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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, 1999

                         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, 1999,  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  on the Nasdaq  National  Market,  was
approximately  $45.7  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, 1999, Registrant had outstanding  26,979,369 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.

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<PAGE>


<TABLE>
                                            TABLE OF CONTENTS

<CAPTION>
                                                  Part I
                                                                                                       Page
                                                                                                       ----
<S>      <C>                                                                                           <C>
Item 1.  Business....................................................................................   1

Item 2.  Properties..................................................................................  17

Item 3.  Legal Proceedings...........................................................................  17

Item 4.  Submission of Matters to a Vote of Security Holders.........................................  17

                                                 Part II

Item 5.  Market for Registrants Common Equity and Related Stockholder Matters........................  17

Item 6.  Selected Financial Data.....................................................................  19

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

Item 7A. Qualitative and Quantitative Disclosures about Market Risk..................................  26

Item 8.  Financial Statements and Supplementary Data.................................................  26

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........  26

                                                 Part III

Item 10. Directors and Executive Officers of Registrant..............................................  27

Item 11. Executive Compensation......................................................................  27

Item 12. Security Ownership of Certain Beneficial Owners and Management..............................  27

Item 13. Certain Relationships and Related Transactions..............................................  27


                                                 Part IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................  28

         Signatures..................................................................................  30

</TABLE>

This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Any statements  contained  herein that are not statements of historical
fact may be  deemed  to be  forward-looking  statements.  Without  limiting  the
foregoing, the words "believes,"  "anticipates," "plans," "expects," and similar
expressions  are  intended  to  identify   forward-looking   statements.   These
forward-looking  statements include,  without  limitation,  statements about the
market  opportunity for website  building  software and services,  our strategy,
competition and expected expense levels,  and the adequacy of our available cash
resources.  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.  We  undertake no  obligation  to update  publicly  any  forward-looking
statements for any reason,  even if new information  becomes  available or other
events occur in the future.

                                       ii

<PAGE>



Item 1. Business



Our Company

         We are a leading  provider of software,  solutions  and  services  that
enable small businesses to build,  deploy,  and maintain  websites  online,  and
conduct online, or e-business and enable large enterprises to effectively create
and manage corporate  intranets.  Our e-business  solutions  address the growing
challenges faced by businesses in capturing the explosive growth of the Internet
as an online  business  medium to publish  content,  run web  applications,  and
manage their e-business operations.

         In 1996, we pioneered the website  building  product  category with the
introduction  of  our  award-winning   flagship  product,   NetObjects   Fusion.
NetObjects  Fusion is an easy-to-use  desktop software  application for building
small business websites with an intuitive,  visual interface that helps automate
and integrate  many  site-building  functions.  Since 1996, we have continued to
enhance and expand NetObjects Fusion,  incorporating a wide range of support for
web  browsers,  database  software  and  web  servers.  In  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 website  planning,  building and  maintenance  needs.

         We have also built popular online resources,  including NetObjects.com,
and eFuse.com,  that target communities of business users and provide sources of
information, product, and services for building websites.

         In October  1999, we acquired  Sitematic  Corporation,  an  Application
Service Provider (ASP),  that offered on-line website building  capabilities for
small  businesses.  In December  1999,  we  combined  our 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.

         As part of our strategy to provide complete  e-business  solutions,  we
have formed  technology  relationships  with other Internet  companies.  We have
worked with many of these  companies to extend their  products to integrate with
NetObjects Fusion and NetObjects  Authoring Server,  such as Allaire ColdFusion,
iCat Commerce Online, Lotus Domino,  Beatnik audio software,  IBM HotMedia,  and
IBM WebSphere,  and we have built  extensions for the Microsoft ASP Site Server.
These   extensions   provide  us  with   broader   platform   connectivity   and
interoperability.  We offer online solutions with key online service  providers,
including website hoster's such as Concentric  Network,  One and One, Verio, and
Strato AG, and banner  exchange  providers such as SmartAge and BeFree.  We also
have product bundling agreements with leading software  companies,  such as IBM,
Lotus Development  Corporation,  and Novell, Inc. that help us to create greater
brand recognition and awareness. Further, we have entered into a joint agreement
with Sun  Microsystems  to offer  the  Netobjects  Authoring  Server  on the Sun
Solaris platform.

         We have established a premier Internet brand and estimate that over 1.5
million copies of NetObjects  Fusion have been licensed to date.  Traffic to our
websites  has grown steadily,  and currently  averages over 100,000 visitors per
month. New visitors provided approximately half of the traffic to our website in
1999. We think the  increasing  number of visitors to our websites  reflects the
broad distribution of our products and the growing strength of our brand.

         On May 7, 1999, we completed an initial  public  offering of our common
stock, raising about $65.0 million, after underwriters' fees and other expenses,
through the sale of six million  shares of common stock.  On October 4, 1999, we
acquired all the outstanding  stock of Sitematic  Corporation for  approximately
two  million  shares  of  NetObjects  common  stock  and $1.5  million  in cash.
Following the  acquisition of Sitematic,  we  reorganized  our business into two
divisions:  The Small  Business  and Online  division,  which offers small firms
website solutions and online application services;  and the Enterprise division,
which offers corporate intranet solutions and services for large enterprises.

                                       1
<PAGE>


Industry Overview

         Growth of the Web

         In fewer than five  years,  the World  Wide Web (WWW) has  emerged as a
universal,  rapidly growing online  business  medium enabling  millions of users
worldwide  to  share  information,   conduct  e-commerce,  and  access  business
applications.  According to International  Data Corp. (IDC), by the end of 2002,
the number of web users  worldwide  will grow to an  estimated  399  million and
worldwide  Internet  commerce  will  grow  to an  estimated  $733  billion.  The
explosive  growth of the web as an online  business  medium has been fueled by a
number of  factors,  including  an  increased  awareness  by  businesses  of the
revenue,  cost and performance  benefits from using the web to conduct business,
and the large and growing number of web users.

         In addition,  we believe the growth will  accelerate  as an  increasing
number of web users  attract more  businesses  to build or enhance  their online
websites,  which in turn attracts more users. IDC reports that the number of web
site addresses, or URL's, will grow to 3.2 billion in 2000.

         As  developing  or enhancing a web presence and building an  e-business
becomes  increasingly  important to businesses,  business  websites are becoming
more  complex.  As the web's  importance  has  grown,  businesses  have  applied
advances  in  Internet  technology  to convert  business  websites  from  static
"billboards" to sophisticated  e-business websites where businesses can interact
and transact with customers, employees, suppliers, and distributors.  E-business
sites may contain  hundreds of pages,  embed audio and video content and provide
access to data, or  "e-publishing",  provide online  commerce,  or  "e-commerce"
capabilities,  and run web applications, or "e-applications" such as interactive
forms.  E-business  websites are rapidly becoming a strategic necessity for many
companies as they discover how conducting  business online can enhance revenues,
reduce costs, and improve performance.

         Growth of Corporate Intranets

         The growth of the web as a global communications medium is also driving
large-scale corporate enterprises to enhance communication,  collaboration,  and
productivity by building corporate intranets consisting of numerous internal web
sites.  These intranets bring together  corporate  information and  applications
that  help  facilitate   communication   and   information   sharing  within  an
organization.  Intranets can also streamline business processes such as customer
service,  sales and marketing,  and human  resources,  thereby reducing costs or
improving performance through automation or self-service.  According to a recent
report,  Zona Research  estimates  that  two-thirds of intranet  sites are being
developed  through  team-based  web  site  building,   and  corporate  intranets
represent  the  greatest  business  opportunity  for  providers  of Internet and
intranet-related software technologies and products.

         The Business WebSite Opportunity

         Although  it has become  relatively  easy to access the web,  it can be
difficult and expensive to build an effective  web presence.  The  challenges of
building a  successful  Internet or intranet  website   require  solutions  that
address planning, design, building and deployment, as well as website  promotion
and  maintenance  after the website  is placed online.  Companies are often also
faced  with a  difficult  "make or buy"  decision,  either to build a website by
using in-house resources or third-party  service providers,  or to develop a web
site with available "off-the-shelf" applications.  Key factors influencing their
choice of solutions include ease and flexibility for building,  reduced time and
cost for construction,  and greater  flexibility at a lower cost for maintaining
and enhancing their website  presence.  In addition,  the web utilizes  multiple
standards and  platforms,  including  different web browsers,  databases and web
servers,  which  increase  the  complexity  of building a site that  operates in
multiple environments.

         The first  generation  of website   building  products was  technically
difficult to use and generally  required the programming  expertise of a limited
number  of highly  skilled  users  such as HTML  programmers  or highly  skilled
designers.  Although  third-party service providers and in-house programmers can
provide technical  coding,  these resources can be expensive and may not provide
the flexibility required to develop and maintain dynamic, evolving websites.  In
addition,  third-party  and in-house  solutions often have excluded key business
users from the website  building and maintenance process, rather than enabling a
truly  collaborative  site building  development  process that includes  content
contributions  from users. The second generation of products and online services
that facilitated  website building targeted  consumers with personal "home page"
building  tools and casual  desktop  users with the  ability to publish  simple,
static information and did not target the business user.

         Our opportunity to provide website  solutions in todays environment lie
in multiple areas. We believe that the majority of small businesses have not yet
strategically  embraced the Internet.  Those that have a web presence often need
to enhance their websites with new functionality such as e-commerce or

                                       2
<PAGE>

marketing  applications,   or  otherwise  improve  their  website  features  and
promotion.  Businesses with more sophisticated website requirements, but without
access  to  programmers,  require  an  easy-to-use,  capability-rich,  and  open
solution.  In-house  programmers  or third-party  service  providers can address
technical design and programming  requirements,  but often at a much higher cost
than  a  packaged   application  and  with  less  flexibility  in  building  and
maintaining  their websites.  In addition,  large  enterprises have a variety of
departments and need solutions that allow effective collaboration in developing,
deploying, and maintaining their intranet websites.

The NetObjects Solution

         Small businesses require easy-to-use  integrated  solutions that enable
them to build  or  enhance  their  websites  quickly  and  efficiently,  add key
functions  such as  e-commerce or web  applications,  and work with a variety of
industry  standards and platforms.  Our  award-winning  application,  NetObjects
Fusion,  now shipping as version 5.0,  addresses these needs.  NetObjects Fusion
has an intuitive,  visual interface that integrates and helps automate many site
creation functions, including site layout and design, page building, and content
management. In addition, NetObjects Fusion 5.0 includes a feature to easily link
the newly created website to a web hosting service.

         For  small  businesses  that  wish to start  with a  simple  e-commerce
presence,  GoBizGo.com offers online site building capabilities using templates,
web hosting,  and other  application  services  needed to make these firms fully
e-commerce  enabled.   GoBizGo.com  also  provides   information  for  building,
maintaining,  and promoting websites,  and an online site development  community
for small businesses.

         Large-scale corporate enterprises and departments require an integrated
solution  that enables them to manage the entire web  production  process.  They
also need products that integrate with disparate corporate systems and platforms
in order to  leverage  existing  legacy  systems,  databases,  and  content.  In
addition,  teams that  develop  corporate  web  applications  have  requirements
distinctly  different from those of individuals who develop  external  websites.
They need a solution that supports creativity and collaboration,  while allowing
an  administrator  to  assert  control  over  the  site-building   process.  Our
Enterprise  division  provides an  award-winning  software  package,  NetObjects
Authoring  Server Suite,  for  corporations  that are developing  enterprise web
applications   as  well  as  the   services   necessary  to  manage  a  seamless
implementation of this software.  In addition, we offer software components that
provide  integration  with products from other technology  companies,  including
Allaire  Corporation,   IBM,  Lotus,  and  Microsoft  Corporation  that  provide
additional web applications,  database publishing,  and e-commerce  capabilities
for the NetObjects Authoring Server Suite.

         To facilitate the implementation of NetObjects  Authoring Server Suite,
we provide our customers  with the training and  consulting  services that large
enterprises  typically need to design,  build, deploy,  maintain their websites,
and integrate their websites with existing  corporate  applications.  We provide
these services  through our own professional  services  organization and through
relationships with third-party service providers.


NetObjects Strategy

         Our  strategy  is  to  establish  ourselves  as a  complete  e-business
solutions  provider for small  businesses  and a leading  developer of corporate
intranets  for  large  enterprises,  by  leveraging  our  position  as a leading
provider  and  brand for  website  building  software.  As more  companies  seek
solutions for capturing  the explosive  growth of the web as an online  business
medium,  we  believe  our  e-business  software  and  services  provide an ideal
starting  point.  NetObjects  Fusion,  NetObjects  Authoring  Server Suite,  and
GoBizGo.com online position us to aggregate broader  solutions,  including third
party  hosting,  software  and  components,   site  content,   e-commerce  using
third-party transactional software, and other web applications and services. Key
elements of our strategy include:

         Brand  Recognition and Broad Customer Base. As a pioneer of the website
building  product  category,  and as the recipient of many industry  awards,  we
believe  that we have  established  a premier  Internet  brand in the market for
website building products and services. We estimate that over 1.5 million copies
of  NetObjects  Fusion have been  licensed to date.  Our  customer  base and the
active  online  communities  of builders who use our  products  help sustain and
promote our brand by participating in our website forums and bulletin boards and
by providing feedback on pre-release versions of our software. Over 60,000 links
exist  from  other  websites  to  NetObjects.com,   including  the  websites  of
complementary products and services providers.  Our strong brand recognition and
growing  customer base are significant  assets for attracting new customers,  as
well as for  enhancing our ability to develop  relationships  with other leading
software and service solution providers.

