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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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


                                    Form 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended September 30, 2000

                         Commission File Number: 0-25427

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

                                NETOBJECTS, INC.
             (Exact name of Registrant as specified in its charter)

             Delaware                                        94-3233791
  (State or Other Jurisdiction of                         (I.R.S. Employer
  Incorporation or Organization)                         Identification No.)


301 Galveston Drive, Redwood City, California                   94063
  (Address of Principal Executive Offices)                    (Zip Code)


                                 (650) 482-3200
              (Registrant's Telephone Number, Including Area Code)

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

                          Common Stock, par value $0.01
           Securities registered pursuant to Section 12(g) of the Act

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
requirements for the past 90 days. Yes X No___

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

As of September  30, 2000,  the  aggregate  market value of voting stock held by
non-affiliates  of the  Registrant,  based upon the closing  sales price for the
Registrant's Common Stock, as reported in the NASDAQ National Market System, was
$36.8  million. Shares of Common  Stock held by each officer and director and by
each  person  who owns 5% or more of the  outstanding  Common  Stock  have  been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive  determination for any other
purpose.

As of November 30, 2000, Registrant had outstanding  31,673,817 shares of Common
Stock, $.01 par value.

                       DOCUMENTS INCORPORATED BY REFERENCE

The following  documents (or parts thereof) are  incorporated  by reference into
the following parts of this Form 10-K: Certain information  required in Part III
of this Form 10-K is incorporated from the registrant's  Proxy Statement for its
Annual Meeting of Stockholders.

--------------------------------------------------------------------------------
<PAGE>

<TABLE>

                                TABLE OF CONTENTS

                                     Part I
<CAPTION>
                                                                                                                   Page

<S>      <C>                                                                                                        <C>
Item     1.       Business....................................................................................       1

Item     2.       Properties..................................................................................      16

Item     3.       Legal Proceedings...........................................................................      16

Item     4.       Submission of Matters to a Vote of Security Holders.........................................      16

                                     Part II

Item     5.       Market for Registrants Common Equity and Related Stockholder Matters........................      16

Item     6.       Selected Financial Data.....................................................................      18

Item     7.       Management's Discussion and Analysis of Financial Condition and Results of Operations.......      20

Item     7A.      Qualitative and Quantitative Disclosures about Market Risk..................................      30

Item     8.       Financial Statements and Supplementary Data.................................................      30

Item     9.       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........      31

                                    Part III

Item     10.      Directors and Executive Officers of Registrant..............................................      31

Item     11.      Executive Compensation......................................................................      31

Item     12.      Security Ownership of Certain Beneficial Owners and Management..............................      31

Item     13.      Certain Relationships and Related Transactions..............................................      31


                                     Part IV

Item     14.      Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................      31

                  Signatures..................................................................................      35

</TABLE>


<PAGE>
                                    BUSINESS

From our inception  through the fiscal year ended September 30, 2000, we founded
our business on being a leading  provider of software,  solutions,  and services
that enable small  businesses to build,  deploy and maintain  Web sites; conduct
online e-business; and enable large enterprises to effectively create and manage
corporate intranets.

Our Company

Our  objective  is to become a leading  provider  of online  services  for small
businesses.  We  intend to  partner  with  service  providers--from  telcos  and
financial  institutions  to ISPs and hardware  manufacturers--to  deliver  these
services to their small business customers. We offer our partners the technology
solutions  and services  they need to enable their small  business  customers to
successfully  leverage  the  power of the Web.  Our  applications  and  services
empower small businesses by helping them create Web sites, engage in e-commerce,
and grow and manage their businesses.  In deploying these services, our partners
benefit  from  potential  new  sources of revenue,  faster time to market,  less
administrative overhead, and an improved customer experience.

In 1996 we introduced  NetObjects  Fusion,  the first Web site building software
application.  Since  then,  NetObjects  Fusion  has  been  instrumental  in  the
development  of over 4 million Web sites and has become an industry  standard in
Web site  building,  winning  over 75  awards.  September  1998,  we  introduced
NetObjects  Authoring  Server  Suite 3.0, a  client-server  application  for the
corporate intranet market. In addition,  to complement our enterprise solutions,
we began  offering  professional  services to our  business  customers to better
serve their Web site planning, building and maintenance needs.

In March 2000, we launched  NetObjects  Collage,  an integrated platform for the
management  of  enterprise  Web  applications.  NetObjects  Collage  provides an
integrated  platform  that  combines   collaboration  with  content  management,
enterprise   integration,   and  dynamic   application   services.   We  provide
professional  services to help our customers install  NetObjects  Collage and to
train their  personnel in the use and  maintenance  of corporate  Web sites with
this product.

On December  21, 2000 we signed an option and license  agreement  under which we
received $4 million in cash for an exclusive  option to purchase  the  Company's
Enterprise division for $18 million (including the option payment).

The option to acquire the Enterprise division will expire on January 5, 2001, if
a definitive  agreement for the purchase of the Enterprise division has not been
signed by that date, or by a later date as may be agreed upon by both companies.
If  the  acquisition  is not  completed,  the  potential  acquirer  will  have a
three-year  license  to  distribute   NetObjects  Collage.   Completion  of  the
acqisition  is  subject  to  the  negotiation  and  execution  of  a  definitive
agreement, which would be subject to customary closing conditions.  Accordingly,
there can be no assurances that the sale of the Enterprise division will occur.

Building on the success of NetObjects Fusion and the growth of the Internet,  we
are changing  the company  from a  traditional  desktop  software  company to an
online services  provider.  We also built popular online   resources,  including
NetObjects.com,  and  eFuse.com,  that target  communities of business users and
provide sources of information,  products,  and services for building Web sites.
This  strategic  shift began in October 1999 with the  acquisition of Sitematic,
Corp.,  and the formation of a Small  Business  Division.  In December  1999, we
combined these online   resources and launched  GoBizGo.com,  a Web  application
services site where small  businesses can find the solutions and services needed
to build a successful Web presence.

In July of 2000, we acquired  privately-held  Rocktide Inc., for $3.6 million in
NetObjects common stock and $0.4 million in cash.  Rocktide is a provider of the
next  generation  application  service  provider  (ASP)  technology and wireless
e-Services that help Web-enable  businesses  worldwide.  This product technology
was  incorporated  in our newly branded Matrix  Platform,  which was launched on
October 30, 2000.

NetObjects  Matrix is an integrated  suite of online services that enables small
businesses  to take  advantage  of the  Internet  to expand  and  improve  their
business.  It is the first set of online services  designed to be distributed by
service  providers,  companies  whose reach into the small business  marketplace
through their business relationships  makes them the most effective distributors
of  NetObjects  products and services.  We believe that these large  established
service providers,  such as hardware vendors,  telecommunications  carriers, Web
hosting companies and ISPs, will use NetObjects Matrix to offer essential online
services to small businesses,  enhancing  customer  relationships  while driving
subscription-based revenue through their own trusted brands.


                                       1
<PAGE>

The mass  distribution of NetObjects  Fusion through service providers will also
create a new market for the  essential  online  services  offered in  NetObjects
Matrix Services.

Small Business Market Opportunity

There are currently over 25 million small firms in the U.S., consisting of small
businesses with fewer than 20 employees and home-based business. We believe this
represents a significant  opportunity for  NetObjects.  According to the October
2000 IDC report the amount of spending by small  businesses  to  establish a Web
presence is anticipated to increase at 45 percent  annually,  from $19.6 billion
in 1999 to $85.4 billion by 2003.

We believe the majority of small businesses have not yet strategically  embraced
the  Internet.  Those that have a Web presence  often need to enhance  their Web
sites with new functionality such as e-commerce or e-applications,  or otherwise
improve  their  Web  site   features  and   promotion.   Businesses   with  more
sophisticated  Web site  requirements,  but without the  financial  resources to
support a Web development team, require an easy-to-use, capability-rich and open
solution. And for those small businesses entering the online world for the first
time,  ease of use in creating a Web site is even more critical.  While in-house
developers or third-party  service  providers can address  technical  design and
programming  requirements,  the cost is often  prohibitive.  As use of  Internet
applications  continues to grow, we believe small firms need  solutions that are
affordable, easy to implement and manage, and that easily integrate,  customize,
and scale to meet their needs.

Small Business Customers

Most small business  customers do not have a Web site. The novice small business
customer  requires  a  simple,  intuitive  and  step-by-step  approach  to  site
building.  The more  technically  savvy  small  business  customer  has  greater
technical   expertise  and  requires  more   sophisticated   functionality   and
customization features. NetObjects has developed two distinct site-

                                       2
<PAGE>

building tools to address these unique customer needs--NetObjects Matrix Builder
for the novice and NetObjects  Fusion for the technically  savvy.

Small  business  customers  that  have  already  built a Web site  using  either
NetObjects  Fusion  or other  Web  authoring  products  have  already  taken the
critical  first  step  in  achieving  an  online  presence,  but  still  require
additional  services  to  promote  that  presence,  attract  and  interact  with
visitors, monitor performance, and engage in online commerce.  NetObjects Matrix
Services  will be offered to these  small  businesses  to help them build a more
effective and comprehensive Web strategy.

The  market  for  online  Web-based  business  services  is  new  and  extremely
competitive.  We cannot be assured of generating a significant amount of revenue
or earning a profit from the sale or license of these services.

NetObjects Strategy

As usage of the Internet by businesses and related  markets for our products and
services have evolved,  we have decided to narrow our focus in order to become a
leading provider of essential online services for small businesses  worldwide by
partnering  with service  providers who can provide mass  distribution  to their
small  business  customers.  Many of the key  elements of our  current  strategy
remain the same, however. To date we have made significant  progress in building
and partnering to create best-of-class Web site builders and online services for
service providers and their subscribers.

Technological Leadership for Building Essential Online Services

In October  2000,  we  announced a new platform of online  services,  NetObjects
Matrix,  designed  exclusively  for  service  providers  to offer to their small
business  customers.  The  NetObjects  Matrix  Platform  provides the  framework
through which our partners can quickly and seamlessly  deliver NetObjects Matrix
Builder and NetObjects  Matrix  Services to their small business  customers over
the Internet.  Using NetObjects  Matrix,  service providers will have the unique
ability  to  offer  essential  online  services  to  their  customers,   driving
subscription-based revenue through their own trusted brands.

Brand recognition and Broad Customer Base

As a pioneer of Web site building technologies, and as the recipient of numerous
industry awards, we believe that we have established a premier Internet brand in
the  market for Web site  building  products  and  services.

NetObjects Fusion will continue to play a significant role in our strategy, even
as we transition from a desktop software company to an online services provider.
The latest version of NetObjects  Fusion,  version 5.0,  features an Online View
from which small  businesses  can instantly  access the full suite of NetObjects
Matrix  Services to enhance the commerce,  connectivity,  and community of their
sites.

Strageic Relationships

Our strong brand recognition is a significant asset for developing relationships
with  service  providers.  We have  made  significant  progress  in this area as
evidenced by the  announcement of distribution  agreements with hardware vendors
Dell and IBM, with ISPs and  telecommunication  providers EarthLink and Deutsche
Telekom/T-Online, and with hosting company 1&1 Internet AG.

Focusing on the Small Business Market

NetObjects  believes  that the ubiquity of Web browsers and the evolution of ASP
technology  to enable the online  delivery of technology  solutions  provide key
benefits to small businesses.  These benefits include ease of use,  installation
and upgradeability, potential revenues from e-commerce, convenience, and reduced
costs--lower monthly subscription fees versus large, up-front payments.

NetObjects also believes that small businesses will look to a single supplier to
provide an integrated  suite of applications  and services they need rather than
shopping for individual services from multiple vendors. We anticipate that small
businesses will purchase these services from their current service  providers --
companies  with whom they  already do  business  and who they trust to help them
achieve online success.

                                       3
<PAGE>

Products and Services

NetObjects Fusion

NetObjects Fusion is an intuitive Web site building tool offering ease of use as
well as sophisticated  functionality to meet the demands of the more technically
savvy small business customer. The latest version,  NetObjects Fusion 5.0 offers
drag  and  drop  productivity,  as  well  as the  ability  to  instantly  access
NetObjects  Matrix  Services,  a suite of  essential  online  services.  Earlier
versions of  NetObjects  Fusion are  available in nine  languages in addition to
English, including German, French, Spanish, Chinese, and Japanese.

NetObects Collage

To  successfully  execute on the next  generation of enterprise Web  strategies,
today's corporate  enterprises  require a solid foundation that can enable a Web
production cycle which controls the dynamics involved with creating and managing
the growing  complexity of Web ever expanding  applications.  This platform must
enable  enterprise-wide   collaboration  and  content  contribution,   scaleable
management of both static and dynamic content,  existing enterprise  application
integration, and dynamic application services. NetObjects Collage is designed to
meet all these  requirements.  In December  2000,  we entered  into an agreement
relating to the sale of our Enterprise  division and this product  family.  See,
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Recent Developments".

NetObjects Matrix Platform

The  NetObjects  Matrix  Platform  provides the framework  through which service
providers  can quickly and  seamlessly  deliver  NetObjects  Matrix  Builder and
NetObjects  Matrix Services to their small business  customers.  It is the first
platform  combining  a  best-of-class  online Web site  builder  with a suite of
integrated add-on business services.  It provides true integration  working with
the service provider's business model and technical  environment--front-end  and
back. The NetObjects  Matrix Platform is highly scalable and reliable,  and uses
XML and server-side Java to ensure openness and interoperability.

The platform also supports multiple  publishing  standards such as HTML, XML and
WML,  allowing  service  providers the opportunity to support  multiple  devices
including PDAs and digital cellular phones.  Service providers can customize the
NetObjects  Matrix  Platform to offer unique  combinations of online services to
better  serve  the  specific  needs  of  their  small  business  customers.  The
NetObjects Matrix Platform can seamlessly  integrate with the service provider's
network and can be installed in their hosting data centers, or run transparently
as a remotely hosted application.

NetObjects Matrix Builder

NetObjects  Matrix  Builder is an online Web site building tool that gives small
businesses online access to the functionality they need to plan, design,  build,
and maintain  their own  interactive,  revenue-producing  Web sites.  NetObjects
Matrix  Builder  is a new  generation  of  online  builder,  providing  a unique
preview-click-edit  approach  to  building  a  Web  site.  With  the  help  of a
QuickStart  Wizard  that  walks  users  step-by-step  through  the Web  building
process,  and a  range  of  preformatted  templates  and  design  styles,  small
businesses can create professional looking, fully functional business Web sites.

NetObjects Matrix Services

NetObjects Matrix Services is a suite of essential online services to help small
companies  grow  and  manage  their  businesses.  These  services  include  list
management,  forms  processing,  tracking,  and  search and site  promotion.  In
addition, there is an intuitive dashboard to manage all of these services.

NetObjects  Matrix Services are remotely  hosted,  thus eliminating the need for
client-side software which generally requires dedicated IT resources to install,
integrate,  maintain,  and upgrade.  The remote hosting model thus saves service
providers both time and money.

                                       4
<PAGE>

NetObjects Matrix Services currently offered include:

o    SiteMiner, allowing small business customers to add search functionality to
     their sites.

o    BannerExchange,  enabling small  business Web sites to generate  additional
     traffic to their sites by participating in banner  exchanges.  This service
     also enables  NetObjects  and its partners to utilize  member Web sites for
     advertising purposes.

o    Ezpolls,  helping  small  businesses  better  understand  what their online
     customers want by adding polls to the Web site.

o    GuestBook and Message  Boards,  providing  small  business Web sites with a
     fully functional guest book and forms processor that encourages visitors to
     speak up about their needs as well as capture important contact information
     on prospective customers.

o    SuperStats,  the loading  tracking  service in the market,  analyzing  site
     traffic and profiling visitors.

o    Hit Counter,  enabling small  businesses to track the number of visitors to
     their Web sites on a daily basis.

NetObjects Global Services

NetObjects  Global  Services is a complete range of services  designed to ensure
seamless and successful  implementation of the NetObjects Matrix Platform by our
service providers  customers.  NetObjects  Global Services provide  integration,
customization,  installation,  configuration, training, and ongoing support. The
NetObjects  Global Services team works with service providers on everything from
the initial project scope to ongoing training and network support to ensure that
both the business and technical objectives of their environment are met.

Strategic Relationships

We have  established a number of  significant  ongoing  strategic  relationships
which include:

Cisco Systems, the worldwide leader in networking for the Internet,  created the
Cisco  Resource  Network to bring  independent  software and  hardware  vendors,
service providers,  value added resellers,  and systems integrators  together to
provide  information,  tools  and  resources  to help  small  and  medium  sized
businesses  fully  participate  in the  Internet  economy.  Cisco  has  included
NetObjects Fusion in the Cisco Resource Network.

Under  an  agreement  with  Dell,  a  world  leader  in  Internet  commerce  and
infrastructure,  Dell  is  preloading  NetObjects  Fusion  software  and  online
services on Dell PCs. Easily  accessible from the NetObjects  Fusion logo on the
desktop,  the  customized  Dell Host Edition of NetObjects  Fusion is integrated
with  DellHost,  making it easier  and more  affordable  for Dell  customers  to
conduct business online.

EarthLink,  a leading  business  solution  company offering a variety of hosting
options,  has chosen  NetObjects  to be one of its  Premiere  Partners,  thereby
making NetObjects' products and services available to all EarthLink subscribers.
The NetObjects  logo appears on  EarthLink's  Biz Resource  Center,  designed to
provide  a  one-stop  destination  for  business  information  and  services  to
EarthLink's small business customers.

IBM leads in the creation,  development,  and manufacture of the industry's most
advanced information technologies. NetObjects Fusion is bundled with several IBM
product  lines,  including  ThinkPad,  Aptiva,  and  Intellistation,  to provide
customers with an easy-to-learn, easy-to-use Web site building solution.

1&1 Internet AG, one of the largest ISPs in Germany, offers value-added services
for the  Internet.  Their  products  enable  customers  to use the Internet in a
meaningful and effective manner for all their business and personal success. 1&1
bundles a German  localized  version of NetObjects  Fusion to every customer who
signs up for hosting.

                                       5
<PAGE>

Lotus, a subsidiary of IBM Corporation,  bundles award-winning NetObjects Fusion
5.0 with DominoDesigner R5, the premier integrated  development  environment for
building secure  e-business  applications.  Lotus SmartSuite  customers can also
download a copy of NetObjects Fusion 5.0.

MyComputer.com,  a provider of online Web site  services  has  integrated  thus,
allowing some of its services  including all of the services  indentified  under
NetObjects,   Matrix  Services,  above,  directly  into  NetObjects  Matrix  and
NetObjects  Fusion 5.0.  allowing small business  customers to both create a Web
site and incorporate these Web site services seamlessly.

Register.com,  one of the leading  domain name  registrars on the Internet,  has
integrated its services into NetObjects Fusion 5.0.  Allowing  customers to both
create a Web site and easily register domain names with one powerful solution.

Sales, Marketing, and Distribution

We sell our products and services through targeted business  development efforts
to service providers as well as through traditional  distribution channels, both
indirect  and online.  To assist our  partners  in selling  these  products  and
services  to their  customers,  we have  undertaken  a variety  of  co-marketing
activities.  As of September 30, 2000, 73 of our employees, or approximately 42%
of our work force, were engaged in sales and marketing activities.

Distribution Channels

Our  indirect   distribution   channels  include   domestic  and   international
distributors,  retail vendors,  value-added  resellers,  OEM resellers and other
technology  companies with whom we have strategic  relationships.  Our principal
OEM accounts are Dell,  EarthLink,  IBM, Lotus, Novell, and 1&1 Internet AG. For
Fiscal 2000, these OEM accounts have represented a major portion of our revenues
from  license  fees.  Additionally,   we  have  approximately  20  non-exclusive
distributors  serving hundreds of resellers worldwide including Ingram Micro and
Digital River in North America; Internet 2000, Softline, and Unipalm in Europe.

Our   online   distribution   channel   includes   a  store  on  our  Web  site,
NetObjects.com, which allows users to download and purchase our products as well
as numerous third-party add-ons. In addition, several third-party e-commerce and
distribution  sites,  including  buy.com  and  beyond.com,   make  our  products
available for sale online.  The online  distribution  channel  continues to be a
convenient and easily  accessible  channel for our customers,  providing  global
accessibility, 24-hours a day.

Marketing Activities

Since our inception,  we have invested in a broad range of marketing  activities
to generate demand,  gain corporate brand identity,  establish the site building
product  category and educate the market about our products and services.  These
activities have included  advertising,  including both print and online,  direct
marketing,  including  direct mail,  newsletters and e-mail,  public  relations,
seminars for  potential  customers,  participation  in trade  shows,  as well as
conferences and Web site promotion.  With a shift in our business  strategy to a
partner-based distribution model, our ongoing marketing efforts will be aimed at
directly informing our partners of the capabilities and benefits of our products
and  services,  so that  they  can in turn  market  more  effectively  to  their
customers. Currently we have co-marketing agreements with

                                       6
<PAGE>

ADP,  Cisco  Systems,  XO (formerly  Concentric  Network),  Dell,  Deluxe Forms,
EarthLink, IBM, Lotus, 1&1 Internet AG, Sir Speedy, and Vobis AG.

Competition

The market for software and services for the Internet is constantly evolving and
intensely competitive. We expect competition to intensify in the future. Many of
our current and  potential  competitors  have greater  financial,  technical and
marketing  resources  than we do. We compete for small  business  customers with
software makers like Adobe Systems,  Inc., Macromedia,  Inc., and Microsoft.  In
the online hosting and services market,  we compete with providers like Trellix,
Netopia,  Covia,  Orbitcommerce,  Kinzan,  and many other  companies  that offer
online subscription services .

While we believe that NetObjects  Fusion and NetObjects  Matrix contain features
that  significantly  differentiate  them  from  our  competition,  there  is  no
guarantee  that  we will be able to  successfully  compete  with  some of  these
companies who have significant financial resources beyond ours.

