JUNO ONLINE SERVICES INC, 10-K, 2000-02-15

JUNO ONLINE SERVICES INC
10-K, 2000-02-15
COMPUTER PROGRAMMING, DATA PROCESSING, ETC.

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM 10-K

(MARK ONE)

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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended: December 31, 1999

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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ______________ to ______________

Commission File Number: 000-26009

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JUNO ONLINE SERVICES, INC.

(Exact name of registrant as specified in its charter)

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DELAWARE 13-3914547
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)

1540 BROADWAY, NEW YORK, NY 10036
(Address of principal executive (Zip code)
offices)
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(212) 597-9000
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

Common Stock $0.01 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

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

As of February 14, 2000, the aggregate market value of voting stock held by
non-affiliates of the registrant, based upon the last reported sales price for
the registrant's common stock, as reported on the Nasdaq National Market, was
approximately $458.8 million (calculated by excluding shares owned beneficially
by affiliates).

As of February 14, 2000, the aggregate market value of all voting stock of
the registrant, based upon the last reported sales price for the registrant's
common stock, as reported on the Nasdaq National Market was approximately
$985.0 million, including shares owned beneficially by affiliates.

As of February 14, 2000, there were 38,629,268 shares of the registrant's
common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or parts thereof) are incorporated by reference
into the following parts of the Form 10-K: Certain information required in
Part III of this Form 10-K is incorporated from the registrant's Proxy Statement
for its 2000 Annual Meeting of Stockholders.

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INDEX TO FORM 10-K
FOR
JUNO ONLINE SERVICES, INC.

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PART I.

Item 1. Business.................................................... 3

Item 2. Properties.................................................. 15

Item 3. Legal Proceedings........................................... 15

Item 4. Submission of Matters to a Vote of Security Holders......... 15

PART II.

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 16

Item 6. Selected Consolidated Financial Data........................ 17

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18

Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 34

Item 8. Financial Statements and Supplementary Data................. 54

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 54

PART III.

Item 10. Directors and Executive Officers of the Registrant.......... 75

Item 11. Executive Compensation...................................... 75

Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 75

Item 13. Certain Relationships and Related Transactions.............. 75

PART IV.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 75

SIGNATURES. ........................................................... 78
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THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THESE FORWARD-LOOKING STATEMENTS ARE USUALLY ACCOMPANIED BY WORDS
SUCH AS "BELIEVES," "ANTICIPATES," "PLANS," "EXPECTS" AND SIMILAR EXPRESSIONS.
OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, AS MORE FULLY
DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT.

JUNO ONLINE SERVICES, INC., A DELAWARE CORPORATION, IS THE SUCCESSOR BY
MERGER TO JUNO ONLINE SERVICES, L.P., A DELAWARE LIMITED PARTNERSHIP. REFERENCES
IN THIS REPORT TO "JUNO", "WE", "OUR", AND "US" REFER TO JUNO ONLINE SERVICES,
INC., ITS MAJORITY-OWNED SUBSIDIARY, AND ITS PREDECESSOR PRIOR TO THE MERGER,
JUNO ONLINE SERVICES, L.P.

PART I.

ITEM 1. BUSINESS

OUR COMPANY

Juno Online Services, Inc. is a leading provider of Internet-related
services to millions of computer users throughout the United States. We provide
several levels of service, ranging from basic dial-up Internet access--which is
provided to the end user for free--to high-speed broadband Internet access,
which is currently being tested in selected markets. Unlike almost all other
Internet access providers, we offer both free basic and billable premium
services, and we believe we are unique in having converted hundreds of thousands
of individuals from free to paying customers. Our strategy of offering several
different service levels and our easy-to-use, intuitive software are designed to
attract a broad spectrum of users, including those who are just now beginning to
explore the Internet.

Our services are provided nationwide through more than 2,300 local telephone
numbers, which we lease from several providers. These phone numbers can be
reached by the vast majority of the U.S. population without having to place a
long distance telephone call. Our revenues are derived primarily from the
subscription fees we charge for the use of our premium services, from the sale
of advertising, and from various types of electronic commerce.

We have been a pioneer in providing free Internet services since
April 1996, when we launched our basic service, which was the first on the
Internet to provide free e-mail. In July 1998, we introduced our first premium
services, which offered features ranging from enhanced e-mail services to full
access to the World Wide Web, and for which we charged subscription fees. In
December 1999, we announced a major expansion of our services:

- Our BASIC SERVICE now provides full Internet access for free.

- JUNO WEB provides competitively priced premium Internet access,
supplementing the features of the basic service with free live technical
support and customer service, priority access to Juno's network, several
hundred additional local access numbers, and the elimination of a
prominent advertising and navigation banner that is displayed to our basic
service users at all times while they are connected to the Web.

- JUNO EXPRESS is a broadband service that provides all the features of Juno
Web at speeds up to 15 times faster than an ordinary dial-up Internet
connection. We are now conducting a pilot test of Juno Express in selected
markets and plan to expand into additional markets over the coming year.

Our services have been very popular, with more than 8.1 million Juno
accounts created since the launch of our basic service in 1996. During the month
of December 1999, an average of 820,000 user accounts dialed into our service on
any given day, with a total of 2.3 million user accounts connecting during the
month of December, and 2.9 million user accounts connecting during the
three-month period ended December 31, 1999. As of December 31, 1999, we had
approximately 550,000 Juno Web subscribers, the majority of whom began as users
of our basic service. We initially marketed Juno Web only to our own

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basic service subscribers. Following our initial public offering on May 25,
1999, however, we began marketing Juno Web beyond the existing Juno user base
through an external marketing campaign. We plan to significantly expand our
marketing activities in 2000 in order to increase the subscriber base of our
billable premium services and, in particular, our expanded free basic service.

In operating our expanded basic service, we plan to capitalize on the size
of our existing user base, advantages we believe our technology confers on our
cost structure, and our established advertising sales and electronic commerce
activities. Our technology has been designed to maximize hours of consumer
contact and potential advertising revenues while minimizing the number of hours
each user actually spends connected by telephone to our central computers or to
the Web, a key component of our costs. We believe our subscribers spend
significantly less time connected to the Internet each month than those of our
largest competitors, in part because of technology we have developed that
enables subscribers to read and write e-mail offline rather than while
connected. Importantly, this technology allows us to continue displaying highly
targetable interactive advertisements throughout this offline time.

As of December 31, 1999, approximately 300 firms had advertised on the Juno
services. In addition, we derive revenues from conducting electronic commerce
both independently and with strategic marketing partners. We have entered into a
number of major strategic marketing alliances, including several that involve
multi-million-dollar guaranteed minimum payments to Juno. These alliances
include multi-year relationships with Qwest, The Hartford, and WingspanBank.com.

In servicing the needs of advertisers and marketing partners, we benefit
from the high degree to which custom-tailored advertisements can be selectively
targeted to various segments of our subscriber base. Juno ads can be targeted
based not only on geography and patterns of computer use, as is often possible
in the case of Web site advertising as well, but also according to such
characteristics as age, gender, income, expected major purchases in any of 20
specified categories, hobbies, interests, family size, and educational
attainment. This data is obtained from the detailed "Member Profile" survey that
all subscribers to our free basic service are required to complete, and that
most subscribers to our billable premium services choose to complete, at the
time they create their accounts.

In addition to our advertising and strategic marketing relationships, we
derive revenue from relationships with providers of Web-based content and
functionality. All Juno users begin each Web session on our portal site,
WWW.JUNO.COM, which contains tools, information, and product offers supplied by
a wide range of strategic partners. Companies with whom we have formed this sort
of strategic relationship include HotJobs.com, Lycos, Mail.com, News
Corporation, and more than 50 online merchants that participate in the shopping
channel on our portal site, including eBay and 1-800-FLOWERS. We plan to
significantly increase both the number of such alliances and the associated
revenues as our Web-enabled subscriber base grows.

MARKET OPPORTUNITY

The Internet is becoming an increasingly significant global medium for
communications, advertising, and commerce. International Data Corporation
estimates that more than 80 million individuals in the U.S. used the Internet in
1999, and projects that this figure will reach 177 million by 2003. We expect
that these increases will have a significant impact on the three main service
and product sectors in which Juno currently operates.

BILLABLE SUBSCRIPTION SERVICES REVENUES. IDC projects that
consumer-targeted dial-up Internet service provider revenues in the U.S. will
grow from $7.4 billion in 1999 to $11.1 billion in 2003.

ADVERTISING REVENUES. Jupiter Communications has projected that online
advertising expenditures in the U.S. will grow from an estimated $3.2 billion in
1999 to $11.5 billion in 2003.

ELECTRONIC COMMERCE. IDC projects that consumer electronic commerce
revenues in the U.S. will grow from $12.8 billion in 1998 to $83.5 billion in
2003.

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OUR SERVICES

Our services and software have been designed with special attention to the
needs of consumers who are only now taking their first steps onto the Internet.
The needs and preferences of this large and rapidly growing body of new Internet
users are likely to differ significantly from those of technically sophisticated
early Internet users and computer hobbyists. We believe the success of our
design is reflected in studies indicating that ease of use is among the
characteristics most closely associated with Juno, and in the relatively high
rate at which members pass along copies of the Juno software to others.

We have expended significant effort to make our services easy to use. Our
fundamental design goal has been to create software and Web-based functionality
that novice users can understand at a glance, but which will continue to satisfy
subscribers once they have gained more experience. In addition to the basic
functions of using the Internet, such as connecting to the Web and sending and
receiving e-mail, we also offer easy-to-use tools enabling subscribers to build
their own Web pages and participate in online discussions, a variety of online
customer service resources, a full-function address book and folders for e-mail
management, and access to a wide range of content and community features, all
within a simple and visually attractive point-and-click environment.

Each time Juno subscribers begin a Web session, the first Web pages they see
provide them with a broad set of tools and information to help them understand,
navigate, and use the Web. Most of the content, directory functionality, and
Internet search functions associated with this Web site are currently provided
by third parties such as Lycos, one of the Internet's leading portal sites.
Under our agreement with Lycos, we receive guaranteed per-visit fees as an
advance against a share of any revenue Lycos generates through the sale of
advertisements on the various Web pages within the Juno portal site for which
they supply content. Both through additional revenue-generating third-party
relationships of this sort and through ongoing internal development, we intend
to continue expanding the set of features we offer our users, and to use such
features not only to generate revenue and enhance our services generally, but
also to maintain a clear differentiation between our free basic service and our
billable premium services. Subscribers who are not yet ready to use or pay for
premium features can begin their use of the Internet with our free basic
service, then migrate to our premium services once they are ready to do so.

FREE BASIC SERVICE

Our basic service provides subscribers with full Internet access, including
access to both e-mail and the World Wide Web. Our subscribers pay us no fees of
any sort for the use of our basic service. Users of the free basic service do,
however, pay a fee of $1.95 per minute if they wish to get live technical
support by phone.

We display advertisements to users of the free basic service within the main
Juno software, on the Web pages comprising Juno's portal site, and within a
separate advertising and navigation banner that is displayed at all times while
a subscriber uses the Web. This banner can be moved to any location on a user's
computer screen but cannot be removed or deactivated while the user is connected
to the Web.

After receiving a copy of our software, a new subscriber follows simple,
clearly worded on-screen instructions to install Juno on his or her computer,
and to select an e-mail address and password. In addition, in order to create an
account, each subscriber to our free basic service must complete the Member
Profile survey, providing information that can be used for the selective
targeting of advertising. Subscribers using a version of our software older than
the current version, Juno 4.0, must upgrade to version 4.0 before they can use
our basic service to connect to the Web.

JUNO WEB

Juno's premium dial-up Internet access service, Juno Web, augments the basic
service by eliminating the persistent advertising and navigation banner shown
continuously to the users of the free basic service and by adding hundreds of
local access telephone numbers across the country. Juno Web also provides a

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number of other premium features, including priority access to Juno's
telecommunications network. Juno Web subscribers receive live technical support
by phone at no charge.

Juno Web's list price of $19.95 per month is lower than the standard $21.95
price point offered by America Online and The Microsoft Network. In addition,
over the past eighteen months we have tested a variety of promotional offerings
that include periods of discounted, free or prepaid access as well as monthly
pricing plans that offer Juno Web for flat rates as low as $9.95. We intend to
continue experimenting with a variety of pricing plans in the future to
determine their impact on subscriber acquisition, conversion and retention
rates.

Between July 1998 and December 1999, we also offered a billable service
called Juno Gold which provided enhanced e-mail functionality for a list price
of $2.95 per month. As of December 1999, we incorporated Juno Gold's e-mail
functionality into the free basic service and automatically upgraded all Juno
Gold subscribers to Juno Web at no additional cost.

JUNO EXPRESS

Juno Express provides broadband Internet access at speeds up to 15 times
faster than an ordinary dial-up Internet connection. Through the use of DSL
technology provided in collaboration with Covad, one of the nation's largest
wholesalers of DSL services, Juno Express offers consumers all the features of
Juno Web plus the benefits of broadband, including the ability to run
high-bandwidth multimedia applications that include video and audio content as
well as the availability of a dedicated, continuous connection to the Internet.

We may expand the service to employ technologies other than DSL and may also
choose to directly provide some portions of the service that we currently
outsource, if it appears economically or otherwise advantageous for us to do so.
We will make these decisions as the broadband market develops and as consumer
demand for various competing broadband offerings can be assessed.

Juno Express is currently being tested in selected pilot markets. Initial
pricing for the service will be determined over the course of the pilot test.
Following completion of the test, we plan to expand the number of markets in
which Juno Express is available.

OUR STRATEGY

Our principal objective is to strengthen our position as a leading provider
of consumer Internet-related services by capturing an increasing number of hours
of customer contact, and by expanding our billable subscription service
offerings, advertising sales, strategic marketing relationships, and electronic
commerce activities. In particular, we plan to:

RAPIDLY EXPAND OUR SUBSCRIBER BASE. Our services are targeted to meet the
needs of consumers with little or no computer experience, who we believe are
seeking access to the Internet in increasing numbers. We intend to make these
consumers aware of our services and to rapidly expand our subscriber base
through a significant expansion of our marketing activities. These activities
may include television, radio, magazine, and newspaper advertising; direct mail
and telemarketing campaigns; the distribution of our software along with
personal computers and other technology products; paid Web advertising; the
bartering of advertising on the Juno system for advertising on various Web sites
and in other online and conventional media; various incentives for referrals by
current subscribers; and the acquisition of other Internet access providers. In
addition, we may consider various alternatives for international expansion.

MIGRATE SUBSCRIBERS TO HIGHER LEVELS OF SERVICE. Our software is designed
to allow users to easily move to higher levels of service when they are ready to
use and pay for them through the point-and-click activation of additional
features, and to do so without having to change e-mail addresses. We plan to
continue marketing our premium services to our existing subscriber base through
a variety of advertising messages and promotions delivered through the Juno ad
system. Because internal marketing of this sort is generally

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less expensive for us on a per-subscriber basis than subscriber acquisition
efforts conducted through direct mail or most other external advertising
channels, we believe the upward migration of our free basic service subscribers
should reduce average subscriber acquisition costs for our billable premium
services. We may also offer additional services or service levels to meet the
needs of our users, or may restructure or change the nature or pricing of our
various service levels at some point in the future.

LEVERAGE AND EXPAND OUR STRATEGIC MARKETING ALLIANCES AND ADVERTISING
SALES. We plan to maintain our focus on initiating new strategic marketing
alliances and expanding the size and scope of our existing alliances. We believe
there may be significant opportunities to expand the scope of our relationships
with some of our existing alliance partners, which currently include Qwest, The
Hartford and WingspanBank.com. In addition, we believe it may be possible to
execute new category-exclusive strategic alliances with major firms in other
industries. Finally, to the extent we are able to increase the size of our
subscriber base, we believe this expansion could increase the value of our
existing strategic marketing and advertising relationships and our ability to
form similar relationships with other firms on favorable terms.

ENHANCE OUR SERVICES TO PROVIDE AN INCREASINGLY PERSONALIZED, INTEGRATED AND
ENGAGING INTERNET EXPERIENCE. In order to maintain and enhance our subscribers'
level of satisfaction with our services, we intend to leverage our unique
assets, such as the Member Profile data we collect, the Juno software our
members use, and our current and future relationships with content and feature
providers such as Lycos and News Corporation, to enable us to offer our members
a compelling Internet experience.

EMBRACE NEW TECHNOLOGIES WHILE MAINTAINING TECHNOLOGY INDEPENDENCE. We
currently use several wholesalers of telecommunications services to connect our
subscribers to Juno's central computers and to the Web. Although we may at some
point consider investing in various forms of networking infrastructure,
particularly in cases where a given type of access would otherwise be difficult
or prohibitively costly to obtain, we currently expect to continue our extensive
use of wholesale providers. We believe this strategy enables us to remain
network-independent, and to switch providers or technologies as cost and
performance improvements become available. As a result, we believe we can be
flexible in responding to subscriber demand for higher-speed access and other
types of improved service.

TECHNOLOGY AND INFRASTRUCTURE

The operation of our services is supported by computer systems and related
infrastructure that have successfully sustained high levels of usage and growth.
Our servers routinely handle more than two million user connections per day. Our
subscribers have not suffered the sorts of repeated, prolonged system-wide
outages that have reportedly affected other online services. To enable our
computer and telecommunications facilities to keep pace with the rapid growth of
our subscriber base, we have made a concerted effort to design our systems
architecture to be highly flexible, to grow quickly without sacrificing
reliability, and to handle problems quickly when they arise.

To use our services, subscribers initiate telephone connections between
their personal computers and computer hardware in local or regional facilities
known as points of presence. We contract for the use of points of presence
around the country from various telecommunications carriers, including MCI
WorldCom, through its UUNET Technologies and MCI WorldCom Advanced Networks
divisions; Level 3; Concentric; Splitrock Services; and Sprint. These
telecommunications companies also carry data between the points of presence and
our central computers, which are located in Cambridge, Massachusetts and Jersey
City, New Jersey. We currently have lease commitments for the use of over 2,300
local telephone numbers associated with points of presence throughout the United
States. Subscribers typically bear no expenses for communication beyond the
cost, if any, of an ordinary local or regional phone call. We estimate that our
current set of local access numbers covers the vast majority of the U.S.
population. Our reliance on several independent providers of network capacity
has allowed us to provide high quality service throughout the United States
while negotiating progressively lower telecommunications rates from these
competing providers.

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Juno Web subscribers have several hundred more local access numbers from
which to choose than do users of our free basic service. Limiting the set of
local access numbers available to our free basic service users is one mechanism
by which we can reduce the cost of providing our free basic service and enhance
the performance of our premium dial-up service. We believe we can also manage
cost and performance by purchasing the telecommunications services described
above from some of our vendors on a per-modem basis rather than a per-minute
basis. The per-modem pricing model gives us greater control of our costs by
enabling us to set the ratio of users to modems. We believe we can reduce our
effective telecommunications rate and our monthly per user cost by increasing
the number of users per modem. We believe we can maintain a higher user-to-modem
ratio than our competitors while providing a competitive level of service
quality due to our offline e-mail architecture, among other factors.

For both our free and our premium services, the time each user spends
connected to our central computers is minimized through the use of a patented
architecture that allows subscribers to read and compose e-mail messages
offline, connecting automatically to Juno's central computer facilities only for
the relatively brief period necessary to download incoming mail or upload
outgoing messages. Advertisements intended to be shown in the main Juno software
are downloaded to a subscriber's computer along with the subscriber's incoming
e-mail messages, and are displayed not only while the subscriber is actually
connected to our central facilities, but throughout the significantly longer
period during which he or she is reading and writing e-mail messages offline,
using only his or her own computer. The relatively large ratio between average
ad display time, an important revenue-related resource, and average connect
time, an important expense item, is essential to the economics of our services.
Because we believe that almost a quarter of all time spent online by subscribers
to the leading Internet access service is attributable to their reading and
writing e-mail messages while connected to the service's central computers, we
believe that our offline e-mail architecture confers an economic advantage on
our service relative to those of our competitors. Our subscribers currently
spend significantly fewer hours connected each month than reported industry
averages, and we believe our offline architecture is one of the reasons for this
relative savings.

SUBSCRIBER ACQUISITION

Since the launch of our free basic service in 1996, we have employed a
number of acquisition channels to maximize total subscriber count, including:

- ONLINE DISTRIBUTION. People with access to the Web may download the Juno
software free of charge from our Web site. Thousands of people download
the software every day.

- DIRECT MAIL. We have conducted numerous direct mail campaigns employing a
wide range of creative approaches, offers and mailing lists. Our direct
mail activities have increased significantly since the completion of our
initial public offering in May 1999.

