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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

                                   FORM 10-K

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

                  For the fiscal year ended December 31, 2000

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

                        Commission File Number: 0-26387

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

                                BE INCORPORATED
            (Exact name of Registrant as specified in its charter)

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

               Delaware                              94-3123667
    (State or other jurisdiction of                 (IRS Employer
    incorporation or organization)               Identification No.)

               800 El Camino Real, Menlo Park, California 94025
         (Address of principal executive offices, including zip code)

                                (650) 462-4100
             (Registrant's telephone number, including area code)

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

          Securities registered pursuant to Section 12(g) of the Act:
                        Common Stock, $0.001 par value

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

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

  The approximate aggregate market value of the common stock held by non-
affiliates of the Registrant, based upon the last sale price of the Common
Stock reported on the Nasdaq National Market, as of February 28, 2001, was
approximately $47,285,282.

  The number of shares of Common Stock outstanding as of February 28, 2001 was
36,484,591.

                      DOCUMENTS INCORPORATED BY REFERENCE

  Certain exhibits filed with the Registrant's Registration Statement on Form
S-1, as amended (Commission File No. 333-77855) are incorporated herein by
reference into Part IV of this Report and portions of the Registrant's
definitive proxy statement to be filed pursuant to Regulation 14A no later
than 120 days after the end of the Registrant's fiscal year December 31, 2000
are incorporated herein by reference into Part III (Items 10, 11, 12 and 13)
of this Report.

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                                BE INCORPORATED

                            FORM 10-K ANNUAL REPORT

                           FOR THE FISCAL YEAR ENDED
                               DECEMBER 31, 2000

                               TABLE OF CONTENTS

<TABLE>
<S>       <C>                                                                                     <C>
                                              PART I

 Item 1.  Business...............................................................................   1
 Item 2.  Properties.............................................................................  23
 Item 3.  Legal Proceedings......................................................................  23
 Item 4.  Submission of Matters to a Vote of Security Holders....................................  23

                                             PART II

 Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters..................  24
 Item 6.  Selected Financial Data................................................................  25
 Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations..  26
 Item 7a. Quantitative and Qualitative Disclosures About Market Risk.............................  31
 Item 8.  Consolidated Financial Statements and Supplementary Data...............................  32
 Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...  33

                                             PART III

 Item 10. Directors and Executive Officers of the Registrant.....................................  34
 Item 11. Executive Compensation.................................................................  34
 Item 12. Security Ownership of Certain Beneficial Owners and Management.........................  34
 Item 13. Certain Relationships and Related Transactions.........................................  34

                                             PART IV

 Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.........................  35

 Signatures......................................................................................  37
</TABLE>
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                                    PART I

ITEM 1. BUSINESS

                          Business of Be Incorporated

The following discussion contains forward-looking statements that have been
made pursuant to the provisions of the private securities litigation reform
act of 1995. Such forward-looking statements are based on our current
expectations, estimates and projections about the company's business,
management's beliefs and assumptions made by management. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates," "likely," and variations of such words and similar expressions
are intended to identify such forward-looking statements. These statements are
not guarantees of future performance and are subject to certain risks,
uncertainties and assumptions that are difficult to predict; therefore, actual
results and outcomes may differ materially from what is expressed or
forecasted in any such forward-looking statements. Such risks and
uncertainties include those set forth below under "Factors Affecting Our
Business, Operating Results and Financial Condition" and our other public
filings with the securities and exchange commission. We undertake no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.

Overview

  Be Incorporated offers software solutions designed specifically for Internet
appliances and digital media applications. An Internet appliance is a
dedicated device designed specifically to access information from the Internet
for a given purpose. An Internet appliance's hardware and software are
seamlessly integrated together to provide users with a responsive and easy to
use interface. In early 2000, we shifted the primary focus of the company from
the marketing and distribution of BeOS, our desktop operating system, to the
development, marketing and deployment of BeIA, our software solution intended
for Internet appliances. BeIA gives our customers the ability to create
completely customized Internet appliances that deliver unique services,
information, and entertainment to their targeted end consumers.

  BeIA, the Complete Internet Appliance Solution(TM), consists of three
components: BeIA Client Platform, BeIA Management and Administration Platform
(MAP), and BeIA Integration Services. This integrated package of small
footprint client-side software, remote administration capability, and
integration services, delivers a responsive user experience and the kind of
stable environment that consumers have come to expect from traditional home
appliances. Using BeIA, developers and manufacturers of Internet appliances
and related hardware and systems, including Original Equipment Manufacturers
(OEMs), consumer electronic companies, system integrators, and Original Device
Manufacturers (ODMs), collectively referred to as "device providers," can
design Internet appliances with the following features:

  .  Modular architecture with small footprint. BeIA Client Platform includes
     a comprehensive Web browser, popular plug-ins like Flash Player and
     RealPlayer, a Java Virtual Machine, and a customizable user-interface.
     Device providers can save storage space--and thus stay within their cost
     considerations--by using only those pieces necessary for a given device.
     Furthermore, our proprietary compression technology reduces the entire
     software stack by a factor of four to five times its original size.

  .  Stable and responsive operating environment. BeIA Client Platform offers
     users a highly responsive and stable experience that users typically
     associate with consumer electronics devices. It requires no rebooting
     for most configuration changes and is resistant to crashes. Operating in
     a broadband environment, BeIA Client Platform allows near-instant
     availability and response from the user interface and, despite
     considerable demands on the device, it provides responsive, glitch-free
     playback of popular media.


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  .  Complete Scalability. BeIA Client Platform operates on a wide range of
     hardware systems, giving device providers many price and functionality
     choices. It provides support for new protocols to give developers the
     ability to add new functionality. Device providers can build more robust
     solutions and add new functionality over time or as new technologies are
     adopted by the market. With BeIA MAP, device or service providers can
     remotely manage a range or class of devices that might have different
     functionality for targeted customers.

  .  Easy customization. BeIA allows device or service providers to control
     the user experience and the branding "look and feel" of the device
     interface. BeIA Client Platform's application framework allows designers
     to use standard web development tools to rapidly complete and modify
     their design work using HTML, Javascript or Flash. Device or service
     providers can update the device's look and feel, branding and
     functionality remotely from a BeIA MAP server. We also provide a native
     development environment based on BeOS that runs on standard PCs which
     facilitates quicker and less costly development of applications running
     on BeIA.

  .  Rapid remote upgradability. BeIA Client Platform's fast and clean
     development environment and modular, operating system core enables
     device providers to change, update and augment the appliances remotely
     without any consumer involvement or hassle. This means that as new
     technologies emerge, older appliances may not need to be replaced by the
     user. The device or service provider can install upgrades to the system
     via BeIA MAP capabilities with little or no user involvement.

  .  Comprehensive browsing capability. BeIA Client Platform's full-featured
     browser allows Internet appliances to load and render the vast majority
     of Web content in the form intended, enabling users to shop, search, and
     interact with content from the Internet with little limitation. The
     Client Platform delivers an immersive, media-rich experience that allows
     inexpensive devices to take advantage of upcoming streaming media
     portals. It also provides the ability to combine Internet access with
     existing media services such as TV and FM radio. BeIA includes
     RealNetworks' RealPlayer for audio and video streaming, Macromedia's
     Flash and Sun's Java Virtual Machine. BeIA supports WAV, MPEG, MP3 and
     other formats that enable exciting additions to regular Web content.

  An Internet appliance involves more than just the hardware and the software.
It also includes the branding, the device look and feel, the maintenance and
support of the software, and the efficient integration of all key pieces. Our
customers may choose to do much of this work themselves, or they may elect to
have Be act as a Value Added Reseller (VAR), integrating key parts (the
hardware, the client software, the server software, and the management of
network services) to bring it together into a cohesive product offering.
Utilizing each of BeIA Client Platform, BeIA MAP and BeIA Integration Services
together, a device provider is better able to bring a product to market
quickly while fulfilling the needs of its user community at a reasonable cost.
It is because of the existence of these components that we believe BeIA
provides the "Complete Internet Appliance Solution."

Background

 Emergence of the Internet Appliance

  While general-purpose PCs do many things well, they do not necessarily fit
all uses of computing. Special-purpose devices can be very different from a
conventional computer in their interface design, form factor, location in the
home or office, or input/output options. Just as a carpenter owns several
different tools rather than a single all-in-one device, consumers have
different devices for listening to music, watching movies, playing games, and
talking to friends. We expect the same trend will hold true in the Internet
space. Consumers find they want tailor-made devices for communicating,
gathering information, and being entertained. As an indicator of this trend,
according to a report issued in January 2001 by Gartner Group's Dataquest
unit, the increase in PC sales in 2000 dipped by over 7% as compared to 1999.
Conversely, according to a February 2001 study by the Pew Internet and
American Life Project, the number of adults in the United States who were
connected to the Internet grew more than 18% over a study conducted only six
months earlier. The cost of PC hardware and

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software, and the knowledge required to operate and maintain a PC, combined
with the high total cost of ownership can be a barrier to widespread adoption
of the Internet to levels commensurate with the telephone or television.

  Recognizing cost of ownership and ease-of-use are the principal barriers PC
Original Equipment Manufacturers and Internet Service Providers face to
enlarge the base of Internet-connected users, manufacturers are seeking
alternatives to traditional PCs. Also, consumer electronics manufacturers,
seeking additional revenue streams, are increasingly viewing the Internet as
providing them with opportunities to sell new categories of consumer devices
intended to access the services and content available on the Internet. In
order to be successful, these new types of devices must deliver a user
experience comparable with other consumer electronics products, offering
significant speed, reliability, stability, and ease of use. Further, these new
types of devices must support an array of services including broadband access,
high quality video and audio capabilities and expandability.

  Industry analysts define Internet appliances as a wide range of new
products, typically in a different form factor than traditional PCs, that are
consumer-focused, low-cost and easy-to-use. They are primarily designed to
deliver the interactive benefits of the Internet or an Internet-like service,
like Web browsing and email. These new classes of devices are typically
categorized into one or more of the following market segments: communication,
information, computing, entertainment and/or "other" types of Internet
appliance devices. IDC, a market research firm in Massachusetts, conducted a
study focusing solely on the information appliance segment, where it estimates
the number of information appliances shipped in the United States will grow to
40.3 million units at a value of nearly $8 billion in 2004, with a compound
annual growth rate of 32.5%. In another study, covering the entire range of
all of the market segments described above, eTForecasts, a market research and
consulting firm based in Illinois, estimates shipments of Internet appliances
will grow to 767 million units worldwide by 2005, and a market value of over
$149 billion. eTForecasts defines the Internet appliance market segments to
include communications devices (Web cellular phones, Web screen phones, and e-
mail terminals), information devices (Web pads and Web terminals), computing
devices (handheld and palm computers, personal digital assistants, and data
collection appliances), entertainment devices (Web TVs, set top boxes, Web
digital TVs, Web music players, Web game consoles, and digital jukeboxes), and
other Internet appliances (electronic books, kitchen Internet appliances,
medical Internet appliances, and appliances for other specialized markets).

 Key Requirements of Internet Appliances

  While Internet appliances will vary in form and function, we believe a core
set of functionality is necessary for any type of Internet appliance to
succeed. To lower overall system costs, device providers are increasingly
seeking alternatives to traditional PCs that do not utilize expensive central
processing units and general-purpose operating systems, such as Windows.
Device and service providers often lack the necessary resources or time to
develop their own customized software. We believe these companies desire a
turnkey customizable software solution to meet their needs and shorten their
time to market. We believe the key features desired of an Internet appliance
software solution to be the following:

  .  Integrated, full-featured Web browser and support for a JavaVM and other
     popular plug-ins like RealPlayer and Flash Player;

  .  Rich media capabilities such as CD-quality audio and television-quality
     video;

  .  Completely customizable and easily localizable user interfaces to enable
     creation of application-specific or custom-branded products worldwide;

  .  Remote management of devices to provide upgrades and new functionality
     without user involvement;

  .  Scalable for larger applications, quickly upgradeable and extensible;

  .  Reliability and stability equivalent to other mainstream consumer
     appliances; and

  .  Responsiveness and rapid start-up or "boot" times to encourage frequent
     use.

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<PAGE>

  We believe an Internet appliance provider needs more than just a robust and
customizable software solution to produce a successful Internet appliance. In
many cases, they also need to have a reliable and cost-effective device for
the software to run on, and we believe they need an easy-to-use interface that
is tailored to their customers' wants and needs. To achieve this, appliance
providers often need a strong partner who will assist them with the selection
and integration of the hardware, software and content.

 Limitations of Traditional Operating Systems for the Internet Appliance
 Market

  Traditional operating systems such as the Windows family of operating
systems, UNIX, Linux and the Macintosh OS are large, general-purpose operating
systems designed to support a wide array of systems and applications.
Accordingly, they require significant processor power, memory and storage to
operate effectively, often too costly for the Internet appliance business
model. Additionally, traditional operating systems demand that the user have
at least a minimum amount of knowledge of the system and how to operate it
efficiently.

  The majority of traditional operating systems used today, for example
Windows, are marketed as a distinct product that cannot be modified or are
very difficult to customize to the requirements of the device provider or
application. Alternatively, other operating systems, such as UNIX derivatives
and Linux exist in multiple versions from many vendors. Because of the lack of
focus and incompleteness of such solutions, device providers are forced to do
their own customization, integration and support, adding to the cost and
complexity of system maintenance. Developers and manufacturers of Internet
appliances and service providers often lack the adequate resources or time to
deliver devices based on these operating systems. While the claim that
Internet appliance users want to have a familiar operating environment has
been voiced, we believe Internet appliance users will, in fact, want no
perceptible operating system. Instead, users will want to have applications
such as e-mail and browsing available to them immediately and reliably without
concern for the additional demands of an operating system.

 Limitations of Embedded Operating Systems for the Internet Appliance Market

  Embedded operating systems such as QNX, Wind River's VxWorks, Palm OS and,
to some extent, Microsoft's Windows CE, offer lighter weight and more
responsive environments as compared to traditional operating systems. However,
because they were built for specific and limited applications, they are
generally not scalable for larger applications and often lack the modern
development environments and access to key PC technologies that are necessary
for highly functional devices. These operating systems do not offer the full
features and benefits of desktop operating systems, such as full featured Web
browsing, that users have come to desire and expect. Device providers are
required to add additional features or solutions in order to build a software
platform that more adequately addresses their needs. Even with these costly
additions and integrations, device and service providers may not end up with
the complete software solution they need for their appliances.

Business Strategy

  Our principal objective is to establish BeIA as the premier software
solution for appliances that deliver communication, information, and
entertainment over the Internet. We intend to continue to establish
relationships with reference platform designers, industry leading ODMs, OEMs,
consumer electronics companies, service providers, and integrators to create
appliances that serve the needs of their customers, and to further enhance and
promote BeIA as the software solution of choice for Internet appliances. The
key elements of our strategy in the Internet appliances market are:

  Leverage Our Technology and Capabilities. We developed our core operating
system technology over the course of ten years. As a result, we believe we
have developed a significant body of technical expertise relating to the
challenges of handling Internet applications and digital media. We will
continue to leverage this technology to deliver a stable, responsive software
platform providing rich media capabilities in a small memory footprint. We
will continue to innovate BeIA's capabilities to include additional modular
functionality, more comprehensive browsing capabilities, and provide
portability to new device platforms.

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  Promote BeIA through strategic relationships with hardware manufacturers. We
intend to focus our marketing and sales efforts on establishing relationships
with strategic partners, such as OEMs and consumer electronic manufacturers,
that are capable of designing and delivering a large volume of products based
on our software solution. We also intend to promote the use and benefits of
our software solution by working closely with ODMs that are creating reference
designs for Internet appliances. Our goal is to ensure our software platform
will run on the products designed by these device manufacturers, that our
products represent a complete solution for such ODMs, and the products
featuring our software solution are ultimately adopted and marketed by device
and service providers.

  Increase awareness of BeIA with device and service providers. We believe
providers of Internet services and companies who desire to strengthen their
brand with their customers through the use of Internet appliances will be a
significant factor in driving the development and adoption of Internet
appliances. Service providers looking to augment their services and retain
customers will look for new ways to offer services and support specifically
geared to their customer base. Service providers are those companies seeking
new ways to expand their service offerings to existing customers and attract
new customers through the use of Internet appliances. We believe these service
providers can better achieve these goals through Internet appliance offerings
that make it easier and more convenient for their customers to do business
with them. We intend to focus our marketing efforts to increase the service
providers' awareness of BeIA and its ability to offer a customizable user
environment that promotes the service provider's brand and products. In
addition, we intend to deliver added value to this market by encouraging
partnerships between service providers and device providers utilizing our
software solution.

  Develop industry leading product designs. Since the Internet appliance
market is emerging and device concepts are being refined, we believe our
success will, in part, be dependent on accurately monitoring the trends and
demands in the Internet appliances market. We plan to work closely with device
and service providers to address these demands. On a limited and focused
basis, we may work with device and service providers to design compelling
products that are capable of being adopted by a large number of users. By
working closely with device and service providers and, when required,
developing reference designs for products of interest to the consumer market,
we believe that we can stimulate the development of new products.

Products and Technologies

 BeIA

  The BeIA solution is comprised of three components: BeIA Client Platform,
BeIA Management and Administration Platform (MAP), and BeIA Integration
Services.

  BeIA Client Platform, provides a high-performance, small-footprint
environment for special-purpose Internet enabled devices to deliver
information, communication, and entertainment into the hands of end users. One
of the core strengths of the BeIA technology is its ability to deliver,
display and control multiple audio and video inputs and applications with
little performance degradation. BeIA Client Platform has been designed and
optimized to provide the high level of responsiveness and stability users
typically experience and associate with consumer electronics devices. The
modular nature of BeIA Client Platform allows device providers to incorporate
only those features of the software required for a particular device, to
deliver specific content and to meet the cost target for each particular
device. BeIA Client Platform is made up of four building blocks:

  .  The base operating environment: The operating environment, built on the
     proven technology of BeOS, is a high-performance, integrated software
     solution for Internet-enabled devices designed to deliver Web browsing
     experiences tailored to fit the user's needs.

  .  Robust browser technology: Rather than being an add-on application, the
     browser technology is integrated into the operating environment to
     provide a high degree of value in the user experience.

  .  Popular plug-ins: To support access to Web content, BeIA Client Platform
     includes licensed technologies such as Java Virtual Machine, RealPlayer,
     and Macromedia Flash Player. These plug-ins

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     are all integrated in a highly customizable, Web content-based user
     interface framework. Many additional modular plug-ins are available to
     handle a wide variety of content formats.

  .  Development environment: A development environment in the form of a
     software development kit (SDK) is available to provide a set of tools
     that can be used to customize and enhance BeIA Client Platform
     implementations.

  BeIA Management and Administration Platform (MAP) allows service providers
to implement remote management features for the BeIA-based client devices
deployed to end users. A network of appliances connected through BeIA MAP
servers can be provided upgrades and updates to keep them at an appropriate
maintenance level, and can serve specific content defined by the user or
service provider, all in a secured manner. This capability coupled with the
technology built into the BeIA Client Platform virtually eliminates the need
for users to be responsible for the maintenance of the device's operating
environment and applications. BeIA MAP is composed of six building blocks:

  .  Device Management Server: The Device Management Server allows the
     service or device provider to more easily control remote management
     activities such as registering devices and end users, delivering
     software updates, querying, granting, or revoking access privileges, and
     querying devices capabilities.

  .  Administration Server: The Administration Server provides a web-based
     interface for the service or device provider to deliver administrative
     services to end-user devices. All the information on the customer
     account is available to be examined and modified, including billing
     information, device software updates and user access privileges. This
     capability is all included in a single interface available only to the
     service or device provider, not the end users.

  .  Mastering Station: The Mastering Station allows service or device
     providers to configure and prepare BeIA software and content releases
     for delivery to devices. A complete development environment is provided,
     including local development and testing tools, and web-based tools for
     administration, validation and deployment of new releases. The Mastering
     Station allows updates to the Client Platform and content to be
     collected and prepared for distribution to end user devices by the
     Device Management Server. The end user can specify when the update is to
     be done, either at the beginning of a session, or the end. Devices can
     be updated on demand or periodically while the device is idle.

  .  Application Server: The Application Server provides end users with
     access to Web-based applications. The service or device provider can
     choose to offer a variety of applications, including e-mail, instant
     messaging, chat rooms, and personal information management. Because
     these services can be branded and customized by the service or device
     provider, it can ensure the end user sees a single, cohesive
     environment.

  .  Import Server: The Import Server provides many of the same features seen
     in traditional web proxies, such as activity logging, blocking of sites,
     and content filtering. It provides these features with reduced overhead
     and more flexibility than traditional proxies. It is designed to allow
     efficient but controlled access to "imported" content, such as content
     the vendor does not provide.

  .  Authentication Server: The Authentication Server integrates with the
     systems of major ISPs to give as many access options as possible to
     service or device providers. Using industry standard protocols, the
     Authentication Server is capable of controlling access to end user
     devices. Authentication is not dependent upon how an end user obtains
     Internet service or the service partnerships.

  BeIA Integration Services offers to device or service providers a desired
expertise that facilitates their quick and reliable delivery and development
of new devices. Services are available in two distinct forms:

  .  Professional Engineering Services: Be provides a wide range of
     integration services to assist our customers in the design, development,
     and implementation of new products. As part of our BeIA Integration
     Services offerings, we can develop features to brand the device for the
     service

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     provider and customize it to its needs. We intend to provide services to
     our partners to assist them with pilot implementations and validation of
     BeIA on new hardware platforms.

