Netscape entered into a business combination with KIVA.
The business combination was accounted for as a pooling of interests and the
historical consolidated financial statements of Netscape for all years prior to
the business combination have been restated to include the financial position,
results of operations, and cash flows of KIVA. Costs of the acquisition were
charged to operations in 1997. See additional discussion in Note 2, "Business
Combinations".

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.

REVENUE RECOGNITION

Netscape derives product revenues from product licensing fees and service
revenues from fees for Website transactions, which include Web advertising,
search and directory services, trademark licensing and other Web services, and
fees for maintenance and support services, training, and consulting. Product
revenues, net of allowances for future returns, are generally recognized when a
license agreement is in effect, the product has been shipped, the license fee is
fixed or determinable, no significant vendor obligations remain and
collectibility is reasonably assured. Product revenues from original equipment
manufacturers ("OEMs") and internet service providers ("ISPs") are generally
recognized upon delivery of product masters provided that the license fees are
fixed and collectibility is not dependent upon resale to the end users;
otherwise, these product revenues are recognized upon notification of delivery
to the end users or upon receipt of cash. Product and service revenues from
customer subscription and technical

59
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NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
support contracts are recognized ratably over the term of the contract period.
Payments for upgrades and support fees are generally made in advance and are
nonrefundable. Service revenues from Web advertising are recognized ratably over
the term of the contract beginning when the advertising is displayed on
Netscape's Web page. Service revenues from search and directory services are
recognized based on actual traffic incurred. Service revenues from trademark
licensing are recognized when a license agreement is executed and the fees are
fixed. Service revenues from training and consulting are recognized when the
services are performed.

CASH, CASH EQUIVALENTS, SHORT- AND LONG-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- and
long-term investments consist of debt securities with original maturities
primarily between 90 days and three years. The debt securities are all
classified as available-for-sale. Long-term investments additionally include
equity holdings in both public and private technology companies, which have been
classified as available-for-sale. Debt securities and unrestricted public equity
securities with a readily determinable fair value, are stated at fair value,
which is determined based upon the quoted market prices of the securities. Other
equity securities are stated at the lesser of cost or the net realizable value.

The following tables detail Netscape's investments and their contractual
maturities:

<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Corporate bonds and notes......................................... $ 168,763 $ 205 $ (132) $ 168,836
Market auction preferred stock.................................... 14,713 30 (69) 14,674
Certificates of deposit........................................... 10,135 - (4) 10,131
Equity investments................................................ 18,394 5,623 - 24,017
---------- ----------- ----- ----------
$ 212,005 $ 5,858 $ (205) $ 217,658
---------- ----------- ----- ----------
---------- ----------- ----- ----------

Included in cash and cash equivalents............................. $ 11,534 $ - $ - $ 11,534
Included in short-term investments................................ 129,470 161 (205) 129,426
Included in long-term investments................................. 71,001 5,697 - 76,698
---------- ----------- ----- ----------
$ 212,005 $ 5,858 $ (205) $ 217,658
---------- ----------- ----- ----------
---------- ----------- ----- ----------

Due within one year............................................... $ 141,004 $ 161 $ (205) $ 140,960
Due after one year through five years............................. 71,001 5,697 -- 76,698
---------- ----------- ----- ----------
$ 212,005 $ 5,858 $ (205) $ 217,658
---------- ----------- ----- ----------
---------- ----------- ----- ----------
</TABLE>

60
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NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government agencies.......................................... $ 10,314 $ 26 $ (27) $ 10,313
Corporate bonds and notes......................................... 185,661 272 (224) 185,709
Market auction preferred stock.................................... 54,376 - (13) 54,363
Certificates of deposit........................................... 9,223 2 - 9,225
Auction rate receipts............................................. 15,509 14 - 15,523
Equity investments................................................ 8,434 - - 8,434
---------- ----------- ----- ----------
$ 283,517 $ 314 $ (264) $ 283,567
---------- ----------- ----- ----------
---------- ----------- ----- ----------
Included in cash and cash equivalents............................. $ 78,078 $ - $ (30) $ 78,048
Included in short-term investments................................ 114,918 213 (116) 115,015
Included in long-term investments................................. 90,521 101 (118) 90,504
---------- ----------- ----- ----------
$ 283,517 $ 314 $ (264) $ 283,567
---------- ----------- ----- ----------
---------- ----------- ----- ----------

Due within one year............................................... $ 192,996 $ 213 $ (146) $ 193,063
Due after one year through five years............................. 72,713 101 (84) 72,730
Due after five years.............................................. 17,808 - (34) 17,774
---------- ----------- ----- ----------
$ 283,517 $ 314 $ (264) $ 283,567
---------- ----------- ----- ----------
---------- ----------- ----- ----------
</TABLE>

The gross realized gains and losses on sales of available-for-sale
securities were $1.8 million, $201,000, and $109,000 in 1997, 1996, and 1995,
respectively. The cost of securities sold is based on the specific
identification method.

Equity investments in which Netscape has a 20% to 50% interest or otherwise
has the ability to exercise significant influence are accounted for under the
equity method. Equity investments in which Netscape has a less than 20% interest
are carried at cost or estimated realizable value, if less.

In June 1996, the Financial Accounting Standards Board released the
Statement of Financial Accounting Standards No. 125 ("SFAS 125"), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SFAS 125 is effective for all transactions occurring after
December 31, 1996. The implementation of SFAS 125 did not have a material impact
on Netscape's financial condition or results of operations.

PROPERTY AND EQUIPMENT

Property and equipment are depreciated using the straight-line method over
the estimated useful life of the asset, generally three to five years. Leasehold
improvements are amortized over the lesser of the term of the lease or the
estimated useful life of the asset.

61
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NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES

Netscape accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes," which
uses the liability method to calculate deferred income taxes.

STOCK-BASED COMPENSATION

As permitted under the Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," Netscape has elected to
follow Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees" in accounting for stock-based awards to employees.
See Note 8.

LONG-LIVED ASSETS

Netscape adopted Statement of Financial Accounting Standards No. 121 ("SFAS
121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" in fiscal 1997. Adoption of SFAS 121 did not have a
material impact on Netscape's financial condition or results of operations.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject Netscape to concentration of
credit risk consist principally of cash investments and trade receivables.
Netscape invests its excess cash in deposits with major banks, in U.S. Treasury
and U.S agency obligations and in debt securities of corporations with strong
credit ratings and in a variety of industries. All of those securities
classified as cash equivalents and marketable investments mature within five
years of their purchase date.

Netscape sells its products to a large number of customers in diversified
industries, primarily in North America, Europe and the Intercontinental region
("ICON"), which includes the Pacific Rim and Latin America. Netscape performs
ongoing credit evaluations of its customers' financial condition and generally
does not require collateral. Netscape maintains reserves to provide for
estimated credit losses. Actual credit losses could differ from such estimates.

FOREIGN CURRENCY TRANSLATION

Assets and liabilities of Netscape's wholly-owned foreign subsidiaries are
translated in U.S. dollars at year-end exchange rates, and revenues and expenses
are translated at average rates prevailing during the year. Translation
adjustments are included in a separate component of stockholders' equity.
Foreign currency transaction gains and losses, which have been immaterial, are
included in results of operations.

62
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED 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 Standards No. 86 ("SFAS 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 Netscape's product development process, technological feasibility
is established upon completion of a working model. Costs incurred by Netscape
between completion of the working model and the point at which the product is
ready for general release have been insignificant. All research and development
costs have been expensed.

ADVERTISING EXPENSES

Netscape accounts for advertising costs as expense in the period in which
they are incurred. Advertising expenses for 1997, 1996, and 1995, were
approximately $13.3 million, $5.4 million, and $2.7 million, respectively.

TRANSACTIONS WITH RELATED PARTIES

During 1997 Netscape made approximately $2.0 million in loans to executives
and other employees which are due over a period of two years. During 1996
Netscape made loans totaling approximately $1.3 million to executives and other
members of senior management of Netscape which are due over a period of 5 years.
Approximately $2.3 million is outstanding under these loans at December 31,
1997.

In July 1996, Netscape committed $4.0 million to the Java Fund, which
intends to fund entrepreneurial ventures targeted at new markets created by the
Java technology. As of December 31, 1997, approximately $1.8 million was
invested. The fund is managed by a member of the Board of Directors.

PER SHARE AMOUNTS

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 ("SFAS 128"), "Earnings Per Share". SFAS 128 supersedes the former
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Subsequent to the completion of the 1997 audit and
release of Netscape's audited 1997 results, the Financial Accounting Standards
Board clarified the inclusion of outstanding common shares subject to
repurchase, which changed the calculation of the previously announced earnings
per share. Unlike former primary earnings per share calculations, outstanding
common shares subject to repurchase are not considered outstanding for purposes
of calculating basic earnings per share, although those shares are included in
the calculation of diluted earnings per share to the extent their effect is
antidilutive using the treasury stock method. Based on the clarification,
Netscape adopted SFAS 128, and restated earnings per share calculations for its
quarter and year ended December 31, 1997 and all prior periods. Netscape's basic
income (loss) per share is computed using the weighted average number of common
shares outstanding during the period. Diluted income per share further includes
dilutive (as determined using the treasury stock method) potential common shares
outstanding during the period. Potential common shares consist of shares
issuable upon the exercise of stock options and outstanding common shares
subject to repurchase.