- PASS-ALONG DISTRIBUTION. We encourage our subscribers to pass the Juno
software along to their friends and associates or to suggest that they
call our toll-free number to order a CD-ROM containing our software. This
practice has historically accounted for a significant percentage of our
new subscribers. Starting in 1999, we began rewarding pass-along
distribution by paying referral bounties ranging from $20 to $50 to any
Juno member responsible for bringing us a new Juno Web subscriber who
remained with the service for at least 90 days.

- ORIGINAL EQUIPMENT MANUFACTURER BUNDLING. At various times since the
launch of our basic service, the software necessary to use our service has
been pre-loaded into a number of lines of personal computers and
distributed with various other types of computer hardware. Most recently,
we announced agreements to distribute the Juno software along with various
lines of desktop printers manufactured by Hewlett-Packard, Lexmark and
Samsung.

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Following the launch of our first premium services in July 1998, our
marketing focused on the development of our billable subscriber base, both
through encouraging upward migration from our free basic service to our premium
services, and through the direct acquisition of billable subscribers through our
external marketing activities.

[LOGO]

Our internal marketing activities continue to focus on persuading free basic
service subscribers to migrate to our premium services. Users of the free basic
service are exposed to a stream of marketing messages delivered through the Juno
ad system that encourage them to upgrade. While we cannot predict the ultimate
rate of conversion to our billable premium services, we believe that continuing
increases in the sophistication of Internet users and in the demands they place
on their Internet services may generate interest in the features provided by our
premium services among new segments of our user base over time. In addition,
when a subscriber to our basic service is ready to begin using a higher level of
service, we believe that it will be easier and more natural to do so by clicking
on a button displayed on the Juno screen that he or she is already using than by
identifying and switching to an alternate access provider. When users of Juno's
basic service develop an interest in using premium services, we believe we are
also likely to benefit from individuals' reluctance to switch e-mail addresses,
which may make them more likely to obtain premium services from us than from
another Internet access provider. Please see "Item 7A.--Risk factors that may
affect future results--Our business may suffer if we have difficulty acquiring
subscribers to our services."

Our external marketing activities now include promotions of both our free
basic service and our billable premium services. The balance between free and
billable services in our various marketing messages and channels is likely to
change over time, depending on where testing suggests that our investment in
subscriber acquisition is likely to yield the most favorable and efficient
results. Our goal is to maximize the size and value of our audience, and we
intend to significantly increase the resources we invest in subscriber
acquisition to achieve this goal. Please see "Item 1.--Our Strategy."

ADVERTISING AND STRATEGIC ALLIANCES

ADVERTISING SALES

Advertising plays an important role in the business model for each of our
service levels. Regardless of the level of service to which they subscribe, Juno
users view advertisements on the portal site where they begin each Web session
and within the main Juno software when they use e-mail. Subscribers to the free
basic service also view advertisements within the separate advertising and
navigation banner that appears at all times while these subscribers use the Web.
Because of the patented advertising technology we have

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developed, we are able to display ads not only during the time a subscriber
spends connected to the Internet but also while he or she is using Juno offline
to read or write e-mail. We thus have a wide variety of advertising
opportunities which we can offer marketers interested in communicating with our
subscribers, ranging from simple one-time ad placements to broad sponsorships of
categories of content, commerce and functionality on our portal site or on the
Juno services in general.

As of December 31, 1999, approximately 300 companies and organizations had
advertised on Juno, including a number of the world's largest advertisers. To
manage ad creation and campaign development, we maintain an in-house ad
production and client service staff. We also employ an internal sales force to
market our ad inventory, with the exception of the banner inventory on our
portal site, which is currently marketed primarily by Lycos under a
revenue-sharing arrangement. Please see "Item 1.--Our Services."

TYPES OF ADVERTISING ON JUNO'S SERVICES

As described above, we currently display advertising in three distinct
locations within the Juno service:

- ON THE PORTAL SITE, where most of the ads take the form of conventional
Web banner ads, supplemented by various types of sponsorship links.

- WITHIN THE MAIN JUNO SOFTWARE, where we display three types of
advertising:

- BANNER ADS, which are displayed in the upper right-hand corner of the
main Juno screen while the subscriber is reading or composing e-mail
messages. Banner ads are displayed on a timed rotation, with a new ad
typically appearing every 20 or 30 seconds, and are interactive,
offering viewers the opportunity to click on them and respond in a
number of ways.

- INTERSTITIAL ADS, which are displayed while a subscriber's modem is
dialing into our central computers to send or receive e-mail or to
connect to the Web, and are displayed for the duration of this
telephone connection. Interstitial ads are approximately four times the
size of a banner ad, and are displayed prominently at a time when the
subscriber is not yet occupied with any online activity.

- POP-UP ADS that interrupt a user's session, and with which the
subscriber must interact at least briefly before continuing with his or
her session. Pop-up ads are most commonly displayed at the start of a
session, immediately after the subscriber types in his or her password,
and may contain any of the features of banner ads.

- WITHIN THE PERSISTENT ADVERTISING AND NAVIGATION BANNER displayed to our
basic service subscribers while they are connected to the Web. In addition
to interactive banner ads similar to those shown within the main Juno
software, the advertising and navigation banner also contains buttons
which, when clicked, bring a user to an advertiser's Web site or to a Web
page featuring links to the sites of multiple advertisers.

Advertising may be purchased on a price-per-impression,
price-per-clickthrough or price-per-response basis, or according to special
arrangements negotiated on a case-by-case basis. With the exception of banner
ads sold and managed by Lycos or another third party sales force, each type of
ad may be targeted to a narrowly specified subset of our subscriber base based
on data provided by each subscriber in his or her Member Profile. While our
privacy policies preclude the dissemination to advertisers or other third
parties of any of the data contained in an individual's Member Profile without
that individual's permission, aggregate statistical information about the Juno
subscriber base is routinely provided to advertisers and can be used to target
specific ads to all subscribers satisfying any specified combination of
attributes.

10
<PAGE>
STRATEGIC MARKETING ALLIANCES

We have formed a number of large-scale, strategic marketing alliances that
provide for substantial guaranteed payments to Juno as advances against various
forms of revenue-sharing:

- QWEST COMMUNICATIONS. Our agreement with Qwest Communications calls for
guaranteed payments to Juno as a non-refundable advance against a
substantial percentage of all revenues derived, on an ongoing basis, from
telephone customers recruited through the Juno service.

- THE HARTFORD. Our agreement with The Hartford provides for reimbursement
of our marketing expenses as well as substantial guaranteed payments as an
advance against both bounties paid when a Juno member purchases an
insurance policy and an ongoing percentage of premiums collected from that
subscriber.

- WINGSPANBANK.COM. Under our agreement with WingspanBank.com, we will
receive payments each year--only the first year of which, however, is
guaranteed--as a non-refundable advance against bounties paid for each new
credit card, banking, or personal loan customer acquired through Juno.
This is an agreement we originally entered into with WingspanBank.com's
affiliate, FirstUSA.

The agreements described above can typically be terminated on short notice
by either party, provided, however, that in some cases, the party terminating
the agreement is required to make specified payments to the other party.

SELECTED ADVERTISING CUSTOMERS AND STRATEGIC MARKETING PARTNERS

As of December 31, 1999, approximately 300 advertisers and strategic
marketing partners had advertised on Juno, including those listed below.

Ameritrade

AT&T Wireless Services

Bank of America

Bose Radio

Cendant Corp.

.Comfax

Comtrad Industries

Crutchfield

Defenders of the Wildlife

DeLorme

Dragon Systems

eBay

Environmental Defense Fund

First USA

Grolier

The Hartford

Hewlett-Packard

Hoechst Marion Roussel

IBM

Intel

Intensor Gaming Chair

Intuit

Jenny Craig

Lexmark

Loews Cineplex

Market Facts

Microsoft

National Education Association

Office of National Drug Control Policy

Official Airline Guides

Okidata

Petsmart.com

Platinum Capital Group

Priceline

Prudential

Qwest

Roxy.com

Sidewalk.com

The Signature Group

SmarterKids.com

Symantec

TWEC

US Navy

WebMD

X10

Yesmail

In a relatively small number of instances, we have provided advertising
credit to other companies in return for distribution of the Juno software, or
have exchanged advertising space with companies on a barter basis.

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<PAGE>
COMPETITION

The market for Internet services is extremely competitive and includes a
number of substantial participants, including America Online, Microsoft and
AT&T. The markets for Internet-based advertising and electronic commerce are
also very competitive. Our ability to compete depends upon many factors, many of
which are outside of our control. We believe that the primary competitive
factors determining success in these markets include effective marketing to
promote brand awareness, a reputation for reliability and service, effective
customer support, pricing, easy-to-use software and geographic coverage. Other
important factors include the timing and introduction of new products and
services and industry and general economic trends. We expect competition to
continue to increase because the markets in which we operate face few
substantial barriers to entry. Competition may also intensify as a result of
industry consolidation and the ability of some of our competitors to bundle
Internet services with other products and services. Our current and potential
competitors include many large national companies that have substantially
greater market presence and financial, technical, distribution, marketing and
other resources than we have. This may allow them to devote greater resources
than we can to the development, promotion and distribution and sale of products
and services. Additionally, our competitors may be able to charge less for
premium Internet services than we do for our billable premium services, or offer
services for free that we currently provide only for a fee, which may put
pressure on us to reduce or eliminate, or prevent us from raising, the fees we
charge for our billable premium services. We may choose to lower or eliminate
the fees we currently charge for our billable premium services, or enhance the
features available to users of our free basic service, in order to remain
competitive with other industry participants. If we do so, our business and
financial results may suffer.

In recruiting subscribers for our services, we currently compete, or expect
to compete, with the following types of companies, among others:

- Established online service providers such as America Online, CompuServe,
and The Microsoft Network;

- Independent national Internet service providers such as EarthLink,
MindSpring, and Prodigy, including a number of companies, such as
AltaVista and NetZero, that offer Web access for free;

- Numerous independent regional and local Internet service providers that
may offer lower prices than a national Internet service provider;

- Various national and local telephone companies such as AT&T, MCI WorldCom
and Pacific Bell;

- Companies providing Internet access through "set-top boxes" connected to a
user's television, such as WebTV, or through a "cable modem" connected to
a user's personal computer, such as Excite@Home; and

- Companies providing Internet access services using other broadband
technologies, including DSL technology, such as the Regional Bell
Operating Companies and various partners of Covad, Rhythms, and
NorthPoint.

In addition, Microsoft and Netscape, publishers of the Web browsers utilized
by most Internet users, including Juno subscribers, each own or are owned by
online or Internet service providers that compete with Juno.

In addition to competition from the types of companies listed above, we also
face the risk that subscribers to our premium billable services will migrate to
our free basic service, which would result in a decrease in our subscription
revenues.

We do not currently compete internationally. If the ability to provide
Internet services internationally becomes a competitive advantage in our markets
and we do not begin to provide services internationally, we will be at a
competitive disadvantage.

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<PAGE>
With respect to the generation of advertising revenue, we compete with many
of the market participants listed above as well as with various
advertising-supported Web sites, including portal sites such as Yahoo! and
Excite, content sites such as CNET and CNN.com, and interactive advertising
networks and agencies such as DoubleClick and 24/7 Media. We also compete with
traditional media such as print and television for a share of advertisers' total
advertising budgets. If advertisers perceive the Internet to be a limited or
ineffective advertising medium or perceive us to be less effective or less
desirable than other Internet advertising vehicles, advertisers may be reluctant
to advertise on our services. We engage in electronic commerce activities by
selling or facilitating the sale of products and services directly to our
subscribers. In doing so, we compete with other Internet-based merchants as well
as with stores and other companies that do not distribute their products through
the Internet. Many of these competitors are larger than we are, enjoy greater
economies of scale than are available to us, have substantially greater
resources than we have, and may be able to offer more products or more
attractive prices than we can.

Our competition is likely to increase. We believe this will probably happen
as Internet service providers and online service providers consolidate and
become larger, more competitive companies, and as large diversified
telecommunications and media companies acquire Internet service providers. Other
Internet service providers are likely to begin offering free Internet access.
Since our announcement of free Internet access in December 1999, at least one
competitor has announced the introduction of a service similar to ours. The
larger Internet service providers and online service providers, including
America Online, offer their subscribers a number of services that we do not
currently provide. Some diversified telecommunications and media companies, such
as AT&T, have begun to bundle other services and products with Internet access
services, potentially placing us at a significant competitive disadvantage.
Additionally, some Internet service providers and personal computer
manufacturers have formed strategic alliances to offer free or deeply discounted
computers to consumers who agree to sign up with the service provider for a
one-year or multi-year term. In a variant on this approach, some Internet
service providers have secured strategic relationships with manufacturers or
retailers of computer equipment in which the service provider finances a rebate
to consumers who sign up with the service provider for one or more years. We
have formed several such relationships, and have not found them effective as a
means of attracting new subscribers to our services. There can be no assurance
that any of the relationships we have formed will be successful as a means of
attracting new subscribers, that they will be economically favorable, or that
the terms of these relationships, or any strategic alliances we complete in the
future, will turn out to be as favorable as those achieved by our competitors or
favorable at all. Our competitors may be able to establish strategic alliances
or form joint ventures that put us at a serious competitive disadvantage.
Competition could require us to increase our spending for sales and marketing as
well as for subscriber acquisition in order to maintain our position in the
marketplace, and could also result in increased subscriber attrition.
Competition could also require us to lower the prices we charge for our billable
premium services, or eliminate such fees altogether, in order to maintain our
marketplace position. Any of these scenarios could harm our business and
financial results, and we may not have the resources to continue to compete
successfully.

GOVERNMENT REGULATION

Providers of Internet access and e-mail services are not subject to direct
regulation by the Federal Communications Commission, but changes in the
regulatory environment relating to the telecommunications and media industries
could have an effect on our business. For example, several telecommunications
carriers are seeking to have communications over the Internet regulated by the
FCC in the same manner as other more traditional telecommunications services.
Local telephone carriers have also petitioned the FCC to regulate Internet
access providers in a manner similar to long distance telephone carriers and to
impose access fees on these providers, and recent events suggest that they may
be successful in obtaining the treatment they seek. In addition, we operate our
services throughout the United States, and regulatory authorities at the state
level may seek to regulate aspects of our activities as telecommunications
services.

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<PAGE>
As a result, we could become subject to FCC and state regulation as Internet
services and telecommunications services converge.

We remain subject to numerous additional laws and regulations that could
affect our business. Because of the Internet's popularity and increasing use,
new laws and regulations with respect to the Internet are becoming more
prevalent. These laws and regulations have covered, or may cover in the future,
issues such as:

- user privacy;

- pricing;

- intellectual property;

- federal, state and local taxation;

- distribution; and

- characteristics and quality of products and services.

Legislation in these areas could slow the growth in use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium. Additionally, because we rely on the collection and use of
personal data from our subscribers for targeting advertisements shown on our
services, we may be harmed by any laws or regulations that restrict our ability
to collect or use this data. The Federal Trade Commission has begun
investigations into the privacy practices of companies that collect information
about individuals on the Internet. In addition, the FTC is conducting an ongoing
investigation into the marketing practices of Internet-related companies,
including Juno. As part of the FTC's activities, we have been requested to
provide, and have provided, marketing-related and customer service-related
information to the FTC. Depending on the outcome of the FTC inquiry, we could be
required to modify our marketing or customer service practices in a way that
could negatively affect our business.

It may take years to determine how existing laws such as those governing
intellectual property, privacy, libel and taxation apply to the Internet. Any
new legislation or regulation regarding the Internet, or the application of
existing laws and regulations to the Internet, could harm us. Additionally,
while we do not currently operate outside of the United States, the
international regulatory environment relating to the Internet market could have
an adverse effect on our business, especially if we should expand
internationally.

The growth of the Internet, coupled with publicity regarding Internet fraud,
may also lead to the enactment of more stringent consumer protection laws. For
example, numerous bills have been presented to Congress and various state
legislatures designed to address the prevalence of unsolicited commercial bulk
e-mail on the Internet. These laws may impose additional burdens on our
business. The enactment of any additional laws or regulations in this area may
impede the growth of the Internet, which could decrease our potential revenues
or otherwise cause our business to suffer. For additional information, see
"Item 7A--Risk Factors that may affect future results--Changes in government
regulation could decrease our revenues and increase our costs."

INTELLECTUAL PROPERTY

We have been granted three U.S. patents for technology related to the
offline display of advertisements and the authentication and dynamic scheduling
of advertisements and other messages to be delivered to computer users. We have
filed a number of other U.S. patent applications relating to additional
techniques for the operation of online services and the provision of advertising
messages. We cannot assure you, however, that any of these applications will
result in the issuance of patents, that any patents that have been issued or
that might be issued in the future will provide us with any competitive

14
<PAGE>
advantages or will be exploited profitably by us, or that any any of these
patents will withstand any challenges by third parties. Furthermore, we cannot
assure you that we will be able to obtain license rights to patents held by
third parties that may be essential to the successful implementation or
operation of our services, or that patents held or obtained by third parties
will not otherwise harm our business or financial results.

Except as described above, we rely solely upon copyright and trademark law,
trade secret protection and confidentiality agreements with our employees and
with some third parties to protect proprietary technology, processes, and other
intellectual property to the extent that protection is sought or secured at all.
We cannot assure you that any steps we might take will be adequate to protect
against misappropriation of our intellectual property by third parties.
Similarly, we cannot assure you that third parties will not be able to
independently develop similar technology, processes, or other intellectual
property. Furthermore, we cannot assure you that third parties will not assert
claims against us for infringement of their intellectual property rights.

EMPLOYEES

As of December 31, 1999, we employed 263 people, of whom 132 were in
operations, sales and marketing, and customer support; 84 were in engineering,
product development and network operations; and 47 were in finance, legal and
administration. Our employees are not covered by any collective-bargaining
arrangements, and we consider our relations with our employees to be good.

ITEM 2. PROPERTIES

Our principal executive office is located in New York, New York, where we
lease approximately 26,400 square feet. In addition, we lease additional office
space in New York City and also lease offices in San Francisco, California,
Cambridge, Massachusetts, Washington, D.C. and Hyderabad, India. We believe that
we will need to obtain additional space to accommodate our growing operations
and that we will be able to obtain such additional space on commercially
reasonable terms.

ITEM 3. LEGAL PROCEEDINGS

We are involved in disputes and litigation in the ordinary course of
business, including two currently pending lawsuits in which former employees of
Juno have asserted claims of sexual harassment and, in one case, wrongful
termination, against us. We believe that these lawsuits are without merit, and
we intend to defend them vigorously. We do not believe that the outcome of
either of these lawsuits will have a material adverse effect on our business,
operations or financial condition.

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

Not applicable

15
<PAGE>
PART II.

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

MARKET PRICE FOR COMMON STOCK

Our common stock has been quoted on the Nasdaq National Market under the
symbol JWEB since our initial public offering on May 26, 1999. The following
table sets forth, for the periods indicated, the high and low sales prices per
share of the common stock as reported on the Nasdaq National Market:

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1999
Second Quarter (from May 26, 1999)...................... $29.3750 $ 8.8750
Third Quarter........................................... $27.7500 $12.0625
Fourth Quarter.......................................... $87.0000 $14.0000
FISCAL YEAR ENDED DECEMBER 31, 2000
First Quarter (through February 14, 2000)............... $48.6250 $24.0000
</TABLE>

On February 14, 2000, the last reported sales price of the common stock on
the Nasdaq National Market was $25.50 per share. As of February 14, 2000, there
were 455 holders of record of our common stock.

DIVIDEND POLICY

We have not declared or paid any cash dividends on our capital stock since
inception. We intend to retain any future earnings to finance the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Consequently, stockholders will need to sell shares of
common stock in order to realize a return on their investment, if any.

16
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes to these
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein. The consolidated statement of
operations data for the years ended December 31, 1997, 1998 and 1999, and the
consolidated balance sheet data at December 31, 1998 and 1999, are derived from
the consolidated financial statements of Juno which have been audited by
PricewaterhouseCoopers LLP, independent accountants, and are included elsewhere
herein. The consolidated statement of operations data for the period from our
inception on June 30, 1995 through December 31, 1995 and for the year ended
December 31, 1996, and the consolidated balance sheet data at December 31, 1995,
1996 and 1997, are derived from the audited consolidated financial statements of
Juno not included elsewhere herein.