Competitive factors in our market segments include:

o    Features for creating, editing, and developing Web sites;

o    Ease of use and interactive user features;

o    The ability to integrate  online  services and site  builders  with partner
     service offerings;

o    Quality and reliability;

o    Pricing;

o    Scalability and cost per user;

o    Compatibility with the user's existing computer systems; and

o    The manner in which the software is distributed with other products.

To expand our partners' user bases and further enhance their users' experiences,
we must  continue to innovate  and improve the  performance  of our products and
services.  We  anticipate  that  consolidation  will  continue  in the Web  site
building products and services industry and related  industries such as computer
software,  media  and  communications.  Consequently,  our  competitors  may  be
acquired  by,  receive   investments   from  or  enter  into  other   commercial
relationships with larger,  well-established and well-financed companies.  There
can be no assurance  that we can  establish or sustain a leadership  position in
our market segments.

New technologies and the enhancement of existing  technologies  will also likely
increase our competitive  pressures.  Competing technologies or the emergence of
new industry standards could adversely affect our competitive position or render
our products or technologies  noncompetitive or obsolete.  There is no assurance
that we will  compete  effectively  with current or future  competitors  or that
competitive  pressures  will not harm our  business  and cause our  revenues and
stock price to fall.

Technology and Development

We devote  substantial  resources to the development of innovative  products and
services.  During  the  fiscal  year  ended  September  30,  2000,  we  invested
approximately 38% of our total revenues on research and development  activities.
We believe that we have  effectively  leveraged our  understanding  of the small
business  market,  our  technology  opportunities  and our  staff  and  software
development  processes to build robust,  open solutions.  We intend to use these
core strengths to introduce innovative new online services, products and product
enhancements for building,  deploying and maintaining  small business Web sites.
We expect to significantly reduce our research and development expenditures from
their current level, but intend to continue  devoting  substantial  resources to
research and development.

To meet and exceed partner and end-user  expectations,  our online  services and
products must be highly reliable and scalable.  To achieve this goal, NetObjects
has employed leading technologies such as XML, server-side Java and Linux, along
with proven solutions from companies such as Oracle,  Sun Microsystems,  and Red
Hat.

                                       7
<PAGE>

In  addition  to  our  products,   product  enhancements  and  core  proprietary
technology,  we  have a  highly  skilled  engineering  workforce  that  includes
seasoned  software  industry  veterans.  As of  September  30,  2000,  we had 69
employees  engaged in research and development  activities.  If we are unable to
retain the required  number of skilled  engineers,  our business will be harmed,
our revenues could decline and our stock price may fall.

Intellectual Property

Our success depends in part on our ability to protect our  proprietary  software
and other  intellectual  property.  To protect our proprietary  rights,  we rely
generally on patent, copyright, trademark and trade secret laws, confidentiality
agreements   with  employees  and  third  parties,   license   agreements   with
consultants,  vendors  and  customers,  and  "shrink-wrap"  license  agreements.
Despite these protections,  a third party could, without authorization,  copy or
otherwise obtain and use our products, or develop similar products. There can be
no  assurance  that our  agreements  will  not be  breached,  that we will  have
adequate  remedies for any breach or that our trade  secrets will not  otherwise
become known or independently developed by competitors.

We currently have several pending patents  relating to our product  architecture
and  technology  and have licensed two utility  patents from Rae  Technology,  a
predecessor  to our business that is controlled  and majority  owned by our CEO.
There can be no assurance that any pending or future patent  application will be
granted, that any existing or future patent will not be challenged,  invalidated
or  circumvented  or that the rights granted under any patent that has issued or
may issue will provide  competitive  advantages to us. If a blocking  patent has
issued or  issues in the  future,  we would  need to obtain a license  or design
around the patent.  Except for patents  licensed from Rae  Technology,  which we
have  rights  to  acquire,  there can be no  assurance  that we would be able to
obtain a license on acceptable terms, if at all, or to design around the patent.

We pursue the  registration  of some of our  trademarks and service marks in the
United States and in other countries,  although we have not secured registration
of all of our marks.  Many of our current  and  potential  competitors  dedicate
substantially  greater  resources to protection and  enforcement of intellectual
property  rights.  We are also aware of other  companies  that use  "Fusion"  or
"Matrix"  in their  marks  alone or in  combination  with other  words,  such as
Allaire's  ColdFusion,  and we do not expect to be able to prevent  third  party
uses of the word "Fusion" or "Matrix" for competing goods and services.  We have
agreed with Allaire that  neither  party will use the word  "Fusion" to describe
products in the absence of appropriate brand identification, such as "NetObjects
Fusion."

The laws of some foreign countries do not protect our proprietary  rights to the
same  extent  as do the  laws  of  the  United  States,  and  effective  patent,
copyright,  trademark and trade secret  protection may not be available in these
jurisdictions.  We license some of our proprietary rights to third parties,  and
there can be no assurance  that these  licensees  will abide by  compliance  and
quality control guidelines with respect to our proprietary rights.

Employees

As of  September  30,  2000,  we had 176  full-time  employees  and 8  part-time
employees.  More  than 40 of  these  employees  were  working  full-time  in our
Enterprise Division as of September 30, 2000. We signed an agreement relating to
the sale of this  division in December  2000 and, if the sale occurs,  would not
retain most of the employees of the Enterprise  Division.  None of our employees
are subject to a collective bargaining agreement.  We believe that our relations
with our employees are good. However,  our future success will depend in part on
our  continued  ability  to  attract,  integrate,  retain  and  motivate  highly
qualified sales, technical,  professional services and managerial personnel, and
upon the continued  service of our current  personnel.  To  supplement  our work
force, we also use independent contractors. None of our personnel is bound by an
employment  agreement  that  prevents  the person  from  terminating  his or her
relationship  with the  Company at any time,  for any  reason.  Competition  for
qualified  personnel is intense,  especially  in the San  Francisco Bay Area. We
cannot  guarantee  that  we  will  be  successful  in  attracting,  integrating,
retaining,  and motivating a sufficient number of qualified personnel to conduct
our business in the future.

                                       8
<PAGE>

RISK FACTORS

In addition to other  information  in this Form 10-K, the following risk factors
should be carefully considered in evaluating NetObjects and its business because
such factors  currently may have a significant  impact on NetObjects'  business,
operating results and financial  condition.  As a result of the risk factors set
forth below and  elsewhere  in this Form 10-K,  and the risks  discussed  in our
other Securities and Exchange  Commission  filings,  actual results could differ
materially from those projected in any forward-looking statements.



Our  ability  to  continue  as a  going  concern  is  dependent  on our  raising
additional funds.

         Without  raising new proceeds  from the sale of assets,  debt or equity
financing,  we will not have enough cash to remain in  business.  Our  auditors,
KPMG LLP, in their  independent  auditors' report,  have expressed  "substantial
doubt" as to our ability to continue as a going concern.  This doubt is based on
our  significant  operating  losses since we were formed,  and our  insufficient
funds as of September  30, 2000 to finance our  operations  through  fiscal year
2001.  This doubt is also  described in note 3 of the notes to our  consolidated
financial statements.

We have a history of  substantial  losses and expect  substantial  losses in the
future.

         We were incorporated in November 1995 and first recognized  revenues in
October  1996.  As of  September  30,  2000,  we had an  accumulated  deficit of
approximately  $107  million.  We expect to sustain  significant  losses for the
foreseeable future,  which could harm our business and decrease the market price
of our stock.

         To achieve  and sustain  profitability,  we must,  among other  things,
increase substantially our revenues from our two principal products,  NetObjects
Fusion and Matrix, and substantially increase our revenues from online services,
which have been insignificant to date.

Our revenues are declining and will be substantially lower in fiscal year 2001
as we change our business model.

         We are changing our business  model from one in which we have  received
large up front license fees for the  distribution  of large numbers of copies of
NetObjects  Fusion to one in which we intend to earn most of our  revenues  from
distribution  arrangements  with  service  providers  that  will pay us  reduced
license fees and a percentage of their subscription revenues received from small
business  subscribers.   There  can  be  no  assurance  that  we  will  generate
substantial  revenues under our new business model and we expect our revenues to
decline  substantially  in the current fiscal year in comparison to our revenues
in preceding fiscal years.

Our online services are new and have not received a broad customer acceptance.

         Since inception,  we have invested  resources to create and enhance our
online  services,  which we believe support and add to market  acceptance of our
products.  With the  acquisition  of  Sitematic  Corporation,  providing  online
services to enable small businesses to conduct e-commerce has become an integral
part  of our  business  growth  strategy.  Including  the  period  during  which
Sitematic operated these services they have been offered to customers  generally
for less  than 12  months.  Together  with our  distribution  partners,  we must
attract a substantial  number of small business  subscribers  for these services
for our online business to succeed.  We may fail to attract these new customers,
which would hurt our business and could cause our stock price to fall.

We may not adequately  adjust our operating  expense to reflect the  anticipated
reduction in revenue.

         We must  reduce our  operating  expenses  relative  to the  anticipated
revenue reduction but anticipate that these expenses will  substantially  exceed
our revenues for at least fiscal year 2001. As a result, we expect our operating
expenses, as well as planned capital  expenditures,  to continue to constitute a
material use of our cash resources.  In addition,  we may require cash resources
to fund acquisitions or investments in complementary businesses, technologies or
product lines.

We may not be able to raise additional capital to fund our future operations.

         We believe that our current cash and cash equivalents,  are adequate to
finance our current  level of operations  only for a short period.  We intend to
raise  additional  capital to fund  future  operations  through  the sale of our
Enterprise Division, and, if possible, the sale of additional equity securities,
new  borrowings,  some  combination  of debt  and  equity,  or  other  available
transactions.  We have not decided  upon the  timing,  form or amount of capital
that we will seek and have no assurances of commitments  that we will succeed in
raising  additional capital by any means. If we fail to raise additional capital
to fund future  operations  our  business,  financial  condition  and results of
operations will be materially and adversely affected.

Our  relationship  with IBM has  changed  substantially  over  time.

         While IBM owns a  substantial  percentage  of our common  stock and has
three  representatives  on our board of directors,  it is under no obligation to
continue any business  relationships  with us. IBM is allowed to compete with us
or act in a manner that is disadvantageous to us.

Although we have contracts with IBM to bundle our products with their offerings,
we have no commitments for future revenues from IBM.

         Revenues  from  IBM  have  been a  substantial  portion  of  our  total
revenues,  representing approximately 19%, 29% and 36% of our total revenues for
the years ended  September  30, 2000,  1999 and 1998,  respectively.  Lotus also
currently  markets,  bundles  and sells our  products  and has  created  foreign
language,  or  "localized,"  versions  of our  software,  for  which IBM pays us
reduced  royalties on products that it sells outside the U.S. Lotus'  obligation
to create  localized  versions of our software  expired on December 31, 1999. We
may need to incur substantial additional expense to obtain localized versions of
new  products or product  upgrades  from Lotus or other  vendors if necessary to
satisfy the requirements of key customers.

         We have a number of license and  reseller  agreements  or  arrangements
with  IBM,  many of  which  are  subject  to the  terms of our  10-year  license
agreement that expires in April 2007. We have no future revenue commitments from
IBM or Lotus.

We have business  conflicts  with IBM. IBM has chosen in the past and is free in
the  future to promote  and  bundle  competitors'  products  over our  products.

         Although  we  have  been   dependent  on  IBM,  and  IBM  has  provided
substantial support to us, IBM makes independent  business and product decisions
that present conflicts with our business objectives.

IBM is free to sell its interest in us.

As of  September  30, 2000 IBM owns  approximately  48% of our common  stock and
holds warrants that if exercised,  would increase its ownership to approximately
49% of our outstanding voting securities. IBM has substantial influence over our
direction  and  management,  and may be able to  prevent  or cause a  change  in
control of us and could take other  actions  that might be  favorable to IBM and
potentially harmful to us.

                                       9
<PAGE>

IBM can act in ways that may be  disadvantageous  to us, such as competing  with
us,   investing   in  our   competitors   and  taking   advantage  of  corporate
opportunities.

         IBM is contractually or otherwise free to act in ways that may harm our
business.   Our  restated  certificate  of  incorporation   contains  provisions
expressly acknowledging that:

o    IBM retains  "freedom of action" to conduct its  business  and pursue other
     business opportunities, even in competition with us;

o    IBM has no obligation to refrain from investing in our  competitors,  doing
     business with our customers or hiring away our key personnel;

o    no director  appointed  by IBM is  prohibited  from taking  actions or from
     voting on any action because of any actual or apparent conflict of interest
     between that director and us; and

o    These provisions  materially limit the liability of IBM and its affiliates,
     including IBM's  representatives  on our board of directors and Lotus, from
     conduct and actions taken by IBM or its affiliates,  even if the conduct or
     actions are beneficial to IBM and harmful to us.

         Furthermore:

o    IBM is eligible to sell its stock  subject to applicable  securities  laws,
     contractual   arrangements  with  the  underwriters  and  the  terms  of  a
     registration  rights agreement.  IBM may transfer some or all of its stock,
     including to our competitors. Such a transfer could result in a transfer of
     IBM's  interest in us,  which could cause our  revenues to decrease and our
     stock price to fall; and

o    IBM is under no obligation to inform us of any corporate opportunity and is
     free to avail itself of any opportunity or to transfer the opportunity to a
     third party.

         Any of IBM's rights could give rise to conflicts of  interests,  and we
cannot be certain that any conflicts would be resolved in our favor.  Any of the
risks arising from our  relationship  with IBM could harm our business and cause
our stock price to fall.

         IBM  could  obtain  and  use  our  source  code  if we  default  on our
obligations under license  agreements with IBM. Although our license  agreements
with IBM contain  restrictions  on IBM's use and  transfer of our  software  and
intellectual  property,  these  restrictions are subject to exceptions.  Under a
software  license  agreement  with IBM,  we have  placed our key source  code in
escrow for IBM's  benefit.  IBM may obtain access to the source code upon events
of default related to the Company's failure to provide required  maintenance and
support or its bankruptcy or similar event of financial reorganization.  IBM may
use the source code that it obtains to create  derivative  works,  which it will
own subject to the Company's rights in the underlying software.

         Our licensing  arrangements  with IBM are not exclusive and IBM is free
to enter into similar  arrangements  with our competitors.  All of our licensing
arrangements  with IBM are  non-exclusive.  IBM has the right to cease promoting
and  distributing  our software at any time. IBM may license its name,  logo and
technology to, or invest in, other Web site building companies,  and it may more
actively promote the services of our competitors.

We have many established  competitors,  and may be unable to compete effectively
against them.

The market for Web site  building  software  and  services  for the Internet and
corporate  intranets  is  relatively  new,  constantly  evolving  and  intensely
competitive.  We expect  competition to intensify in the future.  The market for
subscription  based  online Web site  services for small  businesses  is new and
extremely competitive and may not develop as we anticipate or soon enough for us
to  succeed  in  implementing  this  business  model.  Many of our  current  and
potential competitors have longer operating histories,  greater name recognition
and significantly greater financial,  technical and marketing resources,  and we
may be unable to compete effectively against them. We compete for small business
customers  with  Web  content  software  makers  like  Adobe,  Macromedia,   and
Microsoft;  in the online Web hosting and services  with  providers  like Verio,
Bigstep, Icat, and Yahoo store. For our Enterprise customers,  we compete in the
Internet  application  development  and services  market with  companies such as
Interwoven,  and Vignette.  Microsoft's  FrontPage, a Web site building software
product,  has a dominant  market  share.  Microsoft  bundles  FrontPage  2000 in
several  versions of the Office 2000 product suite that dominates the market for
desktop business application software.

                                       10
<PAGE>

We may not be able to accurately forecast revenue and adjust spending.

         We have a very  limited  operating  history and limited  experience  in
forecasting  our  revenues.  Changing our  business  increases  uncertainty  and
reduces our ability to forcast revenues accurately. Our expense levels are based
in part on our  expectations  of future  revenues,  and to a large  extent those
expenses are fixed,  particularly in the  short-term.  We cannot be certain that
our  revenue  expectations  will be  accurate  or that we will be able to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall.

Our operating results will probably fluctuate.

         We believe that  period-to-period  comparisons of our financial results
are not  necessarily  meaningful,  and  you  should  not  rely  upon  them as an
indication of our future performance.  Going forward,  our revenues from IBM, if
any, are likely to become more variable.  The promptness  with which sales data,
used for recognizing  product royalties,  are reported to us from third parties,
including IBM, may cause annual results to be more volatile.

We allow product  returns and provide price  protection to some  purchasers  and
resellers  of our  products  and  our  allowances  for  product  returns  may be
inadequate.

         We have  stock-balancing  programs for our software products that under
specified  circumstances  allow for the return of software by  resellers.  These
programs  also  provide for price  protection  for our  software for some of our
direct and indirect channel resellers that, under specified conditions,  entitle
the  reseller to a credit if we reduce our price to similar  channel  resellers.
There can be no  assurance  that  actual  returns or price  protection  will not
exceed  our  estimates,   and  our  estimation   policy  may  cause  significant
fluctuations.

Most of our revenues  have been derived  from sales of a single  product,  and a
decline in demand or the sale price of that product  would harm our business and
cause our stock price to fall.

         About 68% of our  revenues  from  software  license fees in fiscal 2000
were derived from versions of one of our  products,  NetObjects  Fusion,  and we
expect that this single product will continue to account for the majority of our
total  revenues  in the  near-term.  To remain  competitive,  software  products
typically  require  frequent  updates  that add new  features.  There  can be no
assurance  that we will succeed in creating and selling  updated or new versions
of NetObjects  Fusion.  A decline in demand for, or in the average selling price
of, NetObjects Fusion, whether as a result of new product introductions or price
competition from competitors,  technological change or otherwise, would hurt our
business or cause our stock price to fall.


                                       11
<PAGE>


We may not be able to expand our distribution channels or sales force.

         We need to maintain our  third-party  distribution  channel because our
direct sales to third  parties  would be  insufficient  to support our operating
base. While we derive some of our revenues from selling our products directly to
third  parties,  most of our  revenues are derived from the sale of our products
through third-party  distributors and resellers.  There can be no assurance that
third  parties will be willing or able to carry our  products in the future.  If
third parties were to reduce or cease carrying our products, our direct sales to
third parties would be insufficient to support our operating expense base.

We need to maintain and  establish new bundling  arrangements  because we may be
less successful at selling our products on a stand-alone  basis.

         We  believe  that  products  that are not sold in a "suite"  containing
software products or components that perform different functions are less likely
to be  commercially  successful.  For  example,  NetObjects  Fusion 5.0 includes
software   products  or  components  from  different  vendors  such  as  Allaire
Corporation,  IBM, iCat, Lotus and NetStudio. IBM also bundles our products with
some of its software  products,  such as the bundling of NetObjects  Fusion with
WebSphere Studio and NetObjects  Fusion with Lotus Designer  Studio.  NetObjects
Fusion is also bundled with Novell's  NetWare for Small  Business.  We cannot be
assured of  maintaining  or obtaining  suitable  product or  component  bundling
arrangements with third parties. Failure to maintain and expand our distribution
channels or conclude suitable software product bundling  arrangements could hurt
our business, cause our revenues to decrease and our stock price to fall.

Our products may contain defects that could subject us to liability in excess of
insurance limitations.

         Our software products are complex and may contain  undetected errors or
result in system failures.  Despite extensive testing, errors could occur in any
of our current or future  product  offerings  after  commencement  of commercial
shipments.  Any errors  could  result in loss of or delay in  revenues,  loss of
market share,  failure to achieve  market  acceptance,  diversion of development
resources,  and injury to our reputation or damage to our efforts to build brand
awareness.  We cannot be certain that the  contractual  limitations of liability
will  be  enforceable,  or that  our  insurance  coverage  will  continue  to be
available  on  reasonable  terms or will be available in amounts to cover one or
more large  claims,  or that the insurer  will not  disclaim  coverage as to any
future claim.  The successful  assertion of one or more large claims that exceed
available  insurance  coverage or changes in our insurance  policies,  including
premium  increases  or  the  imposition  of  large  deductible  or  co-insurance
requirements, could cause our revenues to decrease and our stock price to fall.

If we fail to respond adequately to rapid  technological  changes,  our existing
products and services will become obsolete or unmarketable.

         The market for our  products is marked by rapid  technological  change,
which leads to frequent new product  introductions and  enhancements,  uncertain
product  life  cycles,   changes  in  customer  demands  and  evolving  industry
standards. New Web site building products and services based on new technologies
or new  industry  standards  could  render our  existing  products  obsolete and
unmarketable.  We believe that to succeed,  we must enhance our current products
and  develop  new  products  on a timely  basis to keep pace with  technological
developments and to satisfy the increasingly  sophisticated  requirements of our
customers.

                                       12
<PAGE>

Our product and software  development efforts are inherently difficult to manage
and keep on schedule, so development delays may increase our costs.

         On occasion,  we have experienced  development  delays and related cost
overruns, which to date have not materially affected our business, and we cannot
be certain that we will not encounter  these problems in the future.  Any delays
in developing and releasing enhanced or new products could cause our revenues to
decrease.  In addition,  we cannot be certain that we will successfully  develop
and market new products or product  enhancements  that respond to  technological
change,  evolving  industry  standards  or  customer  requirements,  or that any
product  innovations  will  achieve the market  penetration  or price  stability
necessary for profitability.

The loss of our key personnel,  or failure to hire additional  personnel,  could
harm our business  because we would lose  experienced  personnel and new skilled
personnel are in short supply and command high salaries.

         We depend on the continued service of our key personnel,  and we expect
that we will need to hire additional personnel in all areas. The competition for
personnel throughout our industry is intense,  particularly in the San Francisco
Bay Area, where our headquarters are located.  We have experienced  difficulties
in attracting new personnel, and all of our personnel, including our management,
may terminate  their  employment at any time for any reason.  Currently,  we are
dependent  upon the  services of Samir Arora,  our  President,  Chief  Executive
Officer,  Chairman of the Board and one of our founders. The loss of Mr. Arora's
services  would  materially  impede the  operation and growth of our business at
this  time.  We do  not  maintain  key  person  life  insurance  for  any of our
personnel.  Furthermore,  our  failure to attract  new  personnel  or retain and
motivate our current personnel could hurt our business.

