<PAGE>

                                 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, 1999

          [_]  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 Identification No.)
     incorporation or organization)

               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 29, 2000, was
approximately $349,674,946.

The number of shares of Common Stock outstanding as of February 29, 2000 was
35,616,899.

                      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, 1999) are incorporated
herein by reference into Part III (Items 10, 11, 12 and 13) of this Report.
<PAGE>

                                BE INCORPORATED

                            FORM 10-K ANNUAL REPORT

                           FOR THE FISCAL YEAR ENDED
                               DECEMBER 31, 1999

                               Table of Contents

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

Item 1.   Business............................................................................................

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

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

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

PART II

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

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

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

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

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

PART III

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

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

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

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

PART IV

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

Signatures....................................................................................................
</TABLE>
<PAGE>

                                    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, "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

     We offer software platforms designed for Internet appliances and digital
media applications. Our two software platforms are (i) BeIA, a turnkey
integrated software platform and development tools that enable the creation of
customized Internet appliances, and (ii) BeOS, our desktop operating system
optimized for digital media applications. Our core operating system technology
was developed based on a modular architecture and includes key features such as
pervasive multithreading, protected memory and symmetric multiprocessing. We
have incorporated technology from our core operating system, BeOS, into BeIA,
our software platform designed for a new class of information and entertainment
appliances, often referred to as Internet appliances. An Internet appliance is a
dedicated device designed to specifically 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 transparent and
responsive interface.

     An increasing number of companies have announced products or plans for
development of products intended for the Internet appliance market. We believe
the market for Internet appliances is growing and BeIA presents a complete
software platform for Internet appliances and provides us with significant
opportunities in this market.   In January 2000, we announced that we would be
shifting our resources to more effectively address this market.  We also
announced that we would provide a version of BeOS for personal use at no charge
and would work with third party publishers to distribute a commercial version of
BeOS.

Background


     Overview of Operating Systems

          Operating systems are computer programs that control the functions of
computing devices such as PCs and Internet appliances and coordinate the
interaction of the computer with applications, peripheral devices, such as
printers, network connections and other computers.  Resident in every computer,
operating systems provide the interface by which a user instructs the computer
to perform specific tasks and manage key processes inside the system such as
file storage and maintenance, memory usage and processor activity.

          Operating systems have evolved from complex, character-based systems
that required significant technological sophistication to operate into modern,
graphical user interface-based systems such as Microsoft Corporation's Windows
family of operating systems and Apple Computer, Inc.'s MacOS. Improvements in
operating system functionality and ease of use have had far-reaching effects on
the PC industry, yet the underlying purpose of operating systems has changed
little. In general, traditional operating systems are designed to be general-
purpose platforms upon which a wide variety of applications and systems can
function.
<PAGE>

     Growth of PCs

          Once used primarily for business-oriented tasks or by technically
oriented enthusiasts, PCs are now prevalent and are employed in a wide array of
applications that range from industrial manufacturing to home entertainment.
Advances in the capabilities of PCs have allowed users to run applications that,
previously, were beyond the reach of the preceding generation of PCs. In order
to deliver and support advanced capabilities of new PCs hardware, developers of
operating system software must continuously add functionality. Recognizing the
inherently complex nature of operating systems, the significant time required to
develop them and the importance of providing support for legacy applications,
operating system developers often elect to add capabilities through an
incremental process rather than effect a fundamental redesign of the software.
This design process has helped contribute to a significant increase in the size
of the operating system and the applications that run on them.

           While users have generally benefited from the improvements made in
operating systems, the increasing size of these programs has diminished users'
ability to fully participate in the benefit from the advancement in the
price/performance of PCs.  The incremental addition of features has often
created slower, less stable and much larger applications than a newly
architected design could.  As a result, users frequently are required to perform
costly upgrades to their systems or to purchase more expensive hardware simply
to run newer versions of operating systems and applications.  Similarly, newer
versions of operating systems can create conflicts with legacy devices and
applications, resulting in significant support costs for users and vendors
alike.

          While PCs do many things well, they do not necessarily fit all uses of
computing--in their interface design, form factor, location in the home or
office, or input/output options. Consumers find that they want tailor-built
devices for communicating, gathering information and being entertained. 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 that the same trend will hold
true in the Internet space. Users will want to have access to the information
and media on the Internet, but will choose to do so on devices built for
specific uses. For example, a consumer might want to listen to music coming from
their CD collection or streaming from the Internet played on his home stereo
rather than on his PC.  The optimal device will need to be able to take
advantage of new audio formats, connect to other points in the home for playback
and enhance the audio signal in new ways. A PC running a general-purpose
operating system is burdened by too many other processes and duties to be an
efficient solution for this use.

     Impact of the Internet on PCs and Operating Systems

          The widespread growth of the Internet has also impacted PC growth
dramatically. Using PCs in conjunction with dial-up modems, local-area networks
and, increasingly, high-speed broadband access technologies such as cable modems
and Digital Subscriber Lines ("DSL"), the number of individuals on the Internet,
according to market research firm International Data Corporation ("IDC") is
expected to grow from approximately 100 million in 1998 to approximately 319
million worldwide by the end of 2002.  Strong growth in the number of Internet
users has translated into strong gains in PC sales since PCs, today, are the
principal Internet access platform.  However, the Internet is changing the
economics of both the PC and Internet Service Provider ("ISP") markets
suggesting that PC OEMs, application developers and ISPs will require new
solutions for Internet computing.

          The increasing number of Internet users has affected the PC and
operating systems markets in several ways. Many Internet users are interacting
with PCs, and the operating systems that control them, for the first time. These
users often lack sufficient technical skills or experience to configure, operate
and manage the complex nature of an Internet-connected PC and frequently must
seek technical support from hardware and software vendors or their ISPs. Besides
being a time-consuming and an often frustrating experience for the user,
technical support calls are costly to service providers and vendors. Those
support calls add significantly to PC OEMs' and ISPs' cost structures.

          Also, many of today's applications that access the Internet capitalize
on the Internet's rich media capabilities and require expensive PCs and
peripherals to overcome the limitations of traditional general-purpose operating
systems. While the overall price of PCs continues to decline, Internet users
often must purchase and support more capable PCs to take full advantage of the
Internet. The cost of PC hardware and software, 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.

          As Internet connectivity becomes increasingly essential, a number of
trends are developing among users, PC OEMs and ISPs. These trends include an
increasing prevalence of users with multiple connections to the Internet and an
emphasis of low-cost, purpose-built Internet access devices. PC OEMs and ISPs
are increasingly challenged to deliver a continuously improving user experience
and better functionality, while operating within the constraints of the highly
competitive PC industry. All types of appliances are becoming networked within
the home. Broadband and persistent Internet connection continues to be rapidly
<PAGE>

deployed at the consumer level. New types of inexpensive devices that deliver a
rich, trouble-free Internet experience will become increasingly important as
vendors and users alike balance cost, ease-of-use and performance.

     Emergence of the Internet Appliance

          Recognizing that cost and ease-of-use are the principal barriers that
PC OEMs and ISPs 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 addition to being inexpensive to manufacture and support, these new
types of devices must deliver a user experience comparable with other consumer
electronics products, offering significant speed, reliability and stability.
Further, they must support an array of services including broadband access, high
quality video and audio capabilities and expandability. These new classes of
devices have been broadly termed Internet Appliances and typically function in
one or more of the following three categories: communication, information and/or
entertainment.

          Industry analysts define Internet appliances as a range of new form of
products that are consumer-focused, low-cost, easy-to-use, and primarily
designed to deliver the interactive benefits of the Internet or an Internet-like
service, like Web browsing and email. The appliances offer direct Internet
connectivity and enable users to work interactively with the Internet. Various
types of Internet appliances include set-top boxes, Internet screen-phones,
Internet gaming consoles, Internet smart handheld devices, and Web and email
terminals.  IDC estimates that the number of Internet appliances will increase
from 11 million units at a value of $2.4 billion in 1999, to 89 million units at
a value of $17.8 billion in 2004, a compound annual growth rate of approximately
33% and 39%, respectively.

     Key Requirements of Internet Appliances

          While Internet appliances will vary in form and function, we believe
that a core set of functionality is necessary for any type of Internet appliance
to succeed. An Internet appliance must provide users with robust and stable
performance at an affordable cost. Internet appliances must be able to access
and deliver many types of content available on the Internet. To lower overall
system costs, device providers are seeking alternatives to traditional PCs that
do not utilize expensive central processing units and operating systems, such as
Windows. Device and service providers often lack the necessary resources or time
to develop their own customized software platforms. These companies desire a
turnkey customizable software platform that meets their needs and shortens their
time to market. We believe the key features desired of an Internet appliance
software platform to be the following:

     .    Modular, small footprint operating platform;

     .    Scalable for larger applications, quickly upgradeable and extensible;

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

     .    Reliability and stability equivalent to other mainstream consumer
          appliances;

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

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

     .    Integrated, full-featured Web browser and support for JavaVM and other
          popular plug-ins;

     .    Built-in support for broadband access technologies like cable modems
          and DSL;

     .    Ability to run on multiple hardware reference designs; and

     .    Modern development environment allowing rapid adoption of highly
          customized final applications and functions .

     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.
<PAGE>

          The majority of traditional operating systems used today, for example
Windows, are marketed as a distinct product that cannot be modified or
customized 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.

     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 not as
scalable for larger applications and 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 platform they
need for their appliances.

The Be Solution


          We offer software platforms designed for Internet appliances and
digital media applications. To address the emerging needs of device and service
providers, we have developed BeIA, a turnkey integrated software platform and
development tools that enable the creation of customized Internet appliances.
The combination of an efficient customizable operating system with small memory
footprint designed for fast and reliable performance, makes BeIA the ideal
software platform for Internet appliances. For personal computers, we offer
BeOS, an operating system designed to deliver the most satisfying experience on
a personal computer. The key features and benefits of our two products are
further set forth below.

     BeIA

          Our BeIA software platform is designed to seamlessly interact with the
hardware and other applications to provide the high level of responsiveness and
stability that users typically experience and expect from consumer electronics
devices.  The modular nature of BeIA allows developers and manufacturers of
Internet appliances and related hardware and systems, referred to as "device
providers," to incorporate only those features of BeIA required for a particular
device, to deliver specific content and to meet the cost target for each
particular device. Device providers can include PC OEMs, consumer electronic
companies, system integrators, and other device and hardware manufacturers,
known as "ODMs".

          Using BeIA, companies providing Internet access and other Internet
related services, referred to as "service providers," and device providers can
develop services and products tailored to specific markets without compromising
the quality, stability and performance of the devices delivered to the user. In
addition, BeIA offers the device and service providers the ability to customize
the device's user interface, so that they can create an experience appropriate
for each device's target customer and use. BeIA maintains system stability,
media quality and processor performance while allowing end users to
simultaneously operate multiple audio, video, image processing and Internet-
based software applications. BeIA offers a full-featured Web browser and
supports popular streaming audio and video standards.

     BeOS

          BeOS, our desktop operating system product, is designed to optimize
the higher processing and memory requirements of today's digital media
applications on standard PC hardware. It provides professional users and
enthusiasts with a responsive environment to quickly and easily develop
applications and create digital content such as audio, video, animation and
images. It enables users to work with and edit audio, video and image files
millions of gigabytes in size, simultaneously, in real-time. BeOS scales to meet
the needs of the end users and PC OEMs, and easily facilitates the integration
of new technologies. BeOS can take advantage of up to eight processors
automatically.
<PAGE>

Strategy


          Our principal strategy is to establish BeIA as the premier software
platform for appliances that deliver information and entertainment over the
Internet. We intend to establish relationships with industry leading device
manufacturers and service providers to create Internet appliances based on our
software platform and to further enhance and promote BeIA as the platform of
choice for Internet appliances. The key elements of our strategy in the Internet
appliances market are the following:

          Leverage Our Technology and Capabilities. We developed our core
operating system technology over the course of nine years and 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 containing rich
media capabilities with a small foot print. We will continue to innovate BeIA's
capabilities to include additional modular functionality, a smaller footprint,
and provide portability to new device platforms.

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

          Increase awareness of BeIA to service providers. We believe service
providers 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 to offer Internet appliances specifically geared to
their customer base. 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 services. In
addition, we will encourage partnerships between the service providers and those
device providers utilizing our software platform.

          Focus on strategic product development activities.  Since the Internet
appliance market is emerging and still somewhat undefined, we believe that our
success will be dependent on monitoring the trends and demands in the Internet
appliances market and working closely with device and service providers to
address these demands and design compelling products that will be adopted by a
large number of users.

