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The following is an excerpt from a S-1/A SEC Filing, filed by CYBERGOLD INC on 8/6/1999.
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CYBERGOLD INC - S-1/A - 19990806 - MANAGEMENTS_DISCUSSION

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

The following discussion should be read in conjunction with the financial statements and the notes to those statements that appear elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this prospectus, particularly in "Risk Factors."

OVERVIEW

Cybergold is a leading provider of Internet-based direct marketing and advertising solutions. We were incorporated in October 1994 and from inception through the second quarter of 1996, we were in an early stage of development, and had no sales and limited operating activities. From the second quarter of 1996 through the first quarter of 1997, operating activities related primarily to developing necessary infrastructure, recruiting personnel, raising capital, initial strategic planning and developing our Web site. In March 1997, we launched our initial service and enrolled our first Cybergold members. In March 1999, we introduced our micropayments system, and launched our Earn & Spend Community. Our membership base increased from approximately 250,000 at December 31, 1997 to approximately 1.0 million at December 31, 1998 and to approximately 2.6 million at July 31, 1999. Although our membership has grown in prior periods, we cannot be certain that our membership growth will continue at current rates or increase in the future. See "Risk Factors -- Our success depends on our ability to maintain and expand an active membership base."

Our revenues consist of transaction revenues and custom marketing services and other revenues. Transaction revenues represent fees paid to us each time a member earns incentive rewards within our system and for micropayments transactions. Our members earn rewards by responding to online advertisements with a specific action such as filling out a survey or registering for services. We are paid a transaction fee by advertisers or marketers and we pay a portion of this fee to our members as a cash reward. We also earn a transaction fee when our members spend their cash rewards or use cash transferred to their account from a VISA card to purchase inexpensive digital content, services or products through our site or other sites using our system. These transaction revenues are not recognized until the transaction has been completed. In the case of prepayments by the advertising or marketing client, amounts not yet recognized are included in deferred revenue on the balance sheet. To date, our transaction revenues have been primarily generated from per-transaction fees received from our advertising and marketing clients for incentive programs. Revenues from micropayment transactions have not been material.

Our transaction revenues are driven by a number of factors, including:

- the number of our advertising and marketing clients;

- the size of our membership base;

- the number of transactions performed by each member; and

- the average revenue per transaction.

Custom marketing services and other revenues include production and development fees received for customization of marketing programs, fees received for delivering targeted e-mail to our members and fees received for other advertising and marketing services. Production and development fees represent HTML design services, graphic services, engineering and database development and related services. We charge clients for production and development fees on either a fixed price or time and

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materials basis. Revenue is recognized as these services are performed. These revenues fluctuate based on the number of new programs initiated, type of services, and scope and complexity of each program.

The cost of revenues associated with our transaction revenues represent cash rewards paid to our members for completing transactions or actions. We pay our members a portion of the amount received from the advertiser or marketer in return for completing a specified response or action. Cash rewards to our members are recorded as a current liability in the members payable account of the balance sheet until transferred by a member to a bank account or a VISA card or spent in a micropayment transaction. Gross margin on transaction revenues may fluctuate based on the nature of the incentive programs and the advertisers and marketers in any given period.

The cost of revenues associated with custom advertising and marketing services and other revenues primarily consist of costs for production and development personnel and independent contractors, including associated payroll tax, benefits and other indirect costs. Gross margin associated with these revenues varies from contract to contract depending on the specific terms of the individual contract, and may also fluctuate significantly based on the number and size of fixed price contracts that we undertake in any period and our ability to complete them within the anticipated budget.

We incurred a net loss of approximately $4.8 million in 1998, and approximately $3.9 million in the six months ended June 30, 1999. As of June 30, 1999 we had a retained deficit of approximately $16.9 million. We plan to increase our operating expenses as we continue to build brand and infrastructure, including expenses for online and offline advertising, expanding programs for membership recruitment, and for additional computer hardware and software, and consequently, our losses will increase in the future. Our limited operating history makes it difficult to forecast future operating results. Although we have experienced revenue growth in recent quarters, we cannot be certain that revenues will increase at a rate sufficient to achieve and maintain profitability. Even if we were to achieve profitability in any period, we may not be able to sustain or increase profitability on a quarterly or annual basis.

In connection with the granting of options to purchase our common stock to employees, directors and consultants during 1998 and the first half of 1999, we recorded deferred compensation of $2.1 million representing the difference between the exercise price of options granted and the deemed fair market value of our common stock at the time of grant. We will amortize this deferred compensation as an expense over the vesting periods of the related options. Total deferred compensation expenses recognized during the year ended December 31, 1998 and the six month period ended June 30, 1999 were $198,288, and $490,785, respectively.

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RESULTS OF OPERATIONS

The following table sets forth selected financial data for the periods indicated as a percentage of total revenues. Data for the year ended December 31, 1996 is not presented because we had no material revenues during that period.

                                                           YEAR ENDED        SIX MONTHS ENDED
                                                          DECEMBER 31,           JUNE 30,
                                                        ----------------    ------------------
                                                         1997      1998       1998       1999
                                                        ------    ------    --------    ------
STATEMENT OF OPERATIONS DATA:
Revenues:
  Transaction.........................................    86.0%     62.5%       97.0%     68.9%
  Custom marketing services and other.................    14.0      37.5         3.0      31.1
                                                        ------    ------    --------    ------
          Total revenues..............................   100.0     100.0       100.0     100.0
Cost of Revenues:
  Transaction.........................................    48.2      29.2        36.0      32.6
  Custom Marketing Services and Other.................     7.0      17.2         1.5      14.4
                                                        ------    ------    --------    ------
          Total Cost of Revenues......................    55.2      46.4        37.5      47.0
                                                        ------    ------    --------    ------
          Gross margin................................    44.8      53.6        62.5      53.0
Operating expenses:
  Product development.................................   223.9     169.2       291.3      83.6
  Sales and marketing.................................   406.9     268.1       527.5     185.5
  General and administrative..........................   139.2      78.8       116.0      58.2
  Amortization of deferred compensation...............      --      19.7         9.8      38.4
                                                        ------    ------    --------    ------
          Total operating expenses....................   770.0     535.8       944.6     365.7
                                                        ------    ------    --------    ------
Loss from operations..................................  (725.2)   (482.2)     (882.1)   (312.7)
Interest income (expense), net........................    (2.9)      7.8         2.4       3.5
                                                        ------    ------    --------    ------
Net loss..............................................  (728.1)%  (474.4)%    (879.7)%  (309.2)%
                                                        ======    ======    ========    ======

SIX MONTHS ENDED JUNE 30, 1999 AND 1998

REVENUES

Our revenues increased 372% to $1.3 million in the six months ended June 30, 1999 from $271,000 in the six months ended June 30, 1998.

Transaction Revenues. Transaction revenues increased 235% to $881,000 in the six months ended June 30, 1999 from $263,000 in the six months ended June 30, 1998. All transaction revenues earned for the six months ended June 30, 1999 and 1998, related to members earning cash rewards by performing specified actions in response to advertisements. The increase in transaction revenues is primarily the result of the growth in our membership base. Total membership grew 268% to approximately 2.2 million as of June 30, 1999 from approximately 610,000 as of June 30, 1998.

Custom Marketing Services and Other Revenues. Custom marketing services and other revenues increased 4,858% to $397,000 in the six months ended June 30, 1999 from $8,000 in the six months ended June 30, 1998. For the six months ended June 30, 1999, this revenue was comprised of $278,000 of custom engineering and production fees, $76,000 of fees for the transmission of e-mails to our members and $43,000 in licensing fees. For the six months ended June 30, 1998, this revenue was comprised entirely of custom engineering and production fees. The increase in custom marketing services and other revenues is primarily the result of our relationship with Qwest Communications Corporation as well as increasing demand for the transmission of e-mails to our membership. Qwest Communications Corporation, which retained us to perform non-recurring software engineering services, accounted for $250,000 or 63% of total custom marketing services and other revenues during the six months ended

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June 30, 1999. We expect that custom marketing services and other revenues will fluctuate from period to period.

COST OF REVENUES

Cost of revenues represents the cash incentives paid to members for performing specified actions in response to advertisements and the personnel costs associated with custom marketing services and other revenues. Cost of revenues increased 491% to $600,000 in the six months ended June 30, 1999 from $102,000 in the six months ended June 30, 1998.

The cost of transaction revenues increased 326% to $416,000 in the six months ended June 30, 1999 from $98,000 in the six months ended June 30, 1998. The increase in cost of transaction revenues resulted primarily from an increase in the number of transactions.

The cost of custom marketing services and other revenues increased 4,503% to $184,000 in the six months ended June 30, 1999 from $4,000 in the six months ended June 30, 1998. The increase resulted primarily from activities for the Qwest Communications Corporation project.

Gross margin decreased to 53% in the six months ended June 30, 1999 from 63% in the six month period ended June 30, 1998. This decrease in gross margin was primarily due to a decrease in gross margin for transaction revenue resulting from a change in mix of advertising offers as well as larger average cash incentive awards to our members. We expect overall gross margin to fluctuate as a result of the overall variation in the mix of services we provide, as well as from fluctuations in gross margin for transaction revenue.