A third  party  could be  prevented  from  acquiring  your  shares of stock at a
premium to the market price because of our anti-takeover provisions.

         As of September 30, 2000 IBM owns  approximately 48% of our outstanding
stock and holds  warrants  that if  exercised,  would  increase its ownership to
approximately 49% of our outstanding voting securities.  That ownership interest
and provisions of our restated  certificate of  incorporation,  bylaws, a voting
agreement between us and IBM and Delaware law could make it more difficult for a
third  party to  acquire  us,  even if a change in control  would  result in the
purchase of your shares of common stock at a premium to the market price.

If we fail to  adequately  protect our  intellectual  property  rights or face a
claim of intellectual  property infringement by a third party, we could lose our
intellectual property rights or be liable for significant damages.

         Trademarks  and other  proprietary  rights are important to our success
and our  competitive  position.  We seek to  protect  our  trademarks  and other
proprietary   rights,   but  our   actions   may  be   inadequate   to   prevent
misappropriation  or  infringement  of  our  technology,  trademarks  and  other
proprietary  rights or to  prevent  others  from  claiming  violations  of their
trademarks  and other  proprietary  rights.  Although we have  obtained  federal
registration of the trademark  NetObjects  Fusion, we know that other businesses
use the word "Fusion" in their marks alone or in  combination  with other works.
We do not  believe  that we will be able to prevent  others  from using the word
"Fusion" for competing  goods and  services.  For example,  Allaire  markets its
application  development  and server  software  for Web  development,  including
applications   for  e-commerce,   under  the  federally   registered   trademark
"ColdFusion." Under an agreement with Allaire  Corporation,  we have agreed that
neither  company will  identify  its products and services  with the single word
"Fusion,"  unless  otherwise  agreed  as in the case of our  co-bundled  product
"Fusion2Fusion."  Business  customers may confuse our products and services with
similarly named brands,  which could dilute our brand names or limit our ability
to build  market  share.  To license  many of our  products,  we rely in part on
"shrink-wrap" and "clickwrap"  licenses that are not signed by the end user and,
therefore  may be  unenforceable  under the laws of  certain  jurisdictions.  In
addition,  we may license content from third parties. We could become subject to


                                       13
<PAGE>

infringement  actions  based upon these  third-party  licenses,  and we could be
required to obtain  licenses from other third  parties to continue  offering our
products.

         We  cannot  be  certain  that we will  be  able  to  avoid  significant
expenditures  to protect our  intellectual  property  rights,  to defend against
third-party  infringement  or other  claims or to  license  content  from  third
parties alleging that our products infringe their intellectual  property rights.
Incurring  significant  expenditures to protect our intellectual property rights
or to defend  against  claims or to license  content could decrease our revenues
and cause our stock price to fall.

         Since we are no longer a majority-owned subsidiary of IBM, we no longer
enjoy cross-licensing  protection that we received as an IBM subsidiary.  We may
face material  litigation risk associated with patent  infringement  claims that
IBM's patent  cross-licensees  could not assert  against us while we were an IBM
subsidiary.

Our international operations continue to expand and may not be successful.

         International sales represented approximately 38% of our total revenues
in the fiscal year ended  September  30, 2000.  We intend to expand the scope of
our  international  operations  and currently  have  subsidiaries  in the United
Kingdom  and  Germany.  Our  continued  growth and  profitability  will  require
continued expansion of our international operations, particularly in Europe.

         Our  international  operations  are,  and  any  expanded  international
operations  will be, subject to a variety of risks  associated  with  conducting
business  internationally  that could materially  adversely affect our business,
including the following:

o    difficulties in staffing and managing international operations;

o    lower gross margins than in the United States;

o    slower adoption of the Internet;

o    longer payment cycles;

o    fluctuations in currency exchange rates;

o    seasonal reductions in business activity during the summer months in Europe
     and other parts of the world;

o    recessionary environments in foreign economies; and

o    increases  in tariffs,  duties,  price  controls or other  restrictions  on
     foreign currencies or trade barriers imposed by foreign countries.

         Furthermore,  the laws of foreign  countries  may provide  little or no
protection of our intellectual property rights.

If  Internet  and  intranet  usage  does not  continue  to grow,  we will not be
successful.

         Sales  of our  products  and  services  depend  in  large  part  on the
emergence of the Internet as a viable  commercial  marketplace with a strong and
reliable  infrastructure  and on the  growth of  corporate  intranets.  Critical
issues  concerning  use of  the  Internet  and  intranets,  including  security,
reliability, cost, ease of use and quality of service, remain unresolved and may
inhibit the growth of, and the degree to which  business is conducted  over, the
Internet and  intranets.  Failure of the Internet and  intranets to develop into
viable  commercial  mediums  would harm our  business  and cause our revenues to
decrease and our stock price to fall.

Due to our small size, limited operations and the difficulty of hiring personnel
in  our  industry,   any  future   acquisitions  could  strain  our  managerial,
operational and financial resources.

         In the future we may make  acquisitions  of, or large  investments  in,
businesses that offer products,  services and technologies that we believe would
help us better provide  e-business Web site and intranet site building  software
and services to businesses. Any future acquisitions or investments would present
risks such as difficulty in combining the technology, operations or workforce of
the acquired  business with our own,  disruption of our ongoing  businesses  and
difficulty in realizing the anticipated  financial or strategic  benefits of the
transaction.


                                       14
<PAGE>


         To make  these  acquisitions  or large  investments  we might use cash,
common stock or a combination of cash and common stock.  If we use common stock,
these acquisitions could further dilute existing  stockholders.  Amortization of
goodwill or other intangible assets resulting from acquisitions,  as in the case
of our  acquisitions  of Sitematic and  Rocktide,  could  materially  impair our
operating  results  and  financial  condition.  Furthermore,  there  can  be  no
assurance  that we would be able to obtain  acquisition  financing,  or that any
acquisition, if consummated,  would be smoothly integrated into our business. If
we make  acquisitions  or large  investments  and are unable to  surmount  these
risks,  our business could be harmed,  our revenues could decrease and our stock
price could fall.

We  may  become   subject  to  burdensome   government   regulation   and  legal
uncertainties in areas including network security, encryption and privacy, among
others,  because we conduct  electronic  commerce  and provide  information  and
services over the Internet.

         We are not currently  subject to direct  regulation by any governmental
agency,  other than laws and  regulations  generally  applicable to  businesses,
although  specific U.S. export controls and import controls of other  countries,
including  controls  on the use of  encryption  technologies,  may  apply to our
products.  Due to the  increasing  popularity  and  use of the  Internet,  it is
possible  that a number of laws and  regulations  may be  adopted  in the United
States and abroad with particular  applicability to the Internet. It is possible
that  governments  will enact  legislation that may apply to us in areas such as
network  security,   encryption,  the  use  of  key  escrow,  data  and  privacy
protection,  electronic  authentication  or  "digital"  signatures,  illegal and
harmful content,  access charges and retransmission  activities.  Moreover,  the
applicability to the Internet of existing laws governing issues such as property
ownership,  content, taxation, defamation and personal privacy is uncertain. Any
new   legislation  or  regulation  or   governmental   enforcement  of  existing
regulations  may limit the growth of the  Internet,  increase  our cost of doing
business or increase our legal  exposure,  any of which could cause our revenues
to decrease and our stock price to fall.

A  governmental  body  could  impose  sales and  other  taxes on the sale of our
products,  license of our technology or provision of services,  which would harm
our financial condition.

         We currently do not collect  sales or similar taxes with respect to the
sale of products,  license of  technology or provision of services in states and
countries  other than  states in which we have  offices.  In October  1998,  the
Internet Tax Freedom Act, or ITFA, was signed into law. Among other things,  the
ITFA imposes a three-year  moratorium  on  discriminatory  taxes on  e-commerce.
Nonetheless,  foreign  countries,  or,  following  the  moratorium,  one or more
states,  may seek to impose sales or other tax  obligations  on  companies  that
engage in online commerce within their jurisdictions.  A successful assertion by
one or more states or any foreign  country that we should collect sales or other
taxes on the sale of products, license of technology or provision of services or
remit  payment  of  sales or other  taxes  for  prior  periods,  could  hurt our
business.

Our stock price might have wide fluctuations,  and Internet-related  stocks have
been particularly volatile.

         The market  price of our common  stock is likely to be highly  volatile
and could be  subject  to wide  fluctuations.  Recently,  the stock  market  has
experienced  significant price and volume  fluctuations and the market prices of
securities of technology  companies,  particularly  Internet-related  companies,
have been highly volatile. Market fluctuations, as well as general political and
economic  conditions,  such as  recession  or  interest  rate or  currency  rate
fluctuations, could adversely affect the market price of our common stock.

                                       15
<PAGE>

Item 2. Properties

         Our  executive  offices are  located in Redwood  City,  California.  We
currently maintain five primary work locations listed below.

Redwood City                                San Diego Office

301 Galveston Drive                         10350 Science Center Drive
Redwood City, Ca 94063                      San Diego, Ca 92121
Approximate Sq footage: 26,000              Approximate Sq footage: 8,000
Lease Ends: 11/2002                         Lease Ends: Nov 2000, two one-year
                                            options remain

Berkeley                                    Germany Office
2512 9th Street, Suite 3                    Schatzbogen 56
Berkeley, Ca 94710                          81829 Munich, Germany
Approximate Sq footage: 1,000               Approximate Sq footage: 6,000
Lease Ends: 02/2001                         Lease Ends: 04/2005

United Kingdom

St. Mary's Court
The Broadway, Old Amersham
Bucks, HP7 OUT, United Kingdom
Approximate Sq footage: 400
Lease Ends: 08/2000

Item 3. Legal Proceedings

         From time to time,  we are subject to legal  proceedings  and claims in
the ordinary  course of business,  including  claims of alleged  infringement of
third-party  trademarks and other intellectual  property rights by our licensees
and us. These claims,  even if not meritorious,  could result in the expenditure
of significant financial and managerial resources. We are not aware of any legal
proceedings  or claims  that we  believe  would harm our  business  or cause our
revenues or stock price to fall.

Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of  stockholders  during the fourth quarter of
the fiscal year covered by this report.

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

         NetObjects,  Inc.  common stock is quoted on the Nasdaq National Market
         under the symbol  "NETO".

         The following  table sets forth the range of high and low closing sales
prices for each period indicated.

 Quarter ending                         High                           Low

September 30, 2000                      9.313                         2.844
June 30, 2000                          18.680                         6.781
March 31, 2000                         43.500                        18.000
December 31, 1999                      19.000                         5.938
September 30, 1999                     10.438                         5.156
June 30, 1999                          13.000                         6.750

                                       16
<PAGE>

         The Company had approximately 250 shareholders of record as of November
30, 2000.  The Company has not declared or paid any cash dividends on its common
stock and presently  intends to retain its future earnings,  if any, to fund the
development  and growth of its  business  and,  therefore,  does not  anticipate
paying any cash dividends in the foreseeable future.


                                       17
<PAGE>

Item 6. Selected Financial Data
<TABLE>

         The selected historical consolidated financial data presented below are
derived from our consolidated  financial  statements.  The selected consolidated
financial  data set forth below is  qualified  in its entirety by, and should be
read in  conjunction  with,  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations," our consolidated financial statements, the
related notes and other financial information included herein.
<CAPTION>
                                                                               September 30,
                                                ----------------------------------------------------------------------------
                                                     2000           1999            1998            1997            1996
                                                ------------    ------------    ------------    ------------    ------------
<S>                                             <C>             <C>             <C>             <C>                    <C>
Revenues:
    Software license fees and online revenues   $     23,287    $     13,566    $      9,703    $      7,392           $--
    Service revenues                                   4,492           2,178            --              --              --
    Software license fees from IBM                     6,439           3,689           2,700             175            --
    Service revenues from IBM                           --             2,782           2,867            --              --
                                                ------------    ------------    ------------    ------------    ------------
                   Total revenues                     34,218          22,215          15,270           7,567            --
Cost of revenues:
    Software license fees and online revenues          5,285           1,817           2,531             772            --
    Service revenues                                   6,004           2,295            --              --              --
    Service revenues from IBM                           --             2,113           2,562            --              --
                                                ------------    ------------    ------------    ------------    ------------
                   Total cost of revenues             11,289           6,225           5,093             772            --
                                                ------------    ------------    ------------    ------------    ------------
Gross profit                                          22,929          15,990          10,177           6,795            --
                                                ------------    ------------    ------------    ------------    ------------
Operating expenses:
    Sales and marketing                               28,377          18,800          17,114          12,161           2,998
    Research and development                          13,068           9,358          10,231           8,436           2,765
    General and administrative                         5,809           4,314           3,575           3,762             978
    Amortization of goodwill                           8,297            --              --              --              --
    Stock-based compensation                             626             559             227            --              --
    In-process research and development                1,443            --              --              --              --
                                                ------------    ------------    ------------    ------------    ------------
                   Total operating expenses           57,620          33,031          31,147          24,359           6,741
                                                ------------    ------------    ------------    ------------    ------------
Operating loss                                       (34,691)        (17,041)        (20,970)        (17,564)         (6,741)
                                                ------------    ------------    ------------    ------------    ------------
Interest income (expense)                                962            (715)         (1,194)           (234)             46
Accretion of discount on debt                           --            (1,653)           --              --              --
Interest on beneficial conversion
   feature of convertible debt                          --            (7,457)           --              --              --
                                                ------------    ------------    ------------    ------------    ------------
     Loss before income taxes                        (33,729)        (26,866)        (22,164)        (17,798)         (6,695)
Income taxes                                             (82)            (44)            (60)             (1)           --
                                                ------------    ------------    ------------    ------------    ------------
     Net loss                                   $    (33,811)   $    (26,910)   $    (22,224)   $    (17,799)   $     (6,695)
                                                ------------    ------------    ------------    ------------    ------------
Basic and diluted net loss per share            $      (1.16)   $      (2.40)   $     (12.26)   $     (10.45)   $      (4.10)
                                                ============    ============    ============    ============    ============
Shares used to calculate basic and
   diluted net loss per share                     29,227,545      11,215,118       1,812,484       1,702,726       1,634,259
                                                ============    ============    ============    ============    ============
</TABLE>


                                       18
<PAGE>
<TABLE>
<CAPTION>

                                                                                 September 30,
                                                      ---------------------------------------------------------------------
                                                          2000          1999          1998          1997          1996
                                                      ------------- ------------- ------------- ------------- -------------
Balance Sheet Data:

<S>                                                    <C>            <C>          <C>            <C>          <C>
Cash, cash equivalents and short-term investments      $   8,323      $  32,954    $     459      $     303    $   1,090
Working capital (deficit)                                  9,965         34,022      (30,229)       (10,116)      (1,749)
Short-term borrowings from IBM and IBM Credit Corp.         --             --         20,666           --           --
Long-term obligations, less current portion                   57             54          336            633          173
Total assets                                              32,614         42,709        5,145          4,605        2,129
Accumulated deficit                                     (107,439)       (73,628)     (46,718)       (24,494)      (6,695)
Stockholders' equity (deficit)                            23,774         36,172      (28,925)        (8,913)      (1,357)
</TABLE>


                                       19
<PAGE>

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations


         This  Management's  Discussion and Analysis of Financial  Condition and
Results  of  Operations  should  be read in  conjunction  with the  accompanying
NetObjects,  Inc.  consolidated  financial statements and notes included in this
report. This discussion contains  forward-looking  statements that involve risks
and  uncertainties.  Our  actual  results  could  differ  materially  from those
expressed or implied by these forward-looking  statements as a result of various
factors,  including the risk factors  described in Risk Factors and elsewhere in
this report.

Overview

         For fiscal 2000,  we provided both online and software  solutions  that
enable small  businesses to build,  deploy and maintain  Internet Web sites, and
applications  to conduct  e-business,  and enable  large  enterprises  to create
corporate  intranets.  Our revenues were derived  principally  from license fees
from our  software  products  and, to a lesser  extent,  from fees on a range of
services for both small  business and enterprise  customers.  For small business
and other  customers  we license  NetObjects  Fusion and offer  online  internet
hosting services.  Our online business,  announced in the quarter ended December
31, 1999 and branded GoBizGo,  was established with the acquisition of Sitematic
Corporation  in October 1999. For enterprise  customers,  we license  NetObjects
Authoring Server and NetObjects Collage and offer consulting and design services
for creating corporate Web sites.

         We earn revenues from software  license fees through direct licenses to
enterprises, through important strategic relationships such as our relationships
with IBM and through  our  indirect  (OEM)  distribution  channel.  Professional
services  and   maintenance   are  typically   sold  through  our  direct  sales
organization.  Most of our software license fees to date have come from licenses
to  our  indirect  distribution  channel  and  OEM  resellers.   We  derive  our
international revenues primarily through our indirect distribution channel.

         We recognize  revenues from software  license fees upon delivery of our
software products to our customers,  net of allowances for estimated returns and
price protection, as long as we have no significant obligations remaining and we
believe that collection of the resulting receivable is probable. We provide most
of our  distributors  of software  products  with rights of return and record an
allowance for estimated future returns based upon our historical experience with
product  returns  by those  distributors.  Software  license  fees  earned  from
products  bundled with OEM resellers are recognized  upon  delivery,  if the OEM
vendor  commits to a quantity  and a fixed  price with no right of return or, if
the  volumes are not  committed,  then when the OEM  resellers  ship the bundled
products to their  customers.  We  recognize  service  revenues as services  are
rendered, or, if applicable, using the percentage-of-completion method. We defer
Web site hosting subscriptions, which typically are paid up-front, and recognize
these fees as revenue ratably over the terms of the respective contracts,  which
range  from 1 to 48 months.  We defer  recognition  of  maintenance  fees,  paid
primarily  for support and  upgrades,  upon receipt of payment and recognize the
related  revenues  ratably over the term of the contract,  which typically is 12
months. These payments generally are made in advance and are nonrefundable.

         We acquired  Sitematic  Corporation  in October  1999 in order to offer
online  Web site  building  and hosting  capabilities  to small  businesses.  In
December 1999, we combined our online resources with the Sitematic  offering and
launched  GoBizGo.com.   These  combined  services  include  Web  site  building
software,  e-mail list management for communicating with customers,  domain name
and search engine registration, auction export, relevant content information for
building  and  maintaining  an  e-business  online,  and Web  hosting  services.
Currently,  our online  business has two sources of revenue:  subscriptions  for
Web-hosting services provided directly to small businesses;  and fees charged to
our GoBizGo business "partners" for establishing co-branded sites.

                                       20
<PAGE>

         In March 2000, we launched  NetObjects  Collage, an integrated platform
for the management of enterprise Web applications.  NetObjects  Collage provides
an  integrated  platform that combines  collaboration  with content  management,
enterprise   integration,   and  dynamic   application   services.   We  provide
professional  services to help our customers install  NetObjects  Collage and to
train their  personnel in the use and  maintenance  of corporate  Web sites with
this product.  In December  2000,  we entered into an agreement  relating to the
sale of the  Enterprise  Division  and  this  product  family.  See  "--  Recent
Developments", below.

         In July of 2000, we acquired  privately-held  Rocktide  Inc.,  for $3.6
million in  NetObjects  common  stock and $0.4  million in cash.  Rocktide  is a
provider of the next generation  application  service  provider (ASP) technology
and wireless e-Services that help Web-enable businesses worldwide.  This product
technology  was  incorporated  in our newly branded Matrix  Platform,  which was
launched on October  30,  2000.

         During  fiscal year 2000,  our revenues  derived  from IBM  represented
approximately 19% of our total revenues for the period versus 29% in fiscal year
1999.  We believe that our revenues from IBM may  fluctuate  significantly  from
quarter to quarter  and will  decline  as an  overall  percentage  of our annual
revenue.  Please refer to "Risk  Factors--Our  Relationship  with  International
Business Machines Corporation,  or IBM, has changed substantially over time. IBM
is under no obligation to continue any business  relationships  with us, and IBM
is allowed to compete with us or act in a manner that is disadvantageous to us."

         In the first two quarters of fiscal 2000, the  acquisition of Sitematic
incrementally  increased  our  operating  expenses  as we  shifted  some  of our
existing staff to support online services and built  infrastructure  to maintain
and grow our online business. In the quarter ended June 30, 2000, we reduced our
workforce by approximately  7%,  primarily  through a reduction in the number of
personnel  assigned to our online  services  organization,  which  included some
individuals  who joined us through the  Sitematic  acquisition.  In July 2000 we
reduced our  workforce by an additional  20%, as we began to focus  primarily on
our online services business through our partner relationships.

         We have incurred substantial net losses in each fiscal period since our
inception and, as of September 30, 2000,  had an  accumulated  deficit of $107.4
million.  Such net losses and accumulated  deficit  resulted  primarily from the
significant  costs incurred in the development of our products and  establishing
our brand identity,  marketing  organization,  domestic and international  sales
channels, and general and administrative infrastructure.  Our operating expenses
before goodwill  amortization and other non-cash charges decreased in the fourth
quarter of fiscal  year 2000,  but we expect to  continue  to incur  substantial
losses from operations for the foreseeable future.

         Our future operating results must be considered in light of our limited
operating   history  and  the  risks,   expenses  and  difficulties   frequently
encountered by companies in early stages of development,  particularly companies
in rapidly  evolving  markets such as the market for Web site building  software
and services.