          In the desktop market, we intend to increase the market acceptance of
BeOS, and the number of third party applications through new distribution
models. We intend to increase our market reach by offering BeOS Personal
Edition, a fully functional version of our desktop operating system for free,
via download from the Web. Additionally, we will work with third party
publishers to market, sell and support BeOS Pro Edition, a commercial version
of BeOS with added functionality. It is our belief that once users and
developers have experienced BeOS, they will fully appreciate its advantages as
an operating system and a platform for Internet appliances. We also believe
this will facilitate wider adoption of BeOS as a modern operating system for
digital media applications. Additionally, an increase in the number of BeOS
users could stimulate third party development of software drivers,
technologies and applications for BeOS.

Products and Technologies

     BeIA

          We offer BeIA, a turnkey integrated software platform and development
tools that enable the creation of customized Internet appliances. BeIA provides
device and service providers with all necessary client-side software and
services to deliver a complete Internet appliance solution. Standard features
include a full-featured Web browser with support for third party plug-in
applications, a Java virtual machine, a modern development environment, as well
as media and other application and integration services. BeIA incorporates
support for rich media, broadband connectivity and hosted applications, such as
email and personal information management. Incorporating technology from our
core operating system, BeOS, BeIA is designed to deliver stable, highly
responsive performance on a broad range of Internet appliances. The customizable
nature of BeIA allows our customers to create custom-branded environments and
unique user interfaces that can be tailored to specific target audiences without
additional programming. BeIA delivers high levels of system performance without
requiring costly, power-intensive processors. Its code base is small in size and
can be loaded onto inexpensive, low-capacity flash memory, further reducing
system hardware costs. Key features of BeIA include:
<PAGE>

     .    Modular with small footprint. BeIA operates on a wide range of
          hardware systems, giving device providers many price and functionality
          choices. Device providers can create Internet appliances using only
          those pieces necessary for a given device while staying within its
          cost considerations. The complete BeIA platform with all features,
          including Web browser, plug-ins, Java, user-interface and more,
          enables a fully-featured appliance that needs only 8MB of flash memory
          storage.

     .    Stable and responsive environment.  BeIA offers users a highly
          responsive and stable experience that users typically expect from
          consumer electronics devices. It requires no rebooting for
          configuration changes and is relatively crash proof. Operating in a
          broadband environment, BeIA allows instant availability and response
          from the user interface at all times regardless of demands on the
          device and it provides responsive, glitch-free playback of all popular
          media.

     .    Scalable.  Device providers can easily build more robust solutions and
          add new functionality over time or as new technologies are adopted by
          the market. BeIA provides support for new protocols like USB and
          IEEE1394 to give developers the ability to add new functionality.
          Finally, through BeIA's application and server services, user
          functionality can be moved from the appliance device itself to a
          hosted application-based server environment.

     .    Easily customizable.  Device providers can completely control the user
          experience and branding "look and feel" of the device interface. HTML
          and Macromedia Flash front-end framework allows designers with
          standard web development tools to rapidly complete and modify their
          design work. Device and service providers can easily update the
          device's look, feel, branding and functionality remotely from a
          server. BeIA supports JavaScript which enables further customization
          of devices and support for hosted applications. We also provide a
          native development environment which runs on standard PC's, providing
          quick, inexpensive development and rapid time to market.

     .    Rapid remote upgradability.  BeIA's fast and clean development
          environment and modular, real-time operating system enables device
          providers to change, update and augment the consumers' appliances
          remotely without any customer involvement or hassle. This means that
          as new technologies emerge, older appliances do not necessarily need
          to be replaced or upgraded by the user. The provider of the device can
          carry out changes to the system without any user involvement.

     .    Integrated full-featured browser; Media Savvy, Supports all popular
          formats. BeIA'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. BeIA delivers an immersive, media-
          rich experience that allows inexpensive devices to take full advantage
          of upcoming streaming media portals, as well as the ability to combine
          Internet access with existing media services such as cable TV and FM
          radio. BeIA includes RealNetworks' RealPlayer G2 for audio and video
          streaming, Macromedia's Flash and Sun's Java Virtual Machine. BeIA
          supports QuickTime, AVI, WAV, MPEG, MP3 and other formats that enable
          exciting additions to regular Web content.

     BeOS

        We also offer BeOS, an operating system designed for digital media
applications. BeOS maximizes the performance of digital media applications that
run on a wide 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. The combination of an efficient, new operating system design
for fast performance and rich digital media applications make BeOS an ideal
solution for both processor-intensive applications and lower-cost PC platforms.
Key elements of BeOS include:

     .    Optimized Design for Digital Media Applications. BeOS is designed
          specifically to enable high-performance audio and video applications
          on a wide range of personal computing devices. BeOS is optimized for
          media manipulation and playback and employs features that provide a
          stable, accessible environment for the use and development of digital
          media applications and content. BeOS also employs an advanced, 64-bit
          file system to meet the file size and bandwidth requirements of
          digital video applications.

     .    Support for Simultaneous Use of Multiple, Processor-Intensive
          Applications. BeOS allows software applications to be partitioned into
          multiple compact execution units called "threads" and allows these
          threads to be automatically executed as required by the application
          and system load. BeOS is able to distribute these threads among one or
          more processors, giving priority to media tasks performed on the
          system. This, together with the other features of BeOS, allows
          simultaneous use of multiple, processor-intensive applications,
          editing and playback of uncompressed, high-
<PAGE>

          resolution video and audio files, and increased efficiency and
          performance of all applications running on the system. In addition
          BeOS delivers optimized performance on hardware with one to eight
          processors.

     .    System Performance and Stability. BeOS is designed to reduce operating
          system overhead to a minimum. It makes extensive use of shared code,
          resulting in the creation of smaller, faster applications. A key
          element of BeOS' performance and stability is its journaled file
          system. This file system provides added levels of protection against
          corrupted files and reduces start-up time. BeOS' journaled file system
          differentiates it from the leading desktop operating systems.
          Furthermore, BeOS provides fully protected memory, which increases
          operating system stability and helps prevent a crashing application
          from affecting other applications running on the system or causing a
          full system crash that requires a reboot.

     .    Modular, Flexible Architecture. BeOS is based on a modular design that
          allows new software features, such as drivers, audio and video
          compression and depression algorithms, known as "codecs," and
          additional file system support to be used immediately after
          downloading these features onto the system. Using BeOS, manufacturers
          and users can update and reconfigure their systems through the
          Internet or other networks without the need to "re-boot" the system.
          This modular approach also allows OEMs to incorporate only those
          elements of BeOS needed for a particular application or device,
          facilitating the creation of new user functionality and allowing OEMs
          to address specific price points and markets.

     .    Modern, Object-Oriented Development Environment for Media
          Applications. BeOS uses a modern C++ based architecture that enables
          programmers to quickly create stable, robust, high-performance media
          applications. BeOS development kits allow anyone to write hardware
          drivers, media add-ons and custom applications on standard PCs. Device
          builders can develop complete solutions for many types of applications
          using the services found in BeOS.

Marketing, Sales and Customers


     Our sales and marketing group is dedicated to defining the most compelling
software platform solutions, establishing relationships with industry leading
device and service providers to create Internet appliances based on our software
platform and to further enhance and promote BeIA as the platform of choice for
Internet appliances.

     A key ingredient of a compelling software platform 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. We have entered into an
          agreement with Opera to integrate their Web browser with our products,
          and to distribute it as a component of both BeIA and BeOS.

     .    RealNetworks, Inc. We signed a license agreement with RealNetworks, a
          leader in streaming media technology on the Internet, to enable its
          RealPlayer G2 product to run on our products. RealPlayer G2 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. We have signed a license agreement with Sun
          Microsystems for its PersonalJava technology which is integrated into
          BeIA and the Java2 Standard platform, intended for integration with
          BeOS. Java technologies will allow users of a wide range of Internet
          appliances and PCs running on our software platforms 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 platforms. Intel has
          provided us with technical specifications and software under a license
          to a commonly used communication protocol for peripheral devices,
          known as Universal Serial Bus (USB) and to Indeo, a technology that
          enables compression and decompression of video data. This allows our
          products to be compatible with devices and applications that use these
          technologies. Additionally, Intel has assisted us in developing
          relationships with current and potential partners.
  BeIA

     We market and sell BeIA by actively pursuing relationships among four broad
classifications of customers and strategic partners: Original Device
Manufacturers (ODMs), Original Equipment Manufacturers (OEMs), Service Providers
and Integrators.
<PAGE>

     "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
that meets 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 that it manufactures.  Since ODMs are the
primary producers of the key components and systems used in the Internet
appliances, it is important that BeIA run on their hardware and system designs.
Similar to ODMs are the reference platform designers, however, these designers
do not typically manufacture devices. Many of the components used by ODMs are
based on designs provided by reference platform designers, so it is similarly
important for BeIA to run on or support their reference platforms. Our
relationship with ODMs and reference platform designers is typically symbiotic
in nature where we share common or parallel business goals.  As a result we
often participate in joint sales and marketing activities, but a contractual or
customer relationship is not necessarily formed. Our efforts are targeted to
ensure that the reference platform designs and the resulting ODM product designs
will run on our software platform and that the products featuring our software
platform are ultimately adopted and marketed by OEMs and service providers.  The
following are some of our existing relationships with ODMs and reference
platform designers:

     .    First International Computer, Inc. FIC is one of the leading PC
          motherboard and system vendors based in Taiwan, ROC. FIC recently
          extended its research and development, and manufacturing to include a
          new family of subsystems for Internet appliances and is working
          closely with us to offer BeIA as the operating system software
          platform for these systems.

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

     .    DT Research, Inc. We are working together with DT Research to ensure
          that BeIA is fully integrated with DT Research's family of Internet
          appliances that are based on National Semiconductor's Geode WebPad
          reference platform.

     .    Intel Corporation. We are working with Intel to optimize BeIA to
          provide a reference platform for manufacturers wishing to build low-
          cost, high-performance home audio devices using Intel's Celeron
          processor. The platform is intended to enable the creation of audio
          appliances that support several audio encoding and playback features.
          These features include managing and using a wealth of audio content
          like compact discs and audio streamed from the Internet, sending
          multiple streams of audio to a variety of locations in the home, and
          support for home networking products.

     .    Proxim, Inc. We recently announced a cooperative technology and
          marketing effort to jointly integrate Proxim's HomeRF wireless
          networking technology with BeIA. Proxim and Be plan to offer a
          seamless wireless extension to BeIA, enabling Web pads and other
          Internet appliances and dedicated devices to distribute media and
          share broadband Internet access wirelessly in and around the home.

     "OEMs" are the device manufacturers most recognized by the public.
Typically, OEMs are the companies that actually 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 platform to meet the OEM's customer
needs. Our relationship with OEMs is typically a contractual relationship where
the OEM pays us per-unit royalties for each appliance delivered incorporating
BeIA. Some of our OEM customers include:

     .    Compaq Computer Corporation. We recently signed an OEM agreement with
          Compaq, a leading PC and device company, that allows Compaq to pre-
          install and distribute BeIA on Compaq's Internet appliances.
          Initially, Compaq is marketing these devices to telecommunications
          companies, Internet service providers, and Web content providers. In
          addition, we are working with Compaq on joint marketing and
          development initiatives.

     .    Qubit Technology. Qubit has entered into an OEM agreement with us
          where Qubit intends to use BeIA as the software platform for its
          wireless Web Tablet. Additionally, we are engaged in collaborative
          sales, marketing and development efforts with Qubit. Qubit is working
          with organizations that include financial and telecommunications
          companies who are expected to bring these devices to market.

     .    Fountain Technologies Inc. Fountain has entered into an OEM Agreement
          with us that allows Fountain to distribute Internet appliances using
          BeIA as its software platform.
<PAGE>

          "Service providers" is a term describing 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 services providers might be ISPs, financial
institutions, retailers and telephone companies. Service providers typically
already have relationships with consumers, and look to an Internet appliance to
expand their reach or to help ensure that their consumers remains 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, and will make recommendations for future features and
enhanced functionality. Currently, our relationships with service providers are
fostered through our OEM customers.

          The term "Integrators" describes a group of 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 BeIA's scalability, its 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.

     BeOS

          We have adopted a two-tiered approach for distributing and selling
BeOS, our desktop operating system that will enable us to concentrate our
resources on development and let other, well-focused third parties handle
distribution and consumer marketing.

