<PAGE>   1
                                                                    EXHIBIT 13.1


Selected Financial Data

The following table sets forth selected financial data of the Company as of and
for the five years ended September 30, 1999, 1998, 1997, 1996 and 1995. The
selected financial data has been derived from the Company's audited historical
consolidated financial statements. This financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto appearing elsewhere in this document.


<TABLE>
<CAPTION>
                                                                           FISCAL YEARS ENDED SEPTEMBER 30,
                                                       ----------------------------------------------------------------------
(In thousands, except per share amounts)                 1999(4)      1998(4)    1997(3)(4)    1996(3)(4)(5)  1995(2)(3)(5)
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>         <C>        <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
     Total net revenues                                  $ 29,610    $ 21,169        $ 21,295      $ 22,307       $ 12,141

     Gross profit                                          19,481      15,610          18,267        20,277         10,380

     Income (loss) from operations                         (3,279)    (11,283)        (15,677)        3,153          3,025

     Net income (loss)                                     (1,897)    (10,032)        (14,151)        2,952          2,176

     Net income (loss) available to common
          stockholders                                   $( 1,897)   $(10,032)       $(14,151)     $  2,952       $  1,985



Earnings (loss) per common share-basic (1):

     Net income (loss)                                   $(  0.12)   $(  0.69)       $(  1.07)     $   0.23       $   0.27

     Net income (loss) available to common
          stockholders                                   $(  0.12)   $(  0.69)       $(  1.07)     $   0.23       $   0.25

     Weighted average number of common shares
          outstanding                                      16,029      14,543          13,238        12,768          8,111



Earnings (loss) per common share-diluted (1):

     Net income (loss)                                   $(  0.12)   $(  0.69)       $(  1.07)     $   0.21       $   0.23

     Net income (loss) available to common
          stockholders                                   $(  0.12)   $(  0.69)       $(  1.07)     $   0.21       $   0.21

     Weighted average number of common shares
          outstanding                                      16,029      14,543          13,238        14,023          9,383



BALANCE SHEET DATA:

     Cash, cash equivalents and short-term investments   $ 29,348    $ 22,706        $ 29,026      $ 34,201       $ 34,872

     Working capital                                       35,199      25,678          29,233        38,598         35,550

     Total assets                                          45,773      34,980          42,048        48,908         43,509

     Total stockholders' equity                            39,248      29,807          36,162        43,393         37,614

</TABLE>


(1) In December 1997, the Company adopted Statement of Financial Accounting
Standard No. 128, Earnings per Share ("SFAS No. 128"). SFAS No. 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. In periods when the Company incurs a net loss, the
basic and diluted weighted average number of common shares outstanding will be
equal.

(2) On November 28, 1995, the Board of Directors declared a two-for-one common
stock split, effected in the form of a 100% stock dividend, paid December 20,
1995, to stockholders of record as of December 6, 1995. All share and per share
data prior to December 20, 1995 has been restated to reflect the two-for-one
common stock split for all periods presented.

(3) Selected financial data for the years ended September 30, 1997, 1996, and
1995 does not include the results of AllPen Software which was acquired in
fiscal 1998 in a transaction accounted for as a pooling of interests. Because
the effect of this transaction was considered immaterial, Spyglass' financial
statements were not restated instead, the Company's equity accounts were
adjusted for the effect of the pooling.

(4) Selected financial data for the years ended September 30, 1999, 1998 and
1997 includes the results of Navitel Communications, Inc. which was acquired in
fiscal 1999 in a transaction accounted for as a pooling of interests. Selected
financial data for the year ended September 30, 1996 includes the results of
Navitel from its inception, May 21, 1996.


<PAGE>   2

(5) Selected financial data for the years ended September 30, 1996 and 1995
includes the results of Stonehand Inc., OS Technologies Corporation and
SurfWatch Software, Inc. which were acquired in fiscal 1996 transactions
accounted for as poolings of interests.

DIVIDEND POLICY

The Company has never paid cash dividends on its capital stock. The Company
currently intends to retain earnings, if any, to support its growth strategy and
does not anticipate paying cash dividends in the foreseeable future.

SELECTED QUARTERLY DATA

The following table sets forth certain quarterly financial information of the
Company for fiscal years 1999 and 1998. This information has been derived from
the consolidated quarterly financial statements of the Company which are
unaudited but which, in the opinion of management, have been prepared on the
same basis as the audited consolidated financial statements included herein and
include all adjustments (consisting only of normal recurring items) necessary
for a fair presentation of the financial results for such periods. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this document.


<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED (UNAUDITED)
                                  -------------------------------------------------------------------------------------------------
(In thousands,                      SEPT. 30,   JUNE 30,   MARCH 31,  DEC. 31,    SEPT. 30,      JUNE 30,   MARCH 31,   DEC. 31,
except per share amounts)             1999       1999        1999       1998         1998          1998       1998        1997
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>         <C>        <C>        <C>          <C>           <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA(1):

    Total net revenues               $9,187       $7,232     $7,419     $5,772       $6,158        $5,676      $5,081     $4,254

    Gross profit                      6,375        4,563      4,980      3,563        4,210         4,090       3,932      3,378

    Loss from operations               (23)        (986)      (260)    (2,010)        (975)       (1,972)     (3,589)    (4,747)

    Net income (loss)                   335        (648)        109    (1,693)        (674)       (1,686)     (3,279)    (4,393)

PER SHARE AND SHARE DATA(1):

    Net income (loss) per share-
     basic                            $0.02      ($0.04)      $0.01    ($0.11)      ($0.05)       ($0.11)     ($0.23)    ($0.31)

    Weighted average number of
    common shares outstanding-
    Basic                            16,310       16,217     16,049     15,714       14,878        14,750      14,272     14,166

    Net income (loss) per share-
    diluted                           $0.02      ($0.04)      $0.01    ($0.11)      ($0.05)       ($0.11)     ($0.23)    ($0.31)

    Weighted average number of
    common shares outstanding-
    diluted                          17,694       16,217     17,403     15,714       14,878        14,750      14,272     14,166

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

(1) Selected quarterly data for the years ended September 30, 1999 and 1998
includes the results of Navitel Communications, Inc. which was acquired in
fiscal 1999 in a transaction accounted for as a pooling of interests.

MARKET PRICE PER SHARE

The following table sets forth, for the periods indicated, the high and low
sales prices of the Common Stock of the Company on the Nasdaq National Market,
as reported by Nasdaq.


<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED
                                     -----------------------------------------------------------------------------------------------
                                     SEPT. 30,   JUNE 30,    MARCH 31,    DEC. 31,    SEPT. 30,   JUNE 30,    MARCH 31,   DEC. 31,
                                       1999       1999        1999          1998         1998       1998        1998        1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>         <C>         <C>          <C>         <C>         <C>         <C>        <C>
    High                             $20 1/2     $23 1/2     $20 1/4      $32 1/4     $15 5/16    $15 3/8     $9 9/16      $12
    Low                              $10 3/8     $ 8 5/8     $ 8 7/8      $ 9         $ 9 5/8     $ 8 1/4     $4 1/4       $ 4 1/16
</TABLE>




<PAGE>   3

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

OVERVIEW

         This discussion should be read in conjunction with the Company's
consolidated financial statements included herein. This Management's Discussion
and Analysis of Financial Condition and Results of Operations and the
accompanying Consolidated Financial Statements and Notes thereto have been
prepared to reflect the retroactive effect of Spyglass, Inc.'s ("Spyglass" or
the "Company") acquisition of Navitel Communications, Inc. ("Navitel"),
consummated in April 1999. The acquisition was accounted for as a pooling of
interests, which means that for accounting and financial reporting purposes,
Spyglass' consolidated financial statements have been restated to present the
combined companies' financial position and results of operations for each period
presented.

         Spyglass was organized as an Illinois corporation in February 1990 and
reincorporated in Delaware in May 1995. Spyglass entered the Internet market
during fiscal 1994 and, from fiscal 1994 through fiscal 1996, focused its
efforts on developing, marketing and distributing Internet client and server
technologies for incorporation into a variety of Internet-based products and
services. Since fiscal 1997, the Company has been focusing on the development,
marketing and distribution of its technologies and services to the information
appliance market, and beginning May 1999, increased its focus on the interactive
television ("ITV") and mobile data ("MD") markets.

         Spyglass provides its customers with strategic Internet consulting,
software and professional services that enable them to rapidly develop and
deploy cost-effective Internet-enabled information appliances and Internet-based
services. Spyglass Professional Services include custom engineering for
defining, developing and delivering complete, end-to-end project solutions.
Spyglass solutions have been integrated into a variety of products, including
television set-top boxes, Internet screen phones, wireless phones, televisions,
office equipment, medical devices and industrial controls. In addition,
SurfWatch content filtering software, designed to block unwanted material from
the Internet, has been deployed by several major corporations, schools and ITV
services.

         The Company licenses technology from a number of third-party vendors
for incorporation into the Company's products and pays license fees and/or
royalties for such use. These fees are reflected in cost of Internet technology
revenues.

           On January 21, 1997, the Company amended its license arrangement with
Microsoft Corporation ("Microsoft") to convert Microsoft's existing license for
the Spyglass Mosaic browser technology into a fully paid-up license in
consideration of an additional $8,000,000 payment from Microsoft. Spyglass
recognized the revenue from this payment in the quarter ended March 31, 1997.
Management believes that its results of operations, presented without giving
effect to this one-time event, provide a more accurate presentation of the

<PAGE>   4

Company's ongoing business. Accordingly, the following analyses for the fiscal
year ended September 30, 1997, including amounts and percentages, exclude the
$8,000,000 of revenue as well as the associated $600,000 of cost of sales and
$400,000 of sales expense for the fiscal year ended September 30, 1997.
Approximately 39.5% of the Company's revenues for fiscal 1997 were attributable
to Microsoft.

         In November 1997, Spyglass acquired AllPen Software ("AllPen) in a
transaction accounted for as a pooling of interests. Because the effect of this
transaction on prior year financial statements was considered immaterial, such
financial statements were not restated; instead, the Company's equity accounts
were adjusted for the effect of the pooling.

