<PAGE>


SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>


                                                YEAR ENDED DECEMBER 31,                     QUARTER ENDED (UNAUDITED)
                                           --------------------------------------------------------------------------------------
                                                                                  December 31, September 30,  June 30,  March 31,
In thousands, except per share data         1996     1995     1994     1993          1996          1996        1996       1996
---------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>       <C>       <C>      <C>          <C>            <C>         <C>        <C>
CONSOLIDATED STATEMENT 
OF OPERATIONS DATA:

REVENUES:

Product revenues                      $291,103   $77,489    $3,337  $1,006        $95,995       $83,761     $62,296     $49,051
Service revenues                        55,092     7,898       801     100         19,057        16,255      12,710       7,070
         Total revenues                346,195    85,387     4,138   1,106        115,052       100,016      75,006      56,121
---------------------------------------------------------------------------------------------------------------------------------

COST OF REVENUES:

Cost of product revenues                36,941     9,177       186      28          9,527        10,900       9,703       6,811
Cost of service revenues                13,024     2,530       247      43          5,222         3,794       2,325       1,683
         Total cost of revenues         49,965    11,707       433      71         14,749        14,694      12,028       8,494
---------------------------------------------------------------------------------------------------------------------------------

Gross profit                           296,230    73,680     3,705   1,035        100,303        85,322      62,978      47,627
---------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:

Research and development                82,995    26,841     4,146     871         26,832        24,211      17,826      14,126

Sales and marketing                    153,586    43,679     7,750   1,498         51,410        43,865      32,506      25,805

General and administrative              30,584    11,336     3,389     513         11,074         8,286       6,018       5,206

Property rights agreement and
 related charges                           250       500     2,487      --            250            --          --          --

Merger related charges                   6,100     2,033        --      --             --            --       6,100          --

         Total operating expenses      273,515    84,389    17,772   2,882         89,566        76,362      62,450      45,137
---------------------------------------------------------------------------------------------------------------------------------

Operating income (loss)                 22,715   (10,709)  (14,067) (1,847)        10,737         8,960         528       2,490

Interest income                          8,991     4,898       251      53          2,194         2,285       2,005       2,507

Interest expense                          (325)     (304)      (14)    (18)           (15)         (107)       (127)        (76)

Equity in net losses of joint ventures  (1,928)       --       --       --           (926)         (586)       (416)         --

         Other income, net               6,738     4,594       237      35          1,253         1,592       1,462       2,431
---------------------------------------------------------------------------------------------------------------------------------

Income (loss) before income taxes       29,453    (6,115)  (13,830) (1,812)        11,990        10,552       1,990       4,921

Provision for income taxes               8,545       498       --       --          3,234         2,895       1,084       1,332
   

Net income (loss)                      $20,908   $(6,613) $(13,830)$(1,812)       $ 8,756        $7,657     $   906     $ 3,589
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share            $  0.24   $ (0.09) $  (0.21)$ (0.03)       $  0.10        $ 0.09     $  0.01     $  0.04
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------

Shares used in computing 
  net income (loss) per share           87,861    75,735    67,181  61,904         90,622        87,883      87,937      85,003

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


</TABLE>


<TABLE>
<CAPTION>

                                                        YEAR ENDED DECEMBER 31,
                                             ----------------------------------------
                                                1996     1995     1994      1993
----------------------------------------------------------------------------------------------------
<S>                                         <C>        <C>      <C>        <C> 
CONSOLIDATED BALANCE SHEET DATA:

Working capital                              $202,114  $133,052  $ 4,666    $3,867

Total assets                                  537,450   231,154   16,996     5,093

Long-term obligations excluding 
  current portion                                 484     1,198      725        --

Stockholders' equity                          390,650   177,387    8,161     4,094

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

</TABLE>


1 All periods reflect the business combinations with Collabra Software, Inc., 
  and InSoft Inc., which have been accounted for as poolings of interest. 
  Financial information for periods prior to January 1, 1996 has not been 
  restated for the operations of Netcode Corporation and Paper Software, Inc., 
  due to immateriality. See Note 2 of Notes to Consolidated Financial 
  Statements.  

2 All share and per share data has been restated to reflect a two-for-one 
  stock split approved on January 23, 1996.

3 No dividends have been declared or paid on the common stock of Netscape. 
  The dividends declared and paid by InSoft were insignificant.



   20

<PAGE>

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

OVERVIEW

Netscape Communications Corporation ("Netscape" or the "Company") is a leading 
provider of open software for linking people and information over private 
enterprise networks ("intranets") based on transmission control 
protocol/Internet protocol ("TCP/IP") and the Internet. The Company was 
incorporated in April 1994 and completed business combinations with Collabra 
Software, Inc. ("Collabra") in November 1995 and InSoft, Inc. ("InSoft") in 
April 1996. InSoft was incorporated in September 1991, and Collabra was 
incorporated in February 1993. Each of the business combinations was treated 
as a poolings of interest for accounting purposes, and accordingly, the 
historical financial statements for the Company have been restated as if the 
transactions occurred at the beginning of the earliest period presented. The 
Company additionally completed business combinations with Netcode Corporation 
("Netcode") and Paper Software, Inc. ("Paper") in April 1996 and May 1996, 
respectively, in transactions accounted for as poolings of interest. The 
historical results of operations for Netcode and Paper are not material in 
relation to those of Netscape, and financial information for 1995 and prior 
periods have not been restated to reflect the Netcode and Paper business 
combinations. Operating results since January 1, 1996, however, have been 
restated to reflect the operating results of Netcode and Paper. See Note 2 of 
Notes to Consolidated Financial Statements.

     The Company's operating activities through December 31, 1994 related 
primarily to recruiting personnel, raising capital, purchasing operating 
assets, establishing sales channels, and performing research and development. 
Insignificant revenues were recognized during such period and were primarily 
from products and services no longer offered by the Company. The Company 
experienced significant growth in revenues and operating expenses in 1995 as 
compared to 1994, primarily due to the introduction of new Netscape products 
and services. Revenues and operating expenses continued to rise significantly 
in 1996 with continued sales of those products and services as well as 
several new product and service introductions. The Company expanded its 
product line from four server products and one client product at the end of 
1995 to nine server products and three client products by the end of 1996. 
Due to the foregoing, the Company believes that a comparison of 1996 and 1995 
operating results to 1994 operating results is not meaningful.

FACTORS AFFECTING OPERATING RESULTS

     RISKS RELATED TO PRODUCT INTRODUCTIONS AND TRANSITIONS

In October 1996, the Company introduced Netscape SuiteSpot 3.0 (of which some 
components are currently shipping and others are in public beta release) and 
Netscape Communicator (currently in public beta release). These new products, 
unlike current Netscape products, are designed primarily for email, groupware 
and other enterprise applications across an open network and represent a 
significant product transition for the Company. There are several risks 
inherent in such a product transition. In the near term, the Company's 
revenues may be materially adversely affected as prospective customers defer 
purchases of the Company's current products in anticipation of the new 
products. While the Company believes these new products will be commercially 
released in the second quarter of 1997, it is possible that some or all of 
the products could be delayed, particularly since the software in these 
products is more complex than the Company's previous products, needs 
extensive testing to ensure compatibility with a variety of other software 
programs, and needs debugging prior to commercial release. Moreover, as is 
the case with complex software product introductions, there can be no 
assurance that, despite extensive testing by the Company and by current and 
potential customers, errors or bugs will not be discovered after the new 
products are installed and used by customers.

     Further, as is the case with most product introductions, there can be no 
assurance that the Company's products will achieve market acceptance and 
become widely adopted when commercially available. Netscape does not have the 
same level of name recognition as its competitors in the enterprise software 
market and has limited experience in selling to this market. Market 
acceptance of Netscape SuiteSpot 3.0 and Netscape Communicator could also be 
limited by how the Company prices these products. Furthermore, sales of these 
new products are expected to be made to commercial and government entities, 
which often commit significant resources to an evaluation of enterprise 
software and require the vendor to expend substantial time, effort and money 
educating them about the value of the vendor's solution. As a result, sales 
to these types of customers often require an extensive sales effort 
throughout the organization. The Company will likely experience delays and 
expend substantial funds and management effort in connection with such sales. 
In order to successfully accomplish these new types of sales, the Company 
will be required to continue to expand its direct sales force, extensively 
train its sales personnel, invest greater resources to the sales effort and 
educate the indirect channels. In addition, the Company will need to add 
trained, technical personnel (which personnel are in great demand) to help it 
implement the Netscape SuiteSpot 3.0 and Netscape Communicator solutions for 
its enterprise customers.

                                                                            21
<PAGE>

     With the introduction of Netscape SuiteSpot 3.0 and Netscape 
Communicator, the Company will face new competition from providers of 
enterprise software, most of whom have longer operating histories, larger 
installed customer bases, existing relationships with prospective enterprise 
customers and significantly greater financial, technical, marketing, public 
relations and distribution resources than the Company. In addition, the 
expansion of the Company's product line will require more management 
attention.

     The Company's inability to successfully overcome the risks described in 
the prior paragraphs could have a material adverse effect on the Company's 
business, operating results and financial condition. See "Factors Affecting 
the Company's Business, Operating Results and Financial Condition -- Product 
Introductions and Transitions," "-- Potential Fluctuations in Quarterly 
Results," "-- New Product Development and Technological Change," and "-- Need 
to Manage Evolving Market and Products" in the Company's accompanying Annual 
Report on Form 10-K for the year ended December 31, 1996.

     POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

Although Netscape has achieved earnings per share growth in previous quarters, 
the Company's expenses are relatively fixed in the near term, and unexpected 
variances in planned revenues, which are difficult to forecast, can result in 
variations in operating margins and earnings. The Company typically operates 
with minimal backlog; therefore, quarterly sales and operating results 
generally depend on the volume, timing of, and ability to fulfill orders 
received within the quarter, which are difficult to forecast. Moreover, the 
Company typically recognizes a substantial portion of its revenues in the last 
month of each quarter. Accordingly, the Company will likely be unable to 
adjust spending in a timely manner to compensate for any unexpected revenue 
shortfall. Any significant shortfall of demand for the Company's products and 
services in relation to the Company's expectations would have an immediate 
material adverse impact on the Company's business, operating results, and 
financial condition. Further, as the Company becomes increasingly focused on 
sales to enterprise customers, the Company expects that a limited number of 
large sales may account for a significant portion of revenue in some quarters, 
resulting in fluctuations in revenue in future periods and adversely impacting 
operating results in periods of lower than expected revenue.

     Moreover, the Company believes that significant ongoing investment in 
all areas of the business will continue to be critical to the success of 
Netscape. Specifically, the Company plans to continue increasing its 
operating expenses to fund greater levels of research and development, expand 
the sales and marketing infrastructure domestically and internationally, 
improve core management information systems, and broaden customer support 
capabilities. The Company also continues to seek acquisitions, strategic 
investments, and joint ventures that complement the Company's overall 
business 


22
<PAGE>

strategy. As a result of these factors, the Company directs a significant 
percentage of its revenues towards operating expenses and towards 
nonoperating expenses associated with equity interests in joint ventures and 
strategic investments. These planned increases in operating and nonoperating 
expenses will adversely impact operating results in the near future, 
particularly after adjusting for the impact of any merger-related charges and 
any amortization of goodwill from acquisitions accounted for by the purchase 
method of accounting, and such planned increases may materially adversely 
affect the Company's business, operating results, and financial condition, 
especially to the extent that they precede associated revenues by a quarter 
or are not followed by increased revenues. As a result, historical growth 
rates for revenue and net income will not be sustained.