Net loss per share for the year ended December 31, 1999 is calculated
separately for the periods prior and subsequent to the March 1999 statutory
merger. The pro forma information regarding net loss per share and weighted
average shares outstanding set forth below gives effect to the treatment of
Class A limited partnership units as shares of common stock for all periods
presented and the conversion of Series B redeemable convertible preferred stock
for the period following the March 1999 statutory merger. See the consolidated
financial statements and the notes to these statements appearing elsewhere
herein for the determination of the number of shares used in computing
historical and pro forma basic and diluted loss per share.

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
YEAR ENDED DECEMBER 31, (JUNE 30, 1995)
------------------------------------------ TO DECEMBER
1999 1998 1997 1996 31, 1995
--------- -------- -------- -------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Billable services................................. $ 34,545 $ 6,645 $ 1,371 $ 6 $ --
Advertising and transaction fees.................. 12,662 6,454 1,875 127 --
Direct product sales.............................. 4,794 8,595 5,845 3 --
-------- -------- -------- -------- --------
Total revenues.................................. 52,001 21,694 9,091 136 --
-------- -------- -------- -------- --------
Cost of revenues:
Billable services................................. 24,950 5,606 1,053 -- --
Advertising and transaction fees.................. 4,675 3,725 1,659 278 --
Direct product sales.............................. 4,176 7,627 5,796 3 --
-------- -------- -------- -------- --------
Total cost of revenues.......................... 33,801 16,958 8,508 281 --
-------- -------- -------- -------- --------
Operating expenses:
Operations, free service.......................... 6,698 9,383 11,075 5,803 --
Subscriber acquisition............................ 47,651 5,334 3,140 6,993 592
Sales and marketing............................... 11,556 11,584 12,593 4,276 389
Product development............................... 7,232 7,345 4,860 3,741 2,577
General and administrative........................ 4,615 2,760 2,897 2,172 275
-------- -------- -------- -------- --------
Total operating expenses........................ 77,752 36,406 34,565 22,985 3,833
-------- -------- -------- -------- --------
Loss from operations............................ (59,552) (31,670) (33,982) (23,130) (3,833)
Interest income, net................................ 3,718 44 243 128 --
-------- -------- -------- -------- --------
Net loss........................................ $(55,834) $(31,626) $(33,739) $(23,002) $ (3,833)
======== ======== ======== ======== ========
</TABLE>

17
<PAGE>

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
---------------------------------------- PERIOD FROM
TWO MONTHS TEN MONTHS INCEPTION
ENDED ENDED YEAR ENDED DECEMBER 31, (JUNE 30, 1995)
FEBRUARY 28, DECEMBER 31, ------------------------------ TO DECEMBER
1999 1999 TOTAL 1998 1997 1996 31, 1995
------------- ------------- -------- -------- -------- -------- ---------------
(IN THOUSANDS, EXCEPT PER LIMITED PARTNERSHIP UNIT AND SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS PER SHARE CALCULATION:
Net loss attributable to common
stockholders.................... $(4,350) $(51,484) $(55,834) $(31,626) $(33,739) $(23,002) $(3,833)
======= ======== ======== ======== ======== ======== =======
Basic and diluted net loss per
Class A limited partnership
unit............................ $ (0.25) $ (1.85) $ (3.21) $ (7.01) $ (7.39)
======= ======== ======== ======== =======
Basic and diluted net loss per
share........................... $ (2.07)
========
Weighted average number of:
Class A limited partnership
units......................... 17,684 17,091 10,500 3,281 519
======= ======== ======== ======== =======
Shares of common stock.......... 24,877
========
Pro forma basic and diluted net
loss per share.................. $ (1.84) $ (1.85)
======== ========
Weighted average shares
outstanding used in pro forma
basic and diluted per share
calculation..................... 30,339 17,091
======== ========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 91,497 $ 8,152 $13,770 $ 598 $--
Working capital (deficiency).............................. 67,571 (8,343) 6,927 (2,004) 92
Total assets.............................................. 119,088 14,703 20,133 4,774 92
Total indebtedness, including current maturities.......... 2,878 10,188 795 -- --
Partners' capital (deficiency)............................ -- (12,588) 10,504 (2,004) 92
Total stockholders' equity................................ 71,648 -- -- -- --
</TABLE>

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

THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF JUNO SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND THE NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE HEREIN. THIS
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. JUNO'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED
OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
SUCH AS THOSE SET FORTH UNDER "ITEM 7A.--RISK FACTORS THAT MAY AFFECT FUTURE
RESULTS" AND ELSEWHERE HEREIN.

OVERVIEW

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<PAGE>
We launched our basic service in April 1996. Initially, this service
provided only basic dial-up e-mail services. In July 1998, we introduced our
first premium services, which offered features ranging from enhanced e-mail
services to full access to the World Wide Web, and for which we charged
subscription fees. In December 1999, we announced a major expansion of our
services:

- Our BASIC SERVICE now provides full Internet access for free in addition
to e-mail.

In December 1999, in connection with the expansion of our free basic service, we
upgraded all subscribers using our enhanced e-mail service, Juno Gold, to Juno
Web at no additional cost.

The historical results of operations presented below do not reflect the
expansion of our services described above. This service expansion is expected to
result in increased operating expenses. The provision of full Internet access
for free is expected to significantly increase the costs associated with
providing our basic service. These costs are reflected in the Operations, Free
Service line of our statement of operations. In addition, we anticipate
significantly increasing subscriber acquisition expenses in order to fund
subscriber growth in an attempt to gain market share. We believe that the
expansion of our free basic service, which includes the introduction of a
persistent advertising and navigation banner displayed at all times while a user
is connected to the Web, will generate a substantial amount of additional
advertising inventory, representing a significant revenue opportunity. Our long
term strategy contemplates that we will be able to generate additional revenues
from this banner sufficient to cover the increased costs associated with our
service expansion and accelerated subscriber acquisition efforts. In the near
term, however, we expect that increases in revenues will be less than increases
in operating expenses.

We classify our revenues as follows:

(1) Billable services revenues, consisting of:

(a) subscription fees that we receive from subscribers to our premium
services;

(b) technical support fees received when subscribers to our free basic
service and subscribers automatically upgraded from Juno Gold to Juno
Web in December 1999 call a 900 number for live assistance from a
support technician; and

(c) charges for shipping and handling associated with mailing disks upon
request to prospective Juno subscribers, consulting revenues, and
fees for other billable services.

(2) Advertising and transaction fees, consisting of revenues earned from
advertisers and strategic marketing partners for displaying
advertisements to, and facilitating electronic commerce with, our
subscribers. These advertisements are displayed on Juno's portal site, on
the persistent advertising and navigation banner displayed while users of
our free basic service are connected to the Web, and within the main Juno
software while a Juno subscriber reads or writes e-mail.

(3) Direct product sales, consisting of revenues generated from the sale of
products directly by us to our subscribers and the associated shipping
and handling fees.

The introduction of our billable premium services significantly affected the
composition of our revenues. We launched our premium services on July 22, 1998,
and as of December 31, 1999, we had

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<PAGE>
approximately 550,000 premium service subscribers. Since the launch of our
billable premium services, billable services revenues have increased, both in
absolute terms and as a percentage of our revenues.

We currently offer our billable premium services under a number of pricing
plans. The list price for Juno Web is a flat rate of $19.95 per month, but over
the past eighteen months we have offered a number of promotions, such as a free
month of service or a discounted rate for an initial or prepaid period, as well
as discounted flat-rate plans as low as $9.95 per month. Juno Gold was offered
for a list price of $2.95 per month, billed annually in advance. Pricing for
Juno Express will be determined over the course of the pilot test. Subscription
revenues for our billable premium services accounted for approximately 94.1% of
billable services revenues during 1999.

Our strategy contemplates considerable growth in the number of subscribers
to both our free basic service and our billable premium services. We intend to
devote significant resources to advertising and brand marketing designed to
acquire new subscribers directly into each of our service levels and to
encourage migration of our free basic service subscribers to our premium
services. In addition to direct marketing and advertising initiatives, we
continually experiment with a wide range of product offerings, promotional and
pricing plans, and features of our service as part of our overall subscriber
acquisition and retention strategy. We expect that our ongoing experiments with
discounted pricing will increase cost of revenues for billable services as a
percentage of billable service revenues in the near term, and especially in the
first calendar quarter, which tends to be a favorable time for direct marketing.
We further expect growth in the subscriber base for Juno Web and Juno Express to
result in substantial growth in subscription fees. Our strategy contemplates
that revenues for billable premium services are likely to be the single largest
source of revenues for Juno in the immediate future.

We face intense competition to acquire billable service subscribers. Our
competitors for such subscribers include companies that have substantially
greater market presence and financial, technical, distribution, marketing and
other resources than we have. This competitive environment could have a variety
of harmful effects on us, including limiting our ability to enter into or renew
agreements with distribution partners, necessitating price reductions for our
billable services, or necessitating increased spending in areas such as
marketing, telecommunications, and product development.

We are subject to industry trends that affect Internet access providers
generally, including seasonality and subscriber cancellations. We believe
Internet access providers typically incur higher expenses during the last and
first calendar quarters, corresponding to heavier usage during the fall and
winter, and experience relatively lighter usage and relatively fewer account
registrations during the summer. We believe subscriber acquisition also tends to
be most effective during the first and last calendar quarters of each year, and
we may take these types of seasonal effects into consideration in scheduling our
marketing activities. The results of operations of Internet access providers,
including those of Juno, are significantly affected by subscriber cancellations.
The failure to retain subscribers to our billable premium services, or an
increase in the rate of cancellations of those services, would cause our
business and financial results to suffer.

Additionally, our strategy contemplates increases in revenues from
advertising and transaction fees. We expect that strategic marketing alliances
will account for an increasing portion of such revenues. This is due in part to
our expectation that we may secure additional strategic marketing alliances, as
well as to our expectation that we may earn incremental performance-based
revenues beyond the minimum guaranteed revenues associated with some of these
arrangements. We expect that revenues from direct product sales will be
significantly reduced due to our strategic decision to focus increasingly on
higher margin activities. Our competitors for revenues from advertising and
electronic commerce include companies that have substantially greater market
presence, and financial, technical, distribution, marketing, and other resources
than we have. This competitive environment could have a variety of harmful
effects on us, including necessitating advertising rate reductions and limiting
our ability to enter into or renew advertising agreements.

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Our principal expenses consist of marketing, telecommunications, customer
service, and personnel and related costs. We have elected to obtain
telecommunications services and customer service, as well as merchandising
fulfillment for our direct product sales activities, principally from
third-party providers.

We have incurred net losses of $148.0 million from our inception on
June 30, 1995 through December 31, 1999. In addition, we have recorded
cumulative unearned compensation of $1.2 million, which represents the
difference between the exercise price and the deemed fair market value at the
date of grant for shares of common stock issuable upon the exercise of stock
options. Of the total unearned compensation amount, $34,000 was amortized for
the year ended December 31, 1998 and $416,000 was amortized for the year ended
December 31, 1999. The remaining unearned compensation amount is expected to be
amortized over the remaining vesting periods of the related options.

We have relied on sales of equity securities, totaling $299.8 million, and
borrowings to fund our operations. Included in this amount are $81.1 million of
net proceeds from our February 2000 follow-on offering of common stock,
$77.3 million of net proceeds from our May 1999 initial public offering of
common stock and $61.9 million of net proceeds from our March 1999 private
placement of Series B redeemable convertible preferred stock, which
automatically converted into shares of common stock upon the closing of the
initial public offering. We expect net losses to continue for the foreseeable
future as we continue to incur significant expenses while pursuing our business
strategy.

Prior to March 1, 1999, we operated our business primarily through a limited
partnership, Juno Online Services, L.P. On that date, we completed a statutory
merger of Juno Online Services, L.P. into Juno Online Services, Inc., which had
been a wholly owned subsidiary of Juno Online Services, L.P. Juno Online
Services, Inc. is the surviving entity after completion of the statutory merger.
The consolidated financial statements included herein consist of the accounts of
both Juno Online Services, L.P. and Juno Online Services, Inc. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Since we operated as a limited partnership prior to March 1, 1999, taxable
losses incurred through that date have been allocated to the partners for
reporting on their respective income tax returns. Accordingly, as of that date,
we had no available net operating loss carryforwards available for federal and
state income tax purposes to offset future taxable income, if any.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

REVENUES

Total revenues increased $30.3 million, to $52.0 million for the year ended
December 31, 1999 from $21.7 million for the year ended December 31, 1998, an
increase of 140%. This increase was due to increases in billable services and in
advertising and transaction fees, partially offset by a decrease in direct
product sales.

BILLABLE SERVICES. Billable services revenues increased $27.9 million, to
$34.5 million for the year ended December 31, 1999 from $6.6 million for the
year ended December 31, 1998, an increase of 420%. This increase was due
primarily to the additional number of subscribers to our billable premium
services in the year ended December 31, 1999, as compared with the much smaller
number in the year ended December 31, 1998. Our billable premium services were
introduced in July 1998. Revenues associated with these services contributed
$32.5 million of revenues in the year ended December 31, 1999 compared to
$3.6 million in the year ended December 31, 1998, representing an increase of
797%.

ADVERTISING AND TRANSACTION FEES. Advertising and transaction fees
increased $6.2 million, to $12.7 million for the year ended December 31, 1999
from $6.5 million for the year ended December 31, 1998, an increase of 96.2%.
This increase was due primarily to larger average deal sizes associated with the
shift in our emphasis towards strategic marketing alliances, partially offset by
declines in the number of and the aggregate revenue generated from shorter term
ad sales contracts. Barter transactions accounted

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for approximately 6.2% of total advertising and transaction fees for the year
ended December 31, 1999 versus 1.9% for the year ended December 31, 1998.

DIRECT PRODUCT SALES. Direct product sales decreased $3.8 million, to
$4.8 million for the year ended December 31, 1999 from $8.6 million for the year
ended December 31, 1998, a decrease of 44.2%. This decline reflects our
strategic decision in 1998 to narrow the range of our direct product sales
activities and of the types of products offered to our subscribers. Instead, we
decided to concentrate on forming strategic marketing alliances and developing
other uses for our advertising inventory that we believe should generate
revenues with higher margins than direct product sales.

COST OF REVENUES

Total cost of revenues increased $16.8 million, to $33.8 million for the
year ended December 31, 1999 from $17.0 million for the year ended December 31,
1998, an increase of 99.3%. This increase was due primarily to increases in
costs associated with higher revenues from billable services and advertising and
transaction fees, partially offset by a decrease in costs associated with direct
product sales revenues.

BILLABLE SERVICES. Cost of revenues related to billable services consists
primarily of the costs to provide billable premium services, including
telecommunications, customer service, operator-assisted technical support,
credit card fees, and personnel and related overhead costs. In addition, cost of
revenues related to billable services includes the costs of mailing disks upon
request to prospective Juno subscribers, and the personnel and related overhead
costs associated with our performance of a short-term consulting engagement.

Cost of revenues related to billable services increased approximately
$19.3 million, to $25.0 million for the year ended December 31, 1999 from
$5.6 million for the year ended December 31, 1998, an increase of 345%. This
increase was due primarily to the costs of providing our billable premium
services to a substantially larger number of subscribers in the year ended
December 31, 1999, as compared with the year ended December 31, 1998. Costs
related to the provision of these billable premium services, principally
customer service, technical support and telecommunications expenses, accounted
for 80.0% of the total costs of revenues related to billable services during the
year ended December 31, 1999 and accounted for the majority of the increase.
Cost of billable services revenues as a percentage of billable services revenues
improved to 72.2% for the year ended December 31, 1999 from 84.4% for the year
ended December 31, 1998. This improvement is primarily attributable to decreased
customer service costs per subscriber and declining average telecommunications
rates.

ADVERTISING AND TRANSACTION FEES. Cost of revenues for advertising and
transaction fees consists primarily of the transmission costs associated with
downloading advertisements to the hard drives of subscribers' computers for
later display, the personnel and related costs associated with the creation and
distribution of these advertisements, and the costs associated with reporting
the results of ad campaigns to advertisers.

Cost of revenues for advertising and transaction fees increased
$1.0 million, to $4.7 million for the year ended December 31, 1999 from
$3.7 million for the year ended December 31, 1998, an increase of 25.5%. This
increase was due primarily to the impact of additional strategic marketing
alliances. Cost of revenues related to advertising and transaction fees as a
percentage of advertising and transaction fees improved to 36.9% for the year
ended December 31, 1999 from 57.7% for the year ended December 31, 1998. This
improvement is due primarily to decreased telecommunications rates, faster
average connection speeds, larger average deal sizes over which to spread
production costs, and improvements in our production and distribution methods.

DIRECT PRODUCT SALES. Cost of revenues for direct product sales consists
primarily of the costs of merchandise sold directly by us to our subscribers and
the associated shipping and handling costs.

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The cost of revenues for direct product sales decreased approximately
$3.5 million, to $4.2 million for the year ended December 31, 1999 from
$7.6 million for the year ended December 31, 1998, a decrease of 45.2%. This
decrease corresponds to the decrease in merchandise sold. The cost of revenues
for direct product sales as a percentage of direct product sales revenues
improved to 87.1% for the year ended December 31, 1999 from 88.7% for the year
ended December 31, 1998. This improvement was due primarily to efficiencies
associated with outsourcing various functions rather than performing them
internally, partially offset by a greater decline in the average retail price of
merchandise sold relative to the declines in the costs of such merchandise, and
additional promotional pricing in response to increasing competition for
computer hardware.

OPERATING EXPENSES

OPERATIONS, FREE SERVICE. Operations, free service consists of the costs
associated with providing our free basic service, comprised principally of
telecommunications costs, expenses associated with providing customer service,
depreciation of network equipment, and personnel and related overhead costs.

Expenses associated with operations, free service decreased $2.7 million, to
$6.7 million for the year ended December 31, 1999 from $9.4 million for the year
ended December 31, 1998, a decrease of 28.6%. This decrease was primarily due to
declining telecommunications rates and increasing connection speeds resulting
from the use of faster modems by a portion of our subscriber base. The
historical results were not materially impacted by the expansion of our basic
service to provide full Internet access for free, since this expansion occurred
on December 20, 1999. We expect that this expansion of our free service will
significantly increase our operations, free service expenses.

SUBSCRIBER ACQUISITION. Subscriber acquisition costs include all costs
incurred to acquire subscribers to either our free basic service or one of our
billable premium services. These costs include direct mail campaigns,
advertising through conventional and computer-based media, telemarketing,
producing advertisements to be displayed over the Juno services and transmitting
them to our subscribers, disk duplication and fulfillment, and bounties paid to
acquire subscribers, among other marketing activities. These costs also include
various subscriber retention activities, as well as personnel and related
overhead costs.

Subscriber acquisition costs increased approximately $42.3 million, to
$47.7 million for the year ended December 31, 1999 from $5.3 million for the
year ended December 31, 1998. This increase is due primarily to costs related to
our 1999 external marketing campaign which launched in the second quarter of
1999, including direct mail programs, television and radio commercials, outdoor
advertising and various other advertising expenditures. This increase is also
due to inbound telemarketing costs incurred in connection with subscriber
acquisition and retention activities and to ad production and transmission costs
associated with soliciting basic e-mail subscribers to upgrade to our billable
subscription services. As a percentage of revenues, subscriber acquisition costs
increased to 91.6% in the year ended December 31, 1999 from 24.6% in the year
ended December 31, 1998. This percentage increase was primarily due to increased
costs related to our 1999 external marketing campaign. In connection with the
expansion of our free service described above, we anticipate significantly
increasing subscriber acquisition expenses in order to fund subscriber growth in
an attempt to gain market share.

SALES AND MARKETING. Sales and marketing expenses consist primarily of the
personnel and related overhead costs of the following departments: advertising
sales and business development; direct product sales; and product marketing.
Also included are costs associated with trade advertising intended to support
our ad sales effort, corporate branding activities unrelated to subscriber
acquisition, and public relations, as well as ad production, ad transmission,
customer service and fulfillment costs associated with our direct product sales
activities.

Sales and marketing costs were $11.6 million for the years ended
December 31, 1999 and 1998. Sales and marketing expenses for the year ended
December 31, 1999 include increased trade advertising costs as

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compared to the year ended December 31, 1998. This increase was partially offset
by cost reductions associated with our decision to scale back various direct
product sales activities. Sales and marketing costs for the year ended
December 31, 1998 include one-time costs associated with this decision, as well
as expenses related to the closing of our regional advertising sales offices. As
a percentage of revenues, sales and marketing costs improved to 22.2% in the
year ended December 31, 1999 from 53.4% in the year ended December 31, 1998.
This improvement was primarily due to an increase in revenues for the year ended
December 31, 1999.