PRODUCT DEVELOPMENT COSTS

Our product development costs primarily consist of compensation for technology personnel, fees for outside technology consultants, and an allocation of overhead costs. Product development costs increased 35% to $1.1 million in the six months ended June 30, 1999 from $789,000 in the six months ended June 30, 1998, but decreased as a percentage of revenues to 84% from 291% in these respective periods. The increase in product development costs was primarily due to the increased hiring of additional technical personnel, including consultants. The decrease in product development expenses as a percentage of revenues is primarily attributable to an increase in revenues as we increased our membership and advertising and marketing clients. In addition, the fixed nature of some of our development costs also contributed to the decrease in expense as a percentage of revenues. To date, we have expensed all product development costs as they have been incurred. We expect product development costs to continue to increase as we continue to build features and functionality into our system.

SALES AND MARKETING EXPENSES

Our sales expenses primarily consist of compensation for sales personnel, expenses for trade shows and an allocation of overhead costs. Our marketing expenses consist primarily of member acquisition expenses, promotions directed towards new and existing incentives-based advertisers and marketers, compensation for marketing personnel and an allocation of overhead costs.

Sales and marketing expenses increased 66% to $2.4 million in the six months ended June 30, 1999 from $1.4 million in the six months ended June 30, 1998, but decreased as a percentage of revenues to 186% from 528% in these respective periods. The increase in sales and marketing expenses is primarily attributable to additional hiring of sales and marketing personnel, increased sales commissions resulting from higher revenues, increased expenses associated with membership acquisition, and increased advertising and promotion expenses. The decrease in sales and marketing expenses as a percentage of

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revenues is attributable primarily to an increase in revenues as we increased our membership and advertising and marketing clients. We expect sales and marketing expenses to increase as we continue to increase our marketing efforts, expand our direct sales force and open additional regional sales offices.

GENERAL AND ADMINISTRATIVE EXPENSES

Our general and administrative expenses include compensation for administrative personnel, fees for outside professional advisors and an allocation of overhead costs. General and administrative expenses increased 137% to $744,000 in the six months ended June 30, 1999 from $314,000 in the six months ended June 30, 1998, but decreased as a percentage of revenues to 58% from 116% in these respective periods. The increase in general and administrative expenses resulted from higher professional fees as well as an increase in payroll expenses due to hiring additional administrative personnel. The decrease in general and administrative expenses as a percentage of revenues is primarily attributable to an increase in revenues as we increased our membership and advertising and marketing clients. In addition, the fixed nature of a portion of our general and administrative costs also contributed to the decrease in expenses as a percentage of revenues. We expect that general and administrative expenses will continue to increase as we expand our operations and incur additional costs related to being a public company.

AMORTIZATION OF DEFERRED COMPENSATION EXPENSE

In connection with the granting of options to purchase our common stock to employees, directors and consultants during the six months ended June 30, 1999, we recorded deferred compensation representing the difference between the exercise price of options granted and the deemed fair market value of our common stock at the time of grant. Amortization of deferred compensation was $491,000 in the six months ended June 30, 1999. In the six months ended June 30, 1998, amortization of deferred compensation was $27,000.

INTEREST INCOME (EXPENSE), NET

Interest income (expense), net, primarily consists of interest earned on cash balances, including balances in Cybergold member accounts, offset by interest expense incurred with respect to our capital leases and equipment financing obligations. Interest income (expense), net, increased to $45,000 in the six months ended June 30, 1999 from $7,000 in the six months ended June 30, 1998. The increase in interest income (expense), net resulted primarily from increased interest income on higher cash balances.

YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

REVENUES

Revenues increased 88% to $1.0 million in the year ended December 31, 1998 from $531,000 in the year ended December 31, 1997. We had no material revenues in 1996.

Transaction Revenues. Transaction revenues increased 37% to $628,000 in the year ended December 31, 1998 from $457,000 in the year ended December 31, 1997. All transaction revenues earned for the years ended December 31, 1998 and 1997, related to members earning cash rewards by performing specified actions in response to advertisements. The increase in transaction revenues is primarily the result of the growth in our membership base. Total membership grew 320% from approximately 254,000 on December 31, 1997 to approximately 1,066,000 on December 31, 1998.

Custom Marketing Services and Other Revenues. Custom marketing services and other revenues increased 409% to $377,000 in the year ended December 31, 1998 from $74,000 in the year ended

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December 31, 1997. All custom marketing services revenues earned for the years ended December 31, 1998 and 1997, related to custom engineering and production fees. The increase in custom marketing services and other revenues resulted primarily from the initiation of relationships with three significant customers.

COST OF REVENUES

Overall cost of revenues increased 59% to $466,000 in the year ended December 31, 1998 from $293,000 in the year ended December 31, 1997. Cost of revenues for the year ended December 31, 1998 was comprised of $293,000 of cash incentives earned by members and $173,000 of personnel costs associated with custom marketing services. Cost of revenues for the year ended December 31, 1997 was comprised of $256,000 of cash incentives earned by members and $37,000 of personnel costs associated with custom marketing services. Gross margin increased to 54% from 45% in these respective periods. This increase in gross margin was primarily due to improved gross margin on transaction revenues.

PRODUCT DEVELOPMENT COSTS

Product development costs increased 42% to $1.7 million in the year ended December 31, 1998 from $1.2 million in the year ended December 31, 1997, but decreased as a percentage of revenues to 169% from 224% in these respective periods. The decrease in product development expenses as a percentage of revenues is primarily attributable to an increase in revenues as we increased our membership and advertising and marketing clients. In addition, the fixed nature of some of our development costs also contributed to the decrease in expense as a percentage of revenues.

Product development costs were $1.1 million in the year ended December 31, 1996. The increase in costs from 1996 to 1997 was primarily due to increased hiring of technical employees and consultants.

SALES AND MARKETING EXPENSES

Sales and marketing expenses increased 23% to $2.7 million in the year ended December 31, 1998 from $2.2 million in the year ended December 31, 1997, but decreased as a percentage of revenues to 268% from 407% in these respective periods. The increase in sales and marketing expenses is primarily attributable to additional hiring of sales and marketing personnel, increased sales commissions resulting from higher revenues, increased expenses associated with member acquisition, and increased advertising and promotion expenses. The decrease in sales and marketing expenses as a percentage of revenues is attributable primarily to an increase in revenues as we increased our membership and advertising and marketing clients.

Sales and marketing expenses were $841,000 in the year ended December 31, 1996. The increase in sales and marketing expenses from 1996 to 1997 is primarily attributable to additional hiring of sales and marketing personnel, increased sales commissions resulting from higher revenues, increased expenses associated with member acquisition, and increased advertising and promotion expenses.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses increased 7% to $792,000 in the year ended December 31, 1998 from $740,000 in the year ended December 31, 1997, but decreased as a percentage of revenues to 78% from 139% in these respective periods. The increase in general and administrative expenses resulted from higher professional fees as well as an increase in payroll expenses due to hiring additional administrative personnel. The decrease in general and administrative expenses as a percentage of revenues is primarily attributable to an increase in revenues as we increased our membership and advertising and marketing clients. In addition, the fixed nature of a portion of our general and administrative costs also contributed to the decrease in expense as a percentage of revenues.

General and administrative expenses were $745,000 in the year ended December 31, 1996.

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AMORTIZATION OF DEFERRED COMPENSATION EXPENSE

In connection with the granting of options to purchase our common stock to certain employees, directors and consultants during the year ended December 31, 1998, we recorded deferred compensation representing the difference between the exercise price of options granted and the deemed fair market value of our common stock at the time of grant. Amortization of deferred compensation in the year ended December 31, 1998 was $198,000. For the years ended December 31, 1997 and 1996 we recorded no deferred compensation.

INTEREST INCOME (EXPENSE), NET

Interest income (expense), net was $79,000 in the year ended December 31, 1998, compared to a net expense of $15,000 in the year ended December 31, 1997. The change to net interest income from net interest expense is primarily attributable to an increase in the amount of interest earned on cash balances, partially offset by an increase in interest expense generated from capital lease and equipment financing obligations.

Interest income (expense), net was $10,000 in the year ended December 31, 1996. The change to net interest expense in 1997 from net interest income in 1996 is primarily attributable to an increase in interest expense generated from capital lease and equipment financing obligations as well as interest on investor notes that were paid in full upon completion of our Series B Preferred Stock financing in May 1997.

INCOME TAXES

We recorded a net loss of $4.8 million for the year ended December 31, 1998. For federal and state tax purposes, no provision for income taxes was recorded, and no tax benefit has been recognized due to the uncertainty of realizing future tax deductions for these losses.

As of December 31, 1998, we had net operating loss carryforwards of approximately $9,360,000 for federal and state income tax purposes. The federal and state net operating loss carryforwards begin to expire in the years 2011 and 2005, respectively. Our ability to utilize our net operating loss carryforwards to offset future taxable income, if any, may be restricted as a result of equity transactions that give rise to changes in ownership as defined in the Tax Reform Act of 1986.