     The Company expects to experience significant fluctuations in future 
quarterly operating results that may be caused by many factors, including 
demand for the Company's products, introduction or enhancement of products by 
the Company and its competitors, market acceptance of new products 
(especially Netscape Communicator currently in public beta release and 
Netscape SuiteSpot 3.0, of which some components are currently shipping and 
others are in public beta release), the timing of largesales (particularly to 
enterprise customers), more complex products with higher prices and longer 
sales cycles, price changes by the Company or its competitors, the mix of 
distribution channels through which products are sold, the mix of products and 
services sold, the mix of international and North American revenues, costs of 
litigation, and general economic conditions. In particular, as the Company 
becomes increasingly focused on larger sales of intranet and messaging 
solutions to enterprise customers, the Company believes that quarterly 
operating results may fluctuate due to the timing of revenue from such large 
sales. In addition, as a strategic response to changes in the competitive 
environment, the Company may from time to time make certain pricing or 
marketing decisions (such as the change in client and server pricing 
effective as of December 15, 1996) or enter into business combinations (such 
as the Collabra, InSoft, Netcode, and Paper business combinations) that could 
havea material adverse effect on the Company's business, results of 
operations, or financial condition. As a result, the Company believes that 
period-to-period comparisons of its results of operations are not necessarily 
meaningful and should not be relied on as any indication of future 
performance. Because of all of the foregoing factors, it is likely that in 
some future quarters the Company's operating results will be below the 
expectations of public market analysts and investors. In such event, the 
price of the Company's common stock would likely be materially adversely 
affected.

RESULTS OF OPERATIONS
The following table sets forth operating results, in absolute dollars and as a 
percentage of total revenues, for the years ended December 31, 1996 and 1995, 
and the three-month periods ended December 31, 1996 and September 30, 1996. 
Due to the significant growth in revenues and operating expenses between the 
years ended December 31, 1995 and 1994, the Company believes that a comparison 
of operating results between such periods is not meaningful. See "Overview."

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,                THREE MONTHS ENDED (UNAUDITED)
                                      ----------------------------------------------------------------------------------------
In thousands, except per share data            1996                 1995            December 31, 1996       September 30, 1996
------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>         <C>      <C>         <C>       <C>          <C>       <C>         <C>
Total revenues                         $346,195    100.0%   $  85,387   100.0%    $115,052     100.0%    $100,016    100.0%
Cost of revenues                         49,965     14.4       11,707    13.7       14,749      12.8       14,694     14.7%
------------------------------------------------------------------------------------------------------------------------------
      Gross profit                      296,230     85.6       73,680    86.3      100,303      87.2       85,322     85.3%
------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development                 82,995     24.0       26,841    31.4       26,832      23.3       24,211     24.2%
Sales and marketing                     153,586     44.4       43,679    51.2       51,410      44.7       43,865     43.9%
General and administrative               30,584      8.8       11,336    13.3       11,074       9.6        8,286      8.3%
Property rights agreement 
  and related charges                       250      0.1          500     0.6          250       0.2            -        -%
Merger-related charges                    6,100      1.8        2,033     2.4            -       -              -        -%
------------------------------------------------------------------------------------------------------------------------------
       Total operating expenses         273,515     79.1       84,389    98.9       89,566      77.8%      76,362     76.4%
------------------------------------------------------------------------------------------------------------------------------
Operating income (loss)                  22,715      6.5      (10,709)  (12.6)      10,737       9.4%       8,960      8.9%
Interest income, net                      8,666      2.5        4,594     5.4        2,179       1.9%       2,178      2.2%
Equity in net losses of joint
ventures                                 (1,928)    (0.5)           _       _         (926)     (0.8)%       (586)     (0.6)%
------------------------------------------------------------------------------------------------------------------------------
       Other income, net                  6,738      2.0        4,594     5.4        1,253       1.1%       1,592      1.6%
------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes                                    29,453      8.5      (6,115)    (7.2)      11,990        10.5%      10,552   10.5%
Provision for income taxes                8,545      2.5          498     0.5        3,234         2.9%       2,895    2.8%
------------------------------------------------------------------------------------------------------------------------------
Net income (loss)                     $  20,908      6.0%  $  (6,613)    (7.7)%   $  8,756         7.6%    $  7,657    7.7%
------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share             $  0.24            $   (0.09)             $   0.10                 $   0.09
------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                                                            23
<PAGE>

     REVENUES

The Company derives its revenues from license fees for its software products 
and fees for services, which are generally charged separately from software 
licenses. Product revenues consist of product licensing fees, and service 
revenues consist of fees for maintenance and support services, training, 
consulting, and Web site space. See Note 1 of Notes to Consolidated Financial 
Statements. 

     Netscape Navigator client software features a point-and-click graphical 
user interface that enables users to navigate the Internet's vast array of 
networked resources as well as to exchange information and participate in 
commerce on the Internet. Netscape Navigator brings Web exploring, email, 
newsgroups, chat and FTP together in an integrated package designed to be 
easy to use and learn. In addition, Netscape Navigator provides a platform 
for live online applications, supporting Live Objects and other interactive 
multimedia content such as Java applets, frames, and Netscape online 
plug-ins. The Company currently offers three versions of its Netscape 
Navigator client software.

     The Company's next-generation client product, Netscape Communicator, 
will aggregate a set of features for the user to share and access information 
on the Internet or intranets. Additionally, the Company announced the 
Netscape Communicator Professional Edition, which will include calendaring 
and centralized management capabilities. The Netscape Communicator and 
Netscape Communicator Professional Edition are currently in public beta 
release. 


     Netscape server products combine encryption features, intuitive 
graphical administration, high performance, and adherence to open standards 
to enable communications and electronic commerce over the Internet and 
intranets. These products can either be used independently for implementing 
and operating Web server sites, email, or newsgroups, or they can be 
integrated to provide a seamless, high-performance TCP/IP-based 
communications solution, as well as provide a platform to create 
next-generation, live, online applications.

     Netscape markets its servers individually and collectively through the 
Netscape SuiteSpot server bundle. Netscape SuiteSpot is a flexible suite of 
up to five integrated servers that enables business workgroups to 
communicate and collaborate utilizing open Internet standards, thereby 
providing the basis for a client-server workgroup environment. Netscape 
SuiteSpot also includes Netscape's LiveWire Pro for creating live online 
applications and Web sites.

     The Company's next-generation server software suite will comprise 
ten server and tool products for building corporate intranets. Together with 
the announced Netscape Communicator client, Netscape SuiteSpot 3.0 is 
expected to provide enterprise customers with an integrated solution for 
building and maintaining Web sites, open email, and publishing and groupware 
solutions on intranets. In addition, Netscape SuiteSpot 3.0 is designed to 
support the Netscape ONE framework that allows developers to build 
cross-platform, network-based applications. While some components of Netscape 
SuiteSpot 3.0 are currently in public beta release, other components are 
already shipping.

<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,                     THREE MONTHS ENDED (UNAUDITED)
                                        ----------------------------------------------------------------------------------------
In thousands                                     1996                   1995           December 31, 1996      September 30, 1996
--------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>           <C>     <C>            <C>      <C>           <C>       <C>          <C>
Client                                  $197,527      57.1%   $  52,451      61.4%    $ 58,539      50.9%     $ 58,867     58.9%
Server, commercial 
  applications and other                  93,576      27.0       25,038      29.4       37,456      32.5        24,894     24.9%
Total product revenues                   291,103      84.1       77,489      90.8       95,995      83.4        83,761     83.8%
Service                                   55,092      15.9        7,898       9.2       19,057      16.6        16,255     16.2%
--------------------------------------------------------------------------------------------------------------------------------
Total revenues                          $346,195     100.0%   $  85,387     100.0%    $115,052     100.0%     $100,016    100.0%
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

     TOTAL REVENUES. Total revenues for the years ended December 31, 1996 and 
1995 were $346.2 million and $85.4 million, respectively, representing a 
305.4% increase year to year. The Company experienced absolute dollar growth 
in both major product groups and in service revenues in the year ended 1996 
as compared to the year ended 1995. In general, the Company has experienced 
revenue growth in all product lines offered by the Company as a result of 
higher volumes of software license and service-related product sales, as 
opposed to higher prices. Management believes that this growth reflects the 
general growth in the market for intranet-related software products in the 
corporate environment.

     Total revenues for the quarters ended December 31, 1996 and September 
30, 1996 were $115.1 million and $100.0 million, respectively, representing a 
15.1% increase. The Company experienced absolute dollar growth in the server, 
commercial applications, and other product group, and in services revenues, 
although the client product group remained relatively flat from the third 
quarter to the fourth quarter of 1996.


24
<PAGE>

     PRODUCT REVENUES. Product revenues for the years ended December 31, 1996 
and 1995 were $291.1 million and $77.5 million, respectively, representing a 
275.6% increase. This growth was primarily a result of the Company expanding 
its product line from four server products and one client product at the end 
of 1995 to nine server products and three client products by the end of 1996, 
as well as increased unit shipments of products shipping in 1996.

     While client product revenues experienced absolute dollar revenue growth 
year to year, quarter-to-quarter client product revenues were relatively flat,
in absolute dollar growth, and decreased as a percentage of total revenue to 
50.9% in the fourth quarter of 1996 from 58.9% in the third quarter of 1996. 
The Company believes that this is a result of (i) larger average transaction 
sizes for client product sales, which increased the units sold but resulted 
in lower average selling prices ("ASPs") due to volume discounts, (ii) the 
release of a major client upgrade in the third quarter increasing such 
revenue in that particular quarter, and (iii) the announcement in the fourth 
quarter of 1996 of the forthcoming Netscape Communicator product, which led, 
the Company believes, to some customers delaying purchases in anticipation of 
the new product. The Company expects to commercially release Netscape 
Communicator in the second quarter of 1997. Licenses of the Company's server, 
commercial applications and other software accounted for 32.5% of the 
Company's total revenues in the quarter ended December 31, 1996, as compared 
to 24.9% in the quarter ended September 30, 1996. The growth in server and 
commercial applications revenues between periods was primarily accounted for 
by an increase in the unit volume of core server products, as opposed to the 
commercial applications products, although both product lines experienced 
absolute dollar growth. The Company believes that this growth reflected the 
increased market demand for intranet server products such as the Netscape 
Enterprise Server and internet standards-based messaging products such as the 
Netscape Mail Server. Sales of core server products continued to increase in 
the Netscape SuiteSpot bundle, which allows customers to choose server 
components from the complete Netscape server product line.

     The Company expects that the percentage of product revenues attributable 
to its server, commercial applications, and other software products as 
compared to its client product line will fluctuate in future periods 
depending on the timing of new product introductions, consumer buying 
patterns, pricing actions taken by the Company, competition and other 
factors. In general, it is the Company's strategy to achieve a greater 
percentage of revenues from its server product family in future periods, 
although there can be no assurance that the Company will be successful at 
achieving this goal. In conjunction with the October 1996 announcement of the 
Company's planned Netscape SuiteSpot 3.0 and Netscape Communicator products, 
the Company announced a new pricing program that makes Netscape client and 
server products available on a combined per seat basis. In addition, certain 
server products were priced depending on the number of client computers that 
would access the server ("client access licenses"). In both of these cases, 
as customers increase the number of users to prescribed levels, additional 
incremental license charges will apply, subject to volume and other 
discounts. Because the Company's server and client product lines account for 
the vast majority of the Company's total revenues, this change in pricing and 
any future pricing changes could materially adversely affect sales of the 
Company's products and consequently could have a material adverse affect on 
the Company's business, operating results, or financial condition.