         Our business  model is undergoing a major  transformation,  as we shift
from a predominately software license revenue model, to one driven and sustained
by online  subscription  revenue. To achieve our new business objectives we will
need to do the following:

         o    Become a leading supplier of B2B online services for partners that
              reach small business;

         o    Continue  to develop  successfully  new  versions  of our  product
              offerings;

                                       21
<PAGE>

         o    Continue to be a leading provider of e-business  product solutions
              for  building   Web sites,  and  of  online   services  for  small
              businesses;

         o    Respond  quickly  and  effectively  to  competitive,  market,  and
              technological developments;

         o    Control expenses;

         o    Continue to attract,  train, and retain qualified personnel in the
              competitive online marketplace; and

         o    Maintain  existing  relationships  and establish new relationships
              with leading  Internet  hardware,  software and online  companies,
              such as our existing OEM resellers.

         There  can  be  no   assurance   that  we  will   achieve   or  sustain
profitability.  Moreover,  particularly  as we  transition  to our new  business
model,  we may be unable to adjust spending in a timely manner to compensate for
both  anticipated  and  unanticipated  revenue  shortfalls.   Accordingly,   any
significant  shortfall  of  revenues in  relation  to  expectations  would cause
significant declines in operating results.

         Due  to  the  foregoing  factors,  we  believe  that   period-to-period
comparisons  of  historical  operating  results  should not be relied upon as an
indication of future  performance.  Also,  operating  results may fall below our
expectations  or the  expectations  of securities  analysts or investors in some
future quarter and our stock price may decline substantially.


                                       22
<PAGE>

Results of Operations

Years Ended September 30, 2000 and 1999

         Revenues.  Total revenues increased to approximately $34.2 million from
approximately $22.2 million for 2000 and 1999, respectively. The increase of 54%
year over year was  primarily  due to growth of our domestic  and  international
partner agreements, in which NetObjects Fusion products and related intellectual
property were bundled with products  offered by our partners,  as well as growth
of  license  sales  to IBM.  In  addition,  our  enterprise  business,  which is
comprised of license and service  offerings,  grew  substantially  from the same
period in the  previous  fiscal year,  due to  continued  expansion of our sales
organization and new product introductions.

         For fiscal years 2000 and 1999, international revenues were $10 million
and $4.5 million or 29% and 23% of total revenues, respectively. The increase in
the amount of  international  revenues from the last fiscal year resulted mainly
from new OEM arrangements with Internet service providers (ISP) in Europe.

         IBM  software  license  fees for  fiscal  years 2000 and 1999 were $6.4
million  and $3.7  million,  respectively.  The  increase  was due to  increased
purchases  of  NetObjects  Fusion  5.0 to be bundled  with one of IBM's  product
offerings.

         In the current year, we had no IBM revenue from services as compared to
approximately  $2.8 million in fiscal 1999. Our contract to provide  services to
IBM ended in the second quarter of fiscal 1999. We do not anticipate  additional
service revenue from IBM in the future.

         Cost of Revenues.  We recorded  $5.3  million cost of software  license
fees and online  revenue  for the year ended  September  30, 2000 as compared to
$1.8 million cost incurred for the year ended  September 30, 1999.  The increase
was  attributable  to the cost of bundling  Web  hosting  with Fusion 5.0 and to
royalties due to third parties for integrated technology.

         Our cost of services  increased  to $6 million from $2.3 million in the
year ended ended  September  30, 2000 and 1999,  respectively.  The increase was
driven by the  revenue  growth in  services  and our  investment  in staffing to
handle this growth.

         Gross margins for the year ended September 30, 2000 were 67% versus 72%
for the  previous  fiscal  year.  The  decrease  in gross  margin was due to the
increase in the costs  associated  with the  bundling of Web hosting with Fusion
5.0 and to increased royalties due to third parties.

         Sales and Marketing.  Sales and marketing  expenses were  approximately
$28.4 million and $18.8 million for the year ended  September 30, 2000 and 1999,
respectively, representing 83% and 85%, respectively, of total revenues for each
period.  The increased  amount resulted  primarily from personnel  growth in our
enterprise  division,  increased  European marketing  expenses,  increased sales
commissions,  and costs related to the continued  development and implementation
of our branding and marketing campaigns.

         Research  and  Development.  Research  and  development  expenses  were
approximately  $13.1  million and $9.4 million for the year ended  September 30,
2000  and  1999,   respectively,   representing   approximately   38%  and  42%,
respectively,  of total  revenues for each period.  The increase in research and
development expenses was due to higher staffing levels than the previous period,
costs  associated  with the  release  of  NetObjects  Collage,  and the costs of
ongoing product development.

         General and  Administrative.  General and administrative  expenses were
approximately  $5.8  million and $4.3 million for the year ended  September  30,
2000 and 1999,  respectively,  representing  approximately 17% and 19%, of total
revenues for each period.  The decrease as a percentage of revenue resulted from

                                       23
<PAGE>

faster  revenue  growth than  expense  growth.  The  increase in costs is due to
increased   staffing  levels  and  related   expenses,   as  well  as  increased
professional services needed to operate a public company.

         Amortization of Intangible Assets. Amortization of goodwill and related
intangible assets increased to $8.3 million from $0 for the year ended September
30, 2000 and 1999,  respectively.  The change is attributable to the purchase of
Sitematic  Corporation in October 1999 and the purchase of Rocktide  Corporation
in July 2000.  In connection  with the  acquisitions,  the company  recorded $19
million of goodwill which is being amortized over two years. During fiscal 2000,
the Company recorded $8.3 million in amortization expense.

         Stock-Based  Compensation.  For both years ended September 30, 2000 and
1999,  we  incurred  stock-based  compensation  charges  of  approximately  $0.6
million.  These  stock-based  compensation  charges  are being  amortized  on an
accelerated  basis over the vesting period of the options in a manner consistent
with Financial Accounting Standards Board (FASB) Interpretation No. 28.

         Other Income  (Expense).  We earned interest income of $1.0 million for
the year ended  September  30, 2000.  The interest  income was the result of the
investment of funds obtained at our initial public offering ("IPO") in May 1999.
Interest expense was immaterial for the fiscal year ended September 30, 2000.

         Income  Taxes.  We recorded an income tax  provision  of  approximately
$82,000  in the fiscal  year  ended  September  30,  2000 for our  international
operations.


Years Ended September 30, 1999 and 1998

         Revenues.  Total revenues increased to $22.2 million for the year ended
September 30, 1999 from $15.3 million for the year ended September 30, 1998. The
increase was attributable to additional  license fees for NetObjects Fusion, the
introduction of NetObjects Authoring Server, and related services.  Our software
license  revenues  were $17.3  million  and $12.4  million  for the years  ended
September 30, 1999 and 1998, respectively. Software license revenue from IBM was
$3.7 million and $2.7 million, respectively, for the two fiscal years.

         For the fiscal year ended  September  30, 1999  services  revenues were
approximately  $5.0  million,  compared  to  $2.9  million  for the  year  ended
September 30, 1998. Of these amounts, $2.8 million represented services provided
to IBM in fiscal  1999.  The  remaining  $2.2 million in fiscal 1999 was derived
from our newly formed professional services group.

         International  sales of software  licenses  grew steadily over the same
period,  increasing  to $4.5  million in fiscal 1999 from $2.5 million in fiscal
1998.  Increased  international sales resulted primarily from increased licenses
of NetObjects  Fusion through our  distributors in Europe.  Total  international
revenues, which include the sale of software licenses and services, were 23% and
16% of total  revenues for the fiscal years ended  September  30, 1999 and 1998,
respectively.

         Revenues  from IBM were 29% and 36% of total  revenues  for the  fiscal
years ended September 30, 1999, and 1998, respectively. Service revenue from IBM
declined  slightly with the  expiration of the WebSphere  contract.  IBM license
fees increased by 37% over the entire period, primarily during the first half of
the year.

         Cost of Revenues.  The cost of software license fees was  approximately
$1.8 million and $2.5 million for the years ended  September  30, 1999 and 1998,
respectively,  representing  approximately  8% and 17%,  respectively,  of total
revenues.  The  improvement in percentage  terms from fiscal 1998 to fiscal 1999
resulted  primarily from better  inventory  management,  more favorable  freight
contract terms, and a better sales channel mix.

                                       24
<PAGE>

         The cost of service for our new  professional  services  group was $2.3
million,  with a gross margin of (-5%).  The loss reflected our initial  startup
costs for this business in its first year of operation.

         Cost of revenues  from the sale of services to IBM and  affiliates  was
approximately  $2.1 million and $2.6 million for the years ended  September  30,
1999 and 1998, respectively.

         Overall our gross margin improved from 67% for the year ended September
30, 1998 to 72% for the year ended September 30, 1999.

         Sales  and   Marketing.   Our  sales  and   marketing   expenses   were
approximately  $18.8 million and $17.1 million for the years ended September 30,
1999  and  1998,   respectively,   representing   approximately   85%  and  112%
respectively,  of total revenues. The increased expenses in fiscal 1999 resulted
primarily  from  growth  in the  number  of  sales  personnel,  increased  sales
commissions and costs related to the continued development and implementation of
our branding and marketing campaigns.  The decrease in percentage terms occurred
as revenues grew at a faster rate than expenses.

         Research and  Development.  Our research and development  expenses were
approximately  $9.4 million and $10.2 million for the years ended  September 30,
1999  and  1998,  respectively,  which  was 42% and 67%  respectively,  of total
revenues. The decrease in percentage terms occurred as revenues grew at a faster
rate than expenses.  The savings were achieved through  reductions in contractor
costs and selective staffing reductions.

         General and  Administrative.  Our general and  administrative  expenses
were  approximately  $4.3 million and $3.6 million for the years ended September
30,  1999  and  1998,  respectively,  representing  approximately  19%  and  23%
respectively,  of total revenues.  The decrease in percentage  terms occurred as
revenues grew at a faster rate than expenses. The increase in expenses in fiscal
1999 resulted  primarily from hiring additional  personnel and related personnel
expenses,  as well as  increased  professional  fees  needed to operate a public
company.

         Interest  expense.  Interest  expense was $0.7 million and $1.0 million
for the years ended September 30, 1999 and 1998,  respectively.  In fiscal 1999,
we recorded a charge to earnings of $9.1 million, compared to $200,000 in fiscal
1998. Of this amount,  approximately  $7.5 million was  recognized in connection
with the "in-the-money"  convertible notes totaling $10.9 million that we issued
to IBM and Perseus Capital LLC during October 1998, and was recorded as interest
expense in accordance  with EITF Topic D-60 for the fiscal year ended  September
30, 1999. The remaining $1.6 million charge  recorded  during fiscal 1999 was an
accretion of discount  resulting from Series E-2 and Series F warrants issued in
connection  with loans obtained from IBM, IBM Credit Corp,  and Perseus  Capital
LLC in  fiscal  1999.  The value of the  attached  warrants,  and the  resulting
interest expense was determined using a Black-Scholes  option-pricing  model. We
recorded $200,000 in charges during fiscal 1998.

Liquidity and Capital Resources

         As of September 30, 2000, we had cash, cash  equivalents and short-term
investments  totaling $8.3 million,  a decrease of $24.6 million from  September
30, 1999.  The decrease was primarily due to losses from  continuing  operations
and  the  Sitematic   acquisition   which   required  the  payment  in  cash  of
approximately  $2.0 million,  which includes  approximately $1.6 million paid to
Sitematic preferred stockholders and transaction costs of $0.4 million.

         Net cash  used in  operating  activities  was $24.0  million  and $25.9
million for the twelve months ended  September 30, 2000 and 1999,  respectively.
For the period ended  September 30, 2000, net cash used in operating  activities
included a decrease in accounts receivable of approximately $0.2 million, and an
increase  of $3.0  million  in  prepaid  expenses  related  to  prepaid  royalty
expenses.  Adjustments  to  reconcile  net  loss to net cash  used in  operating
activities  for the period ended  September  30, 2000


                                       25
<PAGE>
included  amortization of goodwill of approximately  $8.4 million related to the
Sitematic and Rocktide  acquisitions.  Net cash used in operating  activities in
the period ended  September 30, 1999 included the recognition of $4.3 million in
deferred  revenues from IBM.  Adjustments to reconcile net loss to net cash used
in operating  expenses for the period ended September 30, 1999 included  noncash
interest  of $7.5  million on the  conversion  feature of debt held by IBM and a
related party.

         Net cash  provided by  investing  activities  was $5.9  million for the
twelve months ended September 30, 2000 as compared to $2.0 million net cash used
in investing  activities  for the twelve months ended  September  30, 1999.  The
change  during  2000  was  primarily  attributable  to the  payment  of  cash to
Sitematic  stockholders  for their  preferred  stock,  offset by the maturity of
short-term  investments.  The increase for the year ended September 30, 1999 was
attributable to expenditures for new leasehold improvements as the Company moved
from smaller  facilities to its current location and to operating loans provided
to Sitematic Corporation in August 1999.

         Net cash  provided  by  financing  activities  was  approximately  $2.9
million  for the twelve  months  ended  September  30, 2000 as compared to $60.5
million for the twelve  months ended  September  30, 1999.  Net cash provided by
financing activities for the period ended September 30, 2000 consisted primarily
of proceeds from the exercise of stock  options by employees.  Net cash provided
by  financing  activities  for the period  ended  September  30, 1999  reflected
proceeds from  borrowings of $16.3 million,  the issuance of preferred  stock of
$5.2 million,  and the issuance of common stock in our initial public  offering,
which  yielded  $65.6  million net of offering  costs offset by the repayment of
short-term notes of $24.4 million.

Recent Developments

         On October 18, 2000,  the Company signed an agreement to acquire all of
the  shares  of  privately  held   MyComputer.com,   Inc.  of  Orem,   Utah  for
approximately  $51 million of common stock and cash, and to pay up to $6 million
in additional shares of common stock based on future performance of the acquired
business.  Under the agreement,  the Company agreed to advance interim operating
funds to  MyComputer,  depending upon the length of time between the date of the
agreement  and the closing.  The Company also agreed to reimburse up to $300,000
for  legal,  accounting  and  other  expenses  of  MyComputer  relating  to  the
transaction;  if the  transaction  failed  to close by  December  1,  2000.  The
agreement and the proposed  acquisition  were  terminated in December  2000. The
Company loaned a total of $2.25 million to MyComputer under this agreement.  All
of the loans  were made  under  notes  bearing  interest  at the prime  rate and
maturing on October 18, 2001. The Company canceled $375,000 of this indebtedness
upon  termination  of the  agreement,  as provided by its terms.  The  remaining
indebtedness,   which  totals  $1.875  million,  will  convert  into  MyComputer
preferred stock that is issued in an equity  financing of at least $15.0 million
prior to October 18, 2001.  We have not received  notice from  MyComputer of any
such financing and cannot be assured that MyComputer will receive such financing
or be able to repay the notes issued to us.

         On  December  13,  2000,  we  borrowed  $750,000  from IBM under a note
bearing interest of 10% per annum. This note will be repaid on January 3, 2001.

         On December  21, 2000 we signed an option and license  agreement  under
which we received  $4 million in cash for an  exclusive  option to purchase  the
Enterprise  Division  for $18  million.  If the sale is  completed,  the  option
payment  will be credited  in full  towards the  purchase  price.  The option to
acquire the Enterprise  Division will expire on January 5, 2001, if a definitive
agreement  for the  purchase of the  Enterprise  Division has not been signed by
that date, or by such later date as may be agreed upon by both companies. If the
acquisition  is not  completed,  the  potential  acquirer will have a three-year
license to distribute  NetObjects Collage and the $4 million option payment will
be  credited  against  future  royalty  payment  obligations  under the  license
agreement.  Completion  of the  acqisition  is  subject to the  negotiation  and
execution of a definitive agreement, which would be subject to customary closing
conditions.  Accordingly,  there  can be no  assurances  that  the  sale  of the
Enterprise division will occur.

         We  expect  our  operating   expenses,   as  well  as  planned  capital
expenditures, to continue to constitute a material use of our cash resources. In
addition,  we will require cash resources to fund acquisitions or investments in
complementary  businesses,  technologies  or product  lines.  We intend to raise
additional  capital to fund future operations through the sale of our Enterprise
Division,  the  sale of  additional  equity  securities,  new  borrowings,  some
combination  of debt and equity,  or other  available  transactions.  We have no
assurances or commitments that we will succeed in raising  additional capital by
any means. If we fail to raise additional  capital to fund future  operations we
will be unable to continue our business.

Recent Accounting Pronouncements

         In June 1998, FASB issued Statement of Financial  Accounting  Standards
(SFAS) no. 133, "Accounting for Derivative  Instruments and Hedging Activities."
As  amended  by SFAS  No.  137 and 138,  SFAS No.  133  establishes  methods  of
accounting for derivative  financial  instruments and hedging activities related
to those  instruments as well as other hedging  activities.  In accordance  with
SFAS  No.  137,  issued  by the  FASB  in  June  1999  and  which  deferred  the
implementation  of SFAS No. 133,  the  Company  has adopted  SFAS No. 133 in the
first quarter of fiscal 2001. To date the  Company's  investments  in derivative
instruments  have not been  significant  and the  Company has not engaged in any
hedging  activities.  Accordingly,  the  Company  has  evaluated  the effects of
adopting  SFAS No.  133 and has  determined  that it will  not  have a  material
impact on its financial statements, cashflows or results of operations.

         In December 1999, the Securities and Exchange  Commission  (SEC) issued
Staff  Accounting  Bulletin  (SAB) No. 101,  "Revenue  Recognition  in Financial
Statements,"  which provides  guidance related to revenue  recognition  based on
interpretations  and  practices  followed by the SEC and  requires  companies to
report any changes in revenue  recognition as a cumulative  change in accounting
principle at the time of implementation in accordance with Accounting Principles
Board  opinion 20,  "Accounting  Changes."  SAB No. 101A and 101B were issued to
delay the  implementation  of SAB No.  101.  The  Company  anticipates  that the
adoption  of SAB No.  101 will  not  have a  material  impact  on its  financial
position, results of operations or cashflows. The Company will adopt SAB No. 101
in the fourth quarter of fiscal 2001.

                                       26
<PAGE>

Quarterly Results of Operations
<TABLE>

         The following table sets forth certain  unaudited  quarterly results of
operations data for the eight quarters ended September 30, 2000. We believe that
this  information  has been  prepared  substantially  on the  same  basis as the
audited   consolidated   financial   statements   appearing  elsewhere  in  this
prospectus,  and all necessary adjustments,  consisting only of normal recurring
adjustments,  have been included in the amounts  stated below to present  fairly
the unaudited quarterly results of operations. The quarterly data should be read
in conjunction with our audited  consolidated  financial statements and notes to
consolidated financial statements appearing elsewhere in this prospectus.
<CAPTION>
                                      30-Sep-00   30-Jun-00   31-Mar-00   31-Dec-99   30-Sep-99   30-Jun-99   31-Mar-99   31-Dec-98
                                       --------    --------    --------    --------    --------    --------    --------    --------
<S>                                    <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Revenues:
   Software license fees               $  3,912    $  6,911    $  6,803    $  5,662    $  4,569    $  3,452    $  2,923    $  2,622
   Service revenues                       1,264       1,098       1,170         959         863         685         440         190
   Software license fees from IBM           250       2,650       2,251       1,288         374         980       1,017       1,318
   Service revenues from IBM               --          --          --          --          --            49       1,246       1,487
                                       --------    --------    --------    --------    --------    --------    --------    --------
     Total revenues                       5,426      10,659      10,224       7,909       5,806       5,166       5,626       5,617

Cost of revenues:
   Software license fees                  2,194       1,708         839         544         382         487         453         495
   Royalty adjustment                      --          --        (1,418)      1,418        --          --          --          --
   Service revenues                       1,361       1,572       1,846       1,225         751         820         540         184
   IBM service revenues                    --          --          --          --          --            21         688       1,404
                                       --------    --------    --------    --------    --------    --------    --------    --------
     Total cost of revenues               3,555       3,280       1,267       3,187       1,133       1,328       1,681       2,083

Gross profit                              1,871       7,379       8,957       4,722       4,673       3,838       3,945       3,534

Operating expenses:
   Sales and marketing                    5,714       7,701       9,015       5,947       4,806       4,968       4,596       4,430
   Research and development               3,194       3,485       3,160       3,229       3,026       2,347       1,781       2,204
   General and administrative             1,450       1,652       1,323       1,384       1,316       1,032       1,072         894
   Amortization of intangible assets      2,247       2,017       2,017       2,016        --          --          --          --
   Stock-based compensation                 274           2         144         206         155         234          70         100
       In Process R&D                     1,443        --          --          --          --          --          --          --
                                       --------    --------    --------    --------    --------    --------    --------    --------
     Total operating expenses            14,322      14,857      15,659      12,782       9,303       8,581       7,519       7,628

Operating loss                          (12,451)     (7,478)     (6,702)     (8,060)     (4,630)     (4,743)     (3,574)     (4,094)
   Interest income (expense)                129         183         276         374         492         (93)       (603)       (511)
   Accretion of discount on debt           --          --          --          --          --        (1,054)       (408)       (191)
   Interest charge on
     beneficial conversion
     feature of convertible debt           --          --          --          --          --          --        (3,665)     (3,792)
                                       --------    --------    --------    --------    --------    --------    --------    --------
     Loss before income taxes           (12,322)     (7,295)     (6,426)     (7,686)     (4,138)     (5,890)     (8,250)     (8,588)

   Income taxes                              19          39          12          12          42        --          --             2
                                       --------    --------    --------    --------    --------    --------    --------    --------

     Net loss                           (12,341)     (7,334)     (6,438)     (7,698)     (4,180)     (5,890)     (8,250)     (8,590)
                                       --------    --------    --------    --------    --------    --------    --------    --------

   Translation adjustment                   (17)        (22)         (9)        (11)        (20)       --          --           (10)
                                       --------    --------    --------    --------    --------    --------    --------    --------

Comprehensive loss                     $(12,358)   $ (7,356)   $ (6,447)   $ (7,709)   $ (4,200)   $ (5,890)   $ (8,250)   $ (8,600)
                                       ========    ========    ========    ========    ========    ========    ========    ========
</TABLE>

                                       27
<PAGE>

         The operating results for any quarter are not necessarily indicative of
the operating results for any future period.