         Strategic   Relationships.   We  will   continue   to  form   strategic
relationships that enhance our product and service offerings and help expand our
market presence. Our current strategic relationships include:

                                       3
<PAGE>


     o   product bundling and distribution  arrangements  with companies such as
         Allaire,  IBM,  Lotus  and  Novell  to combine  NetObjects  Fusion with
         popular business software;

     o   arrangements  with companies such as Deluxe Business  Forms,  ThemeWare
         Corporation,  US West Communications Services, Inc, OfficeMax, Inc, Sir
         Speedy International,  and Tickets.com,  Inc to distribute  GoBizgo.com
         services to their small business customers;

     o   technology relationships to integrate our products with web application
         servers  from  Allaire,  Lotus,  IBM,  Microsoft,  PeopleSoft,  and Sun
         Microsystems,  and e-commerce software from Breakthrough  Software, PDG
         Software,  iCat,  and to create  components  in Java that  provide  our
         products with additional  functions for building web  applications  and
         conducting e-commerce; and

     o   online   solutions  that  combine  our  products  with  online  service
         providers  such as  Concentric  Network,  T-Online,  Verio  and Zip2 by
         offering our products as part of their online services, for hosting and
         promoting  e-business sites,  which enhance our products and solutions,
         as well as complement our sales, marketing, and distribution reach.

         These relationships greatly enhance our brand recognition and provide a
short-term source of revenues.  Our strategic relationship with IBM has provided
us with other sales and marketing  benefits,  including  access to IBM and Lotus
sales and distribution  channels,  co-marketing and co-promotion  benefits,  and
credibility in the marketplace.

         Technological  Leadership and Open Architecture.  NetObjects Fusion and
NetObjects Authoring Server are based on proprietary technology that provides an
intuitive,  visual building environment that allows for significant productivity
gains compared to web page coding  products that require  manual  programming of
each page.  Our  products  are  Windows-based  and allow users to  automatically
generate HTML code by using words and graphics without programming. In addition,
NetObjects Authoring Server offers a collaborative  website building environment
for teams of builders while providing centralized control over the site building
effort. We have an open architecture that:

     o   supports all major Internet protocols;

     o   is  publishable on major web browsers,  such as Netscape  Navigator and
         Microsoft Internet Explorer; and

     o   allows other website  solutions  providers to integrate  their products
         with our products using components implemented in the Java language.

         By maintaining these advantages,  we believe our products will continue
to be recognized as open  platforms  for easy  integration  with their other OEM
products and services.

         Platforms of Choice for e-Business Solutions Aggregation. As businesses
face  the  increasingly  complex  and  numerous  challenges  of  establishing  a
successful  e-business presence,  we believe they will seek aggregated solutions
to address their needs,  from building and hosting their websites to maintaining
and  promoting  them.  We believe that other website  solutions  providers  have
compelling incentives to use NetObjects Fusion,  NetObjects Authoring Server and
GoBizGo.com  as platforms for  aggregating  their  e-business  solutions.  Other
solutions  providers  can  benefit  from our  strong  brand  to reach a  growing
business customer base through our products,  services and websites. In turn, we
can offer more complete  solutions by leveraging our strategic  relationships to
include e-commerce  services,  database access,  banner exchange,  content,  web
applications and other online services from other website solutions providers.


Products and Services

         We provide solutions for two broad categories of customers:  NetObjects
Fusion and GoBizGo.com  services for small businesses;  and NetObjects Authoring
Server and professional services for the large enterprise intranet market.

Small Business and Online Services

         NetObjects  Fusion  is  an  easy-to-use  desktop  application  designed
specifically  for  small  businesses.   NetObjects  Fusion  offers  a  range  of
publishing and e-commerce  capabilities to simplify website building and enhance
the  productivity of both novice and experienced  website  builders.  NetObjects
Fusion is available in nine languages in addition to English,  including German,
French,   Spanish,   Chinese,  and  Japanese.  The  multi-language  versions  of
NetObjects  Fusion,  developed  through our  relationship  with IBM, gives us an
opportunity to enter international markets for website building software,  which
have seen limited development to date.

                                       4
<PAGE>

NetObjects  Fusion 5.0  provides six views that  facilitate  the process of site
building:

     o   Online view  provides a wide variety of online  e-services  and content
         that has direct and immediate  value to building a successful  website.
         The  integrated  browser  enables  the user to add new service to their
         website all from within the NetObjects Fusion application.

     o   Site view lets the author  visually  plan and organize the pages on the
         website.  NetObjects  Fusion  automatically  creates and  maintains the
         navigation  buttons  and  links  based on how the  author  lays out the
         website.

     o   Page  view lets the  author  create  pages  visually.  A wide  range of
         content can be  incorporated  on the page,  including  text,  graphics,
         video, audio, applets, and other components.

     o   Styles  view lets the author  create a  consistent,  attractive  visual
         style for the site. Over 150 site styles are available, and authors can
         customize or create their own styles.

     o   Assets  view  serves as a content  manager  to make it easy to find and
         replace  assets  throughout  the site.

     o   Publish  view lets the author  publish  all or  portions of the site as
         standard HTML pages to the server of choice.

         GoBizGo.com,  offers small businesses the website services they need to
become  e-business   participants.   These  services  include  website  building
software, e-mail list management for communicating to customers, domain name and
search engine registration,  auction export, content, and advice to implement an
e-business plan, and web hosting services.

         Enterprise and Professional Services

         The currrent  family of  NetObjects  Authoring  Server Suite  products,
consist of the  NetObjects  Authoring  Server Suite 2000,  NetObjects  Authoring
Server Connectors and NetObjects Authoring Server for IBM WebSphere.  NetObjects
Authoring  Server  currently  runs only on Windows NT, but supports a variety of
web browsers, databases, and web servers. The Authoring Server Suite consists of
four modules:

         Authoring Server.  Authoring Server is the "server"-side control center
of NetObjects  Authoring  Server and contains an internal  database which stores
the information about assets,  site pages, site structure,  link information and
user profiles for multiple  websites.  It also controls the number of concurrent
users that can access the system. Authoring Server works in conjunction with any
web server.

         Authoring Server Administrator.  Authoring Server Administrator is used
to create  sites and enable the  formation  of teams,  assign team  members with
editing and publishing privileges and monitor workflow.  The product is designed
to provide control of the website building process,  without imposing a specific
workflow on team members.

         TeamFusion   Client.   TeamFusion  Client  provides  the  "client"-side
software  of the  client-server  application  and  includes  all  of  NetObjects
Fusion's features.

         Content  Contributor  Client.  Content  Contributor  Client enables any
business user to submit  content  directly into  templates  created on completed
websites or  websites  under  construction,  regardless  of their web  authoring
skills, and without compromising the website's integrity.  Users can add, modify
and delete  text  easily and  without  considering  website  design.  NetObjects
Authoring  Server  automatically  formats the content  contributed as a web page
when the website is published.

         In  addition,  we  offer  NetObjects  Authoring  Server  Connector  for
Microsoft FrontPage,  which enables Microsoft FrontPage and FrontPage 2000 users
to collaborate with team members using NetObjects  Authoring Server.  NetObjects
Authoring Server Connector for Business  Documents allows Microsoft Office 2000,
Lotus SmartSuite,  and Corel  WordPerfect  users to convert office  productivity
documents  to  web-ready  format  (HTML),  and  integrates  these pages within a
collaborative authoring environment for publishing to a website.

         NetObjects'  Authoring Server's built-in workflow,  publishing and site
management  capabilities provide a comprehensive  end-to-end web development and
management  solution  that can  significantly  streamline  and enhance  internal
communications. The new review/approval workflow publishing system of NetObjects
Authoring  Server 2000  creates an efficient  and  enforceable  process  between
content contributors and content publishers that facilitates collaboration among
members with different roles and skill sets. Other new features include: instant
messaging,   automated  task  scheduling,   versioning,   change  control,  site
histories,  cross-site linking, cross-site shared assets, and mirror publishing.
These  features  provide   increased   control,   security,   ease-of-use,   and
performance.

                                       5
<PAGE>

         We  believe  that  providing  a high  level  of  customer  service  and
technical support is necessary to achieve rapid product  implementation,  which,
in turn, is essential to customer  satisfaction  and license  sales  growth.  We
provide  consulting and implementation  services to our customers  deploying the
NetObjects  Authoring  Server Suite.  We provide these services  through our own
professional  services  organization and, through relationships with third-party
service providers. We also offer support and training services to our customers,
including  telephone  and online  support.  Internationally,  with our technical
assistance, our distributors provide telephone support to their customers.

Customers

         We market and sell our products to a wide range of customers located in
the U.S. and in over 30 other countries.  We believe that  approximately  60% of
our customers have been small businesses and  approximately  40% have been large
enterprises,  including  Fortune  1000  companies  or  departments  within these
enterprises.  Approximately  one-third  of  our  small  business  customers  are
third-party service providers that build websites for other companies.

Sales, Marketing, and Distribution

         We sell our products and services to our customers  using a combination
of indirect distribution channels, our direct enterprise sales force, our online
distribution channel and strategic relationships, and we market our products and
services  using a broad range of activities  to generate  demand and build brand
awareness.  As of September  30, 1999,  51 of our  employees,  or  approximately
one-third of our work force, were engaged in sales and marketing activities.

         Indirect Distribution Channels

         Our indirect  distribution  channels include domestic and international
distributors,   retail  vendors,  value-added  resellers  and  other  technology
companies with whom we have strategic  relationships.  We have 15  non-exclusive
distributors  worldwide  including Ingram Micro,  Tech Data and Digital River in
North America; Softline, Internet 2000, and Unipalm in Europe.

                                       6
<PAGE>


         Direct Enterprise Sales Force

         Our direct  enterprise sales force focuses on sales to larger corporate
customers   worldwide.   The  enterprise  sales  force  is  comprised  of  field
representatives  and inside  sales  representatives.  The field  representatives
market and sell our products and services to corporate customers that the inside
sales representatives have identified as sales prospects through leads generated
from inquiries on our websites, downloads of our trial products and other direct
marketing efforts.

         Online Distribution Channel

         Our  eSiteStore.com  website  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   buydirect.com,
beyond.com and download.com,  make our products  available for sale online.  The
online distribution  channel provides us with a low-cost,  globally  accessible,
24-hour a day sales channel.

         Strategic Relationships

         We have a number of significant  ongoing strategic  relationships  with
other technology companies pursuant to which our products are incorporated into,
or bundled with,  the third party's  products.  We believe that these  strategic
relationships  significantly  enhance our brand recognition and awareness of our
products  and services  and also  provide a source of  revenues.  Our  strategic
relationships include:

         IBM/Lotus.  Lotus  markets,  bundles and sells a version of  NetObjects
Fusion with  Designer for Domino  Application  Studio  under an  agreement  that
expires on December 31, 1999. IBM markets,  bundles and sells NetObjects  Fusion
with its WebSphere  Studio  product.  In addition,  our products are offered for
sale through a variety of IBM and Lotus channels including "Passport Advantage,"
the worldwide  direct  purchasing  option for Lotus and IBM branded software and
the Lotus Business Partner  program,  which allows 18,000 program members access
to our products at discounted prices globally.  At September 30, 1999, IBM owned
a majority of our outstanding common stock.

         Novell.  Novell bundles a version of NetObjects Fusion with its NetWare
for Small Business  product  offering on a worldwide  basis.  Under the terms of
this agreement,  the contract is automatically renewed each September 30, unless
terminated by one of the parties with written notice. This agreement was renewed
on  September  30, 1999 for an  additional  year.  Novell  also offers  end-user
training for NetObjects  Fusion at over 100 Novell  certified  training  centers
worldwide. Novell is a NetObjects stockholder.


         Marketing Activities

         Since our inception,  we have invested a substantial  percentage of our
annual  revenues 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,  trade show  participation  in, as well as conferences and
website  promotion.  Our marketing programs are aimed at informing our customers
of the capabilities and benefits of our products and services,  increasing brand
awareness,  stimulating  demand  across  all  market  segments  and  encouraging
independent  software  developers to develop products and web applications  that
are  compatible  with  our  products  and  technology.  We also  have  had  many
co-marketing and  distribution  arrangements  with well-known  companies such as
AT&T, Cisco Systems,  Compaq Computer,  Inc.,  Concentric  Networks,  Microsoft,
Netscape, Verio, Office Max, Deluxe Forms, ADP, Tickets.com,  Sir Speedy, Strato
AG, One and One, Vobis AG, and  PeopleSoft  that have allowed us to identify our
NetObjects Fusion brand with their brands.

Competition

         The market for software and services for the Internet and  intranets is
relatively  new,  constantly  evolving  and  intensely  competitive.  We  expect
competition  to  intensify  in the future.  Many of our  current  and  potential
competitors  have longer  operating  histories,  greater  name  recognition  and
significantly greater financial,  technical and marketing resources.  We compete
for small  business  customers  with web  content  software  makers  like  Adobe
Systems,  Inc., Macromedia,  Inc., and Microsoft.  In the online web hosting and
services market, we compete with providers like Verio, Bigstep,  Icat, and Yahoo
store.  We compete in the Internet  application  development and services market
for enterprise  customers with companies such as Interwoven,  Inc., and Vignette
Corporation.

                                       7
<PAGE>


         Moreover,  Microsoft's FrontPage, a website  building software product,
has a dominant  market share.  Microsoft has introduced  FrontPage  2000, in one
version of  Microsoft's  Office product  suite,  which  dominates the market for
desktop business  application  software.  We believe that NetObjects  Fusion and
NetObjects  Authoring Server contain features that  significantly  differentiate
them from FrontPage  2000, but widespread  distribution of Office with FrontPage
2000,  and the vast number of computer  users  familiar with  Microsoft  desktop
application  software  products,   give  Microsoft  a  substantial   competitive
advantage over us.

         Competitive factors in our market segments include:

     o   the manner in which the software is distributed with other products;

     o   quality and reliability;

     o   features for creating, editing, and developing websites;

     o   pricing;

     o   ease of use and interactive user features;

     o   scalability and cost per user; and

     o   compatibility with the user's existing computer systems.

         To expand our user base and  further  enhance the user  experience,  we
must  continue to  innovate  and improve the  performance  of our  products.  We
anticipate that  consolidation  will continue in the  website building  products
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.