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QUARTERLY RESULTS OF OPERATIONS

The following tables set forth selected statement of operations data for the quarters ended June 30, 1999 in dollars and as a percentage of revenues. This data has been derived from our unaudited financial statements and is not necessarily indicative of the results that may be expected for future periods. In our opinion, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our financial position and results of operations for such period have been included.

                                                                      THREE MONTHS ENDED
                                 ---------------------------------------------------------------------------------------------
                                   MARCH 31,       JUNE 30,      SEPTEMBER 30,   DECEMBER 31,      MARCH 31,       JUNE 30,
                                     1998            1998            1998            1998            1999            1999
                                 -------------   -------------   -------------   -------------   -------------   -------------
                                                                        (IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues:
  Transaction..................     $   107         $   155         $   175         $   191         $   333         $  548
  Custom marketing services and
    other......................           0               8             108             261             170            226
                                    -------         -------         -------         -------         -------         ------
         Total revenues........         107             163             283             452             503            774
Cost of revenues
  Transaction..................          35              62              87              91             159            257
  Custom marketing and other...           0               4              55             132              85             99
                                    -------         -------         -------         -------         -------         ------
         Total cost of
           revenues............          35              66             142             223             244            356
         Gross margin..........          72              97             141             229             259            418
                                    -------         -------         -------         -------         -------         ------
Operating expenses:
  Product development..........         376             414             430             480             484            583
  Sales and marketing..........         791             637             563             704             967          1,402
  General and administrative...         157             157             244             234             278            466
  Amortization of deferred
    compensation...............           0              27              30             141             327            164
                                    -------         -------         -------         -------         -------         ------
         Total operating
           expenses............       1,324           1,235           1,267           1,559           2,056          2,615
                                    -------         -------         -------         -------         -------         ------
Loss from operations...........      (1,252)         (1,138)         (1,126)         (1,330)         (1,797)        (2,197)
  Interest income (expense),
    net........................          (5)             12              16              55              11             33
                                    -------         -------         -------         -------         -------         ------
Net loss.......................     $(1,257)        $(1,126)        $(1,110)        $(1,275)        $(1,786)        (2,164)
                                    =======         =======         =======         =======         =======         ======

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                                                                      THREE MONTHS ENDED
                                 ---------------------------------------------------------------------------------------------
                                   MARCH 31,       JUNE 30,      SEPTEMBER 30,   DECEMBER 31,      MARCH 31,       JUNE 30,
                                     1998            1998            1998            1998            1999            1999
                                 -------------   -------------   -------------   -------------   -------------   -------------
AS A PERCENTAGE OF NET
  REVENUES:
Revenues:
  Transaction..................        100.0%         95.1%           61.8%           42.2%           66.2%           70.8%
  Custom marketing and other...          0.0           4.9            38.2            57.8            33.8            29.2
                                   ---------        ------          ------          ------          ------          ------
         Total revenues........        100.0         100.0           100.0           100.0           100.0           100.0
Cost of revenues
  Transaction..................         32.7          38.0            30.8            20.1            31.6            33.2
  Custom marketing and other...            0           2.5            19.4            29.2            16.9            12.8
                                   ---------        ------          ------          ------          ------          ------
         Total cost of
           revenues............         32.7          40.5            50.2            49.3            48.5            46.0
         Gross margin..........         67.3          59.5            49.8            50.7            51.5            54.0
                                   ---------        ------          ------          ------          ------          ------
Operating expenses:
  Product development..........        351.4         253.4           151.9           106.2            96.2            75.3
  Sales and marketing..........        739.2         389.5           198.9           155.5           192.2           181.1
  General and administrative...        147.7          96.3            86.2            51.8            55.3            60.2
  Amortization of deferred
    compensation...............          0.0          16.6            10.7            31.2            65.0            21.2
                                   ---------        ------          ------          ------          ------          ------
         Total operating
           expenses............      1,238.3         755.8           447.7           344.7           408.7           337.8
                                   ---------        ------          ------          ------          ------          ------
Loss from operations...........     (1,170.1)       (696.3)         (397.9)         (294.0)         (357.2)         (283.8)
  Interest income (expense),
    net........................         (4.7)          7.4             5.7            12.2             2.2             3.5
                                   ---------        ------          ------          ------          ------          ------
Net loss.......................     (1,174.8)%      (688.9)%        (392.2)%        (281.8)%        (355.0)%        (280.3)%
                                   =========        ======          ======          ======          ======          ======

Our total revenues have grown in each quarter. Transaction revenues have increased in each quarter as a result of growth in our membership base and growth in the volume of transactions. Custom marketing services and other revenues decreased from the quarter ended December 31, 1998 to the quarter ended March 31, 1999 as the result of the timing of recognition of revenue from a single significant contract in the quarter ended December 31, 1998. Gross margin has also fluctuated as a result of quarter to quarter changes in the mix of revenue between higher-margin transaction revenues and lower-margin custom marketing services and other revenues.

Our operating expenses have increased significantly from 1996 to 1998 and in the first six months of 1999 as we have transitioned from the development stage to the commercialization of our services. Sales and marketing expenses fluctuated during 1998, declining sequentially in the second and third quarters of 1998 as a result of changes made to our sales and marketing personnel in an effort to enhance the quality and quantity of advertisers, marketers and new members we attract. Sales and marketing expenses increased during the fourth quarter of 1998 as we added new sales and marketing personnel, including a new Vice President of Sales, and increased promotional expenditures to fuel membership growth and to attract new advertising and marketing clients.

We plan to increase our operating expenses as we continue to build brand and infrastructure. Consequently, our losses may increase in the future. Although we have experienced revenue growth in recent periods, we cannot be certain that such growth will continue at its current rate or increase in the future. If our revenue growth is slower than we anticipate or our operating expenses exceed our expectations, our losses will be significantly greater.

Our quarterly results of operations have varied in the past, and our revenues and operating results are likely to vary significantly from quarter to quarter. A number of factors are likely to cause these variations, some of which are outside of our control. These factors include:

- changes in revenue levels resulting from the advertising and marketing budget cycles of individual advertisers and marketers;

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- changes in advertising and marketing costs that we incur to attract and retain members;

- changes in our pricing policies, the pricing policies of our competitors or the pricing policies for Internet advertising and marketing generally;

- our rate of member acquisition and the level of activity of new and existing members;

- the number and type of programs and development contracts established with our advertising and marketing clients as well as the impact of the fixed price portion of development contracts on gross margin;

- the introduction of new products and services by us or by our competitors;

- unexpected costs and delays resulting from the expansion of our operations; and

- the occurrence of technical difficulties or unscheduled system downtime.

We believe that our revenues will be subject to seasonal fluctuations as a result of general patterns of retail advertising and marketing and consumer purchasing, which are typically higher during the fourth calendar quarter and lower in the following quarter. In addition, expenditures by advertisers and marketers tend to be cyclical, reflecting overall economic conditions and consumer buying patterns. As a result, our results of operations could be harmed by a downturn in the general economy or a shift in consumer buying patterns.

Due to these and other factors, we believe that quarter-to-quarter comparisons of our operating results may not be meaningful and you should not rely upon them as any indication of our future performance. Our operating expenses are based on our expectations of our future revenues and are relatively fixed in the short term. If our revenues are lower than expected, we would incur greater than expected losses. In addition, during future periods our operating results likely will fall below the expectations of public market analysts and investors. In this event, the market price of our common stock likely would decline.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At December 31, 1998, our cash and cash equivalents consisted primarily of demand deposits and money market funds held by large institutions in the United States and our short-term investments were invested in corporate debt and equity securities maturing in less than one year. Due to the nature of our short-term investments, we have concluded that there is no material market risk exposure.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily from the sale of equity securities to venture capital firms and other individual, institutional and strategic investors. We have also borrowed funds under long-term capital lease and equipment financing facilities. As of June 30, 1999, we had cash and cash equivalents of $504,000 outstanding under capital lease and equipment financing facilities.

Net cash used in operating activities was $3.5 million in 1998, $3.2 million in 1997, $2.3 million in 1996 and $2.6 million in the six months ended June 30, 1999. In 1998, the net cash used in operating activities consisted primarily of our net loss, offset in part by an increase in net accounts payable, members payable, membership acquisition payable, depreciation and amortization, and deferred revenue. In 1997, the net cash used in operating activities consisted primarily of our net loss, offset by an increase in depreciation, members payable, membership acquisition payable, and deferred revenue. In 1996, the net cash used in operating activities consisted primarily of our net loss, offset in part by an increase in accounts payable and depreciation and amortization.

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Net cash used in investing activities was $153,000 in 1998, $58,000 in 1997, $387,000 in 1996 and $192,000 in the six months ended June 30, 1999. These amounts were used to acquire property and equipment.

Net cash provided by financing activities was $5.6 million in 1998, $4.3 million in 1997, $2.9 million in 1996 and $8.2 million in the six months ended June 30, 1999. In 1998, this amount included $5.8 million in proceeds from the issuance of preferred stock, less payments on capital leases. In 1997, this amount included primarily $3.1 million in net proceeds from the issuance of preferred stock, $1.0 million in proceeds from stockholder loans that were subsequently converted into preferred stock, and $250,000 in proceeds from a sale-leaseback transaction related to items of computer equipment, less payments on capital leases. In 1996, this amount included primarily $3,000,000 in proceeds from the issuance of preferred stock. Net cash provided by financing activities in the six months ended June 30, 1999 consisted primarily of proceeds from the Series D preferred stock financing.