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NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computation of basic and diluted income
(loss) per share for 1997, 1996, and 1995:

<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ---------
<S> <C> <C> <C>
NUMERATOR:
Net income (loss)................................................. $ (115,496) $ 19,517 $ (6,613)
----------- ---------- ---------
----------- ---------- ---------

DENOMINATOR:
Weighted average common shares outstanding........................ 93,989 86,548 54,687
Weighted average outstanding common shares subject to
repurchase...................................................... (7,931) (13,606) (14,060)
----------- ---------- ---------
Denominator for basic income (loss) per share..................... 86,058 72,942 40,627
Employee stock options and outstanding common shares subject to
repurchase...................................................... -- 17,899 --
----------- ---------- ---------
Denominator for diluted income (loss) per share--adjusted weighted
average shares and assumed conversions.......................... 86,058 90,841 40,627
----------- ---------- ---------
----------- ---------- ---------
Basic income (loss) per share..................................... $ (1.34) $ 0.27 $ (0.16)
----------- ---------- ---------
----------- ---------- ---------
Diluted income (loss) per share................................... $ (1.34) $ 0.21 $ (0.16)
----------- ---------- ---------
----------- ---------- ---------
</TABLE>

For additional disclosures regarding the employee stock options see Note 8.

Prior to the adoption of SFAS 128, primary net income (loss) per share was
reported using the weighted average number of outstanding common shares with no
adjustment for outstanding common shares subject to repurchase. Supplementary
income (loss) per share data computed assuming outstanding common shares subject
to repurchase were outstanding for purposes of basic income (loss) per share in
1997, 1996, and 1995 is $(1.23), $0.23, and $(0.12), respectively.

Options to purchase 14.3 million and 6.0 million shares of common stock at
an average price of $26.85 and $17.17 per share were outstanding during 1997 and
1995, respectively, but were not included in the computation of diluted income
(loss) per share for those years because Netscape reported net losses for both
periods. In 1996, 4.8 million shares of common stock at an average price of
$61.20 per share were outstanding during 1996 but were not included in the
computation of diluted income (loss) per share because the options' price was
greater than the average market price of the common shares, and, therefore, the
effect would be antidilutive.

RECLASSIFICATION

Certain prior period amounts have been reclassified to conform with the
current period presentation.

OTHER RECENT PRONOUNCEMENTS

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NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOP 91-1 and is effective for transactions entered into for fiscal years
beginning after December 15, 1997. However, detailed interpretive and
implementation guidelines for this standard have not yet been issued. Once
issued, such detailed interpretive and implementation guidance could lead to
unanticipated changes in Netscape's current revenue accounting practices, and
such changes could be material to Netscape's revenues and earnings.

2. BUSINESS COMBINATIONS

In November 1995, Netscape completed its business combination with Collabra
Software, Inc., ("Collabra") a developer of collaborative computing software.
Netscape exchanged an aggregate of 3.7 million shares of Netscape common stock
and options for all of the outstanding capital stock and assumption of all of
the outstanding stock options of Collabra, a privately held company. The
business combination was treated as a pooling of interests for accounting
purposes, and accordingly, the historical financial statements of Netscape have
been restated as if the transaction occurred at the beginning of the earliest
period presented. In connection with the business combination, Netscape incurred
direct transaction costs of approximately $2.0 million, which consisted of fees
for investment banking, legal and accounting services, and other related
expenses incurred in conjunction with the merger.

In April 1996, Netscape completed its business combination with InSoft, Inc.
("InSoft"), a provider of network-based communications and collaborative
multimedia software for the enterprise. Netscape exchanged an aggregate of
approximately 2.0 million shares of Netscape common stock and options for all of
the outstanding capital stock and assumption of outstanding stock options of
InSoft, a privately held company. The business combination was treated as a
pooling of interests for accounting purposes, and accordingly, the historical
financial statements of Netscape have been restated as if the transaction
occurred at the beginning of the earliest period presented. In connection with
the business combination, Netscape incurred direct transaction costs of
approximately $5.1 million which consisted of fees for investment banking, legal
and accounting services, and other related expenses incurred in conjunction with
the business combination. Intercompany transactions between InSoft and Netscape
were not material.

In April 1996, Netscape completed its business combination with Netcode
Corporation ("Netcode"), a creator of a Java-based visual interface builder and
object toolkit for rapidly developing Java applications. Netscape exchanged
shares of Netscape common stock and options for all of the outstanding capital
stock and assumed all of the outstanding stock options of Netcode, a privately
held company. The business combination was treated as a pooling of interests for
accounting purposes. As Netcode's historical results of operations were not
material in relation to those of Netscape, the financial information prior to
January 1, 1996 has not been restated to reflect the business combination. In
connection with the business combination, Netscape incurred direct transaction
costs of approximately $300,000 which consisted of fees for legal and accounting
services, and other related expenses incurred in conjunction with the business
combination.

65
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NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. BUSINESS COMBINATIONS (CONTINUED)
In May 1996, Netscape completed its business combination with Paper
Software, Inc. ("Paper"), a provider of distributed three-dimensional graphics
and maker of WebFX VRML software. Netscape exchanged shares of Netscape common
stock for all of the outstanding capital stock of Paper, a privately held
company. The business combination was treated as a pooling of interests for
accounting purposes. As Paper's historical results of operations were not
material in relation to those of Netscape, the financial information prior to
January 1, 1996 has not been restated to reflect the business combination. In
connection with the business combination, Netscape incurred direct transaction
costs of approximately $700,000 which consisted of fees for legal and accounting
services, and other related expenses incurred in conjunction with the business
combination.

In June 1997, Netscape acquired Portola and DigitalStyle. Netscape purchased
all of the outstanding capital stock of each of the corporations and assumed all
of their outstanding stock options in exchange for an aggregate of approximately
2.0 million shares of Netscape's common stock. The acquisitions were accounted
for as purchase transactions as of June 1997 in the accompanying financial
statements. The purchase price for Portola approximated $32.2 million, which
primarily consisted of $31.2 million of stock issued and $934,000 of direct
acquisition costs. The purchase price for DigitalStyle approximated $26.0
million, which consisted of $22.9 million of stock issued and $2.1 million of
direct acquisition costs. The aggregate purchase prices were allocated to the
fair value of the assets acquired, the majority of which was purchased
in-process research and development of $28.1 million for Portola and $24.5
million for DigitalStyle. Purchased in-process research and development, which
was determined by an independent appraisal, represents the present value of the
estimated cash flows expected to be generated by the purchased technology, which
at the acquisition dates had not yet reached technological feasibility. As of
the date of each of the acquisitions, Netscape concluded that the in-process
technology had no alternative future use after taking into consideration the
potential use of the technology in different products, resale of the software,
and internal use. Netscape intends to continue devoting effort to developing
commercially viable products from the purchased in-process research and
development, although it may not develop such commercially viable products. The
value of the purchased in-process research and development was expensed at the
time of each of the acquisitions. The total amount after purchased in-process
research and development allocated to intangible assets from both acquisitions
of $731,000 is being amortized on a straight-line basis over a period of three
years from the date of each acquisition.

In December 1997, Netscape acquired the remaining equity interests of Actra
in exchange for an aggregate of approximately 1.9 million shares of Netscape
common stock, and approximately 637,000 options were granted to Actra employees.
The acquisition was accounted for as a purchase transaction. Actra had an
aggregate purchase price of approximately $67.8 million, which primarily
consisted of $66.1 million of stock and stock options issued and $1.7 million of
direct acquisition costs. Additionally, Netscape assumed liabilities totaling
$1.1 million. The aggregate purchase price was allocated to the fair value of
the assets acquired, the majority of which was purchased in-process research and
development of $50.5 million. Purchased in-process research and development,
which was determined by an independent appraisal, represents the present value
of the estimated cash flows expected to be generated by the purchased
technology, which at the acquisition date had not yet reached technological
feasibility. As of the date of the acquisition, Netscape concluded that the
in-process technology had no alternative future use after taking into
consideration the potential use of the technology in different products, resale
of the software, and internal use. Netscape intends to continue devoting effort
to developing commercially viable products from the purchased in-process
research and development, although there can be no assurance that it will
develop such commercially viable products. The value of the purchased in-process
research and

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NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. BUSINESS COMBINATIONS (CONTINUED)
development was expensed at the time of the acquisition. The total amount, after
purchased in-process research and development, allocated to the remaining
intangible assets was $18.3 million which includes approximately $13.8 million
of goodwill, $2.9 million of purchased software, and $1.6 million of assembled
workforce. They will be amortized on a straight-line basis over a period of
three years from the date of acquisition.