     .    BeOS Personal Edition. BeOS Personal Edition is a free, easy-to-
          install, fully functional version of BeOS. Anyone using Windows can
          download it in a single file directly from our Website and install it
          on their Windows system. Although BeOS Personal Edition is a fully
          functional version of BeOS, it does not include some third party
          royalty-bearing technologies. The free distribution approach is aimed
          at getting BeOS in the hands of as many users as possible. It is our
          belief that once users and developers have experienced BeOS, they will
          fully appreciate its advantages as an operating system and a platform
          for Internet appliances. We also believe this will facilitate wider
          adoption of BeOS as a modern operating system for digital media
          applications. Additionally, an increase in the number of BeOS users
          could stimulate third party development of software drivers,
          technologies and applications for BeOS.

     .    BeOS  Pro Edition. BeOS  Pro Edition is our enhanced, full-featured
          version of BeOS available on CD-ROM. It will be made available to PC
          OEMs, value-added software developers, other software vendors,
          distributors and end users through several third-party publishers
          worldwide. These publishers will package and license the product, and
          will handle all marketing, sales, and end-user support. Also, these
          publishers may choose to add additional software and services.

Competition


          The markets in which we compete are highly competitive and rapidly
changing.  Our principal competition in the operating system software platform
market consists of operating system and software platform developers.

          We believe the principal competitive factors impacting the market for
BeIA are:

     .    partnerships with device and service providers;

     .    key technological features and capabilities of the software platforms;

     .    technical, financial and marketing resources; and

     .    the overall number of users.

          In addition to the above competitive factors, we believe additional
competitive factors impacting the market for BeOS are:

     .    strength of publisher partnerships, and reseller and distribution
          channels; and

     .    the number and strength of third party applications available for use
          on the software platform.
<PAGE>

          Many of our current and potential competitors have longer operating
histories,  significantly greater number of customers, a greater number of
popular applications and tools specifically designed for their operating
systems, greater brand recognition, and greater financial, technical, marketing
and distribution resources than we do. This may allow them to compete more
favorably than we do with respect to some or all of the above factors.

          New product releases or improvements in our competitor's existing
operating systems could enable these operating systems to more effectively
address the needs of developers and manufacturers of Internet appliances or the
requirements for use of digital media in a manner similar to those offered by
our products. For example, enhancements and features could be added to
Microsoft's Windows operating system, Apple's Mac OS, or UNIX based operating
systems such as Linux which could significantly reduce or eliminate any
perceived advantages in our software platforms over these competitors.

     BeIA

          In the market for Internet appliances, there is increased competition
to offer non-PC devices that provide access to the Internet and enable digital
media content on the Internet. Companies such as Microsoft Corporation, QNX
Software Systems Ltd., Wind River Systems, 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 such as WebTV, a subsidiary of Microsoft. Many of these companies
have an established market presence, relationships with device and service
providers who will develop and market Internet appliances, and have
significantly greater financial, marketing and technical resources than we do.

     BeOS

          In the desktop operating system market, we face competition from a
number of companies with significantly greater financial, marketing and
technical resources. The desktop operating system market has historically been
led by Microsoft Corporation, which has captured significant market share and
has significantly greater resources than we do. Other companies that offer
competing desktop operating systems include Apple Computer, Inc., IBM, and a
number of companies that offer versions of the UNIX operating system, including
SGI, the Hewlett-Packard Company, and Sun Microsystems. The open-source public
collaboration version of UNIX known as Linux is also a competing operating
system.

Product Development and Engineering


          Our product development and engineering efforts are focused primarily
on enhancing the functionality, flexibility, performance and reliability of
BeIA. We also continue to develop BeOS as a software development platform for
Internet appliances and as a promotional opportunity for the capabilities of
BeIA.

          We spend considerable resources on the development of core
technologies and new capabilities. Internet technologies are evolving at a rapid
pace and it is important that 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 also expend resources to prototype advanced product concepts for
Internet appliances.

          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 that 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 which is available to our customers via a Web interface.

          In 1997, 1998, and 1999 our research and development expenses were
approximately $4.4 million, $5.8 million, and $7.8 million, respectively.
<PAGE>

Employees

          As of December 31, 1999, we had 105 employees. Of these employees, 34
are in sales and marketing, 54 are in product development and engineering and 17
are in general and administrative. We consider our employee relations to be
good.

Facilities

          We lease approximately 26,829 square feet in Menlo Park, California.
We also lease approximately 2,184 square feet in Paris, France to focus on
channel distribution, sales to OEMs, and third party developer relations and
recruitment. We believe that our current facilities are adequate to meet our
needs for the next twelve months.

   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 and $24.5 million in 1999. As of December 31, 1999,
we had an accumulated deficit of approximately $73.2 million. We expect to incur
significant additional losses and continued negative cash flow from operations
in 2000 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. Sales of BeOS,
our desktop operating system, to resellers and distributors and direct sales to
end users have accounted for the primary source of our revenues to date. In
January 2000, we announced that we would be shifting our resources to focus
primarily on the market for Internet appliances. We also announced that a
version of BeOS would be made available for personal use at no charge and a more
fully featured version would only be available through third party publishers.
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 have recently announced that we will shift our resources to focus
primarily on a new and undeveloped market.

          We have recently announced that we will be shifting our resources to
focus primarily on the market for Internet appliances and the further
development and marketing of BeIA, our software platform 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;
     .    management distraction and loss of key personnel as we focus on this
          market and shift resources towards the development and marketing of
          our software platform 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 platform for
Internet appliances. The market for Internet appliances is new, unproven and
subject to rapid technological change.
<PAGE>

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 platform
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., 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 platform. These more established companies,
together with a large number of smaller companies who offer software platforms
that 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 platform over these
competitors and could reduce market acceptance for our software platform 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 platform. 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 Internet service
and content providers. In the Internet appliance market, we have agreements with
Compaq Computer Corporation, Qubit Technology and Fountain Technologies Inc.,
and collaboration arrangements with National Semiconductor, Inc., First
International Computer, Inc. (FIC), and DT Research, Inc. We cannot be certain
that 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 platform. 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 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
Compaq, Qubit and Fountain, and arrangements with our other strategic partners
including National Semiconductor and FIC, 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
<PAGE>

market products based on our software platform. 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 that that these manufacturers and
service providers will incorporate our software platform 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 platform. We have little
or no ability to influence the development and marketing efforts of our
customers and customers may fail to dedicate adequate resources necessary to
successfully develop and market products based on our software platform.

     We expect long sales cycles associated with our software platform 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 the software platform
represents a significant product decision for the developers and manufacturers
of Internet appliances and we expect long sales cycles as we collaborate and
educate customers and partners on the use and benefits of our software platform.
We similarly expect that customers and partners will spend a significant amount
of time performing internal reviews and testing our software platform before
accepting and adopting our product. Any failure to gain acceptance for our
software platform 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 platform 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 platform 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 platform, we announced that a version of BeOS
will be made available for personal use. Despite these efforts, we may not
experience any significant increase in the number of BeOS users or a broader
market acceptance of our software platform and developers may decide not to
adopt or develop products based on our software platform.

          We may be unsuccessful at marketing BeIA as the software platform 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, 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 platform 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.
<PAGE>

     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 January 2000, we announced that a version of BeOS would be
available for personal use at no charge. We also announced that we would make
the commercial version of BeOS available through third party publishers. Our
intent is to license the commercial version of BeOS to third party publishers
and that these publishers would be responsible for the packaging, sales,
marketing and support related to the commercial version. 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.


     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 platform,
          especially to leading developers and manufacturers of Internet
          appliances;
     .    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 platform. 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 platform
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 platforms that contain new technologies
and the emergence of new industry standards could render our products less
desirable or obsolete. In particular, we expect that 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
platform 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
platform 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.
<PAGE>

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

          We currently believe that our existing capital resources, combined
with the net proceeds of this offering, will be sufficient to meet our presently
anticipated cash requirements for at least the next 12 months. However, we may
need to raise additional capital and we cannot be certain that we will be able
to obtain additional financing on favorable terms, if at all. If we cannot raise
additional capital on acceptable terms, we may not be able to expand our sales
and marketing efforts, further develop or enhance our products, take advantage
of future opportunities or respond to competitive pressures or unanticipated
requirements. Any of these events could have a material adverse effect on our
business and results of operations. 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.

     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 fixed and 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-cancellable 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;

     .    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.

     The demand for our software platform 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.
<PAGE>

     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
platform, we have recently announced that a version of BeOS will be made
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 manufactures 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 platform 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 success depends upon availability of third party applications that
operate on our software platform.

          Demand and market acceptance for our products will depend upon the
availability of an increasing number of third party applications that operate on
our software platform. These applications include video and audio editing, 3D
games, creative audio and video content development and manipulation, and
personal productivity applications.

          In part to encourage the development of an increasing number of
applications that operate on our software platform and to increase market
acceptance for our products, we have announced that a version of BeOS will be
made available for personal use at no charge. However, providing a version of
BeOS to end-users for free may not result in any significant increase in the
number of BeOS users and third party developers, which are generally under no
obligation to develop applications based on our software platform, may not
increase their development of applications that run on our products. A
developer's decision to write applications for our software platform is based in
part on the perception and analysis of the relative technical, financial and
other benefits of developing applications for our platform versus writing
applications for more popular operating systems such as Microsoft's Windows,
Apple's Mac OS, Palm OS, or Linux. If we fail to attract a sufficient number of
application developers who develop and market successful applications on out
software platform, the demand for our products and our business will suffer.
Moreover, any delay or unsuccessful release of third party applications could
have a material adverse effect on our business and results of operations.


     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.

          We must expand our sales and marketing efforts aimed at computer and
consumer electronic companies, systems and hardware manufacturers, and Internet
service and content providers. Without this increase we may be unable to
increase sales and market acceptance of our software platform. This would
require a sophisticated sales force and the commitment of significant
<PAGE>

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 will need 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.

          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 recently 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
platform 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.
<PAGE>

     We depend on key personnel and attracting qualified employees for our
future success.

          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 and 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, 1999, we had 105 employees. We anticipate that the
number of employees may increase during the next 12 months as we increase our
research and development activities and sales and marketing efforts. Our success
depends upon our ability to attract and retain additional highly qualified
senior management and technical, sales and marketing personnel to support
growing operations. Competition for qualified employees is intense. 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. The loss of key
personnel or our inability to attract additional qualified personnel to
supplement or, if necessary, to replace existing personnel, could have a
material adverse effect on our business and results of operations.


     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.


     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 no patents 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
platform 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.
<PAGE>

     We face risks relating to our online operations.

          A significant barrier to widespread use of electronic commerce sites,
such as our BeDepot.com Web site, is concern regarding the security of
confidential information transmitted over public networks. We rely on encryption
and authentication technology licensed from third parties to provide the
security and authentication necessary to effect secure transmission of
confidential information, such as customer credit card numbers. Concerns over
the security of transactions conducted on the Internet and the privacy of users
may also inhibit the growth of online services, especially as a means of
conducting commercial transactions. Our failure to prevent any security breaches
may have a material adverse effect on our business and results of operations.

          Despite our efforts to protect the integrity of our Web site and
products sold on it, a party may be able to circumvent our security measures and
could misappropriate proprietary information or cause interruptions in our
operations and damage to our reputation. Any such action could negatively affect
our customers' willingness to engage in online commerce with us. We may be
required to expend significant capital and other resources to protect against
these security breaches or to alleviate problems caused by these breaches. If
any compromise of our security were to occur, it could materially adversely
affect our reputation and business.


     Our stock  price is highly volatile.

          The trading price of our common stock has fluctuated significantly and
has ranged from $3.25 to $39.5625 over the past 9 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.


     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
<PAGE>

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 our
officers and some of our other key employees. These agreements provide that,
among other things, if an 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.


     Future sales of our common stock may depress our common stock price.

          The market price of our common stock could drop as a result of sales
of a large number of shares of common stock in the market or in response to the
perception that sales of large number of shares could occur. No prediction can
be made about the effect that future sales of common stock will have on the
market price of such shares.


  We may engage in acquisitions that may harm our results, dilute our
stockholders and cause us to incur debt or assume contingent liabilities.

          As part of our business strategy, we may make investments in
complementary companies, products or technologies that we believe would be
advantageous to the development of our business. While we currently have no
formal discussions, agreements or negotiations underway with respect to any such
acquisition, we may acquire businesses, products or technologies in the future.
If we buy a company, we could have difficulty in assimilating that company's
personnel and operations. In addition, the key personnel of the acquired company
may decide not to work for us. If we make other types of acquisitions, we could
have difficulty in assimilating the acquired technology or products into our
operations. These difficulties could disrupt our ongoing business, distract our
management and employees and increase our expenses. Furthermore, we may be
required to incur debt or issue equity securities to pay for any future
acquisitions, the issuance of which could be dilutive to our existing
stockholders.