In 1997 and 1998, we entered into various non-cancelable capital lease agreements for some of our capital expenditures. As a result of these capital lease agreements, we had lease payment obligations of approximately $110,000 in 1997 and $143,000 in 1998. Borrowings under these capital lease arrangements have terms ranging from 36 to 48 months with monthly payments and interest rates ranging from 10.5% to 11.5%.

We currently anticipate that our available cash resources combined with the net proceeds from this offering will be sufficient to meet our anticipated working capital and capital expenditure requirements through the end of 2000. However, we may need to raise additional funds sooner to fund more rapid expansion, to develop new or enhance existing services or products, to respond to competitive pressures or to acquire complementary products, businesses or technologies. If adequate funds are not available on acceptable terms, our business, results of operations and financial condition could be harmed. See "Risk Factors -- We may need more working capital to expand our business, and our prospects for obtaining additional financing are uncertain."

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Development or Obtained for Internal Use. SOP No. 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. We do not expect that the adoption of SOP No. 98-1 will have a material impact on our financial statements.

In April 1998, the Accounting Standards Executive Committee issued SOP 98-5, Reporting on the Costs of Start-Up Activities. This SOP provides guidance on the financial reporting of start-up costs and organization costs. It requires the costs of the start-up activities and organization costs to be expensed as incurred. The SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The Company adopted the SOP during the year ended December 31, 1998. The adoption of the SOP did not have a material impact on our financial statements.

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded to accept only two digit entries in their date code field. Beginning in the Year 2000, these date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, computer systems and software products used by many companies may need to be upgraded to comply with these Year 2000 requirements.

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We have made an assessment of the Year 2000 readiness of all our relevant operating, financial and administrative systems. Our assessment plan consists of:

- quality assurance testing of our internally developed proprietary software;

- contacting third-party vendors and licensors of material hardware and software that are both directly and indirectly related to the delivery of our services to users;

- appointing a Year 2000 compliance team composed of a cross-section of our employees and appointing a manager of the team;

- assessing repair or replacement;

- implementation of the plan; and

- creating contingency plans in the event of Year 2000 failures.

We designed the software underlying our Web-based programs as well as our Web site and related technology infrastructure to be Year 2000 compliant. However, we rely on third-party hardware and software in the operation of our business. We believe we have identified all of the major information systems used in our internal operations, including operating systems, databases and the software residing between databases and the user interface, and have substantially completed all modifications, upgrades or replacements to minimize the possibility of a material disruption of our business. These remediation activities include updating these systems to the newest versions, which are claimed to be Year 2000 compliant, and applying patches to current versions. The expenditures that we have incurred to date and the expenditures we expect to incur in this regard have not been and are not expected to be material to our business, results of operations and financial condition.

We have also contacted the vendors of third-party hardware and software we use in order to gauge their Year 2000 compliance. Based on these vendors' representations and the activities we have conducted, we believe that the third-party hardware and software we use are Year 2000 compliant. We cannot assure you, however, that we will not experience unanticipated negative consequences, including material costs caused by undetected errors or defects in the technology used in our internal systems. If, in the future, it comes to our attention that the software underlying our e-mail or Web-based programs requires modification, or that any of our third-party hardware and software are not Year 2000 compliant, then we will seek to make modifications to our systems. In such case, we expect such modifications will not have a material effect on our results of operations. There can be no assurance, however, that we will be able to modify such systems in a timely and successful manner to comply with the Year 2000 requirements. Any failure to do so could have a material adverse effect on our business, results of operations and financial conditions. The worst case scenario for Year 2000 problems for us if the third-party hardware and software we use in our service were to prove not to be Year 2000 compliant would be the need to cease normal operations for an indefinite period of time if our web site were to become inoperative and the need to remediate transactions that were incorrectly processed or recorded.

We do not currently have any information concerning the Year 2000 compliance status of our advertising and marketing clients. We plan to contact advertising and marketing clients to remind them of the Year 2000 problem and its potential effects on their systems and to gauge their Year 2000 compliance. However, to the extent that our advertising and marketing clients are no longer able to process transactions, process them incorrectly, or transmit incorrect date to our systems, our business could be adversely affected. If our current or future advertising and marketing clients fail to achieve Year 2000 compliance or if they divert expenditures, especially technology expenditures that were reserved for promotional products, to address Year 2000 compliance problems, our business, results of operations, or financial condition could be materially adversely affected.

We are also vulnerable to systemic failures resulting from Year 2000 problems. These failures could include prolonged data communications, telecommunications or electrical failures. A failure of this type

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could prevent members from accessing our Web site or prevent us from operating our business. As a result, we could experience lost revenues, increased operating expenses and loss of members. Any of these eventualities could have a material adverse effect on our business, results of operations and financial condition.

We have not yet developed a comprehensive contingency plan to address Year 2000 problems that are not detected and corrected prior to their occurrence. We expect to complete our Year 2000 contingency plan by October 31, 1999.

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BUSINESS

OVERVIEW

We are a leading provider of online direct marketing and advertising solutions. We combine Internet-based direct marketing and advertising services with programs that reward consumers with cash when they perform actions desired by our advertising and marketing clients. These cash-based online incentives programs are intended to provide flexible, incentive-marketing solutions for our clients. Our payment structure, in which our advertising and marketing clients are only charged when our members execute specific predefined actions, provides these clients with a known cost to achieve the desired response to their advertising campaigns. By leveraging our member database and our targeting capabilities, we are able to offer our clients customized, targeted advertising solutions designed to improve advertisement response rates and reduce the cost of acquiring new customers.

Cybergold serves three main constituencies: advertising and marketing clients, consumer members and merchants. Advertising and marketing clients use Cybergold to cost-effectively acquire new customers with offers and cash incentives. Consumer members use Cybergold to earn cash rewards for responding to offers on our Web site, on third-party Web sites and through e-mail campaigns. Merchants use Cybergold technology as a cost-effective means to sell inexpensive digital content, services and products on a pay-per-transaction basis to the Cybergold membership base.

Our business revolves around what we call the Earn & Spend Community -- a place on the Internet where consumers can earn cash incentives for responding to online marketing offers presented by our advertising and marketing clients and then spend the cash with merchants. By opening a Cybergold account, a consumer can become a member of the Earn & Spend Community. The cash earned by our consumer members can be credited to either their VISA or bank accounts from their Cybergold account or be used to purchase content, services and products, including software, music, games, credit reporting services and original artistic works and publications through our Earn & Spend Community. We currently have approximately 2.6 million consumer members. Advertising and marketing clients that currently use our service include autobytel.com inc., Garden.com, Inc., The Walt Disney Company, Uproar (E-Pub Services Ltd.) and MBNA America Bank.

INDUSTRY BACKGROUND

Growth of the Internet and Online Commerce

The Internet has emerged rapidly as an important medium for facilitating communication, disseminating information and conducting commerce. International Data Corporation estimates that the number of Internet users worldwide exceeded 97 million in 1998 and will grow to approximately 320 million by the end of 2002. International Data Corporation also estimates that worldwide commerce over the Internet will reach approximately $426 billion by the end of 2002, up from approximately $32 billion in 1998. The availability of a broad range of content and the acceptance of electronic commerce has driven rapid Internet adoption by businesses and consumers alike, which has in turn stimulated the proliferation of additional content and electronic commerce.

Online Advertising and Direct Marketing

The Internet possesses unique and commercially powerful characteristics that differentiate it from traditional forms of media, including a lack of geographic or temporal limitations, real time access to dynamic interactive content, and instantaneous connections between advertisers, marketers and consumers. Advertisers and marketers are particularly attracted to the Internet because it enables them to distribute information efficiently, reach potential customers globally and engage in one-to-one

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customer interaction. These capabilities create significant opportunities for advertisers, marketers and merchants to develop direct relationships with consumers. The Internet also facilitates the efficient collection of valuable customer data and demographic information, enabling advertisers and marketers to develop targeted marketing campaigns directed to existing and potential customers.

These characteristics have resulted in the rapid growth of Internet advertising. Forrester Research estimates that worldwide Internet advertising expenditures in 1998 were approximately $1.5 billion and projects Internet advertising expenditures to increase to approximately $15.2 billion in 2003. The majority of Internet advertising to date has been in the form of passive banner advertising. However, as the number of Web sites and amount of advertising on the Internet has proliferated, we believe decreasing consumer response to banner advertising has led advertisers and marketers to question the effectiveness of such advertising and marketing campaigns. According to NetRatings, click-through rates, used by advertisers to measure the effectiveness of their online efforts, was 0.61% in June 1999.

These trends are causing marketers to consider alternative marketing solutions that encourage consumers not only to pay greater attention to marketing messages but also to increase response rates to those messages. Conversely, many consumers prefer to limit the number of advertisements to which they are exposed and prefer to be exposed only to those advertisements for products or services in which they are interested. We believe that the inability of traditional banner advertising to maximize the powerful one-to-one relationships enabled by the Internet has led advertisers to place greater emphasis on online direct marketing as a more effective means to convert Internet users into customers. The Direct Marketing Association estimates that spending on Internet direct marketing will grow from $603 million in 1998 to $5.3 billion in 2003, representing a compound annual growth rate of 54%.