     SERVICE REVENUES. Service revenues for the years ended December 31, 1996 
and 1995 were $55.1 million and $7.9 million, respectively, and were $19.1 
million and $16.3 million for the quarters ended December 31, 1996 and 
September 30, 1996, respectively. Service revenues experienced absolute 
dollar growth both year to year and quarter to quarter primarily due to 
increased fees from the sale of Web site space, increased sales of consulting 
services and increased technical support services provided to a larger 
installed base of customers. The Company believes that service revenues may 
increase as a percentage of total revenues in future periods as a result of 
continued growth in the installed base of technical support contracts, the 
continued expansion of the Company's professional services consulting 
organization (especially to support larger sales to enterprise customers), 
and an increase in Web site space revenues associated with the placement of 
advertisements and other content on the Company's Web site.

     CHANNEL MIX. The Company distributes substantially all of its products 
through a combination of direct (including field sales, Internet-based sales, 
and telesales) and indirect (original equipment manufacturers or OEMs, 
systems integrators, value-added resellers or VARS, and software retailers) 
channels.

     The Company experienced absolute dollar revenue growth across all 
channels for the year ended December 31, 1996 compared to the year ended 
December 31, 1995. Indirect channel revenues increased 312.5% in the year 
ended December 31, 1996 compared to December 31, 1995. The growth in revenues 
in these indirect channels was primarily attributable to an increased number 
of OEMs and VARs as well as increased sales from those OEMs and VARs that 
partnered with Netscape in 1995.

     The Company experienced absolute dollar revenue growth in all 
distribution channels except the retail channel in the quarter ended December 
31, 1996 compared to the quarter ended September 30, 1996. The decrease in 
retail sales revenue was primarily due to the timing of the Company's release 
of its client upgrade in the third quarter.

     In general, it is the Company's strategy to increase indirect channel 
revenues as a percentage of total revenues in future periods, although there 
can be no assurance that the Company will be successful at accomplishing this 
goal. Specifically, the Company believes that indirect channels will account 
for a greater percentage of total revenues as OEM and VAR channels become 
more established and are further leveraged by the Company, 


                                                                     25
<PAGE>

and as the absolute number of OEM and VAR partners increases. In the near 
term, however, the distribution of revenues among channels will fluctuate 
depending on the timing of new product releases; the Company's ability to 
expand, leverage, and educate OEMs and VARs; the timing of larger enterprise 
sales in strategic accounts through the Company's direct sales force; and, to 
a lesser extent, customer buying patterns, which typically impact revenues in 
the retail channel.

     GEOGRAPHIC MIX. International revenues (sales outside of North America) 
were 29.3% and 17.2% of total revenues in the years ended December 31, 1996 
and 1995, respectively. The increase in international revenues, in both 
absolute dollars and as a percentage of total revenue, was primarily due to 
increased sales and marketing efforts in Europe and the Pacific Rim, as well 
as increased demand for Internet and intranet-related products in 
international markets. The Company is continuing to make significant 
investments in international markets through the deployment of sales 
personnel in several countries in Europe and the Pacific Rim, as well as 
through partnering with OEMs and VARs throughout the world. Management 
believes that international revenues may account for a greater percentage of 
total revenues in future periods, although this percentage may fluctuate in 
the near term as a result of localized product release timing, competition, 
and the general demand for Internet and intranet-related products in 
international markets.

     International revenues as a percentage of total revenues remained 
relatively flat between the last two quarters of 1996 at 29.7% in the fourth 
quarter of 1996 as compared to 29.9% in the immediately prior quarter.

     The Company invoices the customers of its international subsidiaries in 
both U.S. dollars and the local currencies of its subsidiaries. The Company 
has not engaged in foreign currency hedging activities, and a portion of the 
international revenues is currently subject to currency exchange fluctuation 
risk. The Company anticipates that international revenues may increase as a 
percentage of total revenues in the future, and, as a result, foreign 
currency exposure may increase. See Note 11 of Notes to Consolidated 
Financial Statements.

     GROSS MARGIN

     COST OF PRODUCT REVENUES. Cost of product revenues for all periods 
presented consisted primarily of the cost of product materials, royalties 
paid for licensed technology, and amounts paid to third-party vendors for 
sales administration, order fulfillment, and telephone support to customers. 
Cost of product revenues, as a percentage of the related product revenues, 
increased to 12.7% in the year ended December 31, 1996 from 11.8% in the year 
ended December 31, 1995. This was due primarily to an increase in the amount 
of royalties paid for licensed technology and amounts paid to third party 
vendors.

     Cost of product revenues was $9.5 million and $10.9 million for the 
quarters ended December 31, 1996 and September 30, 1996, respectively, and 
was 9.9% and 13.0%, respectively, of the related product revenues in both 
periods. The decrease from the third to the fourth quarter of 1996 was 
primarily due to lower retail revenues in the fourth quarter, which typically 
have higher material fulfillment costs.

     COST OF SERVICE REVENUES. Cost of service revenues for all periods 
presented consisted primarily of outside consulting services and 
personnel-related costs incurred in providing customer support, consulting 
services and fees paid to third parties related to the sale of advertising. 
Cost of service revenues increased to $13.0 million for the year ended 
December 31, 1996, from $2.5 million for the year ended December 31, 1995, 
primarily due to increased staffing to support higher demand for Netscape 
service products.

     Cost of service revenues was $5.2 million and $3.8 million for the 
quarters ended December 31, 1996 and September 30, 1996, respectively, and 
was 27.4% and 23.3%, respectively, of related service revenues in both 
periods. The increase from the third quarter to the fourth quarter of 1996 
was primarily due to increased staffing and salaries in the professional 
services and technical support groups. The Company expects continued increase 
in these areas in the future, which will have an adverse impact on cost of 
service revenue and gross margins.

     Gross margins on total revenues may be impacted by the mix of 
distribution channels used by the Company, the mix of products or services 
sold, the mix of product revenues versus service revenues, the mix of 
international versus North American revenues, and the prices charged for 
products. The Company typically realizes higher gross margins on direct sales 
than on sales through VAR and software retail channels, higher gross margins 
on North American sales than international sales, and higher gross margins on 
product revenues than on service revenues. In addition, the Company earns 
lower gross margins on shrink-wrap product licenses than on right-to-copy 
licenses such as those entered into with OEM partners. During the quarter 
ended December 31, 1996, overall average sales prices continued to be 
adversely impacted, and may continue to be adversely impacted in the future, 
by increased sales through OEM and VAR channels and by an increase in the 
number of large sales to enterprises, which are typically subject to volume 
discounts. The effect on the margins of this decline in overall selling 
prices was offset by the decline in retail sales (which typically have lower 
gross margins associated with packaging costs) in the fourth quarter. In 
addition, gross margins may be adversely impacted by increased international 
revenues as a percentage of total revenues and increased service revenues as 
a percentage of total revenues. In addition, the Company expects that the 


26
<PAGE>

total gross margin will fluctuate in future periods due to increased costs 
associated with licensed technology included in both client and server 
products and product warranty costs, which include 90-day free telephone 
support for Netscape Navigator products.

     OPERATING EXPENSES

The Company's total operating expenses have increased in absolute dollar 
amounts every quarter for the last two years. This trend reflects the 
Company's rapid growth and expansion in all operating areas. The Company 
believes that continued expansion of operations is essential to achieving and 
maintaining a strong competitive position. The Company anticipates continued 
increases in its infrastructure-related expenses, such as costs for 
facilities, telecommunications, and management information systems.

     The Company recorded deferred compensation of $11.1 million for the 
difference between the grant price and the deemed fair value of the Company's 
common stock for stock options granted in the first six months of 1995. 
Operating expenses include $2.5 million in each of the years ended December 
31, 1996 and 1995, of non-cash charges associated with the amortization of 
such deferred compensation. The remaining deferred compensation will be 
amortized to operating expense over the related 50-month vesting period of 
the shares and will therefore continue to have an adverse impact on the 
Company's results of operations. Specifically, the Company will record 
additional operating expenses of $2.4 million for the year ended December 31, 
1997 associated with deferred compensation amortization. See Note 7 of Notes 
to Consolidated Financial Statements.

     RESEARCH AND DEVELOPMENT. Research and development expenses consist 
primarily of salaries and consulting fees to support product development.
Research and development expenses were $83.0 million and $26.8 million for 
the years ended December 31, 1996 and 1995, respectively, or 24.0% and 31.4% 
of total revenues, respectively. Research and development expenses were $26.8 
million and $24.2 million for the quarters ended December 31, 1996, and 
September 30, 1996, respectively, or 23.3% and 24.2% of total revenues, 
respectively. The absolute dollar increases in each of the periods were 
primarily attributable to increased staffing and external consultant costs. 
To date, principally all software development costs have been expensed as 
incurred. Management believes that research and development activities are a 
critical area for investment in the Company and, as a result, intends to 
increase the level of research and development expenses in future periods, 
which may cause increases in such expenses as a percentage of total revenues 
in future periods.

     SALES AND MARKETING. Sales and marketing expenses consist primarily of 
compensation, consulting fees, trade show expenses, and advertising. Sales 
and marketing expenses were $153.6 million and $43.7 million for the years 
ended December 31, 1996 and 1995, respectively, or 44.4% and 51.2% of total 
revenues, respectively. Sales and marketing expenses were $51.4 million and 
$43.9 million for the quarters ended December 31, 1996 and September 30, 
1996, respectively, and were 44.7% and 43.9%, respectively, of total revenues.

     The absolute dollar increases in each of the periods were generally due 
to increased staffing, marketing programs, costs associated with opening new 
sales offices, sales commissions on increased revenues, and continued 
investment in Europe and the Pacific Rim. The Company intends to increase the 
level of sales and marketing expenses in future periods, which may cause 
increases in such expenses as a percentage of total revenues in future 
periods.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses consist 
primarily of salaries, fees for professional services, and accounts 
receivable allowances. General and administrative expenses for the years 
ended December 31, 1996 and 1995, were $30.6 million and $11.3 million, or 
8.8% and 13.3% of total revenues, respectively. General and administrative 
expenses were $11.1 million and $8.3 million for the quarters ended December 
31, 1996, and September 30, 1996, respectively, or 9.6% and 8.3% of total 
revenues, respectively. Absolute dollar increases in each of the periods were 
primarily attributable to increased staffing, fees for professional services, 
and accounts receivable allowances to support higher revenue levels. The 
Company intends to increase the level of general and administrative expenses 
in future periods, which may cause increases in such expenses as a percentage 
of total revenues in future periods.

     PROPERTY RIGHTS AGREEMENT AND RELATED CHARGES. The Company has 
segregated certain expenses totaling $250,000 and $500,000 for the years 
ended December 31, 1996 and 1995, respectively. These expenses relate to an 
agreement with the University of Illinois and Spyglass, Inc. and associated 
costs, including fees for expert and professional services, trademark search 
costs and other related expenses. All of these expenses have been recorded 
for financial reporting purposes in accordance with Statement of Financial 
Accounting Standards No. 5 ("SFAS 5"). See Note 6 of Notes to Consolidated 
Financial Statements. 

     MERGER-RELATED CHARGES. The Company has incurred certain merger-related 
expenses totaling $6.1 million and $2.0 million for the years ended December 
31, 1996 and 1995, respectively. The 1996 expenses incurred by the Company 
were primarily fees for investment banking, legal, accounting, and other 
related charges incurred in conjunction with the business combinations with 
InSoft, Paper, and Netcode in the second quarter of 1996. The 1995 expenses 
related to direct transaction costs the Company incurred in connection with 
the business combination with Collabra in November 1995. The Company does not 
anticipate incurring any additional charges associated with the InSoft, 
Paper, Netcode, or Collabra business combinations; however, there can be no 
assurance that such charges, including costs associated with any disputes 
arising from these business combinations, will not be incurred in subsequent 
quarters. See Note 2 of Notes to Consolidated Financial Statements.