ITEM 2.   PROPERTIES

          Our principal administrative, marketing and research and development
facility is located in approximately 26,829 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 to focus on channel
distribution, sales to OEMs and recruitment. This facility is leased through
March 2001.


ITEM 3.   LEGAL PROCEEDINGS

     None.

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

     None.
<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

January 1, 2000 through February 29, 2000....     $27.69    $11.88
</TABLE>

     On February 29, 2000, the closing price of the common stock on the Nasdaq
National Market was $ 14.75 per share.

Stockholders

     As of February 29, 2000, 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

     (1)  On November 15, 1999, we sold 113,755 shares of our common stock to 1
          stockholder pursuant to exercises of warrants at an aggregate purchase
          price of $113,755. The sale and issuance of these securities was
          deemed to be exempt from registration under the Securities Act by
          virtue of Section 4(2) and Regulation D.

     (2)  On December 23, 1999, we sold 59,791 shares of our common stock to 1
          stockholder pursuant to exercises of warrants at an aggregate purchase
          price of $59,791. The sale and issuance of these securities was deemed
          to be exempt from registration under the Securities Act by virtue of
          Section 4(2) and Regulation D.

     (3)  On December 27, 1999, we sold 112,865 shares of our common stock to 1
          stockholder pursuant to exercises of warrants at an aggregate purchase
          price of $404,057. The sale and issuance of these securities was
          deemed to be exempt from registration under the Securities Act by
          virtue of Section 4(2) and Regulation D.
<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,
                                                                                -----------------------
                                                                 1995        1996        1997        1998        1999
                                                               ---------   ---------   ---------   ---------   ---------
                                                                        (in thousands, except per share data)
<S>                                                            <C>         <C>         <C>         <C>         <C>
Consolidated Statement of Operations Data:
Net revenues  ............................................     $      -     $     -    $     86    $  1,199    $  2,656
Cost of revenues (1)  ....................................            -           -          84       2,161       1,436
                                                               --------     -------    --------    --------    --------
Gross profit (loss)  .....................................            -           -           2        (962)      1,220
Operating expenses:
  Research and development  ..............................        2,268       3,039       4,422       5,792       7,812
  Sales and marketing  ...................................        1,558       2,711       4,032       4,496       8,900
  General and administrative  ............................          927       1,292       1,694       2,310       3,570
  Amortization of deferred stock
                                                                      -         955         867       3,881       6,233
    Compensation (3)  ....................................     --------     -------    --------    --------    --------

     Total operating expenses  ...........................        4,753       7,997      11,015      16,479      26,515
                                                               --------     -------    --------    --------    --------
Loss from operations  ....................................       (4,753)     (7,997)    (11,013)    (17,441)    (25,295)
Other income (expense), net  .............................          (24)        220         580         580         789
                                                               --------     -------    --------    --------    --------
Net loss  ................................................     $ (4,777)    $(7,777)   $(10,433)   $(16,861)   $(24,506)
                                                               ========     =======    ========    ========    ========
Net loss attributable to common stockholders  ............     $ (4,777)    $(7,902)   $(10,448)   $(18,423)   $(24,798)
                                                               ========     =======    ========    ========    ========

Net loss per common share--basic and
 Diluted (2)  ............................................     $(154.10)    $(10.85)     $(4.87)     $(5.80)     $(1.41)
                                                               ========     =======    ========    ========    ========
Shares used in per common share
                                                                     31         728       2,145       3,178      17,589
 Calculation--basic and diluted (2)  .....................     ========     =======    ========    ========    ========

<CAPTION>
                                                                                 As of December 31,
                                                                                 ------------------
                                                                  1995      1996       1997        1998        1999
                                                                --------   -------   ---------   ---------   --------
                                                                                   (in thousands)
<S>                                                             <C>        <C>       <C>         <C>         <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments  .........    $   340    $ 6,670   $    899    $ 11,648     $29,129
Working capital  ...........................................        401      6,222     (3,206)      9,702      26,740
Total assets  ..............................................      7,140      7,385      1,303      13,634      32,310
Mandatory redeemable convertible preferred stock  ..........          -     14,037     14,052      38,005           -
Total stockholders' equity (deficit)  ......................    $(1,215)   $ 6,467   $(16,978)   $(27,900)    $28,427
</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)  This expense relates to 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:
<PAGE>

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                                         -----------------------
                                                                1995    1996    1997     1998      1999
                                                                -----   -----   -----   -------   -------
                                                                             (in thousands)
<S>                                                             <C>     <C>     <C>     <C>       <C>
Analysis of the amortization of deferred compensation:
  Research and development  ..............................      $  --   $ 371   $ 480    $1,747    $1,927
  Sales and marketing  ...................................         --     127     273       833     1,692
  General and administrative  ............................         --     457     114     1,301     2,614
                                                                -----   -----   -----    ------    ------
    Total amortization of deferred stock compensation  ...      $  --   $ 955   $ 867    $3,881    $6,233
                                                                =====   =====   =====    ======    ======
</TABLE>
<PAGE>

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

     THIS REPORT ON FROM 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, "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 "RISK FACTORS"
AND "BUSINESS"UNDER ITEM 1 IN THIS REPORT.



Overview

     Be was founded in 1990. We offer software platforms designed for Internet
appliances and digital media applications.  Our two software platforms are (i)
BeIA, a turnkey integrated software platform and development tools that enable
the creation of customized Internet appliances, and (ii) BeOS, our desktop
operating system optimized for digital media applications.  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 that was targeted primarily to end users. Prior
releases of BeOS were targeted primarily to software developers. In February of
2000, we announced the availability of BeIA, our software platform intended for
the Internet appliances market.

     Our 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 our BeDepot.com Web site. We also generate revenue by
collecting commission from sales of third party software through our BeDepot.com
Web site. In January 2000, we announced that we would be shifting our resources
to focus primarily on the market for Internet appliances. We also announced that
a version of BeOS would be made available for personal use at no charge and a
more fully featured version would only be available through third party
publishers. We have very little or no influence over the marketing and
promotional efforts of these third publishers and we may not generate any
meaningful revenues from sales of BeOS through these publishers in the
foreseeable future.

     We expect our future revenues to be primarily generated through royalty
payments and service fees from developers and manufacturers of Internet
appliances, and other systems and hardware manufacturers incorporating BeIA into
their products.  We do not expect the revenues, if any, from BeIA to offset the
loss of revenues from sales of BeOS in the foreseeable future and, as previously
announced, we expect that our revenues and cash flow for the future periods to
be negatively impacted.

     Since adopting and incorporating BeIA as the software platform generally
represents a significant product decision for developers and manufactures of
Internet appliances and related systems and hardware, we expect longer sales
cycle as we collaborate with and educate 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 platform.
We have little or no influence over the development and marketing efforts of our
customers.  Our customers are generally under no minimum payment obligations of
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 platform.   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.  Similarly, in the desktop market, we are highly dependent on the
marketing efforts and success of our third party publishers.   We have little or
no influence over these publishers and which makes it difficult to predict the
realization or timing of any revenues from BeOS.
<PAGE>

     It has been our policy to defer revenues, in accordance with the provisions
of software revenue recognition rules, from sales to distributors and resellers
and we will apply such a policy in the future on sales of BeOS to publishers and
other partners and on royalty payments and other fees received for licensing of
BeIA to OEM's and other partners. We also defer an allocated portion of revenues
attributable to free product upgrades. We recognize revenues from sales to
distributors and resellers when we have evidence that our product has been sold
to end users. For example, we typically recognize revenue when we receive
confirmation from the distributor or reseller of sales to end users. Revenues
deferred due to free product upgrades are recognized as upgrades are shipped. As
of December 31, 1999, we had $99,000 in deferred revenues, related to BeOS
inventory at a distributor that had been reported as sold to end-users by the
distributor subsequent to year end.

     Our cost of revenues consist primarily of the cost of packaging, software
duplication, documentation, translation and product fulfillment. We use a third
party fulfillment house to store, package and ship BeOS in retail channels. We
also include in the cost of revenues the amortized costs relating to the license
of third party technology used in the development of BeOS. In the future, we
expect cost of sales to be mainly related to the licensing of third party
technology.

     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 that research and development expenses
will increase substantially in the future as we further develop and enhance BeOS
and develop new products including those intended 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, promotional materials, travel and related expenses for attending
trade shows. We also include costs relating to third party application
developers, including partial funding of their development costs and cost of
technical support provided to them in our sales and marketing expenses.

     In 1996 and 1997, we developed and shipped the "BeBox," a multiprocessor
hardware platform installed with initial versions of BeOS. The BeBox was
developed primarily for the purpose of promoting development of applications for
BeOS. We shipped the BeBox to software developers who would then write
applications to run on BeOS. When third party hardware platforms suitable for
development of BeOS applications became available at the beginning of 1997, we
stopped shipping the BeBox. We subsidized the cost of BeBoxes purchased by the
development community. Cash received from developers resulting from shipment of
BeBoxes was netted against the cost of manufacturing the BeBoxes, and the
resulting expense was charged to sales and marketing.

     We expect our sales and marketing expenses to increase as we further
promote awareness of our software platform, work on establishing new
relationships with partners and hire new personnel. Sales and marketing expenses
will also increase as we further develop and expand our relationships with
existing and potential partners including expenses related to co-marketing
programs.

     General and administrative expenses consist primarily of compensation and
related expenses for finance and accounting personnel, professional services and
related fees, occupancy costs and other expenses. General and administrative
expenses may increase in the future as we expand our existing facilities or
relocate to new facilities that better address any growth that we may
experience. We also expect general and administrative expenses to increase as we
hire additional personnel and incur costs related to the anticipated growth in
our business and cost 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 53% and of total
revenues for the year ended December 31, 1999. We have a subsidiary located in
France to market and sell our software platform in Europe. In addition, we may
in the future open new offices in other countries to market and sell in those
countries and surrounding regions. The expansion of our existing international
operations and entry into additional international markets will require
significant management attention and financial resources and we cannot be
certain that our investments in establishing offices in other countries will
produce desired levels of revenues. 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
<PAGE>

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, 1999, we had recorded deferred compensation related
to these options in the total amount of $16.6 million, net of cancellations,
representing the difference between the deemed fair value of our common stock,
as determined for accounting purposes, and the exercise price of option at the
date of grant. Of this amount, $955,000 had been amortized in 1996, $867,000
amortized in 1997, $3.9 million in 1998 and $6.2 million in 1999. Future
amortization of expense arising out of options granted through December 31, 1999
is estimated to be $3.1 million in  2000, $1.3 million in 2001, $342,000 in 2002
and $8,000 in 2003. We amortize the deferred compensation charge monthly over
the vesting period of the underlying option.


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 is 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
$1,436,000 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 $2.0 million,
or 35%, to $7.8 million for the year ended December 31, 1999 from $5.8 million
for the year ended December 31, 1998. The net increase is 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 $4.4 million, or 98%,
to $8.9 million for the year ended December 31, 1999 from $4.5 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
$1.2 million, or 55%, to $3.6 million for the year ended December 31, 1999 from
$2.3 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.

     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.

Comparison of the Year Ended December 31, 1998 to the Year Ended December 31,
1997

     Net Revenues. Net revenues increased $1.1 million to $1.2 million for the
year ended December 31, 1998 from $86,000 for the year ended December 31, 1997.
The increase is attributable to sales of the version of the BeOS targeted
primarily to end
<PAGE>

users.  During 1998, we established a distribution channel of resellers to
distribute BeOS to end users. As a result of sales to this channel, sales in
Asia accounted for approximately 37% of our net revenues for the year ended
December 31, 1998.


     Cost of Revenues. Cost of revenues increased $2.1 million to $2.2 million
for the year ended December 31, 1998 from $84,000 for the year ended December
31, 1997. Our cost of revenues for the year ended December 31, 1998 include $1.2
million attributable to a one-time, non-cash write-off of costs relating to
acquisition of technology which was used with BeOS. This write-off relates to
the cost of licensing a development tool which compiled software for use in
versions of BeOS for two microprocessor architectures. However, the performance
characteristics of this tool on one of the microprocessor architectures did not
meet its requirements as a development tool for BeOS on this architecture. In
addition, the manufacturer of systems based on the other microprocessor
architecture announced that it would not release details of any of its future
systems. As a result, the cost of licensing this technology was no longer
recoverable from future forecasted revenues and a $1.2 million non-cash write-
off was taken.