         In October 1998, General Instrument Corporation ("GI") acquired 700,000
shares of the Company's common stock for $7,392,000 and also acquired warrants
to purchase an additional 700,000 shares. The warrants have exercise prices
ranging from $13.20 to $14.78 per share (subject to adjustment in certain
circumstances), and become exercisable on varying dates over a five-year period.
In connection with this investment, the Company and GI entered into a three-year
agreement under which the Company is developing and integrating new Internet
cable services and technologies for GI's next generation digital set-top
platforms. This work is being performed through a subsidiary of the Company, in
which GI holds a 10% minority interest and which GI will have an option to
purchase at fair market value under certain circumstances. The Company has
opened a new facility for this solutions center in Lexington, Massachusetts with
dedicated resources for the execution of the GI agreement, which is expected to
provide Spyglass $20 million in revenues over three years.

          In March 1999, the Company and Microsoft Corporation ("Microsoft")
entered into agreements under which the Company licensed technology and will
provide services over a three-year period to Microsoft to develop and integrate
multiple Windows CE-based applications for information appliance manufacturers
that are developing products utilizing the Windows CE operating system. The
agreements are expected to provide the Company with $20 million in revenues over
three years. In November 1999, the Company moved dedicated resources to a new
facility in Menlo Park, California to facilitate the anticipated growth of this
solutions center.

         In April 1999, Spyglass acquired Navitel in a transaction accounted for
as a pooling of interests. All financial information presented includes the
accounts and results of operations of Navitel for all periods presented from its
inception date, May 21, 1996.

         On September 20, 1999 the Company signed a definitive agreement to sell
SurfWatch Software Inc. ("SurfWatch") to JSB Software Technologies, plc ("JSB").
The transaction was completed on November 4, 1999, and was effected through the
sale of all the issued and outstanding capital stock of SurfWatch for
consideration of $17 million cash and $12 million in JSB equity securities. This
transaction resulted in a pre-tax gain of approximately $27 million.

         In the first quarter of the fiscal year ended September 30, 2000 the
Company recorded a non-recurring restructuring charge consisting primarily of
severance and related personnel costs associated with the organizational
realignment of the Company's professional services group. This realignment was
completed in November 1999 and resulted in a restructuring charge of
approximately $860,000.



RESULTS OF OPERATIONS

The following table sets forth certain financial data as a percentage of total
net revenues for the fiscal years ended September 30, 1999, 1998 and 1997.



<PAGE>   5

<TABLE>
<CAPTION>
                                                  PERCENTAGE OF TOTAL NET REVENUES
                                                FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
                                                ----------------------------------------
                                                      1999         1998        1997
----------------------------------------------------------------------------------------
<S>                                                   <C>          <C>         <C>
NET REVENUES:
   Internet technology                                45.6%        55.1%       69.2%
   Service                                            54.4         44.9        30.8
                                                     -----        -----       -----
      Total net revenues                             100.0        100.0       100.0

COST OF REVENUES:
   Internet technology                                 4.1          8.7         7.0
   Service                                            30.1         17.6        11.2
                                                     -----        -----       -----

      Total cost of revenues                          34.2         26.3        18.2
                                                     -----        -----       -----

Gross profit                                          65.8         73.7        81.8

OPERATING EXPENSES AND OTHER:
   Sales and marketing                                27.8         43.0        59.5
   Research and development                           26.9         50.4       126.1
   General and administrative                         21.3         31.3        59.9
   Restructuring charge                                --           --          6.8
   One-time acquisition costs                          0.9          2.3        --
                                                     -----        -----       -----
      Total operating expenses and other              76.9        127.0       252.3

Loss from operations                                 (11.1)       (53.3)     (170.5)
Other income, net                                      4.7          5.9        11.5
                                                     -----        -----       -----

Loss before income taxes                              (6.4)       (47.4)     (159.0)
Income tax benefit                                     --           --         --
                                                     -----        -----       -----
Net loss                                              (6.4)%      (47.4)%    (159.0)%
                                                     =====        =====      ======
</TABLE>


FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED WITH FISCAL YEAR ENDED
SEPTEMBER 30, 1998

         Internet technology revenues for the year ended September 30, 1999
increased $1,832,000, or 16%, to $13,493,000 compared to $11,661,000 for the
year ended September 30, 1998. The increase was largely attributable to a
$2,632,000 increase in SurfWatch license revenue which included a $2,000,000 fee
paid by JSB to license Spyglass' patented Internet filtering system. The
remaining $632,000 increase in SurfWatch revenues, coupled with increases in
license revenues from device manufacturers was more than offset by a decline in
revenues from licensing of desktop software applications, in addition to
software acquired in the AllPen acquisition that is no longer marketed. Internet
technology revenues to be derived from subsequent royalties under a contract
will be realized as customers commercially deploy information appliances
utilizing the Company's technology and the royalty revenue stream commences. The
Company expects Internet technology revenues to increase during fiscal 2000, as
compared to fiscal 1999 Internet technology revenues excluding SurfWatch
revenues.

         Service revenues, which include both professional services revenues and
revenues from customer support agreements, increased $6,609,000, or 70%, to
$16,117,000 for the year ended September 30, 1999 compared to $9,508,000 for the
year ended September 30, 1998. This increase was due to management's focus on
building an integrated development and service organization that provides
customized solutions to


<PAGE>   6

its customers within the ITV and MD markets. The October 1998 agreement with GI
is expected to provide at least $17,100,000 in professional services revenue
over the next two years. Additionally, the April 1999 agreement with Microsoft
is expected to provide approximately $15,800,000 in professional services
revenues over the next two and a half years. As a result, the Company expects
service revenues during fiscal 2000 to increase both in absolute dollars and as
a percentage of total net revenues over fiscal 1999.

         Gross profit, as a percentage of revenues, was 65.8% for the year ended
September 30, 1999 compared to 73.7% for the year ended September 30, 1998. This
reduction was primarily a result of higher service revenues as a percentage of
total net revenues, and a decline in gross margins from service revenues from
60.9% in fiscal 1998 to 44.7% in fiscal 1999. The Company expects gross profit,
as a percentage of revenues, to decline slightly throughout fiscal 2000 as
services revenues continue to increase as a percentage of total net revenues.
That margin decline is expected to be partially offset by improved gross margins
from Internet technology revenues as royalty costs associated with third-party
software are expected to decline.

         Sales and marketing expenses for the year ended September 30, 1999
decreased $883,000, or 10%, to $8,218,000 from $9,101,000 for the year ended
September 30, 1998, and decreased as a percentage of revenues to 27.8% from
43.0%. Factors contributing to this decrease were $457,000 in reduced
compensation and related personnel expenses resulting from a reduction of sales
and marketing staff, and a reduction in compensation expense related to
amortization of restricted stock issued to certain officers of the Company.
Additionally, the Company decreased its fiscal 1999 marketing program
expenditures by $452,000 as programs were streamlined to shift focus from the
broader information appliance market, to primarily the ITV and MD markets. The
Company expects sales and marketing expenses for fiscal 2000 to increase in
absolute dollars but decrease as a percentage of revenue, as compared to fiscal
1999.

         Research and development expenses for the year ended September 30, 1999
decreased $2,700,000, or 25%, to $7,970,000 compared to $10,670,000 for the year
ended September 30, 1998, and decreased as a percentage of revenues to 26.9%
from 50.4%. The decrease in research and development expenses was due primarily
to a decrease in compensation and related personnel expenses of $3,098,000 as a
result of the increased utilization of development engineers in a professional
services role, as reflected by the increase in cost of service revenues. This
decrease was partially offset by increased expenditures of $423,000, related
primarily to an increased allocation of shared information system costs. The
Company believes that its direct investment in research and development is
sufficient when combined with its retained ownership in the engineering
developments of its professional service engineers. As a result of the changes
noted above, the Company expects its research and development expenses in fiscal
2000 to decrease both in dollars and as a percentage of revenues, as compared to
fiscal 1999.

         General and administrative expenses decreased $313,000, or 5%, to
$6,313,000 for the year ended September 30, 1999 from $6,626,000 for the year
ended September 30, 1998, and decreased as a percentage of revenues to 21.3%
from 31.3%. The decrease was a result of a $103,000 reduction in compensation
and related personnel expenses, and a $526,000 reduction in facility costs as
well as increased allocation of information system costs to other departments
within Spyglass. These decreases were partially offset by increased legal
expenses of $447,000 primarily related to pending shareholder and patent
litigation. The Company expects general and administrative costs to remain
constant in absolute dollars, but decline as a percentage of revenues, in fiscal
2000 as compared to fiscal 1999.

         In connection with the acquisition of Navitel on April 16, 1999, the
Company recorded a charge to operating expenses of $259,000, or $0.02 per share,
for direct acquisition related costs. In connection with the acquisition of
AllPen in November 1997, the Company recorded a charge to operating expenses of

<PAGE>   7

$496,000 or $0.03 per share, for direct acquisition related costs. In both
cases, these costs consisted primarily of professional fees.

         The Company recorded no income tax benefit for fiscal years 1999 and
1998. This reflects a decision by the Company not to recognize income tax
benefits associated with the Company's operating losses generated during such
years. The Company believes that it is appropriate to defer recognition of
potential tax benefits until such time as its return to profitability can
provide assurances that these tax benefits will be realized.

FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED WITH FISCAL YEAR ENDED
SEPTEMBER 30, 1997

         Internet technology revenues for the year ended September 30, 1998
increased $2,467,000, or 27%, to $11,661,000 compared to $9,194,000 for the year
ended September 30, 1997. This growth was due primarily to an increase in
licensing revenues from information appliance manufacturers. Internet technology
revenues from vendors of desktop software applications, excluding SurfWatch
revenues, decreased $3,986,000 while revenues from information appliance
manufacturers increased $5,752,000.

         Service revenues, which include both professional services revenues and
revenues from customer support agreements, increased $5,407,000, or 132%, to
$9,508,000 for the year ended September 30, 1998 compared to $4,101,000 for the
year ended September 30, 1997. This increase was due to management's focus on
building an integrated development and service organization that provides
customized solutions to its customers within the information appliance market.
This resulted in an increase in the number and dollar value of professional
services agreements.

         Gross profit, as a percentage of revenues, was 73.7% for the year ended
September 30, 1998 compared to 81.7% for the year ended September 30, 1997. This
reduction was partially a result of a change in the revenue mix, as total net
revenue consisted of a higher percentage of lower margin professional services
revenues, and a reduction in Internet technology margins related to increased
product royalty costs.