                                                                          27
<PAGE>

     NET INTEREST INCOME

     Net interest income was $8.7 million and $4.6 million for the years 
ended 1996 and 1995, respectively. The increase was due primarily to higher 
average cash and investment balances for 1996 versus 1995 as a result of the 
Company's second public offering in November 1996 and initial public offering 
in August 1995. Net interest income remained flat at $2.2 million in each of 
the third and the fourth quarters of 1996. Pretax interest income in future 
periods may fluctuate as a result of fluctuations in average cash balances 
maintained by the Company and changes to market rates for investments.

     EQUITY IN NET LOSSES OF JOINT VENTURES

Equity in net losses of joint ventures, which began to be incurred in the 
second quarter of 1996, were $1.9 million for the year ended December 31, 
1996. They reflect the Company's share of the net losses of the Company's 
joint ventures under the equity method of accounting. Equity in net losses of 
joint ventures were $926,000 and $586,000 for the fourth and third quarters 
of 1996. The Company may provide additional contributions to these joint 
ventures in the future. Each of the joint ventures are in the development 
stage and will incur escalating losses in the near term as the joint ventures 
grow and increase operating expenses to fund their growth. See Note 10 of 
Notes to Consolidated Financial Statements.

     INCOME TAXES

The Company recorded a provision for income taxes of $8.5 million and $498,000 
in the years ended December 31, 1996 and 1995, respectively. The provision for 
1996 is lower than the statutory U.S. federal rate due primarily to the 
utilization of net operating loss carryforwards and the change in the 
valuation allowance on temporary differences, partially offset by 
nondeductible one-time costs associated with the InSoft, Paper, and Netcode 
mergers. The Company anticipates that its 1997 effective tax rate will 
increase.

     The Company had federal net operating loss carryforwards of 
approximately $5.8 million and $15.0 million for 1996 and 1995, respectively. 
These losses will expire in various years through the year 2011.

     Realization of the Company's net deferred tax assets, which totaled 
$23.7 million at December 31, 1996, is dependent on the Company generating 
sufficient taxable income in future years in appropriate tax jurisdictions to 
obtain benefit from the reversal of temporary differences and from tax credit 
carryforwards. The amount of deferred tax assets considered realizable is 
subject to adjustment in future periods if estimates of future taxable income 
are reduced. At December 31, 1996, there was no valuation allowance for net 
deferred tax assets based on management's assessment that current levels of 
anticipated taxable income will be sufficient to realize the net deferred tax 
asset. See Note 9 of Notes to Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1996, the Company's principal source of liquidity was $200.6 
million in cash, cash equivalents, and short-term investments, representing a 
$48.5 million increase from December 31, 1995 balances. During the same 
period long-term investments increased by $68.8 million from $21.7 million at 
December 31, 1995, to $90.5 million at December 31, 1996. See Note 1 of Notes 
to Consolidated Financial Statements. The increase in cash and investment 
balances was primarily attributable to the net proceeds of $158.3 million from 
the Company's second public offering in November 1996. The Company's cash and 
short-term investments are managed to be available for strategic investment 
opportunities or other potential cash needs in the future. The Company has no 
material debt.

     For the years ended December 31, 1996 and 1995, cash provided by 
operating activities of $15.1 million and $12.0 million, respectively, was 
primarily attributable to increases in net income, deferred revenues, and 
other current liabilities, partially offset by the growth in accounts 
receivable and other current assets. Cash used in investing activities of 
$174.4 million and $139.8 million for the years ended December 31, 1996 and 
1995, respectively, related primarily to net short-term investment purchases 
of $87.1 million and $116.4 million, respectively, as well as capital 
expenditures of $81.9 million and $20.5 million, respectively. The capital 
expenditures primarily consisted of purchases of computer hardware and 
software as well as leasehold improvements and furniture and fixtures related 
to additional leased facilities. Cash flows from financing activities of 
$191.6 million in the year ended December 31, 1996, were primarily 
attributable to the net proceeds of $158.3 million from the Company's second 
public offering in November 1996, $23.3 million in tax benefit related to 
stock options, and, to a lesser extent, approximately $9.6 million from the 
issuance of common stock under the Company's stock option plans. Cash flows 
from financing activities of $172.9 million in the year ended December 31, 
1995, were primarily attributable to the net proceeds of $148.2 million from 
the Company's initial public offering in August 1995 and, to a lesser extent, 
$17.3 million from the issuance of Series C Preferred Stock in April 1995.

     Deferred revenues primarily consist of the unrecognized portion of 
product and service revenues received pursuant to subscription and support 
contracts, respectively, and the unrecognized portion of nonrefundable, 
prepaid license royalties received pursuant to reseller agreements. Deferred 



28
<PAGE>

revenues increased from $30.0 million at December 31, 1995, to $80.3 million 
at December 31, 1996, due to an increase in the number of reseller 
agreements, the amount of prepayments received pursuant to reseller 
agreements and, to a lesser extent, an increase in the number of training, 
consulting, and subscription and support contracts.

     Capital expenditures were $81.9 million and $20.5 million in the years 
ended December 31, 1996 and 1995, respectively. The Company estimates that 
1997 capital expenditures will exceed $100 million, which includes purchases 
of computer hardware and software as well as leasehold improvements and 
furniture and fixtures related to additional leased facilities.

     The Company's principal commitments as of December 31, 1996 consisted of 
payments under operating leases for monthly rent. Additionally, in January 
1997, the Company entered into operating lease agreements that include 
commitments by the Company to complete the build-out of certain tenant 
improvements.  See Note 5 of Notes to Consolidated Financial Statements.

     Management believes existing cash and investments together with cash 
flows expected to be generated from operations will be sufficient to meet the 
Company's operating requirements for the next 12 months.


                                                                          29
<PAGE>

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                        ------------------------
In thousands, except share and per share data                1996           1995
--------------------------------------------------------------------------------
<S>                                                     <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents                             $  87,530      $  55,276
  Short-term investments                                  113,034         96,841
  Accounts receivable, net of allowances of $4,896 
    in 1996 and $667 in 1995                              110,627         27,099
  Deferred tax assets                                      20,347              -
  Other current assets                                     16,892          6,405
--------------------------------------------------------------------------------
          Total current assets                            348,430        185,621
Property and equipment, net                                86,567         20,872
Long-term investments                                      90,504         21,684
Other assets                                               11,949          2,977
--------------------------------------------------------------------------------
          Total assets                                   $537,450       $231,154
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                      $  27,634       $  8,533
  Accrued compensation and related liabilities             17,162          6,567
  Other accrued liabilities                                12,781          6,091
  Income taxes payable                                      7,731             20
  Deferred revenues                                        80,294         30,032
  Current portion of long-term obligations 
    and installment notes payable                             714          1,326
--------------------------------------------------------------------------------
          Total current liabilities                       146,316         52,569
Long-term obligations and installment notes payable           484          1,198
Commitments
Stockholders' equity:
  Preferred stock, $0.0001 par value; 
    issuable in series; 5,000,000 shares
    authorized no shares issued and outstanding                 -              -
  Common stock, $0.0001 par value; 200,000,000 shares
    authorized, 87,940,820 shares in 1996
    and 82,862,283 shares in 1995 issued and outstanding        9              8
  Additional paid-in capital                              399,013        207,188
  Deferred compensation                                    (6,128)        (8,584)
  Accumulated deficit                                      (2,227)       (22,716)
  Other                                                       (17)         1,491
--------------------------------------------------------------------------------
          Total stockholders' equity                      390,650        177,387
--------------------------------------------------------------------------------
          Total liabilities and stockholders' equity     $537,450       $231,154
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>

See accompanying Notes to Consolidated Financial Statements.


30
<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                       --------------------------------------
In thousands, except per share data                        1996           1995           1994
---------------------------------------------------------------------------------------------
<S>                                                      <C>            <C>             <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:

REVENUES:
Product revenues                                        $291,103        $77,489         $3,337
Service revenues                                          55,092          7,898            801
     Total revenues                                      346,195         85,387          4,138
---------------------------------------------------------------------------------------------
COST OF REVENUES:
Cost of product revenues                                  36,941          9,177            186
Cost of service revenues                                  13,024          2,530            247
     Total cost of revenues                               49,965         11,707            433
---------------------------------------------------------------------------------------------
Gross profit                                             296,230         73,680          3,705
---------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Research and development                                  82,995         26,841          4,146
Sales and marketing                                      153,586         43,679          7,750
General and administrative                                30,584         11,336          3,389
Property rights agreement and
  related charges                                            250            500          2,487
Merger-related charges                                     6,100          2,033              -
     Total operating expenses                            273,515         84,389         17,772
---------------------------------------------------------------------------------------------
Operating income (loss)                                   22,715        (10,709)       (14,067)
Interest income                                            8,991          4,898            251
Interest expense                                            (325)          (304)           (14)
Equity in net losses of joint ventures                    (1,928)             -              -
     Other income, net                                     6,738          4,594            237
----------------------------------------------------------------------------------------------
Income (loss) before income taxes                         29,453         (6,115)       (13,830)
Provision for income taxes                                 8,545            498              -
Net income (loss)                                        $20,908        $(6,613)      $(13,830)
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Net income (loss) per share                              $  0.24       $  (0.09)      $  (0.21)
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Share used in computing
  net income (loss) per share                             87,861         75,735         67,181
---------------------------------------------------------------------------------------------
</TABLE>


See accompanying Notes to Consolidated Financial Statements.


                                                                            31
<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                 ADDITIONAL                   
                                                            PREFERRED   COMMON     PAID-IN        DEFERRED    
In thousands, except share and per share data                 STOCK      STOCK     CAPITAL      COMPENSATION  
--------------------------------------------------------------------------------------------------------------
<S>                                                          <C>        <C>      <C>                <C>       
Balance at December 31, 1993                                 $  -       $  -     $  6,188           $  -      
  Issuance of 1,155,514 shares of common stock                                                                
    (Collabra and Insoft Series B)                                                                            
    net of issuance costs of $89.                               -          -        8,336              -      
  Issuance of 7,534,926 shares of common stock                                                                
    to founders and employees for cash and services             -          1           23              -      
  Issuance of 4,151,000 shares of Series A                                                                    
    convertible preferred stock at $0.75 per                                                                  
    share for cash and technology                               1          -        3,112              -      
  Issuance of 2,857,222 shares of Series B                                                                    
    convertible preferred stock at $2.25 per                                                                  
    share for cash, net of issuance costs of $34                -          -        6,395              -      
  Issuance of 1,522,000 shares of common stock on                                                            
    exercise of stock options                                   -          -           29              -      
  Net loss                                                      -          -            -              -      
--------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994                                    1          1       24,083              -      
  Issuance of 21,533,159 shares of common stock                                                               
    primarily on exercise of stock options,                                                                   
    for cash and notes, net of repurchases                      -          2        2,095              -      
  Issuance of 314,087 shares of common stock                                                                  
    (InSoft Series B and Series C) net of                                                                     
    issuance costs of $132                                      -          -        4,477              -      
  Issuance of 2,000,000 shares of Series C                                                                    
    convertible preferred stock at $9.00 per                                                                  
    share for cash, net of issuance costs of $700               -          -       17,300              -      
  Deferred compensation related to grant of                                                                   
    stock options                                               -          -       11,087        (11,087)     
  Amortization of deferred compensation                         -          -            -          2,503      
  Issuance of 11,500,000 shares of common stock                                                               
    upon IPO, net of offering costs of $12,850                  -          1      148,149              -      
  Conversion and split of 9,008,222 shares of                                                                 
    preferred stock to common stock                            (1)         4           (3)             -      
  Unrealized gain on available-for-sale securities              -          -            -              -      
  Net loss                                                      -          -            -              -      
  Translation gain                                              -          -            -              -      
--------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995                                    -          8      207,188         (8,584)     
  Issuance of 1,536,364 shares of common stock                                                                
    primarily on exercise of stock options,                                                                   
    for cash and services, net of repurchases plus                                                            
    cash received from stockholders' notes                      -          -        9,556              -      
  Issuance of 427,689 shares of common stock                                                                  
    (InSoft, PaperSoftware, and Netcode)                        -          -          615              -      
  Amortization of deferred compensation                         -          -            -          2,456      
  Issuance of 3,090,000 shares of common stock,                                                               
    net of offering costs of $325                               -          1      158,314              -      
  Tax benefit related to stock options                          -          -       23,340              -      
  Net unrealized loss on available-for-sale securities          -          -            -              -      
  Net income                                                    -          -            -              -      
  Translation loss                                              -          -            -              -      
--------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996                                 $  -       $  9     $399,013      $  (6,128)     
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying Notes to Consolidated Financial Statements.