     Research and Development. Research and development expenses increased $1.4
million, or 31%, to $5.8 million for the year ended December 31, 1998 from $4.4
million for the year ended December 31, 1997. The increase is primarily
attributable to hiring of additional research and development personnel and
increased costs of licensing third party technology used in the development of
BeOS.

     Sales and Marketing. Sales and marketing expenses increased $464,000, or
12%, to $4.5 million for the year ended December 31, 1998 from $4.0 million for
the year ended December 31, 1997. The increase is primarily attributable to
hiring additional sales and marketing personnel in advance of the first version
of BeOS targeted primarily to end-users. The increase in sales and marketing is
also attributable to amortization of purchased technology related to the
acquisition of StarCode and costs relating to establishing our developer
programs, including technical and financial incentives to third party
developers. In May 1998, we purchased StarCode for $567,000 in cash. The cost of
the StarCode acquisition was capitalized and is amortized as purchased Web site
technology and will be expensed through the end of 1999. Amortization expense
related to the acquisition of StarCode for the year ended December 31, 1998 was
$242,000.

     General and Administrative. General and administrative expenses increased
$616,000, or 36%, to $2.3 million for the year ended December 31, 1998 from $1.7
million for the year ended December 31, 1997. The increase was primarily
attributable to an increase in professional services and legal fees relating to
various licensing and technology acquisition activities, expansion of our leased
facilities, and hiring of additional administrative personnel.

     Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation increased $3.0 million to $3.9 million in 1998 from $867,000 in
1997. These amounts represent the allocated portion of difference between the
deemed fair value of our common stock and the exercise price of stock options
granted by us to employees, consultants, and non-employee directors.

     Other Income (Expense), Net. We had net other income of $580,000 for each
of the years ended December 31, 1998 and December 31, 1997. The other income in
1998 was primarily attributable to $650,000 in net interest income generated by
the investment of proceeds from the sale of Series 2 Preferred Stock in 1998, as
compared to $89,000 in net interest income for the year ended December 31, 1997.
We also realized income of $550,000 in 1997 related to a feasibility study we
performed for a third party.
<PAGE>

Selected Quarterly Results of Operations

     The following table sets forth certain unaudited statements of operations
data for the eight quarters ended December 31, 1999. 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,
                                    1998        1998          1998            1998          1999        1999          1999
                                 ----------   ---------   -------------   ------------   ----------   ---------   -------------
<S>                              <C>          <C>         <C>             <C>            <C>          <C>         <C>
Net revenues  ..................   $    64     $   602         $   226        $   307      $   309     $   537         $   775
Cost of revenues  ..............       143       1,620              99            299           85         239             372
                                   -------     -------         -------        -------      -------     -------         -------
Gross profit (loss)  ...........       (79)     (1,018)            127              8          224         298             403
Operating expenses:
  Research and
    development  ...............     1,075       1,951           1,270          1,496        1,887       1,783           2,004
  Sales and marketing  .........       856       1,027             887          1,726        1,754       2,587           2,179
  General and
    administrative  ............       451         678             549            632          864         694             961
  Amortization of deferred
    stock compensation  ........       537       1,078           1,097          1,169        1,666       1,713           1,597
                                   -------     -------         -------        -------      -------     -------         -------
     Total operating
       expenses  ...............     2,919       4,734           3,803          5,023        6,171       6,777           6,741
                                   -------     -------         -------        -------      -------     -------         -------
Loss from operations  ..........    (2,998)     (5,752)         (3,676)        (5,015)      (5,947)     (6,479)         (6,338)
Other income (net)  ............        74         195             148            163          101          32             284
                                   -------     -------         -------        -------      -------     -------         -------
Net loss  ......................   $(2,924)    $(5,557)        $(3,528)       $(4,852)     $(5,846)    $(6,447)        $(6,054)
                                   =======     =======         =======        =======      =======     =======         =======

Net loss attributable to
 common stockholders  ..........   $(2,990)    $(5,654)        $(3,625)       $(6,154)     $(5,979)    $(6,578)        $(6,082)
                                   =======     =======         =======        =======      =======     =======         =======

<CAPTION>
                                       December 31,
                                           1999
                                       -------------
<S>                                    <C>
Net revenues  ..................        $ 1,035
Cost of revenues  ..............            740
                                        -------
Gross profit (loss)  ...........            295
Operating expenses:
  Research and
    development  ...............          2,138
  Sales and marketing  .........          2,380
  General and
    administrative  ............          1,051
  Amortization of deferred
    stock compensation  ........          1,257
                                        -------
     Total operating
       expenses  ...............          6,826
                                        -------
Loss from operations  ..........         (6,531)
Other income (net)  ............            372
                                        -------
Net loss  ......................        $(6,159)
                                        =======

Net loss attributable to
 common stockholders  ..........        $(6,159)
                                        =======
</TABLE>

     In the first quarter of 1998, we released an enhanced version of BeOS.
Sales of this version of BeOS, as well as the launch of our BeDepot.com Web
site, which enabled customers to purchase BeOS directly from us, resulted in
increased revenues of $602,000 for the second quarter of 1998.

     Our net revenues in the third quarter of 1998 decreased to $226,000 due to,
we believe, potential customers deferring their purchases in anticipation of the
release in fourth quarter of 1998 of the first version of BeOS targeted
primarily to end users. In December 1998, we released version 4.0, the first
version of BeOS targeted primarily to end users and had revenues of $307,000 in
the quarter that ended December 31, 1998. Net revenues in the fourth quarter
were net of $332,000 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 the version 4.0 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. For example, when we receive confirmation from the reseller or
distributor of the sale to the end user. Revenues deferred due to free product
upgrades are recognized when BeOS upgrades are shipped. Net revenues increased
slightly to $309,000 for the first quarter of 1999. We recorded deferred revenue
of $355,000 in the first quarter of 1999 relating to shipments to resellers and
distributors and free upgrades of BeOS for retail purchasers of BeOS. Our first
quarter 1999 net revenues included $125,000 of revenues related to a
distributor, which were previously deferred and which were recognized by
confirmation of 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, following the end of this program in November of 1999. In
January of 2000, we announced that we would be shifting our resources to focus
primarily on the market for Internet appliances. We also announced that a
version of BeOS would be made available for personal use at no charge. 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. We do not
expect the revenues, if any, from BeIA to offset the loss of revenues from sales
of BeOS in the foreseeable future and we expect that our revenues and cash flow
for the future periods to be negatively impacted.
<PAGE>

     Amortization of licensed or acquired technology in the amount of $113,000
was charged in the first quarter of 1998. In the second quarter of 1998, we
amortized $157,000 of costs relating to licensed technology and wrote-off $1.2
million of costs relating to technology which was used with BeOS, the cost of
which was no longer recoverable from forecasted revenues.

     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. Our sales and marketing expenses
in the second quarter of 1998 increased primarily due to additional sales and
marketing personnel and related costs, increased costs relating to trade show
attendance, and costs of establishing our third party developer programs. In the
second quarter of 1998, we began amortizing the acquisition costs of purchased
Web site technology from the acquisition of StarCode. 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.

     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. Research and
development expenses increased in the second quarter of 1998 primarily due to
the costs of licensing software tools used in the 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 platform;

     .    success of products and services incorporating our software platform
          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.


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 increased approximately $17.5 million to
$29.1 million at December 31, 1999, from $11.6 million at December 31, 1998.
This increase is primarily attributable to the proceeds of our initial public
offering, net of amounts used to fund operations.

     Cash used in operating activities increased $6.1 million to $16.0 million
for the year ended December 31, 1999 as compared to $9.9 million for the year
ended December 31, 1998. This increase is primarily attributable to the increase
in net loss during the year ended December 31, 1999.
<PAGE>

     Cash used in investing activities increased approximately $6.4 million to
$16.9 million for the year ended December 31, 1999 as compared to $10.3 million
for the year ended December 31, 1998. This increase is primarily attributable to
net purchases of short-term investments in the year ended December 31, 1999
following our initial public offering. In 1998, we had purchased short-term
investments following the sale of Series 2 convertible preferred stock.

     Cash provided by financing activities for the year ended December 31, 1999
was approximately $36.0 million, which represents a $13.1 million increase in
cash provided by financing activities from the year ended December 31, 1998 of
$22.9 million. This increase is primarily attributable to the net proceeds of
$35.3 million received from our initial public offering. The net proceeds from
the sale of our Series 2 convertible preferred stock in the year ended December
31,1998 amounted to approximately $20.2 million.

     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 January of 2000, we announced that we
would be shifting our resources to focus primarily on the market for Internet
appliances.  We also announced that a version of BeOS would be made available
for personal use at no charge and a commercial version will be made available
only through third party publishers.  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 do not expect the revenues, if any, from BeIA to offset the loss of
revenues from sales of BeOS in the foreseeable future.  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. In
addition, in the future, we may need to raise additional capital and we cannot
be certain that we will be able to obtain additional financing on favorable
terms, if at all. If we cannot raise additional capital on acceptable terms, if
and when needed, we may not be able to further develop or enhance our product
offering, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, any of which could have a material
adverse effect on our business and results of operations.


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, 1999.
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, 1999.

<TABLE>
<CAPTION>
                                                                      2000     Thereafter       Total
                                                                     -------   ----------     ---------
<S>                                                                  <C>       <C>            <C>
  Federal Government Obligations  ..............................     $ 4,443      $ --         $ 4,443
    Weighted Average Interest Rate  ............................        5.52%       --            5.52%
  Corporate Debt Obligation  ...................................     $18,186        --         $18,186
    Weighted Average Interest Rate  ............................        6.36%       --            6.36%
                                                                     -------      ----         -------
  Total Portfolio, excluding equity securities   ...............     $22,629      $ --         $22,629
                                                                     =======      ====         =======
</TABLE>
<PAGE>

Recent Accounting Pronouncements

     In December 1998, AcSEC released Statement of Position 98-9 or SOP 98-9,
Modification of SOP 97-2, "Software Revenue Recognition." SOP 98-9 amends SOP
97-2 to require that an entity recognized revenue for multiple element
arrangements by means of the "residual method" when:

     .    there is no vendor-specific objective evidence ("VSOE") of the fair
          values of all the undelivered elements that are not accounted for by
          means of long-term contract accounting;

     .    VSOE of fair value does not exist for one or more of the delivered
          elements; and

     .    all revenue recognition criteria of SOP 97-2 (other than the
          requirement for VSOE) of the fair value of each delivered element are
          satisfied.

     The provisions of SOP 98-9 that extend the deferral of certain paragraphs
of SOP 97-2 became effective December 15, 1998. These paragraphs of SOP 97-2 and
SOP 98-9 will be effective for transactions that are entered into in fiscal
years beginning after March 15, 1999. Retroactive application is prohibited. We
are currently evaluating the impact of the requirements of SOP 98-9 and the
effects, if any, on our current revenue recognition policies and do not expect
any material impact from it's application.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin  No. 101 (SAB 101), "Revenue Recognition in Financial
Statements."  SAB 101 provides  guidance for revenue recognition under certain
circumstances.  We are currently evaluating the impact of SAB 101 on our
financial statements and related  disclosures.  The accounting and disclosures
prescribed by SAB 101 will be effective for the second quarter of the fiscal
year ended December 31, 2000.

     In June 1998, the Financial Accounting Standards Board 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 component of comprehensive income,
depending on the type of hedging relationship that exists. SFAS 133 will be
effective for fiscal quarters of all fiscal years beginning after June 15, 2000.
We are currently evaluating the impact of the requirements of SFAS 133 and the
effects if any on our financial statements and do not expect any material impact
from its application. We do not currently hold derivative instruments or engage
in hedging activities.


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-26 of this report.


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

     None.
<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 31,1999).  Our executive officers and
their ages as of February 29, 2000 are as follows:


<TABLE>
<CAPTION>
Name                                       Age   Position
-------------------------------------      ---   ---------------------------------------------------------------------
<S>                                        <C>   <C>
Jean-Louis F. Gassee  ................     55    President, Chief Executive Officer and Director
Steve M. Sakoman  ....................     46    Chief Operating Officer, General Manager - Web appliance business and
                                                 Chief Technical Officer
Albert Lombardo  .....................     56    Vice President, Finance and Accounting
</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 has served as our Vice
President, Engineering and Chief Technical Officer since August 1996 and most
recently as our Chief Operating Officer and General Manager, Web appliance
business. 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.