PRODUCT DEVELOPMENT. Product development includes research and development
expenses and other product development costs. These costs consist primarily of
personnel and related overhead costs as well as the costs associated with
research and development and other product development activities performed for
us on a contract basis by a related party in Hyderabad, India, prior to our
hiring as employees substantially all of these individuals in May 1999.

Product development costs decreased $0.1 million, to $7.2 million for the
year ended December 31, 1999 from $7.3 million for the year ended December 31,
1998, a decrease of 1.5%. This decrease is primarily due to lower costs
associated with operating our India-based research and development efforts as a
majority-owned subsidiary, rather than obtaining these services on a contract
basis, partially offset by additional personnel and related costs in both our
domestic and India offices. Product development costs in the year ended
December 31, 1999 and 1998 related primarily to the continued development of our
billable premium services and of various pieces of software. To date, we have
not capitalized any expenses related to any software development activities.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel and related overhead costs associated with executive,
finance, legal, recruiting, human resources and facilities functions, as well as
various professional expenses.

General and administrative costs increased approximately $1.9 million, to
$4.6 million for the year ended December 31, 1999 from $2.8 million for the year
ended December 31, 1998, an increase of 67.2%. This increase is primarily due to
increased insurance costs for directors' and officers' liability insurance,
professional service fees and additional personnel and related overhead costs.
As a percentage of revenues, general and administrative costs decreased to 8.9%
for the year ended December 31, 1999 from 12.7% for the year ended December 31,
1998. This decrease was primarily due to the increase in revenue for the year
ended December 31, 1999 compared to the year ended December 31, 1998. We expect
that we will incur additional general and administrative expenses as we hire
additional personnel and incur additional costs related to the growth of our
business and operation as a public company, including directors' and officers'
liability insurance, investor relations programs and professional service fees.
Accordingly, we anticipate that general and administrative expenses will
increase in absolute dollar terms in the future.

INTEREST INCOME, NET. Interest income, net increased approximately
$3.7 million, to $3.7 million for the year ended December 31, 1999 from $44,000
for the year ended December 31, 1998. This increase is primarily due to interest
income earned on higher average cash balances in the year ended December 31,
1999 resulting from our initial public offering in May 1999 and from the
issuance of redeemable convertible preferred stock in March 1999, partially
offset by higher interest payments for borrowings.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

REVENUES

Total revenues increased $12.6 million, from $9.1 million for the year ended
December 31, 1997 to $21.7 million for the year ended December 31, 1998, an
increase of 139%. This increase was due primarily to increases in billable
services and in advertising and transaction fees.

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BILLABLE SERVICES. Billable services revenues increased approximately
$5.3 million, from $1.4 million for the year ended December 31, 1997 to
$6.6 million for the year ended December 31, 1998, an increase of 385%. This
increase was due primarily to the introduction of our billable subscription
services, which contributed $3.6 million in subscription fees in 1998; a
short-term development consulting contract which contributed $1.0 million; and
technical support fees associated with the growth of the subscriber base of
Juno's free basic e-mail service and of Juno Gold. At December 31, 1998, there
were approximately 144,000 billable services subscribers, with approximately
53,000 subscribing to Juno Gold and approximately 91,000 subscribing to Juno
Web.

ADVERTISING AND TRANSACTION FEES. Advertising and transaction fees
increased $4.6 million, from $1.9 million for the year ended December 31, 1997
to $6.5 million for the year ended December 31, 1998, an increase of 244%. This
increase was due primarily to additional advertisers and advertisements
delivered, and the impact of additional strategic marketing alliances.

From time to time, we engage in barter transactions in which we exchange
advertising with other Internet or traditional media companies, provide
advertising in exchange for software distribution services or other forms of
marketing assistance, or participate in other reciprocal service arrangements.
Barter transactions accounted for 0.3% of total advertising and transaction fees
for the year ended December 31, 1997, and 1.9% for the year ended December 31,
1998.

DIRECT PRODUCT SALES. Direct product sales increased $2.8 million, from
$5.8 million for the year ended December 31, 1997 to $8.6 million for the year
ended December 31, 1998, an increase of 47.0%. However, revenues from direct
product sales decreased $1.0 million, from $5.0 million for the six months ended
December 31, 1997 to $4.0 million for the six months ended December 31, 1998, a
decrease of 20.1%. This decline reflects our strategic decision during the first
quarter of 1998 to narrow the range of our direct product sales activities and
of the types of products offered to our subscribers. Instead, we decided to
concentrate on forming strategic marketing alliances and developing other uses
for our advertising inventory that we believe should generate revenues with
higher margins than direct products sales.

COST OF REVENUES

Total cost of revenues increased $8.5 million, from $8.5 million for the
year ended December 31, 1997 to $17.0 million, an increase of approximately
99.3%. This increase was due primarily to increases in costs associated with
billable services and with advertising and transaction fees.

BILLABLE SERVICES. Cost of revenues related to billable services increased
approximately $4.6 million, from $1.1 million for the year ended December 31,
1997 to $5.6 million for the year ended December 31, 1998, an increase of 433%.
This increase is primarily due to the costs of providing our billable
subscription services. Costs related to the provision of these billable
subscription services, principally customer service, technical support and
telecommunications expenses, accounted for 58.0% of the total costs of revenues
related to all billable services during 1998 and accounted for a majority of the
increase. Cost of revenues related to billable services as a percentage of total
billable services revenues increased from 76.8% for the year ended December 31,
1997 to 84.4% for the year ended December 31, 1998. This increase is principally
related to the introduction of billable subscription services, the relatively
high percentage of subscribers to these services who are in their initial
months, and the higher costs incurred in the early stages of a subscriber's life
cycle. We believe that customer service and technical support costs are
substantially higher in the initial months following signup than during later
months. We also incur significant startup costs associated with training
customer service and technical support representatives and with developing
processes necessary to support the subscriber base and its anticipated future
growth. We expect that, other things being equal, these costs will be highest as
a percentage of the related revenues during periods of rapid percentage growth
in the subscriber base of our billable subscription services.

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ADVERTISING AND TRANSACTION FEES. Cost of revenues for advertising and
transaction fees increased approximately $2.1 million, from $1.7 million for the
year ended December 31, 1997 to $3.7 million for the year ended December 31,
1998, an increase of 125%. This increase was principally due to additional
advertisers and advertisements delivered and the impact of additional strategic
marketing alliances. The cost of revenues for advertising and transaction fees
as a percentage of advertising and transaction fees revenue decreased from 88.5%
for the year ended December 31, 1997 to 57.7% for the year ended December 31,
1998. This decrease is primarily due to economies of scale associated with
higher volumes of ad production, decreased telecommunications rates, faster
average connection speeds, and improvements in our production and distribution
methods.

DIRECT PRODUCT SALES. The cost of revenues for direct product sales
increased $1.8 million, from $5.8 million for the year ended December 31, 1997
to $7.6 million for the year ended December 31, 1998, an increase of 31.6%. This
increase corresponds to the increase in merchandise sold. The cost of revenues
for direct product sales as a percentage of direct product sales revenue
decreased from 99.2% for the year ended December 31, 1997 to 88.7% for the year
ended December 31, 1998. This decrease was primarily due to efficiencies
associated with outsourcing various functions rather than performing them
internally.

OPERATING EXPENSES

OPERATIONS, FREE SERVICE. Expenses associated with operations, free service
decreased $1.7 million, from $11.1 million for the year ended December 31, 1997
to $9.4 million for the year ended December 31, 1998, a decrease of 15.3%. This
decrease was primarily due to declining telecommunications rates and increasing
connection speeds resulting from the use of faster modems by a portion of our
subscriber base. These cost savings were partially offset by an increase in the
number of subscribers connecting in a given month. During the month ended
December 31, 1997, 1,986,000 subscriber accounts connected and during the month
ended December 31, 1998, 2,434,000 subscriber accounts connected.

SUBSCRIBER ACQUISITION. Subscriber acquisition costs increased
$2.2 million, from $3.1 million for the year ended December 31, 1997 to
$5.3 million for the year ended December 31, 1998, an increase of 69.9%. This
increase is primarily due to direct mail and advertising costs incurred to
acquire subscribers to our free basic e-mail service in the first half of 1998,
ad production and transmission costs associated with soliciting basic e-mail
subscribers to upgrade to our billable subscription services starting in
July 1998, and costs incurred during the second half of 1998 to prepare for the
large-scale marketing activities planned for 1999. The increase in these costs
was partially offset by a decrease in expenses related to referral bounties as
various agreements that called for bounty payments expired or were terminated.
As a percentage of revenues, subscriber acquisition costs decreased from 34.5%
in 1997 to 24.6% in 1998. This percentage decrease was primarily due to the
relatively larger 1998 revenues. We expect that subscriber acquisition costs
will increase significantly both in absolute dollar terms and as a percentage of
total revenue in the future.

SALES AND MARKETING. Sales and marketing costs decreased $1.0 million, from
$12.6 million for the year ended December 31, 1997 to $11.6 million for the year
ended December 31, 1998, a decrease of 8.0%. This decrease is primarily due to
reductions in the level of trade advertising we undertook in 1998 as well as to
cost savings associated with our decisions to close our regional ad sales
offices and to narrow the range of our direct product sales activities. We
reduced the headcount assigned to our direct product sales activities, as well
as inventory risk, primarily by outsourcing substantially all of the
procurement, warehousing, fulfillment, billing and customer service aspects of
this initiative. In each of the first and second quarters of 1998, sales and
marketing expenses include charges of approximately $300,000 relating to
inventory write-offs, severance pay, and lease termination costs. As a
percentage of revenues, sales and marketing costs decreased from 139% in 1997 to
53.4% in 1998. This percentage decrease was primarily due to our relatively
larger 1998 revenues.

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PRODUCT DEVELOPMENT. Product development costs increased approximately
$2.5 million, from $4.9 million for the year ended December 31, 1997 to
$7.3 million for the year ended December 31, 1998, an increase of 51.1%. This
increase is primarily due to the costs associated with establishing development
operations in Hyderabad, India, a project we initiated in the fourth quarter of
1997. Product development costs in 1998 related primarily to the continued
development of our billable subscription services and of various pieces of
software. To date, we have not capitalized expenses related to any software
development activities.

GENERAL AND ADMINISTRATIVE. General and administrative costs decreased
$0.1 million, from $2.9 million for the year ended December 31, 1997 to
$2.8 million for the year ended December 31, 1998, a decrease of 4.7%. This
decrease is primarily due to reduced personnel and related overhead costs, lower
professional fees, and cost containment programs. As a percentage of revenues,
general and administrative costs decreased from 31.9% for the year ended
December 31, 1997 to 12.7% for the year ended December 31, 1998. This decrease
was primarily due to the increase in revenues for the year ended December 31,
1998. We expect that we will incur additional general and administrative
expenses as we hire additional personnel and incur additional costs related to
the growth of our business and our operation as a public company, including
directors' and officers' liability insurance, investor relations programs and
professional service fees. Accordingly, we anticipate that general and
administrative expenses will increase in absolute dollar terms in the future.

INTEREST INCOME, NET. Interest income, net decreased $199,000, from
$243,000 for the year ended December 31, 1997 to $44,000 for the year ended
December 31, 1998, a decrease of 81.9%. This decrease is primarily due to
interest payments for borrowings and increased capital lease obligations,
partially offset by interest income earned on higher average cash balances
during 1998.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

REVENUES

Total revenues increased $9.0 million, from $0.1 million for the year ended
December 31, 1996 to $9.1 million for the year ended December 31, 1997. This
increase was primarily due to increases in direct product sales and in
advertising and transaction fees.

BILLABLE SERVICES. Billable services revenues increased $1.4 million, from
$6,000 for the year ended December 31, 1996 to $1.4 million for the year ended
December 31, 1997. This increase is primarily due to the implementation of
fee-based technical support for subscribers to our free basic e-mail service in
January 1997 and the initiation, as of March 1997, of our policy to charge
prospective subscribers to our free basic e-mail service a shipping and handling
fee if they request that a copy of our software be sent to them by mail.

ADVERTISING AND TRANSACTION FEES. Advertising and transaction fees
increased approximately $1.7 million, from $127,000 for the year ended
December 31, 1996 to $1.9 million for the year ended December 31, 1997. This
increase reflects the expansion of our sales force and the growth in the
subscriber base of our free basic e-mail service to a level sufficient to
interest advertisers, and is principally due to the significantly higher number
of advertisers and advertisements delivered.

DIRECT PRODUCT SALES. Direct product sales increased $5.8 million, from
$3,000 for the year ended December 31, 1996 to $5.8 million for the year ended
December 31, 1997. This increase reflects the first full year of direct product
sales activity and the growth of our subscriber base.

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COST OF REVENUES

Cost of revenues increased $8.2 million, from $0.3 million for the year
ended December 31, 1996 to $8.5 million for the year ended December 31, 1997.
This increase was primarily due to increases in costs associated with direct
product sales and with advertising and transaction fees.

BILLABLE SERVICES. The cost of revenues related to billable services
increased $1.1 million, from $0 for the year ended December 31, 1996 to
$1.1 million in 1997. This increase is primarily due to costs associated with
providing fee-based technical support to subscribers to our free basic e-mail
service starting in January 1997 and with our policy to charge prospective
subscribers to our free basic e-mail service a shipping and handling fee if they
request that a copy of our software be sent to them by mail.

ADVERTISING AND TRANSACTION FEES. The cost of revenues for advertising and
transaction fees increased $1.4 million, from $278,000 for the year ended
December 31, 1996 to $1.7 million for the year ended December 31, 1997. This
increase is principally due to additional production and transmission costs
associated with the increase in advertisements delivered.

DIRECT PRODUCT SALES. The cost of revenues for direct product sales
increased $5.8 million, from $3,000 for the year ended December 31, 1996 to
$5.8 million for the year ended December 31, 1997. This increase corresponds to
the increase in products sold.

OPERATING EXPENSES

OPERATIONS, FREE SERVICE. The expenses associated with operations, free
service increased $5.3 million, from $5.8 million for the year ended
December 31, 1996 to $11.1 million for the year ended December 31, 1997, an
increase of 90.8%. This increase is primarily due to the growth in the
subscriber base of our free basic e-mail service, which resulted in increased
telecommunications and customer service costs, partially offset by declining
telecommunication rates and increasing average connection speeds. During the
month ended December 31, 1996, 823,000 subscriber accounts connected and during
the month ended December 31, 1997, 1,986,000 subscriber accounts connected.

SUBSCRIBER ACQUISITION. Subscriber acquisition costs decreased
$3.9 million, from $7.0 million for the year ended December 31, 1996 to
$3.1 million for the year ended December 31, 1997, a decrease of 55.1%. This
decrease is primarily due to the reduction in advertising and direct mail
activities in 1997 relative to those in 1996, the year in which we launched our
free basic e-mail service. The effect of this reduction in advertising and
direct mail activities was partially offset by increased referral bounty
expenses in 1997.

SALES AND MARKETING. Sales and marketing expenses increased $8.3 million,
from $4.3 million for the year ended December 31, 1996 to $12.6 million for the
year ended December 31, 1997, an increase of 195%. This increase is primarily
due to the growth of our advertising sales force as well as the expansion of our
direct product sales activities, which increased our expenses related to ad
production, ad transmission, and order fulfillment. These increases were
partially offset by reductions in the level of trade advertising we undertook in
1997.

PRODUCT DEVELOPMENT. Product development costs increased approximately
$1.1 million, from $3.7 million for the year ended December 31, 1996 to
$4.9 million for the year ended December 31, 1997, an increase of 29.9%. This
increase is primarily due to increased personnel and related overhead costs, due
to higher headcount. Product development costs in 1997 related primarily to
development of refinements to our advertising and electronic commerce systems
and certain other pieces of software.

GENERAL AND ADMINISTRATIVE. General and administrative costs increased
$0.7 million, from $2.2 million for the year ended December 31, 1996 to
$2.9 million for the year ended December 31, 1997, an increase of 33.4%. This
increase is primarily due to increased personnel and related overhead costs, due
to increased headcount.

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INTEREST INCOME, NET. Interest income, net increased $115,000, from
$128,000 for the year ended December 31, 1996 to $243,000 for the year ended
December 31, 1997, an increase of 89.8%. This increase is primarily due to
interest income earned on higher average cash balances in 1997.

QUARTERLY RESULTS OF OPERATIONS DATA

The following table sets forth unaudited quarterly statement of operations
data for each of the six quarters ended December 31, 1999, as well as the same
data expressed as a percentage of our total revenues for the periods indicated.
In our opinion, this unaudited information has been prepared substantially on
the same basis as the audited consolidated financial statements appearing
elsewhere herein, and all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts stated below to present
fairly the unaudited quarterly results of operations data. The quarterly data
should be read in conjunction with the consolidated financial statements and the
notes to these statements appearing elsewhere herein. The operating results for
any quarter are not necessarily indicative of the operating results for any
future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------------
DEC. 31, 1999 SEPT. 30, 1999 JUNE 30, 1999 MAR. 31, 1999 DEC. 31, 1998 SEPT. 30, 1998
------------- -------------- ------------- ------------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Billable services............. $ 13,016 $ 8,654 $ 7,069 $ 5,806 $ 3,943 $ 1,528
Advertising and transaction
fees........................ 4,327 3,367 2,703 2,265 1,927 1,759
Direct product sales.......... 712 1,083 1,350 1,649 2,136 1,847
-------- -------- -------- ------- ------- -------
Total revenues............ 18,055 13,104 11,122 9,720 8,006 5,134
-------- -------- -------- ------- ------- -------
Cost of revenues:
Billable services............. 8,831 5,960 5,481 4,678 3,333 1,306
Advertising and transaction
fees........................ 1,313 1,120 1,162 1,080 1,033 992
Direct product sales.......... 599 988 1,165 1,424 1,900 1,592
-------- -------- -------- ------- ------- -------
Total cost of revenues.... 10,743 8,068 7,808 7,182 6,266 3,890
-------- -------- -------- ------- ------- -------
Operating expenses:
Operations, free service...... 1,617 1,464 1,771 1,846 2,102 2,101
Subscriber acquisition........ 16,003 15,028 13,920 2,700 2,387 1,067
Sales and marketing........... 3,348 3,180 2,716 2,312 2,218 2,212
Product development........... 1,809 1,592 1,977 1,854 2,031 1,849
General and administrative.... 1,645 1,284 982 704 657 513
-------- -------- -------- ------- ------- -------
Total operating
expenses................ 24,422 22,548 21,366 9,416 9,395 7,742
-------- -------- -------- ------- ------- -------
Loss from operations...... (17,110) (17,512) (18,052) (6,878) (7,655) (6,498)
Interest income (expense),
net........................... 1,382 1,430 795 111 (22) 6
-------- -------- -------- ------- ------- -------
Net loss.................. $(15,728) $(16,082) $(17,257) $(6,767) $(7,677) $(6,492)
======== ======== ======== ======= ======= =======
</TABLE>

29
<PAGE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------------
DEC. 31, 1999 SEPT. 30, 1999 JUNE 30, 1999 MAR. 31, 1999 DEC. 31, 1998 SEPT. 30, 1998
------------- -------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF REVENUES:
Revenues:
Billable services........... 72.1% 66.0% 63.6% 59.7% 49.3% 29.7%
Advertising and transaction
fees...................... 24.0 25.7 24.3 23.3 24.1 34.3
Direct product sales........ 3.9 8.3 12.1 17.0 26.6 36.0
-------- -------- -------- ------- ------- -------
Total revenues............ 100.0 100.0 100.0 100.0 100.0 100.0
-------- -------- -------- ------- ------- -------
Cost of revenues:
Billable services........... 48.9 45.5 49.3 48.1 41.7 25.4
Advertising and transaction
fees...................... 7.3 8.5 10.4 11.1 12.9 19.4
Direct product sales........ 3.3 7.5 10.5 14.7 23.7 31.0
-------- -------- -------- ------- ------- -------
Total cost of revenues.... 59.5 61.6 70.2 73.9 78.3 75.8
-------- -------- -------- ------- ------- -------
Operating expenses:
Operations, free service.... 9.0 11.2 15.9 19.0 26.2 40.9
Subscriber acquisition...... 88.6 114.7 125.2 27.8 29.8 20.7
Sales and marketing......... 18.6 24.3 24.4 23.8 27.7 43.1
Product development......... 10.0 12.1 17.8 19.1 25.4 36.0
General and
administrative............ 9.1 9.8 8.8 7.2 8.2 10.1
-------- -------- -------- ------- ------- -------
Total operating
expenses................ 135.3 172.1 192.1 96.9 117.3 150.8
-------- -------- -------- ------- ------- -------
Loss from operations...... (94.8) (133.6) (162.3) (70.8) (95.6) (126.6)
Interest income (expense),
net......................... 7.7 10.9 7.1 1.2 (0.3) 0.1
-------- -------- -------- ------- ------- -------
Net loss.................. (87.1)% (122.7)% (155.2)% (69.6)% (95.9)% (126.5)%
======== ======== ======== ======= ======= =======
</TABLE>

The following table sets forth selected subscriber data for each of the six
quarters ended December 31, 1999. This data should be read in conjunction with
the information appearing elsewhere herein. The selected subscriber data for any
quarter are not necessarily indicative of future periods.