  .  Value Added Reseller Services: Be also intends to act as a VAR, bringing
     together service providers, device manufacturers, hosting services, Web
     content, and third-party applications to provide a complete solution for
     Internet appliance creation.

 HARP

  In January 2001, we launched a BeIA-based reference platform for Internet-
enabled home stereo devices. Designed for consumer electronics companies and
home stereo component manufacturers, Be's Home Audio Reference Platform (HARP)
is an implementation of BeIA Client Platform that functions as a traditional
stereo component to play CDs, tapes and LPs, but can also be used to access
and broadcast Internet-based audio and other services. A HARP device transfers
the contents of a CD to an integrated hard disk in a format, such as the
popular MP3 format, that is compatible with the audio needs of the service
provider and its users. While encoding, or "ripping" the tracks of the CD in
the selected format onto the hard disk, the device can access the Internet for
additional information about the CD and artist, including art work, track name
and time, genre, and other available data. The information obtained from the
Internet is used to assist in the cataloging and organization of the music and
other audio tracks for easy retrieval in a number of convenient ways.
Individual users can develop their own "play lists" and select from these
lists when listening to music. Included in the design of HARP is the
capability for a device to act as a media delivery server, providing multiple
audio streams to different parts of the home and serving the needs of several
users at once. We have built a prototype HARP device as an example of how such
a device can be designed and built. Be does not intend to market this device
to end users, but instead, we intend to pursue relationships with consumer
electronics companies with an interest in building Internet-enabled home audio
devices. We expect that any revenues generated from this endeavor will be
derived through licensing the HARP design to consumer electronics companies.

 BeOS

  BeOS is our operating system designed for digital media applications and
serves as the development platform for BeIA. As a development platform, BeOS
is particularly well suited for development of code for BeIA because it has
complete Application Programming Interface (API) compatibility, and
approximately 90% binary compatibility with BeIA running on an Internet
appliance. The binary compatibility issues stem from the physical differences
between a development environment and the target device. Internet appliances
will typically have no hard disk drive, will have very limited capacity for
testing and debugging tools, and may have significant hardware capability
differences from the development machine. These differences prevent any
serious development from being done on BeIA-powered devices, although limited
testing and debugging can be done. BeOS provides a robust, reliable
environment for creating new code (applications, drivers, and system
extensions), testing and debugging of code in the BeOS environment, and remote
testing and debugging of the code on devices, with a set of tools that allow
for high productivity and maximum effectiveness. We expect professional
developers of BeIA code will use this environment almost exclusively for their
coding, testing, and debugging needs.

  BeOS, as a desktop operating environment, maximizes the performance of
digital audio and video applications that run on a range of desktop PCs and
high-performance multiprocessor workstations. BeOS offers several advantages
over traditional operating systems. It allows users to simultaneously operate
multiple audio, video, image processing and Internet-based software
applications while maintaining system stability, media quality and processor
performance. BeOS provides professional users with a high performance
environment to quickly and easily develop applications and create content. It
is designed to facilitate the integration of new technologies, and combines
fast performance and rich digital media applications for both processor-
intensive applications and lower-cost PC platforms.

  The Personal Edition of BeOS is available at no charge as a single
downloadable file from our Website. Millions of copies of BeOS Personal
Edition have been distributed to date. BeOS Pro Edition is available for a fee
from our licensed publishers. We expect the revenues from BeOS to be minimal
in the future. The development platform for BeIA, is under development and has
not yet been released.

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Marketing, Sales and Customers

 BeIA

  Our sales and marketing group is dedicated to defining the most compelling
software solutions, establishing relationships with industry leading device
and service providers to create Internet appliances based on our software
solution, and further enhancing and promoting BeIA as the solution of choice
for Internet appliances. We market and sell our products by actively pursuing
relationships among six broad classifications of customers and strategic
partners:

  .  Reference Platform Designers are companies who create a new concept by
     integrating key components and systems produced by ODMs, and/or
     manufacture key components of Internet appliances. These designers do
     not typically manufacture devices themselves. Many of the components
     used by ODMs are based on designs provided by reference platform
     designers, so it is important for BeIA to run on or support the
     components provided by these companies. Our relationship with reference
     platform designers is typically symbiotic in nature where we share
     common or parallel business goals, and we often participate in joint
     sales and marketing activities.

  .  Original Device Manufacturers (ODMs) are companies that typically create
     reference designs for Internet appliances using standard computing
     industry components. Many of these companies create their own designs
     while others work from contracts or ideas that originate from OEMs or
     service providers. To find a ready-made solution to meet their target
     customer needs, OEMs and service providers commonly shop for devices
     offered by ODMs. In many cases, an ODM will never actually put its
     company name or brand on the device it manufactures. Since ODMs are the
     primary producers of the key components and systems used in the Internet
     appliances market, it is important BeIA runs on their hardware and
     system designs. Our relationship with ODMs is similarly symbiotic in
     nature where we share common or parallel business goals. As a result, we
     often participate in joint sales and marketing activities. Our efforts
     are targeted to ensure our software platform will run on the reference
     platform designs and the resulting ODM product designs and that the
     products featuring our software solution are ultimately adopted and
     marketed by OEMs and service providers. In certain cases we will
     provide, and charge for, BeIA Integration Services for ODMs.

  .  Original Equipment Manufacturers (OEMs) are the device manufacturers
     most recognized by the public for their brand name and products.
     Typically, OEMs are the companies that have reseller and/or direct
     selling relationships with service providers as well as consumers. OEMs
     gather market requirements from service providers and consumers, and
     work to deliver Internet appliance solutions that meet their target
     customer's requirements. Working closely with OEMs gives us direct
     access to consumer requirements and enables us to further develop our
     software solution to meet the OEM's customer needs. Our relationship
     with OEMs is typically a contractual relationship to provide software
     and services to support the development of their products. OEMs
     typically license BeIA Client Platform, and purchase maintenance and
     support, from us on a per-unit royalty basis, and will generally pay
     BeIA MAP license fees based on the number of units supported by the BeIA
     MAP Software. In many cases we will also provide, and charge for, BeIA
     Integration Services for OEMs.

  .  Consumer Electronics Companies (CEs) are traditional device
     manufacturers most recognized by the public for their stereo,
     television, or other home entertainment products. Typically, CEs are the
     companies that have reseller and/or direct selling relationships with
     multi-level distributors and consumers. CEs gather market requirements
     from consumers and work to deliver Internet-enabled solutions that meet
     their target customer's requirements. Working closely with CEs gives us
     direct access to consumer requirements and enables us to further develop
     our software solutions to meet the CE's customer needs. Our relationship
     with CEs is typically a contractual relationship to provide software and
     services to support the development of their products. CEs typically
     license BeIA Client Platform, and purchase maintenance and support, from
     us on a per-unit royalty basis, and will generally pay BeIA MAP license
     fees based on the number of units supported by the BeIA MAP Software. In
     many cases we will also provide, and charge for, BeIA Integration
     Services for CEs.

                                       8
<PAGE>

  .  Service Providers are those companies that either have an infrastructure
     for providing access to the Web, own content, or have an established
     business model that can be fulfilled through delivering Internet
     appliances. Examples of service providers might be financial
     institutions, retailers, ISPs and/or telephone companies. Service
     providers typically already have relationships with consumers, and look
     to an Internet appliance strategy to expand their reach or to help
     ensure their customers remain loyal to their services. Service providers
     looking to augment their services and retain customers will look to
     offer Internet appliances specifically geared to their customer base.
     Service providers will require a highly customizable user environment
     that promotes their brand and services. Service providers have direct
     feedback from consumers and will provide valuable insight into the
     functionality of BeIA. They will make recommendations for future
     features and enhanced functionality. Currently, our relationships with
     service providers are fostered through our OEM customers. The service
     providers in the technology industry are showing interest in the
     Internet appliance market but many lack the resources to bring products
     to market at this time. We believe this category of customer will become
     more active as the market matures.

  .  Integrators are companies whose business is creating and delivering
     Internet appliances and accompanying functionality, services and
     features to targeted groups of consumers. Integrators typically provide
     an end-to-end solution matching devices, ISPs, necessary software
     platforms, content and back-end server applications. We expect the
     integrators to appreciate the scalability of our products, the easily
     customizable user interface and advanced development environment, and
     our application and integration services. Integrators will also likely
     leverage our relationships with ODMs, OEMs and service providers.

  We have established relationships with a number of prominent ODMs in the
technology industry. Our current list of ODM partners is:

  .  Acer Group. We are working with Acer to ensure that BeIA runs on a
     variety of Acer's Internet appliance hardware platforms. Acer is the
     world's third-largest PC manufacturer, and provides solutions to OEM
     customers on a global basis. Acer is also a leading Internet-enabler by
     providing Internet component technologies, devices, and services.

  .  Arima Computer Corporation. We are working with Arima to offer BeIA as
     the software solution for its Internet appliance devices. Arima is a
     leading ODM based in Taiwan that does business with powerful core
     technologies and offers integration capabilities to provide solutions to
     brand-name marketing companies. Be and Arima additionally announced they
     would cooperate on sales and marketing of these jointly developed
     solutions to OEMs.

  .  DT Research, Inc. We are working with DT Research to ensure BeIA is
     fully integrated with DT Research's family of Internet appliances based
     on National Semiconductor's Geode reference platform. DT Research,
     headquartered in Milpitas, California, is a provider of information
     appliance solutions based on the thin client platform for server-
     centric, Internet-centric, and vertical applications.

  .  First International Computer, Inc. We are working with FIC to offer BeIA
     as the operating system software solution for FIC's recently expanded
     family of subsystems for Internet appliances. FIC is one of the leading
     PC motherboard and system vendors based in Taiwan.

  .  Proview Group. We are working with Proview to ensure that BeIA runs on a
     variety of Proview's Internet appliance offerings. The Proview Group,
     headquartered in Taiwan, is among the leading global suppliers of CRT
     monitors. Proview also has multiple worldwide manufacturing locations,
     and its established high-volume manufacturing capabilities allow for a
     quick time-to-market for new devices.

                                       9
<PAGE>

  We have also established relationships with OEM and CE customers including:

  .  Sony Electronics, Inc. In March 2001, we signed an OEM license and
     distribution agreement with Sony Electronics Inc. Under the agreement,
     Sony is granted a license to include BeIA Client Platform in the Sony
     eVilla(TM) Network Entertainment Center. We have worked with Sony on the
     design and implementation of this product since March 2000 under the
     terms of a professional services agreement that supplements the OEM
     license and distribution agreement.

  .  TEAC Corp. In March 2000, we entered into an OEM license and
     distribution agreement with TEAC Corp. that allows TEAC, or its
     professional division, TASCAM, to include our software with certain
     advanced audio products.

  .  Compaq Computer Corporation. In November 1999, we entered into an OEM
     license and distribution agreement with Compaq Computer Corporation that
     allows Compaq to pre-install and distribute BeIA on Compaq's iPaq
     Internet appliances.

  We have also established relationships with certain Reference Platform
Designers. These companies design and manufacture the key components that go
into qInternet appliances. Some of the Reference Platform Designers we are
working with are:

  .  National Semiconductor Corporation. We are working together with
     National Semiconductor to develop a series of production-ready reference
     platforms for Internet appliances. These platforms are based on
     National's Geode hardware running BeIA Client Platform.

  .  Intel Corporation. Be has established a relationship with Intel
     Corporation as a reference platform designer and as a potential ODM for
     HARP. We are working with Intel to provide a proof-of-concept for
     manufacturers wishing to build low-cost, high-performance home audio
     devices, using Intel's Celeron processor, that support several audio
     encoding and playback features. These features include managing and
     using audio content like compact discs and audio streamed from the
     Internet to send multiple streams of audio to a variety of locations in
     the home and support home networking products.

  We have also established relationships with several System Integrators.
These companies typically bring together ODMs, OEMs, and service providers to
bring a product to market. Some examples of integrators we are working with
are:

  .  Qubit Technology. In December 1999, we entered into a license and
     distribution agreement with Qubit Technology, where Qubit is licensed to
     use BeIA as the software solution for its wireless Web Tablet.

  .  Music Browser, Inc. We are working with Music Browser to include our
     technology in its Music Republic product, an innovative broadband
     digital music delivery system for retail environments. A pilot
     installation of 14 Music Republic stations was launched in September
     2000 at Tower Records, Lincoln Center in New York City.

 BeOS

  Be has adopted a two-tiered approach for distributing and selling BeOS. Our
approach enables us to concentrate our resources on development and allow
third parties to focus on distribution and consumer marketing.

  .  BeOS Personal Edition. BeOS Personal Edition is a free, easy-to-install,
     fully functional version of BeOS. It can be downloaded in a single file
     directly from our Website and installed onto a Windows system. Although
     BeOS Personal Edition is a fully functional version of BeOS, it does not
     include some third party royalty-bearing technologies.

  .  BeOS Pro Edition. BeOS Pro Edition is our enhanced, full-featured
     version of BeOS available on CD-ROM. It is offered to PC OEMs, value-
     added software developers, other software vendors,

                                      10
<PAGE>

     distributors and end users through our third-party publishers. These
     publishers package and license the product and handle all marketing,
     sales, and end-user support. Also, these publishers may choose to add
     additional software and services.

Product Development and Engineering

  Our product development and engineering efforts are focused primarily on
enhancing the functionality, flexibility, performance and reliability of BeIA.
We continue to develop and innovate the core technology and architecture of
BeOS as the integration platform for BeIA and as a software development
environment for Internet appliances.

  A key ingredient of a compelling software solution is the identification of,
and the ability to support, popular industry standard formats and
technologies. Often this requires establishing strategic technology and
licensing arrangements with technology providers to integrate their
technologies with our products. Some of our key technology partners include:

  .  Opera Software A/S. Opera supplies a full-featured World Wide Web
     Consortium (W3C) compliant Web browser. In December 1999, we entered
     into an agreement with Opera to integrate their Web browser technology
     with our products, and to distribute it as a component of our products.

  .  RealNetworks, Inc. In August 1999, we signed a license agreement with
     RealNetworks, a leader in streaming media technology on the Internet, to
     enable its RealPlayer product to run on our products. RealPlayer allows
     BeIA and BeOS users to view streaming video, and audio media and
     provides users with access to a rich selection of digital media on the
     Web.

  .  Sun Microsystems, Inc. In September 1999, we signed a license agreement
     with Sun Microsystems for its PersonalJava technology which is
     integrated into BeIA. Java technologies will allow users of a wide range
     of Internet appliances running on our software solutions to run
     platform-independent applications commonly accessed via the Web.

  .  Intel Corporation. Intel has provided us with assistance in the
     development and enhancement of our software solutions. In December 1998,
     we entered into a software license agreement with Intel where it
     provides us with technical specifications and software for Indeo, a
     technology that enables compression and decompression of video data.
     This allows our products to be compatible with applications that use
     this compression technology.

  .  Bitstream, Inc. In November 1999, we entered into an agreement to
     license Bitstream's FontFusion product, a unified font rendering engine,
     as a key component of the BeIA Client Platform. We have also licensed
     Bitstream's unified, stroke-based CJK (Chinese, Japanese, Korean) font.
     By integrating this font into BeIA Client Platform, we solve a
     significant problem facing manufacturers of Internet appliances bound
     for Asian markets by providing complete, high-quality Asian font support
     without using a large amount of memory.

  .  Macromedia, Inc. In July 2000, we entered into an agreement with
     Macromedia to include its Macromedia Flash Player in BeIA Client
     Platform. The inclusion of the Macromedia Flash Player in BeIA Client
     Platform allows users to view Macromedia Flash content on the Web and
     will ensure a rich multimedia experience. Macromedia Flash Player
     software delivers low-bandwidth animations, presentations, and Web sites
     for Internet users.

  .  Beatnik, Inc. In September 1999, we entered into an agreement with
     Beatnik, Inc., a leader in interactive audio technologies and content
     for the Web and digital devices, to include the Beatnik Audio Engine in
     our BeIA Client Platform. Using the Beatnik Audio Engine, a BeIA-powered
     Internet appliance will be able to play Beatnik's Rich Music Format
     (RMF) files, which can be used to sonify Web pages and other digital
     devices.


                                      11
<PAGE>

  We invest considerable resources in the development of core technologies and
new capabilities. Internet technologies are evolving at a rapid pace and it is
important we identify and adopt emerging standards in a timely manner. We
obtain significant input concerning product development directions from our
technology partners, ODMs, OEM customers, service providers and end users. We
intend to play a technology leadership role in the emerging Internet appliance
market. The technology requirements and constraints for Internet appliances
are often markedly different than for personal computers. As a result, we
invest resources to prototype advanced product concepts for Internet
appliances.

  We have invested significant resources to enhance BeIA Client Platform and
BeIA MAP, and to meet the needs of our customers/OEMs. Our goal is to provide
the best user experience, use inexpensive hardware components to their fullest
ability, and minimize the amount of storage required on the device. In the
last 12 months we have created improvements to our technology designed to help
us achieve those objectives. Some examples of these innovations are:

  .  User interface technology improvements: compression of digital images,
     32-bit color palette, and reduced Random Access Memory requirements;

  .  Improved web compatibility: Web browsing technology was updated to meet
     new World Wide Web Consortium (W3C) standards;

  .  Improved e-mail: support for new e-mail protocols, offline composing of
     messages, and better handling of attachments;

  .  New file browsing capabilities: updated list view capabilities that
     allows the user to access local and remote files using the same browsing
     techniques;

  .  New local PDF viewer: local rendering of portable data format (PDF)
     files according to the latest Adobe specifications. Our PDF viewer
     downloads data as it is needed to display pages of a document, which
     allows the user to start viewing the document quickly;

  .  Compressed File System: better utilization of storage space heightens
     the perception of improved performance;

  .  New MAP Client Agent: provides device interaction with BeIA MAP for
     remote installation of dynamic, incremental software upgrades without
     user involvement;

  .  New BeIA Network Environment: improved network technology to support
     high bandwidth connections;

  .  New input methods: traditional and simplified Chinese input methods have
     recently been developed and added to BeIA. We also provide support for
     Chinese Web pages in our browser.

  We have invested significant time and resources in creating a structured
process for product development and testing. This process uses both
commercially available and proprietary tools. Source code control is
maintained using the Perforce Fast Source Code Management tool set. Source
code is compiled and linked using the Cygnus EGCS tools. Both tool sets run
under BeOS. This enables our products to be developed using our own
technology. We feel this results in a rapid identification and resolution of
problems. Product testing is performed in house by a dedicated quality
assurance team. We also utilize a formal beta test program. Software errors
are logged and tracked using a proprietary database that is available to our
customers via a Web interface.

Competition

  The markets in which we participate are competitive and rapidly changing. We
believe the principal competitive factors in these markets are:

  .  Partnerships with device providers and service providers;

  .  Key technological features and capabilities of the software platforms;

                                      12
<PAGE>

  .  Technical, financial and marketing resources; and

  .  Device providers clearly delivering targeted services that entice
     consumers to regularly use the device.

  In the market for Internet appliances, there is increased competition to
offer software to drive non-PC devices that provide access to the Internet and
enable digital media content on the Internet. For example, Microsoft
Corporation has traditionally been highly competitive in most computer
software markets, and if it chooses to fully enter the Internet appliance
software solutions market, it has the resources and expertise to be a
competitive factor. Other companies such as QNX Software Systems Ltd., Wind
River Systems, Inc., Merinta Inc., vendors of UNIX-based operating systems
such as Linux, and vendors of embedded operating systems have software that is
being used for Internet appliances. Improvements or modifications to other
existing operating systems such as Apple's Mac OS, Palm Inc.'s Palm OS or
companies that market other variations of Linux could also enable those
companies to compete in the Internet appliance market. We also face
competition from vendors of embedded browsers and manufacturers of set-top
boxes and terminals such as WebTV, a subsidiary of Microsoft.

  We believe we compete favorably in the software solutions for Internet
appliances market because BeIA offers a modular, scalable and customizable
client solution, as well as a tightly integrated remote management capability.
Since Be is focused and dedicated to the appliance market, we offer a full
range of operating system technologies, comprehensive browsing capabilities,
the most popular Internet enabled plug-ins, easy customization, remote
administration capabilities and applications, and integrated services to
complete an Internet appliance solution.

Employees

  As of December 31, 2000, we had 116 employees. Of these employees, 33 are in
sales and marketing, 68 are in product development and engineering and 15 are
in general and administrative. We consider our employee relations to be good.

Facilities

  We lease approximately 23,963 square feet in Menlo Park, California. We also
lease approximately 2,184 square feet in Paris, France. We believe our current
facilities are adequate to meet our needs for the next twelve months.

                                      13
<PAGE>

   Factors Affecting Our Business, Operating Results And Financial Condition

The following is a discussion of certain risks, uncertainties and other
factors that currently impact or may impact our business, operating results
and/or financial condition. Anyone evaluating us and making an investment
decision with respect to our common stock or other securities is cautioned to
carefully consider these factors, along with similar factors and cautionary
statements contained in our filings with the Securities and Exchange
Commission.

 We have incurred significant net losses and we may never achieve
profitability.

  We incurred significant net losses of approximately $10.4 million in 1997,
$16.9 million in 1998, $24.5 million in 1999 and $21.1 million for the year
ended December 31, 2000. As of December 31, 2000, we had an accumulated
deficit of approximately $94.4 million. We expect to incur significant
additional losses and continued negative cash flow from operations in 2001 and
beyond and we may never become profitable.