     Albert Lombardo, our Vice President, Finance and Accounting, joined Be as
our Corporate Controller in 1995, bringing with him over 20 years of financial
management experience. From December 1993 to March 1995, Mr. Lombardo served as
Corporate Treasurer for Asante Technologies, Inc., a company that specializes in
computer networking products. Prior to that, from February 1990 to October 1991.
Mr. Lombardo was Corporate Treasurer of Vitalink. Mr. Lombardo managed benefits
and stock administration for Intel Corporation. He has also held controller
positions with Bimillenium, Baron Data and Southern Pacific. Mr. Lombardo has an
M.B.A. from Golden Gate University and BS in Accounting from the University of
Illinois at Chicago.


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 "Stock
Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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


                                    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-26 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

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

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
4.4*      Amended and Restated Investors' Rights Agreement, dated February 4,
          1998
10.1*     Form of Indemnity Agreement entered into between the Company and its
          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
10.6.1*   Office Lease dated June 24, 1994, by and between Menlo Station
          Development and the Company
10.6.2*   Amendment to Office Lease, dated April 10, 1997, by and between Menlo
          Station Development and the Company
10.7*     Employment Agreement, dated June 22, 1998, by and between the Company
          and Wesley S. Saia
10.8*     Employment Agreement, dated March 12, 1999, by and between the Company
          and Roy Graham
10.9*     Employment Agreement, dated October 9, 1998, by and between the
          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
<PAGE>

23.1      Consent of PricewaterhouseCoopers LLP, independent accountants
24.1      Power of Attorney (see signature page)
27.1      Financial Data Schedule
_______________________

*    Incorporated by reference from the Registrant's Registration Statement on
     Form S-1, as amended (File No. 333-77855)
+    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.
<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 Palo
Alto, State of California, on March 30, 2000.


                                        Be Incorporated


                                       By:  /s/ Jean-Louis F. Gassee
                                            ------------------------------------
                                       Name:    Jean-Louis F. Gassee
                                       Title:   President, Chief Executive
                                                Officer and Director
<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 Albert A. Lombardo 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(s)                                     Date
---------                                   --------                                     ----
<S>                                         <C>                                          <C>
/s/   Jean-Louis F. Gassee                  President, Chief Executive Officer and       March 30, 2000
----------------------------------          Director
      Jean-Louis F. Gassee

/s/   Albert A. Lombardo                    Vice President, Finance and Accounting       March 30, 2000
----------------------------------
      Albert A. Lombardo

/s/   Christian E. Marchandise              Director                                     March 30, 2000
----------------------------------
      Christian E. Marchandise

/s/   Barry M. Weinman                      Director                                     March 30, 2000
----------------------------------
      Barry M. Weinman

/s/   Garrett P. Gruener                    Director                                     March 30, 2000
----------------------------------
      Garrett P. Gruener

/s/   Stewart Alsop                         Director                                     March 30, 2000
----------------------------------
      Stewart Alsop

/s/   William F. Zuendt                     Director                                     March 30, 2000
----------------------------------
      William F. Zuendt

/s/   Andrei M. Manoliu                     Director                                     March 30, 2000
----------------------------------
      Andrei M. Manoliu
</TABLE>
<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:

Schedule
--------
  II      Valuation and Qualifying Accounts............................    F-26

                                      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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.  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, 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 the opinion expressed
above.



/s/ PricewaterhouseCoopers LLP
San Jose, California
January 19, 2000

                                      F-2
<PAGE>

                                BE INCORPORATED

                          Consolidated Balance Sheets
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                                        December 31,
                                                                                            -------------------------------------
                                                                                                  1999                1998
                                                                                            -----------------   -----------------
<S>                                                                                         <C>                 <C>
Assets
Current assets:
   Cash and cash equivalents.............................................................           $  6,500            $  3,394
   Short-term investments................................................................             22,629               8,254
   Accounts receivable...................................................................                167                 477
   Prepaid and other current assets......................................................                730                 327
                                                                                                    --------            --------
      Total current assets...............................................................             30,026              12,452
Property and equipment, net..............................................................                562                 403
Purchased web site technology, net of amortization.......................................                 --                 303
Other assets, net of accumulated amortization............................................              1,722                 476
                                                                                                    --------            --------
      Total assets.......................................................................           $ 32,310            $ 13,634
                                                                                                    ========            ========

Liabilities, mandatorily redeemable convertible preferred stock and
stockholders' equity (deficit)
Current liabilities:
   Accounts payable......................................................................           $    860            $    576
   Accrued expenses......................................................................              1,550               1,094
   Technology license obligations, current portion.......................................                777                 688
   Deferred revenue......................................................................                 99                 392
                                                                                                    --------            --------
      Total current liabilities..........................................................              3,286               2,750
Technology license obligations, net of current portion...................................                597                 779
                                                                                                    --------            --------
      Total liabilities..................................................................              3,883               3,529
                                                                                                    --------            --------

Commitments (Note 6)

Mandatorily redeemable convertible preferred stock $0.001 par value:
 Shares authorized: none in 1999 and 22,500,000 in 1998
 Shares issued and outstanding: none in 1999 and 22,498,874 in 1998......................                 --              38,005
                                                                                                    --------            --------

Stockholders' Equity (Deficit):
   Preferred stock, $.001 par value:
     Shares authorized: 2,000,000 in 1999 and none in 1998
     Shares issued and outstanding: none
   Common stock, $.001 par value:
     Shares authorized: 78,000,000 shares in 1999 and 57,500,000 in 1998
     Shares issued and outstanding: 34,692,415 in 1999 and 5,094,757 in 1998.............                 35                   5
Additional paid-in capital...............................................................            106,322              25,302
Deferred stock compensation..............................................................             (4,690)             (4,490)
Accumulated deficit......................................................................            (73,223)            (48,717)
Accumulated other comprehensive loss.....................................................                (17)                 --
                                                                                                    --------            --------
      Total stockholders' equity (deficit)...............................................             28,427             (27,900)
                                                                                                    --------            --------
      Total liabilities, mandatorily redeemable preferred stock and stockholders'
       equity (deficit)...............................................................              $ 32,310            $ 13,634
                                                                                                    ========            ========
</TABLE>

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

                                      F-3
<PAGE>

                                BE INCORPORATED

                     Consolidated Statements of Operations
                   (in thousands, except  per share amounts)

<TABLE>
<CAPTION>

                                                                                  Year Ended December 31,
                                                                    ---------------------------------------------------
                                                                          1999              1998             1997
                                                                    ----------------   --------------   ---------------
<S>                                                                 <C>                <C>              <C>
Net revenues......................................................         $  2,656         $  1,199          $     86
Cost of revenues..................................................            1,436            2,161                84
                                                                           --------         --------          --------
Gross profit (loss)...............................................            1,220             (962)                2
Operating expenses:
  Research and development, excluding amortization of deferred
   stock compensation of $1,927 in 1999, $1,747 in 1998 and $480
   in 1997........................................................            7,812            5,792             4,422
  Sales and marketing, excluding amortization of deferred stock
   compensation of $1,692 in 1999, $833 in 1998 and $273 in 1997..            8,900            4,496             4,032
  General and administrative, excluding amortization of deferred
   stock compensation of $2,614 in 1999, $1,301 in 1998 and $114
   in 1997........................................................            3,570            2,310             1,694
  Amortization of deferred stock compensation.....................            6,233            3,881               867
                                                                           --------         --------          --------
     Total operating expenses.....................................           26,515           16,479            11,015
                                                                           --------         --------          --------
Loss from operations..............................................          (25,295)         (17,441)          (11,013)
Interest expense..................................................             (138)            (159)              (75)
Other income and expenses, net....................................              927              739               655
                                                                           --------         --------          --------
Net loss..........................................................          (24,506)         (16,861)          (10,433)
                                                                           --------         --------          --------
Other comprehensive loss
   Unrealized losses on investments...............................              (17)              --                --
                                                                           --------         --------          --------
Comprehensive loss                                                         $(24,523)        $(16,861)         $(10,433)
                                                                           ========         ========          ========
Dividend related to beneficial
 conversion feature of preferred stock............................               --         $ (1,204)               --
Accretion of mandatorily
 redeemable convertible preferred stock..........................           $  (292)            (358)         $    (15)
                                                                            --------         --------          --------

Net loss attributable to common stockholders.....................          $(24,798)        $(18,423)         $(10,448)
                                                                           ========         ========          ========

                                                                           $  (1.41)          $(5.80)           $(4.87)
Net loss per common share--basic and diluted.....................          ========         ========          ========

Shares used in per common share
 calculation--basic and diluted..................................            17,589            3,178             2,145
                                                                           ========         ========          ========
</TABLE>

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

                                      F-4
<PAGE>

                                BE INCORPORATED

           Consolidated Statements of Stockholders' Equity (Deficit)
                     (in thousands, except  share amounts)

<TABLE>
<CAPTION>


                                                               Common Stock       Additional      Deferred
                                                           --------------------     Paid-in         Stock       Accumulated
                                                             Shares      Amount     Capital     Compensation      Deficit
                                                           -----------   ------   -----------   -------------   ------------
<S>                                                        <C>           <C>      <C>           <C>             <C>
Balance, January 1, 1997................................    4,570,040       $ 5     $ 13,548         $  (904)      $(20,219)
Issuance of common stock to director....................       50,000        --          177              --             --
Repurchase of common stock for cash.....................     (231,800)       --          (23)             --             --
Exercise of stock options...............................      185.000        --           19              --             --
Deferred stock compensation related to grants of
 stock options..........................................           --        --        1,537          (1,537)            --
Cancellation of options.................................           --        --         (241)            241             --
Amortization of deferred stock compensation.............           --        --           --             867             --
Net loss................................................           --        --           --              --        (10,433)
Accretion of mandatorily redeemable convertible
 preferred stock........................................           --        --          (15)             --             --
                                                           ----------    ------     --------         -------    -----------
Balance, December 31, 1997..............................    4,573,240         5       15,002          (1,333)       (30,652)
Repurchase of common stock..............................     (248,700)       --          (25)             --             --
Exercise of stock options...............................      770,217                    206              --             --
Sale of option to purchase preferred stock
 and warrants to purchase common stock...................           --                  1,322              --             --
Exercise of option to purchase preferred stock
 and warrants to purchase common stock..................           --                 (1,322)             --             --
Issuance of warrants to purchase common stock...........           --        --        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             --
Net loss................................................           --        --           --              --        (16,861)
Beneficial conversion feature related to issuance
 of preferred stock.....................................           --        --        1,204              --             --
Dividend related to beneficial conversion feature
 of preferred stock.....................................           --        --           --              --         (1,204)
Accretion of mandatorily redeemable convertible
 preferred stock........................................           --        --         (358)             --             --
Other...................................................           --        --           86              --             --
                                                           ----------    ------     --------         -------    -----------
Balance, December 31, 1998..............................    5,094,757         5       25,302          (4,490)       (48,717)
Repurchase of common stock..............................      (39,640)       --           (3)             --             --
Exercise of stock options...............................      294,548        --           65              --             --
Exercise of common stock warrants.......................      286,411         1          578              --             --
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             --
Compensation expense on grant of fully vested
 options................................................           --        --          662              --             --
Issuance of common stock for cash, net of
 issuance costs of $4,034...............................    6,557,465         6       35,303              --             --
Conversion of Mandatorily Redeemable
 Convertible Preferred Stock............................   22,498,874        23       38,274              --             --
Net loss................................................           --        --           --              --        (24,506)
Accretion of mandatorily redeemable convertible
 preferred stock........................................           --        --         (292)             --             --
Unrealized loss on investments..........................           --        --           --              --             --
                                                           ----------    ------     --------         -------    -----------
Balance, December 31, 1999..............................   34,692,415       $35     $106,322         $(4,690)      $(73,223)
                                                           ==========    ======     ========         =======    ===========