The pro forma results of operations of Netscape for 1997 and 1996, assuming
the Portola, DigitalStyle, and Actra acquisitions occurred at the beginning of
each period presented, excluding the charge for purchased in-process research
and development of $103.1 million related to the acquisitions and eliminating
all material intercompany transactions, are as follows:

<TABLE>
<CAPTION>
NETSCAPE PORTOLA DIGITALSTYLE ACTRA COMBINED
---------- --------- ------------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Net revenues............................ $ 533,851 $ -- $ 534 $ 4,864 $ 539,249
Net loss................................ (12,409) (1,027) (1,153) (11,876) (26,465)
Basic loss per share.................... $ (0.14) $ (0.30)
Diluted loss per share.................. $ (0.14) $ (0.30)

Year ended December 31, 1996
Net revenues............................ $ 346,294 $ -- $ 748 $ 367 $ 347,409
Net income (loss)....................... 19,517 (502) (2,128) (2,809) 14,078
Basic income (loss) per share........... $ 0.27 $ 0.18
Diluted income (loss) per share......... $ 0.21 $ 0.15
</TABLE>

The proforma information for Netscape has been restated to include KIVA. The
pro forma information is presented as an illustration only and does not
necessarily indicate the operating results that would have occurred had the
transactions been completed at the beginning of the period indicated, nor does
it necessarily indicate future operating results.

In December 1997, Netscape completed its business combination with KIVA.
Netscape exchanged approximately 6.0 million shares of Netscape common stock,
which included approximately 740,000 shares for issuance upon exercise of
options granted to KIVA employees, for all of the outstanding capital stock of
KIVA, a privately held company. The business combination was treated as a
pooling of interests for accounting purposes, and accordingly the historical
financial statements of Netscape have been restated as if the transaction
occurred at the beginning of the earliest period presented. The results of
operations of KIVA for 1995 were immaterial. In connection with the business
combination, Netscape incurred direct transaction costs of approximately $5.8
million, which consisted primarily of fees for investment banking, legal and
accounting services incurred in conjunction with the business combination.
Intercompany transactions between KIVA and Netscape were not material. No
material adjustments were required to conform the accounting policies of KIVA to
Netscape.

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NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. BUSINESS COMBINATIONS (CONTINUED)
The table below sets forth the combined net revenues, net loss, and basic
and diluted loss per share for the periods indicated.

<TABLE>
<CAPTION>
MERGER RELATED
NETSCAPE KIVA CHARGES COMBINED
----------- --------- -------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Net revenues.................................... $ 528,772 $ 5,079 $ -- $ 533,851
Net loss........................................ (103,437) (6,211) (5,848) (115,496)
Basic loss per share............................ (1.22) (4.92) -- (1.34)
Diluted loss per share.......................... (1.22) (4.92) -- (1.34)

Year ended December 31, 1996
Net revenues.................................... $ 346,195 $ 99 $ -- $ 346,294
Net income (loss)............................... 21,689 (2,172) -- 19,517
Basic income (loss) per share................... 0.31 (0.85) -- 0.27
Diluted income (loss) per share................. 0.25 (0.85) -- 0.21
</TABLE>

3. RESTRUCTURING COSTS

In December 1997, Netscape implemented of certain restructuring actions
aimed at reducing its cost structure, improving its competitiveness, and
restoring sustainable profitability. The restructuring plan resulted from
decreased demand for certain Netscape products and Netscape's adoption of a new
strategic direction. The restructuring included reduction in workforce, closure
of certain facilities, write-down of operating assets to be disposed of, and
payments on canceled contracts. Netscape incurred $23.0 million related to the
restructuring in the fourth quarter of 1997. At December 31, 1997, Netscape
accrued approximately $3.7 million in restructuring costs, representing
estimated facility and third party royalty payments to be paid in fiscal 1998.
The remaining restructuring costs were comprised primarily of write-offs of
assets to be disposed of in connection with the restructuring. Additionally,
Netscape incurred approximately $12.0 million for severance costs in January
1998 mostly related to the termination of approximately 400 employees, or
approximately 13% of its workforce.

The following table depicts the restructuring charges for the year ended
December 31, 1997:

<TABLE>
<CAPTION>
<S> <C>
Remaining rent payments and leasehold improvements on abandoned facility leases, net of
anticipated sublease income............................................................... $ 9,000
Write-down of abandoned computers and equipment and other operating assets.................. 8,827
Cost to exit third-party royalty arrangements related to discontinued projects.............. 5,173
----------
Total restructuring charges............................................................... 23,000
Non-cash charges............................................................................ (19,315)
----------
Accrued restructuring charges at December 31, 1997.......................................... $ 3,685
----------
----------
</TABLE>

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NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. PROPERTY AND EQUIPMENT

Property and equipment, at cost, consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Computers and equipment......................................................... $ 125,301 $ 76,429
Furniture and fixtures.......................................................... 30,233 12,819
Leasehold improvements.......................................................... 51,646 16,945
---------- ----------
207,180 106,193
Less accumulated depreciation................................................... (58,681) (19,381)
Less restructuring-related write-off............................................ (17,406) --
---------- ----------
$ 131,093 $ 86,812
---------- ----------
---------- ----------
</TABLE>

See Note 3 for further discussion of the restructuring-related write-off.

5. INSTALLMENT NOTES PAYABLE

On March 3, 1995, Netscape entered into a senior loan agreement for total
borrowings not to exceed $2.2 million. Borrowings made under the agreement are
secured by certain assets of Netscape. The notes are payable in 36 monthly
installments at a 17.3% interest rate. Maturities subsequent to December 31,
1997 total approximately $484,000 in 1998. At December 31, 1997 and 1996, the
fair value of the notes approximated their carrying value based on quoted market
prices for similar securities.

6. LEASES

Netscape leases its facilities and certain other equipment under operating
lease agreements expiring through 2013. Future minimum payments as of December
31, 1997, excluding the leases to be canceled under the restructuring, are as
follows (see Note 3):

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998........................................................................................ $ 20,470
1999........................................................................................ 18,808
2000........................................................................................ 17,857
2001........................................................................................ 17,825
2002........................................................................................ 16,644
2003 and thereafter......................................................................... 141,262
----------
$ 232,866
----------
----------
</TABLE>

Rent expense for 1997, 1996, and 1995 was approximately $15.0 million, $6.3
million, and $2.2 million, respectively.

Netscape has entered into certain lease agreements that include commitments
by Netscape to complete the build-out of certain tenant improvements totaling
approximately $10.5 million over the next year.

69
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NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. PROPERTY RIGHTS AGREEMENT

On December 20, 1994, Netscape entered into an agreement with the University
of Illinois (the "University") and Spyglass, Inc. ("Spyglass"). Under the terms
of the agreement, the University and Spyglass agreed not to assert any claim of
trademark infringement arising out of Netscape's prior use of the word "Mosaic"
or other symbols or words used by Netscape to market itself or its products. The
University and Spyglass further agreed not to assert against Netscape any claim
of copyright infringement or trade secret misappropriation or related claims
based on Netscape's use of former University employees in the development of
Netscape's present and future products. As consideration for these covenants not
to assert, Netscape agreed to make certain payments to the University over a
two-year period. The amount of this agreement and associated costs, including
fees for experts and professional services, as well as trademark search and
other costs, was expensed in 1994 and is included as "Property rights agreement
and related charges" in the consolidated statements of operations. Certain
amounts became payable to the University in subsequent years and have been
recorded as long-term obligations. The agreement expired December 21, 1996.
Netscape entered into certain license, distribution, remarketing and
sublicensing agreements with specific companies which, under the terms of the
agreement, required Netscape to make additional payments. During the years ended
December 31, 1997, 1996, and 1995, Netscape expensed zero, $250,000, and
$500,000, respectively, of such additional payments.

8. STOCKHOLDER'S EQUITY

PREFERRED STOCK

On August 14, 1995, Netscape closed its initial public offering of its
common stock. At that time, all issued and outstanding shares of Netscape's
Series A, B and C convertible preferred stock were converted into 36,032,888
shares of Netscape's common stock. In December 1997, in connection with the KIVA
acquisition, all issued and outstanding shares of KIVA's Series A and B
convertible preferred stock were converted into 2,823,938 shares of Netscape
common stock. No additional shares of Series A, B, or C preferred stock were
issued through December 31, 1997.

RESTRICTED STOCK

Through 1994, Netscape issued common stock to employees under restricted
stock purchase agreements. Generally, restricted stock vests over a 50-month
period. Netscape has the option to repurchase unvested shares on termination of
employment for any reason, with or without cause, at the original per share
price paid by the employee. At December 31, 1997, 1,085,600 restricted shares
were subject to repurchase.

70
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NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. STOCKHOLDER'S EQUITY (CONTINUED)

STOCK OPTION PLANS

During 1994, Netscape adopted the 1994 Stock Option Plan (the "1994 Plan")
under which incentive stock options and nonqualified stock options to purchase
common stock could be granted to employees and certain consultants or
independent contractors. Under the 1994 Plan, options to purchase common stock
could be granted at prices not less than 85% of the fair value on the date of
grant (110% of fair value in certain instances), as determined by the Board of
Directors. Generally, options granted were immediately exercisable and the
resulting shares issued to employees under the 1994 Plan are subject to certain
repurchase rights by Netscape, at the discretion of Netscape, upon the
individual's cessation of service prior to vesting in the shares, at the
original purchase price. Generally, these repurchase rights lapse over a
50-month period. The 1994 Stock Option Plan was terminated in August 1995 and no
further options were granted thereunder. At December 31, 1997, 4,015,920 shares
issued under the 1994 Plan were subject to repurchase.