         We  believe  that  additional  competitors  may enter the  market  with
competing  products  as  the  size  and  visibility  of the  market  opportunity
increases.  Increased  competition could result in additional pricing pressures,
reduced  margins or the failure of our  products  to achieve or maintain  market
acceptance,  any of which could harm our  business  and cause our  revenues  and
stock  price to fall.  Many of our  current and  potential  competitors  such as
Microsoft,   Adobe  and   Macromedia   have  longer   operating   histories  and
substantially greater financial,  technical,  marketing and other resources than
us and  therefore  may be  able  to  respond  more  quickly  to new or  changing
opportunities,  technologies,  standards or customer requirements. Many of these
competitors  also have broader and more established  distribution  channels that
may be used to deliver competing  products directly to customers through product
bundling or other means. For example,  Microsoft enjoys significant distribution
advantages  over us,  including the vast number of computer  users familiar with
Microsoft  desktop  application  software  products.  If our competitors  bundle
competing  products with their  products,  the demand for our products  might be
substantially  reduced and our ability to distribute  our products  successfully
would be substantially  diminished.  Moreover,  Microsoft's dominance in desktop
business  application  software  enables it to vary the pricing for its software
sold as part of a suite.  As a result  of  Microsoft's  and  other  competitors'
bundling arrangements, we may need to reduce our prices for our products to keep
them competitive.

         New  technologies  and the  enhancement of existing  technologies  will
likely increase the competitive  pressures on us. 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.

                                       8
<PAGE>


Technology and Development

         We  devote  substantial  resources  to the  development  of  innovative
products for the market for website building  software and services.  During the
fiscal year ended September 30, 1999,  respectively,  we invested  approximately
42% of our total  revenues on research and  development  activities.  NetObjects
Fusion  and  NetObjects  Authoring  Server  are  among  the  earliest  and  most
recognized  entrants in the emerging market for website  building  software.  We
believe that we have been able to leverage our  understanding  of the market and
technology  opportunity as well as our staff and software development  processes
to build  robust,  open  solutions for  customers.  We intend to continue to use
these core strengths to introduce  innovative products and product  enhancements
for building, deploying and maintaining business websites. We intend to continue
to devote  substantial  resources to research and  development  for at least the
next several years.

         Our technology provides the following product advantages:

         Open Architecture

         Our  products are built upon a flexible  object-oriented  architecture,
which  has been  instrumental  in the rapid  development  of our  products.  The
architecture provides such significant benefits as:

     o   separating the visual display of information from its storage;

     o   supporting multiple databases;

     o   supporting major Internet protocols;

     o   allowing any HTML page editor to be used with our products;

     o   extending our products using  components built using the Java language;
         and

     o   allowing  access  to  powerful  applications  over the  Internet  via a
         browser.

         We  intend  to  continue  to  invest  in  further  development  of this
architecture to build and integrate new products and technologies.

         Control and Collaboration

         Intranet websites are evolving from simple publishing pages coordinated
by a single webmaster to  multi-contributor  strategic  business  platforms that
integrate   business   processes  and  deploy   mission-critical   applications.
Enterprise  groups that build these intranet websites face the conflicting needs
of  maintaining  control and  encouraging  collaboration.  NetObjects  Authoring
Server  provides the  performance  needed to support  concurrent,  collaborating
users across an enterprise-wide  deployment with several underlying technologies
such as a Java-based content contributor, an integrated asset manager and remote
systems administrator.

         In addition to our products,  product enhancements and core proprietary
technology, we have a highly-skilled engineering workforce that includes several
seasoned  software  industry  veterans.  As of  September  30,  1999,  we had 58
employees, or approximately one-third of our workforce,  engaged in research and
development  activities.  Our original key  technologists  are still  NetObjects
employees,  and they  continue to play an integral  role in defining and leading
our  technology  vision  and  strategy.  We intend to hire  additional  software
engineers to further our research and development  efforts.  If we are unable to
hire and 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

                                       9
<PAGE>

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"  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" 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,  1999,  we had  158  full-time  employees  and 18
part-time  employees.  None  of  our  employees  are  subject  to  a  collective
bargaining  agreement,  and we believe that our relations with our employees are
good.  We believe that 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.  We also use independent contractors
to  supplement  our work force.  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.  There can be no assurance  that we will be successful  in  attracting,
integrating, retaining and motivating a sufficient number of qualified personnel
to conduct our business in the future.

                                       10
<PAGE>

Risk Factors

         NetObjects  believes  that its results of  operations  in any annual or
quarterly  period may be impacted  adversely  by a number of factors,  including
those set forth below.  Readers of this report should  consider  these and other
ordinary business risk factors in evaluating the business,  financial condition,
results of operations and prospects of NetObjects.

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,  1999,  we had an  accumulated  deficit of
approximately  $73.6 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 NetObjects Authoring Server, and substantially  increase our revenues
from professional and online services.

Our  relationship  with IBM has  changed  substantially  over  time.  While  IBM
controls us, it is under no  obligation  to continue any business  relationships
with us,  and IBM is  allowed  to  compete  with us or act in a manner  which 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 represented a substantial  portion of our total revenues,  representing
approximately  29% and 36% of our total  revenues for the years ended  September
30, 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's obligation to create localized versions of our software
expires on December 31, 1999. After that date, 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 like IBM, Lotus and Novell.

         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 revenue commitments from IBM or
Lotus. Although we expect to continue licensing our products to IBM and Lotus as
original equipment  manufacturer,  or OEM,  resellers,  we believe that revenues
from IBM will comprise a substantially lower percentage of our total revenues in
the future than they have during the fiscal year ended September 30, 1999.

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 controls us and is free to sell its interest in us. As of November 30, 1999,
IBM owned  approximately  47% of our common stock and hold  warrants  which,  if
exercised,  would increase its ownership to approximately 53% of our outstanding
voting securities. As our largest stockholder, with three representatives on our
board  of  directors,  IBM has  substantial  influence  over our  direction  and
management,  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.

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:

                                       11
<PAGE>

     o   IBM is  eligible  to sell its stock  subject to  applicable  securities
         laws, contractual arrangements with our 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.  In the event of our default under the contract,  IBM
will  have  access  rights  to this  source  code  and will be free to use it to
maintain our products and create derivative works for the benefit of IBM and its
customers.

         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 website building  companies,  and it may more
actively promote the services of our competitors.

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

         The market for website 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.  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  market,  we
compete with providers like Verio, Bigstep, Icat, and Yahoo store. We compete in
the Internet application  development and services market segment for enterprise
customers  with  companies  such  as  Interwoven,   and  Vignette.   Microsoft's
FrontPage,  a website 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.

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

         Because our  business is  evolving  rapidly and we have a very  limited
operating  history,  we have little experience in forecasting our revenues.  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 quarterly 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 quarterly 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 quarterly
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.

                                       12
<PAGE>

         About 60% of our  revenues  from  software  license fees in fiscal year
1999 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.

Our future financial  performance depends substantially on market acceptance and
growth  of  NetObjects  Authoring  Server,   Professional  Services  and  Online
services.

         We increasingly depend on NetObjects  Authoring Server Suite to provide
us with revenues.  We depend on increasing  revenues from  NetObjects  Authoring
Server, and we may not receive these revenues for the following reasons:

     o   the  success of  NetObjects  Authoring  Server will depend on the rapid
         emergence of a market for large-scale  enterprise  website and intranet
         building products and services;

     o   information  services  departments of large  enterprises  may choose to
         create and maintain their web and intranet sites  internally or may use
         third-party professional developers to create and maintain their sites;

     o   NetObjects  Authoring Server may not meet customer performance needs or
         be free of significant software defects or bugs;

     o   NetObjects  Authoring  Server  will  have a  longer  sales  cycle  than
         NetObjects  Fusion due to higher  pricing and  different  marketing and
         distribution characteristics;

     o   We depend heavily on bundling  arrangements  with third parties to sell
         our  products,  and we  currently  do not  have  any  arrangements  for
         bundling NetObjects Authoring Server Suite, and;

     o   we may not be able to recruit and retain the additional sales personnel
         needed to effectively market NetObjects Authoring Server.



         Our professional  services business,  through which we provide training
and other support for our products,  may not generate  sufficient  revenues.  We
cannot  be  certain  that  our  professional  services  business  will  generate
significant revenues or achieve profitability.  We believe that software license
fees  growth will  depend on our  ability to provide  our  customers  with these
services and to educate third-party  resellers about how to use our products. We
currently  outsource  much  of our  customers'  services  needs,  but we plan to
increase  the  number  of our  services  personnel  to  meet  the  needs  of our
customers.  Competition  for  qualified  services  personnel is intense,  and we
cannot be certain  that we can attract or retain a  sufficient  number of highly
qualified services personnel to meet our business needs.

Our  online  services  are  new  and  have  not yet  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 Sitematic  acquisition,  providing  online  services to
enable small businesses to conduct e-commerce has become an integral part of our
business  growth  strategy.  Including the  pre-acquisition  period during which
Sitematic provided these services,  they have been offered to customers 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 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

                                       13
<PAGE>

or  components  that  perform   different   functions  are  less  likely  to  be
commercially  successful.  For example,  NetObjects Fusion 4.0 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,  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  website 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.

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 November 30, 1999, IBM owned approximately 47% of our outstanding
stock.  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.

                                       14
<PAGE>

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
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.

         Because  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. In addition, we may be unable to assert patent claims of our own
against an IBM  cross-licensee,  which may remain free of  liability  for claims
under the terms of the applicable IBM cross-license agreement.

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

         International sales represented approximately 23% of our total revenues
in the fiscal year ended  September  30, 1999.  We intend to expand the scope of
our  international  operations  and  currently  have a subsidiary  in the United
Kingdom. 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.

                                       15
<PAGE>

We may be unable to manage our rapid growth.

         We have expanded our operations rapidly since inception,  and we intend
to continue to expand them in the foreseeable future. This rapid growth places a
significant demand on our managerial and operational resources. To manage growth
effectively, we must:

     o   implement and improve our operational systems,  procedures and controls
         on a timely basis;

     o   expand,  train and manage our workforce and, in  particular,  our sales
         and marketing and support organizations in light of our recent decision
         to offer online and professional services;

     o   implement and manage new distribution  channels to penetrate  different
         and  broader  markets,  including  the  market  for  intranet  software
         products; and

     o   manage an increasing  number of complex  relationships  with customers,
         co-marketers and other third parties.

         We cannot be certain that our systems,  procedures  or controls will be
adequate to support our current or future operations or that our management will
be able to manage the expansion and still achieve the rapid execution  necessary
to exploit fully the market for our products and services. Failure to manage our
growth effectively could harm our business.

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.

Year 2000 problems may disrupt our internal operations.

         We have  completed an  assessment  of our Year 2000  readiness and have
developed   contingency  plans.  We  have  contacted  our  third-party  vendors,
licensors and providers of software,  hardware and services regarding their Year
2000 readiness. Our inability to correct a significant Year 2000 problem, if one
exists,  could  result in an  interruption  in, or a failure of,  certain of our
normal  business  activities and  operations.  Furthermore,  because  NetObjects
Fusion and NetObjects  Authoring Server may interact with external databases for
purposes of data storage, the ability of applications integrated with a  website
built using NetObjects Fusion or NetObjects Authoring Server to comply with Year
2000 requirements is largely  dependent on whether the databases  underlying the
application  are Year 2000 ready. If NetObjects  Fusion or NetObjects  Authoring
Server is connected to a database that is not Year 2000 ready, a web application
created  or  developed  for a  website  using  NetObjects  Fusion or  NetObjects
Authoring  Server  could  work  incorrectly  and could  result in  unanticipated
expenses  to  address  problems  or claims  raised by  customers  that we cannot
presently foresee.  Any significant Year 2000 problem in our internal systems or
in our products could require us to incur significant  unanticipated expenses to
remedy these problems and could divert  management's time and attention,  either
of which could harm our  business or  increase  our losses,  and cause 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  additional  acquisitions  of,  or  large
investments in,  businesses that offer products,  services and technologies that
we believe would help us better  provide  e-business   website 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.

         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 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

                                       16
<PAGE>

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.

Item 2. Properties

         Our executive  offices are located in Redwood City,  California,  in an
office  building in which,  as of September  30, 1999,  we lease an aggregate of
approximately  26,000 square feet. The lease agreement terminates on November 2,
2002. We lease three office  suites for our sales and  marketing  personnel in a
facility in Bucks,  United Kingdom under a lease that expired November 23, 1999.
We currently occupy this facility on a month-to-month  basis. We lease an office
facility in Germany under a lease that expires May 31, 2001.

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 us and our
licensees.  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

None.

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

         Our common  stock is quoted on the  Nasdaq  National  Market  under the
symbol "NETO".  We completed an initial  public  offering of our common stock on
May 7, 1999, offering 6,000,000 shares at $12

                                       17
<PAGE>

per share.  Since the IPO, we have  invested  approximately  $1.6 million in the
Sitematic  acquisition.  We have used  approximately  $5.6  million  to  provide
working  capital to maintain  our  business  operations.  The  remainder  of the
original  net  proceeds of $40.1  million,  approximately  $32.9  million,  were
invested in cash,  cash  equivalents  or short term  investments at this time at
September 30, 1999.

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

           Quarter ending                            High             Low

June 30, 1999                                       $13.00           $6.75
September 30, 1999                                  10.438           5.156

         We had 257  stockholders of record as of November 30, 1999. We have 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 our
business and,  therefore,  do not  anticipate  paying any cash  dividends in the
foreseeable future.