         Sales and marketing expenses for the year ended September 30, 1998
increased $1,190,000, or 15%, to $9,101,000 from $7,911,000 for the year ended
September 30, 1997, but decreased as a percentage of revenues to 43.0% from
59.5%. Factors contributing to this increase were $791,000 in additional
compensation and related personnel expenses incurred as a result of the addition
of sales and marketing staff, primarily in international locations as well as at
the Company's SurfWatch business unit, and compensation expense related to
amortization of restricted stock issued to certain officers of the Company.
Additionally, the Company increased its fiscal 1998 marketing program
expenditures by $425,000 in its efforts to promote its solutions to customers in
the information appliance market, and to increase customer and industry
awareness of its SurfWatch products. These increases were partially offset by a
decrease in travel and travel-related expenses of approximately $175,000
primarily due to decreases in trade show expenses resulting from the shift in
focus from the desktop market to the information appliance market.

         Research and development expenses for the year ended September 30, 1998
decreased $6,098,000, or 36%, to $10,670,000 compared to $16,768,000 for the
year ended September 30, 1997, and decreased as a percentage of revenues to
50.4% from 126.1%. The decrease in research and development costs was due
primarily to a decrease in compensation and related personnel expenses of
$2,571,000 as a result of the increased utilization of development engineers in
a professional services role, as reflected by the increase in cost of service
revenues. Additionally, consulting expense decreased by $1,183,000 primarily due
to the reduction in the use of outside consultants by Navitel due to the hiring
of full-time personnel by Navitel.


<PAGE>   8

Navitel received $1,606,000 and $250,000 from Microsoft during fiscal 1998 and
1997, respectively, as funding for research and development expenses which was
netted against research and development expenditures.

         General and administrative expenses decreased $1,339,000, or 17%, to
$6,626,000 for the year ended September 30, 1998 from $7,965,000 for the year
ended September 30, 1997 and decreased as a percentage of revenues to 31.3% from
59.9%. The decrease was a result of a $720,000 reduction in bad debt expense, a
combined $541,000 reduction in conference, travel and meeting expenses, and a
$499,000 decrease in consulting expense. This decrease was partially offset by
an increase in compensation and related personnel expenses of $580,000 due
primarily to the issuance of restricted stock to officers of the Company.

         On March 10, 1997, the Company consolidated its Champaign, Illinois
development operations with its Naperville, Illinois and Cambridge,
Massachusetts operations. This consolidation reflected the Company's evolution
from its desktop focus to the information appliance market and the realignment
of its product development activities with the needs of this market. As a
result, a restructuring charge of $900,000 was recorded in the second quarter of
fiscal 1997, consisting primarily of severance and related personnel costs of
$730,000 and lease cancellation and other exit costs of $170,000. Included in
the charge for personnel costs was $100,000 of compensation expense related to
the acceleration of the exercisability of certain stock options. The decrease in
facility costs related to the closing of the Champaign facility has been offset
by expansion within existing facilities as well as expansion into new
facilities.

         In connection with the acquisition of AllPen in November 1997, the
Company recorded a charge to operating expenses of $496,000 or $0.03 per share
for direct acquisition related costs consisting primarily of professional fees.

         The Company recorded no income tax benefit for fiscal years 1998 and
1997. This reflects a decision by the Company not to recognize income tax
benefits associated with the Company's operating losses generated during such
years. The Company believes that it is appropriate to defer recognition of
potential tax benefits until such time as its return to profitability can
provide assurances that these tax benefits will be realized.

LIQUIDITY AND CAPITAL RESOURCES

         As of September 30, 1999, the Company had no debt and had cash, cash
equivalents, and short-term investments of $29,348,000 and working capital of
$35,199,000. The Company's operating activities used cash of $2,454,000,
$9,194,000 and $7,791,000 for the fiscal years ended September 30, 1999, 1998
and 1997, respectively.

         The Company's operating cash flow for fiscal 1997 was impacted by the
$7,500,000 in cash received from Microsoft during the quarter ended March 31,
1997 in connection with the amendment to the Company's license arrangement with
Microsoft as discussed in the Overview section. In addition, $1,606,000 and
$250,000 in cash was received by Navitel from Microsoft during fiscal 1998 and
1997, respectively, for research and development expenses.

         In November 1999, the Company received $17,000,000 in cash and
$12,000,000 in JSB securities for the sale to JSB of all the issued and
outstanding capital stock of SurfWatch. In October 1998, the Company received
$7,392,000 in cash from GI for the purchase by GI of 700,000 shares of the
Company's common stock.
<PAGE>   9

         The Company's current net accounts and unbilled accounts receivables
increased to $9,630,000 at September 30, 1999 from $5,606,000 at September 30,
1998. This increase was primarily due to an increase in revenues for the fourth
quarter of fiscal 1999 as compared to the fourth quarter of fiscal 1998.

         The Company's capital expenditures totaled $2,020,000, $656,000 and
$3,524,000 for the fiscal years ended September 30, 1999, 1998 and 1997,
respectively. These consisted primarily of computer hardware and software,
office furniture, and leasehold improvements for new employees and for the new
solutions center in Lexington, Massachusetts. The Company had no material
commitments for capital expenditures at September 30, 1999.

          The Company believes that its current cash and cash equivalents, as
well as anticipated cash flow from operations, will be sufficient to finance the
Company's cash flow requirements through at least fiscal 2000.

FUTURE OPERATING RESULTS

         This Annual Report contains a number of forward-looking statements. Any
statements contained herein (including without limitation statements to the
effect that the Company or its management "believes", "expects", "anticipates",
"plans" and similar expressions) that relate to future events or conditions
should be considered forward-looking statements. There are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated by such forward-looking statements. These factors include,
without limitation, those set forth below.

         During fiscal 1997, the Company announced a new strategic focus on the
information appliance market. The Company has been focused on the development,
marketing and distribution of its technologies and services to the broader
information appliance market, and since May 1999, has increased its focus on the
ITV and MD markets. Because this is a relatively new and undeveloped market,
there can be no assurance as to the extent of the demand for the Company's
products and services or the extent to which the Company will be successful in
penetrating this market.

         The Company derived 22.4% and 39.5% of its revenues for the fiscal
years ended September 30, 1999 and September 30, 1997, respectively from
Microsoft Corporation. Sales to GI represented 11.6 % of the Company's revenues
for the fiscal year ended September 30, 1999, and sales to Motorola Corporation
represented 14.5% of revenues for the fiscal year ended September 30, 1998. As
the information appliance market develops, the Company expects to continue to
derive a significant portion of its revenues from a relatively limited number of
customers. Although the Company expects that its reliance on any particular
customer will decline as the information appliance market develops and its
customer base expands, the failure of the Company to enter into a sufficient
number of licensing agreements or sustain revenues from major customers during a
particular period could have a material adverse effect on the Company's future
operating results.

         The Company's future results of operations will also be largely
dependent upon a number of factors relating to the further development and
acceptance of the Internet as a commercial market. In particular, commercial use
of the Internet continues to be constrained by the need for reliable processes
such as security measures for electronic commerce as well as the need for
regularly available customer support. In addition, the market for Internet
software products is characterized by rapidly changing technology, evolving
industry standards and customer demands, and frequent product introductions and
enhancements,


<PAGE>   10

which make it difficult to predict whether the initial commercial acceptance of
the Company's solutions can be sustained over a period of time.

         The market for Internet technologies and services is extremely
competitive, and competition is likely to increase in the future. The Company
currently faces competition from other Internet information appliance technology
vendors and service providers such as BSQUARE, Liberate, Microsoft, OpenTV,
Oracle, Phone.com, Sun Microsystems, on-line service companies, Internet access
providers and networking software companies. Additionally, the Company considers
a significant source of competition for its Internet solutions to be the
prospect company's internal resources.

         The Company has provided its solutions to content providers, service
operators and device manufacturers within the cable and satellite television,
wireless, telecommunications, office equipment, automotive and industrial
control markets who then deploy products and/or services within these markets.
The success of the Company is therefore dependent in large part on the
performance of its customers and the market acceptance of its customers'
products and services, which is outside of the Company's control.

         The Company from time to time receives notices alleging that its
products infringe third-party proprietary rights. Patent and similar litigation
frequently is complex and expensive and its outcome can be difficult to predict.
If, as a result of proprietary rights infringements by any of the Company's
products, the Company is required to discontinue sales of certain products,
eliminate certain features on its products, or pay royalties to another party,
the Company's future operating results could be materially adversely affected.

         The Company's quarterly operating results have varied and they may
continue to vary significantly depending on factors such as the timing of
significant license or service agreements, the terms of the Company's licensing
and service arrangements with its customers and the timing of new product
introductions and upgrades by the Company and its competitors. The Company
typically structures its license agreements with customers to require
commitments for a minimum number of licenses, and license revenues are
recognized as the committed licenses are purchased. Additional revenues from a
customer will not be earned unless and until the initial committed levels are
exceeded. The Company's revenues in any quarter will depend in significant part
on its ability to license technologies and provide services to new customers in
that quarter and the timing of product or service deployment by its customers.
The Company typically structures its professional services agreements with
customers to recognize revenue on the percentage of completion method of
accounting. The Company's expense levels are based in part on expectations of
future revenue levels and are difficult to adjust in the short term. Any
shortfall in expected revenue could therefore have a disproportionate adverse
effect on the Company's operating results in any given period.

IMPACT OF YEAR 2000

         The "Year 2000" issue refers to the problem of certain computer
programs using abbreviated years with two digits and thus being unable to
distinguish, for example, whether the year "00" means 1900 or 2000 which may
lead to such software failing to operate or operating with erroneous results.

The Company has assembled a cross-department task force to address the Year 2000
issue. The task force has been addressing Spyglass products, third-party
software and products used by the Company and software utilized by third parties
that perform services for the Company.
<PAGE>   11

As it relates to Spyglass products, the task force has substantially completed
the testing phase of its overall plan. As a result of this phase, the Company
has determined that all Spyglass products and technologies currently marketed
and sold are Year 2000 compliant. Spyglass defines Year 2000 compliance as it
relates to Spyglass products only and Spyglass compliance testing is limited to
Spyglass products only. Spyglass emphasizes that for a system to be Year 2000
compliant, all interdependent products which comprise the system must be
compliant, including hardware, operating systems and application software. Older
versions of certain Spyglass products and technologies currently available can
be made Year 2000 compliant with the proper patch upgrade. Despite Spyglass'
assessment and testing, known or unknown errors or defects in Spyglass' products
could result in delay or loss of revenue, diversion of development resources,
increased service and warranty costs or damage to Spyglass' reputation, any of
which could materially adversely affect Spyglass' results of operations or
financial condition.