In June 1995, Netscape adopted the 1995 Stock Option Plan (the "1995 Plan")
that provides for the granting of incentive stock options and nonqualified stock
options, stock purchase rights, and cash and stock bonus awards to employees and
consultants. Under the 1995 Plan, the Board of Directors determines the term of
each award, the award price, and conditions under which the award becomes
exercisable. In the case of incentive stock options the price may not be less
than the fair market value at the date of grant, while nonstatutory options may
have exercise prices as determined by the Board of Directors. Options generally
vest at the rate of 20% of the original grant after ten months and 2% per month
thereafter. Options expire no later than ten years from the date of grant.

In June 1995, Netscape also adopted the 1995 Director Option Plan (the
"Director Plan") and reserved 200,000 shares of common stock for issuance under
that plan. The Director Plan provides for the granting of nonstatutory stock
options to non employee directors of Netscape. Under the Director Plan, upon
joining the board, each non-employee director automatically receives an option
to purchase 40,000 shares of Netscape's common stock at an exercise price equal
to the fair market value on the date of grant. These options vest at a rate of
20% of the original grant after ten months and 2% per month thereafter. On each
January 1 thereafter, provided the director has served at least six months, an
additional 10,000 nonstatutory stock options will be granted at the fair market
value on that date, vesting monthly over a two year period.

Netscape assumed the Collabra 1993 Incentive Stock Plan in November 1995,
which provided for the grant of incentive stock options and nonstatutory stock
options to employees and consultants of Netscape at prices ranging from 85% to
110% 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 were determined by the Board of Directors. Options generally vest
at the rate of 24% of the original grant, after 12 months and 2% per month
thereafter. Options expire no later than ten years from the date of the grant.
This plan was terminated in November 1995 and no further options were granted
thereunder.

Netscape assumed the InSoft 1993 Stock Option Plan which provided for the
granting of incentive stock options and nonqualified stock options to certain
officers, key employees, consultants and directors of InSoft. The options
entitle the holders to purchase shares of common stock within one to ten years
from the date of grant at option prices equal to the fair market value as
determined by the Board of Directors at the date of grant. A total of 247,851
shares of Netscape's common stock were reserved for issuance on the

71
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. STOCKHOLDER'S EQUITY (CONTINUED)
exercise of options assumed in connection with the business combination with
InSoft. This plan was terminated in April 1996, and no further options were
granted under it.

Netscape assumed the Netcode 1996 Stock Option Plan which provided for the
granting of incentive and nonqualified options to employees and consultants at
prices ranging from 85% to 110% of the fair-market-value as determined by the
Board of Directors. A total of 33,882 shares were reserved for issuance on the
exercise of options assumed in connection with the business combination with
Netcode. The options generally vest over four year from the date of grant. A
specific portion of the shares vest immediately, and the remaining shares, at
the rate of 2.1% per month at the end of each month thereafter. This plan was
terminated in April 1996 and no further options were granted thereunder.

Netscape assumed the Portola 1996 Stock Option Plan (the "Portola Plan") and
the DigitalStyle 1996 Stock Option Plan (the "DigitalStyle Plan") in June 1997
which provides for the grant of incentive stock options and nonqualified stock
options to employees and consultants at prices from 85% to 110% of the fair
market value of the common stock on the date of grant as determined by the Board
of Directors. Generally, options granted were immediately exercisable and the
resulting shares issued to employees under the Portola Plan and DigitalStyle
Plan are subject to certain repurchase rights by Netscape, at the discretion of
Netscape, upon the individual's cessation of service prior to vesting in the
shares, at the original purchase price. Generally, these repurchase rights lapse
over a 48-month period. Options generally vest at the rate of 25% of the
original grant, after 12 months after the date of grant or employment, and 1/48
per month thereafter. Options expire no later than ten years from the date of
grant. A total of 82,972 and 110,876 shares of Netscape common stock have been
reserved for issuance on the exercise of options assumed in connection with the
acquisition of Portola and DigitalStyle, respectively. The Portola Plan and
DigitalStyle Plan were terminated in June 1997 and no further options were
granted under the Portola Plan and DigitalStyle Plan.

In December 1997 Netscape issued 636,835 stock option shares in connection
with the acquisition of Actra Business Systems, LLC ("Actra").

Netscape assumed the KIVA 1995 Stock Option Plan (the "KIVA Plan") in
December 1997 which provides for the grant of incentive stock options and
nonstatutory stock options to employees and consultants of Netscape at prices
from 85% to 110% of the fair market value of the common stock on the date of
grant as determined by the Board of Directors. Generally, options granted were
immediately exercisable and the resulting shares issued to employees under the
KIVA Plan are subject to certain repurchase rights by Netscape, at the
discretion of Netscape, upon the individual's cessation of service prior to
vesting in the shares, at the original purchase price. Generally, these
repurchase rights lapse over a 48-month period. Options generally vest at the
rate of 25% of the original grant, commencing twelve months after the date of
grant or employment, and 1/48 per month thereafter. Options expire no later than
ten years from the date of grant. A total of 740,631 shares of Netscape common
stock have been reserved for issuance on the exercise of options assumed in
connection with the business combination with KIVA. The KIVA Plan was terminated
in December 1997 and no further options were granted under the KIVA Plan.

At December 31, 1997, options to purchase 3,626,239 shares were vested and
14,738,862 shares were reserved for issuance on exercise of stock options. A
summary of activity under all plans, including options

72
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NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. STOCKHOLDER'S EQUITY (CONTINUED)
assumed by Netscape as a result of the business combinations with Collabra,
InSoft, Paper, Netcode, Portola, DigitalStyle, and KIVA (adjusted for the
respective merger exchange ratios), is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------------
WEIGHTED AVERAGE
SHARES AVAILABLE EXERCISE PRICE PER EXERCISE PRICE
FOR GRANT NUMBER OF SHARES SHARE PER SHARE
---------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995........... 13,201,872 4,195,709 $0.0188 - $ 7.2900 --
Shares reserved...................... 9,940,631 -- -- --
Options granted...................... (16,406,438) 16,406,438 0.0563 - 69.7500 --
Options canceled..................... 484,400 (484,400) 0.0188 - 49.5000 --
Options exercised.................... -- (14,155,656) 0.0188 - 4.8000 --
---------------- ---------------- ------------------ ------
Balance at December 31, 1995......... 7,220,465 5,962,091 $0.0563 - $69.7500 $ 17.17
Shares reserved...................... 33,882 -- -- --
Options granted...................... (8,536,610) 8,536,610 1.3300 - 82.1200 42.91
Options canceled..................... 4,238,702 (4,238,702) 0.6150 - 82.1200 56.67
Options exercised.................... -- (1,138,968) 0.0563 - 47.8750 4.69
Plan shares expired.................. (106,283) -- -- --
---------------- ---------------- ------------------ ------
Balance at December 31, 1996......... 2,850,156 9,121,031 $0.0563 - $82.1200 $ 25.19
Shares reserved...................... 3,711,284 -- -- --
Options granted...................... (7,225,564) 7,225,564 0.3200 - 55.5000 27.38
Options canceled..................... 1,323,707 (1,323,707) 0.0563 - 82.1200 7.41
Options exercised.................... -- (758,862) 0.0563 - 35.3570 29.31
Plan shares expired.................. (184,747) -- -- --
---------------- ---------------- ------------------ ------
Balance at December 31, 1997......... 474,836 14,264,026 $0.0563 - $67.6875 $ 26.85
---------------- ---------------- ------------------ ------
---------------- ---------------- ------------------ ------
</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING CONTRACTUAL AVERAGE AVERAGE
EXERCISE NUMBER LIFE (YEARS) EXERCISE PRICE NUMBER EXERCISE PRICE
- ---------------------- ------------ ------------------------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
$0.0563 - $2.8436 1,651,202 9.03 $ 1.5323 487,003 $ 1.1257
$4.8000 1,829,815 7.53 $ 4.8000 1,533,460 $ 4.8000
$6.6300 - $26.3750 700,622 9.32 $ 21.8300 95,624 $ 13.2762
$26.7100 - $27.5000 2,160,104 9.35 $ 27.4787 239,712 $ 27.4820
$27.5625 - $35.1250 1,359,593 9.18 $ 31.0664 175,262 $ 30.0100
$35.3750 3,624,007 8.46 $ 35.3750 1,567,944 $ 35.3750
$35.6250 - $40.0000 1,522,822 9.44 $ 37.8389 102,628 $ 37.3208
$40.1250 - $67.6875 1,415,861 9.03 $ 48.6317 307,921 $ 51.3913
------------ --- --------------- ---------- ---------------
$0.0563 - $67.6875 14,264,026 8.81 $ 26.8423 4,509,554 $ 21.3206
------------ --- --------------- ---------- ---------------
------------ --- --------------- ---------- ---------------
</TABLE>

At December 31, 1997, 1996, and 1995, 7,015,766, 12,652,600 and 19,714,128
shares, respectively, of common stock were subject to repurchase. In the years
ended December 31, 1997, 1996, and 1995,

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NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. STOCKHOLDER'S EQUITY (CONTINUED)
Netscape repurchased 129,360, 99,120 and 907,562 shares, respectively, of common
stock at the original exercise price.