                                       18
<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>
Statement of Operations Data
                                                                              Year Ended September 30,       Inception (11/21/95) to
                                                            1999              1998               1997           September 30, 1996
                                                       ------------       ------------       ------------    -----------------------
                                                                    (In thousands, except share and per share data)
Revenues:
<S>                                                     <C>                <C>                <C>                      <C>
   Software license fees                                $     13,566       $      9,703       $      7,392   $                 --
   Service revenues                                            2,178               --                 --                       --
   Software license fees from IBM                              3,689              2,700                175                     --
   Service revenues from IBM                                   2,782              2,867               --                       --
                                                        ------------       ------------       ------------   -----------------------
     Total revenues                                           22,215             15,270              7,567                     --
                                                        ------------       ------------       ------------   -----------------------

Cost of revenues:

   Software license fees                                       1,817              2,531                772                     --
   Service revenues                                            2,295               --                 --                       --
   Service revenues from IBM                                   2,113              2,562               --                       --
                                                        ------------       ------------       ------------   -----------------------
     Total cost of revenues                                    6,225              5,093                772                     --
                                                        ------------       ------------       ------------   -----------------------
Gross profit                                                  15,990             10,177              6,795                     --
                                                        ------------       ------------       ------------   -----------------------
     Total operating expenses                                 33,031             31,147             24,359                    6,741
                                                        ------------       ------------       ------------   -----------------------
Operating income (loss)                                      (17,041)           (20,970)           (17,564)                  (6,741)
                                                        ------------       ------------       ------------   -----------------------

Interest income (expense)                                       (715)            (1,194)              (234)                      46
Accretion of discount on debt                                 (1,653)               --                 --                       --
Interest charge on beneficial conversion
  feature of convertible debt                                 (7,457)               --                 --                       --
                                                        ------------       ------------       ------------   -----------------------
  Income (loss) before income taxes                          (26,866)           (22,164)           (17,798)                  (6,695)
                                                        ------------       ------------       ------------   -----------------------
income taxes                                                      44                 60                  1                     --
                                                        ------------       ------------       ------------   -----------------------
   Net income (loss)                                         (26,910)           (22,224)           (17,799)                  (6,695)
                                                        ============       ============       ============   =======================
Basic and diluted asset income (loss) per share         $      (2.40)      $     (12.26)      $     (10.45)  $                (4.10)
                                                        ============       ============       ============   =======================
Shares used to calculate basic and diluted net
      income (loss) per share                             11,215,118          1,812,484          1,702,726                1,634,000
                                                        ============       ============       ============   =======================


                                                                                                  September 30,
                                                                           ---------------------------------------------------------
        Balance Sheet Data                                                   1999            1998            1997         1996
                                                                           --------        --------        --------     ---------
                                                                                                (In thousands)
Cash and cash equivalents                                                  $ 32,954        $    459        $    303     $  1,090
Working capital (deficit)                                                    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                                      54             336             633          173
Total assets                                                                 42,709           5,145           4,605        2,129
Accumulated deficit                                                          73,628         (46,718)        (24,494)      (6,695)
Stockholders' equity (deficit)                                               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
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

         We provide  both  online  and  software  solutions  that  enable  small
businesses to build,  deploy and maintain  Internet websites and applications to
conduct e-business;  and enable large enterprises to create corporate intranets.
For fiscal 1999,  our revenues were derived  principally  from license fees from
our  software  products  and, to a lesser  extent,  fees for a range of services
complementing  these  products.  Subsequent  to Sept.  30, 1999,  we created two
operating divisions.  Our Small Business and Online division licenses NetObjects
Fusion and offers online  services to small  business  customers.  We derived no
revenues from online services  during fiscal year 1999. Our Enterprise  division
licenses NetObjects Fusion(TM) and NetObjects Authoring Server(TM) and in fiscal
year 1999,  began  providing  training,  consulting and design services to large
enterprise customers for creating corporate intranets.

         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  experiences
with product returns by those  distributors.  Software  license fees earned from
products  bundled with OEM resellers,  including  IBM, are generally  recognized
upon the OEM  resellers  shipping 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  recognition  of  maintenance
revenues,  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 earn revenues from software  license fees through direct licenses to
enterprises,  through strategic relationships such as our relationships with IBM
and Lotus and through our indirect 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 expect our revenues from license fees
derived  from  our  direct,  or  enterprise,  sales  channel  to  increase  as a
percentage of our total revenues as our direct sales organization grows in size.
We derive our international revenues primarily through our indirect distribution
channel.

         As a result of our recent acquisition of Sitematic Corporation, we have
begun offering online subscription services,  which will represent an increasing
percentage of our revenue. We anticipate that revenues derived from sales of our
products by resellers  will decrease as a percentage of our total  revenues.  We
anticipate that revenues derived from our direct sales will continue to increase
as a percentage of our total revenues.

         In April 1997, IBM acquired  approximately 80% of our outstanding stock
from existing  investors.  Under the terms of a 10-year  license  agreement with
IBM,  we  granted  IBM  rights to market  and sell some of our  products  to its
customers for 10 years in exchange for nonrefundable  cash prepayments  totaling
$10.5  million  between  April 1997 and  December 31,  1998.  We  requested  and
received the full amount of these  prepayments  between April and December 1997.
These  prepayments  were reflected as deferred  revenues from IBM on our balance
sheet.  By June  1999,  IBM had sold  sufficient  quantities  of  licenses,  and
purchased   services  from  NetObjects  to  fully  utilize  this  $10.5  million
prepayment. In the three months ended December 31, 1997, IBM began reselling our
products,  and in the three  months  ended March 31,  1998,  we began  providing
services to IBM to make our products  compatible with

                                       20
<PAGE>
and to integrate them with IBM's WebSphere products. This services contract with
IBM expired on  February  28,  1999.  Due,  inpart,  to the  expiration  of this
contract, our total revenues from IBM were substantially lower during the second
half of fiscal year 1999  compared to the first six months of the year when they
represented 45.1% of total revenues.  We anticipate that total revenues from IBM
during fiscal year 2000 will decrease  substantially as a percentage of revenues
from the 29% of total revenues they requested in fiscal year 1999.

         We have incurred substantial net losses in each fiscal period since our
inception  and, as of September 30, 1999,  had an  accumulated  deficit of $73.6
million.  Such net losses and accumulated  deficit  resulted  primarily from the
significant  costs  incurred in the  development  of our products,  establishing
brand  identity,  marketing  organization,   domestic  and  international  sales
channels, and general and administrative  infrastructure.  We intend to increase
our  expenditures  in  all  of  these  areas,   particularly  for  research  and
development and sales and marketing.

         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  website building  software
and services. In order to be successful financially, we will need to achieve the
following:

     o   Increase  substantially  our revenues from our two principal  products,
         NetObjects Fusion and NetObjects Authoring Server;

     o   Continue to develop successfully new versions of our products;

     o   Continue to be a leading  provider of e-business  software for building
         websites and corporate intranet sites;

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

     o   Expand our professional services business;

     o   Expand our online services business;

     o   Control  expenses;

     o   Continue to  attract,  train,  and retain  qualified  personnel  in the
         competitive software industry; and

     o   Maintain existing  relationships  and establish new relationships  with
         leading internet hardware and software companies.

         There  can  be  no   assurance   that  we  will   achieve   or  sustain
profitability.  Moreover, we may be unable to adjust spending in a timely manner
to compensate for any unexpected revenue shortfall. 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.

Results of 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.

                                       21
<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.

         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.

         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.

         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.

Years ended September 30, 1998 and 1997

         Revenues.  Our total revenues increased to approximately  $15.3 million
from $7.6  million  for the fiscal  years  ended  September  30,  1998 and 1997,
respectively. The increase was due primarily to growing market acceptance of our
products and $2.9 million of WebSphere services  revenues.  None of the increase
was due to product price increases, although we introduced NetObjects TeamFusion
in 1998,  which had a higher sales price than our previous  products.  In August
1997, we reduced the price of NetObjects Fusion from a suggested retail price of
$495  to  $295,  and  provided  credits  for  unsold  inventory  to  many of our
distributors  and other  resellers,  thereby  reducing  revenues  from  software
license  fees for the three months  ended  September  30, 1997 to a lower amount
than in the preceding quarter. Although the price reduction of NetObjects Fusion
resulted in reduced  revenues  during the three months ended September 30, 1997,
the  increased  sales volume in  subsequent  periods more than offset this price
reduction.

         Our  international  revenues  were  approximately  16% and 15% of total
revenues for the fiscal years ended  September 30, 1998 and 1997,  respectively.
The increase in  international  revenues was due in part to the expansion of the
indirect  sales  channel  in  Europe  as well as the  initiation  of our  master
distributor  agreement  with  Mitsubishi,  which also invested in us in November
1998, to manufacture and sell our products in Japan. We have not been exposed to
significant  foreign  currency  translation  and  transaction  exposure from our
operations in fiscal 1998 and 1997.

         Our revenues from IBM were  approximately  36% and 2% of total revenues
for the fiscal  years  ended  September  30,  1998 and 1997,  respectively.  The
increased  revenues from IBM were generated  primarily from our product  bundles
with Lotus Designer for Domino and our provision of WebSphere services beginning
in March 1998.

                                       22
<PAGE>

         Under our original  agreement with IBM with respect to IBM's  WebSphere
offerings,  we were obligated to deliver modified versions of NetObjects Fusion,
NetObjects  ScriptBuilder  and NetObjects  Authoring Server. We anticipated that
all three products would be bundled with IBM's WebSphere product  offerings.  In
that event,  the  agreement  provided for IBM to pay us license fees for each of
the listed  products  with a minimum  total amount  committed to us. Most of the
license fees would have been due for NetObjects  Authoring Server,  which is our
highest priced product.  In October 1998,  however,  IBM purchased all rights to
Build IT from  Wallop,  Inc.,  and  decided to bundle  that  product  instead of
NetObjects  Authoring  Server. We therefore amended our IBM license agreement to
provide for revenues  from  charges for our services  based on the amount of our
costs and expenses  instead of the minimum  total amount of license  fees.  As a
result of the agreement and IBM's  decision not to bundle  NetObjects  Authoring
Server,  we expect to earn less revenues from our WebSphere  agreement  with IBM
than we had expected to earn and will need to find other revenue sources.

         Cost of revenues.  Our cost of software license fees was  approximately
$2.5  million and $772,000  for the fiscal  years ended  September  30, 1998 and
1997,  respectively,  representing  approximately 26% and 10%  respectively,  of
total  revenues  from sources  other than IBM.  Approximately  $1 million of the
increase can be attributed to increased  production and freight costs  partially
driven by volume increases in 1998 over 1997. In addition, royalty costs grew by
approximately  $300,000 due to our increased  bundling of third party components
and  products  within  NetObjects  Fusion and  NetObjects  TeamFusion.  Finally,
approximately  $400,000  of the  increase  was  due  to  write-offs  of  product
inventory made obsolete by new product  releases.  Cost of IBM service  revenues
consists solely of the costs of providing WebSphere services.

         Research and  development.  Our research and development  expenses were
approximately  $10.2  million  and  $8.4  million  for the  fiscal  years  ended
September 30, 1998 and 1997,  respectively,  and 67% and 111%  respectively,  of
total revenues. The increase in fiscal 1998 resulted primarily from increases in
internal development personnel and independent contractor expenses. The decrease
in percentage terms occurred as revenues grew at a faster rate than expenses.

         Sales  and   marketing.   Our  sales  and   marketing   expenses   were
approximately  $17.1  million  and $12.2  million  for the  fiscal  years  ended
September 30, 1998 and 1997, respectively,  representing  approximately 112% and
161% respectively, of total revenues. Approximately $2.9 million of the increase
resulted from salary and associated  overhead  expense  increases for additional
personnel. Most of the remaining $2.1 million represented additional spending in
marketing  communications  to increase market  awareness of the NetObjects brand
and products.  The decrease in percentage  terms  occurred as revenues grew at a
faster rate than expenses.

         General and  administrative.  Our general and  administrative  expenses
were  approximately  $3.6  million and $3.8  million for the fiscal  years ended
September 30, 1998 and 1997,  respectively,  representing  approximately 23% and
50% respectively,  of total revenues.  Total general and administrative expenses
were higher in fiscal year 1997 than in fiscal year 1998 principally  because of
costs incurred in connection with IBM's  acquisition of approximately 80% of our
stock in fiscal 1997, including approximately $300,000 in professional fees. The
decrease in  percentage  terms  occurred as revenues  grew at a faster rate than
expenses.

         Stock-based  compensation.  We amortized  approximately $227,000 of the
total deferred stock-based compensation in fiscal year 1998.

         Interest expense.  Our interest expense consisted primarily of interest
on our borrowings and increased to approximately  $1.2 million from $234,000 for
the  fiscal  years  ended  September  30,  1998 and  1997,  respectively,  as we
increased  our  borrowings  during  fiscal year 1998.  Fiscal year 1998 interest
expense  included  $201,000 for the Series F preferred  stock warrants issued to
IBM Credit Corp.

         Liquidity and Capital Resources

         In May 1999, we sold 6,000,000  shares of common stock at $12 per share
in our IPO.  Proceeds from the offering were  approximately  $65.6 million after
deducting the underwriting discount and offering expenses.  Prior to our initial
public offering (IPO), we funded our operations  primarily through a combination
of private  placements of equity  securities  and  borrowings,  which yielded an
aggregate of $59.9  million of net  proceeds  from  inception  in November  1995
through April 1999.  IBM and Perseus  Capital LLC provided  approximately  $15.5
million of this financing,  and another $19.0 million was provided by IBM Credit
Corp. in the form of a secured  credit  facility  between  December 1997 and May
1999. In addition,  we received cash prepayments from IBM of approximately $10.5
million  from April 1997 to  December  1997,  which were  recorded  as  deferred
revenues from IBM on our balance sheet.  These deferred revenues offset revenues
from  licenses of our products by IBM from January 1998 through  April 1999.  We
paid interest to IBM on the amounts of  prepayments  that we received in advance
of the scheduled prepayment period set forth in our license agreement with IBM.

                                       23
<PAGE>
         Our $19  million  credit  facility  with IBM  Credit  Corp.,  initially
obtained in December  1997, was repaid out of the proceeds of the initial public
offering and was then terminated. Our $10.9 million Convertible Note and Warrant
Purchase  Agreement with IBM and Perseus was converted into 2,141,713  shares of
common  stock at the time of our initial  public  offering.  A $2.0 million loan
obtained in February  1999, a $1.4 million  loan  obtained in March 1999,  and a
$2.0 million  loan  obtained in April 1999,  all from IBM,  were repaid from the
proceeds of our IPO.