In addition to Spyglass products, the task force has investigated other
associated Year 2000 issues such as ensuring that third-party software used
internally and other products and services supplied to Spyglass are Year 2000
compliant. This investigation included, but was not limited to, review of vendor
and related Web sites and direct confirmation with significant vendors. The
majority of Spyglass' computer programs have been purchased and implemented over
the last three years. As a result, most of these programs were Year 2000
compliant when purchased or have since been upgraded with Year 2000 compliant
software upgrades. In the event third-party internally used systems are not Year
2000 compliant, the Company's ability to process vendor transactions and perform
certain other functions could be impaired. Additionally, Spyglass has no legacy
(mainframe) systems, which are the source of much of the current concern
regarding Year 2000 compliance. During the assessment phase of its overall plan,
the Company received direct confirmation that all material internally used
systems will operate in the year 2000.


Spyglass' approach to ensuring compliance on the hardware, operating systems,
and applications used internally is to define a standard revision for each
system component. These definitions have been created as a benchmark for
compliance testing. Spyglass information systems personnel have been and will be
applying this checklist to each inventoried system and, if necessary, will
perform appropriate upgrades. All critical systems have been tested live to
ensure compliance. All systems not defined as critical will have been verified
by a random sampling of live tests prior to the end of the calendar year.
Equipment and software for which Year 2000 compliance information is unavailable
or not guaranteed by vendors will be retired and replaced.

Several pieces of non-compliant network hardware have been decommissioned and
replaced by upgraded Year 2000 compliant platforms. According to the equipment
vendors' Year 2000 certifications, the remaining Spyglass network hardware and
software systems are in compliance.

A large portion of Spyglass' Year 2000 compliance efforts has focused on our
internal enterprise applications which affect many of Spyglass' business
processes. Established core product and customization upgrades were completed
for the Company's two key internal systems during the quarter ended September
30, 1999, which brought them into compliance.

Spyglass does not currently have reliable information with regard to Year 2000
compliance of its customers. As is the case with all similarly situated
companies, Spyglass' results of operations could be materially impacted if its
customers encounter Year 2000 issues unrelated to Spyglass products and
services. In such a scenario, it is reasonably likely that these customers would
channel resources into products and activities unrelated to products that
utilize Spyglass technologies and/or services, potentially limiting Spyglass'
future revenues from these customers.


<PAGE>   12

The Company does not currently have a contingency plan in the event that
Spyglass products or third-party products and services incur Year 2000 problems.
Such a plan will be devised if and when it has been determined that overall Year
2000 compliance is in question.

As of September 30, 1999, the majority of Year 2000 compliance costs incurred by
the Company have been the value of the time, based on standard hourly rates for
employees, spent by the task force, which approximates $116,000. In addition,
the Company has spent approximately $25,000 for external consultants. The use of
external consultants is expected to remain minimal. The Company estimates it
will incur approximately $65,000 in future expenses to ensure systems will
function properly with respect to dates in the year 2000. These expenses are not
expected to have a material impact on the financial position, cash flow or
results of operations of the Company.

The costs and scope of the Company's Year 2000 compliance efforts are based on
management's best estimates which utilize numerous assumptions of future events.
However, there can be no guarantee that these estimates and assumptions will be
realized. Furthermore, the actual impact of the Year 2000 issue could materially
differ from that anticipated.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company exports products to diverse geographic areas. Substantially all
foreign sales, however, are transacted in U.S. dollars and therefore the Company
is not exposed to significant foreign currency market risk. Additionally, the
Company does not believe it has any material market risk exposures with regard
to foreign derivatives or other financial instruments.

<PAGE>   13
                                 SPYGLASS, INC.
                      Consolidated Statements of Operations


<TABLE>
<CAPTION>
                                                  YEARS ENDED SEPTEMBER 30,
(In thousands, except per share amounts)        1999        1998        1997
--------------------------------------------------------------------------------
<S>                                           <C>         <C>         <C>
Net revenues:
    Internet technology                       $ 13,493    $ 11,661    $ 17,194
    Service                                     16,117       9,508       4,101
                                              --------    --------    --------
       Total net revenues                       29,610      21,169      21,295

Cost of revenues:
    Internet technology                          1,220       1,843       1,535
    Service                                      8,909       3,716       1,493
                                              --------    --------    --------
       Total cost of revenues                   10,129       5,559       3,028
                                              --------    --------    --------

Gross profit                                    19,481      15,610      18,267

Operating expenses and other:
    Sales and marketing                          8,218       9,101       8,311
    Research and development, net of
       funding received of $1,606 and $250
       in 1998 and 1997, respectively            7,970      10,670      16,768
    General and administrative                   6,313       6,626       7,965
    Restructuring charge                          --          --           900
    One-time acquisition costs                     259         496        --
                                              --------    --------    --------
       Total operating expenses and other       22,760      26,893      33,944

Loss from operations                            (3,279)    (11,283)    (15,677)

Other income, net                                1,382       1,251       1,526
                                              --------    --------    --------

Loss before income taxes                        (1,897)    (10,032)    (14,151)
Income tax benefit                                --          --          --
                                              --------    --------    --------

Net loss                                      $ (1,897)   $(10,032)   $(14,151)
                                              ========    ========    ========


Net loss per common share-basic and diluted   $  (0.12)   $  (0.69)   $  (1.07)

Weighted average number of common
    shares outstanding-basic and diluted        16,029      14,543      13,238
                                              ========    ========    ========
</TABLE>


         See accompanying Notes to the Consolidated Financial Statements



<PAGE>   14
                                 SPYGLASS, INC.
                           Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                                                SEPTEMBER 30,
(In thousands, except share amounts)                                           1999        1998
-----------------------------------------------------------------------------------------------
<S>                                                                        <C>         <C>
                                     ASSETS

Current assets:
    Cash and cash equivalents                                              $ 18,613    $ 22,706
    Short-term investments                                                   10,735        --
    Accounts receivable, net of allowance for
       doubtful accounts of $494 and $429, respectively                       8,731       4,704
    Unbilled accounts receivable                                                899         902
    Prepaid expenses and other current assets                                 2,420       2,489
                                                                           --------    --------
       Total current assets                                                  41,398      30,801

Properties and equipment, net                                                 3,897       3,888
Other assets                                                                    478         291
                                                                           --------    --------
       TOTAL ASSETS                                                        $ 45,773    $ 34,980
                                                                           ========    ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                                       $  2,396    $  1,678
    Royalties payable                                                           397         541
    Deferred revenues                                                         1,477         861
    Accrued compensation and related benefits                                 1,680       1,624
    Accrued expenses and other liabilities                                      249         419
                                                                           --------    --------
       Total current liabilities                                              6,199       5,123

Long-term deferred revenues                                                     326          50
                                                                           --------    --------

       Total liabilities                                                      6,525       5,173
                                                                           --------    --------

Stockholders' equity:
    Preferred stock, $.01 par value, 2,000,000 shares authorized,
       none issued                                                             --          --
    Common stock, $.01 par value, 50,000,000 shares authorized,
       16,581,731 and 15,083,239 shares issued and 16,504,517
       and 15,073,525 shares outstanding, respectively                          165         150
    Additional paid-in capital                                               62,221      50,546
    Accumulated deficit                                                     (22,194)    (20,297)
    Treasury stock at cost, 77,214 and 9,714 shares, respectively               (56)        (55)
    Unamortized value of restricted stock issued                               (888)       (537)
                                                                           --------    --------
       Total stockholders' equity                                            39,248      29,807
                                                                           --------    --------
       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                          $ 45,773    $ 34,980
                                                                           ========    ========
</TABLE>


         See accompanying Notes to the Consolidated Financial Statements




<PAGE>   15
                                 SPYGLASS, INC.
           Consolidated Statements of Changes in Stockholders' Equity


<TABLE>
<CAPTION>
                                                                                     ADDITIONAL
                                                       COMMON STOCK                   PAID-IN      ACCUMULATED
(In thousands, except share amounts)                     SHARES        AMOUNT         CAPITAL        DEFICIT
--------------------------------------------------------------------------------------------------------------
<S>                                                    <C>           <C>            <C>            <C>
BALANCE AT SEPTEMBER 30, 1996                          12,968,065    $       129    $    39,340    $     3,924

   Exercise of stock options                              497,882              5            731
   Exercise of employee stock purchase plan
    stock options                                          45,396              1            362
   Issuance of incentive stock options                                                       80
   Conversion of preferred stock into
    common stock                                                                          5,509
   Accelerated vesting of options                                                           232
   Net loss                                                                                            (14,151)
                                                       ----------    -----------    -----------    -----------
BALANCE AT SEPTEMBER 30, 1997                          13,511,343            135         46,254        (10,227)

   Adjustment for acquisition accounted
    for as a pooling of interests                         639,246              6            204            (38)
   Exercise of stock options                              658,327              6          1,519
   Exercise of employee stock purchase
    plan stock options                                     74,323              1            391
   Issuance of restricted stock                           200,000              2          1,011
   Amortization of deferred compensation
    relating to issuance of restricted stock
   Purchase of treasury stock
   Conversion of preferred stock into
    common stock                                                                          1,152
   Accelerated vesting of options                                                            15
   Net loss                                                                                            (10,032)
                                                       ----------    -----------    -----------    -----------
BALANCE AT SEPTEMBER 30, 1998                          15,083,239            150         50,546        (20,297)


   Sale of common stock to
    General Instrument                                    700,000              7          7,385
   Exercise of stock options                              656,913              7          3,240
   Exercise of employee stock
    purchase plan stock options                            47,979           --              467
   Issuance of restricted stock                            93,600              1          1,020
   Repurchase of restricted stock                                                          (437)
   Amortization of deferred compensation
    relating to issuance of restricted stock
   Net loss                                                                                             (1,897)
                                                       ----------    -----------    -----------    -----------
BALANCE AT SEPTEMBER 30, 1999                          16,581,731    $       165    $    62,221    $   (22,194)
                                                       ==========    ===========    ===========    ===========