  We expect to continue to incur significant sales and marketing, research and
development and general and administrative expenses. Prior to this year, sales
of BeOS, our desktop operating system, to resellers and distributors and
direct sales to end users accounted for the primary source of our revenues. In
the first quarter of 2000, we shifted our resources to focus primarily on the
market for Internet appliances. We made a version of BeOS available for
personal use at no charge and a more fully featured version is available
through third party publishers. The personal edition was released at the end
of March and publishers began shipping the commercial version in April. As a
result, we may not generate any meaningful revenues from sales of BeOS in the
foreseeable future. Our shift to focus primarily on the market for Internet
appliances may not result in any increase in our revenues or any improvement
in our operations or financial condition and may not offset the loss of
revenues from sales of BeOS. We will need to generate significant revenues to
achieve profitability and positive operating cash flows. Even if we do achieve
profitability and positive operating cash flow, we may not be able to sustain
or increase profitability or positive operating cash flow on a quarterly or
annual basis.

 We will need to raise additional capital that may not be available to us.

  We believe existing cash and cash equivalents will not be sufficient to meet
operating and capital requirements at our currently anticipated level of
operations beyond the end of the second quarter of 2001. Additional capital
will be necessary in order to fund our operations at currently anticipated
levels beyond the second quarter of 2001. While we are actively considering
various funding alternatives, we have not secured or entered into any
arrangements to obtain additional capital. There can be no assurance we will
be able to obtain additional funds, on acceptable terms or at all. If we
cannot raise additional capital to continue our present level of operations,
we will have to scale back our business which could include among other
things, a reduction in our work force. As a result we may not be able to
further develop or enhance our product offering, take advantage of future
opportunities or respond to competitive pressures, any of which could have a
material adverse effect on our business and results of operations. Our
liquidity may also be adversely affected in the future by factors such as
higher interest rates, inability to borrow without collateral, availability of
capital financing and continued operating losses. If additional capital is
raised through the issuance of equity securities, our stockholders' percentage
ownership of the common stock will be reduced and our stockholders may
experience dilution in net book value per share, or the new equity securities
may have rights, preferences or privileges senior to those of our
stockholders. Any debt financing, if available, may involve covenants limiting
or restricting our operations or future opportunities.

 We have recently shifted our resources to focus primarily on a new and
undeveloped market.

  In the first quarter of 2000, we shifted our resources to focus primarily on
the market for Internet appliances and the further development and marketing
of BeIA, our software solution intended for Internet appliances. We may be
unsuccessful in our attempt to focus primarily on this market and face
significant challenges often encountered with companies undergoing a strategic
reorganization, which include:

  .  inability to effectively shift existing product development and
     engineering, sales and marketing and management resources to focus on
     the market for Internet appliances;

                                      14
<PAGE>

  .  management distraction and loss of key personnel as we focus on this
     market and shift resources towards the development and marketing of our
     software solution for Internet appliances market;

  .  inadequacy of our existing resources to understand the needs and
     requirements of developers and manufacturers of Internet appliances;

  .  inability to train existing personnel or hire and train new qualified
     personnel to address the market for Internet appliances; and

  .  failure to adapt to new and evolving trends in Internet appliances.

  We may not successfully meet any or all of these challenges. Our failure to
meet one or more of these challenges could materially adversely affect our
business and prospects. In addition, our business and prospects are highly
dependent on the development and market acceptance of Internet appliances and
our ability to successfully market BeIA as a viable software solution for
Internet appliances. The market for Internet appliances is new, unproven and
subject to rapid technological change. This market may never develop or may
develop at a slower rate than we anticipate. In addition, our success in
marketing BeIA as a software solution for Internet appliances is dependent
upon developing and maintaining relationships with industry-leading computer
and consumer electronics companies, system and hardware manufacturers, and
Internet service and content providers. Our failure to establish relationships
with companies that offer Internet appliances and establish BeIA in this
market would have a material adverse effect on our business and prospects.

 We face intense competition from companies with significantly greater
financial, marketing, and technical resources.

  There is already intense competition to develop and market operating
systems. This competition exists in the market for desktop operating systems,
as well as operating systems and software platforms intended for the Internet
appliances market. Companies such as Microsoft Corporation, Apple Computer,
Inc., QNX Software Systems Ltd., Palm, Inc., Merinta Inc., vendors of UNIX-
based operating systems such as Linux, and vendors of embedded operating
systems, have operating systems that are being used or may be used for
Internet appliances. We also face competition from vendors of embedded
browsers and manufacturers of set-top boxes and terminals. Many of these
companies have an established market presence, relationships with OEMs and
consumer electronic manufacturers such as those developing and marketing
Internet appliances, and have significantly greater financial, marketing and
technical resources than we do. As a result, we may have difficulty attracting
manufacturers and developers to create devices and software that will use our
software solution. These more established companies, together with a large
number of smaller companies who offer software platforms may be used for
Internet appliances, may capture a larger portion of the market than we do. We
also expect to face increased competition from new entrants offering software
platforms intended for use on Internet appliances.

  We expect our competitors to continue to improve and enhance their current
products and to introduce new products and software platforms, especially
those intended for the Internet appliances market. Successful product
introductions and product improvements by our competitors could reduce or
eliminate any perceived advantages in our software solution over these
competitors and could reduce market acceptance for our software solution and
make it obsolete. To be competitive, we must continue to invest significant
resources in research and development, sales and marketing, and continue to
enhance and improve our software solution. We may have insufficient resources
to make these investments and may be unable to make the advances necessary to
be competitive. Our failure to compete successfully against current or future
competitors would have a material adverse effect on our business and
prospects.

 Our success depends on our ability to establish and maintain strategic
relationships, and the loss of any of our strategic relationships could harm
our business and have an adverse impact on our revenue.

  Our success depends in large part on our ability to establish and maintain
strategic relationships with industry-leading computer and consumer electronic
companies, hardware and systems manufacturers, and

                                      15
<PAGE>

Internet service and content providers. In the Internet appliance market, we
have agreements with Sony Electronics, TEAC, Compaq Computer Corporation, and
Qubit Technology and collaboration arrangements with National Semiconductor,
Inc., Intel Corporation, Acer Group, Arima Computer Corporation (Arima),
DT Research, Inc., First International Computer, Inc. (FIC), and Proview
Group. We cannot be certain we will be able to reach agreements with
additional partners on a timely basis or at all, or that these partners will
devote adequate resources to promote our software solution. We may be unable
to enter into new agreements with additional partners on terms favorable to us
or at all. The market for Internet appliances is new and subject to rapid
technological change. We may be unable to successfully meet the requirements
of existing or future strategic partners. As a result, we may be unable to
maintain strategic relationships with developers and manufacturers of Internet
appliances and Internet service and content providers. If we are unable to
develop or maintain relationships with strategic partners and customers, we
will have difficulty selling and gaining market acceptance for our products
and our business and results of operations will be materially adversely
affected.

 Agreements with strategic partners and device and service providers may not
result in any increase in our revenues or improvement in our operations or
financial conditions.

  Existing agreements with OEM customers, for example, those with Sony, TEAC,
Compaq and Qubit, and arrangements with our other strategic partners including
National Semiconductor, Intel, Arima, DT Research, FIC and Proview, generally
do not contain any minimum purchase commitments or minimum payment
obligations. Similarly, new agreements with additional OEM customer and
arrangements with new strategic partners, may not contain any minimum purchase
commitments or minimum payment obligations. Agreements with existing and new
OEM customers may be limited to a pilot or test program. These partners are
free to use software platforms developed by other companies in their Internet
appliance products and are under no obligation to develop or market products
based on our software solution. In addition, our arrangements with existing
and new strategic partners may not result in the marketing or shipment of any
commercial products based on our platform or may include only a limited number
of demonstration models. As a result, existing arrangements and new
arrangements, if any, with strategic partners may not result in any actual
sales, any increase in our revenues, or any improvement in our operations or
financial condition.

 We are dependent upon the success of the products and services offered by our
partners and customers in the Internet appliances market.

  We expect to market BeIA primarily to developers and manufacturers of
Internet appliances and providers of services to access information and
entertainment over Internet. Our intent is for these manufacturers and service
providers will incorporate our software solution into their products and
services. Our BeIA customers may include computer and consumer electronic
companies, manufacturers of the hardware and systems used in Internet
appliances, and Internet service and content providers. As a result, our
success is dependent in large part on factors which are outside our control
which include, the performance of our customers and the market acceptance of
our customers' products and services based on our software solution. We have
little or no ability to influence the development and marketing efforts of our
customers and our customers may fail to dedicate adequate resources necessary
to successfully develop and market products based on our software solution.

 The demand for our software solution is dependent on our ability to support
key industry standards and access to enabling technologies.

  The demand and acceptance of our product is dependent upon our ability to
support a wide range of industry standards such as those used for streaming
media and Internet browsing and access to key enabling technologies. These key
technologies include a Web browser under license from Opera Software A/S. If
we were to lose our rights to this Web browser or any other key technology
incorporated into our products, we may be required to devote significant time
and resources to replace such browser or other key technologies. This could in
turn be costly, result in the unavailability or delay the release of our
products, and would materially adversely affect our business and operating
results. We also license other enabling technologies for inclusion in our
product, such as third party compression and decompression algorithms known as
"codecs." We may be unable to license these enabling technologies at favorable
terms, or at all, which may result in lower demand for our products.

                                      16
<PAGE>

 We expect long sales cycles associated with our software solution intended
for the Internet appliances market and our stock price could decline if sales
are delayed or cancelled.

  We believe that the adoption of BeIA as their software solution represents a
significant product decision for the developers and manufacturers of Internet
appliances. We expect long sales cycles as we collaborate and educate
customers and partners on the use and benefits of our software solution. We
similarly expect customers and partners will spend a significant amount of
time performing internal reviews and testing our software solution before
accepting and adopting our product. Any failure to gain acceptance for our
software solution and any delays in sales of our product could cause our
quarterly operating results to vary significantly from projected results,
which could cause our stock price to decline.

 Our products may never gain broad market acceptance.

  We have two principle products, BeIA, our software solution intended for the
Internet appliances market and BeOS, our operating system intended for the
desktop market. BeOS has been our primary source of revenues in the past and
it has been used primarily by a limited number of enthusiasts and application
developers. Our business and prospects are dependent on the broader market
acceptance of our products, especially the acceptance of BeIA as a viable
software solution for a broad range of Internet appliances and devices
enabling Internet-based and digital media applications. In an effort to
increase the market acceptance of our software solution, a version of BeOS has
been made available for personal use for no charge. Despite these efforts, we
may not experience any significant increase in the number of BeOS users or a
broader market acceptance of our software solution and developers may decide
not to adopt or develop products based on our software solution.

  We may be unsuccessful at marketing BeIA as the software solution of choice
for Internet appliances, and developers and manufacturers of Internet
appliances and Internet service and content providers may not elect to
incorporate BeIA in their products and services. Potential customers may not
perceive any significant advantages over other operating systems such as
Microsoft Windows CE, QNX, PalmOS, the UNIX-based operating systems, Linux, or
embedded browsers and operating systems. In addition, we may be unable to
demonstrate the commercial viability and cost-effective nature of our
products. If our products, especially our software solution intended for the
Internet appliances, are not accepted or adopted by an increasing number of
developers and manufacturers, our business and prospects will be materially
adversely affected.

  In addition, traditional operating systems could evolve and new operating
systems could emerge to more effectively address the needs of the
manufacturers and developers of Internet appliances and the digital media
requirements of users and OEMs. For example, enhancements and features could
be added to Microsoft's Windows operating system and Apple's Mac OS which
could significantly decrease the differences between our products and these
operating systems. As a result, any technical or marketing advantage we may
have in the market for operating systems could be lost and the demand and
acceptance of our products would diminish.

 We have limited experience marketing and selling our products, which makes it
difficult to evaluate our business.

  We were founded in 1990 and shipped our first commercial product in December
1998. Prior to 1998, our business was primarily focused on research and
product development activities. To date, we have not generated any significant
revenues from sales of our products and this makes it difficult to evaluate
our business and prospects. In January 2000, we announced a shift in our
resources to focus primarily on the Internet appliances market, a new and
unproven market and a market in which we have little experience competing.
Your evaluation of our business and prospects must be made in light of the
risks and uncertainties frequently encountered by companies in an early stage
of development and offering products in a market featuring intense competition
from companies with substantially greater financial and marketing resources.
Risks faced in this regard include:

  .  our inability to manage or adapt to new and evolving trends in Internet
     appliances and digital media;

  .  our inability to market our product as a viable software solution,
     especially to leading developers and manufacturers of Internet
     appliances;

                                      17
<PAGE>

  .  our failure to gain any sustainable level of market share or to compete
     with operating systems and software platforms offered by others; and

  .  costs and delays in releasing new versions and product upgrades.

  We may not successfully meet any of these challenges. Our failure to meet
one or more of these challenges could materially adversely affect our business
and prospects. It is also difficult to predict the size and future growth
rate, if any, of the market for our software solution. We have limited
experience upon which to determine or predict trends that may emerge and
adversely affect our business or prospects. The market for our software
solution may not develop or may develop more slowly than we anticipate, and
may never become economically sustainable.

 We may not be able to respond to the rapid technological change in the
markets in which we compete.

  The markets in which we participate or seek to participate are subject to:

  .  rapid technological change;

  .  frequent product upgrades and enhancements;

  .  changing customer requirements for new products and features; and

  .  multiple, competing and evolving industry standards.

  The introduction of software that contain new technologies and the emergence
of new industry standards could render our products less desirable or
obsolete. In particular, we expect changes in the Internet-based technology
and digital media enabling technology will require us to rapidly evolve and
adapt our products to be competitive. As a result, the life cycle of each
release of our products is difficult to estimate. To be competitive, we will
need to develop and release new products and software solution upgrades that
respond to technological changes or evolving industry standards on a timely
and cost-effective basis. We cannot be certain that we will successfully
develop and market these types of products and software solution upgrades or
that our products will achieve market acceptance. If we fail to produce
technologically competitive products in a cost-effective manner and on a
timely basis, our business and results of operations could suffer materially.

 Our revenues and operating results are subject to significant fluctuations
and our stock price may fall if we fail to meet the expectations of the public
market.

  Our revenues and operating results will likely vary significantly from
period to period due to a number of factors, some of which are under our
control, such as product enhancements by us, and many of which are outside our
control, such as new product releases and product enhancements by our
competitors. Customer orders may be deferred in anticipation of new product
releases, product enhancements or upgrades by us or by our competitors. In
addition, changes in the pricing policies or marketing efforts of our
competitor and our response to these changes, which could include price
reductions or increased marketing efforts by us, may cause significant
fluctuations in our revenues and operating results. Based on these factors, we
may fail to meet the expectations of the public market in any given period and
our stock price would likely be materially adversely affected.

 We may be unable to adjust expenses in a timely manner to compensate for
revenue shortfalls.

  Our expense levels are based, in part, on our expectations of future sales.
We may be unable to adjust spending in a timely manner to compensate for any
sales shortfall. A significant portion of our expenses include minimum
payments for licensed technology under licensing agreements, payment
obligations under non-cancelable lease arrangements, rent and other payments
that are fixed and do not vary with revenues. We plan to increase our
operating expenses to:

  .  expand our sales and marketing efforts;

  .  fund greater levels of product development and engineering;

                                      18
<PAGE>

  .  expand and increase the number of our relationships with strategic
     partners; and

  .  broaden our customer support capabilities.

  Any delay in generating revenue could cause significant variations in our
operating results from quarter to quarter and could result in substantial
operating losses. If we fail to generate sufficient sales or if our sales are
below expectations, operating results are likely to be materially adversely
affected.

 We are dependent upon third party publishers for the marketing and sale of
the commercial version of BeOS and we have little or no control over the
efforts and operation of these publishers.

  In March of 2000, a version of BeOS was made available for personal use at
no charge. In April of 2000, we also made the commercial version of BeOS
available through third party publishers. Our success in the desktop market is
highly dependent on these publishers' ability to sell and market BeOS and
incorporate it as part of successful product offerings. We have little or no
ability to influence the marketing and promotional efforts of these publishers
and these companies may fail to dedicate adequate resources necessary to
successfully market and promote the commercial version of BeOS.

 In our effort to increase market acceptance for our products, we may forego
near-term revenue by providing our products at little or no cost to potential
customers.

  In an attempt to increase the market acceptance of our software solution, we
have made a version of BeOS available to end users for free. In the future, we
may decide to continue to forego immediate revenue potential by providing
other versions of BeOS at little or no cost. We may also forego near-term
revenue potential in the Internet appliances market by providing BeIA to
developers and manufacturers at little to no cost. Customers, whether end-
users or the developers or manufacturers of Internet appliances, may be
unwilling to pay for any upgrades or enhanced versions of our products. Our
decision to forego near-term revenue in expectation of increasing the users
and adopters of our software solution may not yield any increase or
sustainable market acceptance for our products and may not result in any
future revenues. In addition, we may reduce prices in response to competitive
factors or to pursue new market opportunities.

 Our future success depends in part on our ability to continue to attract,
identify, hire and retain key personnel and qualified employees.

  Our success depends to a significant degree upon the continued contributions
of our executive management team, including our co-founders Jean-Louis Gassee,
our Chief Executive Officer, Steve Sakoman, our Chief Operating Officer, and
other senior level financial, technical, marketing and sales personnel. The
loss of these or other members of our senior management team could have a
material adverse effect on our business and results of operations.

  As of December 31, 2000, we had 116 employees. Our success depends upon our
ability to attract and retain highly qualified senior management and
technical, sales and marketing personnel to support growing operations. The
process of locating and hiring personnel with the combination of skills and
attributes required to carry out our strategy is time-consuming and costly. In
addition, there is intense competition for qualified personnel in the software
platform and development industry. Competition is especially intense in the
San Francisco Bay Area, where our corporate headquarters is located. The loss
of key personnel or our inability to attract qualified personnel to supplement
or replace existing personnel, could have a material adverse effect on our
business and results of operations.

  If we are unable to secure sufficient funding or raise additional capital to
fund our present level of operations, we will have to scale back our business
which could include a reduction in our work force and the loss of employees.
As a result of any material reduction in our workforce and loss of employees,
we may not be able to further develop our product offerings, conduct our
business comparable with past practice or take advantage of future
opportunities, which could have a material adverse effect on our business.

                                      19
<PAGE>

 Our success is dependent on the continued growth and improvement of the
Internet and adoption of Internet appliances.

  Our future success depends on the continued growth of and reliance by
consumers and businesses on the Internet, particularly in the Internet
appliance market. Use and growth of the Internet will depend in significant
part on continued rapid growth in the number of households and commercial,
educational and government institutions with access to the Internet. The use
and growth of the Internet will also depend on the number and quality of
products and services designed for use on the Internet. Because use of the
Internet as a source of information, products and services is a relatively
recent phenomenon, it is difficult to predict whether the number of users
drawn to the Internet will continue to increase and whether any significant
market for commercial use of the Internet will continue to develop and expand.
Either Internet use patterns may decline as the novelty of the medium recedes
or the quality of products and services offered online may not support
continued or increased use.

  The rapid rise in the number of Internet users and the growth of electronic
commerce and applications for the Internet has placed increasing strains on
the Internet's communications and transmission infrastructure. This could lead
to significant deterioration in transmission speeds and the reliability of the
Internet as a commercial medium and could reduce the use of the Internet by
businesses and individuals. The Internet may not be able to support the
demands placed upon it by this continued growth. Any failure of the Internet
to support growth due to inadequate infrastructure or for any other reason
would seriously limit its development as a viable source of commercial and
interactive content and services. This could impair the development and
acceptance of Internet appliances which could in turn materially adversely
affect our business and prospects.

 We may be unable to expand our sales and support organization to increase
sales and market awareness for our products.

  If we cannot raise additional capital to continue, and expand our present
level of operations, we may be unable to expand our sales and marketing
efforts aimed at computer and consumer electronic companies, systems and
hardware manufacturers, and Internet service and content providers. Without an
increase we may be unable to increase sales and market acceptance of our
software solution. This would require a sophisticated sales force and the
commitment of significant financial resources on our part. Competition for
qualified sales personnel is intense, especially those with an understanding
of emerging Internet-based technologies and markets. We may not be able to
hire the type and number of sales personnel that we require on a timely basis
or at all.

  We may be unable to increase our staff to support new customers and the
expanding needs of existing customers. Hiring customer service and support
personnel is very competitive in our industry due to the limited number of
people available with the necessary technical skills and understanding of
operating systems and Internet-based applications. If we cannot hire adequate
numbers of qualified sales, marketing and customer service personnel, our
business could suffer materially.

 We may be unable to manage any growth that we may experience.

  To succeed in the implementation of our business strategy, we must rapidly
execute our sales and marketing strategy, further develop and enhance our
products and product support capabilities especially those intended for the
Internet appliance market, and implement effective planning and operating
processes. To manage any anticipated growth we must:

  .  establish and manage multiple relationships with OEMs, Internet service
     and content providers and other third parties;

  .  continue to implement and improve our operational, financial and
     management information systems; and

  .  hire, train and retain additional qualified personnel.

                                      20
<PAGE>

  Our systems, procedures and controls may not be adequate to support our
operations, and our management may not be able to perform the tasks required
to capitalize on market opportunities for our products and services. If we
fail to manage our growth effectively, our business could suffer materially.

 We expect continued erosion in the average selling prices of our products.

  We anticipate that the average selling prices of our products will fluctuate
and decrease in the future in response to a number of factors, including:

  .  competitive pricing pressures;

  .  rapid technological changes; and

  .  sales discounts.

  We also anticipate that the average selling price of our products will
decrease as we market our products to Internet appliance developers and
manufacturers. Therefore, to maintain or increase our gross margins, we must
develop and introduce new products and product enhancements on a timely basis.
As our average selling prices decline, we must increase our unit sales volume
to maintain or increase our revenue. If our average selling prices decline
more rapidly than our costs, our gross margins will decline, which could
seriously harm our business and results of operations.