<CAPTION>
                                                            Accumulated
                                                               Other
                                                           Comprehensive
                                                                Loss          Total
                                                           --------------   ---------
<S>                                                        <C>              <C>
Balance, January 1, 1997................................        --           $ (7,570)
Issuance of common stock to director....................        --                177
Repurchase of common stock for cash.....................        --                (23)
Exercise of stock options...............................        --                 19
Deferred stock compensation related to grants of
 stock options..........................................        --                 --
Cancellation of options.................................        --                 --
Amortization of deferred stock compensation.............        --                867
Net loss................................................        --            (10,433)
Accretion of mandatorily redeemable convertible

 preferred stock........................................        --                (15)
                                                           -------           --------
Balance, December 31, 1997..............................        --            (16,978)
Repurchase of common stock..............................        --                (25)
Exercise of stock options...............................        --                206
Sale of option to purchase preferred stock
 and warrants to purchase common stock...................        --              1,322
Exercise of option to purchase preferred stock
 and warrants to purchase common stock..................        --             (1,322)
Issuance of warrants to purchase common stock...........        --              2,149
Deferred stock compensation related to grants of
 stock options..........................................        --                 --
Cancellation of options.................................        --                 --
Amortization of deferred stock compensation.............        --              3,881
Net loss................................................        --            (16,861)
Beneficial conversion feature related to issuance
 of preferred stock.....................................        --              1,204
Dividend related to beneficial conversion feature
 of preferred stock.....................................        --             (1,204)
Accretion of mandatorily redeemable convertible
 preferred stock........................................        --               (358)
Other...................................................        --                 86
                                                            ------           --------
Balance, December 31, 1998..............................        --            (27,900)
Repurchase of common stock..............................        --                 (3)
Exercise of stock options...............................        --                 65
Exercise of common stock warrants.......................        --                579
Deferred stock compensation related to grants of
 stock options..........................................        --                 --
Cancellation of options.................................
Amortization of deferred stock compensation.............        --              6,233
Compensation expense on grant of fully vested
 options................................................        --                662
Issuance of common stock for cash, net of
 issuance costs of $4,034...............................        --             35,309
Conversion of Mandatorily Redeemable
 Convertible Preferred Stock............................        --             38,297
Net loss................................................        --            (24,506)
Accretion of mandatorily redeemable convertible
 preferred stock........................................        --               (292)
Unrealized loss on investments..........................     $ (17)               (17)
                                                             ------           --------
Balance, December 31, 1999..............................     $ (17)           $ 28,427
                                                            ======           =========
</TABLE>

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

                                      F-5
<PAGE>

                                BE INCORPORATED

                     Consolidated Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                                               Year Ended December 31,
                                                                                         --------------------------------
                                                                                            1999         1998        1997
                                                                                         ----------   ----------   ------
<S>                                                                                      <C>          <C>          <C>
Cash flows from operating activities:
Net loss................................................................................  $(24,506)    $(16,861)    $(10,433)
Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization.........................................................       966          855          156
  Loss on disposal of fixed assets......................................................        69           --           --
  Licensed technology used in research and development..................................       320        1,852           --
  Amortization of discount on technology license obligations............................       134          130           --
  Increase in allowances for sales return...............................................        --           10           --
  Compensation expense incurred on issuance of stock....................................       662           --          172
  Amortization of deferred stock compensation...........................................     6,233        3,881          867
  Changes in assets and liabilities (in 1998, net of effects of acquisition):
    Accounts receivable.................................................................       310         (450)         261
    Prepaid and other current assets....................................................      (525)         (93)          85
    Other accrued.......................................................................       (91)        (142)          17
    Accounts payable....................................................................       284            5          187
    Accrued expenses....................................................................       456          573           72
    Deferred revenue....................................................................      (293)         340           52
                                                                                          --------     --------     --------
      Net cash used in operating activities.............................................   (15,981)      (9,900)      (8,564)
                                                                                          --------     --------     --------
Cash flow provided by (used in) investing activities:
Acquisition of property and equipment...................................................      (515)        (323)        (208)
Acquisition of licensed technology......................................................    (1,893)      (1,373)          --
Purchases of short-term investments.....................................................   (81,749)     (35,213)      (6,185)
Sales of short-term investments.........................................................    34,287       12,399       10,853
Maturities of short term investments....................................................    33,070       14,760           --
Deposits and other......................................................................       (63)          --           --
Acquisition of StarCode (net of cash acquired)..........................................        --         (562)          --
                                                                                          --------     --------     --------
      Net cash provided by (used in) investing activities...............................   (16,863)     (10,312)       4,460
                                                                                          --------     --------     --------
Cash flows provided by financing activities:
Proceeds from issuance of common stock pursuant to common stock options.................        65          206           24
Proceeds from issuance of common stock pursuant to common stock warrants................       579           --           --
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..............................................................        (3)         (25)         (23)
Proceeds from issuance of notes payable.................................................        --           --        3,000
                                                                                          --------     --------     --------
      Net cash provided by financing activities.........................................    35,950       22,907        3,001
                                                                                          --------     --------     --------
Net increase (decrease) in cash and cash equivalents....................................     3,106        2,695       (1,103)
Cash and cash equivalents, beginning of period..........................................     3,394          699        1,802
                                                                                          --------     --------     --------
Cash and cash equivalents, end of period................................................  $  6,500     $  3,394     $    699
                                                                                          ========     ========     ========
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     $     15
                                                                                          ========     ========     ========
Future obligations under noncancelable technology licenses..............................  $    809     $    696     $     --
                                                                                          ========     ========     ========
Unearned stock based compensation related to stock option grants, net of
 cancellations..........................................................................  $  6,433     $  7,038     $  1,296
                                                                                          ========     ========     ========
</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:

     Be Incorporated (the "Company") was founded in 1990 and offers software
platforms designed for Internet appliances and digital media applications. The
Company's two software platforms are (i) BeIA, a turnkey integrated software
platform and development tools that enable the creation of customized Internet
appliances, and (ii) BeOS, the Company's desktop operating system optimized for
digital media applications. Prior to 1998, the Company was engaged primarily in
research and development, raising capital and development of its markets and was
in the development stage.

     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 our BeDepot.com Web site. The Company also
generates revenues by collecting commission from sales of third party software
through its BeDepot.com Web site. In January 2000, the Company announced that it
would be shifting its resources to focus primarily on the market for Internet
appliances.  The Company  also announced that a version of BeOS would be made
available for personal use at no charge and a more fully featured version would
only be made available through third party publishers.  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:

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.


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.

                                      F-7
<PAGE>

                                BE INCORPORATED

            Notes to Consolidated Financial Statements (continued)

     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 1999, 1998 and 1997 and
unrealized holding gains and losses at December 31, 1998 were not significant.
Unrealized losses at December 31, 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

     The Company's revenue is derived entirely of sales of BeOS. At December 31,
1998, one customer accounted for 98% of the Company's accounts receivable.
Subsequent to December 31, 1998, this amount was paid in full. In addition, the
same customer accounted for 37% and 27% of net revenues for the years ended
December 31, 1999 and 1998, respectively. At December 31, 1999, another customer
accounted for 100% of accounts receivable, which amount was paid in full
subsequent to year end.

     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.  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 BeOS. 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 BeOS and applications that run it or they 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 1999, 1998, and 1997 was $287,000, $202,000 and
$156,000, respectively.

                                      F-8
<PAGE>

Accounting for Long-Lived Assets and Purchased Software

     The Company reviews property and equipment, purchased software and
technology licenses and purchased Web site technology for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
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 $154,000, $38,000 and $14,000 in 1999, 1998 and 1997,
respectively.

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

     The Company's revenue is derived from licensing fees from product sales to
end users either by direct-order on the Company's web site or sales by
distributors.

     The Company adopted the provisions of Statement of Position 97-2 or SOP 97-
2, Software Revenue Recognition, as amended by Statement of Position 98-4,
Deferral of the Effective Date of Certain Provisions of SOP 97-2, effective
January 1, 1998. SOP 97-2 supersedes Statement of Position 91-1, Software
Revenue Recognition, and delineates the accounting for software product and
maintenance revenues. Under SOP 97-2, the Company recognizes product revenues
from orders on the Company's web site upon shipment, provided a credit card
authorization is received, the fee is fixed and determinable, collection of
resulting receivables is probable and product returns are reasonably estimable.
The Company uses a standard shrink wrap license for all of its sales. Under the
license, the Company is obligated to provide limited telephone support to end
users who purchase the Company's product and provides a 5-day money back
guarantee. The Company accrues 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 records
an allowance for estimated sales returns.

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

     Under certain circumstances, the Company offers an upgrade to its product
in conjunction with product sales at no additional charge. Generally, such
rights are offered prior to new versions being released and give the customers
who purchase products between established dates the right to such an upgrade.
Revenue is allocated to an upgrade right based on the price for which

                                      F-9
<PAGE>

                                BE INCORPORATED

            Notes to Consolidated Financial Statements (continued)


upgrades are sold separately. The Company recognizes upgrade revenue when the
criteria for product revenue recognition from end users set forth above are met.

     At December 31, 1999, deferred revenues consisted of revenue related to
distributor sales not sold through to end users. At December 31,1998, deferred
revenues also included revenue related to upgrades deliverable in the future.

                                      F-10
<PAGE>

                                BE INCORPORATED

            Notes to Consolidated Financial Statements (continued)


     Prior to the adoption of SOP 97-2, the Company recognized revenue from the
sale of products upon shipment if remaining obligations were insignificant,
collection of the resulting accounts receivable was probable and product returns
were reasonably estimable. Revenue for 1997 was entirely from direct sale of
products to end users.


Stock-based compensation

     The Company uses the intrinsic value method of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for
its employee stock options, and presents disclosure of pro forma information
required under Financial Accounting Standards Board Statement No. 123 or SFAS
123, "Accounting for Stock-Based Compensation."

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 1999, 1998 and 1997 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>
                                                                                    1999        1998        1997
                                                                                  ---------   ---------   ---------
<S>                                                                               <C>         <C>         <C>
Net loss per common share, basic and diluted:
  Net loss.....................................................................   $(24,506)   $(16,861)   $(10,433)
  Dividend related to beneficial conversion feature of
    preferred stock............................................................         --      (1,204)         --
  Accretion of mandatorily redeemable convertible
    preferred stock............................................................       (292)       (358)        (15)
                                                                                  --------    --------    --------
        Numerator for net loss per common
          share, basic and diluted.............................................    (24,798)    (18,423)    (10,448)
  Denominator for basic and diluted loss per common
    share:
     Weighted average common shares
       outstanding.............................................................     17,589       3,178       2,145
                                                                                  ========    ========    ========
  Net loss per common share basic and diluted..................................   $  (1.41)   $  (5.80)   $  (4.87)
                                                                                  ========    ========    ========
  Antidilutive securities:
     Options to purchase common stock..........................................      6,010       2,205         987
     Common stock subject to repurchase........................................        499       1,389       1,921
     Preferred stock...........................................................         --      22,499      14,116
     Warrants..................................................................      2,585       2,871       1,220
                                                                                  --------    --------    --------
                                                                                     9,094      28,964      18,244
                                                                                  ========    ========    ========
</TABLE>

                                      F-11
<PAGE>

                                BE INCORPORATED

            Notes to Consolidated Financial Statements (continued)



Recent accounting pronouncements

     In December 1998, AcSEC released Statement of Position 98-9 or SOP 98-9,
Modification of SOP 97-2, "Software Revenue Recognition." SOP 98-9 amends SOP
97-2 to require that an entity recognize revenue for multiple element
arrangements by means of the "residual method" when (1) there is no vendor-
specific objective evidence ("VSOE") of the fair values of all the undelivered
elements that are not accounted for by means of long-term contract accounting,
and (2) all revenue recognition criteria of SOP 97-2 (other than the requirement
for VSOE of the fair value of each delivered element) are satisfied. The
provisions of SOP 98-9 that extend the deferral of certain paragraphs of SOP 97-
2 became effective December 15, 1998. These paragraphs of SOP 97-2 and SOP 98-9
will be effective for transactions that are entered into in fiscal years
beginning after March 15, 1999. Retroactive application is prohibited. The
Company is currently evaluating the impact of the requirements of SOP 98-9 and
the effects, if any, on its current revenue recognition policies and does not
expect any material impact from its application.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin  No. 101 (SAB 101), "Revenue Recognition in Financial
Statements."  SAB 101 provides  guidance for revenue recognition under certain
circumstances.  The Company is currently  evaluating the impact of SAB 101 on
its financial statements and related  disclosures.  The accounting and
disclosures prescribed by SAB 101 will be effective for the second quarter of
the fiscal year ended December 31, 2000.

     In June 1998, the Financial Accounting Standards Board 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 component of comprehensive income,
depending on the type of hedging relationship that exists. SFAS 133 will be
effective for fiscal quarters of all fiscal years beginning after June 15, 2000.
The Company is currently evaluating the impact of the requirements of SFAS 133
and the effects if any on its financial statements and does not expect any
material impact from its application. The Company does not currently hold
derivative instruments or engage in hedging activities.