<CAPTION>

                                                             TREASURY               UNAMORTIZED
                                                           COMMON STOCK              VALUE OF
                                                       -----------------------      RESTRICTED
(In thousands, except share amounts)                     SHARES        AMOUNT       STOCK ISSUED
------------------------------------------------------------------------------------------------
<S>                                                    <C>           <C>            <C>
BALANCE AT SEPTEMBER 30, 1996                                  --     $  --         $        --

   Exercise of stock options
   Exercise of employee stock purchase plan
    stock options
   Issuance of incentive stock options
   Conversion of preferred stock into
    common stock
   Accelerated vesting of options
   Net loss
                                                       ----------    -----------      -----------

BALANCE AT SEPTEMBER 30, 1997                                  --        --                    --

   Adjustment for acquisition accounted
    for as a pooling of interests
   Exercise of stock options
   Exercise of employee stock purchase
    plan stock options
   Issuance of restricted stock                                                            (1,011)
   Amortization of deferred compensation
    relating to issuance of restricted stock
   Purchase of treasury stock                               9,714            (55)             474
   Conversion of preferred stock into
    common stock
   Accelerated vesting of options
   Net loss
                                                       ----------    -----------       ----------
BALANCE AT SEPTEMBER 30, 1998                               9,714            (55)            (537)

   Sale of common stock to
    General Instrument
   Exercise of stock options
   Exercise of employee stock
    purchase plan stock options
   Issuance of restricted stock                                                            (1,020)
   Repurchase of restricted stock                          67,500             (1)             437
   Amortization of deferred compensation
    relating to issuance of restricted stock                                                  232
   Net loss
                                                       ----------    -----------       ----------
BALANCE AT SEPTEMBER 30, 1999                              77,214         $  (56)     $      (888)
                                                       ==========    ===========      ===========
</TABLE>

         See accompanying Notes to the Consolidated Financial Statements


<PAGE>   16
                                 SPYGLASS, INC.
                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                FOR THE YEARS ENDED SEPTEMBER 30,
(In thousands)                                                   1999        1998        1997
----------------------------------------------------------------------------------------------------
<S>                                                            <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                    $ (1,897)   $(10,032)   $(14,151)
   Adjustments to reconcile net loss to net cash
         used in operating activities:
     Depreciation                                                 1,982       2,097       1,752
     Amortization                                                   869       1,315         157
       Loss on disposal of fixed assets                              19          15          99
     Issuance of warrants to purchase common stock
      in exchange for non-cash common stock                        --            42        --
     Amortization of deferred compensation related
      to issuance of restricted stock                               232         474        --
     Bad debt provision                                             308         309       1,029
     Stock option compensation                                     --           113         312
   Changes in operating assets and liabilities:
     Accounts and long-term receivables                          (4,285)       (783)      3,155
     Unbilled accounts receivable                                     3        (902)       --
     Prepaid expenses, other current assets and other assets     (1,037)        (54)     (1,015)
     Accounts payable                                               718        (368)        474
     Royalties payable                                             (144)        196        (358)
     Deferred revenues                                              892        (819)       (307)
     Accrued compensation and related benefits                       56        (993)        955
     Research and development funding advance                      --           144        --
     Accrued expenses and other liabilities                        (170)         52         107
                                                               --------    --------    --------
     Net cash used in operating activities                       (2,454)     (9,194)     (7,791)
                                                               --------    --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:

   Cash acquired in business combination                           --           574        --
   Short-term investments, net activity                         (10,735)      4,929      12,664
   Net proceeds from sale of fixed assets                            10          82          32
   Capital expenditures                                          (2,020)       (656)     (3,524)
                                                               --------    --------    --------

     Net cash provided by (used in) investing activities        (12,745)      4,929       9,172
                                                               --------    --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:

   Proceeds from exercise of stock options                        3,714       1,917       1,099
   Proceeds from issuance of preferred stock                       --         1,000       3,000
   Proceeds from issuance of common stock                             1          12        --
   Proceeds from issuance of convertible notes payable             --          --         2,009
   Sale of common stock to General Instrument                     7,392        --          --
   Purchase of treasury stock                                        (1)        (55)       --
                                                               --------    --------    --------
     Net cash provided by financing activities                   11,106       2,874       6,108
                                                               --------    --------    --------

Net increase (decrease) in cash and cash equivalents             (4,093)     (1,391)      7,489

Cash and cash equivalents at beginning of period                 22,706      24,097      16,608
                                                               --------    --------    --------

Cash and cash equivalents at end of period                     $ 18,613    $ 22,706    $ 24,097
                                                               ========    ========    ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
     Cash paid for income taxes                                $   --      $      6    $     28
</TABLE>



      See accompanying Notes to the Consolidated Financial Statements
<PAGE>   17
                                 SPYGLASS, INC.

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Operations
Spyglass, Inc. ("Spyglass" or the "Company ") develops, markets and distributes
Internet client and server technologies designed to be incorporated into a
variety of Internet-based products, including but not limited to wireless
phones, Internet screen phones, televisions, television set-top boxes, office
equipment, network computers and Internet access services. The Company's
technology offerings include Spyglass Device Mosaic, Spyglass Prism, Nokia's WAP
Microbrowser, Spyglass MicroServer, Spyglass Device Mail, Spyglass Thin GUI
Library and SurfWatch products. These technologies are used to bring Internet
functionality to customer's products and services. The Company also offers
Internet consulting and custom engineering services through its professional
services organization.

On November 4, 1999, the Company sold SurfWatch Software, Inc.("Surfwatch") to
JSB Software Technologies, plc ("JSB") for cash and securities in JSB. See Note
14.

On April 16, 1999, the Company acquired Navitel Communications, Inc. ("Navitel")
in a transaction accounted for as a pooling of interests. Navitel, located in
Menlo Park, California, is engaged in the business of Internet telephony and
software development focused on Internet technology for information appliances.
This transaction was effected through the exchange of 1,148,520 shares of common
stock of Spyglass for all of the issued and outstanding shares of Navitel. As a
result, all financial information includes the accounts and results of
operations of Navitel for all periods presented from its inception date, May 21,
1996.

There were no intercompany transactions between the Company and Navitel prior to
the merger and there were no significant accounting reclassifications required
to conform the financial reporting of the two companies. The following
information shows revenue and net income of the separate companies during the
periods preceding the combination (in thousands):



<TABLE>
<CAPTION>
UNAUDITED
                     SIX MONTHS ENDED   FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
                      MARCH 31, 1999         1998                   1997
                     ----------------   ---------------------------------------
<S>                  <C>                <C>                       <C>
Revenue:
Spyglass             $ 10,822                $ 20,494              $ 21,295
Navitel                 2,369                     675                  --
                     ------------------------------------------------------
                     $ 13,191                $ 21,169              $ 21,295
                     ========                ========              ========

Net income (loss):
Spyglass             $ (2,102)                 (8,016)               (9,735)
Navitel                   518                  (2,016)               (4,416)
                     ------------------------------------------------------
                     $ (1,584)               $(10,032)             $(14,151)
                     ========                ========              ========
</TABLE>


In October 1998, General Instrument Corporation ("GI") acquired 700,000 shares
of the Company's common stock for $7,392,000 and also acquired warrants to
purchase an additional 700,000 shares. The warrants have exercise prices


<PAGE>   18

ranging from $13.20 to $14.78 per share (subject to adjustment in certain
circumstances), and become exercisable on varying dates over a five-year period.
In connection with this investment, the Company and GI entered into a three-year
agreement under which the Company is developing and integrating new Internet
cable services and technologies for GI's next generation digital set-top
platforms. This work is being performed through a subsidiary of the Company, in
which GI holds a 10% minority interest and which GI will have an option to
purchase at fair market value under certain circumstances.

On November 14, 1997, the Company acquired AllPen Software ("AllPen") in a
transaction accounted for as a pooling of interests. AllPen, located in Los
Gatos, California, develops software solutions and technologies and provides
professional services for the information appliance market. This transaction was
effected through the exchange of 639,246 shares of common stock of Spyglass for
all the issued and outstanding shares of AllPen. Because the effect of this
transaction was considered immaterial, Spyglass' financial statements were not
restated; instead, the Company's equity accounts were adjusted for the effect of
the pooling. In connection with the acquisition of AllPen, the Company recorded
a charge to operating expenses of $496,000 or $0.03 per share for direct
acquisition related costs consisting primarily of professional fees.


Basis of Presentation
The consolidated financial statements include the accounts of the Company and
each of its wholly-owned subsidiaries. The functional currency of the Company's
wholly-owned foreign subsidiaries is the U.S. dollar. All intercompany
transactions and balances between the companies have been eliminated in
consolidation and certain prior year amounts have been reclassified to conform
with the current year presentation. Furthermore, the consolidated financial
statements have been prepared to reflect the retroactive effect of Spyglass'
acquisition of Navitel, consummated in April 1999.


University of Illinois Agreement
The Spyglass Device Mosaic product was initially a commercial derivative version
of NCSA Mosaic(TM). NCSA Mosaic was developed by the National Center for
Supercomputing Applications at the University of Illinois at Urbana-Champaign.
In May 1994, the Company and the University entered into an agreement which was
subsequently amended (the "University Agreement") granting the Company the
exclusive (subject to approximately 10 previously granted licenses), worldwide
right to develop, distribute and sublicense commercial client browsers based on
NCSA Mosaic. The University Agreement provided for royalties based on Spyglass'
net revenues from Device Mosaic, and included cumulative minimum quarterly
royalties. The University Agreement had an initial term of five years. In June
1999, the Company and the University amended this Agreement and the Company will
no longer pay royalties for a license to the NCSA Mosaic product and will only
pay the University a minimal royalty associated with the Company's use of the
University's trademark "Mosaic(TM)." The University is no longer restricted from
the commercial licensing of the NCSA Mosaic product.

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

Cash and Cash Equivalents
All highly liquid investments with original maturities of three months or less
are considered cash equivalents.

Investments
Investments with original maturities between three and twelve months are
considered short-term investments. Short-term investments consist of debt
securities such as commercial paper, time deposits, certificates of deposit,
bankers' acceptances, and marketable direct obligations of the U.S.Treasury.


<PAGE>   19

Other Assets
The Company licenses certain technologies from third parties and records prepaid
royalty costs associated with these licenses. These prepaid royalty costs are
amortized as a percentage of revenues or over the expected period of use. It is
the Company's policy to periodically review and evaluate whether the benefits
associated with these prepaid royalties are expected to be realized and,
therefore, deferral and amortization are appropriate. Approximately $162,000 and
$857,000 of these prepaid royalties are included in prepaid expenses and other
current assets and approximately $4,000 and $118,000 are included in other
assets at September 30, 1999 and 1998, respectively.