32
<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                            TOTAL    
                                                             ACCUMULATED                STOCKHOLDERS'
In thousands, except share and per share data                  DEFICIT       OTHER        EQUITY    
-----------------------------------------------------------------------------------------------------
<S>                                                          <C>               <C>        <C>        
Balance at December 31, 1993                                 $  (2,094)        $  -       $  4,094   
  Issuance of 1,155,514 shares of common stock                                                       
    (Collabra and Insoft Series B)                                                                   
    net of issuance costs of $89.                                    -            -          8,336   
  Issuance of 7,534,926 shares of common stock                                                       
    to founders and employees for cash and services                  -            -             24   
  Issuance of 4,151,000 shares of Series A                                                           
    convertible preferred stock at $0.75 per                                                         
    share for cash and technology                                    -            -          3,113   
  Issuance of 2,857,222 shares of Series B                                                           
    convertible preferred stock at $2.25 per                                                         
    share for cash, net of issuance costs of $34                     -            -          6,395   
  Issuance of 1,522,000 shares of common stock on                                                   
    exercise of stock options                                        -            -             29   
  Net loss                                                     (13,830)           -        (13,830)  
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1994                                   (15,924)           -          8,161   
  Issuance of 21,533,159 shares of common stock                                                      
    primarily on exercise of stock options,                                                          
    for cash and notes, net of repurchases                           -         (763)         1,334   
  Issuance of 314,087 shares of common stock                                                         
    (InSoft Series B and Series C) net of                                                            
    issuance costs of $132                                        (179)           -          4,298   
  Issuance of 2,000,000 shares of Series C                                                           
    convertible preferred stock at $9.00 per                                                         
    share for cash, net of issuance costs of $700                    -            -         17,300   
  Deferred compensation related to grant of                                                          
    stock options                                                    -            -              -   
  Amortization of deferred compensation                              -            -          2,503   
  Issuance of 11,500,000 shares of common stock                                                      
    upon IPO, net of offering costs of $12,850                       -            -        148,150   
  Conversion and split of 9,008,222 shares of                                                        
    preferred stock to common stock                                  -            -              -   
  Unrealized gain on available-for-sale securities                   -        2,157          2,157   
  Net loss                                                      (6,613)           -         (6,613)  
  Translation gain                                                   -           97             97   
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1995                                   (22,716)       1,491        177,387   
  Issuance of 1,536,364 shares of common stock                                                       
    primarily on exercise of stock options,                                                          
    for cash and services, net of repurchases plus                                                   
    cash received from stockholders' notes                           -          763         10,319   
  Issuance of 427,689 shares of common stock                                                         
    (InSoft, PaperSoftware, and Netcode)                          (419)           -            196   
  Amortization of deferred compensation                              -            -          2,456   
  Issuance of 3,090,000 shares of common stock,                                                      
    net of offering costs of $325                                    -            -        158,315   
  Tax benefit related to stock options                               -            -         23,340   
  Net unrealized loss on available-for-sale securities               -       (2,107)        (2,107)  
  Net income                                                    20,908            -         20,908   
  Translation loss                                                   -         (164)          (164)  
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1996                                 $  (2,227)      $  (17)      $390,650   
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
</TABLE>


See accompanying Notes to Consolidated Financial Statements.


                                                                            33
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                        ---------------------------------------
In thousands                                               1996          1995          1994
-----------------------------------------------------------------------------------------------
<S>                                                     <C>           <C>           <C>
Cash flows from operating activities
  Net income (loss)                                     $  20,908      $  (6,613)    $  (13,830)
  Adjustments to reconcile
    net income (loss) to net cash (used in)
    provided by operating activities net of 
    companies acquired:
  Depreciation and amortization                            16,320          3,853            345
  Amortization of deferred compensation                     2,456          2,553              -
  Loss on sale of property and equipment                        -              -             11
  Deferred income taxes                                   (23,747)             -              -
  Changes in assets and liabilities:
  Accounts receivable                                     (83,525)       (24,929)        (1,688)
  Other current assets                                    (10,473)        (5,989)          (298)
  Accounts payable                                         18,951          6,696          1,506
  Accrued compensation and related liabilities             10,585          5,877            682
  Other accrued liabilities                                 6,344          5,133            989
  Accrued taxes payable                                     7,731              -              -
  Deferred revenues                                        50,262         26,152          3,713
  Long-term obligations                                      (725)          (725)         1,450
Net cash (used in) provided by operating activities        15,087         12,008         (7,120)
-----------------------------------------------------------------------------------------------
Cash flows from investing activities
  Capital expenditures                                    (81,931)       (20,522)        (3,175)
  Increase in deposits and other assets                    (5,363)        (2,891)        (1,089)
  Purchase of investments available-for-sale             (468,104)      (153,311)             -
  Maturities of investments available-for-sale            239,208          6,208              -
  Sale of investments available-for-sale                  141,776         30,736              -
Net cash used in investing activities                    (174,414)      (139,780)        (4,264)
-----------------------------------------------------------------------------------------------
Cash flows from financing activities
  Proceeds from the issuance of installment
     notes payable                                              -          2,200              -
  Payments on installment notes payable                      (601)          (401)          (504)
  Proceeds from issuance of preferred stock, net                -         17,300         11,902
  Proceeds from issuance of common stock, net             168,842        153,759          5,950
  Tax benefit related to stock options                     23,340
-----------------------------------------------------------------------------------------------
Net cash provided by financing activities                 191,581        172,858         17,348
-----------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents                  32,254         45,086          5,964
Cash and cash equivalents at beginning of year             55,276         10,190          4,226
-----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                $  87,530      $  55,276      $  10,190
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
  Income taxes paid                                      $  1,241         $  478           $  -
</TABLE>

See accompanying Notes to Consolidated Financial Statements.


34
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

NATURE OF OPERATIONS  Netscape Communications Corporation ("Netscape" or the 
"Company") is a leading provider of open software for linking people and 
information over private TCP/IP-based enterprise networks ("intranets") and 
the Internet. Netscape develops, markets, and supports a broad suite of 
enterprise server and client software, development tools, and commercial 
applications to create a single shared communications platform for 
network-based applications. Netscape software is based on industry standard 
protocols and therefore can be deployed across a variety of computer 
operating systems, platforms, and databases and can be interconnected with 
traditional client/server applications. Using Netscape solutions, 
organizations can extend their internal information systems and applications 
to geographically dispersed facilities as well as to third party partners and 
customers. In addition, Netscape's products allow individuals and 
organizations to access information and to execute transactions across the 
Internet, such as the buying and selling of information, software, and 
merchandise.

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

      As more fully described in Note 2, on April 25, 1996 Netscape entered 
into a business combination with InSoft, Inc. ("InSoft"). The business 
combination has been accounted for as a pooling of interests and the 
historical consolidated financial statements of Netscape for all years prior 
to the business combination have been restated to include the financial 
position, results of operations, and cash flows of InSoft. Costs of the 
acquisition were charged to operations in 1996.

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

REVENUE RECOGNITION  The Company's product revenues are derived from product 
licensing fees, while service revenues are derived from fees for support, 
training, consulting, and advertising space. Product revenues, net of 
allowances for future returns, are generally recognized when a noncancelable 
license agreement is in force, the product has been shipped, the license fee 
is fixed or determinable, no significant vendor obligations remain, and 
collectibility is reasonably assured. Product revenues from OEMs are generally 
recognized on delivery of product masters provided that the license fees are 
fixed and collectibility is not dependent on resale to the end users. 
Otherwise, these product revenues are recognized on notification of delivery 
to the end user. Product and service revenues from customer subscription and 
technical support contracts are recognized ratably over the term of the 
contract period, which is typically 12 months. Payments for subscription and 
support fees are generally made in advance and are nonrefundable. Service 
revenues from training and consulting are recognized when the services are 
performed. Service revenues from the sale of web site space are recognized in 
the period in which the content is displayed on a Web page of the Company. 
Costs related to insignificant obligations, primarily telephone support, are 
accrued on shipment and included in cost of revenues.

CASH, CASH EQUIVALENTS, SHORT- AND LONG-TERM INVESTMENTS Cash and cash 
equivalents consist of cash on deposit with banks and money market instruments 
with original maturities of 90 days or less. Short- and long-term investments, 
all of which are classified as available-for-sale, consist of debt securities 
with most original maturities primarily between 90 days and five years. Short- 
and long-term investments are stated at fair value, which is determined based 
on the quoted market prices of the securities.



                                                                          35
<PAGE>

The following tables detail the Company's investments, and their contractual 
maturities.

<TABLE>
<CAPTION>
                                                                         DECEMBER 31, 1996
                                           ---------------------------------------------------------------------------
                                                             Gross Unrealized    Gross Unrealized    Estimated Fair 
In thousands                               Amortized Cost         Gains               Losses              Value
----------------------------------------------------------------------------------------------------------------------
<S>                                           <C>                  <C>             <C>                    <C>
U.S. Government agencies                      $  10,314            $  26           $    (27)              $ 10,313
Corporate bonds and notes                       183,680              272               (224)               183,728
Market auction preferred stock                   54,376                -                (13)                54,363
Certificates of deposit                           9,223                2                  -                  9,225
Auction rate receipts                            15,509               14                  -                 15,523
Equity investments                                8,434                -                  -                  8,434
----------------------------------------------------------------------------------------------------------------------
                                               $281,536            $ 314           $   (264)              $281,586
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Included in cash and cash equivalents          $ 78,078            $   -           $    (30)              $ 78,048
Included in short-term investments              112,937              213               (116)               113,034
Included in long-term investments                90,521              101               (118)                90,504
----------------------------------------------------------------------------------------------------------------------
                                               $281,536            $ 314           $   (264)              $281,586
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Due within one year                            $191,015            $ 213           $   (146)              $191,082
Due after one year through five years            72,713              101                (84)                72,730
Due after five years                             17,808                -                (34)                17,774
----------------------------------------------------------------------------------------------------------------------
                                               $281,536             $314              $(264)              $281,586
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                         DECEMBER 31, 1995
                                           ---------------------------------------------------------------------------
                                                             Gross Unrealized    Gross Unrealized    Estimated Fair 
In thousands                               Amortized Cost         Gains               Losses              Value
----------------------------------------------------------------------------------------------------------------------
<S>                                           <C>                 <C>               <C>                 <C>
U.S. Government agencies                      $ 27,193            $  500            $      -            $ 27,693
Corporate bonds and notes                       25,744               271                   -              26,015
Foreign debt securities                         23,899               710                   -              24,609
Market auction preferred stock                   5,023                23                   -               5,046
Medium term corporate notes                     57,977               848                (195)             58,630
----------------------------------------------------------------------------------------------------------------------
                                              $139,836            $2,352            $   (195)           $141,993
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Included in cash and cash equivalents         $ 23,521            $  100            $   (153)           $ 23,468
Included in short-term investments              95,100             1,783                 (42)             96,841
Included in long-term investments               21,215               469                   -              21,684
----------------------------------------------------------------------------------------------------------------------
                                              $139,836            $2,352            $   (195)           $141,993
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Due within one year                           $118,621            $1,883            $   (195)           $120,309
Due after one year through five years           21,215               469                   -              21,684
----------------------------------------------------------------------------------------------------------------------
                                              $139,836          $  2,352            $   (195)           $141,993
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
</TABLE>
      The gross realized gains and losses on sales of available-for-sale 
securities were $201,000, $109,000, and $0, in 1996, 1995, and 1994, 
respectively. The cost of securities sold is based on the specific 
identification method.