 We are dependent on third party development tools.

  We are dependent on development tools provided by a limited number of third
party vendors. Development tools are software applications that assist
programmers in the development of applications. Together with our application
developers, we primarily rely upon software development tools provided by
Cygnus Solutions and Perforce Software. Cygnus Solutions was acquired by Red
Hat Software, one of our competitors. If we lose access to these development
tools or if Cygnus or Perforce fail to support or maintain these development
tools, we will either have to devote resources to maintain and support the
tools ourselves or transition to another vendor. Any maintenance or support of
the tools by us or the transition could be costly, time consuming, could delay
our product release and upgrade schedule, and could delay the development and
availability of third party applications used on our products. Failure to
procure the needed software development tools or any delay in the availability
of third party applications could negatively impact our ability and the
ability of third party application developers to release and support our
software solution and the applications that run on it. These factors could
negatively and materially affect the acceptance and demand for our products,
our business and prospects.

 Product defects may harm our business and reputation.

  Computer operating systems, such as our products, frequently contain errors
or bugs. We have detected and may continue to detect errors and product
defects in connection with new releases and upgrades of our operating system
and related products. Despite our internal testing and testing by current and
potential customers, errors may be discovered after our products or related
software and tools are installed and used by customers. These errors could
result in reduced or lost revenue, delay in market acceptance, diversion of
development resources, damage to our reputation, or increased service and
warranty costs, any of which could materially adversely affect our business
and results of operations.

  Our products must successfully integrate with products from other vendors,
such as third party software applications and computer hardware. As a result,
when problems occur in an Internet appliance, a personal computer or any other
device or network using our products, it may be difficult to identify the
source of the problem. The occurrence of hardware and software errors, whether
caused by our products or another vendor's products, may result in the
reduction or loss of market acceptance of our products, and any necessary
product revisions may force us to incur significant expenses. The occurrence
of these problems could materially adversely affect our business and results
of operations.

                                      21
<PAGE>

 Our success depends on our ability to protect and enforce our proprietary
rights.

  Our success depends significantly on our ability to protect our proprietary
rights to technologies used in our products. We rely primarily on a
combination of copyright, trademark and trade secret laws, as well as
confidentiality procedures and contractual provisions to protect our
proprietary rights. To date, we have applied for only one patent and existing
copyright laws afford only limited protection for our software. A substantial
portion of our sales are derived from the licensing of products under "shrink
wrap" license agreements that are not signed by licensees and, therefore, may
be unenforceable under the laws of certain jurisdictions. Despite any measures
taken to protect our proprietary rights, attempts may be made to copy aspects
of our software solution or to obtain and use information that we regard as
proprietary which could harm our business. In addition, the laws of some
foreign countries do not protect our intellectual property to the same extent
as U.S. laws. Finally, our competitors may independently develop similar
technologies. The loss or misappropriation of any material trademark, trade
name, trade secret or copyright could have a material adverse effect on our
business and results of operations.

  The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement.
As the number of entrants into our market increases, the possibility of an
infringement claim against us grows. For example, we may be inadvertently
infringing on a patent. In addition, because patent applications can take many
years to issue, there may be a patent application now pending of which we are
unaware upon which will be infringing when it issues in the future. Although
we do not believe that our products infringes on the rights of third parties,
third parties may still assert infringement claims against us in the future
and this could result in costly litigation and distraction of management. To
address such patent infringement claims, we may have to enter into royalty or
licensing agreements. Licenses may not be available on reasonable terms or at
all which could have a material adverse effect on our business and results of
operations.

 Our stock price is highly volatile.

  The trading price of our common stock has fluctuated significantly and has
ranged from $0.531 to $39.563 over the past 18 months since our initial public
offering in July 1999. In addition, many factors could cause the market price
of our common stock to fluctuate substantially, including:

  .  announcement by us or our competitors of significant strategic
     partnerships, joint ventures, significant contracts, or acquisitions, or
     rumors to that effect;

  .  announcement by us of loss of significant strategic partnerships, joint
     ventures, significant contracts or acquisitions;

  .  news and announcements relating to the ongoing antitrust actions
     involving Microsoft;

  .  announcements by us or our competitors concerning software errors or
     delays in product releases;

  .  availability of key software applications developed for our products or
     our competitor's products; and

  .  changes in financial estimates by securities analysts.

  Specifically, certain market segments such as the computer software industry
have experienced dramatic price and volume fluctuations from time to time.
These fluctuations may or may not be based upon any business or operating
results. Our common stock may experience similar or even more dramatic price
and volume fluctuations which may continue indefinitely.

  In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
stock. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and diversion of management
attention and resources, all of which could materially harm our business and
results of operation.

                                      22
<PAGE>

 Our Amended and Restated Certificate of Incorporation, bylaws, Delaware law
and change of control agreement with some of our key employees contain
provisions that could discourage a third party from acquiring us and
consequently decrease the market value of our common stock.

  Our Amended and Restated Certificate of Incorporation grants our board of
directors the authority to issue up to 2,000,000 shares of preferred stock and
to determine the price, rights, preferences, privileges and restrictions,
including voting rights of these shares without any further vote or action by
the stockholders. Since the preferred stock could be issued with voting,
liquidation, dividend and other rights superior to those of the common stock,
the rights of the holders of common stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that
may be issued. The issuance of preferred stock could have the effect of making
it more difficult for a third party to acquire a majority of our outstanding
voting stock which could decrease the market value of our stock. Further,
provisions in our Amended and Restated Certificate of Incorporation and bylaws
and of Delaware law could have the effect of delaying or preventing a third
party from acquiring us, even if a change in control would be in the best
interest of our stockholders. These provisions include the inability of
stockholders to act by written consent without a meeting and procedures
required for director nomination and stockholder proposal.

  We have entered into a Change of Control Agreement with each of some of our
officers and other key employees. These agreements provide that, among other
things, if such employee is terminated without cause or otherwise resigns for
good reason during the period starting six months prior to the date of a
change of control and ending eighteen months following our change of control,
then the employee shall be entitled to a severance payment, and the
acceleration and immediate exercisability of all unvested options. These
provisions may discourage a third party from acquiring us.

ITEM 2. PROPERTIES

  Our principal administrative, marketing and research and development
facility is located in approximately 23,963 square feet of space in Menlo
Park, California. This facility is leased through February 2002. We also lease
approximately 2,184 square feet in Paris, France through January 2003.

ITEM 3. LEGAL PROCEEDINGS

  In November 2000, our stock transfer agent, Wells Fargo Bank Minnesota,
N.A., received a demand letter from a stockholder alleging damages resulting
from the transfer agent's failure to timely issue its stock certificates.
While Be was not a party named in such demand letter, and no claim has yet
been filed with any court of competent jurisdiction, Be is named as a party on
the stockholder's draft claim attached to the demand letter. We have been
participating in communications with the parties in an effort to resolve the
matter prior to a lawsuit being filed. Be management believes that the
allegations as they relate to Be in the potential and draft claim are without
merit and intends to vigorously defend Be against any potential future related
legal action. However, there can be no assurance this threatened claim will be
resolved without costly litigation, or require Be's participation in the
settlement of such claim, in a manner that is not adverse to our financial
position, results of operations or cash flows. No estimate can be made of the
possible loss or possible range of loss associated with the resolution of this
contingency. If Be were held liable, it is our intent to seek reimbursement
under our D&O insurance policy.

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

  None.

                                      23
<PAGE>

                                    PART II

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

Market Information for Common Stock

  Our common stock is traded on the NASDAQ National Market ("NNM") under the
symbol "BEOS." Public trading of the common stock commenced on July 20, 1999.
The following table shows, for the periods indicated, the high and low per
share prices of common stock, as reported on the NNM. Such prices represent
prices between dealers, do not include retail mark-ups, mark-downs or
commissions and may not represent actual transactions.

<TABLE>
<CAPTION>
   Quarter Ended                                                   High   Low
   -------------                                                  ------ ------
   <S>                                                            <C>    <C>
   September 30, 1999............................................ $10.93 $ 5.87
   December 31, 1999............................................. $39.56 $ 3.28

   March 31, 2000................................................ $24.44 $12.13
   June 30, 2000................................................. $17.00 $ 4.00
   September 30, 2000............................................ $ 6.44 $ 3.75
   December 31, 2000............................................. $ 6.44 $ 0.53

   January 1, 2001 through February 28, 2001..................... $ 2.88 $ 0.78
</TABLE>

  On February 28, 2001, the closing price of the common stock on the Nasdaq
National Market was $1.50 per share.

Stockholders

  As of February 28, 2001, we had approximately 280 record holders of our
common stock.

Dividend Policy

  We have never declared or paid cash dividends on our capital stock. We
currently expect to retain our future earnings, if any, for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future.

Recent Sales of Unregistered Securities

  None.

                                      24
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

  The tables that follow present portions of our consolidated financial
statements and are not complete. You should read the following selected
financial information in conjunction with our Consolidated Financial
Statements and related Notes and with "Management Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Annual Report. The historical results presented below are not necessarily
indicative of the results to be expected for any future fiscal year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

<TABLE>
<CAPTION>
                                       Year Ended December 31,
                             ------------------------------------------------
                               1996      1997      1998      1999      2000
                             --------  --------  --------  --------  --------
                                (in thousands, except per share data)
<S>                          <C>       <C>       <C>       <C>       <C>
Consolidated Statement of
 Operations Data:
Net revenues................ $    --   $     86  $  1,199  $  2,656  $    480
Cost of revenues (1)........      --         84     2,161     1,436     1,097
                             --------  --------  --------  --------  --------
Gross profit (loss).........      --          2      (962)    1,220      (617)
Operating expenses (3):
  Research and development..    3,629     5,170     8,133    10,429     9,139
  Sales and marketing.......    2,971     4,452     5,617    10,966     7,812
  General and
   administrative...........    1,397     1,393     2,729     5,120     4,740
                             --------  --------  --------  --------  --------
    Total operating
     expenses...............    7,997    11,015    16,479    26,515    21,691
                             --------  --------  --------  --------  --------
Loss from operations........   (7,997)  (11,013)  (17,441)  (25,295)  (22,308)
Other income, net...........      220       580       580       789     1,156
                             --------  --------  --------  --------  --------
Net loss.................... $ (7,777) $(10,433) $(16,861) $(24,506) $(21,152)
                             ========  ========  ========  ========  ========
Net loss attributable to
 common stockholders........ $ (7,902) $(10,448) $(18,423) $(24,798) $(21,152)
                             ========  ========  ========  ========  ========
Net loss per common share--
 basic and diluted (2)...... $ (10.85)  $ (4.87)  $ (5.80)  $ (1.41)  $ (0.60)
                             ========  ========  ========  ========  ========
Shares used in per common
 share Calculation--basic
 and diluted (2)............      728     2,145     3,178    17,589    35,533
                             ========  ========  ========  ========  ========

<CAPTION>
                                          As of December 31,
                             ------------------------------------------------
                               1996      1997      1998      1999      2000
                             --------  --------  --------  --------  --------
                                            (in thousands)
<S>                          <C>       <C>       <C>       <C>       <C>
Consolidated Balance Sheet
 Data:
Cash, cash equivalents and
 short-term investments..... $  6,670  $    899  $ 11,648  $ 29,129  $ 14,057
Working capital.............    6,222    (3,206)    9,702    26,740    12,205
Total assets................    7,385     1,303    13,634    32,310    16,071
Mandatory redeemable
 convertible preferred
 stock......................   14,037    14,052    38,005       --        --
Total stockholders' equity
 (deficit).................. $  6,467  $(16,978) $(27,900) $ 28,427  $ 13,324
</TABLE>
--------
(1) Our cost of revenues for the year ended December 31, 1998 includes a $1.2
    million expense attributable to the write-off of capitalized costs
    relating to the acquisition of technology no longer useful to the
    development of BeOS.
(2) See Note 2 of Notes to Consolidated Financial Statements for an
    explanation of the determination of the number of shares used in computing
    net loss per common share--basic and diluted.
(3) Operating expenses include the amortization of deferred compensation which
    was recorded by us and which represents the difference between the deemed
    fair value of our common stock, as determined for accounting purposes and
    the exercise price of options at the date of grant. For the purposes of
    the financial statements, this expense was disclosed as being applicable
    to each line item as follows:

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                ------------------------------
                                                1996 1997  1998   1999   2000
                                                ---- ---- ------ ------ ------
                                                        (in thousands)
   <S>                                          <C>  <C>  <C>    <C>    <C>
   Analysis of the amortization of deferred
    compensation:
    Research and development................... $371 $480 $1,747 $1,927 $  794
    Sales and marketing........................  127  273    833  1,692    646
    General and administrative.................  457  114  1,301  2,614  1,173
                                                ---- ---- ------ ------ ------
      Total amortization of deferred stock
       compensation............................ $955 $867 $3,881 $6,233 $2,613
                                                ==== ==== ====== ====== ======
</TABLE>

                                      25
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

This report on form 10-K contains forward-looking statements that have been
made pursuant to the provisions of the private securities litigation reform
act of 1995. Such forward-looking statements are based on current
expectations, estimates and projections about the company's business,
management's beliefs and assumptions made by management. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates," "likely" and variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and are subject to certain risks,
uncertainties and assumptions that are difficult to predict; Therefore, actual
results and outcomes may differ materially from what is expressed or
forecasted in any such forward-looking statements. Such risks and
uncertainties include those set forth above under "factors affecting our
business, operating results and financial condition" and elsewhere in this
report as well as those noted in our amended registration statement on form S-
1 (file no. 333-77855) and our other public filings with the securities and
exchange commission. The company undertakes no obligation to update publicly
any forward-looking statements, whether as a result of new information, future
events or otherwise. Factors that could cause or contribute to these
differences include, but are not limited to, those discussed in the sections
titled "Factors Affecting our business operating results and financial
condition" and "Business"under item 1 in this report.

Overview

  Be was founded in 1990. We offer software solutions designed for Internet
appliances and digital media applications. Our software solutions are (i)
BeIA: the Complete Internet Appliance Solution(TM), consisting of three
components; BeIA Client Platform, BeIA Management and Administration Platform,
and BeIA Integration Services, (ii) Home Audio Reference Platform (HARP), a
BeIA-based reference platform or prototype for Internet-enabled home stereo
devices, and (iii) BeOS, our operating system designed for digital media
applications and which serves as the development platform for BeIA. Prior to
1998, we had no revenues and our operations consisted primarily of research
and development. In December 1998, we shipped the first version of BeOS, our
desktop operating system targeted primarily to end users. Prior releases of
BeOS were targeted primarily to software developers. Throughout 1999 we
focused on delivering BeOS as a desktop operating system to end users, and
while we were slowly gaining users and traction within the desktop operating
system market, we determined that the cost of competing in that market was
more than we could afford. In recognition of this, and to address shareholder
value, in 2000 we shifted our resources to focus primarily on the market for
Internet appliances and the further development, marketing and deployment of
BeIA, our software solution intended for Internet appliances. At the same time
we announced that we would be making available at no charge a version of BeOS
for personal use, and a more fully featured version would be available for a
charge through third party publishers.

  Our revenues in 2000 have been primarily generated from the sale of BeOS to
our licensed third party publishers, and other resellers and distributors, and
direct sales of BeOS to end users through our BeDepot.com Web site. We also
generated revenue by collecting commission from sales of third party software
through our BeDepot.com Web site.

  We expect our future revenues to be primarily generated through royalty
payments, maintenance and support fees, and professional services and
integration fees from developers and manufacturers of Internet appliances, and
other systems and hardware manufacturers incorporating BeIA into their
products. We expect that any revenues from BeIA will be generally derived
through licensing of BeIA to developers and manufacturers of Internet
appliances and related service fees including integration, support and
maintenance fees. The revenues from BeIA have not offset the loss of revenues
from sales of BeOS and we expect that our revenues and cash flow for the
future periods to continue to be negatively impacted.


                                      26
<PAGE>

  Since adopting and incorporating BeIA as a software solution generally
represents a significant product decision for developers and manufactures of
Internet appliances and related systems and hardware, we have experienced a
longer sales cycle as we have collaborated with and educated customers and
partners on the use and benefits of BeIA. We expect our revenues in the future
to be dependent in large part upon the success of our customers' products
using our BeIA solution. We have little or no influence over the development
and marketing efforts of our customers. Our customers are generally under no
minimum payment obligations or minimum purchase requirements. Our customers
and partners are free to use software platforms developed by other companies
in their Internet appliance products and are under no obligation to develop or
market products based on our software solution. As a result, we have very
limited ability to evaluate the success of our partnership efforts and predict
the realization or timing of any revenues.

  Our research and development expenses consist primarily of compensation and
related costs for research and development personnel. We also include in
research and development expenses the costs relating to licensing of
technologies and amortization of costs of software tools used in the
development of our operating system. Costs incurred in the research and
development of new releases and enhancements are expensed as incurred. These
costs include the cost of licensing technology that is incorporated into a
product or an enhancement, which is still in preliminary development, and
technological feasibility has not been established. Once the product is
further developed and technological feasibility has been established,
development costs are capitalized until the product is available for general
release. To date, products and enhancements have generally reached
technological feasibility and have been released for sale at substantially the
same time. We expect research and development expenses will increase in the
future as we further develop and enhance BeIA and develop new products for the
Internet appliances market.

  Our sales and marketing expenses consist primarily of compensation and
related costs for sales and marketing personnel, marketing programs, public
relations, investor relations, promotional materials, travel, and related
expenses for attending trade shows. We expect that our sales and marketing
expenses in the future will be in large part dependent on our ability to
secure sufficient capital to fund our ongoing operations. If we are able to
secure sufficient capital, we expect our sales and marketing expenses to
increase as we further promote awareness of our software solution and further
develop and expand our relationships with existing and potential partners.

  General and administrative expenses consist primarily of compensation and
related expenses for management, finance, and accounting personnel,
professional services and related fees, occupancy costs and other expenses. We
expect that our general and administrative expenses in the future will be in
large part dependent on our ability to secure sufficient capital to fund our
ongoing operations. If we are able to secure sufficient capital, we expect our
general and administrative expenses to increase as we expand our existing
facilities or relocate to new facilities that better address any growth we may
experience or incur costs related to any growth in our business and the costs
of operating as a public company.

   We market and sell our products in the United States and internationally.
International sales of products accounted for approximately 23%, 56% and 53%
of total revenues in 2000, 1999 and 1998, respectively. Because of our shift
in focus away from BeOS, we expect that in the future a higher percentage of
our total revenues will be derived from North America. While the majority of
our international revenues are presently denominated in US dollars, we expect
an increasing portion of our international revenues to be denominated in local
currencies. We do not currently engage in currency hedging activities.
Although exposure to currency fluctuations to date has been insignificant,
future fluctuations in currency exchange rates may adversely affect revenues
from international sales.

  From time to time in the past, we have granted stock options to employees,
consultants and non-employee directors and expect to continue to do so in the
future. As of December 31, 2000, we had recorded deferred compensation related
to these options in the total amount of $15.8 million, net of cancellations,
representing the difference between the deemed fair value of our common stock,
as determined for accounting purposes, and the

                                      27
<PAGE>

exercise price of options at the date of grant. Of this amount, $5.7 million
had been amortized at December 31 1998, with $6.2 and $2.6 million being
amortized in 1999 and 2000, respectively. Future amortization of expense
arising out of options granted through December 31, 2000 is estimated to be
$949,000, $261,000 and $8,000 for 2001, 2002 and 2003 respectively. We
amortize the deferred compensation charge monthly over the vesting period of
the underlying option.

Comparison

  Certain prior year costs have been reclassified to conform with the current
year presentation.

  Operating expenses as shown in Item 6--Selected Financial Data, include non-
cash charges for stock compensation amortization as follows:

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                       -----------------------
                                                        1998    1999    2000
                                                       ------- ------- -------
                                                           (in thousands)
   <S>                                                 <C>     <C>     <C>
   Amortization of deferred compensation included in:
     Research and development......................... $ 1,747 $ 1,927 $   794
     Sales and marketing..............................     833   1,692     646
     General and administrative.......................   1,301   2,614   1,173
                                                       ------- ------- -------
       Total amortization of deferred stock
        compensation.................................. $ 3,881 $ 6,233 $ 2,613
                                                       ======= ======= =======

  Excluding the amortization of deferred compensation, operating expenses are
as follows:

<CAPTION>
                                                       Year Ended December 31,
                                                       -----------------------
                                                        1998    1999    2000
                                                       ------- ------- -------
                                                           (in thousands)
   <S>                                                 <C>     <C>     <C>
   Operating expenses:
     Research and development......................... $ 6,386 $ 8,502 $ 8,345
     Sales and marketing..............................   4,784   9,274   7,166
     General and administrative.......................   1,428   2,506   3,567
     Amortization of deferred stock compensation .....   3,881   6,233   2,613
                                                       ------- ------- -------
       Total operating expenses....................... $16,479 $26,515 $21,691
                                                       ======= ======= =======
</TABLE>

Comparison of the Year ended December 31, 2000 to the Year Ended December 31,
1999

  Net Revenues. Net revenues decreased $2.2 million to $480,000 for the year
ended December 31, 2000 from $2.7 million for the year ended December 31,
1999. This decrease is primarily attributable to lower shipments of BeOS,
which we believe resulted from making a version of BeOS available for free
download. To date, all of our revenues have been derived from BeOS, with
future revenues to be dependent primarily on BeIA, our software solution for
Internet appliances.

  Cost of Revenues. Cost of revenues decreased $339,000, or 24%, to $1.1
million for the year ended December 31, 2000 from $1.4 million for the year
ended December 31, 1999. Gross margin is negative this year as a result of the
continuing amortization of technology license agreements.