Online Incentive Programs

As advertisers and marketers seek to increase the effectiveness and efficiency of their online marketing efforts, they are turning to incentives-based programs, which reward consumers for their attention or specific response to ads and promotions. Because advertisers are charged on a cost-per-action basis in these programs, advertisers are provided with a predictable cost for the desired response. In contrast, banner advertisers pay simply for the number of times a banner appears on a Web site page, regardless of how many consumers actually view or click on the banners or whether they take additional actions based on what they read.

Most incentives-based programs offer consumers the ability to earn "points" that are redeemable only for limited products, frequent flyer miles or other non-cash rewards. These non-cash incentive programs often have significant limitations on redemption due to the limited items for which rewards can be redeemed as well as various program restrictions. For example, programs offering frequent flyer miles are often restrictive and generally only appeal to consumers who otherwise actively participate in frequent flyer programs. In addition, rewards for participation in online direct marketing programs mostly come in small increments and the redemption opportunities generally require large outlays of points. Therefore, while these programs have the potential to provide significant benefits to advertisers and marketers, they remain limited to a subset of Internet users.

Online Payment Mechanisms

Traditionally, Internet companies have chosen either to fund the free distribution of content or services through selling banner advertising on their Web sites or to sell their content or services on a subscription basis. However, the increasing amount of online advertising inventory and the decreasing effectiveness of banner advertising is causing the price for banner advertising to decline. According to AdKnowledge, the overall average advertising banner cost per thousand impressions (CPMs) have fallen 7.5% from June 1998 to March 1999. We believe a continued decline in CPM rates will lead Internet

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content and service providers, many of whom depend on advertising sales as a major source of revenue, to find alternative revenue sources, including the sale of content or services on a per transaction basis.

While credit cards have traditionally been the dominant form of payment for Internet transactions, the relatively high costs of processing credit card payments makes them less suitable for inexpensive Internet purchases. In addition, consumers have traditionally been reluctant to use credit cards for inexpensive purchases. As a result, the absence of a broadly accepted online micropayment system has left sales of inexpensive content, services and products economically impractical.

Market Opportunity

Advertisers, marketers and merchants need more effective means to induce consumers to respond to online advertising and marketing and facilitate the online purchase of inexpensive content, goods and services. While there have been several attempts to address these needs, current incentives-based online advertising and marketing and micropayment solutions have a number of significant limitations. Current incentives-based online advertising and marketing campaigns impose significant limitations on consumer choice, limiting consumers' ability to monetize their time spent online. These shortcomings limit the utility and flexibility of incentives-based online marketing programs and, therefore, consumers' desire to participate. In addition, current transaction processing methods for the distribution of inexpensive content, services and products are prohibitively expensive. There is a need for online incentives-based advertising and marketing and micropayment solutions which effectively target consumers and provide consumers with greater flexibility and purchasing opportunities.

THE CYBERGOLD SOLUTION

We are a leading provider of online direct marketing and cash-based incentive advertising solutions. We believe that we are the first online company to combine a cash-based incentive program with a direct marketing approach that provides extensive benefits for our advertising and marketing clients, consumer members and merchants. Our Earn & Spend Community has approximately 2.6 million consumer members, which enables our advertising and marketing clients to offer cost-per-action incentive programs either to our entire member database or to a targeted subset. Members are compensated for responding to online advertisements or promotions by performing client-specified actions, such as filling out online surveys or purchasing products or services. Internet users become Cybergold members at no cost by completing a short online registration form on our Web site or on a co-marketer or co-registration Web site.

In order to manage these cash-based incentive programs on our Web site and on other sites, we have developed a proprietary transaction system that enables the cost-effective management of cash-based incentive reward programs and micropayment transactions. Our Earn & Spend Community allows our members to earn cash by interacting with offers that appeal to their interests. For example, under a current promotion, members can earn $3.00 for requesting a quote for a new car from our marketing client, autobytel.com inc. The cash earned by our members is deposited in their Cybergold accounts and can then be credited to either their VISA cards or bank accounts or be used to purchase content, services and products, including software, music, games and original artistic works and publications.

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LOGO

Benefits of our unique incentive programs include:

Advertising and Marketing Client Benefits

- FLEXIBLE AND EFFECTIVE MARKETING SOLUTION. We provide a variety of advertising and marketing services for our clients, including incentive offers on our Earn & Spend Community site, targeted and untargeted e-mails, and ad campaigns that offer cash incentives directly on third-party sites. We believe our services provide our clients with more effective advertising tools to induce desired consumer behavior, including purchasing, product evaluation and subscriptions.

- COST-PER-ACTION PAYMENT STRUCTURE. We provide a cost-per-action incentive marketing solution, in which our clients are only charged when our members take pre-defined actions specified by our clients. In contrast, with banner advertising, advertisers typically pay for a number of impressions on Web sites, regardless of whether consumers click on, or take any action in response to, the banner advertisement. Our cost-per-action solution provides our clients with both a known cost per yield for each advertising and marketing campaign, the costs of acquiring new customers and risk.

- MEASURABLE RESULTS. Member actions in response to client marketing messages are instantly recorded in our database, allowing clients to measure the effectiveness of their advertising campaigns on an ongoing basis. Clients are able to review and modify their campaigns at any time to react to customer response rates.

- TARGETING CAPABILITY. By leveraging our database of approximately 2.6 million members, we are able to provide customized, targeted campaigns for our clients. This targeting capability enables our clients to focus on specific demographic segments or groups of users that exhibit desirable

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online behavioral patterns. We believe that by focusing on a specific target audience, our clients should increase response rates and reduce their customer acquisition costs.

Member Benefits

- CASH REWARDS. Unlike other online incentive programs which reward the customer with "points" redeemable for frequent flyer miles, specified products or other non-cash rewards, we reward our members with cash. One Cybergold dollar equals one U.S. dollar. The dollars our members earn are accumulated in a Cybergold account and can be credited to their VISA cards or bank accounts. We also offer a number of online spending opportunities to our members, such as the ability to purchase digital content, services and products, including software, music, games, credit reporting services and original artistic works and publications.

- MEMBER CHOICE. Our online incentives programs provide two primary benefits for members. First, members may choose to respond only to advertising and marketing that interests them and provides a sufficient reward to induce their participation. Second, members earn cash rewards which they can choose to spend on online purchases or have credited to their VISA cards or bank accounts. This enables members to pursue advertising and marketing that interests them, increasing the quality of their online experience.

Merchant Benefits

- NEW REVENUE OPPORTUNITY. Through our micropayments system, we afford merchants who provide inexpensive digital content, services and products an opportunity to participate in Internet commerce on a pay-per-transaction basis. We offer these merchants an alternative revenue source by providing them access to our members, who have cash accounts that can be used for inexpensive purchases of content, services and products. In addition, if Cybergold members wish to purchase items that cost more than the amount of Cybergold dollars in their accounts, they can deposit additional funds into their Cybergold accounts from their VISA cards. Our broad membership community gives merchants an established base of potential customers.

- VALUE-ADDED SERVICES. We provide merchants with "non-hosted" and "hosted" value-added services to sell inexpensive digital content, products and services. In "non-hosted" solutions, our micropayment transaction system enables merchants to sell inexpensive digital content, services and products on their own Web sites. In "hosted" solutions, we provide the merchants with a complete suite of Web site hosting, systems administration, transaction processing and integration services, while the merchant only provides the content.

STRATEGY

Our objective is to enhance our leadership position in online direct marketing and incentives-based advertising. We intend to achieve our objective through the following key strategies:

Increase Size of Membership Base. We intend to continue to expand our membership base through membership acquisition activities such as co-registration programs, co-marketing programs and advertising on third-party Internet sites. We also plan to initiate offline branding and promotional campaigns using broadcast, print and outdoor advertising in order to attract new members. In addition, we intend to explore international opportunities, including potential strategic alliances, in order to extend the reach of the Cybergold brand.

Increase Number of Advertising and Marketing Clients. We are seeking to broaden our advertising and marketing client base by increasing our direct and indirect sales and marketing efforts. We plan to

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increase significantly the size of our direct sales force and to open additional regional sales offices. In addition, we are seeking to take advantage of existing distribution channels, such as advertising networks, to expand the number of advertisers using our incentive marketing system.

Increase Brand Awareness. We are focused on increasing brand awareness to attract and retain members, advertising and marketing clients and merchants. We intend to use a combination of online and offline advertising, direct marketing, public relations and other marketing programs designed to promote the Cybergold brand and build loyalty among our members, clients and merchants. We also intend to develop promotional and media campaigns with well-known Internet companies and offline marketers of branded consumer products and services.