Properties and Equipment
Properties and equipment are stated at cost less accumulated depreciation.
Depreciation is determined for financial reporting purposes using the
straight-line method over the estimated useful lives of the assets, which range
from two to seven years. Depreciation for income tax reporting purposes is
determined using accelerated depreciation methods.

Revenue Recognition
The Company recognizes revenues from software licensing arrangements in
accordance with the provisions of Statement of Position ("SOP") 97-2, Software
Revenue Recognition. Internet technology revenues are generally recognized after
execution of a license agreement and delivery of the product, provided there are
no remaining obligations relating to development, upgrades, new releases, or
other future deliverables, and provided that the license fee is fixed or
determinable, and collection of the fee is probable. For contracts entered into
after October 1, 1998, the Company allocates revenue between the elements of the
arrangements based on the vendor-specific objective evidence of the fair value
of each of the elements. Service revenues are comprised of revenues from
customer support and professional services agreements. Revenues from the sale of
support agreements are recognized over the term of the agreement using the
straight-line method and related costs are included in operating expenses under
the sales and marketing classification. Revenues from professional services
agreements are recognized on the percentage of completion method based on the
hours incurred relative to total estimated hours for fixed bid contracts or
based on the hours incurred multiplied by the hourly rate for time and material
engagements. Related costs are reported as a cost of service revenues.

In December 1998, the American Institute of Certified Public Accountants issued
SOP 98-9, "Modifications of SOP 97-2, Software Revenue Recognition With Respect
to Certain Transactions." SOP 98-9 amends SOP 98-4 to extend the deferral of the
application of some passages provided by SOP 98-4 through fiscal years beginning
on or before March 15, 1999. All provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999. The
Company believes the adoption of SOP 98-9 will not have a material effect on its
results of operations or financial condition.

Research and Development
Research and development costs are expensed as incurred. During fiscal 1998 and
1997, Navitel received payments from Microsoft of $1,606,000 and $250,000,
respectively, for funding of software development for an Internet screen phone
product. Research and development expense in these years has been recorded net
of these payments.

Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was
$346,000, $758,000, and $386,000 for the years ended September 30, 1999, 1998,
and 1997, respectively.

Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related interpretations
in accounting for its employee stock options. Under APB 25, if the Company's
stock option plans are considered fixed plans, no compensation expense is
recognized if the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant. If the option
grants are not fixed at an amount at least equal to fair market value, the
Company recognizes compensation expense based on the intrinsic value on the
measurement date. The Company has included the disclosure provision of Statement
of Financial Accounting Standard ("SFAS") No. 123, Accounting for Stock-Based
Compensation, which requires pro forma information regarding net income and
earnings per share determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement.


<PAGE>   20

Per Share Information
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings
per Share, which was adopted by the Company in December 1997. SFAS No. 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Basic earnings per share excludes any
dilutive effect of options, warrants and convertible securities. Diluted
earnings per share assumes the conversion of all securities which are
exercisable or convertible into common stock and which would either dilute or
not affect basic earnings per share. All earnings per share amounts for all
periods have been presented and, where necessary, restated to conform to SFAS
No. 128 requirements.

Earnings per share-basic was calculated by dividing net income by the weighted
average number of common shares outstanding during the period. Earnings per
share-diluted was calculated by dividing net income by the sum of the weighted
average number of common shares outstanding plus all common shares that would
have been outstanding if potentially dilutive common shares had been issued. In
years where the company incurs a net loss, the weighted average number of common
shares outstanding, basic and diluted, will be the same. Accordingly, the
weighted average number of common shares outstanding used in the earnings per
share calculations was 16,029,000 shares, 14,543,000 shares and 13,238,000
shares for the fiscal years ended September 30, 1999, 1998, and 1997,
respectively.

Comprehensive Loss
The Company adopted SFAS No. 130, "Reporting Comprehensive Income", as of
December 31, 1998. Under SFAS No. 130, the Company is required to display
comprehensive income (loss) and its components as part of the financial
statements. Other comprehensive income includes changes in equity that are
excluded from net income (loss). Specifically, SFAS No. 130 requires unrealized
holding gains and losses on available-for-sale securities to be included in
accumulated and other comprehensive income. The Company has no material
components of other comprehensive loss and, as a result, the comprehensive loss
is the same as the net loss for all periods presented.

Segment Reporting
Effective October 1, 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131 changes the way
companies report selected segment information in annual financial statements and
requires companies to report selected segment information in interim financial
reports to stockholders. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company operates solely in one segment, and therefore the adoption of this
statement had no impact on the Company's financial statements.


NOTE 2.  CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The following is a summary of cash equivalents and short-term investments at
amortized cost:


<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30,
(In thousands)                                               1999             1998
----------------------------------------------------------------------------------
<S>                                                          <C>           <C>
         Commercial paper                                   $ 5,269        $16,680
         Money market                                        13,075          5,871
                                                            -------        -------
            Cash equivalents                                 18,344         22,551
         Cash                                                   269            155
                                                            -------        -------
         TOTAL CASH AND CASH EQUIVALENTS                    $18,613        $22,706
                                                            =======        =======

         Commercial paper                                   $10,735        $    --
                                                            -------        -------
         TOTAL SHORT-TERM INVESTMENTS                       $10,735        $    --
                                                            =======        =======
</TABLE>


Since commercial paper is short-term in nature, changes in market interest rates
would not have a significant impact on the fair value of these securities. These
securities are carried at amortized cost which approximates fair value. It is
the intent of the Company to hold these securities until maturity.
<PAGE>   21

NOTE 3.  PROPERTIES AND EQUIPMENT

Properties and equipment and related accumulated depreciation were as follows:


<TABLE>
<CAPTION>
                                                                              SEPTEMBER  30,
                                                                          -----------------------
(In thousands)                                                             1999           1998
-------------------------------------------------------------------------------------------------
<S>                                                                       <C>           <C>
              Computer equipment and software                             $ 6,667       $ 5,650
              Furniture, fixtures and office equipment                      2,361         2,070
              Leasehold improvements and other                              1,098           583
                                                                          -------       -------
                                                                           10,126         8,303
              Less: Accumulated depreciation                              (6,229)       (4,415)
                                                                          -------       -------

              PROPERTIES AND EQUIPMENT, NET                               $ 3,897       $ 3,888
                                                                          =======       =======

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


NOTE 4.   MICROSOFT AGREEMENTS

On January 21, 1997, the Company amended its license arrangement with Microsoft.
This amendment converted Microsoft's existing license for the Spyglass Mosaic
browser technology into a fully paid-up license in consideration of an
additional $8,000,000 payment from Microsoft. This payment consisted of
$7,500,000 in cash and $500,000 in software and product maintenance.

In July 1997, Navitel entered into a Joint Development and License Agreement
("July 1997 Agreement") with Microsoft in which Navitel agreed to jointly
develop software applications for an Internet screen phone running on the
Windows CE operating system. Navitel and Microsoft contributed intellectual
property, development, management and marketing resources to the venture and
maintained joint ownership interests in the Internet screen phone software
applications as developed.

The July 1997 Agreement called for sharing of all licensing revenues received by
either company related to the Internet screen phone software applications. It
also required Microsoft to make minimum payments to Navitel of $1,000,000 per
year for funding of the development efforts, notwithstanding any licensing
revenues received. Neither company received any licensing revenue during fiscal
1998 or 1997. Navitel received $1,606,000 and $250,000 during fiscal 1998 and
1997, respectively, which was recorded as received as funding for research and
development expenses and netted against research and development expenditures.

In February 1998, Navitel entered into an agreement to perform certain
development services on behalf of Microsoft related to Windows CE and the
Internet screen phone software applications for a third-party OEM. The Company
agreed to perform these services for a fixed price of $750,000 which was
recognized using the percentage of completion method. Development services
related to this agreement were approximately 90% complete as of September 30,
1998. As such, Navitel recognized $675,000 of revenue from this agreement during
fiscal 1998. The remaining $75,000 was recognized during fiscal 1999.

NOTE 5.  INCOME TAXES

The components of the provision for income taxes were as follows:


<TABLE>
<CAPTION>
                                            FOR THE YEARS ENDED SEPTEMBER 30,
                                            ---------------------------------
(In thousands)                                  1999     1998     1997
----------------------------------------------------------------------------
<S>                                             <C>      <C>      <C>
              Current:
                 Federal                        $  --    $  --    $  --
                 Foreign                          213      121       94
                 State                             --       --       --
                                                -----    -----    -----
                    Total current                 213      121       94
                                                -----    -----    -----

              Deferred:
                 Federal                         (213)    (121)     (94)
                 State                             --       --       --
                                                -----    -----    -----
                    Total deferred               (213)    (121)     (94)
                                                -----    -----    -----

              PROVISION FOR INCOME TAXES        $  --    $   --   $  --
                                                =====    ======   =====

</TABLE>

<PAGE>   22

A reconciliation of income tax expense to the statutory federal income tax rate
follows:


<TABLE>
<CAPTION>
                                            FOR THE YEARS ENDED SEPTEMBER 30,
                                             1999         1998        1997
----------------------------------------------------------------------------
<S>                                         <C>          <C>          <C>
Federal income taxes at
   statutory rate                           34.0 %       34.0 %       34.0%

State income taxes, net
   of federal income tax benefit             4.8 %        4.8 %         4.8 %
Valuation allowance                        (38.8)%      (38.8)%       (38.8)%

EFFECTIVE TAX RATE                           0.0 %        0.0 %        0.0 %
                                            ====         ====         ====

</TABLE>


Significant components of the Company's net deferred tax assets were as follows:


<TABLE>
<CAPTION>
                                                                       SEPTEMBER 30,
                                                                  ---------------------
(In thousands)                                                      1999         1998
---------------------------------------------------------------------------------------
<S>                                                               <C>         <C>
  DEFERRED TAX ASSETS:
  Accounts receivable                                             $    230    $    189
  Accrued expenses and other liabilities                               191         209
  Net operating loss carryforwards                                  15,774      12,157
  Research and development tax credit carryforwards                  2,440       2,275
  Foreign tax credit carryforwards                                     639         366
  Amortization of deferred compensation relating
     to issuance of restricted stock                                  --           184
  Alternative minimum tax credit carryforwards                          10          10
  Other                                                               --            85
                                                                  --------    --------
     Deferred tax assets                                            19,284      15,475
                                                                  --------    --------

  DEFERRED TAX LIABILITIES:
  Depreciation                                                         (47)        (14)
                                                                  --------    --------
     Deferred tax liabilities                                          (47)        (14)
                                                                  --------    --------

  Net deferred tax assets                                           19,237      15,461
  Deferred tax asset valuation allowance                           (19,237)    (15,461)
                                                                  --------    --------
  NET DEFERRED TAX ASSETS                                         $   --      $   --
                                                                  ========    ========
</TABLE>



The Company changed from the cash to accrual basis for tax reporting purposes at
the time of filing its 1997 tax return; as such, 1997 amounts included herein
have been restated from the cash to accrual basis.