         Our total  revenues  fluctuate  from  quarter  to  quarter  due to many
factors,  including new product and product upgrade introductions.  In addition,
we attempt to limit sales of existing  products during the months  preceding the
release of  upgraded  products in order to reduce  returns of the older  product
from some of our  direct  and  indirect  channel  resellers.  The  timing of our
recognition of revenues from  strategic  arrangements  with other  companies has
contributed  to  fluctuations  in revenues  from quarter to quarter.  During the
three months ended  September  30, 2000,  we had no IBM revenue from services as
compared to previous  quarters and earned  license fees of $250,000 from IBM. We
have no ongoing commitments from IBM that will generate significant revenues for
us.

         As a result of our limited operating history and the emerging nature of
the  markets in which we  compete,  we are  unable to  forecast  accurately  our
revenues.  The  success  of our  business  and our  revenue  growth to date have
depended on our ability to create Web site building software that appeals to our
customers, to update our main product,  NetObjects Fusion, with new features and
to release and deliver new  versions of  NetObjects  Fusion on time.  We need to
develop new  products.  Failure to do so will  materially  affect the amount and
timing of future revenues.  Furthermore, $10.5 million of cash prepayments under
our license  agreement with IBM have provided some revenue  certainty from April
1997, through June 30, 1999. Our future revenues from IBM, if any, will continue
to be variable.

         Our expense levels are based in part on our expectations with regard to
future  revenues.  We may be  unable to adjust  spending  in a timely  manner to
compensate for any unexpected revenues  shortfall.  As a result, any significant
shortfall in demand for our products and services  relative to our  expectations
would harm our  business  and cause our  revenues  to  decrease.  Further,  as a
strategic response to changes in the competitive  environment,  we may from time
to time  implement  pricing,  service  or  marketing  changes  that could have a
material  adverse  effect on our business,  prospects,  financial  condition and
results of operations. See "-- Overview," above for additional factors affecting
quarterly operating results.

         In addition to  fluctuations in revenues from IBM and other third party
distributors,  our revenues have become more variable due to factors such as our
decision to focus our sales  activities  on  NetObjects  Matrix  rather than OEM
licenses of NetObjects Fusion,  our planned sale of the Enterprise  Division and
the  uncertainty  of  generating   significant   revenues  from  small  business
subscriptions for online services.

         Other factors  contributing  to  uncertainty  and  fluctuations  in our
quarterly  operating results seasonal demand for our products and services,  for
example,  annual  reductions  in sales in  Europe in July and  August,  costs of
litigation and intellectual  property  protection,  technical  difficulties with
respect to the use of our products,  general  economic  conditions  and economic
conditions  specifically related to businesses dependent upon the Internet.  The
promptness  with which sales and licensing  data,  used in  recognizing  product
royalties,  is  delivered  to us from third  parties  also may affect  quarterly
operating  results.  It often is difficult to forecast the effect these factors,
would have on our results of operations for any given fiscal quarter.

         Due to the  factors  noted  above,  it is  likely  that in some  future
quarters our operating  results will fall below the  expectations  of securities
analysts and investors,  which would harm our business and cause our stock price
to fall.


                                       28
<PAGE>
Item 7A. Qualitative and Quantitative Disclosures About Market Risk

         Our  exposure to market  risks for changes in  interest  rates  relates
primarily to investments in debt securities issued by U.S.  government  agencies
and corporate debt securities. We place our investments with high quality credit
issuers  and,  by policy,  limit the amount of the  credit  exposure  to any one
issuer. We manage interest rate risk by limiting  investments to debt securities
of relatively short maturities.

         At  September  30,  2000,  we had  cash and  cash  equivalents  of $8.3
million,  including  approximately  $1.4  million in money market funds and $1.0
million invested in high-grade  commercial paper issued by U.S. companies,  with
maturities of less than 90 days.  We have  classified  these debt  securities as
available for sale.

         Our general  policy is to limit the risk of  principal  loss and ensure
the safety of invested  funds by  limiting  market and credit  risk.  All highly
liquid  investments  with a  maturity  of  three  months  or less at the date of
purchase are  considered to be cash  equivalents;  investments  with  maturities
greater than three  months are  considered  to be  short-term  investments.  Our
investment  policy  limits  purchases of debt  securities to maturities of three
months or less.

         To date,  we have not  purchased  or sold  forward  contracts  to hedge
foreign currency exposure,  since the relative amounts of international  revenue
generated by us have not been large enough to make hedging cost-effective.

Item 8. Financial Statements and Supplemenatary Data

         Reference is made to the financial  statements listed under the heading
"(a)(1) Financial Statements and Report of KPMG LLP" of Item 14, which financial
statements are incorporated by reference in response to this Item 8.

                                       29
<PAGE>

Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure.

None.

                                    Part III

Item 10. Directors and Executive Officers of the Registrant

         The  response  to this  item is  incorporated  by  reference  from  the
Sections titled  "Management" and "Section 16(A) Beneficial  Ownership Reporting
Compliance" in the  Registrant's  Proxy Statement for its 2001 Annual Meeting of
Stockholders.

Item 11. Executive Compensation

         The response to this item is incorporated by reference from the Section
titled  "Executive  Compensation",  but not from the Sections titled  "Executive
Compensation--Performance   Graph"  and   "Executive   Compensation--Report   on
Executive  Compensation by the Compensation and Management Development Committee
of the Board of Directors",  in the  Registrant's  Proxy  Statement for its 2001
Annual Meeting of Stockholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management

         The response to this item is incorporated by reference from the Section
titled "Share Ownership: in the Registrant's Proxy Statement for its 2001 Annual
Meeting of Stockholders.

Item 13.  Certain Relationships and Related Transactions

         The response to this item is incorporated by reference from the Section
titled "Certain  Relationships  and Related  Transactions"  in the  Registrant's
Proxy Statement for its 2001 Annual Meeting of Stockholders.

                                     Part IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)      The following documents are filed as part of this report:

         (1)   Financial  Statements and Report of KPMG LLP, which are set forth
               in the index to  Consolidated  Financial  Statements on pages F-1
               through F-28 of this report.

                                                                        Page

Independent Auditors Report ............................................ F-2

Consolidated Balance Sheets as of September 30, 2000
          and 1999...................................................... F-3
Consolidated Statement of Operations and Comprehensive Loss for
         the years ended September 30, 2000, 1999, and 1998............. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for
         the years ended September 30, 2000, 1999 and 1998.............. F-5
Consolidated Statements of Cash Flows for the years
         ended September 30, 2000, 1999, and 1998....................... F-7

Notes to Consolidated Financial Statements.............................. F-8



         (2)   Financial  Statement  Schedules.
<TABLE>

                 Schedule II - Valuation and Qualifying Accounts
<CAPTION>
                                          BALANCE AT              ADDITIONS
                                         BEGINNING OF            CHARGED TO                                   BALANCE AT
                                            PERIOD                 EXPENSE             DEDUCTIONS            END OF PERIOD
                                      -------------------- -- ------------------ -- ------------------ -- --------------------
Accounts Receivable Reserve
<S>                                         <C>                      <C>                  <C>                    <C>
Year ended September 30, 1998                 756                    4,691                (3,184)                2,263
Year ended September 30, 1999               2,263                    1,698                (3,053)                  908
Year ended September 30, 2000                 908                    2,372                (1,965)                1,315
</TABLE>

         (3)   Exhibits

                                       31
<PAGE>
Item 14.  Exhibits and Financial Statement Schedules.

Exhibit
Number           Description of Document
------           -----------------------

2.1+++           Agreement and Plan of Reorganization with Sitematic Corporation
                 dated of October 4, 1999

2.2              Agreement and Plan of Reorganization with Rocktide,  Inc. dated
                 as of July 7, 2000.

3.1.1++++        Restated Certificate of Incorporation of the Registrant

3.2.1+           Bylaws of the Registrant

4.1+             Specimen Stock Certificate

4.3+             Form of Series E Preferred Stock Warrant

4.4+             Form of Series E-2 Preferred Stock Warrant

4.5+             Form of Series F Preferred Stock Warrant

9.1+             Voting Agreement  between  NetObjects,  Inc. and  International
                 Business Machines

10.1.1+          NetObjects, Inc. Amended and Restated 1997 Stock Option Plan

10.1.2+          Form of Stock Option Agreement under the 1997 Stock Option Plan

10.1.3+          Form of  Restricted  Stock  Purchase  Agreement  under the 1997
                 Stock Option Plan

10.1.4+          Form of  Restricted  Stock  Transfer  Agreement  under the 1997
                 Stock Option Plan

10.1.5++         Form of Executive Stock Option Agreement

10.2+            NetObjects, Inc. 1997 Special Stock Option Plan

10.3.1+          Amended 1999 Employee Stock Purchase Plan

10.4+            IBM Software License  Agreement  (NetObjects  License Agreement
                 #L97063)  by and between  NetObjects  and IBM dated as of March
                 18, 1997

10.4.1+          Amendment Number 1 to NetObjects License Agreement L97063 dated
                 as of April 30, 1997

10.4.2+          Second Amendment to NetObjects  License  Agreement L97063 dated
                 as of October 7, 1997

10.4.3+          Third Amendment to NetObjects License Agreement L97063 dated as
                 of December 16, 1997

10.4.4+          Fourth Amendment to NetObjects  License  Agreement L97063 dated
                 as of April 27, 1998

10.4.5+          Fifth Amendment to NetObjects License Agreement L97063 dated as
                 of January 14, 1999

10.4.6+          Amendment No. 6 to NetObjects License Agreement L97063 dated as
                 of September 18, 1998

10.4.7+          Seventh  Amendment  to  NetObjects   License  Agreement  L97063
                 effective January 15, 1999

10.4.8+          Eighth Amendment to NetObjects  License  Agreement L97063 dated
                 September 18, 1998

10.4.9+          Amendment  No.  9 to  NetObjects  License  Agreement  effective
                 January 21, 1999

10.4.10+         Amendment No. 10 to NetObjects  License  Agreement  dated as of
                 February 4, 1999

10.4.11+         Letter Agreement modifying  NetObjects License Agreement L97063
                 dated as of February 6, 1998

10.4.12+         Letter Agreement modifying  NetObjects License Agreement L97063
                 dated as of June 30, 1998

10.4.13+         Letter Agreement modifying  NetObjects License Agreement L97063
                 dated as of January 14, 1999

10.4.14+         Letter Agreement modifying  NetObjects License Agreement L97063
                 dated as of March 25, 1999

                                       32
<PAGE>

10.5+            IBM Patent License Agreement by and between  NetObjects and IBM
                 dated as of April 10, 1997

10.6+            Lease Agreement by and between NetObjects and Metropolitan Life
                 Insurance Company dated July 24, 1998

10.7+            Lease  Agreement  by  and  between  NetObjects  Limited  and HQ
                 Executive Offices (UK)

                                       33
<PAGE>

                 LTD dated February 15, 1999

10.10+           Technology Transfer Agreement between Rae Technology,  Inc. and
                 NetObjects, Inc. dated February 2, 1996

10.10.1+         Amendment to Technology  Transfer  Agreement by and between Rae
                 Technology and NetObjects dated as of March 18, 1997

10.11+           Patent  Transfer  and  License  Agreement  by and  between  Rae
                 Technology LLC and NetObjects, Inc. dated as of April 10, 1997,
                 as amended

10.12+           Technology  License  Agreement  by and between  NetObjects  and
                 Clement Mok Designs dated as of December 21, 1995

10.13+           Distribution  Agreement by and between  Ingram Micro,  Inc. and
                 NetObjects, Inc. dated March 6, 1997

10.14+           Commercial Application Partner Agreement by and between Sybase,
                 Inc. and NetObjects, Inc. dated June 30, 1997

10.15+           Master   Distributor   Agreement  by  and  between   Mitsubishi
                 Corporation and NetObjects, Inc. dated September 30, 1997

10.16+           Standard  Inbound License  Agreement by and between  NetObjects
                 and Novell effective September 30, 1998

10.16.1+         Amendment to Standard Inbound License  Agreement by and between
                 NetObjects and Novell effective April 2, 1999

10.17+           Build-It License Agreement dated as of February 2, 1999

10.18+           IBM Trademark License Agreement dated as of January 19, 1999

10.19+           Letter  Agreement  by and between  NetObjects  and John Sculley
                 dated February 3, 1999

10.20+           Sun  Microsystems,  Inc.  Porting  Agreement by and between Sun
                 Microsystems, Inc. and NetObjects dated as of March 26, 1999

10.21+           Employment Agreement between Russell F. Surmanek and NetObjects
                 dated as of April 5, 1999

10.22+           Distribution   Agreement  by  and  between  Lotus   Development
                 Corporation and NetObjects dated as of April 21, 1999

10.23            Promissory Note from Samir Arora to the Company dated September
                 28, 2000

10.24            Option  Agreement  with [***] dated as of December 19,
                 2000

16.1+            Letter from Ernst & Young LLP dated  February 5, 1999 regarding
                 change in certifying accountant

21.1             Subsidiaries of the Registrant

23.1             Consent of KPMG LLP, Independent Auditors

24.1             Power of attorney  (included on the signature page of this Form
                 S-1)

27.1             Financial Data Schedule

--------------
+ Incorporated  by reference to the  same-numbered  exhibit to our  Registration
Statement on Form S-1, as amended,  originally filed February 5, 1999,  declared
effective  May 7, 1999  (Commission  File No.  333-71893).

++ Incorporated by reference to the form of Executive  Option Agreement filed as
Exhibit  A to the  Registrant's  preliminary  proxy  statement,  filed  with the
Securities and Exchange Commission on January 28, 2000 (No. 000-25427).

+++   Incorporated  by  reference  to  the  Sitematic   Agreement  and  Plan  of
Reorganization filed as an exhibit to the Form 8-K filed with the Securities and
Exchange Commission on October 19, 1999.

++++  Incorporated by reference to the same numbered exhibit to our Registration
Statement on Form S-3 filed on June 6, 2000 (Commission File No. 333-36990).

(b) On July  27,  2000,  we  filed a report  on Form  8-K  with  respect  to the
acquisition of Rocktide, Inc.

[***] omitted pursuant to a request for confidential treatment.

                                       34
<PAGE>


                                   Signatures

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned,  thereunto duly authorized, on the __th day of
December, 2000.

                            /s/  Samir Arora
                            ----------------------------------------------------
                            Samir Arora
                            Chairman of the Board, Chief Executive Officer,
                            and President (principal executive officer)

                            /s/  Russell Surmanek
                            ----------------------------------------------------
                            Russell Surmanek
                            Executive Vice President, Finance & Operations,
                            and Chief Financial Officer
                            (principal financial officer)

         KNOW ALL PERSONS BY THESE  PRESENTS,  that each person whose  signature
appears below constitutes and appoints Samir Arora and Russell R. Surmanek,  and
each of them,  his true and  lawful  attorneys-in-fact,  each with full power of
substitution,  for him in any and all capacities, to sign any amendments to this
report  on Form  10-K and to file the  same,  with  exhibits  thereto  and other
documents in connection therewith,  with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact or their
substitute or substitutes may do or cause to be done by virtue hereof.
<TABLE>

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  amendment has been signed below by the following  persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<CAPTION>
<S>                           <C>                                                        <C>

  /s/ Samir Arora
---------------------------   Chairman of the Board, Chief Executive Officer,            December 29, 2000
    Samir Arora               and President

/s/ Russell F. Surmanek
---------------------------   Executive Vice President, Finance & Operations,            December 29, 2000
    Russell F. Surmanek       and Chief Financial Officer

/s/ Robert G. Anderegg
---------------------------   Director                                                   December 29, 2000
    Robert G. Anderegg

/s/ Lee A. Dayton
---------------------------   Director                                                   December 29, 2000
    Lee A. Dayton

/s/ Blake Modersitzki
---------------------------   Director                                                   December 29, 2000
    Blake Modersitzki

/s/ Michael D. Zisman
---------------------------   Director                                                   December 29, 2000
    Michael D. Zisman


</TABLE>

                                       35
<PAGE>

                        NetObjects, Inc and subsidiaries

   Index to Consolidated Financial Statements and Financial Statement Schedule

                                                                        Page

Independent Auditors Report ............................................ F-2

Consolidated Balance Sheets as of September 30, 2000
          and 1999...................................................... F-3
Consolidated Statement of Operations and Comprehensive Loss for
         the years ended September 30, 2000, 1999, and 1998............. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for
         the years ended September 30, 2000, 1999 and 1998.............. F-5
Consolidated Statements of Cash Flows for the years
         ended September 30, 2000, 1999, and 1998....................... F-7

Notes to Consolidated Financial Statements.............................. F-8


<PAGE>

                          Independent Auditors' Report

The Board of Directors and Stockholders
NetObjects, Inc.:

         We  have  audited  the  accompanying  consolidated  balance  sheets  of
NetObjects,  Inc. and  subsidiaries  as of September 30, 2000 and 1999,  and the
related   consolidated   statements  of  operations  and   comprehensive   loss,
stockholders'  equity  (deficit),  and cash  flows  for each of the years in the
three-year period ended September 30, 2000. In connection with our audits of the
consolidated  financial  statements,  we also have audited the related financial
statement  schedule.  These  consolidated  financial  statements  and  financial
statement  schedule are the  responsibility  of the  Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements and financial statement schedule based on our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States of America.  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 financial position of NetObjects,
Inc.  and  subsidiaries  as of September  30, 2000 and 1999,  and the results of
their  operations  and their cash flows for each of the years in the  three-year
period ended  September  30, 2000,  in  conformity  with  accounting  principles
generally  accepted in the United  States of America.  Also in our opinion,  the
related financial statement  schedule,  when considered in relation to the basic
consolidated  financial  statements taken as a whole,  presents  fairly,  in all
material respects, the information set forth therein.

         The accompanying  consolidated  financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
3 to the consolidated  financial statements,  the Company has suffered recurring
losses  from  operations  that  raises  substantial  doubt  about its ability to
continue as a going concern.  Management's  plans in regard to these matters are
also described in Note 3. The consolidated  financial  statements do not include
any adjustments that might result from the outcome of this uncertainty.

                                             KPMG LLP

Mountain View, California
November 7, 2000 except as to Note 14
which is as of December 21, 2000

                                      F-2
<PAGE>

                                NETOBJECTS, INC.
                                AND SUBSIDIARIES
                           Consolidated Balance Sheets
                 (In thousands, except share and per share data)

                                                       September      September
                                                       30, 2000       30, 1999
                                                     -----------    -----------
                              Assets

Cash and cash equivalents                            $     8,323    $    23,623
Short-term investments                                      --            9,331
Accounts receivable, net of allowance for
   doubtful accounts of $1,315 and $908 at
   September 30, 2000 and 1999, respectively               5,647          5,643
IBM trade receivable                                         250            422
Prepaid expenses                                           3,892            848
Other current assets                                         636            638
                                                     -----------    -----------
         Total current assets                             18,748         40,505
Property and equipment, net                                2,700          2,204
Intangible assets, net of amortization
   of $8,297 and $0 as of
   September 30, 2000 and 1999, respectively              10,690           --
Other long-term assets                                       476           --
                                                     -----------    -----------
Total Assets                                         $    32,614    $    42,709
                                                     ===========    ===========
                Liabilities & Stockholders' Equity

Accounts payable                                     $       944    $     2,489
Accrued compensation                                       1,337          1,068
Other accrued liabilities                                  3,900          1,657
Deferred revenue                                           2,434            988
Current portion of capital lease obligations                 168            281
                                                     -----------    -----------
         Total current liabilities                         8,783          6,483

Capital lease obligations, less current portion               57             54
                                                     -----------    -----------
Total liabilities                                          8,840          6,537

Stockholders' Equity:

Preferred stock, $0.01 par  value,
    6,000,000 and 0  shares  authorized  as of
    September  30, 2000 and  1999, respectively
    No  shares  issued  and outstanding as of
    September 30, 2000 and 1999                             --             --

Common stock, $0.01 par value. 120,000,000 and
    60,000,000 shares authorized as of
    September 30, 2000 and 1999, respectively;
    31,632,125 and 24,755,960 shares
    issued and outstanding at
    September 30, 2000 and 1999, respectively                316            248
Additional paid-in capital                               132,007        110,810
Deferred stock-based compensation                           (423)        (1,205)
Notes receivable from stockholders                          (598)           (23)
Accumulated other comprehensive losses                       (89)           (30)
Accumulated deficit                                     (107,439)       (73,628)
                                                     -----------    -----------
         Total stockholders' equity                       23,774         36,172
                                                     -----------    -----------
Total liabilities and stockholders' equity           $    32,614    $    42,709
                                                     ===========    ===========


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

                                      F-3
<PAGE>
<TABLE>

                                NETOBJECTS, INC.
                                AND SUBSIDIARIES
           Consolidated Statement of Operations and Comprehensive Loss
                 (In thousands, except share and per share data)
<CAPTION>
                                                          Year ended September 30,
                                                 --------------------------------------------
                                                     2000            1999           1998
                                                 ------------    ------------    ------------
<S>                                              <C>             <C>             <C>
Revenues:
     Software license fees and online revenues   $     23,287    $     13,566    $      9,703
     Service revenues                                   4,492           2,178            --
     Software license fees from IBM                     6,439           3,689           2,700
     Service revenues from IBM                           --             2,782           2,867
                                                 ------------    ------------    ------------
         Total revenues                                34,218          22,215          15,270
Cost of revenues:
     Software license fees and online revenues          5,285           1,817           2,531
     Service revenues                                   6,004           2,295            --
     Service revenues from IBM                           --             2,113           2,562
                                                 ------------    ------------    ------------
         Total cost of revenues                        11,289           6,225           5,093
                                                 ------------    ------------    ------------
Gross profit                                           22,929          15,990          10,177
                                                 ------------    ------------    ------------
Operating expenses:
     Sales and marketing                               28,377          18,800          17,114
     Research and development                          13,068           9,358          10,231
     General and administrative                         5,809           4,314           3,575
     Amortization of goodwill                           8,297            --              --
     Stock-based compensation                             626             559             227
In process research and development                     1,443            --              --
                                                 ------------    ------------    ------------
         Total operating expenses                      57,620          33,031          31,147
                                                 ------------    ------------    ------------
Operating loss                                        (34,691)        (17,041)        (20,970)
                                                 ------------    ------------    ------------
Interest income (expense)                                 962            (715)         (1,194)
Accretion of discount on debt                            --            (1,653)           --
Interest on beneficial conversion
feature of convertible debt                              --            (7,457)           --
                                                 ------------    ------------    ------------
     Loss before income taxes                         (33,729)        (26,866)        (22,164)
Income taxes                                               82              44              60
                                                 ------------    ------------    ------------
     Net loss                                    $    (33,811)   $    (26,910)   $    (22,224)
                                                 ------------    ------------    ------------
Translation adjustment                                    (59)            (30)           --
                                                 ------------    ------------    ------------
     Comprehensive loss                          $    (33,870)   $    (26,940)   $    (22,224)
                                                 ============    ============    ============
Basic and diluted net loss per share             $      (1.16)   $      (2.40)   $     (12.26)
                                                 ============    ============    ============
Shares used to calculate basic and diluted
net loss per share                                 29,227,545      11,215,118       1,812,484
                                                 ============    ============    ============