         At  September  30,  1999,  we had  cash or cash  equivalents  of  $23.6
million,  and  short-term  investments  of $9.3  million,  an  increase of $32.5
million from September 30, 1998. Net cash used in operating activities was $10.8
million, $19.0 million and $25.9 million for the years ended September 30, 1997,
1998 and 1999, respectively.  For the year ended September 30, 1997, the outflow
of cash  from  operating  activities  was  partially  offset by an  increase  in
deferred revenue attributable to a prepayment by IBM for goods and services. For
the year ended September 30, 1998, an operating loss was partially  offset by an
increase in accounts  payable.  For the year ended September 30, 1999, cash used
in  operating  activities  was  primarily  attributable  to a net  loss of $26.9
million,  a nonrecurring  interest charge on convertible  debt obtained from IBM
and Perseus of $7.5 million, a $3.8 million increase in accounts  receivable,  a
$1.9  million  decrease  in  accounts  payable  and a $4.3  million  decrease in
deferred  revenue.  The  decrease in deferred  revenue was due  primarily to the
recognition  of deferred  revenues from license and service fee  prepayments  by
IBM.

         Net cash used in investing  activities  was $1.0 million,  $0.8 million
and $2.2  million  for the  years  ended  September  30,  1997,  1998 and  1999,
respectively.  For the years ended  September  30, 1997 and 1998,  the principal
investing activity was the purchase of property and equipment.  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  $11.0
million, $20.0 million and $60.0 million for the years ended September 30, 1997,
1998 and 1999,  respectively.  For the year ended  September 30, 1997, the major
financing activity was the issuance of Series E preferred stock and the exercise
of Series B, C and E warrants. For the year ended September 30, 1998, repayments
of about  $2.1  million in notes to IBM offset  $21  million  in  proceeds  from
short-term  notes,  principally from IBM and IBM Credit Corp. For the year ended
September 30, 1999, we received  $12.9 million in proceeds of  convertible  debt
from IBM and Perseus, $3.4 million in short-term notes from IBM, $5.3 million in
proceeds from the issuance of preferred stock, and $65.6 million in net proceeds
from our IPO of which we used  approximately  $26.7 million to repay  short-term
notes, convertible debt, and credit facilities to IBM and IBM Credit Corp.

         We  anticipate  moderate  growth  in our  operating  expenses  for  the
foreseeable  future to execute  our  business  plan,  particularly  in sales and
marketing  expenses and to a lesser extent  research and development and general
and administrative  expenses.  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 believe  that our current  cash,  cash  equivalents,  and  short-term
investments  will be sufficient to meet our anticipated  cash  requirements  for
working capital and capital expenditures through September 30, 2000. Thereafter,
if cash  generated  from  operations  is  insufficient  to satisfy our liquidity
requirements,  we may seek to sell  additional  equity  or debt  securities,  or
obtain additional credit facilities.

Recent Accounting Pronouncements

         In June 1998, the Financial  Accounting  Standards  Board (FASB) issued
Statement of  Financial  Accounting  Standards  133 (SFAS 133),  Accounting  for
Derivative Instruments and Hedging Activities,  which establishes accounting and
reporting standards for derivative instruments and hedging activities.  SFAS 133
is  effective  as of the  beginning  of the first  quarter  of the  fiscal  year
beginning after June 16, 2000. The Company is determining the effect of SFAS 133
on the financial statements.

         In February 1998, the Accounting  Standards Executive Committee (AcSEC)
issued  Statement of Position  (SOP) 98-1,  Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 provides guidelines to
assist management in determining when software  products  developed or purchased
for internal use should be expensed or capitalized. We do not expect SOP 98-1 to
have a material effect on our financial condition or results of operations.

Recent Developments

         In  November  1999,  the board of  directors  approved  an  increase of
3,100,000  shares  under the Amended and Restated  1997 Stock  Option  Plan,  as
options to purchase all 4,500,000  shares  previously  authorized under the plan
had been  granted and were  outstanding  prior to  November.  One million of the
additional   authorized  shares  have  been  approved  for  grants  to  existing
employees.  The  compensation  committee of the board of directors also approved
the issuance of new options to purchase a total of 1,400,000  shares to existing
executives.  All of these options are subject to  stockholder  approval prior to
exercise, and the recent option grants

                                       24
<PAGE>
generally vest monthly based upon continued  employment over the next 24 months.
These  actions are  intended to keep us  competitive  in the tight labor  market
currently faced by all Silicon Valley e-commerce companies.

Year 2000 Readiness

         Many  existing  software  programs  are coded to accept  only two digit
entries  in their  date  fields.  As a  result,  these  programs  are  unable to
distinguish  whether  "00"  means the year 1900 or the year  2000,  which  could
result in system failures or miscalculations  causing disruptions to operations.
Although we believe that our products  are Year 2000 ready,  because  NetObjects
Fusion and NetObjects  Authoring Server may interact with external databases for
purposes of data storage, the ability of applications integrated with a  website
built using NetObjects Fusion or NetObjects Authoring Server to comply with Year
2000 requirements is largely  dependent on whether any databases  underlying the
application  are Year 2000 ready. If NetObjects  Fusion or NetObjects  Authoring
Server is connected to a database that is not Year 2000 ready, a web application
created or developed for a  website built using NetObjects  Fusion or NetObjects
Authoring  Server  could  work  incorrectly  and could  result in  unanticipated
expenses  to  address  problems  or claims  raised by  customers  that we cannot
presently  foresee.  Furthermore,  Year 2000  issues may  affect the  purchasing
patterns of customers or potential  customers as businesses  expend  significant
resources to correct their current systems for Year 2000 readiness.

 State of Readiness.  We have completed an assessment of Year 2000  requirements
for our  products  and our  internal  systems.  To ensure that our  products are
compliant,  we have completed quality assurance testing of NetObjects Fusion and
NetObjects  Authoring  Server.  To  ensure  that  the  software  that  we use is
compliant,    we   have   upgraded   our   internal   financial   systems,   our
telecommunications  systems, and our office productivity software, among others.
To ensure that the  hardware  that we use is  compliant,  we have  upgraded  our
servers and other  internal  hardware  systems.  To protect the integrity of the
data that is critical to our business,  we have prepared  back-up copies of that
data.  To prepare for  unanticipated  Year 2000 problems from third parties that
could have an impact on our  business,  we have  developed  certain  contingency
plans.

         Separately,  we have begun an evaluation of Year 2000  preparations  by
Sitematic Corporation,  which we acquired in October 1999. The costs of bringing
Sitematic's  systems into  compliance are not expected to have a material impact
on our business.

 Costs.  To date, our costs to identify,  evaluate and fix Year 2000  compliance
issues have been  approximately  $400,000.  Most of our expenses have related to
the  indirect  operating  costs  associated  with time spent by employees in the
evaluation process,  upgrading internal software and hardware systems,  and Year
2000 compliance matters generally.

 Risks.  We are not  currently  aware of any  significant  Year 2000  compliance
problems  relating to our software for our product  offerings or our information
technology or non-information technology systems that would harm our business or
results of  operations,  without taking into account our efforts to avoid or fix
these  problems.  There can be no assurance  that we will not discover Year 2000
compliance  problems in our software for our product offerings that will require
substantial  revisions or replacements.  In addition,  there can be no assurance
that third-party  software,  hardware or services incorporated into our material
information  technology and non-information  technology systems will not need to
be revised  or  replaced,  which  could be  time-consuming  and  expensive.  Our
inability  to fix our  software  for our product  offerings or to fix or replace
third-party  software  or  hardware  on a  timely  basis  could  result  in lost
revenues,  increased  operating costs and other business  interruptions,  any of
which could harm our  business,  cause our  revenues  to decrease  and our stock
price to fall.  Because the Company has less  control  over the efforts of third
parties to correct  their Year 2000  deficiencies,  we believe that the greatest
risk to the Company's operations will come from utilities and telecommunications
suppliers.

 Contingency  Plan.  We have  developed  contingency  plans  in the  event  that
unanticipated  external  system  failures  occur after  January 1, 2000.  We are
assessing  the  vulnerability  of third  parties to Year 2000  problems  and the
extent to which  delivery of services from these third parties would disrupt our
business.

 Reasonably likely worst case scenario.  A reasonably likely worst-case scenario
would  include  the  failure  of  our  products  to  operate  properly,  causing
customers'  systems and/or operations to fail or be disrupted.  Our inability to
correct a  significant  Year 2000 problem,  if one develops,  could result in an
interruption  in, or a failure of, certain of our normal business  activities or
operations.  In addition, a significant Year 2000 problem concerning  NetObjects
Fusion  and  NetObjects  Authoring  Server  could  cause our  customers  to seek
alternate providers of  website building software or services. Any material Year
2000 problem could  require us to incur  significant  unanticipated  expenses to
remedy and could divert our  management's  time and  attention,  either of which
could harm our  business,  cause our revenues to decrease and our stock price to
fall.

                                       25
<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,  limits 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.  In addition,  we maintain  sufficient cash and
cash equivalents so that it can hold investments to maturity.

         At September 30, 1999, we had short-term  investments with an amortized
cost of approximately  $9.3 million,  consisting of high-grade  commercial paper
issued by US companies, with maturities that extend from 90 to 180 days. We have
classified these debt securities as held-to-maturity.

         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. Effective
October 1, 1999, we have implemented an investment  policy that 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  the  Company   have  not  been  large  enough  to  make  hedging
cost-effective.


Item 8. Financial Statements and Supplementary Data

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


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

         Ernst & Young LLP was previously our principal  accountant.  On October
29, 1997,  Ernst & Young LLP was dismissed as our principal  accountant and KPMG
LLP was engaged to audit our  consolidated  financial  statements.  The board of
directors approved the appointment of KPMG LLP as our principal accountants.

         In connection with the audit for the period from November 21, 1995, our
inception, through September 30, 1996, and the subsequent interim period through
October  29,  1997,  there were no  disagreements  with Ernst & Young LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing  scope or  procedures,  which  disagreements  if not  resolved to their
satisfaction  would have caused them to make reference in connection  with their
opinion on the subject matter of the disagreement.

                                       26
<PAGE>

                                    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 2000 Annual Meeting of
Shareholders.


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 2000
Annual Meeting of Shareholders.


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 2000 Annual
Meeting of Shareholders.


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 2000 Annual Meeting of Shareholders.

                                       27
<PAGE>

                                     Part IV

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

(a)(1)   Consolidated Financial Statements

         See pages 31 through 49 of this Annual Report on Form 10-K.

(a)(2)   Financial Statement Schedules

<TABLE>
                          Accounts Receivable Reserve

<CAPTION>
                                      BALANCE AT          ADDITIONS
                                      ----------          ---------
                                     BEGINNING OF         CHARGED TO                           BALANCE AT
                                     ------------         ----------                           ----------
                                        PERIOD             EXPENSE            DEDUCTIONS      END OF PERIOD
                                        ------             -------            ----------      -------------

<S>                                    <C>                  <C>                 <C>                 <C>
Year ended September 30, 1997               -               1,850               (1,094)             756
Year ended December 31, 1998              756               4,691               (3,183)           2,263
Year ended December 31, 1998            2,263               1,698               (3,053)             908
</TABLE>


         All other financial statement schedules required by Item 14(a) (2) have
been omitted because they are  inapplicable or because the required  information
has been included in the consolidated financial statements or notes thereto.
<PAGE>

(a)(3)   Exhibits

         The  following  Exhibits  are  incorporated  herein by reference or are
filed with this report as indicated below.


                                Index to Exhibits


Number    Description
------    -----------
3.1.1+    Restated Certificate of Incorporation of the Registrant

3.2.1+    Form of Amended and Restated 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 Corporation

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

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

10.2+     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

                                       28
<PAGE>


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


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) 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


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


24.1      Power of attorney  (included on the signature page, p. 33 of this Form
          10-K)

27.1      Financial Data Schedule

99.1      Sitematic Corporation Financial Statements

-------

+    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).


*    Portions of these exhibits have been omitted and filed  separately with the
     Commission pursuant to a request for confidential treatment under Rule 406.

                                       29


<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 20th day of
December, 1999.


                      /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
substitue or substitutes may do or cause to be done by virtue hereof.

         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:




/s/ Samir Arora
---------------------------   Chairman of the Board,        December 20, 1999
    Samir Arora               Chief Executive Officer,
                              and President

/s/ Russell F. Surmanek
---------------------------   Executive Vice President,     December 20, 1999
    Russell F. Surmanek       Finance & Operations, and
                              Chief Financial Officer
/s/ Robert G. Anderegg
---------------------------   Director                      December 20, 1999
    Robert G. Anderegg

/s/ Lee A. Dayton
---------------------------   Director                      December 20, 1999
    Lee A. Dayton

/s/ John Sculley
---------------------------   Director                      December 20, 1999
    John Sculley

/s/ Christopher M. Stone
---------------------------   Director                      December 20, 1999
    Christopher M. Stone

/s/ Michael D. Zisman
---------------------------   Director                      December 20, 1999
    Michael D. Zisman

                                       30


<PAGE>


Index to Consolidated Financial Statements

Report of KPMG LLP, Independent Auditors.....................................32

Consolidated Balance Sheets as of September 30, 1999
          and 1998...........................................................33
Consolidated Statement of Operations and comprehensive loss for the
         years ended September 30, 1999, 1998, and 1997......................34
Consolidated Statements of Stockholders' Equity (Deficit) for
         the years ended September 30, 1999, 1998 and 1997...................35
Consolidated Statements of Cash Flows for the years
         ended September 30, 1999, 1998, and 1997............................36

Notes to Consolidated Financial Statements...................................37

                                       31

<PAGE>



                          Independent Auditors' Report




The Board of Directors
NetObjects, Inc.:

         We  have  audited  the  accompanying  consolidated  balance  sheets  of
NetObjects,  Inc. and subsidiary (the Company),  a majority owned  subsidiary of
IBM Corporation, as of September 30, 1999 and 1998, 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, 1999. These consolidated  financial statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects,  the financial position of NetObjects,
Inc. and  subsidiary,  a majority  owned  subsidiary of IBM  Corporation,  as of
September  30,  1999  and  1998,  and  the  results  of  their   operations  and
comprehensive  loss and their cash flows for each of the years in the three-year
period  ended  September  30,  1999,  in  conformity  with  generally   accepted
accounting principles.