     Equity investments in which the Company has a 20% to 50% interest or 
otherwise has the ability to exercise significant influence are accounted for 
under the equity method. Equity investments in which the Company has a less 
than 20% interest are carried at cost or estimated realizable value, if less, 
as these securities do not have readily determinable fair values. 

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

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


36
<PAGE>


STOCK-BASED COMPENSATION  As permitted under the Statement of Financial 
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based 
Compensation," the Company has elected to follow Accounting Principles Board 
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees" in 
accounting for stock-based awards to employees. See Note 7 below.

CONCENTRATION OF CREDIT RISK  Financial instruments that potentially subject 
the Company to concentration of credit risk consist principally of cash 
investments and trade receivables. The Company invests its excess cash in 
deposits with major banks, in U.S. Treasury and U.S agency obligations, and in 
debt securities of corporations with strong credit ratings and in a variety of 
industries. Approximately 94% of those securities classified as cash 
equivalents and marketable investments mature within five years of their 
purchase date.

     The Company sells its products to a large number of customers in 
diversified industries, primarily in North America, Europe, and the Pacific 
Rim. The Company performs ongoing credit evaluations of its customers' 
financial condition and generally does not require collateral. The Company 
maintains reserves for credit losses, and such losses have been within 
management's expectations.

RESEARCH AND DEVELOPMENT  Research and development expenditures are charged to 
operations as incurred. Statement of Financial Accounting Standards No. 86 
("SFAS 86"), "Accounting for the Costs of Computer Software to be Sold, 
Leased, or Otherwise Marketed," requires capitalization of certain software 
development costs subsequent to the establishment of technological feasibility.

     Based on the Company's product development process, technological 
feasibility is established on completion of a working model. Costs incurred 
by the Company between completion of the working model and the point at which 
the product is ready for general release have been insignificant. All 
research and development costs have been expensed.

ADVERTISING EXPENSES  The Company accounts for advertising costs as expense in 
the period in which they are incurred. Advertising expenses for 1996, 1995, 
and 1994 were approximately $5.4 million, $2.7 million, and $69,000, 
respectively.

TRANSACTIONS WITH RELATED PARTIES  During 1996 the Company made loans totaling 
approximately $1.3 million to executives and other members of senior 
management of the Company which are due over a period of 5 years. 
Approximately $1.0 million is outstanding under these loans at December 31, 
1996.

     In July 1996, the Company commited $4.0 million to the Java Fund which 
intends to fund entrepreneurial ventures targeted at new markets created by 
the Java technology. The fund is managed by a member of the Board of 
Directors of the Company.

PER SHARE AMOUNTS  Net income per share is computed using the weighted average 
number of common and dilutive common equivalent shares outstanding during the 
period. Common equivalent shares consist of the incremental common shares 
issuable on conversion of the convertible preferred stock (using the 
if-converted method) and shares issuable on the exercise of stock options 
(using the treasury stock method). Net loss per share is computed using the 
weighted average number of common shares outstanding during the period. Common 
stock equivalent shares from stock options and warrants are not included as 
the effect is antidilutive. Pursuant to the Securities and Exchange 
Commission Staff Accounting Bulletins and Staff Policy, all computations 
include the common and common equivalent shares issued within 12 months of 
the initial public offering date as if they were outstanding for all periods 
presented prior to the initial public offering using the treasury stock 
method.

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

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

2. BUSINESS COMBINATIONS

On November 9, 1995, the Company completed its business combination with 
Collabra Software, Inc. ("Collabra"), a developer of collaborative computing 
software. The Company exchanged an aggregate of 3.7 million shares of Netscape 
common stock and options for all of the outstanding capital stock and 
assumption of all of the outstanding stock options of Collabra, a privately 
held company. The business combination was treated as a pooling of interests 
for accounting purposes, and accordingly, the historical financial statements 
of the Company have been restated as if the transaction occurred at the 
beginning of the earliest period presented. In connection with the business 
combination, the Company incurred direct 


                                                                           37
<PAGE>

transaction costs of approximately $2.0 million, which consist of fees for 
investment banking, legal and accounting services, and other related expenses 
incurred in conjunction with the merger.

     On April 25, 1996, the Company completed its business combination with 
InSoft, Inc., a provider of network-based communications and collaborative 
multimedia software for the enterprise. The Company exchanged an aggregate of 
approximately 2 million shares of Netscape common stock and options for all 
of the outstanding capital stock and assumption of outstanding stock options 
of InSoft, a privately held company. The business combination was treated as 
poolings of interest for accounting purposes, and accordingly, the 
historical financial statements of the Company have been restated as if the 
transaction occurred at the beginning of the earliest period presented. In 
connection with the business combination, the Company incurred direct 
transaction costs of approximately $5.1 million, which consist of fees for 
investment banking, legal, and accounting services, and other related 
expenses incurred in conjunction with the business combination. Intercompany 
transactions between InSoft and Netscape were not material.

The table below sets forth the combined net revenues and net income (loss) 
for the periods indicated:

<TABLE>
<CAPTION>
                                                                             Merger-
                                                                             Related
 In thousands                                Netscape         InSoft         Charges       Combined
----------------------------------------------------------------------------------------------------
<S>                                         <C>             <C>              <C>           <C>
Year ended December 31, 1996
  Net revenues                               $344,116       $  2,079         $     -       $346,195
  Net income (loss)                          $ 30,270         (4,262)         (5,100)        20,908

Year ended December 31, 1995
  Net revenues                               $ 80,656       $  4,731         $     -       $ 85,387
  Net loss                                     (3,441)        (3,172)        $     -         (6,613)

Year ended December 31, 1994
  Net revenues                               $  1,403       $  2,735         $     -       $  4,138
  Net loss                                    (11,879)        (1,951)        $     -        (13,830)
</TABLE>

     On April 30, 1996, the Company completed its business combination with 
Netcode Corporation ("Netcode"), a creator of a Java-based visual interface 
builder and object toolkit for rapidly developing Java applications. The 
Company exchanged shares of Netscape common stock and options for all of the 
outstanding capital stock and assumed all of the outstanding stock options of 
Netcode, a privately held company. The business combination was treated as 
poolings of interest for accounting purposes. As Netcode's historical results 
of operations are not material in relation to those of Netscape, the 
financial information prior to January 1, 1996, has not been restated to 
reflect the business combination. In connection with the business 
combination, the Company incurred direct transaction costs of approximately 
$300,000, which consist of fees for legal and accounting services and other 
related expenses incurred in conjunction with the business combination.

     On May 28, 1996, the Company completed its business combination with 
Paper Software, Inc. ("Paper"), a provider of distributed three-dimensional 
graphics and maker of WebFX VRML software. The Company exchanged shares of 
Netscape common stock for all of the outstanding capital stock of Paper, a 
privately held company. The business combination was treated as poolings of 
interest for accounting purposes. As Paper's historical results of 
operations are not material in relation to those of Netscape, the financial 
information prior to January 1, 1996, has not been restated to reflect the 
business combination. In connection with the business combination, the 
Company incurred direct transaction costs of approximately $700,000, which 
consist of fees for legal and accounting services and other related expenses 
incurred in conjunction with the business combination.


38
<PAGE>

3. PROPERTY AND EQUIPMENT

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

                                                       DECEMBER 31,
                                                ------------------------
In thousands                                       1996           1995
------------------------------------------------------------------------
Computers and equipment                         $  76,138      $  19,402
Furniture and fixtures                             12,816          3,164
Leasehold improvements                             16,945          1,318
------------------------------------------------------------------------
                                                  105,899         23,884
Less accumulated depreciation                     (19,332)        (3,012)
------------------------------------------------------------------------
                                                $  86,567      $  20,872
------------------------------------------------------------------------
------------------------------------------------------------------------

4. INSTALLMENT NOTES PAYABLE

On March 3, 1995, the Company entered into a senior loan agreement for total 
borrowings not to exceed $2.2 million. Borrowings made under the agreement are 
secured by certain assets of the Company. The notes are payable in 36 monthly 
installments. Maturities subsequent to December 31, 1996, are approximately 
$714,000 in 1997 and $484,000 in 1998. At December 31, 1996 the fair value of 
the notes approximated its carrying value based on quoted market prices for 
similar securities.

5. LEASES 

The Company leases its facilities and certain other equipment under operating 
lease agreements expiring through 2013. Future minimum payments as of 
December 31, 1996, under these leases are as follows:

In thousands
------------------------------------------------------------------------------
1997                                                    $  16,214
1998                                                       23,523
1999                                                       22,385
2000                                                       22,238
2001                                                       22,323
2002 and thereafter                                       163,646
------------------------------------------------------------------------------
                                                         $270,329
------------------------------------------------------------------------------
------------------------------------------------------------------------------

     Rent expense for the years ended December 31, 1996, 1995, and 1994, was 
approximately $6.2 million, $2.2 million, and $735,000, respectively. 

     In January 1997 the Company entered into operating lease agreements for 
office facilities, requiring payments of approximately $8 million per year, 
commencing September 1997 and ending March 2013. Payments under these new 
agreements are included in the future minimum payments as of December 31, 
1996, above. In addition, these agreements include commitments by the Company 
to complete the build-out of certain tenant improvements totaling 
approximately $23 million over two years.

6. PROPERTY RIGHTS AGREEMENT

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

     If over the term of the agreement (two years from December 21, 1994) the 
Company entered into a license, distribution, remarketing, or sublicensing 
agreement with certain specific companies, the Company would be required to 
pay up to an additional $1.3 million to the University.

During the years ended December 31, 1996 and 1995, the Company expensed 
$250,000 and $500,000, respectively, of such additional payments.

7. STOCKHOLDER'S EQUITY

PREFERRED STOCK  On August 14, 1995, the Company closed its initial public 
offering of its common stock. At that time, all issued and outstanding shares 
of the Company's Series A, B, and C convertible preferred stock were converted 
into 36,032,888 shares of the Company's common stock. No additional shares of 
Series A, B, or C preferred stock were issued through December 31, 1996.

RESTRICTED STOCK  Through 1994, the Company issued common stock to employees 
under restricted stock purchase agreements. Generally, restricted stock vests 
over a 50-month period. The Company has the option to repurchase unvested 
shares on termination of employment for any reason, with or without cause, at 
the original per share price paid by the employee. At December 31, 1996, 
2,509,600 restricted shares were subject to repurchase.


                                                                            39
<PAGE>
STOCK OPTION PLANS  During 1994, the Company adopted the 1994 Stock Option 
Plan (the "1994 Plan") under which incentive stock options and nonqualified 
stock options to purchase common stock could be granted to employees and 
certain consultants or independent contractors. Under the 1994 Plan, options 
to purchase common stock could be granted at prices not less than 85% of the 
fair value on the date of grant (110% of fair value in certain instances), as 
determined by the board of directors. Generally, options granted were 
immediately exercisable and the resulting shares issued to employees under the 
1994 Plan are subject to certain repurchase rights by the Company, at the 
discretion of the Company, upon the individual's cessation of service prior to 
vesting in the shares, at the original purchase price. Generally, these 
repurchase rights lapse over a 50-month period. The 1994 Stock Option Plan was 
terminated in August 1995 and no further options were granted thereunder. At 
December 31, 1996, 7,631,000 shares issued under the 1994 Plan were subject to 
repurchase.