<PAGE>   23

As of September 30, 1999, the Company had net operating loss carryforwards for
income tax purposes of approximately $40,706,000 which expire in the years
2006-2019. Of this amount, $21,426,000 relates to tax deductions generated by
the exercise of certain incentive stock options by employees which will be
available to reduce future income tax liabilities by a total of $8,298,000. Of
this tax benefit, $2,669,000 was credited to paid-in capital to offset deferred
tax liabilities. The remaining $5,629,000 is available to offset future deferred
tax liabilities as a credit to paid-in capital.

As of September 30, 1999, the Company had research and development credit
carryforwards of approximately $2,440,000, which are available to offset future
income tax liabilities and expire in the years 2006-2019.

Under the provisions of the Internal Revenue Code, certain substantial changes
in Navitel's ownership may result in a limitation on the amount of net operating
loss and tax credit carryforwards available annually to offset any future
taxable income. The amount of this annual limitation is determined based upon
Navitel's value prior to the ownership changes taking place.

The valuation allowance increased by $3,776,000 and $5,275,000 for the fiscal
years ended September 30, 1999 and 1998, respectively, and relates primarily to
increases in net operating loss carryforwards. The Company has established the
valuation allowance to defer recognition of potential tax benefits until such
time that operating results can provide assurance that these tax benefits will
be recognized.


NOTE 6.  CONVERTIBLE PREFERRED STOCK

In July 1997, Navitel issued 7,935,571 shares of Series A, B, and C convertible
preferred stock, $.001 par value per share, for $5,509,103. On May 27, 1998,
Navitel issued 1,204,820 shares of Series C convertible preferred stock for
$1,000,000. All convertible preferred stock was converted to shares of Spyglass
common stock on April 16, 1999 in connection with the acquisition of Navitel by
Spyglass, as discussed in Note 1.


NOTE 7.  COMMON STOCK PURCHASE WARRANTS

In connection with the settlement of disputes arising over services performed by
certain vendors, Navitel issued to those vendors 33,500 and 200,000 warrants to
purchase common stock at an exercise price of $0.08 on March 30, 1998 and June
11, 1998, respectively. Navitel recorded an expense related to the issuance of
these warrants of $41,638 for the year ended September 30, 1998. Prior to the
acquisition of Navitel by Spyglass, the holders of these common stock purchase
warrants exercised their rights to purchase a combined 233,500 shares of
Navitel's common stock, which were converted to Spyglass common stock in
connection with the Navitel acquisition, as discussed in Note 1.

NOTE 8.  STOCK INCENTIVE PLANS

The Company has a 1995 Stock Incentive Plan ("1995 Incentive Plan") which
replaced the Company's 1991 Stock Option Plan ("1991 Option Plan"), a 1995
Director Stock Option Plan ("1995 Director Option Plan"), and a 1991 Employee
Stock Bonus Plan ("1991 Bonus Plan") which was terminated effective June 27,
1995, when the Company completed its initial public offering. Accordingly,
options under the 1991 Option Plan and the 1991 Bonus Plan are not granted in
years after 1995 but remain outstanding.

The above plans enable the Company to grant options to purchase common stock, to
make awards of restricted common stock and to issue certain other equity-related
securities of the Company to any full or part-time employees, officers,
directors, consultants or independent contractors of the Company. Stock options
entitle the optionee to purchase common stock from the Company for a specified
exercise price during a period specified in the applicable option agreement.
Restricted stock awards entitle the recipient to purchase common stock for a
nominal amount from

<PAGE>   24

the Company under terms which provide for vesting over a period of time and a
right of repurchase in favor of the Company of the unvested portion of the
common stock subject to the award upon the termination of the recipient's
employment or other relationship with the Company. The plans, except for the
1995 Director Option Plan, are administered by the Compensation Committee of the
Board of Directors, which selects the persons to whom stock options and
restricted stock awards are granted and determines the number of shares of
common stock covered by the option or award, its exercise price or purchase
price, its vesting schedule and, in the case of stock options, its expiration
date.

Furthermore, the above plans stipulate that the exercise price of any incentive
stock option shall not be less than 100% of the fair market value of the common
stock at the date of the grant or less than 110% of the fair market value in the
case of optionees holding more than 10% of the total combined voting power of
all classes of stock of the Company. The exercise periods of incentive stock
options cannot exceed 10 years from the date of grant, except for incentive
stock options granted to optionees holding more than 10% of the total combined
voting power of all classes of stock, which must be exercised within five years.
Non-qualified stock options, if any, must be exercised within the time period
set forth in the option agreement. Any portion not exercised within the terms as
stipulated in the option agreement shall be forfeited.

The Company records as compensation expense the excess, if any, of the fair
market value of the common stock at the date of option grant over the option
exercise price. Any compensation expense is recognized ratably over the vesting
period of the options. The Company recorded compensation expense of
approximately $24,000, $112,000 and $312,000 for the years ended September 30,
1999, 1998 and 1997, respectively, relating to options granted with an exercise
price below the estimated fair market value of the common stock and the
acceleration of the vesting of stock options.

As a result of the acquisition of Navitel described in Note 1, the Company
substituted options covering 100,883 shares of Spyglass common stock for options
issued under the Navitel option plan and assumed the rights and obligations of
Navitel with respect to such outstanding options. The terms of the Navitel
option plan required accelerated vesting of up to 50% of the unvested options in
the event of the sale or merger of Navitel with the remaining unvested options
vesting over a period not to exceed one year from the closing date. As of
September 30, 1999, there were options to purchase 72,055 shares outstanding, of
which options for 63,897 shares were exercisable.

1995 STOCK INCENTIVE PLAN

The maximum number of shares of common stock which may be issued pursuant to the
1995 Incentive Plan is 4,250,000 shares, subject to certain anti-dilution
adjustments. Options granted under the 1995 Incentive Plan generally become
exercisable over four years, commencing on the one-year anniversary of the date
of grant, and accumulate if not exercised. As of September 30, 1999, options to
purchase approximately 681,000 shares are available for issuance.

The 1995 Incentive Plan further provides for the granting of stock appreciation
rights ("SARs") subject to certain conditions and limitations to holders of
options under the 1995 Incentive Plan. SARs permit optionees to surrender an
exercisable option for any amount equal to the excess of the market price of the
common stock over the option price when the right is exercised. There have been
no SARs issued under this plan.

Furthermore, the 1995 Incentive Plan provides for the granting of awards of
restricted stock entitling recipients to purchase common stock from the Company
under terms which provide for vesting over a period of time, as determined by
the Board of Directors, and a right of repurchase in favor of the Company of the
unvested portion of the common stock subject to the award upon the termination
of the recipient's employment or other relationship with the Company. Awards of
293,600 shares of restricted stock, generally vesting over four years in equal
annual installments commencing on the one-year anniversary of the date of grant,
had been granted for a purchase price of $0.01 per share (and had a fair value
range of $5.063 - $13.25 on the date of issue) under this plan as of September
30, 1999. As of September 30, 1999, 67,500 of such shares had been repurchased
by the Company at a price of $.01 per share. Upon issuance of stock under the
plan, unearned compensation equivalent to the excess of the market value at


<PAGE>   25

the date of grant over the purchase price is offset against stockholders' equity
and subsequently amortized over the periods during which the restrictions lapse.

1995 DIRECTOR STOCK OPTION PLAN

Under the Company's 1995 Director Stock Option Plan, the maximum number of
shares of common stock that may be issued is 200,000 shares, subject to certain
anti-dilution adjustments. Each director initially elected to the Board of
Directors, who is not otherwise an employee, is granted an option, on the date
of initial election, to purchase 20,000 shares of common stock. Each such
director is also granted, on the date of each Annual Meeting of Stockholders, an
option to purchase 5,000 shares. Options become exercisable over four years,
commencing on the one-year anniversary of the date of grant, and accumulate if
not exercised. As of September 30, 1999, options for 95,000 shares were
outstanding, of which 31,200 were exercisable.

1995 EMPLOYEE STOCK PURCHASE PLAN

Under the Company's 1995 Employee Stock Purchase Plan ("Stock Purchase Plan"),
employees are granted the opportunity to purchase the Company's common stock.
The first offering under the Plan commenced on August 16, 1995 and concluded
February 15, 1996. Subsequent offerings begin on February 16 and August 16 of
each year and conclude on August 15 and February 15, respectively. The price at
which the employees may purchase the common stock is equal to 85% of the closing
price of the Company's common stock on the Nasdaq National Market on the date
the offering period commences or terminates, whichever is lower. A total of
600,000 shares of common stock have been reserved under this plan. In fiscal
1999, 1998 and 1997, 47,979 shares, 74,323 shares and 45,396 shares were issued
under the Stock Purchase Plan, respectively. As of September 30, 1999, a total
of 413,901 shares of common stock were reserved for future issuance.

1991 STOCK OPTION PLAN

The 1991 Option Plan was terminated effective June 27, 1995, when the Company
completed its initial public offering, and was replaced by the 1995 Stock
Incentive Plan. Options granted under the 1991 Option Plan generally become
exercisable in four equal annual installments, commencing on the date of grant
and continuing through the third anniversary of the date of grant, and
accumulate if not exercised. Options to purchase 1,520,132 shares of common
stock, at prices ranging from $0.08 to $4.125 per share, have been granted.