<TABLE>
<CAPTION>
SELECTED SUBSCRIBER DATA: DEC. 31, 1999 SEPT. 30, 1999 JUNE 30, 1999 MAR. 31, 1999 DEC. 31, 1998 SEPT. 30, 1998
- ------------------------- ------------- -------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Total subscriber accounts
as of (1)............. 8,137,000 7,613,000 7,175,000 6,817,000 6,336,000 5,852,000
Subscriber accounts
that connected in the
three-month period
ended............... 2,961,000 2,910,000 2,920,000 3,108,000 3,108,000 3,121,000
Subscriber accounts
that connected in the
month ended......... 2,325,000 2,276,000 2,277,000 2,438,000 2,434,000 2,409,000
Average subscriber
accounts that
connected per day in
the month ended..... 820,000 837,000 810,000 912,000 887,000 889,000
Billable subscription
service accounts
as of (2)............ 550,000 400,000 270,000 207,000 144,000 64,000
</TABLE>

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

(1) Includes all user accounts created since Juno's inception, regardless of
activity level, if any, net of accounts that have been cancelled.

(2) Billable subscription service accounts are a subset of total subscriber
accounts and, to the extent applicable, are also included in the number of
subscriber accounts shown as having connected during the periods described.

30
<PAGE>
We have historically experienced seasonality, with use of Internet services
being somewhat lower during the summer and year-end holiday periods. We believe
seasonality favorably impacts subscriber acquisition during the first and fourth
calendar quarters. We also believe that direct product sales are positively
affected in the fourth quarter due to the year-end holiday buying season,
although we cannot assure you that any of these trends will continue in future
periods. See "Item 7A. Risk factors that may affect future results--Juno's
business is subject to fluctuations in operating results which may negatively
impact the price of our stock."

Despite the impact of seasonality, our revenues have increased in all
quarters presented. We believe that these increases occurred for a number of
reasons, including:

- the overall growth of our business and the industry's growth as a whole;

- the launch of our billable subscription services on July 22, 1998; and

- the increase in advertising and transaction fees generated by strategic
marketing alliances beginning with the third quarter of 1998.

We cannot assure you that we will not experience seasonal fluctuations and the
risks associated therewith in the future. Primarily due to our previously
described strategic decision to scale back our direct product sales activities,
direct product sales revenue decreased in all quarters except for the fourth
quarter of 1998, which we believe was positively affected by the holiday buying
season.

Cost of revenues increased as a percentage of total revenues in the fourth
quarter of 1998 primarily due to:

- the startup costs associated with the introduction of our billable premium
services;

- the relatively high percentage of subscribers to these services who were
in their initial months;

- the higher costs incurred in the early months of a subscriber's life
cycle; and

- the fact that most Juno Web subscribers received their first month of
service at no charge.

Total cost of revenues has decreased as a percentage of revenues in each of
the four fiscal quarters in the year ended December 31, 1999, reflecting
improved margins in both billable services and advertising and transaction fee
revenues. Billable service costs decreased as a percentage of billable services
revenue as economies of scale were achieved in member service operations and as
our average telecommunications rates continued to decline. The cost of
advertising and transaction fees decreased as a percentage of advertising and
transaction fee revenues largely due to decreasing telecommunications rates and
efficiencies associated with larger average contract sizes.

Operating expenses have increased in each quarter through the three months
ended December 31, 1999 due principally to increased spending related to
subscriber acquisition. Subscriber acquisition expenses through March 31, 1999
reflect increased levels of marketing conducted over the Juno service in order
to promote our billable premium services to our free basic service subscribers.
The consecutive quarterly increase in subscriber acquisition expenses since
March 31, 1999 reflects the costs related to the launch of a significant
external marketing campaign in the second quarter of 1999. In connection with
the December 1999 expansion of our free service to include full Internet access,
we expect operating expenses to increase significantly on a quarter-to-quarter
basis, both due to the substantial increase we anticipate in subscriber
acquisition spending and the increased cost of providing full Internet access as
compared to the cost of providing basic e-mail services, which is reflected in
the Operations, Free Service line of our statement of operations.

31
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

Since our formation, we have financed our operations from funds generated by
the sale of equity securities and borrowings. Sales of equity securities include
$81.1 million of net proceeds from our February 2000 follow-on offering of
common stock, $77.3 million of net proceeds from our May 1999 initial public
offering of common stock and $61.9 million of net proceeds from our March 1999
private placement of redeemable convertible preferred stock, which converted
into common stock upon the completion of our initial public offering. We have
incurred significant losses since inception, totaling $148.0 million through
December 31, 1999.

Net cash used in operating activities was $33.6 million and $20.9 million
for the years ended December 31, 1997 and 1998, respectively. For the year ended
December 31, 1999, we used $36.4 million in cash for working capital purposes
and to fund losses from operations. Additionally, at December 31, 1999,
$8.7 million remained prepaid for advertising that may be used at any time prior
to March 2001, bringing total net cash used in operating activities to
$45.1 million. The increase in cash used in operating activities for the year
ended December 31, 1999 was primarily the result of an increase in the net loss
for 1999 and prepayments for advertising, partially offset by changes in
deferred revenue and other working capital accounts.

Net cash used in investing activities was $3.4 million, $1.6 million and
$1.3 million for the years ended December 31, 1997, 1998 and 1999, respectively.
The principal use of cash for the periods presented was for the purchase of
fixed assets. Prior to July 1997, we utilized fixed assets owned by DESCO, L.P.,
the expense relating to which was allocated to us. Beginning in July 1997,
substantially all new acquisitions of fixed assets have been made directly by
us.

Net cash provided by financing activities was $50.1 million, $16.9 million
and $129.7 million for the years ended December 31, 1997, 1998 and 1999,
respectively. Financing activities prior to 1999 are primarily capital
contributions, the borrowing and repayments under a note from an affiliated
party, and capital lease obligations. Financing activities for the year ended
December 31, 1999 primarily include $139.1 million of net proceeds received from
our March 1999 private placement and our May 1999 initial public offering. Of
the net proceeds from the initial public offering, $8.6 million was used to
repay, in full, the note mentioned above. Additionally, in February 2000, we
completed the sale of equity in a follow-on offering of common stock, which
provided us with $81.1 million in net proceeds.

In July 1999, we entered into a credit facility with a bank that provides
for borrowings up to $10.0 million. Borrowings can be in the form of advances or
standby letters of credit. The facility expires in July 2000. The facility is
collateralized by substantially all of Juno's assets. It is not collateralized
by assets established pursuant to capital leases. Advances outstanding under the
facility bear interest at the bank's prime rate, 8.50% at December 31, 1999.
Under the terms of the facility, Juno is required to maintain certain quarterly
financial and operational ratios and to obtain bank approval for certain mergers
or acquisitions and fixed asset financing. As of the date of this report, there
were no amounts outstanding under the facility.

We do not currently have any material commitments for capital expenditures
outside of the normal course of business and recent historical trends. However,
we do anticipate that we will increase our capital expenditures and lease
commitments beyond recent historical trends to expand our infrastructure in
anticipation of the growth of our subscriber base. We may also take advantage of
opportunities to employ various cost-effective but capital-intensive approaches
to the provision of our Internet services. As a result of our outsourcing
arrangements for telecommunications services and customer service, we have
substantially reduced the level of capital expenditures that would otherwise
have been necessary to develop our product offerings. In the event that these
outsourcing arrangements were no longer available to us, significant capital
expenditures would be required and our business and financial results could
suffer. The expansion of our free basic service to include Web access will
significantly increase the telecommunications costs that we incur. In addition,
we anticipate significantly increasing subscriber acquisition expenses in

32
<PAGE>
order to fund subscriber growth and help us gain market share. Additional
expenditures in connection with subscriber acquisition and the purchase of
telecommunications capacity will represent material uses of our cash resources.

We believe that our existing cash and cash equivalents, which include
$81.1 million in net proceeds from our February 2000 follow-on offering of
common stock, will be sufficient to meet our anticipated cash needs for at least
the next twelve months. If existing cash and cash equivalents are insufficient
to satisfy our liquidity requirements, we may choose to reduce certain
discretionary expenditures, including incremental subscriber acquisition costs
associated with our service expansion, and we may seek to sell additional equity
or debt securities or to increase, extend or supplement our existing credit
facility. The sale of additional equity or convertible debt securities would
result in additional dilution to our stockholders. The incurrence of
indebtedness would result in increased fixed obligations and could result in
covenants that would restrict our operations. We have not made arrangements to
obtain additional financing and there can be no assurance that financing will be
available in amounts or on terms acceptable to us, if at all. See "Risk
Factors--We cannot predict our future capital needs and we may not be able to
secure additional financing."

IMPACT OF THE YEAR 2000

The Year 2000 issue is the result of computer programs being written using
two digits rather than four to identify a given year. Many of the computer
programs that Juno utilizes include specialized functions that involve date
manipulation. These functions are critical to our business, and include:

- signup of new subscribers to our services;

- validation of credit cards;

- transfer, storage and processing of e-mail and advertisements;

- scheduling of advertisements and reporting of results to advertisers; and

- billing and invoicing of advertisers and subscribers to our billable
subscription services.

Juno's business is heavily dependent upon the use of operating systems and
applications that, in the aggregate, involve millions of lines of computer code.
Similarly, our business is also dependent on the coordinated functioning of a
network made up of hundreds of servers and other pieces of computer equipment,
all of which have computer code embedded in them. We are aware of no material
cases in which our software or hardware has malfunctioned due to interpreting
the date code "00" as the year 1900 rather than the year 2000, and as such, Juno
has yet to encounter significant errors in the information we use to manage the
business and the computer systems that operate our online services. Any
miscalculations that may occur and be detected later could result in errors in
our operations or in disruption of operations, including, among other things, a
temporary inability to process transactions, send invoices or engage in other
normal business activities.

COSTS. To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. The cost of software tools and
consulting expenses used for detection of Year 2000 problems has not exceeded
$100,000. If any errors are detected, we expect that our existing employees or
consultants will perform all significant work to correct any errors discovered.

RISKS. We are not currently aware of any significant Year 2000 compliance
problems relating to our proprietary software, our information technology
systems or our other systems that would materially harm our business, results of
operations or financial condition. If problems are discovered in versions of our
product software that are already in use by our subscribers, we may need to
distribute new versions of the software to those subscribers. It may not be
possible to correct these problems in a timely manner.

33
<PAGE>
To date we have not experienced Year 2000 compliance problems with material
third-party software, hardware, service providers or non-information-technology
infrastructure. If Year 2000 compliance problems are detected in the future they
may require substantial repair or replacement, which could be time-consuming and
expensive. It may not be possible to repair or replace some of these components
or service providers in a timely manner.

The failure to correct any material Year 2000 problem that may arise could
materially harm our business, results of operations and financial condition
because:

- new subscribers may be unable to sign up for our services, resulting in
reduced growth and lower effectiveness of our marketing efforts;

- current subscribers may be unable to upgrade to higher service levels,
resulting in reduced revenue growth and lower effectiveness of our
marketing efforts;

- current subscribers may be unable to use our services or get adequate
customer support, which may result in increased attrition, higher customer
support costs and reduced revenue; or

- we may be subject to claims of mismanagement, misrepresentation or breach
of contract and related litigation, which could be costly and
time-consuming to defend and, if defended unsuccessfully, could result in
the imposition of substantial fines or judgments.

In addition, we cannot assure you that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will not encounter Year 2000 problems in the future. The
failure by these entities to timely detect and correct any Year 2000 problems
that may occur could result in a systemic failure beyond our control, including,
for example, a prolonged failure of Internet, telecommunications or electrical
systems, which could also prevent us from providing our services, or prevent
users from accessing our services, either of which would materially harm our
business, results of operations and financial condition.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

CURRENCY RATE FLUCTUATIONS

Our results of operations, financial position, and cash flows are not
materially affected by changes in the relative values of non-U.S. currencies to
the U.S. dollar. We do not use derivative financial instruments to limit our
foreign currency risk exposure.

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

BECAUSE WE HAVE OFFERED OUR BILLABLE PREMIUM SERVICES FOR ONLY SIX QUARTERS AND
OUR FREE BASIC SERVICE IN ITS CURRENT FORM FOR LESS THAN ONE QUARTER, THERE IS
LIMITED INFORMATION UPON WHICH YOU CAN EVALUATE OUR BUSINESS

We have a limited operating history upon which you can evaluate our business
and our services. We began offering our free basic service to the public in its
original form in April 1996, first offered billable premium services to the
public in July 1998 and expanded our basic service to include free Internet
access in addition to e-mail in December 1999. As a company in the new and
rapidly evolving market for Internet services, we face numerous risks and
uncertainties. Some of these risks relate to our ability to:

- attract and retain subscribers to our free basic service and our billable
premium services;

- anticipate and adapt to the changing Internet market;

- generate advertising and electronic commerce revenues;

- maintain and develop strategic relationships with business partners to
market their products over our services;

34
<PAGE>
- implement an effective marketing strategy to promote awareness of the Juno
services;

- respond to actions taken by our competitors and the entry of new
competitors into our markets;

- develop and deploy successive versions of the Juno software;

- operate computer systems and related infrastructure adequate to
effectively manage our growth and provide our basic service and our
billable premium services;

- develop, deploy and operate broadband Internet access services, whether
independently or in collaboration with one or more third parties;

- manage the billing systems used to invoice subscribers to our billable
premium services; and

- attract, retain and motivate qualified personnel.

Our business and financial results will depend heavily on the commercial
acceptance and profitability of both our free basic and our billable premium
services. If we are unsuccessful in addressing these risks or in executing our
business strategy, our business and financial results may suffer. Please see
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" for detailed information on our limited operating history.

WE HAVE A HISTORY OF LOSSES SINCE OUR INCEPTION IN 1995 AND EXPECT CONTINUED
LOSSES FOR THE FORESEEABLE FUTURE

Since our inception in 1995, we have not been profitable. We have incurred
substantial costs to create and introduce our various services, to operate these
services, to promote awareness of these services and to grow our business. We
incurred net losses of approximately $3.8 million from inception through
December 31, 1995, $23.0 million for the year ended December 31, 1996,
$33.7 million for the year ended December 31, 1997, $31.6 million for the year
ended December 31, 1998 and $55.8 million for the year ended December 31, 1999.
As of December 31, 1999, our accumulated net losses totaled $148.0 million. We
incurred negative cash flows from operations of approximately $16.4 million for
the year ended December 31, 1996, $33.6 million for the year ended December 31,
1997 and $20.9 million for the year ended December 31, 1998. For the year ended
December 31, 1999, we used $36.3 million in cash for working capital purposes
and to fund losses from operations. Additionally, at December 31, 1999,
$8.8 million remained prepaid for advertising that may be used at any time prior
to March 2001, bringing total net cash used in operating activities to
$45.1 million.

Since we operated as a limited partnership prior to the merger of Juno
Online Services, L.P. into Juno Online Services, Inc. in March 1999, taxable
losses incurred prior to the merger were allocated to the partners of Juno
Online Services, L.P. for reporting on their income tax returns. As a result, we
will not be able to offset future taxable income, if any, against losses
incurred prior to the merger.

We expect operating losses and negative cash flows to continue for the
foreseeable future as we continue to incur significant expenses. We cannot
assure you that we will ever be successful in implementing our business
strategies or in addressing the risks and uncertainties facing our company. Even
if we do address these risks successfully, we may not be profitable in the
future. Were we to achieve profitability, we cannot assure you that we would be
able to sustain or increase profitability on a quarterly or annual basis in the
future. Please see "Item 6. Selected Consolidated Financial Data" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for more detailed information.

35
<PAGE>
JUNO'S BUSINESS IS SUBJECT TO FLUCTUATIONS IN OPERATING RESULTS WHICH MAY
NEGATIVELY IMPACT THE PRICE OF OUR STOCK

Our revenues, expenses and operating results have varied in the past and may
fluctuate significantly in the future due to a variety of factors, many of which
are outside of our control. These factors include, among others:

- the rate of new subscriber acquisitions and seasonal trends relating to
subscriber usage of our services;

- the timing and effectiveness of our marketing efforts to acquire
subscribers and promote the Juno brand;

- the timing and effectiveness of any revenue sharing arrangements or other
strategic alliances into which we enter;

- the demand for Internet advertising and seasonal trends relating to
Internet advertising spending;

- seasonal trends relating to the demand for products sold over the
Internet;

- capital expenses related to upgrading our computer systems and related
infrastructure;

- our ability to protect our systems from any telecommunications failures,
power loss, or software-related system failures;

- our ability to integrate operations and technologies from any acquisitions
or other business combinations or relationships into which we enter;

- the extent to which we experience increased competition in the markets for
Internet services, Internet advertising and electronic commerce;

- changes in operating expenses including, in particular, telecommunications
expenses and the cost of providing various types of technical and
non-technical customer support to our subscribers; and

- economic conditions specific to the Internet as well as general economic
and market conditions.

Since we expect to be heavily dependent on revenues from our billable
premium services in the foreseeable future, our revenues are likely to be
particularly affected by our ability to recruit new subscribers directly to our
billable premium services, upgrade users of our free basic service to our
billable premium services, and retain subscribers to our billable premium
services. In addition, our operating expenses are based on our expectations of
our future revenues and are relatively fixed in the short term. We may be unable
to adjust spending quickly enough to offset any unexpected revenue shortfall,
which may cause our business and financial results to suffer.

Due to all of the above factors and the other risks discussed in this
section, you should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. It is possible that in some
future periods our results of operations may be below the expectations of public
market analysts and investors. In this event, the price of our common stock is
likely to fall. Please see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" for detailed information on our
operating results.

36
<PAGE>
THE EXPANSION OF OUR FREE BASIC SERVICE TO INCLUDE FULL WEB ACCESS INCREASES OUR
TELECOMMUNICATIONS COSTS AND EXPOSES US TO ADDITIONAL BUSINESS RISKS

In December 1999, we announced the expansion of our free basic service to
include full Internet access, including access to the World Wide Web. We face
numerous costs, risks, and uncertainties associated with this expansion,
including the following:

- OUR TELECOMMUNICATIONS COSTS WILL INCREASE SIGNIFICANTLY. When using
e-mail, subscribers need to be connected to our central computers for the
relatively short period of time required to send e-mail they have written
or download e-mail that has been sent to them. When using the Web, a
subscriber must remain continuously connected to the Internet for the
entire duration of a Web session. The expansion of our free basic service
to include Web access is therefore expected to increase the amount of time
that users spend connected, and correspondingly to increase our
telecommunications costs both on an absolute and a per-subscriber basis.
The expansion of the service may also attract a large number of new
subscribers to our free basic service, further increasing our
telecommunications costs on an absolute basis. Our telecommunications
costs represent one of the most significant expenses of providing our free
basic service. We cannot assure you that we will be able to achieve
reductions in our per-subscriber telecommunications costs, and if we are
unable to achieve such reductions, our business and financial results will
suffer. Please see "--The economic viability of our expanded free basic
service may depend on our ability to obtain telecommunications capacity on
a fixed-price basis."

- OUR PAYING SUBSCRIBERS MAY CANCEL THEIR BILLABLE SERVICE SUBSCRIPTIONS AND
SWITCH TO THE EXPANDED FREE SERVICE. Now that users of our basic service
can access the Web for free, it is likely that some, and possibly many,
Juno Web subscribers will cancel their billable service subscriptions and
switch to the free basic service. If the number of Juno Web subscribers
who switch to the free basic service is significant, our business and
financial results may suffer.

- USERS OF OUR EXPANDED FREE BASIC SERVICE MAY REACT NEGATIVELY TO THE
PERSISTENT ADVERTISING BANNER DISPLAYED WHILE THEY USE THE WEB. Users of
our expanded free basic service are required to view a prominent
advertising and navigation banner at all times while they are connected to
the Web. Some users, particularly those using low-resolution computer
monitors to view the Web, may consider this banner to be intrusive to an
extent that interferes with their use of the service. Some competitors
have introduced free Internet access services that do not require the user
to view an additional advertising banner. If these competitive services
become popular, or if additional competitors introduce free Internet
access services that do not require the user to view a persistent
advertising banner, then our ability to retain users of our free basic
service or our ability to derive revenue by displaying advertisements to
such users may be harmed.