In 1995, Netscape granted an option to purchase 8,000,000 shares of common
stock outside of the plans. The exercise price was $0.0563 per share. This
option was immediately exercisable in its entirety with 4,000,000 shares subject
to repurchase at the option of Netscape on the individual's cessation of service
prior to vesting in the shares at the original purchase price. The unvested
shares vest over a 50-month period. The option was exercised in 1995.

In 1995, Netscape recorded deferred compensation expense of approximately
$11.1 million for the difference between the grant price and the deemed fair
value of certain of Netscape's common stock options granted during 1995. This
amount is being amortized over the vesting period of the individual options,
generally a 50-month period. Deferred compensation attributed to 4,000,000
shares of common stock was expensed at June 30, 1995, as such shares were fully
vested on grant. Compensation expense from the remaining options recorded in the
year ended December 31, 1997, 1996, and 1995 totaled approximately $2.5 million
in each year.

In February and March 1995, as additional compensation for services
rendered, Netscape granted to certain individuals warrants to purchase 200,000
and 20,000 shares of common stock, respectively, at an exercise price of $2.25
and $0.00 per share, respectively. These warrants were fully exercised at
December 31, 1996.

In August 1996, the Board of Directors authorized the repricing of options
to purchase 3,990,708 shares of common stock effective as of the close of
business on August 30, 1996 to the then fair market value of $35.375 per share.
Under the terms of the repricing, the repriced options maintain the same vesting
and expiration terms, except they may not be exercised until February 24, 1997.
No employees owning 3% or more of Netscape's common stock participated in the
repricing. In January 1998 the Board of Directors authorized a second repricing
of options. See Note 15 of Notes to Consolidated Financial Statements for
further discussion.

EMPLOYEE STOCK PURCHASE PLAN

In June 1995, Netscape adopted an Employee Stock Purchase Plan (ESPP) under
Section 423 of the Internal Revenue Code and reserved 2,000,000 shares of common
stock for issuance under the plan. Under this plan, qualified employees are
entitled to purchase shares at 85% of fair market value. There were 509,158,
276,506, and no shares issued under the ESPP during 1997, 1996 and 1995,
respectively.

STOCK-BASED COMPENSATION

Under APB 25, Netscape generally recognizes no compensation expense with
respect to stock-based awards to employees. Pro forma information regarding net
income and earnings per share is required by SFAS 123 for awards granted after
December 31, 1994 as if Netscape had accounted for its stock-based awards to
employees under the fair value method of SFAS 123. The fair value of Netscape's
stock-based awards to employees was estimated using a Black-Scholes option
pricing model (minimum value model for awards prior to Netscape's initial public
offering). The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. The Black-Scholes model requires the input of highly
subjective assumptions including

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. STOCKHOLDER'S EQUITY (CONTINUED)
the expected stock price volatility. Because Netscape's stock-based awards to
employees have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The fair value of Netscape's stock-based awards
to employees was estimated assuming no expected dividends and the following
weighted-average assumptions:

<TABLE>
<CAPTION>
OPTIONS ESPP
--------------------------------- -------------------------------
1997 1996 1995 1997 1996 1995
--------- --------- ----- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Expected life (year)............................... 3.6 3.1 2.9 0.5 0.5 0.5
Expected volatility................................ 55.0% 55.6% 7.3% 74.0% 73.0% 85.0%
Risk-free interest rate............................ 5.7% 6.1% 5.9% 5.6% 5.6% 5.0%
</TABLE>

The weighted-average fair value of stock options and employee stock purchase
rights granted during 1997 was $16.60 and $9.62 per share, respectively. The
weighted-average fair value of stock options and employee stock purchase rights
granted during 1996 was $24.11 and $37.26 per share, respectively. For pro forma
purposes, the estimated fair value of Netscape's stock-based awards to employees
is generally amortized over the options' vesting period (for options) and the
six-month purchase period (for stock purchases under the ESPP). Netscape's pro
forma information is as follows:

<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ---------
<S> <C> <C> <C> <C>
As reported $ (115,496) $ 19,517 $ (6,613)
Net income (loss)......................... Pro forma $ (187,133) $ (41,262) $ (7,940)

As reported $ (1.34) $ 0.27) $ (0.16)
Basic income (loss) per share............. Pro forma $ (2.17) $(0.56 $ (0.19)

As reported $ (1.34) $ 0.21 $ (0.16)
Diluted income (loss) per share........... Pro forma $ (2.17) $ (0.56) $ (0.19)
</TABLE>

Because SFAS 123 is applicable only to awards granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until approximately
1999.

9. BENEFIT PLAN

Netscape maintains a 401(k) retirement savings plan (the "Plan") for its
full time employees. Each participant in the Plan may elect to contribute from
1% to 15% of his or her annual compensation to the Plan. Netscape, at its
discretion, may make contributions to the Plan; however, Netscape has made no
contributions through December 31, 1997.

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NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. INCOME TAXES

The United States and foreign components of income (loss) before taxes
consisted of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
United States.................................. $(128,529) $ 21,034 $ (6,115)
Foreign........................................ 1,245 6,246 --
--------- --------- ---------
Income (loss) before income taxes.............. $(127,284) $ 27,280 $ (6,115)
--------- --------- ---------
--------- --------- ---------
</TABLE>

The provision (benefit) for income taxes is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal...................................... $ 7,718 $ 23,148 $ --
State........................................ 873 4,232 20
Foreign...................................... 3,848 4,912 478
--------- --------- ---------
12,439 32,292 498
--------- --------- ---------
Deferred:
Federal...................................... (22,651) (21,203) --
State........................................ (1,576) (3,326) --
--------- --------- ---------
(24,227) (24,529) --
--------- --------- ---------
Provision (benefit) for income taxes........... $ (11,788) $ 7,763 $ 498
--------- --------- ---------
--------- --------- ---------
</TABLE>

The tax benefits associated with employee stock options reduce taxes
currently payable as shown above by $5.7 million, $23.3 million, and zero in
1997, 1996, and 1995, respectively. Such benefits will be credited to additional
paid-in capital when realized.

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NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income before income taxes.
The sources and tax effects of the difference are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected tax at federal statutory rate........... $ (44,549) $ 9,548 $ (2,140)
State taxes, net of federal benefit.............. (4,018) 2,441 20
Effect of foreign operations..................... 2,516 2,801 478
Tax-exempt interest.............................. (2,087) (1,488) --
Merger costs..................................... 1,442 2,135 --
Tax credits...................................... (2,000) (436) --
Purchased in-process research and development.... 18,406 -- --
Change in valuation allowance.................... 17,872 (9,381) 2,071
Other............................................ 630 2,143 69
--------- --------- ---------
Provision (benefit) for income taxes............. $ (11,788) $ 7,763 $ 498
--------- --------- ---------
--------- --------- ---------
</TABLE>

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NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Netscape's net deferred tax assets are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Deferred revenue....................................... $ 15,592 $ 11,096
Reserves and accrued expenses.......................... 12,721 5,445
Compensation not currently deductible.................. 2,917 3,699
Restructuring reserves................................. 9,044 --
Acquired intangibles................................... 19,858 --
Net operating loss carryforwards....................... 7,843 2,814
Other, net............................................. 1,379 1,475
--------- ---------
Total before valuation allowance......................... 69,354 24,529
Valuation allowance for deferred tax assets.............. (23,594) --
--------- ---------
Total deferred tax assets................................ 45,760 24,529
Deferred tax liabilities:
Unrealized gain on investments......................... (2,288) --
--------- ---------
$ 43,472 $ 24,529
--------- ---------
--------- ---------
Recorded on the balance sheet as:
Current deferred tax asset............................. $ 37,336 $ 20,347
Noncurrent deferred tax asset (included in Other
assets).............................................. 6,136 4,182
--------- ---------
$ 43,472 $ 24,529
--------- ---------
--------- ---------
</TABLE>

Realization of Netscape's net deferred tax assets is dependent on Netscape
generating sufficient taxable income in future years in appropriate tax
jurisdictions to obtain benefit from the reversal of temporary differences and
from net operating loss and tax credit carryforwards. The amount of deferred tax
assets considered realizable is subject to adjustment in future periods if
estimates of future taxable income are reduced. The valuation allowance
increased by $23.6 million in 1997 and includes approximately $5.7 million of
tax benefits associated with employee stock options which will be credited to
stockholders' equity when realized and approximately $17.9 million related to
the acquisition of intangibles which will be amortized over 15 years for tax
purposes.

As of December 31, 1997, Netscape had federal net operating loss
carryforwards from acquired companies of approximately $20.5 million that will
expire between 2008 and 2012 and may be subject to certain restrictions on their
utilization.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. JOINT VENTURES

In June 1997, Netscape completed the formation of a joint venture, Novonyx,
Inc., ("Novonyx"), with Novell, Inc. ("Novell"). Novell and Netscape will
collaborate to integrate certain products and services for networked enterprise
customers building intranet and extranet applications. Netscape acquired for
cash a minority interest in the outstanding capital stock of Novonyx.