                                              KPMG LLP



Mountain View, California
November 5, 1999
                                       32


<PAGE>


<TABLE>
                                                          NETOBJECTS, INC.
                                                           AND SUBSIDIARY
                                          (A Majority Owned Subsidiary of IBM Corporation)
                                                     Consolidated Balance Sheets
                                           (In thousands, except share and per share data)
<CAPTION>
                                                                                                              September 30,
                                                                                                         --------------------------
                                                                                                           1999               1998
                                                                                                         ---------        ---------
                                   Assets
Current assets:
<S>                                                                                                      <C>              <C>
  Cash and cash equivalents                                                                              $  23,623        $     459
  Short-term investments                                                                                     9,331             --
  Accounts receivable, net of allowances of $908 and $2,263
    as of September 30, 1999 and 1998, respectively                                                          6,065            2,292
  Prepaid expenses and other current assets                                                                  1,486              754
                                                                                                         ---------        ---------
     Total current assets                                                                                   40,505            3,505
Property and equipment, net                                                                                  2,204            1,640
                                                                                                         ---------        ---------
Total assets                                                                                             $  42,709        $   5,145
                                                                                                         =========        =========

                      Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable                                                                                       $   2,489        $   4,723
  Notes payable to IBM and IBM Credit                                                                         --             20,666
  Accrued compensation                                                                                       1,068            1,690
  Other accrued liabilities                                                                                  1,657            1,066
  Deferred revenue from IBM                                                                                   --              5,121
  Other deferred revenue                                                                                       988              169
  Current portion of capital lease obligations                                                                 281              299
                                                                                                         ---------        ---------
      Total current liabilities                                                                              6,483           33,734
                                                                                                         ---------        ---------
  Capital lease obligations, less current portion                                                               54              336
                                                                                                         =========        =========

  Stockholders Equity (Deficit):

  Convertible preferred stock, $0.01 par value, 0 and 15,783,333 shares
     authorized as of September 30, 1999 and 1998, respectively. 0 and
     11,576,937 shares issued and outstanding as of September 30, 1999 and 1998, respectively                 --                109

  Preferred stock, $0.01 par value, 6,000,000 and 0 shares authorized as of September 30,
     1999 and 1998, respectively. 0 shares issued and outstanding as of September 30, 1999
     and 1998

  Common stock, $0.01 par value; 60,000,000 and 28,333,333 shares authorized as of
     September 30, 1999 and 1998, respectively. 24,755,960 and 2,001,186 shares issued
     and outstanding as of September 30, 1999 and 1998, respectively                                           248               20

  Additional paid in capital                                                                               110,810           18,318
  Notes receivable from stockholders                                                                           (23)            (113)
  Accumulated other comprehensive income (losses)                                                              (30)            --
  Deferred stock-based compensation                                                                         (1,205)            (541)
  Accumulated deficit                                                                                      (73,628)         (46,718)
                                                                                                         ---------        ---------
      Total stockholders equity (deficit)                                                                   36,172          (28,925)
                                                                                                         ---------        ---------
Total liabilities and stockholders equity (deficit)                                                      $  42,709        $   5,145
                                                                                                         =========        =========

<FN>
              The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
                                                                 33
<PAGE>


<TABLE>
                                                          NETOBJECTS, INC.
                                                           AND SUBSIDIARY
                                                (A Majority Owned Subsidiary of IBM)
                                     Consolidated Statement of Operations and Comprehensive Loss
                                           (In thousands, except share and per share data)


<CAPTION>
                                                                                           Year Ended September 30,
                                                                           ---------------------------------------------------------
                                                                               1999                  1998                  1997
                                                                           ------------          ------------          ------------
Revenues:
<S>                                                                        <C>                   <C>                   <C>
     Software license fees                                                 $     13,566          $      9,703          $      7,392
     Service revenues                                                             2,178                  --
     Software license fees from IBM                                               3,689                 2,700                   175
     Service revenues from IBM                                                    2,782                 2,867                    --
                                                                           ------------          ------------          ------------
       Total revenues                                                            22,215                15,270                 7,567
                                                                           ------------          ------------          ------------

Cost of revenues:

  Software licensefees                                                            1,817                 2,531                   772
  Service revenues                                                                2,295                  --
  Service revenues from IBM                                                       2,113                 2,562                  --
                                                                           ------------          ------------          ------------
     Total cost of revenues                                                       6,225                 5,093                   772

Gross profit                                                                     15,990                10,177                 6,795
                                                                           ------------          ------------          ------------

Operating expenses:
  Sales and marketing                                                            18,800                17,114                12,161
  Research and development                                                        9,358                10,231                 8,436
  General and administrative                                                      4,314                 3,575                 3,762
  Stock-based compensation                                                          559                   227                    --
                                                                           ------------          ------------          ------------
     Total operating expenses                                                    33,031                31,147                24,359
                                                                           ------------          ------------          ------------
Operating income (loss)                                                         (17,041)              (20,970)              (17,564)
Interest income (expense)                                                          (715)               (1,194)                 (234)
Accretion of discount on debt                                                    (1,653)                 --                   --
Interest on beneficial conversion feature of
convertible debt                                                                 (7,457)                 --                   --
                                                                           ------------          ------------          ------------
  Income (loss) before income taxes                                             (26,866)              (22,164)              (17,798)
                                                                           ------------          ------------          ------------
Income taxes                                                                         44                    60                     1
                                                                           ------------          ------------          ------------
  Net income (loss)                                                             (26,910)              (22,224)              (17,799)
Translation adjustment                                                              (30)                 --
  Comprehensive loss                                                       $    (26,940)         $    (22,224)         $    (17,799)
                                                                           ============          ============          ============
Basic and diluted net income (loss) per share                              $      (2.40)         $     (12.26)         $     (10.45)
                                                                           ============          ============          ============

Shares used to calculate basic and diluted net
income (loss) per share                                                      11,215,118             1,812,484             1,702,726
                                                                           ============          ============          ============

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

                                                                 34


<PAGE>


<TABLE>
                                                           NETOBJECTS INC.
                                                           AND SUBSIDIARY

                                                (A Majority Owned Subsidiary of IBM)
                                           Consolidated Statements of Stockholders' Equity
                                                Three Years Ended September 30, 1999
                                                           (In thousands)

CAPTION>
                                                                             Preferred Stock
                                        -------------------------------------------------------------------------------------------

                                           Series A           Series B           Series C           Series E           Series F
                                        ---------------    ---------------    ---------------    ---------------    ---------------

                                        Shares   Amount    Shares   Amount    Shares   Amount    Shares   Amount    Shares   Amount
                                        ------   ------    ------   ------    ------   ------    ------   ------    ------   ------

<S>                                     <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>        <C>     <C>

Balance at September 30, 1996            1,833              4,467       45
Exercise of stock options
Issuance of common stock
Repurchase of restricted stock
Warrants exercised                                             27              4,821       48        23
Issuance of Series E and F warrants
Conversion of Series A, B, and C
     preferred stock to Series E
     preferred stock                    (1,181)            (4,494)     (45)   (4,821)     (48)   10,495      105
Issuance of Series E preferred stock                                                                225        2
Net loss
                                        ------   ------    ------   ------    ------   ------    ------   ------    ------   ------


Balance at September 30, 1997              652                                                   10,743      107
Exercise of stock options
Issuance of common stock
Repurchase of restricted stock
Warrants to purchase Series F
     preferred stock
Issuance of Series E preferred stock                                                                182        2
Repayment of shareholder
     notes receivable
Deferred compensation related
     to stock option grants
Amortization of stock-based
     compensation
Net loss
                                        ------   ------    ------   ------    ------   ------    ------   ------    ------   ------


Balance at September 30, 1998              652                                                   10,925      109
Exercise of stock options
Issuance of common stock,
     non-employee grants
ESPP
Repurchase of restricted stock
Warrants exercised                                                               652        7
Warrants to purchase Series E
     preferred stock
Issuance of in-the-money convertible
     debt and warrants to purchase
     Series E preferred stock
Issuance of Series F preferred stock,
     net of $30 in issuance costs                                                                                      389        4
Issuance of Series E preferred stock,
     net of $67 in issuance costs                                                                    82        1
Cashless exercise of C warrants
Issuance of common stock at IPO,
     net of $7,076 in issuance costs
Conversion of Series A, C, E, and F
     preferred to common                  (652)                                 (652)      (7)  (11,007)    (110)     (389)      (4)
Issuance of common stock for
     Series A, C, E and F preferred
Convertible debt and interest
     converted to common stock
Repayment of shareholder
     notes receivable
Deferred compensation related
     to stock option grants
Amortization of stock-based
     compensation
Translation adjustment
Net loss
                                        ------   ------    ------   ------    ------   ------    ------   ------    ------   ------


Balance at September 30, 1999               --       --        --       --        --       --        --       --        --       --
                                        ======   ======    ======   ======    ======   ======    ======   ======    ======   ======


                                      Preferred Stock    Common Stock
                                      ---------------  ---------------  Additional
                                                                         Paid-in
                                      Shares   Amount  Shares   Amount   Capital
                                      ------   ------  ------   ------   -------

Balance at September 30, 1996          6,300       45   1,892       19     5,417
Exercise of stock options                 --       --     127        1        15
Issuance of common stock                  --       --       2       --         1
Repurchase of restricted stock            --       --    (164)      (2)      (18)
Warrants exercised                     4,871       48                      8,400
Issuance of Series E and F warrants       --       --                        298
Conversion of Series A, B, and C
     preferred stock to Series E
     preferred stock                      (1)      12                        (12)
Issuance of Series E preferred stock     225        2                      1,498
Net loss
                                      ------   ------  ------   ------   -------


Balance at September 30, 1997         11,395      107   1,857       18    15,599
Exercise of stock options                                 144        2        89
Issuance of common stock                                   18                116
Repurchase of restricted stock                            (18)                (2)
Warrants to purchase Series F
     preferred stock                                                         535
Issuance of Series E preferred stock     182        2                     1,213
Repayment of stockholder
     notes receivable
Deferred compensation related
     to stock option grants                                                  768
Amortization of stock-based
     compensation
Net loss
                                      ------   ------  ------   ------   -------


Balance at September 30, 1998         11,577      109   2,001       20    18,318
Exercise of stock options                                 541        5       588
Issuance of common stock,
     non-employee grants                                   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
Discount on 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 to common             (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
Deferred compensation related
     to stock option grants                                                1,223
Amortization of stock-based
     compensation
Translation adjustment
Net loss
                                      ------   ------  ------   ------   -------


Balance at September 30, 1999             --       --  24,756      248   110,810
                                      ======   ======  ======   ======   =======

                                                                                                 Total
                                         Deferred        Notes       Accumulated                 Stock-
                                          Stock-       Receivable       Other                   holders'
                                           Based         from       Comprehensive  Accumulated   Equity
                                        Compensation  Stockholders       Loss        Deficit    (Deficit)
                                        ------------  ------------      ------       -------    ---------

Balance at September 30, 1996                                 (143)         --        (6,695)      (1,357)
Exercise of stock options                                                                              16
Issuance of common stock                                                                                1
Repurchase of restricted stock                                                                        (20)
Warrants exercised                                                                                  8,448
Issuance of Series E and F warrants                                                                   298
Conversion of Series A, B, and C
     preferred stock to Series E
     preferred stock                                                                                   --
Issuance of Series E preferred stock                                                                1,500
Net loss                                                                             (17,799)     (17,799)
                                        ------------  ------------      ------       -------    ---------


Balance at September 30, 1997                                 (143)         --       (24,494)      (8,913)
Exercise of stock options                                                                              91
Issuance of common stock                                                                              116
Repurchase of restricted stock                                                                         (2)
Warrants to purchase Series F
     preferred stock                                                                                  535
Issuance of Series E preferred stock                                                               1,215
Repayment of stockholder
     notes receivable                                           30                                     30
Deferred compensation related
     to stock option grants                     (768)                                                  --
Amortization of stock-based
     compensation                                227                                                  227
Net loss                                                                             (22,224)     (22,224)
                                        ------------  ------------      ------       -------    ---------


Balance at September 30, 1998                   (541)         (113)         --       (46,718)     (28,925)
Exercise of stock options                                                                             593
Issuance of common stock,
     non-employee grants                                                                              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
Discount on 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                                                                   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 to common             (                                                                 --
Convertible debt and interest
     converted to common stock                                                                     11,450
Repayment of stockholder
     notes receivable                                           90                                     90
Deferred compensation related
     to stock option grants                   (1,223)                                                  --
Amortization of stock-based
     compensation                                559                                                  559
Translation adjustment                                                     (30)                       (30)
Net loss                                                                             (26,910)     (26,910)
                                        ------------  ------------      ------       -------    ---------


Balance at September 30, 1999                 (1,205)          (23)        (30)      (73,628)      36,172
                                        ============  ============      ======       =======    =========







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

                                                                 35

<PAGE>


<TABLE>
                                                          NETOBJECTS, INC.
                                                           AND SUBSIDIARY
                                                (A Majority Owned Subsidiary of IBM)

                                                Consolidated Statements of Cash Flows
                                                           (In thousands)
<CAPTION>
                                                                                                 Year ended September 30,
                                                                                                 ------------------------
                                                                                       --------          --------         ---------
                                                                                         1999              1998              1997
                                                                                       --------          --------         ---------

<S>                                                                                    <C>               <C>              <C>
Cash used in operating activities:
Net loss                                                                               $(26,940)         $(22,224)        $ (17,799)
Adjustments to reconcile net loss to net cash used in
 operating activities:
  Depreciation and amortization                                                           1,119             1,104               697
  Accretion of discount on borrowings                                                     1,653               201              --
  Nonrecurring interest charge on beneficial conversion
   feature of convertible debt                                                            7,457              --                --
  Amortization of deferred stock-based compensation                                         559               227              --
  Changes in operating assets and liabilities:
      Accounts receivable                                                                (3,772)             (275)           (2,018)
      Prepaid expenses and other current assets                                            (234)             (306)               27
      Accounts payable                                                                   (1,919)            2,205               721
      Accrued compensation                                                                 (622)              649               699
      Other accrued liabilities                                                             810               382               685
      Deferred revenue                                                                   (4,301)             (999)            6,186
      Interest payable                                                                      321              --                --
                                                                                       --------          --------         ---------
         Net cash used in operating activities                                          (25,869)          (19,036)          (10,802)