- REVENUES GENERATED FROM THE SALE OF ADDITIONAL ADVERTISING INVENTORY
CREATED BY THE EXPANSION OF OUR FREE BASIC SERVICE MAY BE INSUFFICIENT TO
COVER OUR INCREASED COSTS. The expansion of our free basic service may
make us more dependent on advertising as a source of revenue in the
future. The addition of a persistent advertising banner displayed to users
of our expanded basic service when they use the Web is expected to create
a significant amount of advertising inventory. However, there can be no
assurance that we will be able to generate revenues from the sale of this
new advertising inventory, or that any portion of it that we are able to
sell will be sold at favorable rates. If we are unable to sell this
inventory or to do so at favorable rates, our business and financial
results may suffer.

OUR BUSINESS MAY SUFFER IF WE HAVE DIFFICULTY ACQUIRING SUBSCRIBERS TO OUR
SERVICES

We may not succeed in acquiring a sufficiently large subscriber base for our
free basic service and our billable premium services, or in persuading a
significant number of our free basic subscribers to upgrade to our premium
services.

37
<PAGE>
To acquire new members, we currently rely on multiple distribution channels
for our free proprietary software that enables subscribers to use our services.
Our ability to recruit new subscribers may depend on our ability to enter into
additional distribution agreements and to retain our current distribution
partners. We cannot be sure that we will be able to enter into additional, or
maintain or replace our current, distribution agreements on favorable terms, or
that any of our distribution partners will be able to market our services
effectively. Many of our distribution partners also distribute competing
products, and are free to terminate our distribution arrangements at their
convenience. Our inability to recruit, manage or retain distribution partners,
or the inability of these distribution partners to effectively promote and
distribute our software, may cause our business and financial results to suffer.

Our business strategy contemplates that a significant percentage of the
subscribers to our free basic service will decide over time to upgrade to our
premium services. We are relying on this migration as a major source of
subscribers to our billable premium services and, since July 1998, we have
conducted advertising to our free basic service subscribers to encourage them to
upgrade. Over time, repeated exposure to these advertisements may cause their
effectiveness to decline. As a result, we expect that we will need to rely on
more expensive forms of external marketing and promotion to attract additional
users directly to our billable premium services, as well as to attract new users
to our free basic service. If our marketing techniques fail to generate the
anticipated conversion rate from free to billable premium services, if the
acquisition cost for subscribers acquired directly into our billable premium
services is greater than expected, or if technical limitations make the
conversion process more difficult or time-consuming than anticipated, our
business and financial results may suffer. Please see "--Our marketing program
may not succeed in generating new subscribers or in persuading subscribers to
upgrade to our premium services" for more information on our marketing
activities.

DIFFICULTY RETAINING SUBSCRIBERS TO OUR SERVICES MAY CAUSE OUR BUSINESS TO
SUFFER

Our business and financial results are also dependent on our ability to
retain subscribers to our services. Each month, a significant number of
subscribers to our billable premium services choose to cancel the service. In
addition, each month a significant number of subscribers to our free basic
service become inactive. As a result, the total number of subscribers using our
services in a given month has remained at between 2.2 million and 2.4 million
since March 1998, even though we have added new subscribers during that period.
We believe that intense competition has caused, and may continue to cause, some
of our subscribers to switch to other services. It is easy for Internet users to
switch to competing providers and we cannot be certain that any steps we take
will maintain or improve subscriber retention. In addition, new subscribers may
decide to use our services out of curiosity regarding the Internet, or to take
advantage of free or low-cost introductory offers for our billable premium
services, and may later discontinue using our services. Furthermore, we may in
the future charge a fee for our basic service or limit the amount a subscriber
may use this service in a given period. In the event we were to implement these
kinds of charges or restrictions, we may lose a significant number of our basic
service subscribers. If we are unable to retain subscribers to both our basic
service and our billable premium services, or if we experience an increase in
the rate of cancellations by subscribers to our billable premium services, our
business and financial results may suffer. Please see "--Competition in the
markets for Internet services, Internet advertising and electronic commerce is
likely to increase in the future and may harm our business" for more information
concerning the competition facing our business.

SOME USERS OF OUR FREE BASIC SERVICE MAY BE UNABLE TO ACCESS THE WEB

In order to obtain access to the Web, users of our free basic service must
be equipped with the latest version of our software, version 4.0, as well as a
recent version of Microsoft Internet Explorer, the Web browsing software that
our free basic service requires. Approximately 45% of our free basic service
users currently use versions of our software older than version 4.0. Although we
plan to upgrade such users' software to version 4.0 automatically by downloading
the newer version to their computer during one of

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their connections, technical constraints prevent us from completing automatic
upgrades for users of the oldest versions of our software. Instead, these users
must choose to install the current version of our software and, in some cases,
need to be sent a copy of the software by mail before they can complete this
process. Approximately 6% of our free basic service users currently use a
version of the Microsoft Windows operating system older than Windows 95, and
cannot upgrade to version 4.0 of the Juno software unless they upgrade to a more
current version of Windows. There is a risk that some portion of our basic
service user base will never upgrade to version 4.0 of the Juno software and
will be unable to access the Web through our free basic service.

In addition, to avoid straining our telecommunications resources, we are
employing a staggered roll-out strategy in upgrading basic service users'
software to version 4.0 and in notifying such users about the expansion of the
service to include Web access. Since we do not expect to complete this upgrade
process before the second quarter of 2000 at the earliest, a significant portion
of those basic service users who can be upgraded to version 4.0 may not be
upgraded for at least several months.

If a significant percentage of our basic service users do not begin using
the Web, our ability to display Web-related advertisements and generate
associated revenues may be harmed.

OUR MARKETING PROGRAM MAY NOT SUCCEED IN GENERATING NEW SUBSCRIBERS OR IN
PERSUADING SUBSCRIBERS TO UPGRADE TO OUR PREMIUM SERVICES

We expect to incur significant costs in implementing an extensive marketing
campaign. This campaign will be directed at encouraging users to sign up
directly for either our free basic service or our billable premium services and
persuading users of our free basic service to upgrade to our billable premium
services. This marketing program may include forms of advertising, such as
television and radio advertising, with which we have limited experience. There
are risks that this campaign may not be effective in accomplishing one or both
of these goals. In addition, it is possible that, over time, it will become more
difficult and expensive to effectively market our premium services to users of
our free basic service and that the rate at which users of the free basic
service upgrade to our billable premium services will decline. We also do not
know what kind of advertising our competitors will undertake or the timing and
extent of advertising by our competitors. Many of our competitors have greater
financial resources than we do and have undertaken significant advertising
campaigns utilizing the same advertising media that we use. It is possible that
these campaigns will have an adverse effect on our own marketing plans or
expenses. If we incur significant costs in implementing our marketing program
without generating sufficient new subscribers to our services, our business and
financial results will suffer.

COMPETITION IN THE MARKETS FOR INTERNET SERVICES, INTERNET ADVERTISING AND
ELECTRONIC COMMERCE IS LIKELY TO INCREASE IN THE FUTURE AND MAY HARM OUR
BUSINESS

INTENSE COMPETITION EXISTS IN THE MARKET FOR INTERNET SERVICES

We may not be able to compete successfully against current or future
competitors, and the competitive pressures that we face may cause our business
and financial results to suffer. We believe that the primary competitive factors
determining success in these markets include effective marketing to promote
brand awareness, a reputation for reliability and service, effective customer
support, pricing, easy-to-use software and geographic coverage. Other important
factors include the timing and introduction of new products and services and
industry and general economic trends. We expect competition to continue to
increase because the markets in which we operate face few substantial barriers
to entry. Competition may also intensify as a

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result of industry consolidation and the ability of some of our competitors to
bundle Internet services with other products and services. Our current and
potential competitors include many large national companies that have
substantially greater market presence and financial, technical, distribution,
marketing and other resources than we have. This may allow them to devote
greater resources than we can to the development, promotion and distribution and
sale of products and services. Additionally, our competitors may be able to
charge less for premium Internet services than we do for our billable premium
services, or offer services for free that we currently provide only for a fee,
which may put pressure on us to reduce or eliminate, or prevent us from raising,
the fees we charge for our billable premium services. We may choose to lower or
eliminate the fees we currently charge for our billable premium services, or
enhance the features available to users of our free basic service, in order to
remain competitive with other industry participants. If we do so, our business
and financial results may suffer.

In recruiting subscribers for our services, we currently compete, or expect
to compete, with the following types of companies, among others:

- Established online service providers such as America Online, CompuServe,
and The Microsoft Network;

- Independent national Internet service providers such as EarthLink,
MindSpring, and Prodigy, including a number of companies, such as
AltaVista and NetZero, that offer Web access for free;

- Numerous independent regional and local Internet service providers that
may offer lower prices than a national Internet service provider;

- Various national and local telephone companies such as AT&T, MCI WorldCom
and Pacific Bell;

- Companies providing Internet access services using other broadband
technologies, including digital subscriber line technology, commonly known
as DSL, such as the Regional Bell Operating Companies and various partners
of Covad, Rhythms, and NorthPoint.

WE RELY ON REVENUES FROM ADVERTISING AND ELECTRONIC COMMERCE

With respect to the generation of advertising revenue, we compete with many
of the market participants listed above as well as with various
advertising-supported Web sites, including portal sites such as Yahoo! and
Excite, content sites such as CNET and CNN.com, and interactive advertising
networks and agencies such as DoubleClick and 24/7 Media. We also compete with
traditional media such as print and television for a share of advertisers' total
advertising budgets. If advertisers perceive the Internet to be a limited or
ineffective advertising medium or perceive us to be less effective or less
desirable than other Internet advertising vehicles, advertisers may be reluctant
to advertise on our services. Please see "--Our

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business may be adversely affected if the market for Internet advertising fails
to develop" for more information regarding our advertising activities.

We engage in electronic commerce activities by selling or facilitating the
sale of products and services directly to our subscribers. In doing so, we
compete with other Internet-based merchants as well as with stores and other
companies that do not distribute their products through the Internet. Many of
these competitors are larger than we are, enjoy greater economies of scale than
are available to us, have substantially greater resources than we have, and may
be able to offer more products or more attractive prices than we can. We believe
that this competition is likely to increase in the future.

OUR COMPETITION IS LIKELY TO INCREASE IN THE FUTURE

WE ARE DEPENDENT ON STRATEGIC MARKETING ALLIANCES AS A SOURCE OF REVENUES AND
OUR BUSINESS COULD SUFFER IF ANY OF THESE ALLIANCES ARE TERMINATED

We have strategic marketing alliances with a number of third parties, and
most of our strategic marketing partners have the right to terminate their
agreements with us on short notice. In the past year, one strategic marketing
partner terminated a multi-year agreement at the end of its first year. If any
of our strategic marketing agreements are terminated, we cannot assure you that
we will be able to replace the terminated agreement with an equally beneficial
arrangement. We also expect that we will not be able to renew all of our current
agreements when they expire or, if we are, that we will be able to do so on
acceptable terms. We also do not know whether we will be successful in entering
into additional strategic marketing alliances, or that any additional
relationships, if entered into, will be on terms favorable to us. Our receipt of
revenues from our strategic marketing alliances may also be dependent on factors
which are beyond our control, such as the quality of the products or services
offered by our strategic marketing partners.

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WE MUST ADAPT TO TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS OR WE WILL
NOT BE COMPETITIVE

Our failure to respond in a timely and effective manner to new and evolving
technologies, including cable modem and other broadband technology, could harm
our business and financial results. The Internet services market is
characterized by rapidly changing technology, evolving industry standards,
changes in member needs and frequent new service and product introductions. Our
business and financial results depend, in part, on our ability to use leading
technologies effectively, to develop our technical expertise, to enhance our
existing services and to develop new services that meet changing member needs on
a timely and cost-effective basis. In particular, we must provide subscribers
with the appropriate products, services and guidance required to best take
advantage of the rapidly evolving Internet. If the market for our services
should fail to develop, develop more slowly than we expect, become saturated
with competitors, or develop in a fashion that renders our services
uncompetitive or otherwise unappealing to consumers, our business and financial
results may suffer.

We are also at risk due to fundamental changes in the way that Internet
access may be provided in the future. Currently, consumers access Internet
services primarily through computers connected by telephone lines. Broadband
connections, however, allow significantly faster access to the Internet than is
possible using the telephone-based analog modems currently used by most of our
subscribers. The companies currently providing or expecting to begin providing
broadband connections to consumers' homes, including cable television companies,
local and long distance telephone companies, electric utility companies and
wireless communications companies, have decided or may decide to provide
Internet access as well. For example, competitors have developed technologies
that enable cable television operators to offer high-speed Internet access
through their cable facilities. These cable television operators, as well as
other competitors, may include Internet access in their basic bundle of services
or may offer Internet access for a nominal additional charge. Moreover, these
companies could prevent us in the future from delivering Internet access through
the wire and cable connections that they own, or from doing so on a
cost-effective basis.

Even if we are not prevented from delivering our Internet services through
the broadband connections owned by other companies, the delivery of our Internet
services using broadband technology is subject to significant risks and
uncertainties, and we may be unable to adapt to the challenges posed by
broadband technologies. Please see "--If the market for broadband access in
general, or for Juno Express in particular, fails to develop, or if other
broadband technologies prove more popular than DSL, our business may be harmed."

We may also have to modify the means by which we deliver our Internet
services, in which case we would incur significant costs. If consumers adopt
alternative forms of Internet access that provide a continuous connection to the
Internet rather than relying on a series of separate dial-up connections, then
any competitive advantage that we currently realize because our technology
minimizes connect time may diminish. If other companies are able to prevent us
from delivering our Internet services through the wire, cable and wireless
connections that they own, if we are unable to adapt to the challenges posed by
broadband technologies or if we incur significant costs without generating
sufficient revenues, our business and financial results may suffer.

IF THE MARKET FOR BROADBAND ACCESS IN GENERAL, OR FOR JUNO EXPRESS IN
PARTICULAR, FAILS TO DEVELOP, OR IF OTHER BROADBAND TECHNOLOGIES PROVE MORE
POPULAR THAN DSL, OUR BUSINESS MAY BE HARMED

We recently launched a small-scale pilot test of Juno Express, a premium
billable service which delivers Internet access at broadband speeds through the
use of DSL technology. As the Juno Express service is currently designed, before
we can provide DSL-based service to a subscriber, the subscriber's local
telephone company must either install and configure an additional copper
telephone line at the subscriber's residence or reconfigure an existing
telephone line if a line that can be dedicated exclusively to the DSL connection
is available. Accordingly, consumers who wish to subscribe to Juno Express
currently

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must go through a complex installation process, for which we are dependent on
the performance of the local telephone company. We are also currently dependent
on the performance of a national supplier of DSL services, Covad Communications,
with whom we have chosen to partner for the delivery of Juno Express. Covad is
responsible for completing the installation process begun by the local telephone
company. Currently, a Covad technician must visit the residence of each Juno
Express subscriber to complete any necessary wiring and to deliver and test DSL
hardware. If our relationship with Covad is unsuccessful, or if Juno and Covad
are unable to coordinate the installation of necessary telephone lines with
local telephone companies, or if other factors delay or otherwise hinder our
ability to complete the roll-out of Juno Express into additional markets beyond
those involved in the pilot test, or if these or other factors affect our
ability to introduce or deliver broadband services in a timely and
cost-effective fashion, then our business and financial results may suffer.

The market for broadband services is in the early stages of development, and
we cannot assure you that DSL technology in particular or broadband services in
general will become popular with consumers. If alternate broadband delivery
technologies, such as cable or wireless technologies, become more popular with
consumers than DSL, we cannot assure you we will be able to gain access to such
alternate technologies at favorable rates or at all. Additionally, Juno Express
faces competition in the market for broadband services from many competitors
with significant financial resources, well-established brand names, and large
existing customer bases. Many local telephone companies are themselves in some
stage of test marketing or offering broadband services. In many markets, these
competitors already offer, or are expected to offer, broadband Internet access
at prices lower than we expect to be able to offer to potential customers for
Juno Express. If we are unable to provide competitive broadband services at
competitive rates, our business and financial results may suffer.

OUR BUSINESS MAY BE ADVERSELY AFFECTED IF THE MARKET FOR INTERNET ADVERTISING
FAILS TO DEVELOP

Our business and financial results are dependent on the use of the Internet
as an advertising medium. Internet-based advertising accounts for only a small
fraction of all advertising expenditures, and we cannot be sure that
Internet-based advertising will ever grow to account for a substantial
percentage of total advertising spending or when an increase might occur. Our
business may suffer if the market for Internet-based advertising fails to
develop or develops more slowly than expected. In addition, no standards have
been widely accepted to measure the effectiveness of Internet-based advertising.
If measurement standards do not develop, many advertisers may choose not to
advertise on the Internet. Different pricing models are used to sell
Internet-based advertising. Our revenues could suffer if we are unable to adapt
to new forms of, and new pricing models for, Internet-based advertising. It is
difficult to predict which, if any, forms of Internet-based advertising will
emerge as the industry standard. This makes it difficult to project our future
advertising rates and revenues. Moreover, "filter" software programs that limit
or prevent advertising from being delivered to an Internet user's computer are
available. Widespread adoption of this type of software could harm the
commercial viability of Internet-based advertising.

Sales of advertising space on our services represent an important revenue
source for us. Our expansion of our free basic service to include Web access may
increase our dependence on advertising revenues. Competition for Internet-based
advertising revenues is intense, and this competition could result in
significant price erosion over time. We cannot assure you that we will be
successful in selling advertising or capturing a significant share of the market
for Internet-based advertising. We also cannot assure you that we will be able
to sell advertising at the rates we currently project. It is also possible that
we will find it necessary to lower the rates for advertising space on our
services. Please see "--The expansion of our free basic service to include Web
access increases our telecommunications costs and exposes us to additional
business risks."

We currently rely on our internal sales and marketing personnel for
generating sales leads and promoting our services to the advertising community.
With substantially all of our sales and marketing personnel based in New York
City, we may not be able to effectively market our services to regional

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advertisers outside of New York. We also rely on the sales and marketing
personnel of Lycos, our primary Web site content partner, for the sale of
advertising space on the default portal site used by Juno Web subscribers.
Although we have not done so in the past, we might also retain the services of
one or more external sales organizations to sell advertising space on our
network. We cannot be sure that our internal sales organization, Lycos or any
other independent sales organization will achieve our advertising sales
objectives in a cost-effective manner.

If Internet-based advertising does not continue to grow, if we are unable to
capture a sufficient share of Internet-based advertising, or if Lycos or other
independent sales organizations do not perform as we anticipate, our business
and financial results may suffer.

OUR ADVERTISING SYSTEM REQUIRES LABOR AND IMPOSES COSTS ON US BEYOND THOSE
ASSOCIATED WITH STANDARD WEB ADVERTISING

Some of the advertising inventory available on our services is non-standard
when compared to advertising on the Web and may put Juno at a competitive
disadvantage. The advertisements displayed while a subscriber reads and writes
e-mail are created using proprietary tools that are not fully compatible with
standard Web advertising. Therefore, many advertisements displayed on our
services require customization that would not be required by a Web site capable
of displaying previously prepared standard advertisements. This customization
work increases the time necessary to prepare an advertisement to be displayed on
our services and the costs associated with running these ads. We must also
absorb the telecommunications cost associated with initially downloading these
ads to our subscribers, which is an expense that advertising-supported Web sites
do not incur. As ads become more complex, our telecommunications expenses may
increase. Furthermore, the costs associated with selling or attempting to sell
advertising space on our services are significant. These costs may be greater
than the costs associated with selling advertising space on Web sites that
exclusively utilize standard Web advertising formats. Additionally, our use of a
proprietary advertising format could prevent us from packaging a significant
portion of our advertising space for sale by an advertising network such as
DoubleClick. We also rely on detailed data provided by our subscribers for
purposes of targeting some ads. We do not currently verify the accuracy of this
data at the time it is provided or require subscribers to update their
information thereafter. Furthermore, individuals who subscribe directly to one
of our billable premium services are not currently required to provide this
data. Any of the above factors could discourage advertising on our network by
some advertisers.

SEASONAL TRENDS IN INTERNET USAGE AND ADVERTISING SALES MAY NEGATIVELY AFFECT
OUR BUSINESS

Seasonal trends are likely to affect the revenues we generate from operating
our Internet services. Subscribers typically use our Internet services less
during the summer months and year-end holiday periods. To the extent that our
revenues depend on the amount of usage by our subscribers, our revenues may be
lower during these periods. For example, some of the subscribers to Juno Web pay
us based on the number of hours they spend using our services in a given month.
In addition, the rate at which new subscribers sign up for our billable premium
services may be lower during the summer months and year-end holiday periods.