<FN>
        The accompanying notes are an integral part of these consolidated
                             financial statements.
</FN>
</TABLE>
                                      F-4
<PAGE>

<TABLE>

                        NETOBJECTS INC. AND SUBSIDIARIES
            Consolidated Statements of Stockholders' Equity (Deficit)
                Three Years Ended September 30, 2000, 1999, 1998
                                 (In thousands)
<CAPTION>

                                                Preferred Stock     Common Stock
                                                ----------------- -----------------
                                                                                                                      Notes
                                                Shares   Amount   Shares   Amount    Additional      Deferred       Receivable
                                                                                      Paid in         Stock            from
                                                                                      Capital      Compensation    Stockholders
                                                -------- ------  -------- -------- ------------   ------------    ------------
<S>                                              <C>     <C>        <C>   <C>       <C>           <C>              <C>
Balance at September 30, 1997                    11,395  $   107    1,857 $     18  $    15,599   $      --        $     (143)
Exercise of stock options                                             144        2           89
Issuance of common stock                                               18                   116
Repurchase of restricted stock                                        (18)                   (2)
Warrant to purchase Series F preferred stock                                                535
Issuance of Series E preferred stock                182        2                          1,213
Repayment of stockholder notes receivable                                                                                  30
Deferred compensation related to stock option                                               768           (768)
grants
Amortization of stock-based compensation                                                                   227
Net loss
                                                -------- ------  -------- -------- ------------   ------------    ------------
Balance at September 30, 1998                    11,577      109    2,001       20       18,318           (541)          (113)
Exercise of stock options                                             541        5          588
Issuance of common stock to non-employees                              33                   316
Issuance of common stock pursuant to ESPP                              13                    76
Repurchase of restricted stock                                        (30)                   (6)
Warrants exercised                                  652        7                          1,181
Warrants to purchase Series E preferred stock                                               120
Issuance of in-the-money convertible debt and
warrants to purchase Series E preferred stock                                             8,776
Issuance of Series F preferred stock, net of
$30 in issuance costs                               389        4                          3,466
Issuance of Series E preferred stock, net of
$67 in issuance costs                                82        1                            482
Cashless exercise of C warrants for common
stock                                                               1,356       14          (14)
Issuance of common stock at IPO, net of
$7,076 in issuance costs                                            6,000       60       64,862
Conversion of Series A,C,E and F preferred
stock to common stock                           (12,700)    (121)  12,700      127           (6)
Convertible debt and interest converted to
common stock                                                        2,142       22       11,428
Repayment of stockholder notes receivable                                                                                  90
Deferred compensation related to stock option
grants                                                                                    1,223         (1,223)
</TABLE>

<TABLE>

                                                      Accumulated                         Total
                                                         Other          Accumulated    Stockholders'
                                                   Comprehensive Loss     Deficit     Equity (Deficit)
                                                  -------------------  -----------   ----------------
<S>                                                <C>                 <C>            <C>
Balance at September 30, 1997                      $        --         $   (24,494)   $     (8,913)
Exercise of stock options                                                                       91
Issuance of common stock                                                                       116
Repurchase of restricted stock                                                                  (2)
Warrant to purchase Series F preferred stock                                                   535
Issuance of Series E preferred stock                                                         1,215
Repayment of stockholder notes receivable                                                       30
Deferred compensation related to stock option
grants                                                                                          --
Amortization of stock-based compensation                                                       227
Net loss                                                                   (22,224)        (22,224)
                                                  -------------------  -----------   ----------------
Balance at September 30, 1998                               --             (46,718)        (28,925)
Exercise of stock options                                                                      593
Issuance of common stock to non-employees                                                      316
Issuance of common stock pursuant to ESPP                                                       76
Repurchase of restricted stock                                                                  (6)
Warrants exercised                                                                           1,188
Warrants to purchase Series E preferred stock                                                  120
Issuance of in-the-money convertible debt and                                                8,776
warrants to purchase Series E preferred stock
Issuance of Series F preferred stock, net of
$30 in issuance costs                                                                        3,470
Issuance of Series E preferred stock, net of
$67 in issuance costs                                                                          483
Cashless exercise of C warrants for common
stock                                                                                           --
Issuance of common stock at IPO, net of
$7,076 in issuance costs                                                                     64,922
Conversion of Series A,C,E and F preferred
stock to common stock                                                                           --
Convertible debt and interest converted to
common stock                                                                                11,450
Repayment of stockholder notes receivable                                                       90
Deferred compensation related to stock option
grants                                                                                          --
</TABLE>
                                      F-5
<PAGE>

<TABLE>
<CAPTION>
                                                Preferred Stock     Common Stock
                                                ----------------- -----------------
                                                                                                                      Notes
                                                Shares   Amount   Shares   Amount    Additional      Deferred       Receivable
                                                                                      Paid in         Stock            from
                                                                                      Capital      Compensation    Stockholders
                                                -------- ------  -------- -------- ------------   ------------    ------------
<S>                                                 <C>     <C>    <C>         <C>      <C>            <C>                <C>
Amortization of stock-based compensation                                                                  559
Translation adjustment
Net loss
                                                -------- ------  -------- -------- ------------   ------------    ------------
Balance at September 30, 1999                        --     --     24,756      248      110,810        (1,205)            (23)
Issuance of common stock for Sitematic
Corporation acquisition                                             2,005       20       13,458
Issuance of common stock for Rocktide
Corporation acquisition                                               458        5        3,595
Exercised warrants for cash                                            51                   551
Cashless exercise of warrants for common stock                      3,163       32          (32)
Exercise of stock options                                           1,124       11        3,394
Issuance of shareholder notes receivable                                                                                 (575)
Issuance of common stock pursuant to ESPP                              75                   360
Deferred compensation related to stock option                                               211          (184)
grants
Cancellation of deferred compensation                                                      (340)          340
Amortization of deferred compensation                                                                     626
Translation adjustment
Net loss
                                                -------- ------  -------- -------- ------------   ------------    ------------
Balance at September 30, 2000                        --   $ --     31,632 $    316    $ 132,007     $    (423)     $     (598)
                                                ======== ======  ======== ======== ============   ============    ============
</TABLE>

<TABLE>
<CAPTION>
                                                    Accumulated                         Total
                                                       Other          Accumulated    Stockholders'
                                                 Comprehensive Loss     Deficit     Equity (Deficit)
                                                -------------------  -----------   ----------------
<S>                                                          <C>        <C>               <C>
Amortization of stock-based compensation                                                     559
Translation adjustment                                       (30)                            (30)
Net loss                                                                (26,910)         (26,910)
                                                -------------------  -----------   ----------------
Balance at September 30, 1999                                (30)       (73,628)          36,172
Issuance of common stock for Sitematic
Corporation acquisition                                                                   13,478
Issuance of common stock for Rocktide
Corporation acquisition                                                                    3,600
Exercised warrants for cash                                                                  551
Cashless exercise of warrants for common stock                                                --
Exercise of stock options                                                                  3,405
Issuance of shareholder notes receivable                                                    (575)
Issuance of common stock pursuant to ESPP                                                    360
Deferred compensation related to stock option                                                 27
grants
Cancellation of deferred compensation                                                         --
Amortization of deferred compensation                                                        626
Translation adjustment                                       (59)                            (59)
Net loss                                                                (33,811)         (33,811)
                                                -------------------  -----------   ----------------
Balance at September 30, 2000                      $         (89)    $ (107,439)        $ 23,774
                                                =================== ============== ================

<FN>

        The accompanying notes are an integral part of these consolidated
                             financial statements.
</FN>
</TABLE>
                                      F-6
<PAGE>
<TABLE>

                                NETOBJECTS, INC.
                                 AND SUBSIDIARY
                      Consolidated Statements of Cash Flows
                                 (In thousands)
<CAPTION>
                                                                               Year ended September 30,
                                                                         -----------------------------------
                                                                            2000        1999        1998
                                                                         -----------------------------------
<S>                                                                       <C>         <C>         <C>
Cash used in operating activities:
Net loss                                                                  $(33,870)   $(26,940)   $(22,224)
Adjustments to reconcile net loss to net
cash used in operating activities:
    Depreciation                                                             1,555       1,119       1,104
    Accretion of discount on borrowings                                       --         1,653         201
    Nonrecurring interest charge on
       beneficial conversion feature of
        convertible debt                                                      --         7,457        --
    Amortization of intangible assets                                        8,410        --          --
    Amortization of deferred stock-based compensation                          626         559         227
    Allowance for doubtful accounts and returns                                406      (1,355)      1,508
    Changes in operating assets and liabilities:
        Accounts receivable                                                   (179)     (2,417)     (1,782)
        Prepaid expenses                                                    (3,044)       (234)       (306)
        Other current assets                                                   448        --          --
        Accounts payable                                                    (1,763)     (1,919)      2,205
        Accrued compensation                                                   269        (622)        649
        Other accrued liabilities                                            1,660         810         382
        Deferred revenue                                                     1,394      (4,301)       (999)
        Interest payable                                                      --           321        --
                                                                          --------    --------    --------
            Net cash used in operating activities                          (24,088)    (25,869)    (19,036)
                                                                          --------    --------    --------
Cash provided by (used in) investing activities:
    Purchases of property and equipment                                     (1,798)     (1,684)       (792)
    Cash paid for Sitematic Corporation, net of cash acquired               (1,297)       --          --
    Bridge loan to Sitematic Corporation                                      --          (500)       --
    Cash paid for Rocktide Corporation, net of cash acquired                  (360)
    Purchase of short-term investments                                        --       (16,000)       --
    Maturities of short-term investments                                     9,331       6,669        --
                                                                          --------    --------    --------
            Net cash provided by (used in)
                investing activities                                         5,876     (11,515)       (792)
                                                                          --------    --------    --------
Cash provided by financing activities:
    Proceeds from short-term borrowings                                       --         3,421      21,000
    Repayments of short-term borrowings                                       --       (24,421)     (2,050)
    Proceeds from convertible debt                                            --        12,910        --
    Repayment of convertible debt                                             --        (2,000)       --
    Payment on capital lease obligations                                      (339)       (298)       (300)
    Proceeds from issuance of preferred stock,
      net of issuance costs                                                   --         5,262       1,215
    Proceeds from issuance of common stock,
      net of issuance costs                                                  3,826      65,584          91
    Repurchases of common stock                                               --          --            (2)
    Issuance of stockholder notes receivable                                  (575)       --          --
    Repayment of stockholder notes receivable                                 --          90            30
                                                                          --------    --------    --------
            Net cash provided by financing activities                        2,912      60,548      19,984
                                                                          --------    --------    --------
Effect of exchange rate changes on cash                                        (59)        (30)       --
Net increase (decrease) in cash                                            (15,241)     23,164         156
Cash and cash equivalents at beginning of period                            23,623         459         303
                                                                          --------    --------    --------
Cash and cash equivalents at end of period                                $  8,323    $ 23,623    $    459
                                                                          ========    ========    ========
Supplemental disclosures of cash flow information:
    Interest paid                                                         $   --      $  1,471    $    753
    Noncash investing and financing activities:
        Equipment recorded under capital leases                           $   --      $    335    $    634
        Discount on borrowings                                            $   --      $  1,653    $    535
        Stock issued in exchange for services                             $   --      $    316    $   --
        Issuance of common stock for acquisitions                         $ 17,078    $   --      $   --
        In process research and development                               $  1,443    $   --      $   --
        Deferred stock-based compensation                                 $    123    $  1,223    $    768

<FN>

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

</FN>
</TABLE>
                                      F-7
<PAGE>

                       NETOBJECTS, INC. AND SUBISIDIARIES
                   Notes to Consolidated Financial Statements

1.   Description of the Business

         The Company  was  incorporated  in  Delaware  on November  21, 1995 and
became a majority-owned subsidiary of IBM on April 11, 1997. In fiscal 1998, the
Company  changed its fiscal year end from  September 30 to the Saturday  nearest
September 30. For presentation  purposes,  the consolidated financial statements
and notes refer to the calendar month end.

         On May 7, 1999, the Company  completed its initial public offering.  At
that time, all series of convertible preferred shares outstanding were converted
to common stock.

         On October 4, 1999 NetObjects acquired Sitematic Corporation and issued
common stock that brought IBM's ownership to less than 50%. See Note 13.

         On July 14, 2000 NetObjects  acquired  Rocktide  Corporation and issued
common stock that brought IBM's ownership to 48%. See Note 13.

         On September  29,  2000,  the Company  entered  into an agreement  with
IBIZU,  Inc. a private company (IBIZU)  pursuant to which the Company acquired a
preferred  equity  interest  in IBIZU in  exchange  for the  transfer of certain
technology  rights  developed  by the  Company.  The Company  accounts  for this
investment using the equity method of accounting.

         On October 18, 2000,  the Company signed an agreement to acquire all of
the  shares  of  privately  held   MyComputer.com,   Inc. See note 13.

         NetObjects provides software, solutions, and services that enable small
businesses to build, deploy, maintain Web sites online, provide online services,
and conduct  e-business;  and enable large enterprises to effectively create and
manage corporate intranets.

2.  Summary of Significant Accounting Policies




                                      F-8
<PAGE>


                       NETOBJECTS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


         Consolidation Principles

         The accompanying consolidated financial statements include the accounts
of  NetObjects,  Inc.  and its  wholly  owned  subsidiaries,  NetObjects,  Ltd.,
Sitematic Corporation and Rocktide Corporation  (collectively,  the "Company" or
"NetObjects").   All   intercompany   transactions   have  been   eliminated  in
consolidation.

         Estimates and Assumptions

         In preparing these financial statements,  management has made estimates
and  assumptions  that  effect the  reported  amounts  of  assets,  liabilities,
revenues and expenses and  disclosures of contingent  assets and  liabilities at
the date of the  consolidated  financial  statements.  Actual results may differ
from these estimates.

         Equity Investments

         Where  the  company  has  investments  in which it has the  ability  to
exercise  significant  influence  over  operating  and financial  policies,  the
investments  are  accounted  for  using  the  equity  method.  Accordingly,  the
Company's  share  of  income/(loss)  in the  investments  is  included  in other
operating  income.  To date, the effect of such amounts on net loss has not been
material.

         Foreign Currency Translation

         The  functional  currency of the  Company's  foreign  subsidiary is its
local currency.  Adjustments  arising from the  translation of the  subsidiary's
financial statements are reported in other comprehensive income.  Exchange gains
and losses  arising from  transactions  denominated in a currency other than the
functional  currency of the subsidiary are included in net income.  To date, the
effect of such amounts on net loss has not been material.

         Revenue Recognition

         The Company recognizes revenue in accordance with American Institute of
Certified Public Accountants  (AICPA) Statement of Position (SOP) 97-2, Software
Revenue  Recognition,  as amended by SOP 98-9, Software Revenue Recognition with
respect to certain arrangements.

         Under SOP 97-2, software license revenue is recognized upon delivery of
the software,  when persuasive evidence of an agreement exists, and provided the
fee is  fixed,  determinable,  and  collectible,  and the  arrangement  does not
involve  significant  customization  of the  software.  Maintenance  and service
revenue are recognized on a straight-line basis over the term of the maintenance
agreement.  In addition,  SOP 97-2 generally requires revenue earned on software
arrangements  involving  multiple elements to be allocated to each element based
on the relative fair values of the elements.

                                      F-9
<PAGE>

                       NETOBJECTS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


         The fair value of an element must be based on evidence that is specific
to the  vendor.  If a vendor  does not have  evidence  of the fair value for all
delivered  elements in a  multiple-element  arrangement,  revenue is  recognized
under the  `residual  method' in accordance  with SOP 98-9.  Under the `residual
method', the total fair value of the undelivered  elements is deferred,  and the
residual  revenue is recorded upon delivery in  accordance  with SOP 97-2.  When
evidence of fair value of the undelivered items does not exist, all revenue from
the arrangement is deferred until such evidence exists or until all elements are
delivered.

         Software  license  fees  are  generally  recognized  upon  delivery  to
distributors,  net of an allowance for estimated  returns,  price protection and
rebates,   provided  no  significant  obligations  of  the  Company  remain  and
collection  for the resulting  receivable is probable.  The Company  receives on
hand inventory and sales  information  from its  significant  distributors  on a
periodic  basis.  The allowance  for returns and price  protection is determined
based on a  comparison  of on hand  inventory  in the  distribution  channel  to
historical sales made by the distributors to their  respective  customers.  This
analysis  is  performed  on a product  line basis to estimate  potential  excess
inventory in the distribution  channel.  The allowance for rebates is based upon
contractual  rebate rates  certain  distributors  earn upon selling  products to
their respective  customers.  Software license fees earned from products bundled
with original  equipment  manufacturer's  (OEM) products are  recognized  either
upfront, if the OEM vendor commits to a quantity and a fixed price with no right
of return or, if the volumes are not  committed,  upon the OEM shipping  bundled
products to its customer. IBM and Lotus are considered OEMs for purposes of this
accounting  policy.  See Note 11 for a discussion of software  license fees from
IBM.

         Service revenue from maintenance agreements for support and upgrades of
existing  products,  online  services and hosting are  deferred  and  recognized
ratably over the term of the  contract,  which  typically is 12 months.  Service
revenue for training and consulting  services are recognized as the services are
performed. See Note 11 for a discussion of service revenue from IBM.

         Prior to October 1, 1999, the Company  recognized revenue in accordance
with American  Institute of Certified Public  Accountants  (AICPA)  Statement of
Position (SOP) 91-1,  Software Revenue  Recognition.  Software license fees were
generally  recognized  upon  delivery to  distributors,  net of an allowance for
estimated  returns,  price  protection  and  rebates,  provided  no  significant
obligations of the Company  remained and collection of the resulting  receivable
was probable.

Property and Equipment

         Fixed assets are stated at cost and depreciated over the useful life of
the related asset on a straight-line  basis.  Leasehold  improvements and assets
recorded  under capital leases are amortized on a  straight-line  basis over the
lesser of the related asset's estimated useful life or the remaining lease term.

                                      F-10
<PAGE>

                       NETOBJECTS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


The estimated useful life for each category are:

Asset Category                                       Estimated Useful Life
--------------                                       ---------------------
Office equipment                                            5 years
Furniture and fixtures                                      5 years
Computer equipment                                          3 years
Tradeshow equipment                                         3 years
Software                                                    3 years


         Goodwill and Other Intangible Assets

         The Company records goodwill when the cost of net  identifiable  assets
it acquires exceeds their fair value.  Goodwill,  purchased technology and other
intangible  assets are  amortized  on a  straight-line  basis over an  estimated
useful life of 2 years.

         Long Lived Assets

         The Company  regularly  performs  reviews to  determine if the carrying
value of  long-lived  assets  is  impaired.  The  purpose  for the  review is to
identify any facts or circumstances, either internal or external, which indicate
that the carrying value of the asset cannot be recovered. No such impairment has
been indicated to date. If, in the future,  management  determines the existence
of  impairment  indicators,  the Company  would use  undiscounted  cash flows to
initially determine whether impairment should be recognized.  If necessary,  the
Company  would  perform a  subsequent  calculation  to measure the amount of the
impairment loss based on the excess of the carrying value over the fair value of
the impaired  assets.  If quoted market prices for the assets are not available,
the fair value would be calculated using the present value of estimated expected
future cash flows. The cash flow calculation would be based on management's best
estimates, using appropriate assumptions and projections at the time.

         Stock-Based Compensation

         The Company accounts for its stock-based  compensation  plans using the
intrinsic value method.  Deferred  stock-based  compensation expense is recorded
if, on the date of the grant,  the current market value of the underlying  stock
exceeds  the  exercise  price.  The  Company  amortizes   deferred   stock-based
compensation  in accordance  with Financial  Accounting  Standards  Board (FASB)
Interpretation 28.

         Net Loss Per Share

         Basic net loss per share is computed using the weighted-average  number
of outstanding shares of common stock,  excluding shares of common stock subject
to repurchase. Diluted net loss per share is computed using the weighted-average
number of shares of common  stock  outstanding  and,  when  dilutive,  potential
common shares from stock subject to repurchase, options and warrants to purchase
common stock using the treasury stock method and from convertible  securities on
an "as if-converted"  basis. All potential

                                      F-11
<PAGE>

                       NETOBJECTS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

common shares have been excluded  from the  computation  of diluted net loss per
share for all periods presented because the effect would have been antidilutive.

         Diluted net loss per share for the year ended  September 30, 2000, does
not  include  the  effect  of   approximately   336,528  stock  options  with  a
weighted-average  exercise  price of $7.70 per  share,  7,375,534  common  stock
warrants with a  weighted-average  exercise price of $9.20 per share,  or 32,849
shares of common stock issued and subject to  repurchase  at a  weighted-average
exercise price of $0.16, because their effects are antidilutive.