  Research and Development. Research and Development expenses were relatively
constant at $8.3 million for the year ended December 30, 2000 as compared with
$8.5 million for the year ended December 31, 1999. Lower outside consulting
expenses were partially offset by increases in payroll expenses due to
additional headcount.

  Sales and Marketing. Sales and marketing decreased $2.1 million, or 23%, to
$7.2 million for the year ended December 31, 2000 from $9.3 million for the
year ended December 31, 1999. This decrease is primarily

                                      28
<PAGE>

attributable to our shift in resources to focus on the Internet appliances
market, and resulting shift in our potential customer base from end users to
device and service providers. Additionally, the Web site technology purchased
in 1998 is now fully amortized.

  General and Administrative. General and administrative expenses increased
$1.1 million, or 42%, to $3.6 million for the year ended December 31, 2000
from $2.5 million for the year ended December 31, 1999. This increase was
primarily attributable to the full year expenses associated with the
activities of a public company.

  Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation decreased $3.6 million to $2.6 million for the year ended
December 31, 2000, from $6.2 million for the year ended December 31, 1999.
These amounts represent the allocated portion of the difference between the
deemed fair value of our common stock and the exercise price of stock options
granted by us to employees and non-employee directors.

  Other Income (Expense), Net. Net other income increased $367,000, or 47%, to
$1.2 million for the year ended December 31, 2000, from $789,000 for the year
ended December 31, 1999. The increase is primarily attributable to the
increase in interest income due to the increased balances in our investment
portfolio following our initial public offering.

Comparison of the Year ended December 31, 1999 to the Year Ended December 31,
1998

  Net Revenues. Net revenues increased $1.5 million to $2.7 million for the
year ended December 31, 1999 from $1.2 million for the year ended December 31,
1998. This increase was primarily attributable to higher shipments of BeOS as
a result of the release of version R4.5 in June of 1999 and of the development
of a reseller distribution channel in 1999, and to the recognition of
approximately $254,000 of revenue previously reserved under the R4.5 free
upgrade program which ended in November of 1999.

  Cost of Revenues. Cost of revenues decreased $725,000, or 34%, to $1.4
million for the year ended December 31, 1999 from $2.2 million for the year
ended December 31, 1998. The cost of revenues for the year ended December 31,
1998 includes a charge of $1.2 million relating to technology which was used
with BeOS, the cost of which was no longer recoverable from forecasted
revenues.

  Research and Development. Research and development increased $2.1 million,
or 33%, to $8.5 million for the year ended December 31, 1999 from $6.4 million
for the year ended December 31, 1998. The net increase was primarily
attributable to an increase in personnel costs and in licensing costs.
Personnel expenses increased by approximately $1.3 million and included a one-
time charge of approximately $145,000 related to the grant of immediately
vested stock options and the acceleration of vesting of stock options
previously issued to an employee.

  Sales and Marketing. Sales and marketing increased $4.5 million, or 94%, to
$9.3 million for the year ended December 31, 1999 from $4.8 million for the
year ended December 31, 1998. This increase is primarily attributable to the
hiring of additional sales and marketing personnel and to the costs relating
to our third party developer programs including financial incentives in the
form of partial funding of developers' costs and technical support provided to
developers. Sales and marketing expenses also increased due to the
amortization of purchased technology related to the acquisition in the second
quarter 1998 of StarCode, a software development company. In 1999, sales and
marketing expenses also increased due to the launch of new marketing programs
including those related to the release of version 4.5 of BeOS in June of 1999.

  General and Administrative. General and administrative expenses increased
$1.1 million, or 75%, to $2.5 million for the year ended December 31, 1999
from $1.4 million for the year ended December 31, 1998. This increase was
primarily attributable to increases in professional services and related fees,
increased personnel and related costs, to premiums related to insurance
coverage obtained concurrently with the initial public offering and expansion
of leased facilities.

                                      29
<PAGE>

  Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation increased $2.4 million, or 61%, to $6.2 million for the year
ended December 31, 1999, from $3.9 million for the year ended December 31,
1998. These amounts represent the allocated portion of the difference between
the deemed fair value of our common stock and the exercise price of stock
options granted by us to employees and non-employee directors.

  Other Income (Expense), Net. Net other income increased $209,000, or 36%, to
$789,000 for the year ended December 31, 1999, from $580,000 for the year
ended December 31, 1998. The increase is primarily attributable to the
increase in interest income due to the increased balances in our investment
portfolio following our initial public offering.

Liquidity and Capital Resources

  Since our inception, we have financed our operations primarily through the
sale of our equity securities and through borrowing arrangements. Cash and
cash equivalents and short-term investments decreased approximately $15.0
million to $14.1 million at December 31, 2000, from $29.1 million at December
31, 1999. This decrease is primarily attributable to the amounts used to fund
operations, net of the proceeds of stock-option exercises.

  Cash used in operating activities increased $1.5 million to $17.5 million
for the year ended December 31, 2000 as compared to $16.0 million for the year
ended December 31, 1999. This increase is primarily attributable to the
increase in the net loss, net of non-cash items, and to the decrease in
payables balances, during the year ended December 31, 2000.

  Cash provided by investing activities was approximately $17.1 million for
the year ended December 31, 2000 as compared with cash used in investing
activities of $16.9 million for the year ended December 31, 1999. This change
is primarily attributable to net sales of short-term investments in the year
ended December 31, 2000 and the net purchases of short-term investments
following our initial public offering in the year ended December 31, 1999.

  Cash provided by financing activities for the year ended December 31, 2000
was approximately $3.4 million as compared with $36.0 million in the year
ended December 31, 1999. This change is primarily attributable to the proceeds
of $35.3 million received from our initial public offering in the third
quarter of 1999.

  We require substantial working capital to fund our operations. We expect to
continue to experience losses from operations and negative cash flows for at
least the next twelve month period. In the first quarter of 2000, we shifted
our resources to focus primarily on the market for Internet appliances. We
made a version of BeOS available for personal use at no charge and a more
fully featured version is available through third party publishers. The
personal edition was released at the end of March and publishers began
shipping the commercial version in April. Sales of BeOS have been our primary
source of revenue in the past. We have little or no influence over the
marketing and promotional efforts of third party publishers and their success,
and we may not generate any meaningful revenues from sale of BeOS in the
future through these publishers.

  We expect our revenues and cash flow for the future periods to be negatively
impacted as a result of providing a version of BeOS for free. In July 1999, we
completed the initial public offering of our common stock and raised
approximately $32.2 million in net cash proceeds. We raised an additional $3.1
million in net proceeds in August 1999 upon the underwriters' exercise of
their over-allotment option. The proceeds of the initial public offering are
and will be used for working capital and general corporate purposes, including
any expansion of our sales and marketing efforts, increases in research and
development activities, and licensing and acquisition of new technologies.
Since inception, we have experienced losses and negative cash flow from
operations and expect to continue to experience significant negative cash flow
in the foreseeable future.

  We believe that existing cash and cash equivalents will not be sufficient to
meet operating and capital requirements at our currently anticipated level of
operations beyond the end of the second quarter of 2001.

                                      30
<PAGE>

Additional capital will be necessary in order to fund our operations at
currently anticipated levels beyond the second quarter of 2001. While we are
actively considering various funding alternatives, we have not secured or
entered into any arrangements to obtain additional capital. There can be no
assurance we will be able to obtain additional funds, on acceptable terms or
at all. If we cannot raise additional capital to continue our present level of
operations, we will have to scale back our business which could include among
other things, a reduction in our work force. As a result we may not be able to
further develop or enhance our product offering, take advantage of future
opportunities or respond to competitive pressures, any of which could have a
material adverse effect on our business and results of operations. Our
liquidity may also be adversely affected in the future by factors such as
higher interest rates, inability to borrow without collateral, availability of
capital financing and continued operating losses.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  We considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments and Derivative Commodity
Instruments." We had no holdings of derivative financial or commodity
instruments at December 31, 2000. However, we are exposed to financial market
risks, including changes in foreign currency exchange rates and interest
rates. Much of our revenue and capital spending is transacted in U.S. dollars.
However, the expenses and capital spending of our French subsidiary are
transacted in French francs. Results of operations from our French subsidiary
are not material to the results of our operations, therefore, we believe that
foreign currency exchange rates should not materially adversely affect our
overall financial position, results of operations or cash flows. We believe
that the fair value of our investment portfolio or related income would not be
significantly impacted by increases or decreases in interest rates due mainly
to the short-term nature of our investment portfolio. However, a sharp
increase in interest rates could have a material adverse effect on the fair
value of our investment portfolio. Conversely, sharp declines in interest
rates could seriously harm interest earnings of our investment portfolio.

  The table below presents principal amounts by expected maturity (in thousand
U.S. dollars) and related weighted average interest rates by year of maturity
for our investment portfolio as at December 31, 2000.

<TABLE>
<CAPTION>
                                                      2001   Thereafter Total
                                                     ------  ---------- ------
   <S>                                               <C>     <C>        <C>
   Commercial paper................................. $4,594       --    $4,594
   Weighted Average Interest Rate...................   6.52%      --      6.52%
                                                     ------    ------   ------
     Total Portfolio, excluding equity securities
      .............................................. $4,594    $  --    $4,594
                                                     ======    ======   ======
</TABLE>

Recent Accounting Pronouncements

  In June 1998, the Financial Accounting Standards Board, ("FASB"), issued
Statement of Financial Accounting Standards No. 133, or SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at fair value
in the statement of financial position, and that the corresponding gains or
losses be reported either in the statement of operations or as a deferred item
depending on the type of hedge relationship that exists with respect of such
derivatives. In July 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 137, or SFAS 137, "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB Statement No. 133." SFAS 137 deferred the effective date until
fiscal years beginning after June 30, 2000. In June 2000, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 138, or SFAS 138, "Accounting for Derivative Instruments and Hedging
Activities--An Amendment of FASB Statement 133." SFAS 138 amends the
accounting and reporting standards for certain derivative activities such as
net settlement contracts, foreign currency transactions and intercompany
derivatives. The Company will adopt

                                      31
<PAGE>

SFAS 133 effective January 1, 2001. To date, the Company has not engaged in
derivative or hedging activities and does not expect the adoption of SFAS 133
and 138 to have a material impact on its financial position or results of
operations.

  In various areas, including revenue recognition and stock-based compensation
accounting standards and practices continue to evolve. The SEC continues to
issue interpretative guidance relating to SAB 101, and the FASB and the
Emerging Issues Task Force continue to address revenue and other related
accounting issues. The management of the Company believes it is compliance
with all of the rules and related guidance as they currently exist. However,
any changes to generally accepted accounting principles in these areas could
impact the Company's accounting for its operations.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  The Company's financial statements and the report of independent accountants
appears on pages F-1 through F-25 of this report.

Selected Quarterly Results of Operations

  The following table sets forth certain unaudited statements of operations
data for the eight quarters ended December 31, 2000. This data has been
derived from unaudited financial statements that, in the opinion of our
management, include all adjustments consisting only of normal recurring
adjustments that we consider necessary for a fair presentation of the
information when read in conjunction with our audited financial statement and
the attached notes. The operating results for any quarter are not necessarily
indicative of the results for any future period.

<TABLE>
<CAPTION>
                                                                 Quarter Ended
                          ---------------------------------------------------------------------------------------------
                          March 31, June 30,  September 30, December 31, March 31, June 30,  September 30, December 31,
                            1999      1999        1999          1999       2000      2000        2000          2000
                          --------- --------  ------------- ------------ --------- --------  ------------- ------------
<S>                       <C>       <C>       <C>           <C>          <C>       <C>       <C>           <C>
Net revenues............   $   309  $   537      $   775      $ 1,035     $   254  $   142      $    68      $    16
Cost of revenues........        85      239          372          740         293      261          216          327
                           -------  -------      -------      -------     -------  -------      -------      -------
Gross profit (loss).....       224      298          403          295         (39)    (119)        (148)        (311)
Operating expenses:
 Research and
  development...........     2,032    1,937        2,200        2,333       2,148    1,843        2,088        2,266
 Sales and marketing....     1,965    2,540        2,279        2,489       2,171    1,983        1,422        1,590
 General and
  administrative........       508      587          665          747         950      839          880          898
 Amortization of
  deferred stock
  compensation..........     1,666    1,713        1,597        1,257       1,033      657          507          416
                           -------  -------      -------      -------     -------  -------      -------      -------
 Total operating
  expenses..............     6,171    6,777        6,741        6,826       6,302    5,322        4,897        5,170
                           -------  -------      -------      -------     -------  -------      -------      -------
Loss from operations....    (5,947)  (6,479)      (6,338)      (6,531)     (6,341)  (5,441)      (5,045)      (5,481)
Other income (net)......       101       32          284          372         341      322          274          219
                           -------  -------      -------      -------     -------  -------      -------      -------
Net loss................   $(5,846) $(6,447)     $(6,054)     $(6,159)    $(6,000) $(5,119)     $(4,771)     $(5,262)
                           =======  =======      =======      =======     =======  =======      =======      =======
Net loss attributable to
 common stockholders....   $(5,979) $(6,578)     $(6,082)     $(6,159)    $(6,000) $(5,119)     $(4,771)     $(5,262)
                           =======  =======      =======      =======     =======  =======      =======      =======
</TABLE>

  Net revenues in the first quarter of 1999 were net of $355,000 in deferred
revenues relating to sales made to distributors and resellers and revenue
which was deferred due to free upgrades provided to retail customers who
purchased version R4.0 of BeOS. Revenues deferred from sales to resellers and
distributors are generally recognized when we have evidence that our product
has been sold by the reseller or distributor to end users. Revenues deferred
due to free product upgrades are recognized when BeOS upgrades are shipped.
Our first quarter 1999 net revenues included $125,000 of revenues related to a
distributor, which were previously deferred and which were recognized by upon
sales by the distributor to end users.

  For the second and third quarter of 1999, net revenues increased primarily
due to the release of version R4.5 in June of 1999 and the development of our
reseller distribution channel. In the fourth quarter of 1999, we recognized
approximately $254,000 in revenue previously reserved under the R4.5 free
upgrade program,

                                      32
<PAGE>

following the end of this program in November of 1999. In January of 2000, we
announced we would be shifting our resources to focus primarily on the market
for Internet appliances. We also announced a version of BeOS would be made
available for personal use at no charge. After the first quarter of 2000, net
revenues were primarily generated by royalties received from third-party
publishers. The decrease in net revenues is primarily attributable to lower
shipments of BeOS, which we believe resulted from making a version of BeOS
available for free download. Sales of BeOS have been our primary source of
revenue in the past. We may not generate any meaningful revenues from sales of
BeOS in the foreseeable future.

  Amortization of licensed or acquired technology is charged to cost of
revenues and as a result of the continuing amortization of technology license
agreements, gross margins were negative in year 2000.

  In 1999, quarterly fluctuations in sales and marketing expenses relate
primarily to increased sales and marketing personnel and related costs,
attendance at trade shows and costs relating to our developer programs. Sales
and marketing expenses may fluctuate in the quarter as we increase our
advertising and promotional efforts prior to product releases and upgrade
introductions and participate in various trade shows and developer
conferences. In the second quarter of 1999, sales and marketing expenses
increased as a result of increased costs relating to our third-party developer
programs and expenses relating to the launch of new marketing programs
including those related to the launch of version R4.5 of BeOS in June of 1999.
From the first quarter of 2000, sales and marketing expenses started to
decrease, following our decision to reallocate capital to focus on the
Internet appliances market and shifting our potential customer base from end
users to OEMs and ODMs.

  Quarterly fluctuations in research and development expenses relate primarily
to costs associated with increased personnel and related costs and the costs
of licensing technology used for development of BeOS.

  Our quarterly and annual operating results will likely vary significantly
from quarter to quarter in the future due to a number of factors, many of
which are outside our control, including:

  .  demand for and acceptance of our software solution;

  .  success of products and services incorporating our software solution
     offered by Internet appliance developers and manufacturers, system and
     hardware manufacturers and Internet service and content providers;

  .  success of the marketing and promotional efforts of our third party
     publishers for the commercial version of BeOS;

  .  ability to attract and retain key strategic partners, including OEMs and
     third party technology providers;

  .  new product releases and product enhancements by us and our competitors;

  .  delays and defects in our products;

  .  changes in our pricing policies or the pricing policies of our
     competitors;

  .  the mix of domestic and international sales;

  .  risks inherent in international operations, including foreign currency
     fluctuations;

  .  potential acquisitions and integration of technology or businesses; and

  .  changes in accounting standards, including standards relating to revenue
     recognition, business combinations and stock-based compensation.

  Any one or all these factors could materially adversely affect our business
and results of operations.

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

  None.

                                      33
<PAGE>

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  The information regarding directors and executive officers is incorporated
herein by reference from the section entitled "Election of Directors" of our
definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934, (the "Proxy Statement"), no later than 120
days after the end of our fiscal year (December 31,2000). Our executive
officers and their ages as of February 28, 2001 are as follows:

<TABLE>
<CAPTION>
Name                     Age Position
----                     --- --------
<S>                      <C> <C>
Jean-Louis F. Gassee....  56 President, Chief Executive Officer and Director
Steve M. Sakoman........  46 Chief Operating Officer, Chief Technical Officer and Director
P.C. Berndt.............  37 Chief Financial Officer
</TABLE>

  Jean-Louis F. Gassee co-founded Be in 1990 and has served as our President,
Chief Executive Officer and Chairman of the Board since October 1990. Prior to
forming Be, Mr. Gassee was associated with Apple Computer, Inc. for ten years
serving in numerous capacities including President of Apple Products, the R&D
and Manufacturing division of Apple. Prior to joining Apple Computer, Inc.,
Mr. Gassee was President and General Manager of the French subsidiary of Exxon
Chemical Company. He also held several management positions with Data General
Corporation, including Chief Executive Officer of Data General for France and
Director of Product Marketing for Europe. Mr. Gassee serves as a director of
several private and publicly traded companies. Mr. Gassee serves as a director
of 3Com Corporation, Electronics for Imaging, Inc., Logitech International
S.A., and VirtualFund.com, Inc. Mr. Gassee holds an M.A. of Science from the
Faculty of Sciences (France).

  Steve M. Sakoman co-founded Be in 1990 and had served as our Vice President,
Engineering and Chief Technical Officer since August 1996 and now serves as
our Chief Operating Officer. In addition, Mr Sakoman was appointed to the
Board on November 28, 2000. From 1994 to 1996, Mr. Sakoman served in various
management positions at SGI, including Director of Consumer Technology. Prior
to forming Be, Mr. Sakoman served as Director of Macintosh and Apple II
Development for Apple from 1985 until 1987 and Director of Newton Development
from 1987 to 1990. Mr. Sakoman has also held various management positions at
the Hewlett-Packard Company. Mr. Sakoman has also served as a consultant and
contract designer for the consumer electronics industry in the area of home
theater sound systems. Mr. Sakoman holds a B.S. in Computer Engineering from
Case Western Reserve University.

  P.C. Berndt, our Chief Financial Officer, joined Be in August of 2000 from
Coca-Cola where he was director of revenue management of the Greater Europe
Group. Prior to his five-year tenure with Coca-Cola, Mr. Berndt held positions
with Deloitte & Touche Management Consulting as a manager in the finance,
operations and strategy group and with Arthur Andersen & Co. as a member of
the senior financial valuation staff. Mr. Berndt has advised numerous high-
profile clients, including Anheuser-Busch, BellSouth, Inc., First Republic
Bank, W H Smith, Aeromexico Airlines and several professional sport
franchises. Mr. Berndt has an M.B.A. from the University of Michigan at Ann
Arbor, a B.S. in Accounting and a B.S. in Finance from the University of
Illinois at Champaign-Urbana.

ITEM 11. EXECUTIVE COMPENSATION

  Information regarding executive compensation is incorporated herein by
reference from the section entitled "Executive Compensation" of the Proxy
Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the section entitled
"Security Ownership of Certain Beneficial Owners and Management" of the Proxy
Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  Information regarding certain relationships and related transactions is
incorporated herein by reference from the section entitled "Certain
Transactions" of the Proxy Statement.

                                      34
<PAGE>

                                    PART IV

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

  (a)(1) Financial Statements

    The consolidated financial statements of the registrant as set forth
  under Item 8 are filed as part of this Annual Report on Form 10-K.

  (2) Financial Statement Schedule

    Schedule II--Valuation and Qualifying Accounts is filed on page F-25 of
  this Report on Form 10-K.

  All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are omitted because they
are not required under the related instructions or are inapplicable.

  The independent accountant's report with respect to the above listed
financial statements and financial statement schedule listed in Items 14 (a)
(1) and 14 (a) (2), respectively, is filed on page F-2, of this Report on Form
10-K.