Since our operating expenses are based on our expectations of future
revenues, including seasonal fluctuations, it is possible that operating results
will suffer if these seasonal trends do not continue in the future or if
different seasonal trends develop in the future. Please see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for more information on our operating results.

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WE ARE DEPENDENT ON A SMALL NUMBER OF TELECOMMUNICATIONS CARRIERS AND MAY BE
UNABLE TO FIND ADEQUATE REPLACEMENTS IF THEIR RATES INCREASE, SERVICE QUALITY
DECLINES, OR IF THEY DISCONTINUE DOING BUSINESS WITH US

Our business and financial results depend in significant part on the
capacity, affordability, reliability and security of our telephone company data
networks. To use our services, subscribers must initiate telephone connections
between their personal computers and computer hardware in local or regional
facilities known as "points of presence." We contract for the use of points of
presence around the country from various telecommunications carriers. These
carriers currently include UUNET Technologies and WorldCom Advanced Networks,
both of which are operated by MCI WorldCom; Level 3; Concentric; Splitrock
Services; and Sprint. These telecommunications companies also carry data between
their points of presence and our central computers located in Cambridge,
Massachusetts and Jersey City, New Jersey.

As of December 31, 1999, we had contracted for the use of more than 2,300
local telephone numbers associated with points of presence throughout the United
States. Nevertheless, a significant minority of our subscriber base is unable to
access our services through a point of presence that is within their local
calling area. These users may be particularly reluctant to use the Web, either
through our free basic service or through Juno Web, due to the
telecommunications charges that they would incur during an extended connection
to the Web. The inability of some of our subscribers to access the Web with a
local call in some areas of the country could harm our business. We cannot be
sure if or when additional infrastructure developments by our telecommunications
providers will establish points of presence that cover these areas.

At various times in the past, network capacity constraints at particular
points of presence have prevented or delayed access by subscribers attempting to
connect to our services. This could happen in the future, especially during
times of peak usage. Difficulties accessing our services due to poor network
performance could cause our subscribers to terminate their membership with us.
Because we depend on third-party telecommunications carriers for crucial
portions of our network infrastructure, we do not have direct control over
network reliability and some aspects of service quality. A natural disaster or
other unanticipated problem that affects the points of presence or the
telecommunications lines we use, or that affects the nation's telecommunications
network in general, could cause interruptions in our services.

Only a small number of telecommunications companies can provide the network
services we require. This number has been reduced through consolidation in the
telecommunications industry, and there is a significant risk that further
consolidation could make us reliant on an even smaller number of providers.
Currently, we are particularly dependent on companies controlled by MCI
WorldCom, which provide more than 1,100 of the more than 2,300 points of
presence for which we contract in the United States, and which carry a
significant percentage of our traffic. Furthermore, MCI WorldCom has announced
that it will offer consumer Internet access, making it a direct competitor of
ours. Additionally, MCI WorldCom has announced that it will merge with Sprint
during 2000, subject to approval of their stockholders and the receipt of
regulatory approvals. This merger will further concentrate our reliance on MCI
WorldCom and the companies it controls. Our business could be significantly
harmed if we are unable to maintain a favorable relationship with MCI WorldCom.
We cannot assure you that we would be able to replace the services provided to
us by MCI WorldCom were our relationship with them to be terminated.

Our financial results are highly sensitive to variations in prices for the
telecommunications services described above. We cannot assure you that
telecommunications prices will decline, or that there will not be
telecommunications price increases due to factors beyond our control. Some of
our telecommunications carriers impose minimum connection charges. Our business
could be harmed if minimum connection charges increase or become more prevalent.
We cannot assure you that our telecommunications carriers will continue to
provide us access to their points of presence on adequate price terms, or that
alternative services will be available in the event that their quality of
service declines or that our relationship with any of our current carriers is
terminated.

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Most of the telecommunications services we purchase are provided to us under
short-term agreements that the providers can terminate or elect not to renew. As
a result, there is a significant risk that any or all of UUNET Technologies,
WorldCom Advanced Networks, Level 3, Concentric, Splitrock or Sprint could end
their relationship with us. In addition, each of our telecommunications carriers
provides network access to some of our competitors, and could choose to grant
those competitors preferential network access, potentially limiting our members'
ability to access the Internet or connect to our central computers. Furthermore,
the majority of our telecommunications providers compete, or have announced an
intention to compete, with us in the market to provide consumer Internet access.
If our telecommunications service providers were to decrease the levels of
service or access provided to us, or if they were to terminate their
relationships with us for competitive or other reasons, our business and
financial results would suffer.

THE ECONOMIC VIABILITY OF OUR EXPANDED FREE BASIC SERVICE MAY DEPEND ON OUR
ABILITY TO OBTAIN TELECOMMUNICATIONS CAPACITY ON A FIXED-PRICE BASIS

We believe that our ability to purchase telecommunications capacity from our
network providers on a fixed-price basis may be a critical component of our
ability to cost-effectively provide full Internet access for free. We currently
purchase most of the telecommunications capacity we use on a variable-price
basis. Under this variable pricing model, we share points of presence with other
Internet access providers and are charged at a specified rate for every minute
during which a Juno subscriber is connected to one of our network providers'
modems. We have no control over how many modems are available at any given time
for our subscribers' use or over the ratio of Juno subscribers to available
modems. We believe we may be able to lower our monthly per-subscriber
telecommunications cost by purchasing telecommunications capacity on a per-modem
basis and by maintaining a higher ratio of subscribers to modems than is typical
in the industry. We have recently begun to experiment with this fixed-price
model. However, there are a number of risks and uncertainties related to this
pricing model. Under this fixed-price model, we contract for exclusive use of a
certain number of modems and are charged the same amount regardless of the
amount of data actually transmitted over the modems during a month. The
effective per-subscriber costs incurred under this model are highly sensitive to
our ability to accurately project, as much as six months in advance, our rate of
subscriber growth and the level of usage per subscriber. If we overestimate and
commit to lease too many modems, our per-subscriber costs will increase,
possibly significantly. If we underestimate and lease too few modems to satisfy
the levels of subscriber demand we actually experience, service quality and
customer satisfaction may suffer. We cannot assure you that we will be able to
effectively project our telecommunications capacity requirements or otherwise
manage these telecommunications relationships.

We have entered into only one agreement under which we purchase
telecommunications capacity on a per-modem basis. This agreement is with a
supplier that, as of December 1999, operated in a limited number of geographic
markets, corresponding to at most one-third of our subscriber base. As of that
date, fewer than half of our subscribers within these geographic markets had
connected to modems being made available to us under a per-modem pricing model.
In order to secure exclusive use of the modems we have leased from this
supplier, we have been required to make advance commitments totaling
approximately $13.3 million for telecommunications capacity. Our agreement
provides us only limited rights to demand additional capacity from this
supplier. If we are unsuccessful in contracting with additional suppliers to
provide us with per-modem pricing, if our current supplier is unable or
unwilling to accommodate our expansion, or if we are unable to accurately
project our telecommunications needs, our business and financial results may
suffer.

WE ARE DEPENDENT ON THIRD PARTIES FOR TECHNICAL AND CUSTOMER SERVICE SUPPORT AND
OUR BUSINESS MAY SUFFER IF THEY ARE UNABLE TO PROVIDE THESE SERVICES OR CANNOT
EXPAND TO MEET OUR NEEDS

Our business and financial results depend, in part, on the availability of
live technical and customer service support, and of inbound telemarketing and
disk distribution services. Should our ability to provide

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these services be hampered, our business may suffer. Although many Internet
service providers have developed internal customer service operations designed
to meet these needs, we have elected to outsource these functions to third-party
vendors. We currently use ClientLogic Corporation for technical and customer
service support. As a result, we maintain only a small number of internal
customer service personnel. We are not equipped to provide the necessary range
of customer service and telemarketing services in the event that either
ClientLogic or other external providers become unable or unwilling to offer
these services to us.

Our most important relationship is with ClientLogic, which, at December 31,
1999, provided us with approximately 430 full-time or part-time employees at its
facilities to service our account. The availability of call-in technical support
and customer service is especially important to acquire and retain subscribers
to our billable premium services, and we rely almost entirely on ClientLogic to
provide this function. At times, our subscribers have experienced lengthy
waiting periods to reach representatives trained to provide the technical or
customer support they require. The growth of our subscriber base has caused
waiting periods for technical and customer support to lengthen recently.
Reducing these waiting periods and accommodating potential future growth will
require significantly more support personnel than are currently available to us
through ClientLogic. Additionally, if we elect to offer customer service
features that we do not currently support, such as 24-hour live support, or to
enhance the overall quality of our customer support for competitive reasons, we
will require even greater resources. As a result, we expect that it will become
necessary, in the near future, to identify supplemental or replacement vendors
for these services or to develop the resources ourselves to deliver these
services. Our agreement with ClientLogic converts to a month-to-month contract
on August 1, 2000, providing either party the right to terminate the
relationship at any time upon one month's notice. Prior to that date,
ClientLogic can terminate the contract without cause upon 90 days notice. In
addition, ClientLogic may terminate the contract upon 60 days notice if we do
not reach agreement with ClientLogic with regard to modifications ClientLogic
proposes to the pricing terms of the contract within 60 days of the
modifications being proposed. If our relationship with ClientLogic terminates
and we are unable to enter into a comparable arrangement with a replacement
vendor, if ClientLogic is unable to provide enough personnel to provide the
quality and quantity of service we desire, if system failures, outages or other
technical problems make it difficult for our subscribers to reach customer
service representatives at ClientLogic, or if we are required to obtain
externally or develop internally additional or replacement customer service and
technical support capacity, our business and financial results may suffer.

DISRUPTION OF OUR INTERNET SERVICES DUE TO SECURITY BREACHES AND SYSTEM FAILURES
COULD RESULT IN SUBSCRIBER CANCELLATIONS

Both our infrastructure and the infrastructure of our network providers are
vulnerable to security breaches or similar disruptive problems and system
failures. Our systems are also subject to telecommunications failures, power
loss, software-related system failures and various other events. Any of these
events, whether intentional or accidental, could lead to interruptions, delays
or cessation of service to our subscribers. This could cause some of our
subscribers to stop using our Internet services. Third parties could also
potentially jeopardize the security of confidential information stored in our
computer systems or our subscribers' computer systems through their
inappropriate use of the Internet, which could cause losses to us or our
subscribers or deter some people from subscribing to our services. People may be
able to circumvent our security measures or the security measures of our third
party network providers.

We may have to interrupt, delay or cease service to our subscribers to
alleviate problems caused by computer viruses, security breaches or other
failures of network security. Any damage or failure that interrupts or delays
our operations could result in subscriber cancellations, could harm our
reputation, and could affect our business and financial results. In addition, we
expect that our subscribers will increasingly use the Internet for commercial
transactions in the future. Any network malfunction or security breach could
cause these transactions to be delayed, not completed at all or completed with
compromised

47
<PAGE>
security. Our subscribers or others may assert claims of liability against us as
a result of this type of failure. Furthermore, until more comprehensive security
technologies are developed, the security and privacy concerns of existing and
potential subscribers may inhibit the growth of the Internet service industry in
general and our subscriber base and revenue in particular.

Our insurance policies may not adequately compensate us for any losses that
may occur due to any failures in our systems or interruptions in our services.

RAPID GROWTH IN OUR BUSINESS COULD STRAIN OUR MANAGERIAL, OPERATIONAL,
FINANCIAL, AND INFORMATION SYSTEMS RESOURCES

The anticipated future growth necessary to expand our operations will place
a significant strain on our managerial, operational, financial and information
systems resources. If we are unable to manage our growth effectively, our
business and financial results will suffer. In order to achieve growth in
revenues from Internet advertising, we will need to expand our sales efforts and
continue to improve and develop our software. In order to achieve growth in
revenues from our billable premium services, we will need to expand our
marketing efforts, promote the Juno brand, expand the computer systems and
related infrastructure we use to provide our Internet services, and increase
both our internal and outsourced customer service capabilities. We expect that
we will need to continually improve our financial and managerial controls,
billing systems, reporting systems and procedures, and we will also need to
continue to expand, train and manage our workforce. We had 65 employees at
December 31, 1996, 152 employees at December 31, 1997, 144 employees at
December 31, 1998 and 263 employees at December 31, 1999, including 60 employees
in India. Prior to May 21, 1999, consultants used in India were employed by an
affiliate of Juno. We have significantly increased our reliance on outsourced
support for customer service, technical, and back-office functions. We expect
the size of our own workforce and our reliance on outsourced services will
continue to increase for the foreseeable future.

The demand on our network infrastructure, technical staff and technical
resources has grown rapidly with our expanding subscriber base. We cannot be
certain that our infrastructure, technical staff and technical resources will
adequately accommodate or facilitate the anticipated growth of our subscriber
base. In particular, if we were to experience repeated or prolonged system-wide
service outages, our business and financial results would suffer.

WE FACE POTENTIAL LIABILITY FOR INFORMATION TRANSMITTED OR RETRIEVED THROUGH OUR
INTERNET SERVICES

Our business and financial results may suffer if we incur liability as a
result of information transmitted or retrieved through our services. The
liability of Internet service providers and online services companies for
information transmitted or retrieved through their services is uncertain. It is
possible that claims may be filed against us based on a variety of theories,
including defamation, obscenity, negligence, copyright or trademark
infringement, or other theories based on the nature, publication or distribution
of this information. These types of claims have been brought, sometimes
successfully, against providers of Internet services in the past. Such claims,
with or without merit, would likely divert management time and attention and
result in significant costs to investigate and defend. In addition, if we become
subject to these types of claims and we are not successful in our defense, we
may be forced to pay substantial damages. We may also be forced to implement
expensive measures to alter the way our services are provided to avoid any
potential liability.

CHANGES IN GOVERNMENT REGULATION COULD DECREASE OUR REVENUES AND INCREASE OUR
COSTS

Changes in the regulatory environment could decrease our revenues and
increase our costs. As a provider of Internet access and e-mail services, we are
not currently subject to direct regulation by the Federal Communications
Commission. However, several telecommunications carriers are seeking to have
communications over the Internet regulated by the FCC in the same manner as
other more traditional telecommunications services. Local telephone carriers
have also petitioned the FCC to regulate Internet

48
<PAGE>
access providers in a manner similar to long distance telephone carriers and to
impose access fees on these providers, and recent events suggest that they may
be successful in obtaining the treatment they seek. In addition, we operate our
services throughout the United States, and regulatory authorities at the state
level may seek to regulate aspects of our activities as telecommunications
services. As a result, we could become subject to FCC and state regulation as
Internet services and telecommunications services converge.

- user privacy;

- pricing;

- intellectual property;

- federal, state and local taxation;

- distribution; and

- characteristics and quality of products and services.

The growth of the Internet, coupled with publicity regarding Internet fraud,
may also lead to the enactment of more stringent consumer protection laws. For
example, numerous bills have been presented to Congress and various state
legislatures designed to address the prevalence of unsolicited commercial bulk
e-mail on the Internet. These laws may impose additional burdens on our
business. The enactment of any additional laws or regulations in this area may
impede the growth of the Internet, which could decrease our potential revenues
or otherwise cause our business to suffer. Please see "Item
1. Business--Government Regulation."

IF INTERNET USAGE DOES NOT CONTINUE TO GROW, OUR BUSINESS WILL SUFFER

Our business and financial results depend on continued growth in the use of
the Internet. We cannot be certain that this growth will continue or that it
will continue in its present form. If Internet usage declines or evolves away
from our business, our growth will slow or stop and our business and financial
results will suffer.

49
<PAGE>
UNANTICIPATED DELAYS OR PROBLEMS IN THE INTRODUCTION OF NEW FEATURES OR SERVICES
MAY CAUSE CUSTOMER DISSATISFACTION

If we experience problems related to the reliability and quality of our
services or delays in the introduction of new versions of or enhancements to our
services, we could experience increased subscriber cancellations, adverse
publicity and reduced sales of advertising and products. Our services are very
complex and are likely to contain a number of undetected errors and defects,
especially when new features or enhancements are first released. Furthermore, in
order to introduce new features or enhancements, we may elect to license
technology from other companies rather than develop such features or
enhancements ourselves, and we may be exposed to undetected errors or defects in
third-party technology that is out of our control. Any errors or defects, if
significant, could harm the performance of these services, result in ongoing
redevelopment and maintenance costs and cause dissatisfaction on the part of
subscribers and advertisers. These costs, delays or dissatisfaction could
negatively affect our business.

WE HAVE LIMITED EXPERIENCE WITH THE SOFTWARE WE USE TO BILL SUBSCRIBERS TO OUR
BILLABLE PREMIUM SERVICES

The operation of our billable premium services requires the accurate
operation of billing system software as well as our development of policies
designed to reduce the incidence of credit card fraud and other forms of
uncollectable "chargebacks." We have limited experience with the operation of
these billing and fraud detection systems. If we encounter difficulty with the
operation of these systems, or if errors, defects or malfunctions occur in the
operation of these systems, this could result in erroneous overcharges to
customers or in the under-collection of revenue, either of which could hurt our
business and financial results.

OUR RELATIONSHIP WITH D. E. SHAW & CO., L.P. MAY PRESENT POTENTIAL CONFLICTS OF
INTEREST

The Chairman of our board of directors and our controlling stockholder,
Dr. David E. Shaw, is the Chairman and Chief Executive Officer of D. E. Shaw &
Co., Inc., which is the general partner of D. E. Shaw & Co., L.P., a global
securities firm whose activities focus on various aspects of the intersection
between technology and finance. Dr. Shaw devotes only a portion of his time to
our company, and spends most of his time and energy engaged in business
activities unrelated to us. Dr. Shaw indirectly owns a controlling interest in
DESCO, L.P. and in some of its affiliated entities. Transactions between us and
these parties may occur in the future and could potentially result in conflicts
of interest that prove harmful to us.

In the past, we have contracted with DESCO, L.P. to provide accounting, tax,
payroll, insurance, employee benefits and information technology services to us,
and we may obtain these or other services from DESCO, L.P. in the future. At the
current time, we sublease office space in New York City from DESCO, L.P. We
cannot be sure that we would be able to lease other space on favorable terms in
the event this sublease were to be terminated.

In May 1999, we terminated an agreement with DESCO, L.P. under which
individuals employed by its affiliates located in India provided consulting
services to us. Following the termination of this agreement, these individuals
became employees of a Juno subsidiary located in Hyderabad, India. We expect to
continue to obtain some services in India from DESCO, L.P. or its affiliates.

Dr. Shaw and entities affiliated with him are likely to manage, invest in or
otherwise be involved with other technology-related business ventures apart from
our company. These relationships could also restrict our ability to transact
business with non-affiliated parties, and could negatively affect us.

OUR DIRECTORS AND OFFICERS EXERCISE SIGNIFICANT CONTROL OVER US

As of February 14, 2000, the executive officers, directors, and persons and
entities affiliated with executive officers or directors beneficially owned in
the aggregate approximately 45.8% of our outstanding

50
<PAGE>
common stock. The Chairman of our board of directors is Dr. David E. Shaw.
Dr. Shaw continues to serve as the Chairman and Chief Executive Officer of
D. E. Shaw & Co., Inc., which is the general partner of DESCO, L.P. As of
February 14, 2000, Dr. Shaw and persons or entities affiliated with him,
including DESCO, L.P., beneficially owned, in the aggregate, approximately 44.3%
of our outstanding common stock as of that date. As a result of this
concentration of ownership, Dr. Shaw is able to exercise significant influence
over matters requiring approval by our stockholders, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership could also have the effect of delaying or preventing a change in
control of Juno.

IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY OR FACE A CLAIM OF
INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, WE COULD LOSE OUR
INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR SIGNIFICANT DAMAGES

We have taken steps to protect our intellectual property rights, but we
cannot be certain that our efforts will be adequate to safeguard our rights to
technology we have developed. Disputes concerning the ownership or rights to use
intellectual property could be costly and time consuming to litigate, may
distract management from other tasks of operating the business, and may result
in our loss of significant rights and the loss of our ability to operate our
business.

We have been granted three U.S. patents covering aspects of our technology
for the offline display of advertisements and the authentication and dynamic
scheduling of advertisements and other messages to be delivered to computer
users. We have also filed a number of other U.S. patent applications relating to
additional aspects of our business. We cannot assure you, however, that these
applications will result in the issuance of patents, that any patents that have
been granted or that might be granted in the future will provide us with any
competitive advantages or will be exploited profitably by us, or that any of
these patents will withstand any challenges by third parties. We also cannot
assure you that others will not obtain and assert patents against us which are
essential for our business. If patents are asserted against us, we cannot assure
you that we will be able to obtain license rights to those patents on reasonable
terms or at all. If we are unable to obtain licenses, we may be prevented from
operating our business and our financial results may therefore be harmed.