In August 1997, Netscape completed the merger of Navio Communications, Inc.,
a joint venture of Netscape, with and into Network Computer, Inc., ("NCI"), a
wholly-owned subsidiary of Oracle Corporation ("Oracle"). The surviving company,
NCI, creates software for open standards-based network computers and other
Internet appliances that will be used in homes, businesses, and schools. Oracle
retains majority ownership in NCI and Netscape retains a minority equity
interest in NCI.

Netscape reports its share of earnings and losses of joint ventures in which
it owns a greater than 20% interest under the equity method of accounting. Other
joint ventures in which Netscape owns less than a 20% interest, including NCI
and Novonyx, are stated at the lesser of cost or net realizable value. The
balance of investments in joint ventures at December 31, 1997 was immaterial.

12. INDUSTRY AND GEOGRAPHIC SEGMENT AND CUSTOMER INFORMATION

Transfers between geographic areas are accounted for at prices that are
representative of unaffiliated party transactions and consistent with the rules
and regulations of governing tax authorities.

Netscape conducts its business within one industry segment. Netscape's
export sales (i.e. sales to unaffiliated customers outside of the United States
by the U.S. operation) were approximately $36.6 million, $79.4 million, and
$17.3 million for the years ended December 31, 1997, 1996, and 1995,
respectively. No export sales for 1997, 1996, and 1995 to a particular
geographic region totaled more than 10% or greater of total revenues. For the
years ended December 31, 1997 and 1996, no single customer accounted for 10% or
more of total revenues. Ventana Communications Inc. accounted for 10% of total
revenues for the year ended December 31, 1995.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. INDUSTRY AND GEOGRAPHIC SEGMENT AND CUSTOMER INFORMATION (CONTINUED)
Netscape operates in two main geographic areas as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------
NORTH INTERCONTINENTAL
AMERICA EUROPE REGION ELIMINATIONS CONSOLIDATED
----------- --------- --------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers... $ 452,665 $ 59,485 $ 21,701 $ -- $ 533,851
Transfers between geographic
areas........................... 22,706 28,839 8,258 (59,803) --
----------- --------- ------- ------------ ------------
Total revenues.................. $ 475,371 $ 88,324 29,959 $ (59,803) $ 533,851
----------- --------- ------- ------------ ------------
----------- --------- ------- ------------ ------------
Operating income (loss)........... $ (134,071) $ (750) 2,477 $ 77 $ (132,267)
----------- --------- ------- ------------ ------------
----------- --------- ------- ------------ ------------
Identifiable assets............... $ 608,804 $ 36,490 $ 10,179 $ (22,653) $ 632,820
----------- --------- ------- ------------ ------------
----------- --------- ------- ------------ ------------
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------
NORTH INTERCONTINENTAL
AMERICA EUROPE REGION ELIMINATIONS CONSOLIDATED
----------- --------- --------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers... $ 291,579 $ 30,367 $ 24,348 $ -- $ 346,294
Transfers between geographic
areas........................... 17,952 1,007 341 (19,300) --
----------- --------- ------- ------------ ------------
Total revenues.................. $ 309,531 $ 31,374 $ 24,689 $ (19,300) $ 346,294
----------- --------- ------- ------------ ------------
----------- --------- ------- ------------ ------------
Operating income (loss)........... $ 14,285 $ 1,665 $ 4,817 $ (279) $ 20,488
----------- --------- ------- ------------ ------------
----------- --------- ------- ------------ ------------
Identifiable assets............... $ 522,770 $ 24,788 $ 13,004 $ (19,237) $ 541,325
----------- --------- ------- ------------ ------------
----------- --------- ------- ------------ ------------
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------------------
NORTH INTERCONTINENTAL
AMERICA EUROPE REGION ELIMINATIONS CONSOLIDATED
----------- --------- --------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers... $ 82,161 $ -- $ 3,226 $ -- $ 85,387
Transfers between geographic
areas........................... -- -- -- -- --
----------- --------- ------- ------------ ------------
Total revenues.................. $ 82,161 $ -- $ 3,226 $ -- $ 85,387
----------- --------- ------- ------------ ------------
----------- --------- ------- ------------ ------------
Operating income (loss)........... $ (10,373) $ (1,919) $ (443) $ 2,026 $ (10,709)
----------- --------- ------- ------------ ------------
----------- --------- ------- ------------ ------------
Identifiable assets............... $ 229,427 $ 559 $ 4,828 $ (3,660) $ 231,154
----------- --------- ------- ------------ ------------
----------- --------- ------- ------------ ------------
</TABLE>

13. LEGAL PROCEEDINGS

80
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. LEGAL PROCEEDINGS (CONTINUED)
Wang is seeking injunctive relief and/or one and nine tenths percent (1.9%)
royalties from the sale of Netscape client software. Netscape has asserted that
the '669 Patent is invalid, noninfringed, and unenforceable do to inequitable
conduct. Netscape believes that it has meritorious defenses and is vigorously
defending against this claim. Netscape believes that the ultimate outcome of
this litigation will not materially adversely affect Netscape's business,
operating results, and financial position. However, an unfavorable resolution of
this litigation could materially affect Netscape's future results of operations
or cash flows in a particular period.

In addition to the Wang litigation, Netscape is subject to various legal
proceedings and claims, either asserted or unasserted, which arise in the
ordinary course of business. While the outcome of these claims cannot be
predicted with certainty, Netscape does not believe that the outcome of any of
these legal matters will have a material adverse effect on Netscape's business,
consolidated operating results, or consolidated financial position. However, an
unfavorable resolution of these matters could materially affect Netscape's
future results of operations or cash flows in a particular period.

14. PRODUCT CONCENTRATION AND OTHER RISKS

PRODUCTS

PRODUCT INTRODUCTIONS AND TRANSITIONS

Netscape's software business was initially characterized by relatively short
sales cycles, relatively small initial sales orders, relatively simple uses for
its software, short product development cycles, and low aggregate royalty
payments to third parties for embedded technology. However, Netscape has evolved
and expanded its product lines to focus on sales to enterprise customers. As a
result of these new product introductions, Netscape's business has been, and
will continue to be, characterized by longer sales cycles, larger initial sales
orders, more complex uses of its software, longer product development cycles,
and higher aggregate royalty payments to third parties for embedded technology.
Netscape has relatively limited experience with these types of sales, and
Netscape may not be able to successfully manage this evolution of its business.
There are several other risks inherent in such a product transition, including
the risk that enterprise software products as complex as Netscape Application
Server, the Netscape CommerceXpert family of products, and Netscape's other
enterprise software products may contain errors or bugs and such products may
not achieve market acceptance or become widely adopted. In order for Netscape's
enterprise software products to achieve market acceptance, Netscape will need to
continue to adjust to longer sales cycles and execute a different type of sale
than it has historically. Netscape has experienced and will likely continue to
experience delays following initial contact with a prospective customer and
expend substantial funds and management effort in connection with these sales.
As single, large sales of these products become a larger percentage of revenue,
the loss or deferral of one or more significant sales could contribute to
substantial fluctuations in Netscape's quarterly results of operations,

81
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. PRODUCT CONCENTRATION AND OTHER RISKS (CONTINUED)
particularly if there are significant sales and marketing expenses associated
with the deferred sales. Additionally, Netscape will be required to restructure
its direct sales force, extensively train and effectively manage its sales
personnel, invest greater resources in the sales effort, educate the indirect
channels, and add trained technical personnel to help it implement solutions for
its enterprise software customers. Netscape may not be able to accomplish any of
the foregoing on a timely, cost-effective basis. Finally, expansion of
Netscape's product line will require more management attention, which may place
a significant strain on Netscape's management and operations.

CUSTOMERS AND MARKETS

The market for Netscape's software and services, especially for its
enterprise software products and services, is relatively new, intensely
competitive, rapidly evolving and is characterized by an increasing number of
market entrants who have introduced or developed products and services for
communication, collaboration, and commerce over intranets, extranets, and the
Internet. As is typical in the case of a new and rapidly evolving industry,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty. The intranet, extranet, and internet
software industry is relatively young and has a limited number of proven
products. Moreover, critical issues concerning the use of intranets, extranets,
and the Internet (including security, reliability, cost, ease of deployment and
administration, and quality of service) remain unresolved and may impact the
growth of intranet, extranet, and Internet use. While Netscape believes that its
enterprise software products offer significant advantages for communication,
collaboration, and commerce over intranets, extranets, and the Internet, those
uses may not become widespread and Netscape's enterprise software products may
not become widely adopted for these purposes.