Expand Earn & Spend Opportunities to Other Web Sites. Although we currently are primarily a site-centric service, our micropayment technology enables our Earn & Spend capabilities to function on third-party Web sites. To date, a number of Web sites have installed the Cybergold Mint, our electronic commerce payment software, on their servers. We are seeking to aggressively expand Cybergold Mint installations on other Web sites to increase the number of Internet users who are exposed to the Cybergold Earn & Spend Community and establish additional sources of revenue. We are also pursuing strategic relationships with electronic commerce infrastructure vendors to further expand the distribution of the Cybergold Mint technology.

Enhance Cybergold Earn & Spend Community. We intend to continue to enhance the Cybergold Earn & Spend Community by increasing the number and variety of incentive offers provided and the breadth of online purchasing opportunities. We are also actively developing a community store site where our members can sell their own inexpensive digital content, services and products to other members. We believe that the Cybergold Earn & Spend Community and our technology enable individuals and businesses to sell inexpensive digital content, services and products that were previously not cost-effective to offer online.

Pursue Strategic Acquisitions and Relationships. We intend to continue to enter into strategic relationships in order to build our Earn & Spend Community, generate additional traffic to our Web site, increase membership and establish additional sources of revenue. We have entered into strategic relationships with the First National Bank of Omaha, MBNA America Bank, Earthlink Network, Inc. and others which have enabled us to offer our clients and members a broader selection of advertising opportunities, expanded content and more online services. In addition, we intend to pursue strategic acquisitions of complementary technologies and services in order to expand and enhance our current offering of products and services.

CYBERGOLD SERVICES

Cybergold serves three main constituencies: advertising and marketing clients, consumer members and merchants. Advertising and marketing clients use Cybergold to cost-effectively acquire new customers with offers and cash incentives. Consumer members use Cybergold to earn cash rewards for responding to offers on our Web site, on third-party Web sites and through e-mail campaigns. Merchants use Cybergold technology as a cost-effective means to sell inexpensive digital content, services and products on a pay-per-transaction basis to the Cybergold membership base.

Advertising and Marketing Client Services. We work closely with our advertising and marketing clients to develop marketing campaigns that are tailored to their customer acquisition needs. These programs include:

- incentives-based offers and promotions on the Cybergold Web site;

- targeted and untargeted e-mail campaigns conducted by us on behalf of our advertising and marketing clients;

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- programs introduced on our marketing clients' Web sites; and

- banner ads placed on various targeted Web sites.

Our membership database technology enables us to maintain and track information about our members. We are able to track aspects of member online activity, such as marketing programs in which specific members have participated and online purchases initiated through Cybergold. In addition, we have access to member information gathered by a number of our advertising and marketing clients. We believe that our database of membership information allows us to carefully tailor marketing campaigns to maximize their effectiveness for our clients.

Member Services. Internet users become Cybergold members at no cost by completing a short online registration form on our Web site or on a co-marketer or co-registration Web site. Our members earn cash rewards for completing various desired actions, such as viewing an incentive offer, completing a survey or registration form or downloading software. Members can also earn rebates and incentives by purchasing a variety of products or services offered through our Web site or third-party Web sites. In addition, to encourage members to visit our Web site frequently, our members receive free services, including e-mail, chat, stock quotes and news.

Existing members are notified of new programs and promotions through periodic e-mail distributions. In contrast to other incentive programs, our members have the opportunity not only to earn cash rewards that are transferable to their VISA cards or bank accounts, but also to spend their Cybergold cash rewards for a variety of goods and services. Cash is transferable to a member's bank account in a minimum amount of $10.00 and to a VISA card in a minimum amount of $5.00. Members are also able to transfer money from VISA cards to their Cybergold accounts to enable them to use our micropayment system to purchase additional content, goods and services from merchants.

We are committed to maintaining the privacy and security of our members. We keep all personal information about our members confidential. Cybergold is a member of TRUSTe, a non-profit organization dedicated to the protection of user privacy and promotion of security online.

Merchant Services. We offer merchants the ability to sell digital content, products and services over the Internet in transactions of any size. By eliminating the high transaction costs typically associated with very small credit card transactions, we enable the cost-effective delivery of content such as articles or music for cents rather than dollars. We believe that our micropayment system enables new business models for merchants of content, products and services. We offer merchants with two micropayment environment options:

- Non-hosted -- a technology and marketing solution where the Cybergold Mint, our electronic commerce payment software, is provided to merchants for use on their own Web sites to sell inexpensive content, services and products to online consumers.

- Hosted -- a full-service solution where we provide the customer with a complete suite of Web site hosting, systems administration, transaction processing and integration services while the merchant only provides the content.

SALES AND MARKETING

Our primary sales strategy is to sell our services directly to advertisers, direct marketers, ad agencies and electronic commerce merchants. We currently sell our services in the United States through a direct sales organization, with seven employees located in the San Francisco Bay Area, metropolitan Dallas and metropolitan New York. Our sales force is dedicated to establishing and maintaining relationships with advertising and marketing clients. Our sales force uses industry directories, press, personal contacts,

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industry knowledge and Internet search engines to seek likely sales prospects. Recently we have begun to receive sales leads from advertising agencies that have recommended Cybergold to clients.

Our marketing organization is composed of marketing communications, product management, product marketing and membership marketing groups. In addition, we also use consultants such as public relations agencies and graphic design firms to assist with marketing activities. Marketing communications is responsible for external public relations activities, managing relationships with the press and industry analysts, and creating marketing collateral materials, such as sales brochures. Product management is responsible for working with our engineering department and our clients to define new products as well as enhancements to existing products and services. Product management also contributes to management development efforts, assists customers with special requirements, and provides additional resources as needed throughout our company. Product marketing is responsible for the content and graphics on our Web site, including the production and implementation of advertising and merchant offers. Product marketing also determines which additional services may be of interest to members, clients and merchants.

Membership marketing is focused on expanding our membership base. We use a variety of methods to generate new members, including e-mail campaigns, advertising, and co-registration agreements with some of our affiliate partners, as well as referrals by current members and public relations. Currently, we attract the majority of our members through co-registration agreements with online partners, whereby registrants for those sites have the option to concurrently sign up for the Cybergold Earn & Spend Community. We believe that the convenience afforded by this co-registration capability is a significant factor in attracting new members. Currently, we have a network of approximately 55 affiliate partners through which we can attract new members. In addition to these online methods of increasing our membership base, we are currently planning a range of offline marketing campaigns designed to attract new members.

ADVERTISING AND MARKETING CLIENTS

Our advertising and marketing clients pay us commissions each time a member takes an action defined by our clients in response to some online advertising or promotion. Since inception, a total of 154 advertising and marketing clients have offered incentives using our system. In 1997, no client accounted for more than 10% of our revenue. Revenues from significant clients as a percentage of total revenues in 1998 and the first half of 1999 are as follows:

YEAR ENDED DECEMBER 31, 1998
  Qwest Communications International, Inc...................   22%
  Interactive Coupon Network (Cool Savings).................   16%
SIX MONTHS ENDED JUNE 30, 1999
  Qwest Communications International, Inc...................   20%
  autobytel.com inc.........................................   10%

We have 65 advertising and marketing clients who are currently offering incentives using our system, including:

- American Homeowners         - KB Holdings, Inc.           - Quintel Communications,
  Association                   (BrainPlay)                 Inc.
- autobytel.com inc.          - LifeMinders.com, Inc.       - Uproar (E-Pub Services
- Garden.com, Inc.            - MBNA America Bank           Ltd.)
                              - Netmarket Group Inc.        - The Walt Disney Company
                                                              (Disney Daily Blast,
                                                              Disney Store Online)

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STRATEGIC RELATIONSHIPS

To date, we have entered into a number of strategic relationships to build our Earn & Spend Community, generate additional traffic to our Web site, increase our membership and generate additional revenue.

These strategic relationships include:

- The First National Bank of Omaha. Our relationship with the First National Bank of Omaha enables consumers to directly credit their personal VISA accounts with money earned through Cybergold and to credit their Cybergold accounts with funds from their VISA account. Cybergold pays a monthly minimum fee to the First National Bank of Omaha, along with a transaction fee for each transfer from a Cybergold account to a VISA account.

- MBNA America Bank. Together with MBNA America Bank, we launched the co-branded Cybergold MBNA VISA card, which provides convenient and easy Internet shopping, MBNA's state-of-the-art fraud protection, VISA Platinum Plus cardholder benefits and the potential for cash incentives. Cybergold receives fee for each co-branded card generated and transaction fees for all purchases made on these cards.

- Earthlink. We launched a private-label loyalty program with Earthlink under which Earthlink will utilize our transaction processing and account management technology to implement an incentives-based loyalty program for its members that use their Earthlink credit cards for shopping both on the Internet and offline. Cybergold receives a monthly minimum fee as well as transaction fees for Cybergold transactions that occur on Earthlink's Web site.

TECHNOLOGY

We have developed a scaleable technology infrastructure that executes both incentive reward transactions and online micropayments for consumer purchases. There are two proprietary components to our infrastructure:

- The Cybergold Mint is our electronic commerce payment software which runs on either our servers or the servers of our clients or merchants. The Cybergold Mint executes both Cybergold incentive reward transactions and online micropayments for consumer purchases. To make world-wide distribution possible, the Cybergold Mint employs a cryptographic system called HMAC-MD5 that offers full 128-bit security without export controls.