         Diluted net loss per share for the year ended  September 30, 1999, does
not  include  the  effect  of  approximately  3,045,869  stock  options  with  a
weighted-average  exercise  price of $4.42 per  share,  4,614,550  common  stock
warrants with a  weighted-average  exercise price of $7.49 per share,  or 37,594
shares of common stock issued and subject to  repurchase  at a  weighted-average
exercise price of $0.12, because their effects are antidilutive.

         Diluted net loss per share for the year ended  September 30, 1998, does
not  include the effect of  approximately  11,576,937  (on an "as  if-converted"
basis)  shares of  convertible  preferred  stock  outstanding,  2,466,694  stock
options with a  weighted-average  exercise  price of $1.32 per share,  6,650,006
preferred  stock  warrants with a  weighted-average  exercise price of $5.60 per
share,  or 88,177  shares of common stock issued and subject to  repurchase at a
weighted-average   exercise   price  of  $0.12,   because   their   effects  are
antidilutive.

         Research and Development

         Research and development costs are expensed as incurred up to the point
that  technological  feasibility  is  established.  To date, the Company has not
capitalized  any software  development  costs as software  development  has been
completed concurrent with the establishment of technological feasibility.

         Income Taxes

         The  Company's  tax  provision  for all years has been  calculated on a
stand-alone  basis  using the asset and  liability  method.  Under this  method,
deferred tax  liabilities  and assets are recognized for the expected future tax
consequences  attributable to differences  between the carrying  amounts and the
tax bases of assets and  liabilities.  Deferred tax assets and  liabilities  are
measured  using  enacted tax rates  expected  to apply to taxable  income in the
years in which those  temporary  differences  are  expected to be  recovered  or
settled.  The effect on deferred tax assets and  liabilities  of a change in tax
rates is recognized in income in the period that includes the enactment  date. A
valuation allowance is recorded to reduce deferred tax assets to an amount whose
realization is more likely than not.

         Cash equivalents and short-term investments

         The Company  considers  highly liquid  investments held in money-market
funds and certificates of deposit with maturities of 90 days or less at the date
of purchase to be cash equivalents.  The Company does not hold equity securities
for investment purposes.

         Short-term   investments  are  carried  at  fair  market  value,  which
approximates cost. Realized and unrealized gains and losses for the fiscal years
ended  September  30, 2000 and 1999 were not  material.  Short-term  investments
consisting of high-quality  commercial paper having maturities of 90 to 180 days
at September  30, 1999,  were  classified  as held to maturity,  and measured at
amortized cost.

                                      F-12
<PAGE>

                       NETOBJECTS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


         Concentration of Credit Risk

         Financial   instruments  that   potentially   subject  the  Company  to
concentrations  of credit risk  consist of cash,  cash  equivalents,  short-term
investments and trade accounts receivable.  The Company's cash, cash equivalents
and  short-term  investments  are managed by recognized  financial  institutions
which follow the Company's  investment policy. Such investment policy limits the
amount  of  credit  exposure  in any  one  issue  and the  maturity  date of the
investment  securities that typically comprise  investment grade short-term debt
instruments.

         Accounts  receivable  has the  potential  to  subject  the  Company  to
concentrations  of credit risk. The Company  evaluates its customer's  financial
condition prior to extending terms,  performs ongoing credit  evaluations of its
customers and generally does not require collateral for accounts receivable.  As
necessary,  the Company maintains an allowance for doubtful accounts and to date
the use of such allowances has been within management  estimates.  The following
indicates significant customer balances:

                                                Year Ended
                                               September 30,
                                  ------------------------------------
                                       2000                1999
                                  ----------------     ---------------
Customer 1                              26%                  10%
Customer 2                              15%                  --
Customer 3                              --                   22%

         For the year  ended  September  30,  2000,  software  license  fees and
service  revenue  from  IBM  represented  approximately  19% of  total  revenues
respectively,  while four other  customers  accounted for  approximately  38% of
total revenues. No other customer accounts for more than 5% of total revenues.

         For the year  ended  September  30,  1999,  software  license  fees and
service revenue from IBM represented  approximately 29% of total revenues, while
three other customers  accounted for  approximately  24% of total  revenues.  No
other customer accounts for more than 5% of total revenues.

         The  Company's   principal   markets  are  North  America  and  Europe.
International  sales represented  approximately 38%, 23% and 16% of revenues for
the fiscal years ended September 30, 2000, 1999 and 1998.

         Fair Value of Financial Instruments

         The  carrying  amounts  of  cash  and  cash   equivalents,   short-term
investments,  account receivable,  accounts payable,  accrued compensation,  and
other accrued  liabilities  approximate fair value because of the short maturity
of these instruments.

         Advertising Expense

         The cost of advertising is expensed as incurred and included in selling
and marketing  expenses.  For the years ended September 30, 2000, 1999 and 1998,
those  expenses  totaled  approximately  $6.6  million,  $7.2  million  and $5.8
million, respectively.

                                      F-13
<PAGE>

                       NETOBJECTS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


         Employee Benefits Plan

         The Company has  established  a qualified  savings  plan for  employees
under Section 401(k) of the Internal  Revenue  Service Code, in which  employees
may  defer as much as 15% of their  pretax  annual  salary  up to the  statutory
limits. The Company does not contribute to the plan.

Recent Accounting Pronouncements

         In June 1998, FASB issued Statement of Financial  Accounting  Standards
(SFAS) no. 133, "Accounting for Derivative  Instruments and Hedging Activities."
As  amended  by SFAS  No.  137 and 138,  SFAS No.  133  establishes  methods  of
accounting for derivative  financial  instruments and hedging activities related
to those  instruments as well as other hedging  activities.  In accordance  with
SFAS  No.  137,  issued  by the  FASB  in  June  1999  and  which  deferred  the
implementation  of SFAS No. 133,  the  Company  has adopted  SFAS No. 133 in the
first quarter of fiscal 2001. To date the  Company's  investments  in derivative
instruments  have not been  significant  and the  Company has not engaged in any
hedging  activities.  Accordingly,  the  Company  has  evaluated  the effects of
adopting  SFAS No.  133 and has  determined  that it will  not  have a  material
impact on its financial statements, cashflows or results of operations.

         In December 1999, the Securities and Exchange  Commission  (SEC) issued
Staff  Accounting  Bulletin  (SAB) No. 101,  "Revenue  Recognition  in Financial
Statements,"  which provides  guidance related to revenue  recognition  based on
interpretations  and  practices  followed by the SEC and  requires  companies to
report any changes in revenue  recognition as a cumulative  change in accounting
principle at the time of implementation in accordance with Accounting Principles
Board  opinion 20,  "Accounting  Changes."  SAB No. 101A and 101B were issued to
delay the  implementation  of SAB No.  101.  The  Company  anticipates  that the
adoption  of SAB No.  101 will  not  have a  material  impact  on its  financial
position, results of operations or cashflows. The Company will adopt SAB No. 101
in the fourth quarter of fiscal 2001.

3.  Basis of Presentation

         The Company has  suffered  recurring  losses  from  operations  and has
insufficient  funds to finance  operations  through  fiscal 2001.  This raises a
substantial  doubt about its ability to continue as a going concern.  Management
has been working to improve its results from operations and to obtain additional
capital  in  order  to  provide  the  funding   necessary  to  continue  product
development  activities  and bring  products to market.  Management is currently
seeking  the  sale of its  Enterprise  business  segment  (see  Note  14) and in
addition is actively pursuing strategic alliances,  equity financing,  and sales
of  non-strategic  assets  to  address  this  issue,  although  there  can be no
assurance that these efforts will be successful.  The accompanying  consolidated
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.

4.  Property and Equipment

         The  Company's  property and  equipment  consist of the  following  (in
thousands):

                                                       Year ended
                                                      September 30,
                                                   ------------------
                                                     2000       1999
                                                   -------    -------
Computer equipment and software                    $ 4,711    $ 2,963
Furniture and equipment                                854        651
Leasehold improvements                               1,690      1,589
                                                   -------    -------
                                                     7,255      5,203
Less: accumulated depreciation and amortization     (4,555)    (2,999)
                                                   -------    -------
Total property and equipment                       $ 2,700    $ 2,204
                                                   =======    =======

         Equipment  recorded  under  capital  leases  was $1.2  million  and the
related  accumulated  amortization  was $1.2 million as of  September  30, 2000.
Equipment  recorded  under  capital  leases  is $1.2  million  and  the  related
accumulated amortization is $912 thousand as of September 30, 1999.

                                      F-14
<PAGE>

                       NETOBJECTS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

5. Goodwill and Intangible Assets

     Goodwill and intangible assets consisted of the following (in thousands):

                                                           Year ended
                                                          September 30,
                                                      ---------------------
                                                       2000          1999
                                                      -------       -------
Goodwill                                              $16,757         $--
Purchased technology                                    1,980          --
Other Intangibles                                         250          --
                                                      -------       -------
                                                       18,987          --
Less: accumulated amortization                          8,297          --
                                                      -------       -------
Total goodwill and intangible assets                  $10,690         $--
                                                      =======       =======


         As of September  30,  2000,  intangible  assets  consisted of Purchased
Technology,  Goodwill  and  other  miscellaneous  intangibles  acquired  in  the
acquisitions of Sitematic, and Rocktide. Purchased technology and other specific
intangibles   such  as  acquired   workforce,   patents,   tradename  and  other
miscellaneous  acquisition  expenses have been  identified by  independent  fair
value  appraisals.  Goodwill  represents the excess purchase price over the fair
value of assets  acquired.  See Note 13 for a more  in-depth  discussion of each
acquisition.  All  intangible  assets are being  amortized  over a period of two
years from the respective dates of acquisition.

6. Other Accrued Liabilities

     Other accrued expenses consisted of the following (in thousands):

                                                                Year ended
                                                               September 30,
                                                         -----------------------
                                                          2000             1999
                                                         ------           ------
Accrued professional fees                                $1,086           $  428
Accrued MDF                                               1,439               76
Accrued royalties                                           920              138
Other accrued liabilities                                   455            1,015
                                                         ------           ------
Total                                                    $3,900           $1,658
                                                         ======           ======

7.   Stockholder's Equity (Deficit)

         Capital stock

         On December 23, 1997, the Company  issued a warrant to purchase  83,333
shares of Series F preferred  stock, at a purchase price of $10.80 per share, to
IBM Credit Corp. These warrants are exercisable until December 23, 2002 and have
not been  exercised as of September 30, 2000.  The Company  determined  the fair
value of these  warrants  at the date of grant using the  Black-Scholes  pricing
model with the following assumptions: a risk-free interest rate of 6%; a life of
five years;  volatility of 65%; and no dividend  yield.  The resulting  interest
expense of $535,000 was accounted for as  additional  paid-in  capital and fully
amortized  in fiscal  1998.  At the  closing  of the  Company's  initial  public
offering (IPO),  these warrants became exercisable for common stock. The holders
of the warrants may

                                      F-15
<PAGE>

                       NETOBJECTS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

surrender  them on a cashless  exercise basis by  surrendering  shares of common
stock as payment of the exercise price.

         In connection with IBM's  acquisition of approximately 80% of our stock
on April 11,  1997,  the  Company  issued a  warrant  to IBM to  purchase  up to
3,482,838   shares  of  Series  E  preferred  stock  at  an  exercise  price  of
approximately  $6.68 per share.  On September  30,  2000,  these  warrants  were
exercised  for  3,163,000  shares of common stock upon a cashless  basis per the
terms of the warrant agreement.

         On October 8, 1998,  the  Company  entered  into  Convertible  Note and
Warrant  Purchase  Agreements  with IBM and  Perseus  Capital  LLC.  The Company
recorded a $7.5 million  nonrecurring  interest charge in fiscal 1999 to account
for the "in-the-money"  conversion right of the convertible notes. Principal and
accrued interest totaling $10.9 million on these notes was converted into Series
E-2  preferred  stock at $5.35  per share  which  converted  automatically  into
2,141,713 shares of common stock upon the completion of the Company's IPO.

         In connection with the Convertible Note and Warrant Purchase Agreement,
the Company  issued  warrants to acquire  163,715 shares of Series E-2 preferred
stock at an exercise price of $6.68 per share.  The Company  determined the fair
value of these  warrants  at the date of grant using the  Black-Scholes  pricing
model with the following assumptions: a risk-free interest rate of 6%; a life of
five years;  volatility of 65%; and no dividend  yield.  The resulting  interest
expense of $887,000, which appears in the accompanying consolidated statement of
operations  as a  portion  of the  accretion  of  discount  on debt,  was  fully
amortized  during the year  ended  September  30,  1999.  At the  closing of the
Company's IPO, these warrants became  exercisable for common stock. The warrants
remain  outstanding  and are  exercisable for shares of common stock at any time
before  October,  2003.  As of  September  30,  2000,  these  warrants are still
outstanding and have not been exercised.

         In  connection  with notes issued to IBM in October and December  1998,
the Company  issued  warrants to acquire  51,335  shares of Series E-2 preferred
stock at an exercise price of $6.68 per share.  The Company  determined the fair
value of these  warrants  at the date of grant using the  Black-Scholes  pricing
model. The fair value of the warrants issued, calculated using the Black Scholes
option pricing model and the following assumptions:  6% interest rate, a life of
5 years,  and expected  volatility of 80% was  determined by the Company and the
resulting  discount of $432,000 was accounted for as additional  paid-in capital
and was fully  amortized in fiscal 1999. The warrants are exercisable for common
stock at any time  before  February,  2004.  As of  September  30,  2000,  these
warrants have not been exercised.

         In May 1999,  the Company  sold  6,000,000  shares of its common  stock
through its IPO. Net proceeds from the offering were  approximately $65 million,
after deducting the underwriting  discount and other offering  expenses.  At the
time of the IPO, all of the Company's then authorized  shares of preferred stock
were  eliminated and all  outstanding  shares of preferred stock and convertible
debt  automatically  converted into  14,056,093  and 2,141,713  shares of common
stock,  respectively.  All outstanding warrants that were not exercised upon the
IPO became warrants to purchase common stock.

         In the fiscal year ended  September 30, 1999, the Company issued common
stock with a fair value of approximately $316,000 to various vendors in exchange
for services.

         Stock split

         On   February   4,  1999,   the  Board  of   Directors   authorized   a
recapitalization  of the Company's equity  structure,  including  changes in par
value,  the number of shares  authorized and a 1-for-6  reverse

                                      F-16
<PAGE>

                       NETOBJECTS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

split of all the outstanding shares of the Company's preferred and common stock.
The reverse  stock split took effect upon the closing of IPO.  All share and per
share  amounts  have been  restated to reflect  the reverse  stock split for all
periods presented.

         Stock option plans

         The Company's 1997 Stock Option Plan,  (the 1997 plan) provides for the
issuance of incentive stock options under the Internal  Revenue Code of 1986 and
for the  issuance of  nonqualified  stock  options to purchase  common  stock to
employees,  non-employee  directors or consultants  at exercise  prices not less
than 85% of the fair  market  value at the date of grant.  A total of  9,526,994
shares of common stock have been  authorized  for issuance  under the 1997 Plan.
The board of directors, or the compensation committee of the board of directors,
utilizes the fair market value of the common stock as the basis for  determining
the exercise price. Options currently  outstanding generally vest 25% at the end
of the first  year and then  monthly  on a pro rata  basis  over the next  three
years. Options expire ten years from the date of grant.

         In  connection  with  IBM's  acquisition  of  approximately  80% of the
Company's  outstanding stock in April 1997, the Company's 1996 Stock Option Plan
was canceled and all options issued under that plan were reissued under the 1997
Plan.  Under the 1996 Stock  Option  Plan,  optionees  had the right to exercise
unvested options,  subject to the Company's right to repurchase  unvested shares
held at the time of termination  of  employment.  That right was carried over to
the 1997 Plan for  optionees  who held options  under the 1996 Stock Option Plan
that were  reissued  under  the 1997  Plan,  but does not  apply to new  options
granted  since April 11, 1997 under the 1997 Plan.  As of  September  30,  2000,
32,849  shares of common  stock  were  subject to our right of  repurchase,  and
1,756,443 shares of common stock were available for future option grants,  under
the 1997 Plan.

         In March 1997, the board of directors  adopted,  and in April 1997, the
stockholders  approved, the 1997 Special Stock Option Plan. A total of 1,041,056
shares of common stock were authorized for issuance under the plan. On March 18,
1997, the board of directors authorized the grant of options for the purchase of
all shares of common  stock  authorized  for  issuance  under the plan to 35 key
employees.  The options  granted under the plan generally vest 25% at the end of
the first year and then  monthly on a pro rata basis over the next three  years.
The board of  directors  does not  intend to grant any more  options  under this
stock option plan.

         In November  1999, the board of directors  adopted,  and in March 2000,
the stockholders approved, the Executive Stock Option Plan. A total of 1,400,000
shares of common stock were authorized for issuance under the plan. On March 15,
2000, the board of directors authorized the grant of options for the purchase of
all  shares of common  stock  authorized  for  issuance  under the plan to 7 key
senior executives.  The options granted under the plan generally vest monthly on
a pro rata basis over the next two years. The board of directors does not intend
to grant any more options under this stock option plan.

         In connection with options granted in fiscal year 2000, 1999, and 1998,
the  Company  has  recorded  deferred  stock-based   compensation  of  $208,000,
$1,223,000 and $768,000,  respectively,  representing the difference between the
exercise  price and the fair value of the Company's  common stock at the date of
grant.  Amortization of deferred stock-based compensation of $ 626,000, $559,000
and $227,000 was  recognized  during the fiscal years ended  September 30, 2000,
1999 and 1998, respectively.

         The amortization of deferred employee stock-based compensation combined
with the expense associated with stock options granted to non-employees, relates
to the following items in the accompanying consolidated statements of operations
and comprehensive loss (in thousands):

                                      F-17
<PAGE>

                       NETOBJECTS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

                                                                  Year ended
                                                                September 30,
                                                             -------------------
                                                             2000           1999
                                                             ----           ----
Sales and marketing                                          $397           $352
Research and development                                       72             73
General and administrative                                    157            134
                                                             ----           ----
Total                                                        $626           $559
                                                             ====           ====
<TABLE>

         The Company's stock option plans and related activity are summarized in
the table below:
<CAPTION>
                                         Year ended                  Year ended                  Year ended
                                     September 30, 2000          September 30, 1999          September 30, 1998
                                -----------------------------------------------------------------------------------
                                                Weighted                     Weighted     Number of    Weighted
                                 Number of     Average        Number of       Average      Exercise      Average
                                  Options    Exercise Price    Options    Exercise Price   Options       Price
                                -----------------------------------------------------------------------------------
<S>                              <C>          <C>             <C>          <C>             <C>          <C>
Outstanding at beginning of
period                           3,045,869    $    4.41       2,466,694    $    1.32       2,517,670    $    1.20

Granted at market value          9,005,712    $    8.75         848,180    $    7.28         173,362    $    2.10

Granted at less than market
value related to Sitematic
acquisition                        296,718    $    0.33         939,361    $    7.47         167,940    $    2.10

Exercised                       (1,122,761)   $    3.03        (541,498)   $    1.09        (144,410)   $    0.60

Cancelled                       (1,841,165)   $    8.91        (666,868)   $    3.70        (247,768)   $    1.26

Outstanding at end of period     9,383,391    $    7.72       3,045,869    $    4.42       2,466,694    $    1.32

Vested at period end             2,396,488                      973,735                      852,158
Weighted-average fair value
of options granted during the
period with exercise prices
equal to market value at date
of grant                                      $    6.83                    $    5.41                    $    0.66

Weighted-average fair value
of options granted during the
period with exercise prices
less than market value at
date of grant                                 $    5.29                    $    5.65                    $    0.69

</TABLE>

                                      F-18
<PAGE>
                       NETOBJECTS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


<TABLE>
The following table summarizes  outstanding and exercisable options at September
30, 2000:
<CAPTION>
                                      Options Outstanding                              Options Exercisable
                    ---------------------------------------------------------  -------------------------------------
    Range of            Number          Weighted average        Weighted            Number             Weighted
 exercise prices      Outstanding       contractual life        average           Exercisable          average
                                           remaining         exercise price                         exercise price
------------------  ----------------   -------------------  -----------------  ------------------  -----------------
<S>                       <C>                      <C>       <C>                         <C>            <C>
   $  0.12 - 1.65           770,167                  6.76    $          1.25             615,633        $      1.29
      2.10 - 2.94         1,274,315                  9.77               2.89              61,758               2.44
      3.13 - 5.81         1,040,780                  9.82               4.11              34,970               5.49
      5.88 - 6.94         1,301,945                  8.99               6.46             261,243               6.27
      7.00 - 7.13         1,436,878                  9.16               7.12             586,947               7.13
      7.44 - 9.72         1,047,971                  9.00               8.03             246,516               7.68
     9.75 - 13.19         1,305,816                  9.47              12.42             276,962              12.43
    13.44 - 18.06           940,927                  9.25              14.62             292,929              14.51
    18.19 - 40.88           256,592                  9.03              23.98              19,530              22.14
            43.50             8,000                  9.43              43.50                  --                 --
                    ----------------   -------------------  -----------------  ------------------  -----------------
     0.12 - 43.50         9,383,391                  9.12   $            .72           2,396,488         $     7.08
</TABLE>

         Employee stock purchase plan.

         The  Company's  board of  directors  approved the 1999  Employee  Stock
Purchase Plan (ESPP), which became effective on May 28, 1999, and 300,000 shares
were reserved under the plan.

         The ESPP permits an eligible  employee to purchase  common stock, in an
amount which may not exceed 10% of his or her compensation,  at a price equal to
85% of the lesser of the fair market value of the common stock at the  beginning
of the offering  period and the fair market value of the common stock at the end
of each purchase period.

         To date,  87,867 shares have been purchased at a weighted average price
of $4.97 per share. The weighted average fair market value of the stock purchase
rights  granted  during  fiscal  2000 and  fiscal  1999  was  $4.81  and  $2.20,
respectively.