Cash used in investing activities:
    Purchases of property and equipment                                                  (1,684)             (792)           (1,028)
    Bridge loan to Sitematic Corporation                                                   (500)             --                --
    Purchases of short-term investments                                                 (16,000)             --                --
    Maturities of short-term investments                                                  6,669              --                --
                                                                                       --------          --------         ---------
        Net cash used in investing activities                                           (11,515)             (792)           (1,028)

Cash used in financing activities:
    Proceeds from short-term borrowings                                                   3,421            21,000             1,050
    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                                                   (298)             (300)             (252)
    Proceeds from issuance of preferred stock, net of
       issuance costs                                                                     5,262             1,215            10,246
    Proceeds from issuance of common stock, net of
       issuance costs                                                                    65,584                91                17
    Repurchases of common stock                                                            --                  (2)              (20)
    Repayment of stockholder notes receivable                                                90                30              --
                                                                                       --------          --------         ---------
         Net cash provided by financing activities                                       60,548            19,984            11,041

Net increase (decrease) in cash                                                          23,164               156              (789)
Cash and cash equivalents at beginning of period                                            459               303             1,092
                                                                                       --------          --------         ---------
Cash and cash equivalents at end of period                                             $ 23,623          $    459          $    303
                                                                                       ========          ========          ========


Supplemental disclosures of cash flow information:
    Interest paid                                                                      $  1,471          $    753          $    293
    Noncash investing and financing activities:
      Equipment recorded under capital leases                                          $    335          $    634          $    934
      Deferred stock-based compensation                                                $  1,223          $    768          $   --
      Discount on borrowings                                                           $  1,653          $    535          $    298
      Stock issued in exchange for services                                            $    316          $   --            $   --
      Common stock issued in exchange for note receivable                              $   --            $    116          $   --

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

                                                                 36

<PAGE>


                                NETOBJECTS, INC.
                                 AND SUBSIDIARY
                      (A Majority Owned Subsidiary of IBM)

                   Notes to Consolidated Financial Statements
                 (in thousands, except share and per share data)

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. The transaction did
not result in a new  accounting  basis for financial  reporting  purposes of the
Company.  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.

         NetObjects provides software and solutions that enable small businesses
and large  enterprises to build,  deploy and maintain  Internet and intranet web
sites and applications.

2.       Summary of Significant Accounting Policies

         The accompanying consolidated financial statements of NetObjects,  Inc.
and  subsidiary  (a  majority  owned   subsidiary  of  IBM)  ("the  Company"  or
"NetObjects")   have  been  prepared  in  accordance  with  generally   accepted
accounting principles. Certain 1998 amounts have been reclassified to conform to
the 1999 basis of presentation.

         Consolidation Principles

         The accompanying consolidated accounts and financial statements include
the accounts of the Company and its wholly-owned  subsidiary,  NetObjects,  Ltd.
All intercompany transactions have been eliminated in consolidation.

         Estimates and Assumptions

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

         Foreign Currency Translation

         The  functional  currency of the  Company's  foreign  subsidiary is its
local  currency.  Adjustments  arising from the  translation  of the  subsidiary
financial  statements  are  reflected as a separate  component of  stockholder's
equity.  Foreign  currency  transaction  gains and  losses are  included  in the
consolidated statements of operations.

         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.

         Through  September  30,  1998,  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 for the resulting
receivable was probable.

                                       37

<PAGE>


                              NETOBJECTS, INC.
                                 AND SUBSIDIARY
                      (A Majority Owned Subsidiary of IBM)

                   Notes to Consolidated Financial Statements

         Under SOP 97-2,  which  was  adopted  by the  Company  in fiscal  1999,
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.

         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
elements in a multiple-element  arrangement, 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  remained  and
collection  for the  resulting  receivable  was probable.  The Company  receives
inventory on hand 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  inventory  on hand 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 upon the
OEM shipping bundled products to its customer. IBM and Lotus are considered OEMs
for purposes of this accounting  policy. See Note 8 for a discussion of software
license fees from IBM.

         Service revenues from  maintenance  agreements for support and upgrades
of existing  products are deferred and  recognized  ratably over the term of the
contract,  which  typically  is 12 months.  Service  revenues  for  training and
consulting services are recognized as the services are performed. See Note 8 for
a discussion of service revenues from IBM.

         In December 1998, AcSEC issued SOP 98-9 Software  Revenue  Recognition,
with Respect to Certain  Arrangements,  which  requires  recognition  of revenue
using the "residual  method" in a multiple  element  arrangement when fair value
does not exist for one or more of the  delivered  elements  in the  arrangement.
Under the "residual method", the total fair value of the undelivered elements is
deferred and  subsequently  recognized in accordance  with SOP 97-2. The Company
will adopt SOP 98-9 in fiscal  2000 and does not expect that its  adoption  will
have a significant impact on the Company's results of operations.

         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 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
using  the "as  if-converted"  basis.  All  potential  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.  To date, the Company
has not had any issuances or grants for nominal consideration.

                                       38
<PAGE>


                                NETOBJECTS, INC.
                                 AND SUBSIDIARY
                      (A Majority Owned Subsidiary of IBM)

                   Notes to Consolidated Financial Statements

         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 and "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.

         Diluted net loss per share for the year ended  September 30, 1997, does
not include the effect of  approximately  11,394,965  (on and "as  if-converted"
basis)  shares of  convertible  preferred  stock  outstanding,  2,517,670  stock
options with a  weighted-average  exercise  price of $1.20 per share,  6,650,006
preferred  stock  warrants with a  weighted-average  exercise price of $5.60 per
share,  or 134,524  shares of common stock issued and subject to repurchase at a
weighted-average   exercise   price  of  $0.12,   because   their   effects  are
antidilutive.

         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.

         The Company evaluates  long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying value of an asset may not
be recoverable.  If such assets are considered to be impaired, the impairment to
be recognized is measured as the difference  between the carrying  amount of the
asset and its fair value.  To date,  the Company has made no  adjustments to the
carrying values of its long-lived assets.

         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.

         Accumulated Other Comprehensive Losses

         Other  comprehensive  income  refers to revenues,  expenses,  gains and
losses that under  generally  accepted  accounting  principles  are  included in
comprehensive  income but excluded from net income.  To date,  accumulated other
comprehensive  losses have consisted  entirely of foreign  currency  translation
adjustments. The tax effects of translation adjustments were not significant.

                                       39
<PAGE>


                                NETOBJECTS, INC.
                                 AND SUBSIDIARY
                      (A Majority Owned Subsidiary of IBM)

                   Notes to Consolidated Financial Statements

         Recent Accounting Pronouncements

         In June 1998, the Financial  Accounting  Standards  Board (FASB) issued
Statement of  Financial  Accounting  Standards  133 (SFAS 133),  Accounting  for
Derivative Instruments and Hedging Activities,  which establishes accounting and
reporting standards for derivative instruments and hedging activities.  SFAS 133
is  effective  as of the  beginning  of the first  quarter  of the  fiscal  year
beginning after June 16, 2000. The Company is determining the effect of SFAS 133
on its financial statements.

         In February 1998, the Accounting  Standards Executive Committee (AcSEC)
issued  Statement of Position  (SOP) 98-1,  Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 provides guidelines to
assist management in determining when software  products  developed or purchased
for internal use should be expensed or capitalized.  The Company does not expect
SOP 98-1 to have a  material  effect on its  financial  condition  or results of
operations.

         Income Taxes

         Income taxes are recorded  using the asset and  liability  method.  The
Company's  tax  provision  for all years has been  calculated  on a  stand-alone
basis.  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.  A valuation  allowance is recorded to reduce deferred tax assets to an
amount  whose  realization  is more likely than not.  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.

         Cash, cash equivalents and short-term investments

         The Company  considers cash held in checking accounts and 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.

         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.  The Company does not hold
equity securities for investment purposes.

         Concentration of Credit Risk

         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.

         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 revenue.

         For the year  ended  September  30,  1998,  software  license  fees and
service revenue from IBM represented  approximately 36% of total revenues. Sales
to one other customer accounted for 29% of total revenue.

         The Company's  principal  markets are North America,  Europe and Japan.
International  sales represented  approximately 23%, 16% and 15% of revenues for
the fiscal years ended September 30, 1999, 1998 and 1997.

                                       40
<PAGE>


                                NETOBJECTS, INC.
                                 AND SUBSIDIARY
                      (A Majority Owned Subsidiary of IBM)

                   Notes to Consolidated Financial Statements

         Fair Value of Financial Instruments

         SFAS No. 107,  Disclosures  About Fair Value of Financial  Instruments,
requires  that fair  values be  disclosed  for most of the  Company's  financial
instruments.  The  carrying  amounts  of cash and cash  equivalents,  short term
investments,  account receivable, accounts payable, accrued compensation,  other
accrued  liabilities,  and notes payable  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, 1999, 1998 and 1997,
those  expenses  totaled  approximately  $7.2 million,  $5.8  million,  and $4.9
million, respectively.

         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 Benefit Plan.


3.       Property and Equipment

     Property and equipment consisted of the following (in thousands):

                                                             September 30,
                                                          ------------------
                                                            1999       1998
                                                          -------    -------
Computer equipment and software                           $ 2,963    $ 2,166
Fulrniture and equipment                                      651        559
Leasehold improvements                                      1,589        795
                                                          -------    -------
                                                            5,203      3,520

Less: accumulated depreciation and amortization            (2,999)    (1,880
                                                          -------    -------
Total property and equipment                              $ 2,204    $ 1,640
                                                          =======    =======

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


4.       Stockholder's Equity (Deficit)

         Capital stock

         On March 14, 1997,  the Company  issued  warrants to purchase  274,604,
105,511,  73,190,  109,783,  188,636,  13,581  and  10,551  shares  of  Series F
preferred   stock,   originally   classified   as  Series  D  preferred   stock,
respectively,  at a  purchase  price  of  $10.80  per  share,  to  Perseus  U.S.
Investors,  L.L.C.,  Rae Technology,  LLC,  Venrock  Associates,  L.P.,  Venrock
Associates  II,  L.P.,  Norwest  Equity  Partners  V, John  Sculley  and  Studio
Archetype,  respectively.  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 for three
years from the date of issuance.  The holders of the warrants may surrender them
on a cashless  exercise basis by surrendering  shares of common stock as payment
of the exercise price. The preferred  warrants  automatically  convert to common
stock upon exercise.

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.  IBM's warrant to purchase  shares of Series E preferred stock expires on
April 11, 2000.  The preferred  warrants  automatically  convert to common stock
upon exercise.

                                       41
<PAGE>


                                NETOBJECTS, INC.
                                 AND SUBSIDIARY
                      (A Majority Owned Subsidiary of IBM)

                   Notes to Consolidated Financial Statements




         On October 8, 1998,  the  Company  entered  into  Convertible  Note and
Warrant  Purchase  Agreements  with IBM and Perseus  Capital LLC.  Principal and
accrued interest on these notes was converted into Series E-2 preferred stock at
$5.35 per share upon the  completion of the Company's  initial  public  offering
(IPO).  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.   These  notes   totaling   $10.9  million  were  converted
automatically into 2,141,713 shares of common stock at the 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%; an
expected  life of five years;  volatility  of 65%;  and no dividend  yield.  The
resulting  interest  expense of  $887,000,  which  appears on our  statement  of
operations  as a  portion  of the  accretion  of  discount  on debt,  was  fully
amortized  during  the year  ended  September  30,  1999.  The  warrants  remain
outstanding and are exercisable at any time before October,  2003. The preferred
warrants automatically convert to common stock upon exercise.

         On October 16, 1998, NetObjects entered into a Stock Purchase Agreement
with Novell  authorizing  the sale and issuance of 333,333  shares of Series F-2
preferred stock at a purchase price of $9.00 per share for an aggregate price of
$3 million.  The  transaction  closed on October 26, 1998. At that time,  Novell
received  a warrant  to  purchase  an  additional  16,666  shares of Series  F-2
preferred  stock at $9.00 per share.  The  warrant was  exercisable  only if the
Company did not complete an initial public  offering with aggregate  proceeds of
more  than $30  million  by  December  31,  2000.  Since the  Company  met these
conditions with its IPO, Novell's warrants expired unexercised.

         On October 28, 1998, NetObjects entered into a Stock Purchase Agreement
with MC Silicon  Valley,  a subsidiary of Mitsubishi,  authorizing  the sale and
issuance of 55,555 shares of Series F-2 preferred  stock at a purchase  price of
$9.00 per share, for an aggregate price of $500,000.  The transaction  closed on
November 10, 1998.  At the time of the IPO,  these share of Series F-2 preferred
stock were converted into common stock.

         In connection  with notes issued to IBM, 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 resulting  discount of
$432,000 was accounted for as additional paid-in capital and was fully amortized
in fiscal 1999. The warrants are exercisable at any time before February,  2004.
The preferred warrants automatically convert to common stock upon exercise.

         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  outstanding  preferred  stock  and
convertible debt automatically converted into 14,056,093 and 2,141,713 shares of
common stock, respectively.

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

                                       42
<PAGE>

                                NETOBJECTS, INC.
                                 AND SUBSIDIARY
                      (A Majority Owned Subsidiary of IBM)

                   Notes to Consolidated Financial Statements

     Stock option plans

         The  Company's  1997 Stock  Option 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 prices not less than the fair market
value at the date of grant.  A total of  2,158,943  shares of common  stock have
been  authorized  for  issuance  under the 1997  Plan.  The  board of  directors
determines  the  fair  market  value  of the  common  stock.  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 our
outstanding  stock in April 1997,  the 1996 Stock Option Plan was  cancelled 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. At September  30, 1999,  37,594 shares of common stock
were subject to our right of  repurchase,  and 1,631,079  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 connection  with options  granted in fiscal year 1999 and 1998,  the
Company  has  recorded  deferred  stock-based  compensation  of  $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 $559,000 and $227,000 was
recognized   during  the  fiscal  years  ended  September  30,  1999  and  1998,
respectively.