- The Cybergold payment server is our real-time transaction processing engine. This engine is optimized for high-volume financial transactions and is designed to scale by simply adding additional hardware to our system. The Cybergold payment server communicates with consumer browsers using SSL, the industry-standard Web security protocol, to safeguard all private user information.

Our payment server includes property modules for handling:

- interactive transactions;

- background transactions for off-line incentive programs;

- consumer account management and online statements;

- VISA and bank (ACH) transfers and charity donations;

- transaction reversal and dispute management;

- real-time risk management with velocity checking and fraud detection;

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- context-sensitive help; and

- automated customer assistance with escalation to our separate Customer Service system.

Typical Cybergold transactions begin when Internet users encounter advertisements offering incentive and/or purchases on our Web site or on third-party Web sites. The merchant Web servers use the Cybergold Mint to generate rewards and payments. The transactions are sent over the Internet to the Cybergold payment servers, which move incentive funds from merchant accounts to member accounts, and move payment funds from member accounts to merchant accounts. The payment servers incorporate a database of user, merchant and offer information.

Our technology consists of proprietary programs integrated with third-party hardware and software. Our third-party hardware includes Sybase SQL Servers, Sun Solaris platforms and Apache Web servers, which members access with standard Web browsers such as Netscape Navigator and Microsoft Internet Explorer. We do not require consumers to download any software to process or store micropayments and rewards.

We internally developed our systems for maintaining our Web site processing transactions and maintaining member accounts. If, in the future, we cannot modify these systems to accommodate increased traffic and an increased volume of transactions and orders, we could suffer slower response time, problems with customer service and delays in reporting accurate financial information. See "Risk Factors -- If we fail to adapt to rapid change in our industry or our internally developed systems cannot be modified properly for increased traffic or volume, our products and services may become obsolete."

COMPETITION

The market for online direct advertising and marketing is extremely competitive. In addition, while the market for services that facilitate small-scale electronic commerce transactions is very new, we expect competition in that area to increase dramatically in the near future. We cannot assure you that we will compete successfully in this environment. Our ability to compete in these marketplaces depends on many factors, some of which are beyond our control. Please see "Risk Factors -- We face significant competition from online incentives-based advertising and marketing programs and providers of micropayment systems" for a list of these factors. Our failure to compete in these marketplaces could have a material adverse effect on our business, results of operations and financial condition.

We believe that the principal competitive factors in the online incentives-based advertising market are:

- brand recognition;

- breadth and depth of content and services;

- number and quality of advertising clients;

- size of membership base;

- ease of use;

- transaction speed and security;

- quality of service; and

- technical expertise.

We face significant competition from online incentives-based advertising and marketing programs and providers of micropayment systems. We expect competition to increase due to the lack of significant barriers to entry for online business generally and for online incentives-based direct marketing programs and micropayment transactions in particular. Currently, several companies offer competitive online

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incentives programs, including MyPoints.com, Inc. and Netcentives Inc. We may also face competition from established Internet portals and community Web sites that engage in direct marketing, as well as from traditional advertising agencies and direct marketing companies that may seek to offer online products or services. In addition, financial service organizations, such as banks and credit card companies, or other large organizations may develop competitive micropayment systems and incentives-based advertising and marketing programs.

Some of our current and potential competitors have longer operating histories, greater brand recognition, larger client and member bases and significantly greater financial, technical and marketing resources than we do. These advantages may enable them to respond more quickly to new or emerging technologies and changes in customer preferences. These advantages may also allow them to engage in more extensive research and development, undertake extensive far-reaching marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to potential employees, strategic partners and advertisers. As a result, it is possible that our existing competitors or new competitors may rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross margin and loss of market share. We may not be able to compete successfully, and competitive pressures may affect our business, results of operations and financial condition.

INTELLECTUAL PROPERTY

We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology or business model. Monitoring unauthorized use of our technology and business model is difficult and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology and business model. In addition, our business activities may infringe upon the proprietary rights of others, and, from time to time, we have received, and may continue to receive, claims of infringement against us.

Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. In May 1999 we notified MyPoints.com, Inc. of our claim of infringement by MyPoints.com on our patent 5,794,210, which is described below. If this claim cannot be resolved through a license or similar arrangement, we could become a party to litigation with MyPoints.com. Any litigation could subject us to significant liability for damages and invalidation of our proprietary rights. These lawsuits, regardless of their success, would likely be time consuming and expensive to resolve and would divert management's time and attention away from our business. Any potential intellectual property litigation could also force us to do one or more of the following:

- make significant changes to the structure and operation of our business;

- attempt to design around a third party's patent; or

- license alternative technology from another party.

Implementation of any of these alternatives could be costly and time consuming, and may not be possible. Accordingly, an adverse determination in any litigation that we are a party to would have a material adverse effect on our business, results of operations and financial condition.

Cybergold has two issued U.S. Patents covering its business method and software architecture:

- Patent #5,794,210 covers Attention Brokerage, in which users are compensated for paying attention online to advertisements, promotions, and similar information, and Orthogonal Sponsorship, in which users can apply their earned compensation to purchase digital content or other intellectual property; and

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- Patent #5,855,008, for Consumer Controlled Privacy Management, in which users establish criteria by which their personal information is released to others, those requesting access to personal data provide their identity, intentions for using the personal data, and may offer compensation to the user for access to the personal data, and the user or an automated process decides whether to release the requested personal data based on the user's criteria and the requester's information.

We also have U.S. and foreign pending patent applications. Cybergold is our only registered trademark, although we have applied to register additional trademarks in the United States. We cannot assure you that our patents or trademarks will not be successfully challenged by others or invalidated, that our pending patents will be issued or that our trademark registrations will be approved. If our trademark registrations are not approved because third parties own these trademarks, our use of these trademarks would be restricted unless we entered into arrangements with the third-party owners, which might not be possible on reasonable terms.

We generally enter into confidentiality or license agreements with our employees and consultants, and control access to and distribution of our technologies, documentation and other proprietary information. Despite our efforts to protect our proprietary rights from unauthorized use or disclosure, parties may attempt to disclose, obtain or use our solutions or technologies. We cannot assure you that the steps we have taken will prevent misappropriation of our solutions or technologies, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States.

EMPLOYEES

As of June 30, 1999, we had a total of 62 employees. Of those, 34 are in sales and marketing, 17 are in engineering and 11 are in general and administrative. We believe that we have good relationships with our employees. We have never had a work stoppage, and none of our employees is represented under a collective bargaining agreement. We believe that our future success will depend in part on our ability to attract, integrate and retain highly motivated sales, marketing, production and technical personnel and upon the continued service of our senior management. Competition for qualified personnel in our industry and geographical locations is intense, and there can be no assurance that we will be successful in attracting, integrating, retaining and motivating a sufficient number of qualified personnel to conduct our business in the future.

FACILITIES

Our headquarters are located in approximately 14,200 square feet of office space we have leased at 1330 Broadway, Oakland, California. Our lease extends through July 2002, with an option to lease the space for an additional five year term, and includes a right of first refusal on additional space which may become available in the building where we are headquartered. We believe our office space is adequate to meet our needs for the next six months, and we expect our growth for the next 24 months to be accommodated by our right of first refusal on additional office space which may become available in our building. We have sales personnel located in the metropolitan areas of Dallas and New York. These personnel work out of home-based offices, and do not receive any additional compensation for the use of their home offices, other than reimbursement for direct expenses such as telephone, office equipment and supplies. We anticipate adding additional field personnel in the future; such personnel may or may not work out of home-based offices, and therefore, we may or may not incur additional expenses relating to the rental of additional office space.

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MANAGEMENT

DIRECTORS AND OFFICERS

The following table sets forth the name, age and position of each of our directors and officers as of June 30, 1999:

                   NAME                     AGE                       POSITION
                   ----                     ---                       --------
A. Nathaniel Goldhaber....................  51     President, Chief Executive Officer and Chairman
                                                   of the Board
Steven M. Farber..........................  40     Chief Operating Officer
John D. Steuart...........................  38     Chief Financial Officer
Gary Fitts................................  53     Chief Technology Officer
Daniel W. Berger..........................  40     Vice President, Sales
Michael Koifman...........................  51     Vice President, Engineering
Larry Weinstein...........................  52     Vice President, Strategic Relationships
Pieter Hartsook...........................  52     Vice President, Business Development
Christopher D. Alafi, Ph.D.(2)............  35     Director
Jay Chiat(2)..............................  67     Director
Garrett P. Gruener(2).....................  44     Director
Regis P. McKenna(1).......................  59     Director
Alan Salzman(1)...........................  45     Director
Peter S. Sealey, Ph.D.(1).................  58     Director


(1) Member of the Audit Committee

(2) Member of the Compensation Committee

A. Nathaniel Goldhaber has served as President, Chairman of the Board and Chief Executive Officer since October 1994. Prior to joining Cybergold, Mr. Goldhaber was self-employed as a venture capitalist. Prior to that Mr. Goldhaber was the Chief Executive Officer of Kaleida Labs, Inc., a multimedia joint venture between IBM and Apple Computer, and the Chief Executive Officer of Centram Systems West, a developer of local area networks. Mr. Goldhaber is a Member of the Executive Board of the University of California, Berkeley, College of Letters and Sciences. Mr. Goldhaber received a B.A. from Maharishi International University and an M.A. from the University of California, Berkeley.