                                      F-12
<PAGE>

                                BE INCORPORATED

            Notes to Consolidated Financial Statements (continued)



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 each 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           1997
                                                                               ----------     ----------
<S>                                                                            <C>             <C>
   Revenue................................................................      $  1,215        $     95
   Net loss...............................................................      $(17,064)       $(11,013)
   Net loss per common share, basic and diluted...........................      $  (5.37)       $  (5.13)
</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,
                                                                        ------------
                                                               1999                  1998
                                                               ----                  ----
                                                          Cost     Fair Value    Cost     Fair Value
                                                         -------   ----------   -------   ----------
<S>                                                      <C>       <C>          <C>       <C>
Cash and cash equivalents
Cash..................................................    $1,935       $1,935    $3,134       $3,134
Commercial paper......................................     4,565        4,565       260          260
                                                          ------       ------    ------       ------
                                                          $6,500       $6,500    $3,394       $3,394
                                                          ======       ======    ======       ======

<CAPTION>
                                                                         December 31,
                                                                         ------------
                                                                  1999                 1998
                                                                  ----                 ----
                                                           Cost     Fair Value    Cost     Fair Value
                                                         --------   ----------   -------   ----------
<S>                                                      <C>        <C>          <C>       <C>
Short-term investments
Federal government obligations........................    $ 4,443      $ 4,443    $5,264       $5,264
Corporate debt obligations............................     18,203       18,186     2,990        2,990
                                                          -------      -------    ------       ------
                                                          $22,646      $22,629    $8,254       $8,254
                                                          =======      =======    ======       ======
</TABLE>

     All short-term investments mature within one year.

                                      F-14
<PAGE>

                                BE INCORPORATED

            Notes to Consolidated Financial Statements (continued)

<TABLE>
<CAPTION>
                                                                                                      December 31,
                                                                                                      ------------
                                                                                                 1999         1998
                                                                                                 ----         ----
<S>                                                                                           <C>            <C>
   Property and equipment, net
   Computer equipment....................................................................      $ 900          $ 775
   Furniture and fixtures................................................................        458            168
                                                                                               ------         ------
                                                                                                1,358            943
   Less: accumulated depreciation........................................................        (796)          (540)
                                                                                               ------         ------
                                                                                               $  562         $  403
                                                                                               ======         ======
   Accrued expenses
   License and royalty liabilities.......................................................      $  174         $  152
   Product warranty accrual..............................................................          --             77
   Payroll and related...................................................................         893            531
   Other.................................................................................         483            334
                                                                                               ------         ------
                                                                                               $1,550         $1,094
                                                                                               ======         ======

   Other assets, net
   Technology licenses...................................................................      $ 3,447        $ 2,069
   Deposits..............................................................................           91             29
                                                                                               -------        -------
                                                                                                 3,538          2,098
   Less: accumulated amortization........................................................       (1,816)        (1,622)
                                                                                               -------        -------
                                                                                               $ 1,722        $   476
                                                                                               =======        =======
</TABLE>

     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 permanent impairment in the value of $1,211,000 was
recorded in June 1998. This impairment charge has been included in cost of sales
in the statement of operations.

     In addition, in 1999 and 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 1999 and 1998, costs capitalized and expensed as research and development
under these agreements were $809,000 and nil and $663,000 and 641,000,
respectively.

                                      F-15
<PAGE>

                                BE INCORPORATED

            Notes to Consolidated Financial Statements (continued)


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:

     The Company leases its facilities under non cancelable operating leases
expiring at various dates through February, 2002. Future annual minimum lease
payments as of December 31, 1999 are as follows:

<TABLE>
<S>                                                                  <C>
2000..........................................................        $1,187
2001..........................................................           898
2002..........................................................           150
                                                                      ------
                                                                      $2,235
                                                                      ======
</TABLE>

  Total rent expense was $1,168,000, $825,000 and $400,000 for 1999, 1998 and
1997, respectively.

  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>
2000..........................................................        $  925
2001..........................................................           345
2002..........................................................           295
                                                                      ------
                                                                       1,565
Less discount.................................................          (191)
                                                                      ------
                                                                       1,374
Less current portion..........................................          (777)
                                                                      ------
                                                                      $  597
                                                                      ======
</TABLE>

                                      F-16
<PAGE>

                                BE INCORPORATED

            Notes to Consolidated Financial Statements (continued)



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).

     Changes in the mandatorily redeemable convertible preferred stock during
1997, 1998 and 1999 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                                          Amount
                                                                                                        ----------
<S>                                                                                                     <C>
Balance, January 1, 1997............................................................................     $ 14,037
  Accretion to redemption value.....................................................................           15
                                                                                                         --------
Balance, December 31, 1997..........................................................................       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>

                                      F-17
<PAGE>

                                BE INCORPORATED

            Notes to Consolidated Financial Statements (continued)



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 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 ($2 million net of issuance costs of $0.1 million) 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>

                                      F-18
<PAGE>

                                BE INCORPORATED

            Notes to Consolidated Financial Statements (continued)


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

     The April 1996 warrants were issued in connection with the conversion of
Series B preferred stock to common stock. The fair value of the warrants of $114
was estimated using the Black-Scholes model and the following assumptions;
dividend yields of 0%, volatility of 60% risk free interest rate of 6.05% and a
term of 5 years. The estimated value of the warrants was accounted for as a
dividend to Series B preferred stockholders and increased net loss attributable
to common stockholders in 1996.

     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.

                                      F-19
<PAGE>

                                BE INCORPORATED

            Notes to Consolidated Financial Statements (continued)



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
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 exerciseable as to 25% of the shares awarded
after one year and 1/48 of the award monthly thereafter.

                                      F-20
<PAGE>

                                BE INCORPORATED

            Notes to Consolidated Financial Statements (continued)



     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, 1997..........................      550,732      960,900    $0.10-$51.00    $    96       $0.10
  Options granted.................................     (410,500)     410,500       0.10-0.20         48        0.12
  Options exercised...............................           --     (185,000)      0.10-0.20        (19)       0.10
  Options terminated..............................      199,000     (199,000)     0.10-51.00        (21)       0.10
                                                     ----------    ---------                    -------
Balance, December 31, 1997........................      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
                                                     ==========    =========                    =======
</TABLE>

     At December 31, 1999, 1998 and 1997, 2,435,895, 2,204,927 and 987,400
outstanding options were exercisable at weighted average exercise prices of
$2.01, $0.29 and $0.11. Of these shares, 743,050 shares, 1,691,474 shares and
631,600 shares at weighted average exercise prices of $0.34, $0.31 and $0.11,
respectively, are subject to the Company's right of repurchase upon exercise. In
addition, 499,069, 1,339,302 shares and 1,920,929 shares of the Company's
outstanding common stock is subject to the Company's right of repurchase at
weighted average prices of $0.24, $0.17 and $0.10, 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
                                                 =========    =======                ======
</TABLE>

     At December 31, 1999, none of the options outstanding were exercisable.

                                      F-21
<PAGE>

                                BE INCORPORATED

            Notes to Consolidated Financial Statements (continued)

Options Outstanding

     The options outstanding and currently exercisable by exercise price at
December 31, 1999 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........................................     1,571,724       8.03         $ 0.30     1,571,724      $0.30
$5.00-5.75........................................     3,640,998       9.27         $ 5.03       780,509      $5.00
$6.00-6.25........................................       764,000       9.61         $ 6.20        83,662      $6.12
$14.38-14.38......................................        33,000       9.92         $14.38            --         --
                                                       ---------                               ---------
                                                       6,009,722       8.99         $ 4.00     2,435,895      $2.01
                                                       =========                               =========
</TABLE>

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, 1999, the Company had recorded deferred compensation
related to these options in an amount of $16,626,000 (net of cancellations), of
which $6,233,000, $3,881,000 and $867,000 had been amortized to expense during
1999, 1998 and 1997. Future compensation expense from options granted through
December 31, 1999 is estimated to be $3,063,000, $1,277,000, $342,000 and $8,000
for 2000, 2001, 2002 and 2003 respectively.

     During 1999, 1998 and 1997, options to purchase 4,173,000, 2,436,500 and
410,500 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 being of $4.98, $0.34 and $0.12  per share and the deemed
weighted average market value of the common stock being of $6.81, $3.41 and
$3.78 per share, respectively.

Value of Options Granted

     The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123").

     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>
                                                                   1999         1998         1997
                                                                ----------   ----------   ----------
<S>                                                             <C>          <C>          <C>
Expected volatility.........................................     0% and 60%          0%            0%
Weighted average risk-free interest rate....................          4.80%  4.59-6.03%    5.85-6.63%
Expected life...............................................       2 years     5 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 1999, 1998 and 1997 were
$13,919,000, $7,766,000 and $1,535,000, and $2.77, $3.19 and $3.69,
respectively.

                                      F-22
<PAGE>

                                BE INCORPORATED

            Notes to Consolidated Financial Statements (continued)


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 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 Company's first offering period under the plan started on July 20, 1999
with the first purchase date to occur on January 31, 2000.

     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 for 1999; expected volatility of 60%,
weighted-average risk-free interest rate of 4.80%, expected life of 6 months and
expected dividends of  $0. The estimated fair value of awards under the employee
stock purchase plan was approximately $140,000 in the aggregate and $1.95 per
share.

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>
                                                                                 1999        1998        1997
                                                                               ---------   ---------   ---------
<S>                                                                            <C>         <C>         <C>
Net loss attributable to common stockholders--as reported.................     $(24,798)   $(18,423)   $(10,448)
Net loss attributable to common stockholders--pro forma...................     $(27,039)   $(18,442)   $(10,488)
Net loss per common share--basic and diluted as reported..................     $  (1.41)   $  (5.80)   $  (4.87)
Net loss per common share--basic and diluted pro forma....................     $  (1.54)   $  (5.80)   $  (4.89)
</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.

                                      F-23
<PAGE>

                                BE INCORPORATED

            Notes to Consolidated Financial Statements (continued)


NOTE 8--INCOME TAXES:

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

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                            ------------
                                                                                     1999               1998
                                                                                     ----               ----
<S>                                                                            <C>                 <C>
Net operating loss carryforwards..........................................      $ 17,466            $ 10,993
Tax credit carryforwards..................................................         1,648                 879
Property and equipment and intangibles....................................            48                  40
Other.....................................................................           807                 168
                                                                                --------            --------
                                                                                  19,969              12,080
Less: valuation allowance.................................................       (19,969)            (12,080)
                                                                                --------            --------
Net deferred tax asset....................................................      $     --            $     --
                                                                                ========            ========
</TABLE>

     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 $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>
                                                                  1999       1998       1997
                                                                --------   --------   --------
<S>                                                             <C>        <C>        <C>
Federal benefit at statutory rate..........................     $ 8,332    $ 5,901    $ 3,652
Nondeductible expenses.....................................      (2,242)    (1,419)      (304)
Net operating losses and benefits..........................      (6,090)    (4,482)    (3,348)
                                                                -------    -------    -------
                                                                $    --    $    --    $    --
                                                                =======    =======    =======
</TABLE>


     At December 31, 1999, the Company had approximately $45,997,000 of net
operating loss carryforwards and $939,000 of research and development credits to
offset future federal income taxes. The Company also had $31,316,000 of net
operating loss carryforwards and $705,000 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 $245,000 and $123,000
of net operating loss carryforwards for federal and state purposes,
respectively, as of December 31, 1999, 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 2000 through 2019 if not utilized. Due to
changes in ownership, the Company's net operating loss and credit carryforwards
may become subject to certain annual limitations.

                                      F-24
<PAGE>

                                BE INCORPORATED

            Notes to Consolidated Financial Statements (continued)



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 ($10,000 in
1999). Discretionary contributions may be made by the Company. No contributions
were made by the Company during 1999, 1998 and 1997.

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>
1999
   Americas................................................      $1,156
   Europe..................................................         755
   Asia....................................................         745
                                                                 ------
       Total...............................................      $2,656
                                                                 ======

1998
   Americas................................................      $  565
   Europe..................................................         194
   Asia....................................................         440
                                                                 ------
       Total...............................................      $1,199
                                                                 ======
</TABLE>

                                      F-25
<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 Period     Expenses    Deductions   of Period
<S>                                                                <C>          <C>          <C>          <C>
Year Ended December 31, 1997
     Allowance for sales returns                                      $  --         $ --        $ --         $ --
     Deferred tax asset valuation allowance....................       $ 2,383       $3,715      $ --         $ 6,098

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
</TABLE>

                                      F-26