A summary of activity under the plans is as follows:


<TABLE>
<CAPTION>
                                                                                      SEPTEMBER 30,
                                               --------------------------------------------------------------------------------
                                                            1999                     1998                     1997
                                               --------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
                                                             WEIGHTED                     WEIGHTED                    WEIGHTED
                                                             AVERAGE                      AVERAGE                     AVERAGE
                                                             EXERCISE                     EXERCISE                    EXERCISE
                                                 SHARES       PRICE          SHARES        PRICE        SHARES         PRICE
<S>                                            <C>          <C>            <C>          <C>            <C>          <C>
Outstanding, beginning of year                 2,508,540    $      5.27    2,107,061    $      5.49    2,128,801    $     8.40

Granted                                        1,642,260          10.05    1,922,396           3.95    1,339,488          9.38

Exercised                                       (797,051)          4.02     (883,481)          1.75     (497,882)         1.62


Forfeited                                       (488,945)          7.32     (637,436)          6.76     (863,346)        11.86
                                               ---------                   ---------                   ---------

Outstanding, end of year                       2,864,804    $      7.85    2,508,540    $      5.27    2,107,061    $     5.49
                                               =========                   =========                   =========


Weighted average remaining contractual life                        8.45                        8.54                       8.81

Options exercisable at year-end                                 753,697                     752,313                    633,766


Weighted average fair value of
   options granted during the year                          $      8.48                  $     4.93                 $    11.75
</TABLE>


<PAGE>   26
A summary of information on stock options outstanding as of September 30, 1999
follows:


<TABLE>
<CAPTION>
Options Outstanding                                       Options Exercisable
-------------------------------------------------------   -----------------------------------------
                                         Weighted          Weighted                       Weighted
Range of                                 Average           Average                        Average
Exercise                Number           Remaining         Exercise         Number        Exercise
Prices               Outstanding      Contractual Life      Price        Exercisable       Price
---------------------------------------------------------------------------------------------------
<S>                  <C>              <C>                 <C>            <C>             <C>
   $0.08-$4.375        609,086              6.68             $2.7632        352,545       $1.7070

 $5.3125-$6.875        581,396              7.99             $6.1006        290,407       $6.2914

    $7.00-$9.25        518,941              8.93             $8.6628         72,397       $7.4328

 $9.50-$10.6875        480,381              8.93             $9.8228         32,748       $9.9914

$10.875-$11.375        357,500              9.77            $10.9240          5,600      $11.2500
 $12.875-$13.25        317,500              9.72            $13.0728          --           --
                     ---------                                              -------

   $0.08-$13.25      2,864,804              8.45             $7.8539        753,697       $4.4540
                     =========                                              =======
</TABLE>



STOCK BASED COMPENSATION

Pro-forma information, as required by Statement of Financial Accounting
Standards No. 123, is as follows:


<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
(In thousands, except per share data)         1999          1998        1997
--------------------------------------------------------------------------------
<S>                                        <C>           <C>          <C>
Net loss as reported                       $(   1,897)   $(  10,032)  $(  14,151)
                                           ==========    ==========   ==========
Pro forma net loss                         $(   4,707)   $(  13,864)  $(  18,933)
                                           ==========    ==========   ==========


Net loss per share as reported             $(    0.12)   $(    0.69)  $(    1.07)
                                           ==========    ==========   ==========

Pro forma net loss per share               $(    0.29)   $(    0.95)  $(    1.43)
                                           ==========    ==========   ==========
</TABLE>



In determining the fair value of the options, Spyglass used the Black-Scholes
model and assumed a risk free interest rate of 5.78%, 4.23%, and 6.0% and an
expected stock price volatility of 99.8%, 90.0%, and 70.2% for 1999, 1998,


<PAGE>   27

and 1997, respectively. Spyglass also assumed expected lives of the options
ranging from five to six years and no dividends for all years. 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. In
addition, it requires the input of highly subjective assumptions, including the
expected stock price volatility. Because Spyglass' options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, the
estimated valuations may not necessarily provide a reliable measure of the fair
value of Spyglass' options.


In determining the fair value of the options and warrants, Navitel used the
minimum value method with the following assumptions for grants during 1998 and
1997: no dividend yield or volatility; risk free interest rate of 4.23%, and
6.0%; and a weighted average expected option term of 5 years. Because changes in
the subjective input assumptions can materially affect the fair value estimate,
the estimated valuations may not necessarily provide a reliable measure of the
fair value of Navitel's options.



NOTE 9.   STOCK OPTION EXCHANGE PROGRAM

The Company uses stock options as a significant element of the compensation of
employees, in part because it believes options provide an incentive to employees
to maximize shareholder value. Stock options also serve as a means of retaining
employees. Because the market value of the Spyglass' common stock in early 1997
had fallen significantly below the exercise price of most outstanding options,
the value of such stock options as a means of motivating and retaining employees
had been significantly diminished. The Board of Directors concluded that
Spyglass needed to restore the value of the existing stock options as a means of
motivating and retaining employees in order to promote the successful
implementation of the Company's growth strategies.

As a result, on April 8, 1997, the Board of Directors approved a stock option
exchange program (the "Exchange Program"), pursuant to which full-time permanent
employees holding stock options under Spyglass's 1995 Stock Incentive Plan were
given the opportunity to exchange the unexercised portion of such options (the
"Existing Options") for new options (the "New Options") on a basis of four
shares of common stock for every five shares covered by the Existing Option and
having an exercise price of $6.875 per share (the fair market value of the
Company's common stock on such date). The New Options expire 10 years from the
date of grant and have the same vesting schedule and other terms as the Existing
Options cancelled in exchange therefor. Option holders who own more than 1% of
Spyglass' outstanding common stock and Directors were excluded from the Exchange
Program. Stock option disclosures in Note 8 have been adjusted to reflect
options for approximately 235,000 shares which were forfeited as a result of the
Exchange Program.

NOTE 10.  401(K) SAVINGS PLAN

The Company has a salary reduction 401(k) retirement savings plan (the "Plan")
covering substantially all of the Company's employees. Participating Spyglass
employees may contribute an amount up to 15% of their eligible compensation,
subject to an annual limit. The Company, at the discretion of the Board of
Directors, may make contributions to the Plan. Spyglass contributed $269,500,
$273,200 and $269,000 to the Plan in fiscal 1999, 1998 and 1997, respectively.

NOTE 11. COMMITMENTS AND CONTINGENCIES

The Company leases office facilities under non-cancelable operating lease
agreements and has sublease agreements expiring at various dates through fiscal
2005. At September 30, 1999, approximate future minimum lease commitments and
receipts under these leases and subleases were as follows:



<PAGE>   28

<TABLE>
<CAPTION>
                         Minimum Lease    Sublease Receipts
   (In thousands)         Commitments
                         -------------    -----------------
<S>                      <C>              <C>
   2000                     $2,522               $455
   2001                      2,494                455
   2002                      2,446                228
   2003                      2,304                  -
   2004                      2,105                  -
   2005                        727                  -
</TABLE>

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


Total rent expense under non-cancelable operating leases was approximately
$1,565,000, $1,633,000 and $1,429,000 for the years ended September 30, 1999,
1998 and 1997, respectively, net of sublease amounts of $703,000, $243,000 and
$31,000, respectively.

NOTE 12: SIGNIFICANT CUSTOMERS AND EXPORT REVENUES

Sales to a significant customer represented 22.4% and 39.5% of total net
revenues in fiscal 1999 and 1997, respectively. Sales to another significant
customer represented 11.6% of total net revenues in fiscal 1999. Sales to a
third significant customer represented 14.5% of total net revenues in fiscal
1998. Significant accounts receivable balances representing 46.7% of net
accounts receivable were attributable to three customers at the end of fiscal
1999. At the end of fiscal 1998, 38.6% of net accounts receivable were
attributable to three customers. Significant unbilled accounts receivable
balances representing 54.2% of total unbilled accounts receivable were
attributable to two customers at the end of fiscal 1999. At the end of fiscal
1998, 84.0% of total unbilled accounts receivable were attributable to four
customers.


The Company exports products to diverse geographic areas. Substantially all
foreign sales, however, are transacted in U.S. dollars and therefore the Company
is not exposed to foreign currency market risk. Net export revenues by
geographic areas were as follows:


<TABLE>
<CAPTION>
(In thousands)                     1999            1998            1997
--------------------------------------------------------------------------
<S>                           <C>               <C>              <C>
Japan                         $    3,064        $    1,488       $     583
Other International                2,879               899           1,113
                              --------------------------------------------
Total net export revenues     $    5,943        $    2,387      $    1,696
                              ============================================
</TABLE>


NOTE 13.   RESTRUCTURING CHARGE

On March 10, 1997, the Company consolidated its Champaign, Illinois development
operations with its Naperville, Illinois and Cambridge, Massachusetts
operations. This consolidation reflected the Company's evolution from its
desktop focus to the information appliance market and the realignment of its
product development activities with the needs of this market. A pre-tax
restructuring charge of $900,000 was recorded in the second quarter of fiscal
1997 and consisted primarily of severance and related personnel costs of
$730,000 and lease cancellation and other exit costs of $170,000. Included in
the charge for personnel costs was $100,000 of compensation expense related to
the acceleration of the exercisability of certain stock options. The
restructuring was completed as of September 30, 1997.

<PAGE>   29

NOTE 14.  SUBSEQUENT EVENTS

On September 20, 1999 the Company signed a definitive agreement to sell
Surfwatch Software Inc. to JSB. This transaction was completed on November 4,
1999, at which time Spyglass received consideration of $17 million cash and
800,000 shares of JSB (EASDAQ: JSBS) valued at $12 million on the date of the
transaction. This transaction resulted in a pre-tax gain of approximately $27
million.

In the first quarter of the fiscal year ending September 30, 2000 the Company
recorded a non-recurring restructuring charge consisting primarily of severance
and related personnel costs associated with the organizational realignment of
the Company's professional services group. This realignment was completed in
November 1999 and resulted in a restructuring charge of approximately $860,000.



                         REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of Spyglass, Inc.

We have audited the consolidated balance sheets of Spyglass Inc. and
subsidiaries as of September 30, 1999 and 1998, and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
each of the three years in the period ended September 30, 1999. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Spyglass, Inc. and
subsidiaries at September 30, 1999 and 1998, and the consolidated results of
their operations and their cash flows for the three years in the period ended
September 30, 1999 in conformity with generally accepted accounting principles.



Ernst and Young LLP

Chicago, Illinois
October 19, 1999,
         except for Note 14,
         as to which the date is November 4, 1999