<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, 1999             September 30, 1998          September 30, 1997
                                          -------------------------------     -------------------------   ------------------------
                                                               Weighted                     Weighted                      Weighted
                                                                Average                      Average                      Average
                                             Number of          Exercise      Number of     Exercise       Number of     Exercise
                                              Options             Price        Options        Price         Options        Price
                                             ---------          ---------     ---------     --------      ----------     ---------
<S>                                          <C>                 <C>          <C>           <C>            <C>           <C>
Outstanding at beginning of
period                                       2,466,694           $   1.32     2,517,670     $   1.20         758,051     $   0.12
Granted at market value                        848,180           $   7.28       173,362     $   2.10       2,251,557     $   1.05
Granted at less than market value              939,361           $   7.47       167,940     $   2.10             --            --
Exercised                                     (541,498)          $   1.09      (144,410)    $   0.60        (126,353)    $   0.12
Canceled                                      (666,868)          $   3.70      (247,768)    $   1.26        (365,585)    $   0.48
                                             ---------                        ---------                    ---------
Outstanding at end of period                 3,045,869           $   4.42     2,466,694     $   1.32       2,517,670     $   1.20
                                             =========                        =========                    =========
Vested at period end                           973,735                          852,158                      128,388           --
                                             =========                        =========                    =========


Weighted-average fair value
of options granted
during the period with
exercise prices equal to
market value at date of grant                                    $   5.41                   $   0.66                     $   1.08


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

</TABLE>
                                                                            43
<PAGE>

                                            NETOBJECTS, INC.
                                             AND SUBSIDIARY
                                  (A Majority Owned Subsidiary of IBM)

                               Notes to Consolidated Financial Statements

The following table summarizes  outstanding and exercisable options at September
30, 1999:

<TABLE>
<CAPTION>
                                   Options Outstanding                        Options Exercisable
                    --------------------------------------------------   ------------------------------
     Range of                     Weighted average          Weighted                        Weighted
   of exercise        Number        contractual life        average         Number           average
     prices         Outstanding    remaining (In years)  exercise price   Exercisable    exercise price
   ----------       -----------   --------------------   --------------   -----------    --------------
<S>                  <C>                       <C>                <C>        <C>                    <C>
     0.12              166,293                 7.55               0.12       125,091                0.12
   0.30 - 0.60          94,668                 7.54               0.81        46,336                0.39
   1.50 - 2.10       1,236,547                 7.66               1.61       728,890                1.58
   5.31 - 6.91         456,693                 9.86               6.02         5,334                6.09
   7.06 - 7.94         844,489                 9.43               7.51        48,898                7.53
   8.06-12.00          247,179                 9.67               9.55        20,834                9.87
                     ---------                 ----               ----       -------                ----
                     3,045,869                 8.64               4.44       975,383                1.83
                     =========                 ====               ====       =======                ====
</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.

         During the first offering  period of the ESPP,  which concluded on July
31, 1999,  12,983 shares were purchased at $5.87 per share. The weighted average
fair market value of the stock  purchase  rights  granted during fiscal 1999 was
$2.20.

         Stock compensation

         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 1999,  1998 and 1997 would have
been as follows (in thousands, except per share amounts):

                                               Year ended September 30,
                                               ------------------------
                                           1999            1998            1997
                                           ----            ----            ----
Net income (loss)
    As reported                     $   (26,940)     $  (22,224)     $  (17,799)
    Pro forma                           (28,011)        (22,417)        (17,851)

Net income (loss) per share -
 basic and diluted
   As reported                            (2.40)         (12.26)         (10.45)
   Pro forma                              (2.50)         (12.37)         (10.48)
                                    -----------      ----------      ----------
Weighted average common
  shares outstanding                 11,215,118       1,812,484       1,702,726
                                    ===========      ==========      ==========



         For the fiscal year ended  September 30, 1999 fair value was determined
for all of the Company's stock-based  compensation plans using the Black-Scholes
option  pricing  method  with the  following  weighted-average  assumptions:  an
expected  life of two years,  a  risk-free  interest  rate of  5.875%,  expected
volatility of 0.85 and no dividend  yield.  Expected  volatility  was calculated
using an  average of  NetObjects  share  price  volatility  and the share  price
volatility of similar companies.

         For the fiscal years ended  September 30, 1998 and 1997, the fair value
of each option granted was estimated  using the minimum value method on the date
of grant,  assuming a risk-free  interest rate of 6.5%, an expected life of four
years, and no dividend yield.

                                       44
<PAGE>

                                NETOBJECTS, INC.
                                 AND SUBSIDIARY
                      (A Majority Owned Subsidiary of IBM)

                   Notes to Consolidated Financial Statements


5.       Income Taxes

         The Company's deferred tax assets are as follows (in thousands):


                                                    Year ended September 30,
                                                    ------------------------
                                                     1999               1998
                                                     ----               ----

Net operating loss carryforwards                   $   29,821         $  17,506
Research and development credit carryforwards           1,811             1,649
Accruals and reserves not currently deductible          1,059             1,767
Depreciation on property and equipment                    739               488
                                              ----------------    --------------
      Gross deferred tax assets                        33,430            21,410
                                              ----------------    --------------

Valuation allowance                                  (33,430)          (21,410)

                                              ----------------    --------------
      Net deferred tax assets                 $         ---       $       ---
                                              ================    ==============


         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  $12.0 million from fiscal 1998 to fiscal
1999, and by $10.8 million from fiscal 1997 to fiscal 1998.

         As  of  September  30,  1999,   the  Company  had  net  operating  loss
carryforwards  of $70.2  million and $67.3  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
2005. As of September 30, 1999 the Company has research and  development  credit
carryforwards for federal and state tax purposes of approximately $1,041,000 and
$770,000 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.

         The Tax Reform Act of 1986 and the  California  Tax  Conformity  Act of
1987 limit the use of net operating  loss  carryforwards  in certain  situations
where changes occur in the stock ownership of a company. The Company had such an
ownership change, as defined, in April 1997.  Accordingly,  $11.5 million of the
Company's  federal and state net  operating  loss  carryforwards  are limited in
their annual usage to $3.9 million per year on a cumulative basis.

                                       45
<PAGE>

                                NETOBJECTS, INC.
                                 AND SUBSIDIARY
                      (A Majority Owned Subsidiary of IBM)

                   Notes to Consolidated Financial Statements

         The  Company's  actual tax expense for the years  ended  September  30,
1999, 1998, and 1997 differs from the benefit at the federal  statutory tax rate
of 34%, as follows (in thousands):

                                             Year ended September 30,
                                             ------------------------
                                         1999            1998             1997
                                         ----            ----             ----
  Statutory federal income tax
     benefit                           $(9,243)        $ (7,556)       $ (6,051)
  Losses not benefited                   9,243            7,556           6,051
  State taxes                                1                1               1
  Foreign taxes                             43               59             ---
                                   ------------    -------------    ------------
                                        $   44           $   60          $    1
                                   ============    =============    ============


         The components of income taxes for the years ended  September 30, 1999,
1998, and 1997 are as follows (in thousands):


                                Year ended September 30,
                                ------------------------
                         1999             1998            1997
                         ----             ----            ----
Current:
    Foreign             $   43            $   59         $  ---
    State                    1                 1              1
                   ------------      ------------     ----------
Total                   $   44             $  60          $   1
                   ============      ============     ==========


6.       Commitments

         Operating leases

         Total rental expense for operating leases was  approximately  $686,000,
$683,000,  and $341,000 for the years ended  September 30, 1999,  1998 and 1997,
respectively.  Future minimum rental  payments under  noncancellable  leases are
approximately  $893,000 $884,000, and $869,000 for the years ended September 30,
2000,  2001,  and 2002,  respectively.  As of September 30, 1999,  approximately
$360,000 of the  Company's  cash  balance is pledged as security for a furniture
and fixtures lease.

7.       Segment Information

         The Company conducts its business in two distinct segments:  Enterprise
and Small Business Online.  The principal  product of the Enterprise  segment is
NetObjects  Authoring  Server,  which is  targeted  toward  the  large  business
intranet market.  The principal product of the Small Business and Online segment
is NetObjects  Fusion,  which is targeted to small businesses that would like to
establish a  website or upgrade an  existing  site.  The  Company  uses a direct
sales force to distribute  NetObjects  Authoring Server domestically and through
resellers in international  markets. The Company sells NetObjects Fusion through
resellers, distributors, and a dedicated  website.

                                       46
<PAGE>

                                NETOBJECTS, INC.
                                 AND SUBSIDIARY
                      (A Majority Owned Subsidiary of IBM)

         The  Company's  Chief  Operating  Decision  Maker  (CODM)  is the Chief
Executive   Officer.   During  fiscal  1999,  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:

                           Small Business
                             on Online         Enterprise       Total NetObjects
                             ---------         ----------       ----------------
Revenues:
     Domestic license           10,600            2,200               12,800
     International license       4,400               --                4,400
     Domestic service               --            1,500                1,500
     International service          --              700                  700
     IBM service                 2,800               --                2,800
                                ------            -----               ------
       Total Revenue            17,800            4,400               22,200
                                ======            =====               ======


         In the Small Business Online segment,  $3.7 million in software license
fees  from  IBM for the year  ended  September  30,  1999  represented  the only
significant customer  concentration.  This compares to $2.7 million from IBM for
the year  ended  September  30,  1998,  when the  Company  operated  in a single
segment.  There were no significant  customer  concentrations  in the Enterprise
segment. The accounting policies of each segment are the same as those described
in the summary of significant accounting policies.

         Sales 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.

         Substantially all of the Company's assets are located within the United
States.

8.       IBM Relationship

Sales and Service Agreements with IBM

     The Company  entered into a Master License  Agreement with IBM in 1997 that
was subsequently  amended effective September 30, 1998. The salient terms of the
agreement were as follows:

     o   IBM could  sublicense the Company's  software  products in exchange for
         per unit royalty payments.

     o   IBM was to make prepaid royalty payments of $1.5 million on a quarterly
         basis beginning April 1, 1997 and ending October 1, 1998. However,  the
         Company could and did request that these prepayments be made in advance
         of the due date.  IBM made  payments  of $10.5  million to the  Company
         between  April 1 and  December  31,  1997,  for which the Company  paid
         interest at the rate of 7.5% per annum.

                                       47


<PAGE>

                                NETOBJECTS, INC.
                                 AND SUBSIDIARY
                      (A Majority Owned Subsidiary of IBM)

                   Notes to Consolidated Financial Statements

     o  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 $6.0 million.

In January  1999 the Company and IBM amended  the Master  License  Agreement  as
follows:

     o  Under  an  agreement  with  Lotus,  a  certain  number  of  units of the
        Company's  products  were  to  be  bundled  with  Lotus  products  in  a
        promotional  period that was to end September 30, 1998. The  promotional
        period was extended to June 30, 1999 and the maximum  number of units to
        be shipped under the program was increased from 200,000 to 225,000.

     o  The  maximum  amount to be paid to the  Company in  connection  with the
        services provided to IBM was reduced to approximately $5.3 million,  and
        the related mark-up on the services to be provided was reduced.

         In March 1999 the Company and IBM amended the Master License  Agreement
to establish a new special  promotion  program whereby Lotus will bundle certain
NetObjects products with certain Lotus products,  and Lotus will pay the Company
royalties  based on a percentage  of Lotus' net revenue.  The  promotion  period
began on January 1, 1999 and ends on December 31, 1999.

         For the year ended September 30, 1999 and 1998, the Company  recognized
license  revenues  from IBM of  approximately  $3.7  million  and $2.7  million,
respectively.  Service revenues from IBM for the same periods were approximately
$2.8 million and $2.9 million, respectively.

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 the
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  remains
outstanding  and expires April 11, 2000. The Series E preferred  stock issued to
IBM when they acquired 80% of our voting shares was converted to common stock at
our IPO.  The  preferred  warrants  automatically  convert to common  stock upon
exercise.

         In December 1997, the Company obtained a line of credit from IBM Credit
Corp. that was eventually increased to a total of $19 million. The interest rate
on this line was LIBOR + 1.5%. In connection  with this line, we 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 our initial
public  offering  in May 1999.  The  warrant to  purchase  Series F  convertible
preferred stock expires December 23, 2002 and  automatically  converts to common
stock upon  exercise.  The Company  determined  the fair value of these warrants
using the  Black-Scholes  option  pricing model.  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 Sept. 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  to  purchase  Series  E-2  convertible
preferred  expires  October  8,  2003 and  remains  outstanding.  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 to purchase  Series E-2
convertible  preferred expires February 19, 2004 and  automatically  converts to
common  stock upon  exercsie.  The  Company  determined  the fair value of these
warrants  using the  Black-Scholes  option pricing  model.  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 Sept. 30, 1999.

                                       48

<PAGE>

                                NETOBJECTS, INC.
                                 AND SUBSIDIARY
                      (A Majority Owned Subsidiary of IBM)

                   Notes to Consolidated Financial Statements


         As of September  30, 1999 IBM held  12,475,843  shares of the Company's
common stock and warrants to purchase an additional  3,819,365  shares of common
stock. If all outstanding  warrants were exercised,  IBM would own approximately
53% of the Company's common stock.

9. Other Related Party Transactions

         During fiscal 1999 the Company received royalty payments of $_____ from
Novell Corporation, a stockholder of the Company.

10.  Subsequent Event

         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 will be 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  conversion of their  preferred  shares to the Company's
common stock,  Sitematic  preferred  shareholders  received  approximately  $1.6
million for their  shares.  All issued and  outstanding  Sitematic  options were
converted to options to purchase 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,  transaction costs of approximately $0.5 million,
was  $15.4  million.  Allocation  of the  purchase  price  that is in  excess of
Sitematic  Corporation's  net book value will  result in the  addition  of about
$15.6 million in  intangible  assets to the Company's  balance  sheet,  of which
about $13.6 million represents goodwill. The intangible assets will be amortized
on a straight-line basis over periods ranging from 2 to 5 years.

                                       49