Netscape will also face competition from providers of enterprise software,
most of whom have longer operating histories, larger installed customer bases,
existing relationships with prospective enterprise customers and significantly
greater financial, technical, marketing, public relations, and distribution
resources than Netscape. In particular, computer operating systems companies
currently bundle and may expand bundling of server and client software with
their server and desktop operating systems and applications at no separately
stated cost to purchasers, which may cause the price of Netscape's server
software products to decline in the same manner that such practices caused the
price of Netscape's client software to decline. In January 1998, Netscape
announced that it will distribute several versions of its client software to all
users without licensing fees. There are several risks related to distributing
Netscape's client software without licensing fees, particularly the risk that
Netscape's stand-alone client revenues will likely continue to decrease
substantially as a percentage of total revenues in future periods. Additionally,
Netscape announced that it plans to make publicly available for royalty-free
licensing an early developer release of Netscape Communicator 5.0 source code.
Netscape's decision to make its source code available for royalty-free licensing
involves risks that cannot be fully known at this time. For example, only a
limited number of developers may design enhancements to the source code,
developers may not contribute such enhancements to the public source code base,
proposed enhancements may not meet Netscape's quality specifications, proposed
enhancements may not address Netscape's design goals for Netscape Communicator,
the free source code may lead to a proliferation of incompatible or competitive
products (potentially creating brand and market confusion), or Netscape's
competitors may attempt to incorporate certain competitive design advantages of
Netscape Communicator into their own products. If any of the foregoing were to
occur, the demand for and revenue generated from Netscape Communicator and
Netscape's other

82
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. PRODUCT CONCENTRATION AND OTHER RISKS (CONTINUED)
enterprise software products may decrease and Netscape's ability to maintain a
commercial licensing program could be adversely impacted.

15. SUBSEQUENT EVENTS

REPRICING OF STOCK OPTIONS

In January 1998, the Board of Directors authorized the repricing of options
to purchase 8,581,294 shares of common stock effective as of the close of
business on January 28, 1998 to the then fair market value of $16.8125 per
share. Under the terms of the repricing, the vesting schedules for the repriced
options were extended by six months and are exercisable after July 28, 1998. The
repriced options maintain the same expiration terms. The Board of Directors,
Chief Executive Officer, and Executive Vice Presidents were excluded from the
repricing.

CHANGE IN FISCAL YEAR

In February 1998, Netscape announced that its Board of Directors approved a
change in Netscape's fiscal year to November 1 through October 31, effective for
the ten month period ending October 31, 1998. Netscape previously reported
results on a calendar fiscal year model of January 1 through December 31. The
Board's action reflects Netscape's increased focus on its enterprise software
and services business and is designed to align Netscape's financial reporting
practices with its business strategy by taking into account the seasonal buying
patterns of enterprise customers. Netscape will file a Quarterly Report on Form
10-Q for the quarter ending April 30, 1998, which will include January operating
results in conjunction with reporting financial results for the quarter ending
April 30, 1998.

SOP 98-4

Statement of Position 98-4 was issued in March 1998. The statement delays
for one year the implementation of a narrow provision of SOP 97-2 that defines
vendor specific objective evidence in arrangements including software license
fees.

83
<PAGE>
QUARTERLY RESULTS OF OPERATIONS/SUPPLEMENTARY FINANCIAL INFORMATION
(UNAUDITED)

<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------
DEC. 31 SEP. 30 JUN. 30 MAR. 31 DEC. 31 SEP. 30 JUN. 30 MAR. 31
1997 1997 1997 1997 1996 1996 1996 1996
----------- ---------- ---------- ---------- ---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues............... $ 125,280 $ 152,068 $ 135,970 $ 120,533 $ 115,151 $ 100,016 $ 75,006 $ 56,121
Gross profit................. 99,457 129,761 118,299 104,545 100,305 85,318 62,978 47,627
Purchased in-process research
and development............ 50,500 -- 52,587 -- -- -- -- --
Merger-related charges....... 5,848 -- -- -- -- -- 6,100 --
Income (loss) before income
taxes...................... (113,754) 15,702 (40,455) 11,222 11,056 9,788 1,602 4,835
Net income (loss)............ (88,330) 10,223 (44,697) 7,308 8,158 7,169 656 3,534
Basic income (loss) per
share...................... $ (0.98) $ 0.12 $ (0.53) $ 0.09 $ 0.10 $ 0.10 $ 0.01 $ 0.05
Diluted income (loss) per
share...................... $ (0.98) $ 0.10 $ (0.53) $ 0.08 $ 0.09 $ 0.08 $ 0.01 $ 0.04
</TABLE>

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

(1) All periods have been restated for the business combination with KIVA, which
has been accounted for as a pooling of interests. See Note 2 of Notes to
Consolidated Financial Statements.

(2) The fourth quarter of 1997 loss before income taxes, net loss, basic and
diluted loss per share includes $56.3 million of purchased in-process
research and development and merger related charges, and $23.0 million of
restructuring charges. Excluding these charges net loss is $20.8 million and
diluted loss per share is $0.23.

(3) The second quarter of 1997 loss before income taxes, net loss, basic and
diluted loss per share includes $52.6 million of purchased in-process
research and development. Excluding this charge net income is $7.9 million,
and diluted income per share is $0.08.

84
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized on this 25th day of
March 1998.

NETSCAPE COMMUNICATIONS CORPORATION

By: /s/ PETER L.S. CURRIE
------------------------------------------
Peter L.S. Currie,
EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on March 25, 1998 on
behalf of the Registrant and in the capacities and indicated:

SIGNATURES TITLE
- ------------------------------ ------------------------------------------

By: /s/ JAMES L. BARKSDALE President, Chief Executive Officer
- ------------------------------ (PRINCIPAL EXECUTIVE OFFICER) and Director
James L. Barksdale

/s/ PETER L.S. CURRIE Executive Vice President and Chief
- ------------------------------ Administrative Officer (PRINCIPAL
Peter L.S. Currie FINANCIAL OFFICER)

By: /s/ NOREEN G. BERGIN Senior Vice President and Corporate
- ------------------------------ Controller (PRINCIPAL ACCOUNTING OFFICER)
Noreen G. Bergin

By: /s/ JAMES H. CLARK Chairman of the Board of Directors
- ------------------------------
James H. Clark

By: /s/ MARC L. ANDREESSEN Executive Vice President, Products and
- ------------------------------ Director
Marc L. Andreessen

By: /s/ ERIC A. BENHAMOU Director
- ------------------------------
Eric A. Benhamou

By: /s/ L. JOHN DOERR Director
- ------------------------------
L. John Doerr

By: /s/ JOHN E. WARNOCK Director
- ------------------------------
John E. Warnock

85
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING COST AND DEDUCTIONS/ END OF
CLASSIFICATION OF PERIOD EXPENSES WRITE-OFFS PERIOD
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for doubtful accounts........................................ $ 4,896 $ 7,858 $ (4,419) $ 8,335

Year ended December 31, 1996
Allowance for doubtful accounts........................................ $ 667 $ 4,376 $ (147) $ 4,896

Year ended December 31, 1995
Allowance for doubtful accounts........................................ $ 104 $ 572 $ (9) $ 667
</TABLE>

S-1
<PAGE>
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Reorganization dated as of April 30, 1997 by and among Registrant, PCI Acquisition
Corporation, and Portola Communications, Inc. (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 2.1
TO THE REGISTRANT'S FORM S-3 REGISTRATION NO. 333-29933).

2.2 Agreement and Plan of Reorganization dated as of April 25, 1997 by and among Registrant, DSC Acquisition
Corporation, and DigitalStyle Corporation (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 2.2 TO
THE REGISTRANT'S FORM S-3 REGISTRATION NO. 333-29933).

2.3 Agreement and Plan of Reorganization dated as of November 24, 1997 by and among Registrant, Knife
Acquisition Corporation ("Knife"), and KIVA Software Corporation ("KIVA") (WHICH IS INCORPORATED HEREIN
BY REFERENCE TO EXHIBIT 2.1 TO THE REGISTRANT'S CURRENT REPORT ON FORM 8-K DATED DECEMBER 15, 1997).

2.4 Agreement of Merger dated December 1, 1997 by and between Knife and KIVA (WHICH IS INCORPORATED HEREIN
BY REFERENCE TO EXHIBIT 2.2 TO THE REGISTRANT'S CURRENT REPORT ON FORM 8-K DATED DECEMBER 15, 1997).

2.5 Purchase Agreement dated November 6, 1997 between Netscape and GE Information Services, Inc. (WHICH IS
INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 2.1 TO THE REGISTRANT'S CURRENT REPORT ON FORM 8-K DATED
DECEMBER 15, 1997).

3.(i) Restated Certificate of Incorporation, as amended through January 23, 1996 (WHICH IS INCORPORATED HEREIN
BY REFERENCE TO EXHIBIT 3.(I) TO THE REGISTRANT'S 1995 10-K).

3.(ii) Amended and Restated Bylaws of Registrant, as amended through January 24, 1997 (WHICH IS INCORPORATED
HEREIN BY REFERENCE TO EXHIBIT 3.(II) TO THE REGISTRANT'S 1996 10-K).

4.1 FORM OF REGISTRANT'S COMMON STOCK CERTIFICATE (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 4.1
TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-1, REGISTRATION NO. 33-93862 ("REGISTRANT'S 1995
S-1).

4.2 Second Amended and Restated Investors' Rights Agreement dated April 5, 1995 (WHICH IS INCORPORATED
HEREIN BY REFERENCE TO EXHIBIT 4.2 TO THE REGISTRANT'S 1995 S-1).

10.1* Form of Indemnification Agreement entered into by Registrant with each of its directors and executive
officers (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.1 TO THE REGISTRANT'S 1995 S-1).