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

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

     The Company assumed the Collabra 1993 Incentive Stock Plan in November 
1995, which provided for the grant of incentive stock options and 
nonstatutory stock options to employees and consultants of the Company at 
prices ranging from 85% to 110% of the fair market value of the common stock 
on the date of grant as determined by the board of directors. The vesting and 
exercise provisions of the option grants were determined by the board of 
directors. Options generally vest at the rate of 24% of the original grant, 
commencing 12 months after the date of grant or employment, and 2% per month 
thereafter. Options expire no later than ten years from the date of the 
grant. This plan was terminated in November 1995 and no further options were 
granted thereunder.

     The Company assumed the InSoft 1993 Stock Option Plan, which provided 
for the granting of incentive stock options and nonqualified stock options to 
certain officers, key employees, consultants, and directors of InSoft. The 
options entitle the holders to purchase shares of common stock within one to 
ten years from the date of grant at option prices equal to the fair market 
value as determined by the Board of Directors at the date of grant; 247,851 
shares of the Company's common stock were reserved for issuance upon the 
exercise of options assumed in connection with the business combination with 
InSoft. This plan was terminated in April 1996, and no further options were 
granted thereunder.

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

     In August 1996, the Board of Directors authorized the repricing of 
options to purchase 3,990,708 shares of common stock effective as of the 
close of business on August 30, 1996, to the then fair market value of 
$35.375 per share. Under the terms of the repricing, the repriced options 
maintain the same vesting and expiration terms, except they may not be 
exercised until February 24, 1997. No employees owning 3% or more of the 
Company's common stock participated in the repricing.


40
<PAGE>

     At December 31, 1996, options to purchase 1,280,167 shares were vested 
and 11,230,556 shares were reserved for issuance on exercise of stock 
options. A summary of activity under all plans, including options assumed by 
Netscape as a result of the business combinations with Collabra, InSoft, 
Paper, and Netcode (adjusted for the respective merger exchange ratios), is 
as follows:

<TABLE>
<CAPTION>
                                                                   Options Outstanding
                                  ---------------------------------------------------------------------------------------------
                                                                                                          
                                  Shares Available for                                 Exercise           
                                         Grant             Number of Shares         Price per Share       
-------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>                      <C>                  <C>                            <C>
     Balance at January 1, 1994         749,133                 177,104                   $0.22
Shares reserved                      24,773,344                       -                     -
Options granted                     (12,920,605)             12,920,605             $0.0003 - $7.2900
Options canceled                        600,000                (600,000)            $0.0188 - $0.0188
Options exercised                             -              (8,302,000)            $0.0003 - $0.0563
-------------------------------------------------------------------------------------------------------------------------------
     Balance at December 31, 1994    13,201,872               4,195,709             $0.0188 - $7.2900
Shares reserved                       9,200,000                       -                     -
Options granted                     (16,375,004)             16,375,004             $0.0563 - $69.500         Weighted Average
Options canceled                        484,400                (484,400)            $0.0188 - $49.500        Exercise Price per
Options exercised                             -             (14,155,656)            $0.0188 - $4.8000              Share
-------------------------------------------------------------------------------------------------------------------------------
     Balance at December 31, 1995     6,511,268               5,930,657             $0.0563 - $69.750            $  17.26
Shares reserved                          33,882                       -                     -
Options granted                      (8,270,818)              8,270,818             $1.3300 - $82.120            $  45.43
Options canceled                      4,236,702              (4,236,702)            $0.6150 - $82.120            $  56.66
Options exercised                             -              (1,138,968)            $0.0563 - $47.875            $   4.69
Plan shares expired                    (106,283)                      -                     -
-------------------------------------------------------------------------------------------------------------------------------
     Balance at December 31, 1996     2,404,751               8,825,805             $0.0563 - $82.120            $  26.36
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The following table summarizes information about stock options outstanding at 
December 31, 1996:

<TABLE>
<CAPTION>
                                            Options Outstanding                                     Options Exercisable
                        -----------------------------------------------------------------   ------------------------------------
                                       Weighted Average Remaining      Weighted-Average                        Weighted Average
       Exercise              Number     Contractual Life (years)        Exercise Price          Number          Exercise Price
--------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>                 <C>                         <C>                <C>                  <C>
 $ 0.0563 - $ 1.3300         396,045           7.94 years                  $ 0.4278             242,159            $ 0.3139
       $4.8000             2,499,208           8.53                        $ 4.8000           1,899,515            $ 4.8000
 $ 6.6300 - $14.0000         181,555           8.28                        $10.7973              94,025            $ 9.3556
 $22.6250 - $35.1250         438,269           8.76                        $29.0304              96,817            $29.1874
      $35.3750             4,104,769           9.22                        $35.3750             462,742            $35.3750
 $36.6250 - $45.5000         319,550           9.74                        $40.8703                   -            $      -
 $46.1250 - $56.8750         641,350           9.83                        $50.5414               3,180            $48.1407
 $57.5000 - $82.1200         245,059           9.82                        $61.7029              11,549            $69.4900
--------------------------------------------------------------------------------------------------------------------------------
 $ 0.0563 - $82.1200       8,825,805           9.00                        $26.3603           2,809,987            $10.7560
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
     At December 31, 1996 and 1995, 12,652,600 and 19,714,128 shares, 
respectively, of common stock were subject to repurchase. In the years ended 
December 31, 1996 and 1995, the Company repurchased 99,120 and 907,562 
shares, respectively, of common stock at the original exercise price.


                                                                           41
<PAGE>

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

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

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

EMPLOYEE STOCK PURCHASE PLAN In June 1995, the Company adopted an Employee 
Stock Purchase Plan (ESPP) under Section 423 of the Internal Revenue Code and 
reserved 2,000,000 shares of common stock for issuance under the plan. Under 
this plan, qualified employees are entitled to purchase shares at 85% of fair 
market value. There were 276,506 shares issued under the plan during 1996 and 
none in 1995.

STOCK-BASED COMPENSATION  Under APB 25, the Company generally recognizes no 
compensation expense with respect to stock-based awards to employees. Pro 
forma information regarding net income and earnings per share is required by 
SFAS 123 for awards granted after December 31, 1994, as if the Company had 
accounted for its stock-based awards to employees under the fair value method 
of SFAS 123. The fair value of the Company's stock-based awards to employees 
was estimated using a Black-Scholes option pricing model (minimum value model 
for awards prior to the Company's initial public offering). The Black-Scholes 
option valuation model was developed for use in estimating the fair value of 
traded options that have no vesting restrictions and are fully transferable. 
The Black-Scholes model requires the input of highly subjective assumptions 
including the expected stock price volatility. Because the Company's 
stock-based awards to employees have characteristics significantly different 
from those of traded options, and because changes in the subjective input 
assumptions can materially affect the fair value estimate, in management's 
opinion, the existing models do not necessarily provide a reliable single 
measure of the fair value of its stock-based awards to employees. The fair 
value of the Company's stock-based awards to employees was estimated assuming 
no expected dividends and the following weighted-average assumptions:

                                      Options                ESPP
---------------------------------------------------------------------------
                                  1996       1995       1996       1995
---------------------------------------------------------------------------
Expected life (years)              3.1       2.9         .5         .5
Expected volatility               55.6%      7.3%      73.0%      85.0%
Risk-free interest rate            6.1%      5.9%       5.6%       5.0%

     The weighted-average fair value of stock options and employee stock 
purchase rights granted during 1996 was $22.97 and $37.26 per share, 
respectively. For pro forma purposes, the estimated fair value of the 
Company's stock-based awards to employees is generally amortized over the 
options' vesting period (for options) and the six-month purchase period (for 
stock purchases under the ESPP). The Company's pro forma information follows:

                                              YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
In thousands, except per share data              1996          1995
---------------------------------------------------------------------------
Net income (loss)             As reported    $  20,908      $  (6,613)
                              Pro forma      $ (39,871)     $  (7,940)

Net income (loss) per share   As reported    $     0.24     $   (0.09)
                              Pro forma      $    (0.47)    $   (0.11)

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


42
<PAGE>
8.  BENEFIT PLAN

The Company maintains a 401(k) retirement savings plan (the "Plan") for its 
full time employees. Each participant in the Plan may elect to contribute from 
1% to 15% of his or her annual compensation to the Plan. The Company, at its 
discretion, may make contributions to the Plan; however, the Company has made 
no contributions through December 31, 1996.

9.  INCOME TAXES

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

                                              YEAR ENDED DECEMBER 31, 
-------------------------------------------------------------------------------
In thousands                            1996           1995            1994 
-------------------------------------------------------------------------------
United States                        $  23,207       $(6,115)       $(13,830) 
Foreign                                  6,246             -               -
Income (loss) before income taxes      $29,453       $(6,115)       $(13,830)

     The provision for income taxes is as follows:

                                              YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
In thousands                          1996             1995            1994
-------------------------------------------------------------------------------
Current:
  Federal                          $  23,148           $  -           $  -
  State                                4,232             20              -
  Foreign                              4,912            478              -
-------------------------------------------------------------------------------
                                      32,292            498              -

Deferred:
  Federal                            (20,421)             -              -
  State                               (3,326)             -              -
  Foreign                                  -              -              -

                                     (23,747)             -              -

Provision for income taxes          $  8,545           $498           $  -
-------------------------------------------------------------------------------

The tax benefits associated with employee stock options reduce taxes currently 
payable as shown above by $23.3 million and $0 for 1996 and 1995, 
respectively. Such benefits are credited to additional paid-in capital when 
realized.

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

                                                    YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
In thousands                                          1996          1995
-------------------------------------------------------------------------------
Expected tax at federal statutory rate              $10,309       $(2,140)
State taxes, net of federal benefit                   2,462            20
Effect of foreign operations                          2,801           478
Tax-exempt interest                                  (1,488)            -
Nondeductible merger costs                            2,135             -
Tax credits                                            (436)            -
Net operating losses not benefited                        -         2,071
Valuation allowance reversal                         (9,381)            -
Other, net                                            2,143            69
-------------------------------------------------------------------------------
                                                   $  8,545        $  498
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------


                                                                          43
<PAGE>

     The Company accounts for income taxes pursuant to Statement of Financial 
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes" 
which uses the liability method to calculate deferred income taxes. Deferred 
income taxes reflect the net tax effects of temporary differences between the 
carrying amounts of assets and liabilities for financial reporting purposes 
and the amounts used for income tax purposes. Significant components of the 
Company's net deferred tax assets are as follows:

                                                   YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
In thousands                                         1996          1995
-----------------------------------------------------------------------------
Deferred tax assets:
  Deferred revenue                                $11,096           $  -
  Reserves and accrued expenses                     5,445             52
  Compensation not currently deductible             3,699            155
  Net operating losses                              2,032          5,815
  Credits                                           1,094          1,245
  Other, net                                          381          3,184
-----------------------------------------------------------------------------
Total before valuation allowance                   23,747         10,451
Valuation allowance for deferred tax assets             -        (10,451)
-----------------------------------------------------------------------------
Net deferred tax assets                           $23,747           $  -
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
As reported on the balance sheet:

  Current deferred tax asset                      $20,347           $  -
  Noncurrent deferred tax asset 
    (included in Other assets)                      3,400              -
-----------------------------------------------------------------------------
                                                  $23,747           $  -
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------

     The valuation allowance decreased by approximately $10.5 million in 
1996. Approximately $1.8 million of the valuation allowance decrease was 
related to tax carryforwards attributable to stock option deductions and was 
credited to stockholders' equity in 1996.