                                      F-19
<PAGE>

                       NETOBJECTS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

Stock compensation

<TABLE>
         The Company accounts for stock-based  compensation  using the intrinsic
method. Had compensation expense for the Company's stock compensation plans been
determined using the fair-value method, as described by SFAS 123, Accounting for
Stock-Based  Compensation,  pro forma losses for 2000,  1999 and 1998 would have
been as follows (in thousands, except per share amounts):
<CAPTION>
                                                        Year Ended September 30,
                                             --------------------------------------------
                                                 2000            1999           1998
                                             ------------    ------------    ------------
<S>                                          <C>             <C>             <C>
Net income (loss)
     As reported                             $    (33,870)   $    (26,940)   $    (22,224)
     Pro forma                               $    (36,554)   $    (28,011)   $    (22,417)
Net income (loss) per share - basic and
diluted
     As reported                             $      (1.16)   $      (2.40)   $     (12.26)
     Pro forma                               $      (1.25)   $      (2.50)   $     (12.37)

Weighted average common shares outstanding     29,227,545      11,215,118       1,812,484
</TABLE>

<TABLE>
           The fair value of each  option  grant and share  purchased  under the
Purchase  Plan are  estimated on the date of grant or share  purchase  using the
Black-Scholes option-pricing model with the following assumptions:
<CAPTION>
                                                        Year Ended September 30,
                                             --------------------------------------------
                                                 2000            1999           1998
                                             ------------    ------------    ------------
<S>                                                  <C>            <C>              <C>
Expected volatility                                   100%             85%             85%
Risk-free interest rate                              5.91%          5.875%           6.50%
Dividend yield                                         --              --              --
Expected life in years                                  2               2               4
</TABLE>

Expected  volatility was calculated  using an average of NetObjects  share price
volatility and the share price volatility of similar companies.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable  while the Company's  employee  stock options have  characteristics
significantly  different  from  those of traded  options.  In  addition,  option
valuation models require the input of highly  subjective  assumptions  including
the expected stock price volatility.

                                      F-20
<PAGE>

                       NETOBJECTS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

8.   Income Taxes

         As  of  September  30,  2000,   1999,  1998,  the  types  of  temporary
differences that give rise to significant portions of the Company's deferred tax
assets and liabilities as follows (in thousands):

                                                     Year ended September 30,
                                                 -------------------------------
                                                   2000       1999       1998
                                                 --------   --------   --------
Net operating loss carryforwards                 $ 37,319   $ 29,821   $ 17,506
Research and development credit carryforwards       2,787      1,811      1,649
Accruals and reserves not currently deductible      1,891      1,059      1,767
Depreciation on property and equipment                898        739        488
Other                                                  80       --         --
                                                 --------   --------   --------
      Gross deferred tax assets                    42,975     33,430     21,410
                                                 --------   --------   --------
Valuation allowance                               (42,003)   (33,430)   (21,410)
                                                 --------   --------   --------
Total deferred assets                                 972       --         --
Deferred tax liabilities -acquired intangibles       (972)      --         --
                                                 --------   --------   --------
Net deferred tax asset, net of deferred tax
liabilities                                      $   --     $   --     $   --
                                                 ========   ========   ========


         The Company has  recorded a valuation  allowance  on its  deferred  tax
assets due to uncertainty of future  realization of such amounts.  The valuation
allowance  increased  by  approximately  $9.5 million from fiscal 1999 to fiscal
2000, and by $12.0 million from fiscal 1998 to fiscal 1999.

         As  of  September  30,  2000,   the  Company  had  net  operating  loss
carryforwards  of $93 million  and $63 million for federal and state  income tax
purposes,  respectively. The federal tax loss carryforwards expire in years 2012
through 2020, while the state tax loss carryforwards expire in the year 2006. As
of  September  30,  2000  the  Company  has  research  and  development   credit
carryforwards  for federal and state tax  purposes  of  approximately  $1.5M and
$1.2M  respectively.  The federal research and development credit  carryforwards
expire in the years  2012  through  2020.  The state  research  and  development
credits can be carried forward indefinitely.

         Federal and California tax laws impose substantial  restrictions on the
utilization  of net operating loss  carryforwards  in the event of an "ownership
change" as defined in section 382 of the Internal  Revenue  Code.  If NetObjects
has an ownership change,  NetObjects'  ability to utilize the net operating loss
carryforwards could be significantly reduced.

                                      F-21
<PAGE>

                       NETOBJECTS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


         The  Company's  actual tax expense for the years  ended  September  30,
2000, 1999, and 1998 differs from the benefit at the federal  statutory tax rate
of 34%, as follows (in thousands):

                                                    Year ended September 30,
                                                    ------------------------
                                                  2000       1999        1998
                                                -------     -------     -------
Statutory federal income tax benefit            ($9,878)    ($9,243)    ($7,556)
Losses not benefited                              9,878       9,243       7,556
State taxes                                           2           1           1
Foreign taxes                                        80          43          59
                                                -------     -------     -------
                                                $    82     $    44     $    60
                                                =======     =======     =======

         The components of income taxes for the years ended  September 30, 2000,
1999, and 1998 are as follows (in thousands):

                                                   Year ended September 30,
                                                   ------------------------
                                               2000          1999           1998
                                               ---            ---           ---
Current:
   Foreign                                     $80            $43           $59
   State                                         2              1             1
                                               ---            ---           ---
Total                                          $82            $44           $60
                                               ===            ===           ===

9.     Commitments

         Purchase Commitments

         During December, 1999, the Company entered into a marketing and hosting
services  agreement  with  Concentric  Networks   Incorporated  related  to  the
provision of co-marketing,  internal  hosting,  and external Fusion 5.0 customer
hosting services.  Under the terms of the contract,  the Company is obligated to
pay $6.0 million over the  twenty-two  month period of the contract  through the
combined utilization of hosting services and hardware purchases. As of September
30, 2000 the Company had paid approximately $3.3 million and has $2.7 million in
future  minimum  payments due in equal  quarterly  installments  during the year
ended September 30, 2001.

         Operating leases

     Total  rental  expense for  operating  leases was  approximately  $948,000,
$686,000,  and $683,000 for the years ended September 30, 2000,  1999, and 1998,
respectively.  Future minimum rental  payments  under  noncancelable  leases are
approximately $1,390,000 $1,246,000,  and $483,000 for the years ended September
30, 2001,  2002,  and 2003,  respectively.  As of  September  30, 2000 and 1999,
approximately $407,000 and $360,000 respectively,  of the Company's cash balance
is pledged as security for a lease line for furniture and fixtures.

                                      F-22
<PAGE>
                       NETOBJECTS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


10.  Segment and Geographic Information

         The Company conducts its business in two distinct segments:  Enterprise
and Small Business Online.  The products of the Enterprise  segment are targeted
toward the large business intranet and content management markets. The principal
products of the Enterprise segment are NetObjects Collage, which was launched in
March 2000, and NetObjects  Authoring Server. The products of the Small Business
and Online segment are targeted at small businesses that would like to establish
a Web site or upgrade an  existing  site. The  principal  products  of the Small
Business and Online  segment are  NetObjects  Fusion and, as of the October 1999
acquisition of Sitematic, Corp., GoBizGo.com. In October 2000, The Company added
the NetObjects  Matrix Platform to the Small Business and Online  segment's line
of products.

         The Company uses a direct sales force to distribute  NetObjects Collage
and NetObjects Authoring Server domestically and uses resellers in international
markets. The Company distributes  NetObjects Fusion,  GoBizGo and Matrix through
resellers, distributors, and a dedicated Web site.

         The  Company's  Chief  Operating  Decision  Maker  (CODM)  is the Chief
Executive   Officer.   During  fiscal  2000,  the  CODM  received  only  revenue
information on a disaggregated  basis for the Company's two segments.  All other
operating  information was prepared on a basis  consistent with the consolidated
statement of operations.

Revenue information for the Company's two segments is as follows:

<TABLE>
              For the twelve month period ended September 30, 2000
<CAPTION>

                                             Small Business &        Enterprise
                                             Online Markets            Markets          Total NetObjects
                                               -----------           -----------           -----------
<S>                                            <C>                   <C>                   <C>
Revenues:
         Domestic license and online           $     9,106           $     5,174           $    14,280
         International license                       7,889                 1,119                 9,008
         Domestic service                                -                 3,479                 3,479
         International service                           -                 1,012                 1,012
         IBM license                                 6,193                   246                 6,439
                                               -----------           -----------           -----------
Total Revenue                                  $    23,188           $    11,030           $    34,218
                                               ===========           ===========           ===========
</TABLE>

         In the Small Business and Online segment, three customers accounted for
approximately 66% of the revenue for the twelve months ended September 30, 2000.
In the Enterprise  segment one customer  accounted for  approximately  8% of the
revenue for the twelve months ended September 30, 2000. The accounting  policies
of each segment are the same as those  described  in the summary of  significant
accounting policies.

         For the twelve  months ended  September 30, 2000 revenues for the Small
Business  Online  segment  were  concentrated  in the United  States and Europe,
representing approximately $15.7 million and $7.8 million, respectively. License
fees for the  Enterprise  segment  were  concentrated  in the United  States and
Europe, representing approximately $8.5 million and $2.0 million, respectively.

                                      F-23
<PAGE>
                       NETOBJECTS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
<TABLE>

              For the twelve month period ended September 30, 1999

<CAPTION>

                                             Small Business &        Enterprise
                                             Online Markets            Markets          Total NetObjects
                                               -----------           -----------           -----------
<S>                                            <C>                   <C>                   <C>
Revenues:
         Domestic license and online            $    6,915            $    2,195            $    9,110
         International license                       4,437                    18                 4,455
         Domestic service                                -                 1,463                 1,463
         International service                           -                   716                   716
         IBM license                                 3,689                     -                 3,689
         IBM Service                                 2,782                     -                 2,782
                                               -----------           -----------           -----------
Total Revenue                                    $  17,823            $    4,392             $  22,215
                                               ===========           ===========           ===========
</TABLE>

         In the Small Business and Online  segment,  one customer  accounted for
approximately 36% of the revenue for the twelve months ended September 30, 1999.
There were no significant customer concentrations in the Enterprise segment.

         For the twelve months ended September 30, 1999,  revenues for the Small
Business & Online  segment were  concentrated  in the United  States and Europe,
representing approximately $13.4 million and $4.4 million,  respectively.  Sales
for the Enterprise  segment were  concentrated  in the United States and Europe,
representing approximately $3.7 million and $0.7 million, respectively.

         The Company did not begin  selling  NetObjects  Authoring  Server until
September  1998 and did not begin  operating  in two  segments  until the end of
fiscal 1999. As a result,  a comparison  with previous fiscal years would not be
meaningful.

11.  IBM Relationship

         Sales and Service Agreements with IBM

         The Company has entered into a Master  License  Agreement,  as amended,
whereby IBM could  sublicense  the Company's  software  products in exchange for
royalty  payments,  the Company  agreed to  integrate  certain of the  Company's
software  products into IBM's WebSphere  software  products as part of a service
agreement with IBM, for which the Company was to be paid an amount not to exceed
$5.3 million,  and the Company's products were to be bundled with Lotus products
in  connection  with  certain  promotional  programs,  in  exchange  for royalty
payments.  The  promotion  period began on January 1, 1999 and ended on December
31, 1999. There were no significant amendments during the fiscal 2000.

          During the year ended  September 30, 2000,  1999 and 1998, the Company
recognized license revenue from IBM of approximately $6.4 million,  $3.7 million
and $2.7 million,  respectively.  During the year ended  September 30, 2000, the
Company did not recognize any service  revenue  related to IBM.  Service revenue
from IBM for the years ended  September 30, 1999,  and 1998 was $2.8 million and
$2.9 million, respectively.

                                      F-24
<PAGE>
                       NETOBJECTS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

         Debt and Equity Financing from IBM

         IBM  acquired  controlling  interest of  NetObjects  on April 11, 1997,
receiving 10,495,968 shares of Series E convertible preferred stock at $6.68 per
share.  This represented  about 80% of the Company's  voting  securities at that
time. In connection with this  transaction,  the Company issued a warrant to IBM
to purchase up to 3,482,838 shares of Series E convertible preferred stock at an
exercise price of approximately  $6.68 per share.  This warrant for common stock
expired  April 11,  2000.  The Series E preferred  stock issued to IBM when they
acquired 80% of the Company  voting  shares was converted to common stock at the
Company's IPO.

         In December 1997, the Company obtained a line of credit from IBM Credit
Corp.  that was  eventually  increased to a total of $19 million.  In connection
with this line, the Company issued  warrants to purchase 83,333 shares of Series
F convertible  preferred stock at $10.80 per share to IBM Credit Corp. This note
was repaid with proceeds from the Company's initial public offering in May 1999.
The warrant is currently  exercisable for common stock and expires  December 23,
2002. In connection with the warrant  issuance,  the Company  recorded  interest
expense of $535,000,  which  appears on the statement of operations as a portion
of the  accretion  of discount on debt to IBM,  has been fully  amortized  as of
September 30, 1999.

         In October  1998,  the  Company  entered  into a  Convertible  Note and
Warrant  Purchase  Agreement  with IBM and Perseus  Capital LLC, under which the
Company  borrowed  $10.9  million and issued  warrants to purchase an additional
163,715  shares of Series E-2  preferred  stock at $6.68 per share.  These notes
totaling $10.9 million were  converted  automatically  into 2,141,713  shares of
common stock at the IPO. The warrant is currently  exercisable  for common stock
and expires  October 8, 2003. The preferred  warrants  automatically  convert to
common stock upon exercise.

         From  February  1999  through  March  1999,  the  Company  borrowed  an
additional $3.4 million from IBM at an interest rate of 10% per annum, for which
IBM received  warrants to acquire 51,335 shares of Series E-2 preferred stock at
$6.68 per share.  In April 1999,  the Company  borrowed an additional $2 million
from IBM under the Convertible Note and Warrant Purchase Agreement.  The Company
repaid both notes with proceeds of its IPO. The warrant is currently exercisable
for common stock and expires  February 19, 2004. In connection  with the warrant
issuance,  the Company recorded  interest expense of $432,000,  which appears on
the  statement of  operations as a portion of the accretion of discount on debt,
has been fully amortized as of September 30, 1999.

         As of September  30, 2000 IBM held  15,205,522  shares of the Company's
common stock and  warrants to purchase an  additional  336,528  shares of common
stock. If all outstanding  warrants were exercised,  IBM would own approximately
49% of the  Company's  common stock.  All of these  warrants may be exercised by
foregoing  the  receipt  of that  number of shares of common  stock  that  would
otherwise have been issued upon  exercise,  equal in value to the exercise price
of all warrants exercised.

12.  Other Related Party Transactions

         On April 17,  2000 and  September  28,  2000,  the  Company  issued two
shareholder  notes  receivable for a total of $575,000.  The notes are unsecured
and accrue  interest  at 6.45% per annum,  and are due in full in two years from
the date of issuance.  The shareholder has agreed to pay the amount due from net
proceeds,  after  payment  of  commissions,  of the  sale of his  shares  of the
Company's common stock.

                                      F-25
<PAGE>
                       NETOBJECTS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

13.  Acquisitions and Investments

Acquistions

     On  October  4,  1999,  the  Company  acquired  Sitematic  Corporation,  an
application  services provider (ASP) that offers e-business  solutions for small
businesses.  Under the terms of the  acquisition,  which was  accounted for as a
purchase, the Company exchanged approximately two million shares of common stock
for all issued and outstanding Sitematic equity.

     In addition  to the  exchange of its  preferred  shares with the  Company's
common stock,  Sitematic  preferred  shareholders  received  approximately  $1.6
million in cash for their shares.  All issued and outstanding  Sitematic options
were converted into options to purchase  267,506 shares of the Company's  common
stock.

     Sitematic's  operating  results  for the  year  ended  September  30,  1999
included revenue of  approximately  $0.2 million and a net loss of approximately
$2.6 million.

     Total  consideration,  including  transaction  costs of approximately  $0.5
million,  was  $15.5  million.  Allocation  of the  purchase  price in excess of
Sitematic Corporation's net book value resulted in the addition of $15.7 million
in  intangible  assets to the  Company's  balance  sheet,  of which  about $14.1
million  represents  goodwill.  The  goodwill  and  intangible  assets are being
amortized on a straight-line basis over an estimated useful life of 2 years.

     During July 2000, the Company  acquired  Rocktide,  Inc.; a developer of an
embedded ASP platform and an embeddable  online Web builder.  Under the terms of
the  acquisition  which was accounted for as a purchase,  the Company  exchanged
approximately  $458,000 shares of its common stock for the 8,625,000  issued and
outstanding Rocktide common stock.

     In addition to the exchange of its common stock with the  Company's  common
stock, Rocktide common stockholders received  approximately $400,000 in cash for
their shares.  All issued and outstanding  Rocktide  options were converted into
options to purchase 29,213 shares of the Company's common stock.

     Rocktide as of the date of  acquisition  has not yet generated any revenues
and had incurred a net loss of approximately  $135,000 for the six month period,
from inception, to the date of acquisition.

     Total  consideration  including  transaction  costs  of  $67,000,  was $4.2
million.  Allocation of the purchase price that was in excess of Rocktide Inc.'s
net book value resulted in the write-off of $1.4 million representing in-process
research and development  and the addition of $2.8 million in intangible  assets
to the Company's balance sheet, of which $2.6 million represents goodwill.

     The  following  unaudited pro forma  information  presents a summary of the
Company's consolidated results of operations including the acquired ASP business
of Sitematic and the embeddable Web business of Rocktide as if the  acquisitions
had occurred on October 1, 1998.

                                      F-26
<PAGE>
                       NETOBJECTS, INC. AND SUBSIDIARIES
                        (a subsidiary of IBM corporation)
                   Notes to Consolidated Financial Statements


In thousands except per share data               Year ended September 30
                                                    2000             1999
Revenues                                          34,218           22,418
Net Earnings                                     (33,577)         (40,397)
Net Earnings per share                             (2.45)           (2.95)


         These  unaudited pro forma  results have been prepared for  comparative
purposes and do not purport to be  indicative of  operations  which,  would have
actually  resulted had the combinations  been in effect on October 1, 1998 or of
future results of operations.

         On October 18, 2000,  the Company signed an agreement to acquire all of
the  shares  of  privately  held   MyComputer.com,   Inc.  of  Orem,   Utah  for
approximately  $51 million of common stock and cash, and to pay up to $6 million
in additional shares of common stock based on future performance of the acquired
business.  Under the agreement,  the Company agreed to advance interim operating
funds to  MyComputer,  depending upon the length of time between the date of the
agreement  and the closing.  The Company also agreed to reimburse up to $300,000
for  legal,  accounting  and  other  expenses  of  MyComputer  relating  to  the
transaction;  if the transaction  failed to close by December 1, 2000. (See note
14)

Investments

         On September  29,  2000,  the Company  entered  into an agreement  with
IBIZU,  Inc. a private company (IBIZU)  pursuant to which the Company acquired a
preferred  equity  interest  in IBIZU in  exchange  for the  transfer of certain
technology  rights  developed by the Company.  The investment has been accounted
for under the equity method of accounting. As of September 30, 2000, the Company
recorded no basis for the carrying value of this investment. See Note 2.

14.  Subsequent Events

     Sale of Enterprise Division

         On December 21, 2000 the Company signed an option and license agreement
under which it received $4 million in cash for an  exclusive  option to purchase
the Enterprise  Division for $18 million.  If the sale is completed,  the option
payment  will be credited  in full  towards the  purchase  price.  The option to
acquire the Enterprise  division will expire on January 5, 2001, if a definitive
agreement  for the  purchase of the  Enterprise  Division has not been signed by
that date, or by such later date as may be agreed upon by both companies. If the
acquisition  is not  completed,  the  potential  acquirer will have a three-year
license to distribute  NetObjects Collage and the $4 million option payment will
be  credited  against  future  royalty  payment  obligations  under the  license
agreement.  Completion  of the  acqisition  is  subject to the  negotiation  and
execution of a definitive agreement, which would be subject to customary closing
conditions.  Accordingly,  there  can be no  assurances  that  the  sale  of the
Enterprise division will occur.

     Issuance of Promissory Note to IBM

         In  December  2000,  the  Company  issued  a  promissory  note  to  IBM
corporation  for  $750,000  at an  annual  interest  rate  of 10%.  The  note is
currently due and payable.

     Termination of MyComputer.com Transaction

         In  December  2000,  the  agreement  and the  proposed  acquisition  of
MyComputer.com,  Inc.  were  terminated.  The  Company  loaned  a total of $2.25
million to  MyComputer  under this  agreement.  All of the loans were made under
notes bearing  interest at the prime rate and maturing on October 18, 2001.  The
Company will  forgive  $375,000 of this  indebtedness  upon  termination  of the
agreement,  as provided by its terms. The remaining  indebtedness,  which totals
$1.875 million,  will convert into MyComputer  preferred stock that is issued in
an equity  financing of at least $15.0  million  prior to October 18, 2001.  The
Company has not received notice from MyComputer of any such financing and cannot
be assured that  MyComputer will receive such financing or will be able to repay
the notes issued to the Company.

                                      F-27
<PAGE>


<TABLE>

                 Schedule II - Valuation and Qualifying Accounts
<CAPTION>
                                          BALANCE AT              ADDITIONS
                                         BEGINNING OF            CHARGED TO                                   BALANCE AT
                                            PERIOD                 EXPENSE             DEDUCTIONS            END OF PERIOD
                                      -------------------- -- ------------------ -- ------------------ -- --------------------
Accounts Receivable Reserve
<S>                                         <C>                      <C>                  <C>                    <C>
Year ended September 30, 1998                 756                    4,691                (3,184)                2,263
Year ended September 30, 1999               2,263                    1,698                (3,053)                  908
Year ended September 30, 2000                 908                    2,372                (1,965)                1,315

                                      F-28

</TABLE>