Steven M. Farber has served as Chief Operating Officer since August 1998. Prior to joining Cybergold, Mr. Farber was the Chief Executive Officer of Interwoven, a provider of open systems for enterprise Web production for Internets and intranets, from March 1997 to March 1998. From 1996 to 1997, he was self-employed as a consultant. From 1995 to 1996, Mr. Farber was a Vice President of Summit Integration Group, a software consulting firm. Prior to that, Mr. Farber served as a Vice President of The Vantive Corporation, a customer relationship management software company. Mr. Farber received a B.S. from Tufts University.

John D. Steuart has served as Chief Financial Officer since June 1996. Prior to joining Cybergold, Mr. Steuart acted as the Chief Financial Officer of Alafi Capital, a venture capital firm, from October 1988 to June 1996. He is a member of the Board of Directors of a number of privately held companies. Mr. Steuart received a B.A. in Economics from the University of California, Berkeley and an M.S. in Business from Golden Gate University.

Gary Fitts has served as Chief Technology Officer since July 1995. Prior to joining Cybergold, Mr. Fitts was self-employed as a consultant. He has also served as the Directors of TOPS Technology for SunSelect, a personal computer networking business unit of Sun Microsystems, Inc., and as Vice

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President, Technology, of Sitka Corporation, a networking subsidiary of Sun Microsystems, Inc. Mr. Fitts received a B.A. from Dartmouth College.

Daniel W. Berger has served as Vice President, Sales since November 1998. From April 1998 to October 1998, Mr. Berger was Vice President, Sales, at Conduct Software Technologies, Inc., a network software company. From April 1997 to March 1998 Mr. Berger was Vice President, Sales, at Make Systems, Inc., a network design tool vendor. From August 1995 to March 1997, Mr. Berger was self- employed as a software and Internet consultant. Prior to that Mr. Berger was Vice President, Sales, at Seagate Software, a network software company. Mr. Berger received a B.A. from Colby College.

Michael Koifman has served as Vice President, Engineering since November 1998. From October 1997 to November 1998, Mr. Koifman was Vice President of Engineering at Blue Pumpkin Software, a developer of workforce management software for call centers. From September 1996 to October 1997, Mr. Koifman served as Manager of Advanced Applications at Siebel Systems, a sales force automation company. Prior to that, Mr. Koifman was a Senior Principal at AMS, a computer consulting company. Mr. Koifman holds an M.S. in Mathematics from St. Petersburg University in St. Petersburg, Russia and an M.S.E.E. in Computer Design from the Institute of Electrical Engineering in St. Petersburg, Russia.

Larry Weinstein has served as Vice President, Strategic Projects since February 1999. From February 1998 to February 1999, Mr. Weinstein was the Executive Vice President of Greenleaf Technologies, an encryption technology company. From January 1996 to February 1998, Mr. Weinstein was self-employed as a consultant. Prior to that Mr. Weinstein was a Producer for Frankfurt Balkind Partners, a strategic communications agency.

Pieter Hartsook has served as Vice President, Business Development since July 1998. From June 1997 to April 1998, Mr. Hartsook was Vice President, Business Development, at IPT, Inc., a computer software firm. From November 1996 to April 1997, Mr. Hartsook was Vice President, Marketing Analysis, at Apple Computer, Inc., a maker of personal computing products. Prior to joining Apple, Mr. Hartsook was the President of the Hartsook Letter, a market research consulting firm. Mr. Hartsook received a B.A. and an M.L.S. from the University of California, Berkeley.

Christopher D. Alafi has served as one of our directors since July 1997. Dr. Alafi is currently a general partner of Alafi Capital Co., a venture capital firm. Prior to joining Alafi Capital in 1995, Dr. Alafi was a visiting scholar in the Department of Chemistry at Stanford University. Dr. Alafi is currently a member of the Board of Directors of a number of private companies. Dr. Alafi received a B.A. from Pomona College and a Ph.D. in Biochemistry from the University of Oxford.

Jay Chiat has served as one of our directors since May 1996. Since October 1998 Mr. Chiat has been the Chief Executive Officer of ScreamingMedia.net, an Internet news service. From June 1968 to November 1996, Mr. Chiat served as the Chief Executive Officer of Chiat/Day Advertising, an advertising firm. Mr. Chiat is a member of the Board of Directors of Department 56, Inc., a designer, importer and distributor of collectibles and giftware. Mr. Chiat received a B.S. in Education from Rutgers University and an Executive M.B.A. from the Anderson School at U.C.L.A.

Garrett P. Gruener has served as one of our directors since May 1998. Mr. Gruener has been a general partner of Alta Partners L.P., a venture capital firm, since February 1996. Since 1992, Mr. Gruener has been a general partner of funds affiliated with Burr, Egan, Deleage & Co., a venture capital firm. Mr. Gruener is a member of the Board of Directors of several private companies. Mr. Gruener received a B.S. from the University of California, San Diego, and an M.A. from the University of California, Berkeley.

Regis P. McKenna has served as one of our directors since May 1996. Mr. McKenna has been Chairman of The McKenna Group, a Silicon Valley-based management and marketing consulting firm,

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since 1970. Mr. McKenna serves on the board of the Economic Strategies Institute and is a member of the Council on Competitiveness. Mr. McKenna also serves on the advisory board to Stanford's Graduate School of Business. Mr. McKenna is a trustee of Santa Clara University and is the Chairman of the Board of the Santa Clara University Center for Science, Technology and Society. Mr. McKenna serves as a member of the Board of Directors of Cylink Corporation, a supplier of network information security products. Mr. McKenna received a B.A. from Duquesne University.

Alan Salzman has served as one of our directors since May 1998. Mr. Salzman is a founder and managing partner of VantagePoint Venture Partners, a venture capital firm focused on the Internet, data networking and communications services. Prior to joining VantagePoint in 1995, Mr. Salzman was a general partner with Canaan Partners, a venture capital firm. Prior to that Mr. Salzman was a partner with Brobeck, Phleger & Harrison, LLP, a law firm. Mr. Salzman received a B.A. from the University of Toronto, a J.D. from Stanford Law School and an L.L.M. from the University of Brussels.

Peter Sealey has served as one of our directors since May 1996. Dr. Sealey has been a Lecturer and an Adjunct Professor of Marketing at the Haas School of Business at the University of California, Berkeley since 1994. In addition, Dr. Sealey has been self-employed as a management consultant, serving primarily technology-oriented companies, during the same period. Prior to that, Dr. Sealey was employed by the Coca-Cola Company for 24 years, where he held a series of senior management positions, including Senior Vice President, Global Marketing. Dr. Sealey serves on the board of directors of Autoweb.com, a consumer automotive Internet service provider, and USWeb Corporation, an Internet professional services and integrated marketing communications services company. Dr. Sealey received a B.S. from the University of Florida, an M.I.A. from Yale University and an M.A. and a Ph.D. from Claremont Graduate University.

Classified Board. Our certificate of incorporation provides for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms. As a result, a portion of our board of directors is elected each year. To implement the classified structure, prior to the consummation of the offering, two of the nominees to the board of directors were elected to one-year terms, two were elected to two-year terms, and three were elected to three-year terms. Thereafter, directors will be elected for three-year terms. Christopher D. Alafi and Jay Chiat have been designated Class I directors whose term expires at the 2000 annual meeting of stockholders. A. Nathaniel Goldhaber and Garrett D. Gruener have been designated Class II directors whose term expires at the 2001 annual meeting of stockholders. Regis P. McKenna, Alan Salzman and Peter Sealey have been designated Class III directors whose term expires at the 2002 annual meeting of stockholders. See "Description of Capital Stock -- Antitakeover Effects of Provisions of Certificate of Incorporation, Bylaws and Delaware Law."

Executive officers are appointed by the board of directors on an annual basis and serve until their successors have been duly elected and qualified.

BOARD COMMITTEES

The board of directors has a compensation committee and an audit committee.

Compensation Committee. The compensation committee of the board of directors reviews and makes recommendations to the board regarding the compensation and benefits provided to our key executive officers and directors, including stock compensation and loans. In addition, the compensation committee reviews policies regarding compensation arrangements and benefits for all of our employees. As part of the foregoing, the compensation committee also administers our 1999 Omnibus Equity Incentive Plan and 1999 Employee Stock Purchase Plan. The current members of the compensation committee are Messrs. Alafi, Chiat and Gruener.

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Audit Committee. The audit committee of the board of directors reviews and monitors our internal accounting procedures and reviews the results and scope of the annual audit and other services provided by our independent accountants. The audit committee also consults with our management and our independent auditors prior to the presentation of financial statements to stockholders and, as appropriate, initiates inquiries into aspects of our financial affairs. In addition, the audit committee has the responsibility to consider and recommend the appointment of, and to review fee arrangements with, our independent auditors. The current members of the audit committee are Messrs. McKenna, Salzman and Sealey.

BROKERAGE PARTNERS