  (3) Exhibits

<TABLE>
<CAPTION>
 Exhibit
 Number  Description of Document
 ------- -----------------------
 <C>     <S>
  3.1*   Amended and Restated Certificate of Incorporation

  3.2*   Bylaws

  4.1*   Form of Common Stock Certificate

  4.2*   Form of Warrant to purchase an aggregate of up to 1,046,102 shares of
         common stock issued in connection with the Series 1 convertible
         preferred stock financing

  4.3*   Warrant to purchase up to 1,538,462 shares of common stock, dated
         December 23, 1998, issued by Be Incorporated to Intel Corporation

         Amended and Restated Investors' Rights Agreement, dated February 4,
  4.4*   1998

         Form of Indemnity Agreement entered into between the Company and its
 10.1*   directors and officers

 10.2.1* 1992 Stock Option Plan

 10.2.2* Form of 1992 Stock Option Agreement

 10.3.1* 1999 Equity Incentive Plan

 10.3.2* Form of 1999 Equity Incentive Plan Stock Option Agreement

 10.3.3* Form of 1999 Stock Option Grant Notice

 10.4.1* Employee Stock Purchase Plan

 10.4.2* Form of Employee Stock Purchase Plan Offering

 10.5.1* Non-Employee Directors' Stock Option Plan

 10.5.2* Form of Nonstatutory Stock Option

         Office Lease dated June 24, 1994, by and between Menlo Station
 10.6.1* Development and the Company

 10.6.2* Amendment to Office Lease, dated April 10, 1997, by and between Menlo
         Station Development and the Company

         Employment Agreement, dated June 22, 1998, by and between the Company
 10.7*   and Wesley S. Saia

         Employment Agreement, dated March 12, 1999, by and between the Company
 10.8*   and Roy Graham
</TABLE>


                                      35
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number  Description of Document
 ------- -----------------------
 <C>     <S>
         Employment Agreement, dated October 9, 1998, by and between the
 10.9*   Company and Jean R. Calmon

 10.10*  Stock Purchase Agreement, dated as May 1, 1998, by and among StarCode
         Software, Inc., the Stockholders of StarCode Software, Inc., and Be
         Incorporated

 10.11*+ Software Distribution Agreement, dated November 5, 1998 by and between
         the Company and Plat'Home Co. Ltd.

 10.12** Form of Change in Control Agreement

 21.1*   List of Subsidiaries

 23.1    Consent of PricewaterhouseCoopers LLP, independent accountants

 24.1    Power of Attorney (see signature page)
</TABLE>
--------
 * Incorporated by reference from the Registrant's Registration Statement on
   Form S-1, as amended (File No. 333-77855)

** Incorporated by reference from the Registrant's Annual Report on Form 10-K,
   filed with the SEC on March 30, 2000.

 + Confidential Treatment has been granted with respect to certain portions of
   this agreement.

  (b) Reports on Form 8-K

    None

  (c) Exhibits

    See Item 14 (a) (3) above.

  (d) Financial Statement Schedules

    See Item 14 (a) (2) above.

                                       36
<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 report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Menlo Park, State of California, on March 28, 2001.

                                          Be Incorporated

                                                 /s/ Jean-Louis F. Gassee
                                          By: _________________________________
                                          Name: Jean-Louis F. Gassee
                                          Title:  President, Chief Executive
                                                  Officer and Director

                                       37
<PAGE>

                               POWER OF ATTORNEY

  KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jean-Louis F. Gassee and P.C. Berndt and each of
them, his attorney-in-fact, each with the power of substitution, for him in any
and all capacities, to sign all amendments to this Form 10-K and to file this
Form-10K (including all exhibits and other documents related to the Form 10-K)
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that such attorneys-in-fact, or
their substitutes, may lawfully do or cause to be done by virtue hereof. This
Power of Attorney may be signed in several counterparts.

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
     /s/ Jean-Louis F. Gassee          President, Chief Executive   March 28, 2001
______________________________________  Officer and Director
         Jean-Louis F. Gassee

         /s/ P.C. Berndt               Chief Financial Officer      March 28, 2001
______________________________________
             P.C. Berndt

        /s/ Steve Sakoman              Director and Chief           March 28, 2001
______________________________________  Operating Officer
            Steve Sakoman

       /s/ Barry M. Weinman            Director                     March 28, 2001
______________________________________
           Barry M. Weinman

      /s/ Garrett P. Gruener           Director                     March 28, 2001
______________________________________
          Garrett P. Gruener

        /s/ Stewart Alsop              Director                     March 28, 2001
______________________________________
            Stewart Alsop

      /s/ William F. Zuendt            Director                     March 28, 2001
______________________________________
          William F. Zuendt

      /s/ Andrei M. Manoliu            Director                     March 28, 2001
______________________________________
          Andrei M. Manoliu
</TABLE>

                                       38
<PAGE>

1.Index to Consolidated Financial Statements

  The following financial statements are filed as part of this Report:

<TABLE>
   <S>                                                                       <C>
   Report of Independent Accountants........................................ F-2

   Consolidated Balance Sheets.............................................. F-3

   Consolidated Statements of Operations.................................... F-4

   Consolidated Statements of Stockholders' Equity (Deficit)................ F-5

   Consolidated Statements of Cash Flows.................................... F-6

   Notes to Consolidated Financial Statements............................... F-7
</TABLE>

2.Index to Financial Statement Schedules

  The following financial statement schedule is filed as part of this report
and should be read in conjunction with the Consolidated Financial Statements:

<TABLE>
<CAPTION>
   Schedule
   --------
   <C>      <S>                                                             <C>
     II     Valuation and Qualifying Accounts.............................  F-25
</TABLE>

                                      F-1
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To The Board of Directors and Stockholders of
Be Incorporated:

  In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Be Incorporated and its subsidiaries at December 31, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States of America, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

  The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Company has suffered
recurring losses from operations and has an accumulated deficit. These
conditions raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

/s/ PricewaterhouseCoopers LLP

San Jose, California
January 19, 2001

                                      F-2
<PAGE>

                                BE INCORPORATED

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              2000      1999
                                                            --------  --------
                                                             (in thousands,
                                                            except share and
                                                                per share
                                                                amounts)
<S>                                                         <C>       <C>
Assets
Current assets:
  Cash and cash equivalents................................ $  9,463  $  6,500
  Short-term investments...................................    4,594    22,629
  Accounts receivable......................................       26       167
  Prepaid and other current assets.........................      549       730
                                                            --------  --------
    Total current assets...................................   14,632    30,026
Property and equipment, net................................      391       562
Other assets, net of accumulated amortization..............    1,048     1,722
                                                            --------  --------
    Total assets........................................... $ 16,071  $ 32,310
                                                            ========  ========

Liabilities and stockholders' equity
Current liabilities:
  Accounts payable......................................... $    362  $    860
  Accrued expenses.........................................    1,502     1,550
  Technology license obligations, current portion..........      454       777
  Deferred revenue.........................................      109        99
                                                            --------  --------
    Total current liabilities..............................    2,427     3,286
Technology license obligations, net of current portion.....      320       597
                                                            --------  --------
    Total liabilities......................................    2,747     3,883
                                                            --------  --------
Commitments and Contingencies (Note 6)

Stockholders' Equity:
  Preferred stock, $.001 par value:
    Shares authorized: 2,000,000 in 2000 and 1999
    Shares issued and outstanding: none
  Common stock, $.001 par value:
    Shares authorized: 78,000,000 shares in 2000 and 1999
    Shares issued and outstanding: 36,202,899 in 2000 and
     34,692,415 in 1999....................................       36        35
Additional paid-in capital.................................  108,880   106,322
Deferred stock compensation................................   (1,218)   (4,690)
Accumulated deficit........................................  (94,375)  (73,223)
Accumulated other comprehensive income (loss)..............        1       (17)
                                                            --------  --------
    Total stockholders' equity.............................   13,324    28,427
                                                            --------  --------
    Total liabilities and stockholders' equity............. $ 16,071  $ 32,310
                                                            ========  ========
</TABLE>

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

                                      F-3
<PAGE>

                                BE INCORPORATED

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                   ----------------------------
                                                     2000      1999      1998
                                                   --------  --------  --------
                                                   (in thousands, except per
                                                         share amounts)
<S>                                                <C>       <C>       <C>
Net revenues.....................................  $    480  $  2,656  $  1,199
Cost of revenues.................................     1,097     1,436     2,161
                                                   --------  --------  --------
Gross profit (loss)..............................      (617)    1,220      (962)
Operating expenses:
  Research and development, including
   amortization of deferred stock compensation of
   $794 in 2000, $1,927 in 1999 and $1,747 in
   1998..........................................     9,139    10,429     8,133
  Sales and marketing, including amortization of
   deferred stock compensation of $646 in 2000,
   $1,692 in 1999 and $833 in 1998...............     7,812    10,966     5,617
  General and administrative, including
   amortization of deferred stock compensation of
   $1,173 in 2000, $2,614 in 1999 and $1,301 in
   1998..........................................     4,740     5,120     2,729
                                                   --------  --------  --------
    Total operating expenses.....................    21,691    26,515    16,479
                                                   --------  --------  --------
Loss from operations.............................   (22,308)  (25,295)  (17,441)
Interest expense.................................      (155)     (138)     (159)
Other income and expenses, net...................     1,311       927       739
                                                   --------  --------  --------
Net loss.........................................   (21,152)  (24,506)  (16,861)
                                                   --------  --------  --------
Other comprehensive gain (loss)
  Unrealized gains (losses) on investments.......        18       (17)      --
                                                   --------  --------  --------
Comprehensive loss...............................  $(21,134) $(24,523) $(16,861)
                                                   ========  ========  ========

Net loss.........................................  $(21,152) $(24,506) $(16,861)
Dividend related to beneficial conversion feature
 of preferred stock..............................       --        --     (1,204)
Accretion of mandatorily redeemable convertible
 preferred stock.................................       --       (292)     (358)
                                                   --------  --------  --------
Net loss attributable to common stockholders.....  $(21,152) $(24,798) $(18,423)
                                                   ========  ========  ========
Net loss per common share--basic and diluted.....  $  (0.60) $  (1.41) $  (5.80)
                                                   ========  ========  ========
Shares used in per common share calculation--
 basic and diluted...............................    35,533    17,589     3,178
                                                   ========  ========  ========
</TABLE>


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

                                      F-4
<PAGE>

                                BE INCORPORATED

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                                  Accumulated
                            Common Stock     Additional   Deferred                   Other
                          ------------------  Paid-in      Stock     Accumulated Comprehensive
                            Shares    Amount  Capital   Compensation   Deficit    Gain (Loss)   Total
                          ----------  ------ ---------- ------------ ----------- ------------- --------
                                              (in thousands, except share amounts)
<S>                       <C>         <C>    <C>        <C>          <C>         <C>           <C>
Balance, January 1,
 1998...................   4,573,240   $  5   $ 15,002    $(1,333)    $(30,652)      $--       $(16,978)
Repurchase of common
 stock..................    (248,700)   --         (25)       --           --         --            (25)
Exercise of stock
 options................     770,217               206        --           --         --            206
Sale of option to
 purchase preferred
 stock and warrants to
 purchase common stock..         --              1,322        --           --         --          1,322
Exercise of option to
 purchase preferred
 stock and warrants to
 purchase common stock..         --             (1,322)       --           --         --         (1,322)
Issuance of warrants to
 purchase common stock..         --     --       2,149        --           --         --          2,149
Deferred stock
 compensation related to
 grants of stock
 options................         --     --       7,472     (7,472)         --         --            --
Cancellation of
 options................         --     --        (434)       434          --         --            --
Amortization of deferred
 stock compensation.....         --     --         --       3,881          --         --          3,881
Net loss................         --     --         --         --       (16,861)       --        (16,861)
Beneficial conversion
 feature related to
 issuance of preferred
 stock..................         --     --       1,204        --           --         --          1,204
Dividend related to
 beneficial conversion
 feature of preferred
 stock..................         --     --         --         --        (1,204)       --         (1,204)
Accretion of mandatorily
 redeemable convertible
 preferred stock........         --     --        (358)       --           --         --           (358)
Other...................         --     --          86        --           --         --             86
                          ----------   ----   --------    -------     --------       ----      --------
Balance, December 31,
 1998...................   5,094,757      5     25,302     (4,490)     (48,717)       --        (27,900)
Repurchase of common
 stock..................     (39,640)   --          (3)       --           --         --             (3)
Exercise of stock
 options................     294,548    --          65        --           --         --             65
Exercise of common stock
 warrants...............     286,411      1        578        --           --         --            579
Deferred stock
 compensation related to
 grants of stock
 options................         --     --       7,457     (7,457)         --         --            --
Cancellation of
 options................                        (1,024)     1,024
Amortization of deferred
 stock compensation.....         --     --         --       6,233          --         --          6,233
Compensation expense on
 grant of fully vested
 options................         --     --         662        --           --         --            662
Issuance of common stock
 for cash, net of
 issuance costs of
 $4,034.................   6,557,465      6     35,303        --           --         --         35,309
Conversion of
 Mandatorily Redeemable
 Convertible Preferred
 Stock..................  22,498,874     23     38,274        --           --         --         38,297
Net loss................         --     --         --         --       (24,506)       --        (24,506)
Accretion of mandatorily
 redeemable convertible
 preferred stock........         --     --        (292)       --           --         --           (292)
Unrealized loss on
 investments............         --     --         --         --           --         (17)          (17)
                          ----------   ----   --------    -------     --------       ----      --------
Balance, December 31,
 1999...................  34,692,415     35    106,322     (4,690)     (73,223)       (17)       28,427
Repurchase of common
 stock..................     (22,165)   --          (2)       --           --         --             (2)
Exercise of stock
 options................     911,110      1      2,225        --           --         --          2,226
Exercise of common stock
 warrants...............     454,625    --         454        --           --         --            454
Compensation expense on
 grant of fully vested
 options................         --     --          38        --           --         --             38
Cancellation of
 options................         --     --        (859)       859          --         --            --
Sale of shares under the
 Employee Stock Purchase
 Plan...................     166,914    --         702        --           --         --            702
Amortization of deferred
 stock compensation.....         --     --         --       2,613          --         --          2,613
Net loss................         --     --         --         --       (21,152)       --        (21,152)
Unrealized gain on
 investments............         --     --         --         --           --          18            18
                          ----------   ----   --------    -------     --------       ----      --------
Balance, December 31,
 2000...................  36,202,899   $ 36   $108,880    $(1,218)    $(94,375)      $  1      $ 13,324
                          ==========   ====   ========    =======     ========       ====      ========
</TABLE>

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

                                      F-5
<PAGE>

                                BE INCORPORATED

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                   ----------------------------
                                                     2000      1999      1998
                                                   --------  --------  --------
                                                         (in thousands)
<S>                                                <C>       <C>       <C>
Cash flows from operating activities:
Net loss.........................................  $(21,152) $(24,506) $(16,861)
Adjustments to reconcile net loss to net cash
 used in operating activities:
 Depreciation and amortization...................     1,187       966       855
 Loss on disposal of fixed assets................         5        69       --
 Licensed technology used in research and
  development....................................       --        320     1,852
 Amortization of discount on technology license
  obligations....................................       109       134       130
 Increase in allowances for sales return.........       --        --         10
 Compensation expense incurred on issuance of
  stock..........................................        38       662       --
 Amortization of deferred stock compensation.....     2,613     6,233     3,881
 Changes in assets and liabilities (in 1998, net
  of effects of acquisition):
 Accounts receivable.............................       141       310      (450)
 Prepaid and other current assets................       241      (525)      (93)
 Other accrued...................................       --        (91)     (142)
 Accounts payable................................      (548)      284         5
 Accrued expenses................................      (169)      456       573
 Deferred revenue................................        10      (293)      340
                                                   --------  --------  --------
  Net cash used in operating activities..........   (17,525)  (15,981)   (9,900)
                                                   --------  --------  --------
Cash flow provided by (used in) investing
 activities:
Acquisition of property and equipment............      (182)     (515)     (323)
Acquisition of licensed technology...............      (746)   (1,893)   (1,373)
Purchases of short-term investments..............   (64,377)  (81,749)  (35,213)
Sales and maturities of short-term investments...    82,412    67,357    27,159
Deposits and other...............................       --        (63)      --
Acquisition of StarCode (net of cash acquired)...       --        --       (562)
                                                   --------  --------  --------
  Net cash provided by (used in) investing
   activities....................................    17,107   (16,863)  (10,312)
                                                   --------  --------  --------
Cash flows provided by financing activities:
Proceeds from issuance of common stock pursuant
 to common stock options.........................     2,226        65       206
Proceeds from issuance of common stock pursuant
 to common stock warrants........................       455       579       --
Proceeds from issuance of common stock under the
 Employee Stock Purchase Plan....................       702       --        --
Proceeds from issuance of preferred stock, net...       --        --     20,156
Proceeds from issuance of common stock warrants..       --        --      1,248
Proceeds from option to purchase Series 2
 preferred stock and common stock warrants.......       --        --      1,322
Proceeds from issuance of common stock in initial
 public offering, net............................       --     35,309       --
Repurchase of common stock.......................        (2)       (3)      (25)
                                                   --------  --------  --------
  Net cash provided by financing activities......     3,381    35,950    22,907
                                                   --------  --------  --------
Net increase in cash and cash equivalents........     2,963     3,106     2,695
Cash and cash equivalents, beginning of year.....     6,500     3,394       699
                                                   --------  --------  --------
Cash and cash equivalents, end of year...........  $  9,463  $  6,500  $  3,394
                                                   ========  ========  ========
Supplemental schedule of noncash financing
 activities:
Conversion of mandatorily redeemable convertible
 preferred stock to common stock.................  $    --   $ 38,297  $    --
                                                   ========  ========  ========
Conversion of notes payable and accrued interest
 to preferred stock..............................  $    --   $    --   $  3,094
                                                   ========  ========  ========
Issuance of preferred stock to bankers...........  $    --   $    --   $    345
                                                   ========  ========  ========
Allocation of proceeds from option to purchase
 preferred stock and warrants....................  $    --   $    --   $  1,322
                                                   ========  ========  ========
Dividend related to beneficial conversion feature
 of preferred stock..............................  $    --   $    --   $  1,204
                                                   ========  ========  ========
Accretion of mandatorily redeemable preferred
 stock...........................................  $    --   $    292  $    358
                                                   ========  ========  ========
Future obligations under noncancelable technology
 licenses........................................  $    --   $    809  $    696
                                                   ========  ========  ========
Unearned stock based compensation related to
 stock option grants, net of cancellations.......  $   (859) $  6,433  $  7,038
                                                   ========  ========  ========
</TABLE>

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

                                      F-6
<PAGE>

                                BE INCORPORATED

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1--Nature of Business: (to mirror business section text)

  Be Incorporated (the "Company") was founded in 1990 and offers software
platforms designed for Internet appliances and digital media applications. The
Company's software platforms (i) BeIA: consisting of three components; BeIA
Client Platform, BeIA Management and Administration Platform, and BeIA
Integrations Services, (ii) Home Audio Reference Platform (HARP), a BeIA-based
reference platform or prototype for Internet-enabled home stereo devices, and
(iii) BeOS, the Company's operating system designed for digital media
applications and serves as the development platform for BeIA.

  The Company's revenues to date have been primarily generated from the
following sources: sale of BeOS to resellers and distributors, and direct
sales of BeOS to end users through its BeDepot.com Web site. The Company also
generated revenues by collecting commission from sales of third party software
through its BeDepot.com Web site. In 2000, the Company shifted its resources
to focus primarily on the market for Internet appliances and the further
development and marketing of BeIA, its software solution intended for Internet
appliances. At the same time it announced that it would be making available at
no charge a version of BeOS for personal use, and a more fully featured
version would be available for a charge through third party publishers. During
2000, the Company discontinued sales of software through its BeDepot.com
website. Since inception, the Company has experienced losses and negative cash
flow from operations and expects to continue to experience significant
negative cash flow in the foreseeable future.

Note 2--Summary of Significant Accounting Policies:

 Basis of presentation

  These consolidated financial statements contemplate the realization of
assets and the satisfaction of liabilities in the normal course of business.
The Company has incurred losses since its inception and has an accumulated
deficit at December 31, 2000 of $94.4 million. These conditions raise
substantial doubt about the Company's ability to continue as a going concern

  The Company believes that existing cash and cash equivalents will not be
sufficient to meet the Company's operating and capital requirements at its
currently anticipated level of operations beyond the end of the second quarter
of 2001. Additional capital will be necessary in order to fund the Company's
operations at the currently anticipated levels beyond the second quarter of
2001. While the Company is actively considering various funding alternatives,
the Company has not secured or entered into any arrangements to obtain
additional capital. There can be no assurance that the Company will be able to
obtain additional funds, on acceptable terms or at all. If the Company cannot
raise additional capital to continue its present level of operations, it will
have to scale back its business which could include among other things, a
reduction in its workforce. As a result, it may not be able to further develop
or enhance its product offering, take advantage of future opportunities or
respond to competitive pressures, any of which could have a material adverse
effect on its business and results of operations. The Company's liquidity may
also be adversely affected in the future by factors such as higher interest
rates, inability to borrow without collateral, availability of capital
financing and continued operating losses.

  The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

 Principles of consolidation

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

                                      F-7
<PAGE>

                                BE INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Foreign currency translation

  The functional currency of the Company's foreign subsidiary is the U.S.
Dollar. Nonmonetary assets and liabilities are remeasured into U.S. Dollars at
historical rates, monetary assets and liabilities are remeasured at exchange
rates in effect at the end of the year and income statement accounts are
remeasured at average rates for the period. Remeasurement gains and losses of
the Company's foreign subsidiary are included in the results of operations and
are not significant.

 Use of estimates

  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.

 Financial instruments

  The Company considers all highly liquid investments with an original or
remaining maturities of three months or less at the date of purchase to be
cash equivalents. Cash and cash equivalents are deposited with two major banks
in the United States. Deposits in these banks may exceed the amount of
insurance provided on such deposits. The Company has not experienced any
losses on its deposits of its cash and cash equivalents.

  Management has classified all of its short-term investments as available for
sale. Realized gains and losses are calculated using the specific
identification method. Realized gains and losses in 2000, 1999 and 1998 and
unrealized holding gains and losses at December 31, 1998 were not significant.
Unrealized gains and losses at December 31, 2000 and 1999 are shown in the
Consolidated Statements of Operations and Stockholders' Equity (Deficit).