10.2* 1994 Stock Option Plan and related agreements, as amended (WHICH IS INCORPORATED HEREIN BY REFERENCE TO
EXHIBIT 10.3 TO THE REGISTRANT'S 1995 S-1).

10.3* 1995 Stock Plan and related agreements (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.4 TO THE
REGISTRANT'S 1995 S-1).

10.4* 1995 Employee Stock Purchase Plan and related agreements (WHICH IS INCORPORATED HEREIN BY REFERENCE TO
EXHIBIT 10.5 TO THE REGISTRANT'S 1995 S-1).

10.5* 1995 Director Option Plan and related agreements (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT
10.6 TO THE REGISTRANT'S 1995 S-1).

10.6* Collabra Software, Inc. 1993 Incentive Stock Plan (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT
4.3 TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8, REGISTRATION NO. 33-99198).

10.7* InSoft, Inc. 1993 Stock Option Plan (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 4.3 TO THE
REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8, REGISTRATION NO. 333-4222).
</TABLE>

S-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.8* Netcode Corporation 1996 Stock Plan (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 4.3 TO THE
REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8, REGISTRATION NO. 333-4478).

10.9* DigitalStyle Corporation 1995 Stock Option/Stock Issuance Plan (WHICH IS INCORPORATED HEREIN BY
REFERENCE TO EXHIBIT 4.4 TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8, REGISTRATION NO.
333-29931).

10.10* Portola Communications, Inc. 1996 Stock Option (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 4.8
TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8, REGISTRATION NO. 333-29931).

10.11* KIVA Software Corporation 1995 Stock Option Plan (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT
4.4 TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8, REGISTRATION NO. 333-44135).

10.12* Employment Agreement between Registrant and James L. Barksdale dated January 4, 1995 (WHICH IS
INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.7 TO THE REGISTRANT'S 1995 S-1).

10.13+ License and Series A Stock Purchase Agreement between Registrant and RSA Data Security, Inc. dated
August 19, 1994 (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.9 TO THE REGISTRANT'S 1995
S-1).

10.14 Lease between Registrant and Ellis-Middlefield Business Park dated October 14, 1994 (WHICH IS
INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.11 TO THE REGISTRANT'S 1995 S-1).

10.15 Lease between Registrant and Ellis-Middlefield Business Park dated April 28, 1995 (WHICH IS INCORPORATED
HEREIN BY REFERENCE TO EXHIBIT 10.12 TO THE REGISTRANT'S 1995 S-1).

10.16 Lease between Registrant and Sobrato Development Companies dated August 1995 (WHICH IS INCORPORATED
HEREIN BY REFERENCE TO EXHIBIT 10.14 TO THE REGISTRANT'S 1995 10-K).

10.17 Lease between Registrant and Renault & Handley Employees Investment Co. dated December 12, 1995 (WHICH
IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.15 TO THE REGISTRANT'S 1995 10-K).

10.18 Lease between Registrant and 464 Ellis Street Associates, L.P. dated January 23, 1997 (includes Phase I
and Phase II) (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.17 TO THE REGISTRANT'S 1996
10-K).

21.1 Subsidiaries of the Registrant.

23.1 Consent of Ernst & Young LLP, Independent Auditors.

27.1 Financial Data Schedule for the fiscal year ended December 31, 1997.
</TABLE>

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

+ Confidential treatment has been previously granted for certain portions of
these exhibits.

* Indicates management compensatory plan, contract or arrangement.

S-3

<PAGE>
EXHIBIT 21.1

DOMESTIC SUBSIDIARIES

<TABLE>
<S> <C>
NAME ORGANIZED UNDER THE LAWS OF
Actra Business Systems, LLC Delaware
Digital Style Corporation Delaware
KIVA Software Corporation California
Portola Communications, Inc. California
</TABLE>

INTERNATIONAL SUBSIDIARIES

<TABLE>
<S> <C>
COUNTRY OFFICIAL NAME
Australia Netscape Communications Australia PTY
Limited
Barbados Netscape Communications FSC Incorporated
Brazil Netscape Communications do Brasil Ltda.
Canada Netscape Communications Canada, Inc.
Denmark Netscape Communications Denmark A/S
European Headquarters Netscape Communications Europe SARL
France Netscape Communications Societe Anonyme
Germany Netscape Communications GmbH
Hong Kong Netscape Communications Limited
Ireland Netscape Communications Ireland Limited
Italy Netscape Communications Italia SRL
Japan Netscape Communications Japan, Ltd.
Netherlands Netscape Communications Nederland B.V.
Spain Netscape Internet Communications Espana.
S.A.
Singapore Netscape Communications Asia South Pte
Limited
Sweden NSCP Communications Sweden AB
Switzerland Netscape Communications (Switzerland) Ltd.
United Kingdom Netscape Communications Limited
</TABLE>

<PAGE>
EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We also consent to the incorporation by reference in the (i) Registration
Statement (Form S-8 No. 33-95536) pertaining to the 1994 Stock Option Plan, 1995
Stock Plan, 1995 Employee Stock Purchase Plan and 1995 Director Option Plan of
Netscape Communications Corporation, (ii) Registration Statement (Form S-8 No.
33-99198) pertaining to the 1993 Incentive Stock Option Plan of Collabra
Software, Inc., (iii) Registration Statement (Form S-8 No. 333-4222) pertaining
to the 1993 Stock Option Plan of InSoft, Inc., (iv) Registration Statement (Form
S-8 No. 333-4478) pertaining to the 1996 Stock Plan of Netcode Corporation, (v)
Registration Statement (Form S-8 No. 333- 29931) pertaining to the 1995 Stock
Option/Issuance Plan of DigitalStyle Corporation and the 1996 Stock Option Plan
of Portola Communications, Inc., (vi) Registration Statement (Form S-8 No.
333-38469) pertaining to the 1995 Stock Plan of Netscape Communications
Corporation, (vii) Registration Statement (Form S-8 No. 333-44135) pertaining to
the 1995 Stock Option Plan of KIVA Software Corporation and the 1995 Stock Plan
of Netscape Communications Corporation, (viii) Registration Statement (Form S-3
No. 333-29933) and related Prospectus pertaining to the registration of the
common stock issued in connection with the business combination of DigitalStyle
Corporation and Portola Communications, Inc., (ix) Registration Statement (Form
S-3 No. 333-42401) and related Prospectus pertaining to the registration of the
common stock issued in connection with the purchase of membership interests in
Actra Business Systems, LLC, and (x) Registration Statement (Form S-3 No.
333-44129) and related Prospectus pertaining to the registration of the common
stock issued in connection with the business combination of KIVA Software
Corporation, of our report dated January 23, 1998 except for Note 14 as to which
the date is March 25, 1998, with respect to the consolidated financial
statements incorporated herein by reference, and our report included in the
preceding paragraph with respect to the consolidated financial statement
schedule included in this Annual Report (Form 10-K) of Netscape Communications
Corporation for 1997.

/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP

Palo Alto, California
March 27, 1998

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NETSCAPE
COMMUNICATIONS CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 55,172
<SECURITIES> 129,426
<RECEIVABLES> 161,526
<ALLOWANCES> (8,335)
<INVENTORY> 0
<CURRENT-ASSETS> 395,086
<PP&E> 207,180
<DEPRECIATION> (76,087)
<TOTAL-ASSETS> 632,820
<CURRENT-LIABILITIES> 203,550
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 429,045
<TOTAL-LIABILITY-AND-EQUITY> 632,820
<SALES> 383,950
<TOTAL-REVENUES> 533,851
<CGS> 50,232
<TOTAL-COSTS> 81,789
<OTHER-EXPENSES> 584,329
<LOSS-PROVISION> (3,439)
<INTEREST-EXPENSE> 425
<INCOME-PRETAX> (127,284)
<INCOME-TAX> (11,788)
<INCOME-CONTINUING> (115,496)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (115,496)
<EPS-PRIMARY> (1.34)
<EPS-DILUTED> (1.34)

</TABLE>

<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 88,233 55,276
<SECURITIES> 115,015 96,841
<RECEIVABLES> 115,717 27,766
<ALLOWANCES> (4,896) (667)
<INVENTORY> 0 0
<CURRENT-ASSETS> 351,344 185,621
<PP&E> 106,193 23,884
<DEPRECIATION> (19,381) (3,012)
<TOTAL-ASSETS> 541,325 231,154
<CURRENT-LIABILITIES> 146,487 52,569
<BONDS> 0 0
0 0
0 0
<COMMON> 9 8
<OTHER-SE> 394,213 177,379
<TOTAL-LIABILITY-AND-EQUITY> 541,325 231,154
<SALES> 291,183 77,489
<TOTAL-REVENUES> 346,294 85,387
<CGS> 36,943 9,177
<TOTAL-COSTS> 50,067 11,707
<OTHER-EXPENSES> 275,739 84,389
<LOSS-PROVISION> (4,896) (667)
<INTEREST-EXPENSE> 330 304
<INCOME-PRETAX> 27,280 (6,115)
<INCOME-TAX> 7,763 498
<INCOME-CONTINUING> 19,517 (6,613)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 19,517 (6,613)
<EPS-PRIMARY> 0.27 (0.16)
<EPS-DILUTED> 0.21 (0.16)

</TABLE>