     As of December 31, 1996, the Company had federal net operating loss 
carryforwards of approximately $5.8 million that will expire between 2008 and 
2011.

     Realization of the Company's net deferred tax assets is dependent on the 
Company generating sufficient taxable income in future years in appropriate 
tax jurisdictions to obtain benefit from the reversal of temporary 
differences and from net operating loss and tax credit carryforwards. The 
amount of deferred tax assets considered realizable is subject to adjustment 
in future periods if estimates of future taxable income are reduced. At 
December 31, 1996, there was no valuation allowance for net deferred tax 
assets based on management's assessment that current levels of anticipated 
taxable income will be sufficient to realize the net deferred tax asset.

10.  JOINT VENTURES

In April 1996, the Company formed a joint venture with GE Information 
Services to form Actra Business Systems L.L.C. ("Actra") to develop and 
market software for Internet-based business-to-business electronic commerce. 
The Company acquired for cash a 50% joint venture interest in the outstanding 
common stock of Actra.

     In July 1996, the Company formed a joint venture called Navio 
Communications, Inc. ("Navio"), an independent Internet software company to 
deliver core, scalable technology for Netscape Navigator for a wide variety 
of consumer and non-PC products such as televisions, telephones, set-top 
boxes, game players, and the new breed of network computers and information 
appliances. The Company acquired for cash and the contribution of certain 
technology licenses a 50% joint venture interest in the outstanding voting 
capital stock of Navio.

     The Company reports its share of earnings and losses of the joint 
ventures under the equity method of accounting. The joint ventures are in the 
development stage and will incur escalating losses in the near term. The 
balance of investments in joint ventures at December 31, 1996, is 
approximately $3.7 million.


44
<PAGE>

11.  INDUSTRY AND GEOGRAPHIC SEGMENT AND CUSTOMER INFORMATION

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

     The Company conducts its business within one industry segment. The 
Company's export sales (i.e. sales to unaffiliated customers outside of the 
United States by the U.S. operation) were approximately $79.4 million for the 
year ended December 31, 1996, and were approximately $17.3 million for the 
year ended December 31, 1995. No export sales for 1996 or 1995 to a particular
geographic region totaled more than 10% or greater of total revenues. No
international revenues (sales outside North America) to unaffiliated
customers within any geographic region totaled 10% or greater of total
revenues for 1996 and 1995.

     The Company operates in two main geographic areas as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996                         North America  International  Eliminations   Consolidated
---------------------------------------------------------------------------------------------------------------
<S>                                                     <C>            <C>           <C>             <C>
In thousands
Sales to unaffiliated customers                          $291,480      $   54,715     $      -       $346,195
Transfers between geographic areas                         17,952           1,348      (19,300)             -
---------------------------------------------------------------------------------------------------------------
Total revenues                                           $309,432      $   56,063     $(19,300)      $346,195
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
Operating income (loss)                                  $ 16,512      $    6,482     $   (279)      $ 22,715
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
Identifiable assets                                      $518,895      $   37,792     $(19,237)      $537,450
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------

YEAR ENDED DECEMBER 31, 1995

In thousands
---------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers                          $ 82,161      $    3,226            -       $ 85,387
Transfers between geographic areas                              -               -            -              -
---------------------------------------------------------------------------------------------------------------
Total revenues                                           $ 82,161      $    3,226     $      -       $ 85,387
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
Operating income (loss)                                  $(10,373)     $   (2,362)    $  2,026       $(10,709)
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
Identifiable assets                                      $229,427      $    5,387     $ (3,660)      $231,154
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------

YEAR ENDED DECEMBER 31, 1994
---------------------------------------------------------------------------------------------------------------
In thousands

Sales to unaffiliated customers                          $  4,138              -              -       $  4,138
Transfers between geographic areas                              -              -              -              -
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
    Total revenues                                         $4,138             $-             $-         $4,138
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
Operating loss                                           $(14,067)            $-             $-       $(14,067)
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
Identifiable assets                                      $ 16,996             $-             $-        $16,996
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
</TABLE>

     For the year ended December 31, 1996, no single customer accounted for 
10% or more of total revenues. Ventana Communications Inc. accounted for 10% 
of total revenues for the year ended December 31, 1995, and Burlington Coat 
Factory accounted for 12% of total revenues for the year ended December 31, 
1994.

12.  CONCENTRATION AND OTHER RISKS

PRODUCTS The Company is a leading provider of open software for linking 
people and information over intranets and the Internet. Netscape develops, 
markets and supports a broad suite of enterprise server and client software, 
development tools and commercial applications to create a single shared 
communications platform for network-based solutions. Netscape software is 
based on industry standard protocols and therefore can be deployed across a 
variety of computer operating systems, platforms and databases and can be 
interconnected with traditional client/server applications. Using Netscape 
solutions, organizations can be interconnected with traditional client/server 
applications. Using Netscape solutions, organizations can extend their 
internal information systems and applications to geographically dispersed 
facilities as well as to third party partners and customers. In addition, 
Netscape's products allow individuals and organizations to access information 
and to execute transactions across the Internet such as the buying and 
selling of information, software, and other merchandise.

                                                                           45
<PAGE>

PRODUCT INTRODUCTIONS AND TRANSITIONS In October 1996, the Company introduced 
Netscape SuiteSpot 3.0 (of which some components are currently shipping and 
others are in public beta release) and Netscape Communicator (currently in 
public beta release).  These new products, unlike current Netscape products, 
are designed primarily for email, groupware, and other enterprise applications 
across an open network, and represent a significant product transition for 
the Company.  There are several risks inherent in such a product transition, 
including deferral of purchases of the Company's current products in 
anticipation of the new products, the risk that the new products will be 
delayed beyond their anticipated release dates, and the risk that the new 
products may contain errors or defects. Even if the new products are 
commercially available on time, there can be no assurance that these products 
will achieve market acceptance because the market for intranet software has 
only recently begun to develop, is rapidly evolving and is characterized by 
an increasing number of market entrants. Moreover, Netscape does not have the 
name recognition in the enterprise software market that most of its 
competitors have, and Netscape has very limited experience in selling to this 
market.  Furthermore, the success of the new products is dependent on a 
number of factors, including market acceptance, the Company's ability to 
adjust to longer sales cycles and execute a different type of sale than it 
has historically executed, and the Company's ability to expand its direct 
sales force, extensively train its sales personnel, invest greater resources 
to the sales effort, and educate the indirect channels.  The Company will also 
need to add a number of technical personnel to implement the new enterprise 
software products for its enterprise customers.  Finally, the introduction of 
the new products will also expose the company to additional risks.  For 
example, if single, large sales of enterprise software products become a 
larger percentage of revenue, as the Company anticipates may happen, the loss 
or deferral of one or more significant sales could cause substantial 
fluctuation in the Company's results of operations.  The Company's revenues 
are also likely to fluctuate due to the lengthy sales cycles of the new 
products and factors that impact the large organizations that are likely to 
be prospective customers of the Company's enterprise software products. The 
Company will also face new competition from providers of enterprise software, 
most of whom have longer operating histories, larger installed customer 
bases, existing relationships with prospective enterprise customers and 
significantly greater financial, technical, marketing, public relations, and 
distribution resources than the Company.  In addition, expansion of the 
Company's product line will require more management attention, which will 
place a significant strain on the Company's management and operations.


CUSTOMERS AND MARKETS The market for the Company's software and services, 
especially for its intranet products and services such as Netscape SuiteSpot 
3.0 and Netscape Communicator, is relatively new, is rapidly evolving, and is 
characterized by an increasing number of market entrants who have introduced 
or developed products and services for communication and commerce over the 
Internet and intranets. As is typical in the case of a new and rapidly 
evolving industry, demand and market acceptance for recently introduced 
products and services are subject to a high level of uncertainty. The 
industry is relatively young and has a limited number of proven products. 
Moreover, critical issues concerning the use of intranets and of the Internet 
(including security, reliability, cost, ease of deployment and 
administration, and quality of service) remain unresolved and may impact the 
growth of intranet and Internet use. While the Company believes that its 
software products offer significant advantages for commerce, collaboration 
and communication over the Internet and intranets, there can be no assurance 
that commerce and communication over the Internet or intranets will become 
widespread, or that the Company's products for commerce, collaboration and 
communication over the Internet or intranets will become widely adopted for 
these purposes.

     In particular, the Company's client software competes with free client 
software distributed by online service providers, Internet access providers, 
and others. In addition, computer operating systems companies, notably 
Microsoft, bundle client software with their operating systems at little or 
no additional cost to users, which may cause the price of the Company's 
client products to decline. The Company announced significant price 
reductions in its server product line during the quarter ended December 31, 
1995 and announced further price reductions in its server product line in 
March 1996. Moreover, continued market acceptance of the Company's server and 
commercial applications software products is substantially dependent on the 
adoption of the Internet and intranets for commerce, collaboration and 
communications. The adoption of the Internet or intranets for commerce, 
collaboration and communications, particularly by those individuals and 
enterprises that have historically relied on alternative means of commerce, 
collaboration and communication, generally requires the acceptance of a new 
way of conducting business and exchanging, collaborating information. In 
particular, enterprises that have already invested substantial resources in 
other means of conducting commerce and exchanging, collaborating information 
may be particularly reluctant or slow to adopt a new strategy that may make 
some or all of their existing information systems technology, software, and 
systems obsolete. In addition, there can be no assurance that individual PC 
users in business or at home will adopt or, if they do adopt, continue to use 
the Internet or intranets for online commerce, collaboration or communication.

46
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Netscape Communications Corporation

We have audited the accompanying consolidated balance sheets of Netscape 
Communications Corporation as of December 31, 1996 and 1995, and the related 
consolidated statements of operations, stockholders' equity, and cash flows 
for each of the three years in the period ended December 31, 1996. These 
financial statements are the responsibility of the Company's management. Our 
responsibility is to express an opinion on these financial statements based on 
our audits.

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

     In our opinion, the consolidated financial statements referred to above 
present fairly, in all material respects, the consolidated financial position 
of Netscape Communications Corporation at December 31, 1996 and 1995, and the 
consolidated results of its operations and its cash flows for each of the 
three years in the period ended December 31, 1996, in conformity with 
generally accepted accounting principles.



Palo Alto, California
January 24, 1997


                                                                       47
<PAGE>

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                              QUARTER ENDED
-------------------------------------------------------------------------------------------------------------------------------
                                         Dec. 31,   Sept. 30,   June 30, March 31,   Dec. 31,  Sept. 30,   June 30, March 31,
In thousands, except per share data          1996        1996       1996      1996       1995       1995       1995      1995
-------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>         <C>         <C>        <C>       <C>        <C>        <C>         <C>
Total revenues                           $115,052    $100,016    $75,006    $56,121   $41,562    $23,308    $14,072     $6,445
Gross profit                              100,303      85,322     62,978     47,627    34,824     20,289     12,753      5,814
Merger-related charges                          -           -      6,100          -     2,033          -          -          -
Income (loss) before income taxes          11,990      10,552      1,990      4,921     1,009        175     (2,792)    (4,507)
Net income (loss)                           8,756       7,657        906      3,589       511        175     (2,792)    (4,507)
Net income (loss) per share                 $0.10       $0.09      $0.01      $0.04     $0.01      $0.00     $(0.04)    $(0.07)
</TABLE>
------------
1.   All periods reflect the business combinations with Collabra Software, 
     Inc., and InSoft, Inc., which have been accounted for as poolings of 
     interest. Financial information for periods prior to January 1, 1996, 
     has not been restated for the operations of Netcode Corporation and 
     Paper Software, Inc., due to immateriality. See Note 2 of Notes to 
     Consolidated Financial Statements.


48