  The carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable,
accrued expenses and notes payable approximate fair value due to their short
maturities. The fair value of short term investments is set forth in note 4 of
notes to the consolidated financial statements.

 Certain risks and concentrations

  To date, the Company's revenue has been derived entirely of sales of BeOS.
In the first quarter of 2000, the Company shifted its resources to focus
primarily on the market for Internet appliances and the further development
and marketing of BeIA, its software solution intended for Internet appliances.
The Company may be unsuccessful in its attempt to focus primarily on this
market and has not yet recognized revenues from its BeIA product.

  The Company's success depends in large part on its ability to establish and
maintain strategic relationships with industry-leading computer and consumer
electronic companies, hardware and systems manufacturers, and Internet service
and content providers. If the Company is unable to develop or maintain
relationships with strategic partners and customers, it will have difficulty
selling and gaining market acceptance for its products and its business and
results of operations will be materially adversely affected.

  The demand and acceptance of the Company's product is dependent upon its
ability to support a wide range of industry standards such as those used for
streaming media and Internet browsing and access to key enabling technologies.
These key technologies include a Web browser under license from one software
vendor. If the Company were to lose its rights to this Web browser or any
other key technology incorporated into its products, it may be required to
devote significant time and resources to replace such browser or other key
technologies.

                                      F-8
<PAGE>

                                BE INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

This could in turn be costly, result in the unavailability or delay the
release of its products, and would materially adversely affect its business
and operating results. The Company also licenses other enabling technologies
for inclusion in its product, such as third party compression and
decompression algorithms known as "codecs." The Company may be unable to
license these enabling technologies at favorable terms or at all which may
result in lower demand for our products.

  The Company depends on development tools provided by a limited number of
third party vendors. Together with application developers, the Company relies
primarily upon software development tools provided by two companies. If one or
both of these companies fail to support or maintain these development tools,
the Company will have to support the tools itself or transition to another
vendor. Any maintenance or support of the tools by the Company or transition
could be time consuming, could delay product release and upgrade schedule and
could delay the development and availability of third party applications used
on the Company's products. Failure to procure the needed software development
tools or any delay in availability of third party applications could
negatively impact the Company's ability and the ability of third party
application developers to release and support its software solution and the
applications that run it. These factors could negatively and materially affect
the acceptance and demand for BeOS, our business and prospects.

 Property and equipment

  Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets, generally three years. Upon disposal, the cost of
the asset and related accumulated depreciation are removed from the accounts
and any resulting gain or loss is included in the results of operations.

  Depreciation expense for 2000, 1999, and 1998 was $347,000, $287,000 and
$202,000, respectively.

 Accounting for Long-Lived Assets

  The Company reviews its property and equipment for impairment whenever
events or changes in circumstances indicate that the carrying amount these
assets may not be recoverable. Recoverability is measured by comparison of its
carrying amount to future net cash flows the assets are expected to generate.
If such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets exceeds
the projected discounted future cash flows arising from the asset.

  At each balance sheet date, the unamortized cost of purchased software is
compared to the net realizable value of the related software product. The
amount by which the unamortized cost exceeds the net realizable value of the
software is charged to operations. The net realizable value of the software
product is determined by estimating future gross revenues and reduced by the
estimated future costs of selling the product.

 Income taxes

  The Company accounts for its income taxes in accordance with the liability
method. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts
expected to be realized.

 Advertising costs

  Advertising costs, included in sales and marketing expenses, are expensed as
incurred and were $73,000, $154,000 and $38,000 in 2000, 1999 and 1998,
respectively.

                                      F-9
<PAGE>

                                BE INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Research and development costs

  Costs incurred in the research and development of new software products are
expensed as incurred, including minimum payments made and due to third parties
for technology incorporated into the Company's product, until technological
feasibility is established. Development costs are capitalized beginning when a
product's technological feasibility has been established and ending when the
product is available for general release to customers. To date, products and
enhancements have generally reached technological feasibility and have been
released for sale at substantially the same time.

 Revenue recognition

  In the second half of 2000, the Company's revenue was primarily derived from
royalties on sales of BeOS by third-party publishers. In prior periods,
revenue was generated from licensing fees on sales to end-users either by
direct-order on the Company's web site or sales by distributors.

  The Company recognized product revenues from orders on the Company's web
site upon shipment, provided a credit card authorization was received, the fee
was fixed and determinable, collection of resulting receivables was probable
and product returns were reasonably estimable. The Company used a standard
shrink wrap license for all of its sales. Under the license, the Company was
obligated to provide limited telephone support to end users who purchase the
Company's product and provided a 5-day money back guarantee. The Company
accrued the costs of providing telephone support upon shipment of the product
based on the historical cost of providing such support to its customers. In
addition, upon shipment of its product, the Company recorded an allowance for
estimated sales returns.

  Product revenues for sales to its distributors were recognized upon sell
through to an end user provided a signed contract existed, the fee was fixed
and determinable and collection was probable. The Company recognized revenue
from these distributors upon sale by the distributors to an end user because
the Company did not have sufficient experience with the distributors to
reasonably estimate returns.

  During 1999 and 1998, under certain circumstances, the Company offered an
upgrade to its product in conjunction with product sales at no additional
charge. Generally, such rights were offered prior to new versions being
released and gave the customers who purchase products between established
dates the right to such an upgrade. Revenue was allocated to an upgrade right
based on the price for upgrades when sold separately. The Company recognized
upgrade revenue when the criteria for product revenue recognition from end
users set forth above are met.

  At December 31, 2000, deferred revenues consisted primarily of prepaid
royalties for BeIA. At December 31, 1999, deferred revenues consisted of
revenue related to distributor sales not sold through to end users.

  In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 10, or SAB 101, "Revenue Recognition in
Financial Statements," which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosures related to revenue recognition policies.
The Company adopted SAB 101 in the fourth quarter of 2000. The adoption of SAB
101 did not have a material impact on the Company's financial position or
results of operations in 2000.

 Stock-based compensation

  The Company accounts for stock based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
or APB 25, "Accounting for Stock Issued to

                                     F-10
<PAGE>

                                BE INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Employees," and Financial Accounting Standards Board Interpretation ("FIN")
No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans," and complies with the disclosure provisions of
Statement of Financial Accounting Standards No. 123, or SFAS 123, "Accounting
for Stock-Based Compensation." Under APB 25, compensation expense is based on
the difference, if any, on the date of grant, between the estimated fair value
of the Company's common stock and the exercise price. SFAS 123 defines a "fair
value" based method of accounting for an employee stock option or similar
equity investment. The pro forma disclosures of the difference between the
compensation expense included in net loss and the related cost measured by the
fair value method are presented in Note 7. The Company accounts for equity
instruments issued to nonemployees in accordance with the provisions of SFAS
123 and Emerging Issues Task Force 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling Goods or Services."

  In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, or FIN 44, "Accounting for Certain Transactions
involving Stock Compensation, an interpretation of APB Opinion No. 25." FIN 44
clarifies the application of Opinion No. 25 for (a) the definition of employee
for purposes of applying APB 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 was effective July 1, 2000, but certain
conclusions cover specific events that occurred either after December 15,
1998, or January 12, 2000. The adoption of FIN 44 did not have a material
impact on the results of operations or financial position of the Company.

 Comprehensive income

  Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner sources. The differences between net loss and
comprehensive loss are shown in the Consolidated statements of Operations.

                                     F-11
<PAGE>

                                BE INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Net loss per common share

  Basic net loss per common share is computed by dividing net loss available
to common stockholders by the weighted average number of vested common shares
outstanding for the period. Diluted net loss per common share is computed
giving effect to all dilutive potential common shares, including options,
warrants and preferred stock. Options, warrants and preferred stock were not
included in the computation of diluted net loss per common share in 2000, 1999
and 1998 because the effect would be antidilutive. A reconciliation of the
numerator and denominator used in the calculation of basic and diluted net
loss per common share follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                    2000      1999      1998
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Net loss per common share, basic and diluted:
  Net loss....................................... $(21,152) $(24,506) $(16,861)
  Dividend related to beneficial conversion
   feature of preferred stock....................      --        --     (1,204)
  Accretion of mandatorily redeemable convertible
   preferred stock...............................      --       (292)     (358)
                                                  --------  --------  --------
    Numerator for net loss per common share,
     basic and diluted...........................  (21,152)  (24,798)  (18,423)
  Denominator for basic and diluted loss per
   common share:
    Weighted average common shares outstanding...   35,533    17,589     3,178
                                                  ========  ========  ========
  Net loss per common share basic and diluted.... $  (0.60) $  (1.41) $  (5.80)
                                                  ========  ========  ========
  Antidilutive securities:
    Options to purchase common stock.............    5,911     6,010     2,205
    Common stock subject to repurchase...........      222       499     1,389
    Preferred stock..............................      --        --     22,499
    Warrants.....................................    2,130     2,585     2,871
                                                  --------  --------  --------
                                                     8,263     9,094    28,964
                                                  ========  ========  ========
</TABLE>

 Recent accounting pronouncements

  In June 1998, the Financial Accounting Standards Board, ("FASB"), issued
Statement of Financial Accounting Standards No. 133, or SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at fair value
in the statement of financial position, and that the corresponding gains or
losses be reported either in the statement of operations or as a deferred item
depending on the type of hedge relationship that exists with respect of such
derivatives. In July 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 137, or SFAS 137, "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB Statement No. 133." SFAS 137 deferred the effective date until
fiscal years beginning after June 30, 2000. In June 2000, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 138, or SFAS 138, "Accounting for Derivative Instruments and Hedging
Activities--An Amendment of FASB Statement 133." SFAS 138 amends the
accounting and reporting standards for certain derivative activities such as
net settlement contracts, foreign currency transactions and intercompany
derivatives. The Company will adopt SFAS 133 effective January 1, 2001. To
date, the Company has not engaged in derivative or hedging activities and does
not expect the adoption of SFAS 133 and 138 to have a material impact on its
financial position or results of operations.

  In various areas, including revenue recognition and stock-based compensation
accounting standards and practices continue to evolve. The SEC continues to
issue interpretative guidance relating to SAB 101, and the

                                     F-12
<PAGE>

                                BE INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FASB and the Emerging Issues Task Force continue to address revenue and other
related accounting issues. The management of the Company believes it is
compliance with all of the rules and related guidance as they currently exist.
However, any changes to generally accepted accounting principles in these
areas could impact the Company's accounting for its operations.

 Reclassifications

  Certain prior year amounts have been reclassified for consistency with
current year financial statement presentation.

Note 3--Acquisition:

 StarCode acquisition

  On April 30, 1998, the Company acquired StarCode Software, Inc. ("StarCode")
for an aggregate purchase price of $567,000. StarCode owned and operated an
electronic commerce web site, which the Company and certain developers of
application software for use with BeOS used to sell their products. The
Company had previously contracted with StarCode to provide access to this web
site and paid a fee based on the level of revenue generated by orders
therefrom. The acquisition has been accounted for using the purchase method of
accounting and the results of operations of StarCode have been included with
those of the Company since the date of acquisition.

  The fair value of the assets acquired from StarCode and a summary of the
consideration exchanged for these assets is as follows:

<TABLE>
     <S>                                                                  <C>
     Total purchase price................................................ $567
                                                                          ====
     Assets acquired: Tangible assets, including cash, accounts
      receivable and property and equipment.............................. $ 22
     Purchased web site technology.......................................  545
                                                                          ----
                                                                          $567
                                                                          ====
</TABLE>

  The amount allocated to purchased Web Site technology, for which
technological feasibility had been established at the acquisition date, is
being amortized on a straight-line basis over eighteen months. Accumulated
amortization at December 31, 1999 and 1998 was $545,000 and $242,000,
respectively.

  Summarized below are the unaudited pro forma results of operations of the
Company as though StarCode had been acquired at the beginning of the period
presented. Adjustments have been made for the estimated increases in
amortization related to purchased web site technology and other appropriate
pro forma adjustments.

<TABLE>
<CAPTION>
                                                                        1998
                                                                      --------
     <S>                                                              <C>
     Revenue......................................................... $  1,215
     Net loss........................................................ $(17,064)
     Net loss per common share, basic and diluted.................... $  (5.37)
</TABLE>

  The above amounts are based upon certain assumptions and estimates which the
Company believes are reasonable. The pro forma financial information presented
above is not necessarily indicative of either the results of operations that
would have occurred had the acquisition taken place at the beginning of each
period presented or of future results of operations of the combined companies.

                                     F-13
<PAGE>

                                BE INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 4--Balance Sheet Accounts:

<TABLE>
<CAPTION>
                                                          December 31,
                                                  -----------------------------
                                                      2000           1999
                                                  ------------- ---------------
                                                          Fair           Fair
                                                   Cost  Value   Cost    Value
                                                  ------ ------ ------- -------
     <S>                                          <C>    <C>    <C>     <C>
     Cash and cash equivalents
       Cash...................................... $  426 $  426 $ 1,935 $ 1,935
       Money Market..............................      8      8     --      --
       Repurchase Agreements.....................  6,785  6,785     --      --
       Corporate Obligations.....................  1,250  1,250     --      --
       Commercial paper..........................    994    994   4,565   4,565
                                                  ------ ------ ------- -------
                                                  $9,463 $9,463 $ 6,500 $ 6,500
                                                  ====== ====== ======= =======
<CAPTION>
                                                          December 31,
                                                  -----------------------------
                                                      2000           1999
                                                  ------------- ---------------
                                                          Fair           Fair
                                                   Cost  Value   Cost    Value
                                                  ------ ------ ------- -------
     <S>                                          <C>    <C>    <C>     <C>
     Short-term investments
       Federal government obligations............    --     --  $ 4,443 $ 4,443
       Corporate debt obligations................    --     --   18,203  18,186
       Commercial paper.......................... $4,593 $4,594     --      --
                                                  ------ ------ ------- -------
                                                  $4,593 $4,594 $22,646 $22,629
                                                  ====== ====== ======= =======
</TABLE>

  All short-term investments mature within one year.

<TABLE>
<CAPTION>
                                                                December 31,
                                                               ----------------
                                                                2000     1999
                                                               -------  -------
     <S>                                                       <C>      <C>
     Property and equipment, net
       Computer equipment..................................... $ 1,124  $   900
       Furniture and fixtures.................................     390      458
                                                               -------  -------
                                                                 1,514    1,358
     Less: accumulated depreciation...........................  (1,123)    (796)
                                                               -------  -------
                                                               $   391  $   562
                                                               =======  =======
     Accrued expenses
       License and royalty liabilities........................ $    70  $   174
       Payroll and related....................................     932      893
       Other..................................................     500      483
                                                               -------  -------
                                                               $ 1,502  $ 1,550
                                                               =======  =======
     Other assets, net
       Technology licenses.................................... $ 3,520  $ 3,447
       Deposits...............................................      24       91
                                                               -------  -------
                                                                 3,544    3,538
     Less: accumulated amortization...........................  (2,496)  (1,816)
                                                               -------  -------
                                                               $ 1,048  $ 1,722
                                                               =======  =======
</TABLE>

                                      F-14
<PAGE>

                                BE INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  During 1998 the Company entered into a licensing agreement for the delivery
of a development tool which compiled software for use in versions of BeOS for
two microprocessor architectures. The present value of the non cancelable
payments due under this agreement of $1,406,000 were initially recorded as a
technology license asset and were amortized over an estimated useful life of
three years (see Note 6).

  However, in June 1998, based on the performance characteristics of this tool
on one of the microprocessor architectures, management deemed that it did not
meet its requirements as a development tool for BeOS and made alternative
arrangements with another company to develop a suitable replacement for that
architecture. Also in June 1998, the manufacturer of systems based on the
other microprocessor architecture announced that they would not release
details of any of their future systems. As a result, the Company was unable to
support any of the future platforms. Since no estimated future cash flows were
expected from the licensed technology, a charge of $1,211,000 was recorded in
June 1998. This charge has been included in cost of sales in the statement of
operations.

  Beginning in 1998, the Company entered into other technology license
agreements including non cancelable minimum payments. The present value of
payments due under these agreements (see Note 6) is recorded as an asset and
amortized over the lesser of the term of the agreement or three years, if
technological feasibility was established at the date the agreement was signed
or as research and development costs if technological feasibility had not been
established and there was no alternative future use for the licensed
technology. During 2000, 1999 and 1998, costs capitalized under these
agreements were $100,000, $809,000 and $663,000, respectively. During 1998,
$641,000 was expensed as research and development under these agreements.

Note 5--Notes Payable:

  During 1997, the Company issued notes payable to certain shareholders in
exchange for $3,000,000 of cash. These notes payable bore interest at an
annual rate of 10%, and were payable in February 1998. These notes payable and
related accrued interest were converted to Series 2 convertible preferred
stock in February 1998 (see Note 7).

Note 6--Commitments and Contingencies:

 Lease Commitments

  The Company leases its facilities under non cancelable operating leases
expiring at various dates through January, 2003. Future annual minimum lease
payments as of December 31, 2000 are as follows (in thousands):

<TABLE>
     <S>                                                                  <C>
     2001................................................................ $1,299
     2002................................................................    270
     2003 ...............................................................      5
                                                                          ------
                                                                          $1,574
                                                                          ======
</TABLE>

  Total rent expense was $1,308,000, $1,168,000 and $825,000 for 2000, 1999
and 1998, respectively.

                                     F-15
<PAGE>

                                BE INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  In addition, the Company has entered into several technology licensing
agreements which include non cancelable payments. These payments have been
recorded at the net present value using a discount rate of 10% per annum. The
future minimum payments under these agreement are as follows:

<TABLE>
     <S>                                                                  <C>
     2001................................................................ $ 510
     2002................................................................   345
                                                                          -----
                                                                            855
     Less discount.......................................................   (81)
                                                                          -----
                                                                            774
     Less current portion................................................  (454)
                                                                          -----
                                                                          $ 320
                                                                          =====
</TABLE>

 Contingencies

  In November 2000, the Company's stock transfer agent, Wells Fargo Bank
Minnesota, N.A., received a demand letter from a stockholder alleging damages
resulting form the transfer agent's failure to timely issue its stock
certificates. While the Company was not a party named in such demand letter,
and no claim has yet been filed with any court of competent jurisdiction, it
is named as a party on the stockholder's draft claim attached to the demand
letter. The Company has been participating in communications with the parties
in an effort to resolve the matter prior to a lawsuit being filed. Be
management believes that the allegations as they relate to Be in the potential
and draft claim are without merit and intends to vigorously defend Be against
any potential future related legal action. However, there can be no assurance
this threatened claim will be resolved without costly litigation, or require
Be's participation in the settlement of such claim, in a manner that is not
adverse to its financial position, results of operations or cash flows. No
estimate can be made of the possible loss or possible range of loss associated
with the resolution of this contingency. If Be were held liable, it is the
Company's intent to seek reimbursement under its D&O insurance policy.

Note 7--Stockholders' Equity:

 Initial Public Offering

  In July 1999, the Company completed its initial public offering and sold
6,000,000 shares of its common stock at a price of $6.00 per share. The
Company received approximately $32.2 million in cash, net of underwriting
discounts, commissions and other offering expenses. Simultaneously with the
closing of the initial public offering, the Company's mandatorily redeemable
convertible preferred stock outstanding at December 31, 1998 automatically
converted into 22,498,874 shares of common stock. The Company's shares are now
traded on the NASDAQ national market system under the symbol "BEOS".

  In August 1999, the underwriters exercised their over-allotment option and
the Company sold an additional 557,465 shares of its common stock at a price
of $6.00 per share, thereby raising proceeds of approximately $3.1 million,
net of underwriting discounts.

 Mandatorily Redeemable Convertible Preferred Stock

  On closing of the Company's initial public offering in July 1999 the
mandatorily redeemable preferred stock automatically converted into 22,498,874
shares of common stock (see above).

                                     F-16
<PAGE>

                                BE INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Changes in the mandatorily redeemable convertible preferred stock during
1998 and 1999 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                        Amount
                                                                       --------
   <S>                                                                 <C>
   Balance, January 1, 1998..........................................  $ 14,052
     Issuance of Series 2:
       February 1998, net of issuance costs of $1,432................    22,391
       December 1998, net of issuance costs of $217 and allocation to
        warrants of $2,001...........................................     1,204
     Beneficial conversion feature...................................    (1,204)
     Dividend related to beneficial conversion feature of preferred
      stock..........................................................     1,204
     Accretion to redemption value...................................       358
                                                                       --------
   Balance, December 31, 1998........................................    38,005
     Accretion to redemption value...................................       292
     Conversion to common stock......................................   (38,297)
                                                                       --------
   Balance, December 31, 1999........................................  $    --
                                                                       ========
</TABLE>

 Issuance of Series 2 Mandatorily Redeemable Convertible Preferred Stock

  In February 1998, the Company sold 6,706,318 shares of its Series 2
mandatorily redeemable convertible preferred stock to investors for total
gross proceeds of $21,795,000. In addition, the Company issued 923,077 shares
if its Series 2 mandatorily redeemable convertible preferred stock in exchange
for the $3,000,000 of notes payable outstanding at December 31, 1997, and an
additional 31,950 shares were issued for forgiveness for interest related to
the notes payable.

  In connection with the sale of Series 2 mandatorily redeemable convertible
preferred stock, the Company issued the lead investor an option to purchase an
additional 615,385 shares of Series 2 mandatorily redeemable convertible
preferred stock and other warrants to purchase up to 1,538,462 shares of
common stock, subject to certain terms and conditions. The right to purchase
Series 2 mandatorily redeemable convertible preferred stock and the warrants
to purchase common stock were to expire on December 31, 1998. The lead
investor exercised this option in December 1998 and the additional shares were
issued. In addition, as the result of this exercise, the warrants issued to
the lead investor become exercisable (see "Warrants" below). The Company
received total cash consideration of $5 million from the lead investor of
which $3 million was received in February 1998 and $2 million in December
1998.

  In February 1998, the net proceeds of $2.9 million ($3 million net of
issuance costs of $0.1 million) were allocated to preferred stock and the
option to purchase the additional shares of preferred stock and the warrant
for common stock (the "Option") based on the relative fair values of each of
these instruments. The fair value of the option was estimated at $2,584,000
using the Black-Scholes model and the following assumptions; dividend yield of
0%, volatility of 60%, risk free interest rate of 5.51% and a term of eight
months. The resulting allocation was as follows (in thousands):

<TABLE>
     <S>                                                                <C>
     Series 2 mandatorily redeemable convertible preferred stock ...... $1,535
     Option ...........................................................  1,322
                                                                        ------
                                                                        $2,857
                                                                        ======
</TABLE>

  In December 1998, the proceeds from the issuance of preferred stock were
allocated to the preferred stock and warrants to purchase 1,538,462 shares of
common stock based on the relative fair values of each of these

                                     F-17
<PAGE>

                                BE INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

instruments. The fair value of the warrants was estimated at $6,202,000 using
the Black-Scholes model and the following assumptions; dividend yield of 0%,
volatility of 60%, risk free interest rate of 4.76% and a term of five years.
The proceeds comprised $1.9 million ($2 million net of issuance costs of $0.1
million) in cash consideration plus the fair value of the options to purchase
preferred stock and the common stock warrants discussed above and totaled
$3,205,000. The resulting allocation was as follows (in thousands):

<TABLE>
     <S>                                                                 <C>
     Series 2 mandatorily redeemable convertible preferred stock........ $1,204
     Common stock warrants..............................................  2,001
                                                                         ------
                                                                         $3,205
                                                                         ======
</TABLE>

  In connection with these issuances the Company issued 75,375 and 30,769
shares of Series 2 mandatorily redeemable convertible preferred stock in
February 1998 and December 1998 to the bankers in lieu of investment bankers
fees. The fair value of these shares has been recorded and included as
issuance costs of Series 2 mandatorily redeemable convertible preferred stock
financing. In May and December 1998, warrants were issued for investment
banker fees related to the issuance of the Series 2 preferred stock. The fair
value of the warrants of $148,000 was estimated using the Black-Scholes model
and the following assumptions; dividends yield of 0%, volatility of 60% risk
free interest rate of 4.76%-5.51% and a term of 5 years. The value of the
warrant, a stock issuance cost, was offset against the proceeds from the
Series 2 preferred stock.

 Warrants

  The Company has issued fully exercisable warrants to purchase common stock.
None of these warrants were exercised prior to 1999. Warrant activity can be
analyzed as follows:

<TABLE>
<CAPTION>
                                                                             Number of                   Number of
                                                    Number of  Number of      Warrants     Number of      Warrants
                                                     Shares     Warrants   Outstanding at   Warrants   Outstanding at
                        Expiration   Exercise Price Under the Exercised in  December 31,  Exercised in  December 31,
    Issuance Date          Date        Per share    Warrants      1999          1999          2000          2000
    -------------      ------------- -------------- --------- ------------ -------------- ------------ --------------
<S>                    <C>           <C>            <C>       <C>          <C>            <C>          <C>
April 1996             March 2001        $1.00      1,219,648   173,546      1,046,102      454,625        591,477
December 1998          December 2003     $3.25      1,538,462       --       1,538,462          --       1,538,462
May and December 1998  June 17, 2000     $3.58        112,865   112,865            --           --             --
                                                    ---------   -------      ---------      -------      ---------
                                                    2,870,975   286,411      2,584,564      454,625      2,129,939
                                                    =========   =======      =========      =======      =========
</TABLE>

  The December 1998 warrants were issued in connection with the issuance of
Series 2 preferred stock in December 1998 and valued as described above under
"Issuance of Series 2 mandatorily redeemable convertible preferred stock".

  The May and December 1998 warrants were issued for investment banker fees
related to the issuance of the Series 2 preferred stock.

 1992 Stock Option Plan

  In 1992 the Company adopted a stock option plan (the "1992 Plan") under
which 5,000 shares of the Company's common stock had been reserved for
issuance of stock options to employees, directors, or consultants under terms
and provisions established by the board of directors. In 1997 and 1998, the
Company reserved an additional 5,995,000 shares and 2,000,000 shares,
respectively, for issuance under the 1992 Plan. Options granted under the 1992
Plan are immediately exercisable; however, shares exercised under the 1992
Plan are subject to the Company's right of repurchase at the end of the
holder's association with the Company. The Company's right of repurchase
generally lapses as to 20% of the shares one year from the date of grant and
1/60th each month

                                     F-18
<PAGE>

                                BE INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

thereafter or as to 25% of the shares one year from the date of grant and
1/48th each month thereafter. The options expire ten years from the date of
grant.

  On March 30, 1999, the board of directors terminated the 1992 Plan. No
further options will be granted under the 1992 plan.

 1999 Equity Incentive Plan

  On March 30, 1999 the Company adopted the Equity Incentive Plan (the "1999
Plan") under which a total of up to 8,000,000 shares of common stock were
initially reserved for issuance. This number of shares initially reserved was
reduced by the 1,943,347 shares reserved for issuance under options then
outstanding under the 1992 Plan. If any of these 1,943,437 options are
cancelled, the number of shares reserved under the 1999 Plan will be increased
by the number of such cancellations. In addition, at the end of each year an
additional number of shares will automatically be added to the number of
shares already reserved for issuance under the 1999 Plan. This additional
number of shares will be not more than the lesser of 5% of the number of
shares of the Company's issued and outstanding common stock as of year end or
the number equal to 8% of the number of shares of common stock issued and
outstanding at year end less the number of shares of common stock reserved for
issuance under the 1999 Plan but not subject to outstanding awards. The 1999
Plan provides for the grant of incentive stock options, non-qualified stock
options, restricted stock purchase rights and stock bonuses to employees,
consultants and directors. Incentive stock options may be granted only to
employees. The exercise price of incentive stock options granted under the
1999 Plan must be at least equal to the fair market value of the Company
common stock on the date of grant. The exercise price of non-qualified stock
options is set by the administrator of the 1999 Plan, but can be no less than
85% of the fair market value. The maximum term of options granted under the
1999 Plan is ten years. Options granted under the terms of the 1999 Plan
become exercisable as to 25% of the shares awarded after one year and 1/48 of
the award monthly thereafter.

  Activity under the Company's Plans is set forth below (in thousands, except
per share and share numbers):

<TABLE>
<CAPTION>
                                            Options Outstanding
                            -------------------------------------------------------
                                                                           Average
                                                                           Weighted
                            Available                Price per             Exercise
                            for Grant     Shares       Share      Amount    Price
                            ----------  ----------  ------------ --------  --------
   <S>                      <C>         <C>         <C>          <C>       <C>
   Balance, January 1,
    1998...................    339,232     987,400  $ 0.10-$0.20 $    104   $0.11
     Options authorized....  2,000,000         --       --            --      --
     Options granted....... (2,436,500)  2,436,500   0.20-0.35        840    0.34
     Options exercised.....        --     (770,217)  0.10-0.35       (205)   0.27
     Options terminated....    448,756    (448,756)  0.10-0.35        (94)   0.21
                            ----------  ----------               --------
   Balance, December 31,
    1998...................    351,488   2,204,927   0.10-0.35        645    0.29
     Options authorized
      March................  5,524,813         --       --            --      --
     Options authorized
      December.............    298,435         --       --            --      --
     Options granted....... (4,328,000)  4,328,000   0.35-14.38    22,726    5.25
     Options exercised.....        --     (294,548)  0.10-5.00        (64)   0.22
     Options terminated....    928,657    (928,657)  0.10-6.25     (2,875)   3.10
                            ----------  ----------               --------
   Balance, December 31,
    1999...................  2,775,393   5,309,722   0.10-14.38    20,432    3.85
     Options authorized....  1,810,145         --       --            --      --
     Options granted....... (3,961,500)  3,961,500   1.00-17.88    32,112    8.11
     Options exercised.....        --     (911,110)  0.10-12.88    (2,226)   2.44
     Options terminated....  1,870,409  (1,870,409)  0.10-14.44   (13,662)   7.30
                            ----------  ----------               --------
   Balance, December 31,
    2000...................  2,494,447   6,489,703  $0.10-$17.88 $ 36,656   $5.65
                            ==========  ==========               ========
</TABLE>

                                     F-19
<PAGE>

                                BE INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  At December 31, 2000, 1999 and 1998, 2,339,767, 2,435,895 and 2,204,927
outstanding options were exercisable at weighted average exercise prices of
$4.52, $2.01 and $0.29. Of these shares, 295,869 shares, 848,685 shares and
1,611,674 shares at weighted average exercise prices of $0.33, $0.33 and
$0.32, respectively, are subject to the Company's right of repurchase upon
exercise. In addition, 221,743, 499,069 and 1,339,302 shares of the Company's
outstanding common stock is subject to the Company's right of repurchase at
weighted average prices of $0.29, $0.24 and $0.17, respectively.

 1999 Non-Employee Directors' Stock Option Plan

  On March 30, 1999 the board of directors also adopted the Non-Employee
Directors' Stock Option Plan (the "Directors' Plan"), and have reserved a
total of 1,500,000 shares of common stock for issuance thereunder. The
exercise price of options under the Directors' Plan will be equal to the fair
market value of the common stock on the date of grant. The maximum term of the
options granted under the Directors' Plan is ten years. Each initial grant
under the Directors' Plan will vest at 1/4th of the shares subject to the
option one year after the date of grant and 1/48th of the shares each month
thereafter. The rate of vesting of each subsequent grant will be 1/48th of the
shares on a monthly schedule after the date of grant. The board may amend
(subject to stockholder approval as necessary) or terminate the Directors'
Plan at any time.

  Activity under the 1999 Non-Employee Director's Stock Option Plan is set
forth below (in thousands, except per share and share numbers):

<TABLE>
<CAPTION>
                                           Options Outstanding
                              ------------------------------------------------
                                                                      Average
                                                                      Weighted
                              Available            Price per          Exercise
                              for Grant  Shares      Share    Amount   Price
                              ---------  -------  ----------- ------  --------
   <S>                        <C>        <C>      <C>         <C>     <C>
   Options authorized........ 1,500,000      --   $       --  $  --    $  --
   Options granted...........  (700,000) 700,000   5.00-5.75   3,575     5.11
                              ---------  -------              ------
   Balance, December 31,
    1999.....................   800,000  700,000   5.00-5.75   3,575     5.11
   Options granted...........  (100,000) 100,000     16.13     1,612    16.13
   Options terminated........    90,625  (90,625)    5.00       (453)    5.00
                              ---------  -------              ------
   Balance, December 31,
    2000.....................   790,625  709,375  $5.00-16.13 $4,734   $ 6.67
                              =========  =======              ======
</TABLE>

  At December 31, 2000 and 1999, 285,416 and nil options outstanding were
exercisable at weighted average exercise prices of $5.08 and nil,
respectively.

 Options Outstanding

  The options outstanding and currently exercisable by exercise price at
December 31, 2000 are as follows:

<TABLE>
<CAPTION>
                               Options Outstanding         Options Exercisable
                         --------------------------------- --------------------
                                      Weighted
                                       Average    Weighted             Weighted
                                      Remaining   Average              Average
                           Number    Contractual  Exercise   Number    Exercise
   Exercise Prices       Outstanding Life (years)  Price   Exercisable  Price
   ---------------       ----------- -----------  -------- ----------- --------
   <S>                   <C>         <C>          <C>      <C>         <C>
   $0.10-0.35...........    824,296     7.21       $ 0.33     824,296   $ 0.33
   $1.00-4.56...........  1,446,000     9.83         2.40      33,444   $ 4.20
   $5.00-5.75...........  2,662,726     8.27         5.04   1,215,918   $ 5.02
   $6.00-9.00...........    991,683     9.04         7.28     268,464   $ 6.85
   $12.88-17.88.........  1,274,373     9.09        13.35     283,061   $12.98
                          ---------                         ---------
                          7,199,078     8.71       $ 5.75   2,625,183   $ 4.58
                          =========     ====       ======   =========   ======
</TABLE>

                                     F-20
<PAGE>

                                BE INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Deferred stock compensation

  In accordance with the requirements of APB 25, the Company has recorded
deferred compensation for the difference between the exercise price of the
stock options granted before its initial public offering and the fair market
value of the Company's stock at the date of grant. This deferred compensation
is amortized to expense over the period during which the Company's right to
repurchase the stock lapses or the options become exercisable, generally four
or five years, using the multiple options method.

  At December 31, 2000, the Company had recorded deferred compensation related
to these options in an amount of $15,767,000 (net of cancellations), of which
$2,613,000, $6,233,000 and $3,881,000 had been amortized to expense during
2000, 1999, and 1998.

  During 1999 and 1998 options to purchase 4,173,000 and 2,436,500 shares of
the Company's common stock were granted with exercise prices below the
estimated market value at the date of grant; the weighted average exercise
prices were $4.98 and $0.34 per share and the deemed weighted average market
values of the common stock was $6.81 and $3.41 per share, respectively. During
2000, all options were granted with an exercise price equal to the fair market
value of the underlying common stock on the date of grant.

 Value of Options Granted

  The fair value of each option grant is estimated on the date of grant using
a type of Black-Scholes option pricing model with the following assumptions
used for grants:

<TABLE>
<CAPTION>
                                                   2000      1999       1998
                                                  ------- ---------- ----------
   <S>                                            <C>     <C>        <C>
   Expected volatility...........................    142% 0% and 60%         0%
   Weighted average risk-free interest rate......   6.21%      4.80% 4.59-6.03%
   Expected life................................. 2 years    2 years    5 years
   Expected dividends............................      0%         0%         0%
</TABLE>

  For the period prior to the Company's Initial Public Offering, volatility
for the purposes of the SFAS No. 123 calculation was 0%.

  Based on the above assumptions, the aggregate fair value and weighted
average fair value per share of options granted in 2000, 1999 and 1998 were
$29,359,000, $13,919,000 and $7,766,000, and $7.24, $2.77 and $3.19,
respectively.

 Employee Stock Purchase Plan

  On May 4, 1999 the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan"). The Company has reserved a total of 1,500,000 shares of
common stock for issuance under the Purchase Plan. Under the terms of the
Purchase Plan, employees who work at least 20 hours a week and have been
employed for at least five months in a calendar year may contribute, during an
offering period, a specified percentage, not to exceed 15%, of their
compensation to purchase shares of common stock of the Company. Each offering
period runs for a period of 24 months and will be divided into consecutive
purchase periods of approximately six months. New offering periods commence
every six months on August 1st and February 1st each year.

  The price of the common stock purchased under the Purchase Plan is equal to
85% of the fair market value of the common stock on the first day of the
applicable offering period or the last day of the applicable purchase period
whichever is lower. No person may purchase shares under the Purchase Plan to
the extent that such person would own 5% or more of the total combined value
or voting power of all classes of the capital stock of the

                                     F-21
<PAGE>

                                BE INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company or to the extent that such person's rights to purchase stock under
stock purchase plans would accrue at a rate in excess of $25,000 per year.

  The first purchases under the Plan occurred in 2000, during which 166,914
shares were issued under the plan at a weighted average purchase price of
$4.21. At December 31, 2000, 1,333,086 shares were reserved for future
issuance under the plan.

  Under SFAS No. 123, compensation cost is also recognized for the fair value
of employee's purchase rights under the Employee Stock Purchase Plan, which
was estimated using the following assumptions:

<TABLE>
<CAPTION>
                                                                 2000     1999
                                                               -------- --------
   <S>                                                         <C>      <C>
   Expected volatility........................................     142%      60%
   Weighted average risk-free interest rate...................    6.18%    4.80%
   Expected life.............................................. 6 months 6 months
   Expected dividends.........................................       0%       0%
</TABLE>

  Based on the above assumptions, the aggregate fair value and weighted
average fair value per share of those purchase rights granted in 2000 and 1999
was $417,000 and $140,000, and $3.45 and $1.94, respectively.

 Pro forma stock compensation

  Had compensation cost been determined based on the fair value at the grant
date for the awards made in 1995 and thereafter under the Company's stock
option plans and employee stock purchase plan consistent with the provisions
of SFAS No. 123, the Company's net loss would have been as follows (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                   2000      1999      1998
                                                 --------  --------  --------
   <S>                                           <C>       <C>       <C>
   Net loss attributable to common
    stockholders--as reported..................  $(21,152) $(24,798) $(18,423)
   Net loss attributable to common
    stockholders--pro forma....................  $(31,855) $(27,039) $(18,442)
   Net loss per common share--basic and diluted
    as reported................................  $  (0.60) $  (1.41) $  (5.80)
   Net loss per common share--basic and diluted
    pro forma..................................  $  (0.90) $  (1.54) $  (5.80)
</TABLE>

  Such pro forma disclosures may not be representative of future compensation
cost because options vest over several years and additional grants are made
each year.

Note 8--Income Taxes:

  The components of the net deferred tax asset are as follows (in thousands):

<TABLE>
<CAPTION>
                                                               December 31,
                                                             ------------------
                                                               2000      1999
                                                             --------  --------
   <S>                                                       <C>       <C>
   Net operating loss carryforwards......................... $ 27,492  $ 17,466
   Tax credit carryforwards.................................    1,770     1,648
   Property and equipment and intangibles...................       49        48
   Other....................................................       53       807
                                                             --------  --------
                                                               29,364    19,969
   Less: valuation allowance................................  (29,364)  (19,969)
                                                             --------  --------
   Net deferred tax asset................................... $    --   $    --
                                                             ========  ========
</TABLE>

                                     F-22
<PAGE>

                                BE INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Due to uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its net deferred tax assets. The valuation allowance increased $9.4
million in 2000, $7.9 million in 1999 and $6.0 million in 1998.

  The principal items accounting for the difference between income taxes
benefit at the U.S. statutory rate and the benefit from income taxes reflected
in the statement of operations are as follows (in thousands):

<TABLE>
<CAPTION>
                                                       2000     1999     1998
                                                      -------  -------  -------
   <S>                                                <C>      <C>      <C>
   Federal benefit at statutory rate................. $ 7,192  $ 8,332  $ 5,901
   Nondeductible expenses............................    (890)  (2,242)  (1,419)
   Net operating losses and benefits.................  (6,302)  (6,090)  (4,482)
                                                      -------  -------  -------
                                                      $   --   $   --   $   --
                                                      =======  =======  =======
</TABLE>

  At December 31, 2000, the Company had approximately $73,407,000 of net
operating loss carryforwards and $1,272,000 of research and development
credits to offset future federal income taxes. The Company also had
$43,430,000 of net operating loss carryforwards and $498,000 of research and
development credits to offset future state income taxes. In addition to the
net operating loss carryforwards referred to above, there are approximately
$6,944,000 and $3,473,000 of net operating loss carryforwards for federal and
state purposes, respectively, as of December 31, 2000, which relate to stock
option deductions. The tax benefit of these additional losses will be credited
to additional paid in capital if the Company's deferred tax asset is
recognized. These carryforwards expire in the years 2005 through 2020 if not
utilized. Due to changes in ownership, the Company's net operating loss and
credit carryforwards may become subject to certain annual limitations.

Note 9--401(k) Profit Sharing Plan:

  The Company has a 401(k) Profit Sharing Plan which covers all employees.
Under the Plan, employees are permitted to contribute up to 15% of gross
compensation not to exceed the annual limitation for any plan year ($10,500 in
2000). Discretionary contributions may be made by the Company. No
contributions were made by the Company during 2000, 1999 and 1998.

                                     F-23
<PAGE>

                                BE INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 10--Geographic Information:

  Management uses one measurement of profitability for its business. The
Company markets its products and related services to customers in the United
States, Europe and Asia.

  All long lived assets are maintained in the United States. Revenue
information by geographic area is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                    Net Revenues
                                                                    ------------
     <S>                                                            <C>
     2000
       Americas....................................................    $  370
       Europe......................................................        36
       Asia........................................................        74
                                                                       ------
         Total.....................................................    $  480
                                                                       ======
     1999
       Americas....................................................    $1,156
       Europe......................................................       755
       Asia........................................................       745
                                                                       ------
         Total.....................................................    $2,656
                                                                       ======
     1998
       Americas....................................................    $  565
       Europe......................................................       194
       Asia........................................................       440
                                                                       ------
         Total.....................................................    $1,199
                                                                       ======
</TABLE>

                                     F-24
<PAGE>

                                                                     SCHEDULE II

                                BE INCORPORATED

                       VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)

<TABLE>
<CAPTION>
                                               Additions
                                    Balance at Charged to            Balance at
                                    Beginning  Costs and             Ending of
                                    of Period   Expenses  Deductions   Period
                                    ---------- ---------- ---------- ----------
<S>                                 <C>        <C>        <C>        <C>
Year Ended December 31, 1998
  Allowance for sales return.......  $   --      $   17      $  7     $    10
  Deferred tax asset valuation
   allowance.......................  $ 6,098     $5,982      $ --     $12,080

Year Ended December 31, 1999
  Allowance for sales returns......  $    10     $  --       $ --     $    10
  Deferred tax asset valuation
   allowance.......................  $12,080     $7,889      $ --     $19,969

Year Ended December 31, 2000
  Allowance for sales returns......  $    10     $  --       $ --     $    10
  Deferred tax asset valuation
   allowance.......................  $19,969     $9,395      $ --     $29,364
</TABLE>

                                      F-25