Except as described above, we rely solely upon copyright and trademark law,
trade secret protection and confidentiality agreements with our employees and
with some third parties to protect our proprietary technology, processes, and
other intellectual property, to the extent that protection is sought or secured
at all. We cannot assure you that any steps we might take will be adequate to
protect against infringement and misappropriation of our intellectual property
by third parties. Similarly, we cannot assure you that third parties will not be
able to independently develop similar or superior technology, processes, or
other intellectual property. Furthermore, we cannot assure you that third
parties will not assert claims against us for infringement and misappropriation
of their intellectual property rights nor that others will not infringe or
misappropriate our intellectual property rights, for which we may wish to assert
claims.

PROBLEMS RESULTING FROM THE YEAR 2000 PROBLEM COULD REQUIRE US TO INCUR
UNANTICIPATED EXPENSE AND COULD DIVERT MANAGEMENT'S TIME AND ATTENTION

The Year 2000 problem could harm our business and financial results. Many
currently installed computer systems and software products produced before
January 1, 2000 were coded to accept or recognize only two-digit entries in the
date code field. These systems may interpret the date code "00" as the year 1900
rather than the year 2000. As a result, computer systems and software used by
many companies and governmental agencies may need to be upgraded or replaced to
comply with Year 2000 requirements or risk system failure or miscalculations
causing disruptions of normal business activities. We are not aware of any
material Year 2000 problems that have harmed or threaten to harm our business,
but we cannot assure you that no such problems will emerge. Our failure to
correct a material Year 2000 problem could result in an interruption in, or a
failure of, aspects of our normal business activities or

51
<PAGE>
operations. In addition, a significant Year 2000 problem involving our network
services or equipment provided to us by third-party vendors could cause our
customers to consider seeking alternate providers or cause an unmanageable
burden on our customer service and technical support capabilities. Any
significant Year 2000 problem could require us to incur significant
unanticipated expenses to remedy these problems and could divert management's
time and attention. Please see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Impact of the Year 2000" for more
detailed information regarding the Year 2000 issue.

WE ARE DEPENDENT ON KEY MANAGEMENT PERSONNEL FOR OUR FUTURE SUCCESS

Our business and financial results depend in part on the continued service
of our key personnel. We do not carry key person life insurance on any of our
personnel. The loss of the services of any of our executive officers or the loss
of the services of other key employees could harm our business and financial
results.

WE MAY NOT BE ABLE TO HIRE AND RETAIN QUALIFIED EMPLOYEES

Our business and financial results depend in part on our ability to attract,
retain and motivate highly skilled employees. Competition for employees in our
industry is intense, and has become more pronounced recently. We may be unable
to retain our key employees or attract, assimilate or retain other highly
qualified employees. We have from time to time in the past experienced, and we
expect to continue to experience, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications.

WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING

We currently anticipate that our available funds, which include
$81.1 million in net proceeds from our February 2000 follow-on offering of
common stock, will be sufficient to meet our anticipated needs for at least the
next 12 months. We may need to raise additional funds in the future to fund our
operations, to finance subscriber acquisition costs, to enhance or expand the
range of Internet services we offer or to respond to competitive pressures or
perceived opportunities. We cannot be sure that additional financing will be
available on terms favorable to us, or at all. If adequate funds are not
available or not available when required or on acceptable terms, we may be
forced to cease our operations, and even if we are able to continue our
operations, our business and financial results may suffer.

WE MAY NOT BE ABLE TO SUCCESSFULLY MAKE ACQUISITIONS OF OR INVESTMENTS IN OTHER
COMPANIES

We have no experience in acquiring or making investments in companies,
technologies or services. From time to time we have had discussions with
companies regarding our acquiring, or investing in, their businesses, products
or services, or customers. We have no present understanding or agreement
relating to any acquisition or investment. If we buy a company, we could have
difficulty in assimilating that company's personnel and operations. In addition,
the key personnel of the acquired company may decide not to work for us. If we
make other types of acquisitions, we could have difficulty in assimilating the
acquired services, technologies or customers into our operations. These
difficulties could disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our results of operations
due to accounting requirements such as the amortization of goodwill.
Furthermore, we may incur debt or issue equity securities to pay for any future
acquisitions. The issuance of equity securities could be dilutive to our
existing stockholders.

WE COULD FACE ADDITIONAL REGULATORY REQUIREMENTS, TAX LIABILITIES AND OTHER
RISKS IF WE DECIDE TO EXPAND INTERNATIONALLY

We may decide to expand internationally, and believe that any international
operations would be subject to most of the risks of our business generally. In
addition, there are risks inherent in doing business

52
<PAGE>
in international markets, such as changes in regulatory requirements, tariffs
and other trade barriers, fluctuations in currency exchange rates, and adverse
tax consequences, and there are likely to be different consumer preferences and
requirements in such markets. We cannot assure you that one or more of these
factors would not harm any future international operations.

FUTURE SALES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE

We have a large number of shares of common stock outstanding and available
for resale beginning at various points in time in the future. The market price
of our common stock could decline as a result of sales of a large number of
shares of our common stock in the market, or the perception that such sales
could occur. These sales also might make it more difficult for us to sell equity
securities in the future at a price that we think is appropriate, or at all.

OUR STOCK PRICE HAS EXPERIENCED, AND IS LIKELY TO CONTINUE TO EXPERIENCE,
EXTREME PRICE AND VOLUME FLUCTUATIONS

The stock market has experienced extreme price and volume fluctuations. The
market prices of the securities of Internet-related companies have been
especially volatile. Until recently, there has been no public market for our
common stock. We cannot predict the extent to which investor interest in Juno
will lead to the development of an active trading market or how liquid that
market might become. We may suffer significant declines in the market price of
our common stock.

In the past, companies that have experienced volatility in the market price
of their stock have been the object of securities class action litigation. If we
were the object of securities class action litigation, it could result in
substantial costs and a diversion of our management's attention and resources.

WE HAVE ANTI-TAKEOVER PROVISIONS WHICH MAY MAKE IT DIFFICULT FOR A THIRD PARTY
TO ACQUIRE US

Provisions of our certificate of incorporation, our bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
might be beneficial to our stockholders.

WE DO NOT PLAN TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE AND, AS A RESULT,
STOCKHOLDERS WILL NEED TO SELL SHARES TO REALIZE A RETURN ON THEIR INVESTMENT

53
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(a)(1) Consolidated Financial Statements

All consolidated financial statements of Juno Online Services, Inc. and the
Report of Independent Accountants thereon are included herein:

<TABLE>
<S> <C>
Report of Independent Accountants........................... 55
Report of Management........................................ 56
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 57
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998, and 1997......................... 58
Consolidated Statement of Partners' Capital
(Deficiency)/Statement of Stockholders' Equity for the
years ended December 31, 1999, 1998, and 1997............. 60
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997......................... 61
Notes to Consolidated Financial Statements.................. 62
</TABLE>

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

Not applicable

54
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Juno Online Services, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, partners' capital
(deficiency)/stockholders' equity and cash flows present fairly, in all material
respects, the financial position of Juno Online Services, Inc. and Subsidiary at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

/s/ PRICEWATERHOUSECOOPERS LLP

New York, New York
January 19, 2000,

except as to the follow-on offering
described in Note 13, which is
as of February 14, 2000

55
<PAGE>
REPORT OF MANAGEMENT

The management of Juno Online Services,, Inc. is responsible for the
integrity and objectivity of the financial and operating information contained
in this Annual Report on Form 10-K, including the consolidated financial
statements covered by the Report of Independent Accountants. These statements
were prepared in conformity with generally accepted accounting principles and
include amounts that are based on the best estimates and judgments of
management, which it believes, are reasonable under the circumstances.

The Company maintains a system of internal accounting policies, procedures
and controls designed to provide management with reasonable assurance that
assets are safeguarded against loss from unauthorized use or disposition, and
that transactions are executed in accordance with management's authorization and
recorded properly.

PricewaterhouseCoopers LLP audits the Company's consolidated financial
statements in accordance with generally accepted auditing standards and provides
an objective, independent review of the Company's internal controls and the
fairness of its reported financial condition and results of operations. In
addition, the Audit Committee of the Board of Directors meets periodically with
management and the independent auditors to review internal accounting controls,
audit results and accounting principles and practices, and annually recommends
to the Board of Directors the selection of independent auditors.

CHARLES E. ARDAI
President, Chief Executive Officer and Director

RICHARD M. EATON, JR.
Chief Financial Officer and Treasurer

56
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 91,497 $ 8,152
Accounts receivable, net of allowance for doubtful
accounts of $544
and $296 in 1999 and 1998, respectively................. 6,370 2,115
Prepaid expenses and other current assets................. 15,437 168
-------- -------
Total current assets.................................... 113,304 10,435

Fixed assets, net........................................... 5,684 4,086
Other assets................................................ 100 182
-------- -------
Total assets............................................ $119,088 $14,703
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY/PARTNERS' CAPITAL (DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses..................... $ 29,800 $11,166
Current portion of capital lease obligations.............. 1,423 450
Current portion of senior note............................ -- 1,560
Deferred revenue.......................................... 14,510 5,602
-------- -------
Total current liabilities............................... 45,733 18,778

Capital lease obligations................................... 1,455 609
Senior note................................................. -- 7,569
Deferred rent............................................... 252 335

Commitments and contingencies (Note 9)

Partners' capital (deficiency).............................. (12,588)
Stockholders' equity:
Preferred stock--$0.01 par value; 5,000,000 shares
authorized, none
issued and outstanding.................................. --
Common stock--$0.01 par value; 133,333,334 shares
authorized,
34,833,568 shares issued and outstanding................ 348
Additional paid-in capital................................ 123,530
Unearned compensation..................................... (745)
Cumulative translation adjustment......................... (1)
Accumulated deficit....................................... (51,484)
--------
Total stockholders' equity.............................. 71,648
-------- -------
Total liabilities and stockholders' equity/partners'
capital (deficiency).................................. $119,088 $14,703
======== =======
</TABLE>

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

57
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER LIMITED PARTNERSHIP UNIT AND PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Billable services......................................... $ 34,545 $ 6,645 $ 1,371
Advertising and transaction fees.......................... 12,662 6,454 1,875
Direct product sales...................................... 4,794 8,595 5,845
-------- -------- --------
Total revenues........................................ 52,001 21,694 9,091
-------- -------- --------

Cost of revenues:
Billable services......................................... 24,950 5,606 1,053
Advertising and transaction fees.......................... 4,675 3,725 1,659
Direct product sales...................................... 4,176 7,627 5,796
-------- -------- --------
Total cost of revenues................................ 33,801 16,958 8,508
-------- -------- --------

Operating expenses:
Operations, free service.................................. 6,698 9,383 11,075
Subscriber acquisition.................................... 47,651 5,334 3,140
Sales and marketing....................................... 11,556 11,584 12,593
Product development....................................... 7,232 7,345 4,860
General and administrative................................ 4,615 2,760 2,897
-------- -------- --------
Total operating expenses.............................. 77,752 36,406 34,565
-------- -------- --------
Loss from operations.................................. (59,552) (31,670) (33,982)

Interest income, net........................................ 3,718 44 243
-------- -------- --------
Net loss.............................................. $(55,834) $(31,626) $(33,739)
======== ======== ========
</TABLE>

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

58
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)

(IN THOUSANDS, EXCEPT PER LIMITED PARTNERSHIP UNIT AND PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
--------------------------------------
TWO MONTHS TEN MONTHS YEAR ENDED
ENDED ENDED DECEMBER 31,
FEBRUARY 28, DECEMBER 31, -------------------
1999 1999 TOTAL 1998 1997
------------ ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net loss attributable to common
stockholders........................... $ (4,350) $(51,484) $(55,834) $(31,626) $(33,739)
======== ======== ======== ======== ========
Basic and diluted net loss per Class A
limited partnership unit............... $ (0.25) $ (1.85) $ (3.21)
======== ======== ========
Basic and diluted net loss per share..... $ (2.07)
========
Weighted average number of:
Class A limited partnership units...... 17,684 17,091 10,500
======== ======== ========
Shares of common stock................. 24,877
========
Pro forma basic and diluted net loss per
share.................................. $ (1.84) $ (1.85)
======== ========
Weighted average shares outstanding used
in pro forma basic and diluted per
share calculation...................... 30,339 17,091
======== ========
</TABLE>

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

59
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIENCY)/

STATEMENT OF STOCKHOLDERS' EQUITY

(IN THOUSANDS)
<TABLE>
<CAPTION>
PARTNERS'
CONTRIBUTIONS COMMON STOCK ADDITION CUMULATIVE
------------------- ------------------- PAID-IN UNEARNED TRANSLATION ACCUMULATED
UNITS AMOUNT SHARES AMOUNT CAPITAL COMPENSATION ADJUSTMENT DEFICIT
-------- -------- -------- -------- -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996...... 5,519 $ 24,831 $(26,835)
Capital contributions......... 10,275 46,247 --
Net loss...................... -- -- (33,739)
------- -------- ---------
Balance, December 31, 1997...... 15,794 71,078 (60,574)
Capital contributions......... 1,890 8,500 --
Net loss...................... -- -- (31,626)
Amortization of unearned
compensation................ -- -- 34
------- -------- ---------
Balance, December 31, 1998...... 17,684 79,578 (92,166)
Net loss for the period
January 1, 1999 to
February 28, 1999........... -- -- -- (4,350)
Effect of statutory merger
(see Note 1)................ (17,684) (79,578) -- -- $(95,788) $(728) -- 96,516
Preferred stock accretion..... -- -- (151) -- -- --
Issuance of common stock, net
of offering costs........... 6,500 $ 65 77,220 -- -- --
Issuance of common stock upon
exercise of stock options... 511 5 506 -- -- --
Proceeds from the sale of
preferred stock............. -- 59 -- -- --
Conversion of redeemable
convertible preferred stock
to common stock............. 27,823 278 141,251 -- -- --
Net loss for the ten months
ended December 31, 1999..... -- -- -- -- -- (51,484)
Unearned compensation......... -- 433 (433) -- --
Amortization of unearned
compensation................ -- -- -- 416 -- --
Foreign currency adjustment... -- -- -- $ (1) --
------- -------- ------ ---- -------- ------ ----- ---------
Balance, December 31, 1999...... -- $ -- 34,834 $348 $123,530 $(745) $ (1) $(51,484)
======= ======== ====== ==== ======== ====== ===== =========

TOTAL
--------
<S> <C>
Balance, December 31, 1996...... $ (2,004)
Capital contributions......... 46,247
Net loss...................... (33,739)
--------
Balance, December 31, 1997...... 10,504
Capital contributions......... 8,500
Net loss...................... (31,626)
Amortization of unearned
compensation................ 34
--------
Balance, December 31, 1998...... (12,588)
Net loss for the period
January 1, 1999 to
February 28, 1999........... (4,350)
Effect of statutory merger
(see Note 1)................ (79,578)
Preferred stock accretion..... (151)
Issuance of common stock, net
of offering costs........... 77,285
Issuance of common stock upon
exercise of stock options... 511
Proceeds from the sale of
preferred stock............. 59
Conversion of redeemable
convertible preferred stock
to common stock............. 141,529
Net loss for the ten months
ended December 31, 1999..... (51,484)
Unearned compensation......... --
Amortization of unearned
compensation................ 416
Foreign currency adjustment... (1)
--------
Balance, December 31, 1999...... $ 71,648
========
</TABLE>

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

60
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(55,834) $(31,626) $(33,739)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 2,396 2,438 161
Amortization of deferred rent........................... (66) 157 244
Amortization of unearned compensation................... 416 34 --
Changes in operating assets and liabilities:
Accounts receivable................................... (4,255) (974) (1,020)
Prepaid expenses and other current assets............. (15,269) 1,001 (983)
Accounts payable and accrued expenses................. 18,616 2,861 1,401
Deferred revenue...................................... 8,908 5,251 345
-------- -------- --------
Net cash used in operating activities............... (45,088) (20,858) (33,591)
-------- -------- --------
Cash flows from investing activities:
Purchases of fixed assets................................. (1,359) (1,942) (3,270)
Proceeds from sale of fixed assets........................ -- 402 --
Other assets.............................................. 82 (95) (87)
-------- -------- --------
Net cash used in investing activities............... (1,277) (1,635) (3,357)
-------- -------- --------
Cash flows from financing activities:
Payments on capital lease obligations..................... (816) (754) (62)
Proceeds from senior note................................. -- 10,000 --
Payments on senior note................................... (9,129) (871) --
Net proceeds from issuance of redeemable convertible
preferred stock......................................... 61,859 -- --
Capital contributions..................................... -- 8,500 50,182
Net proceeds from issuance of common stock................ 77,285 -- --
Proceeds from issuance of common stock upon exercise of
stock options........................................... 511 -- --
-------- -------- --------
Net cash provided by financing activities........... 129,710 16,875 50,120
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 83,345 (5,618) 13,172

Cash and cash equivalents, beginning of period.............. 8,152 13,770 598
-------- -------- --------
Cash and cash equivalents, end of period.................... $ 91,497 $ 8,152 $ 13,770
======== ======== ========

Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 370 $ 496 $ 127

Supplemental schedule of noncash investing and financing
activities:
Capital lease obligations incurred for network
equipment............................................... $ 2,635 $ 1,018 $ 857
</TABLE>

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

61
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)

1. ORGANIZATION AND BUSINESS

Juno Online Services, Inc. (the "Company" or "Juno") is a provider of
Internet-related services throughout the United States. The Company offers
several levels of service, ranging from basic dial-up Internet access--which is
provided to the end user for free--to high-speed broadband Internet access,
which is currently being tested in selected markets. Revenues are derived
primarily from the subscription fees charged for use of the Company's premium
services, from the sale of advertising, and from various types of electronic
commerce.

The Company announced the expansion of its free basic service to include
full Internet access on December 20, 1999. Prior to the announcement, the
Company's free basic service provided only basic dial-up e-mail functionality.
The results of operations presented have not been materially impacted by the
expansion.

The Company has experienced operating losses since its inception. Such
losses are due to the Company's efforts to maximize the number of subscribers to
both its free basic service and its premium services, and to its development of
computer systems and related infrastructure that could be rapidly expanded to
accommodate additional users. The Company expects that it will continue to incur
net losses as it expends substantial additional resources to accelerate its
subscriber acquisition activities and to cover the increased costs associated
with the service expansion it announced in December 1999. There can be no
assurance that the Company will achieve or sustain profitability or positive
cash flow from its operations.

Juno Online Services, Inc. is the surviving entity of a statutory merger
with Juno Online Services, L.P. (the "Partnership"). On March 1, 1999, the
Partnership and Juno Online Services, Inc., entities under common control,
effected the statutory merger pursuant to which the Partnership was merged with
and into Juno Online Services, Inc., in a manner similar to a pooling of
interests (the "Statutory Merger"). This tax free transaction resulted in the
combination of the Partnership with its wholly owned subsidiary, Juno Online
Services, Inc. such that Juno Online Services, Inc. is the surviving entity. In
connection with the Statutory Merger, the Class A Units of the Partnership were
converted into Series A Redeemable Convertible Preferred Stock, and accumulated
losses of the Partnership were reclassified to additional paid-in capital.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned (more than 99%), India-based subsidiary, Juno
Online Services Development Private Limited. All intercompany accounts and
transactions have been eliminated in consolidation.

USE OF ESTIMATES

The Company's consolidated financial statements are prepared in accordance
with generally accepted accounting principles, which require management to use
its judgment in making certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
liabilities at the dates of the financial statements and the reported amounts of
operating revenues and expenses during the reporting periods. It is expected
that such estimates, primarily valuation allowances,

62
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

will differ to some extent from the amounts ultimately realized due to
uncertainties inherent in any such estimation process.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash balances at
December 31, 1999 consisted of bank deposits with one institution and investment
grade overnight securities. The Company reviews the credit ratings of its
banking institutions on a regular basis.

REVENUE RECOGNITION

Billable services revenues are recognized over the period services are
provided. Prior to 1997, billable services revenues consisted primarily of
technical support fees. Since 1998, billable services revenues consisted
primarily of fees charged for our billable subscription services and technical
support fees.

Advertising and transaction fees are derived both from advertising,
including the sale of impressions and sponsorships, and strategic marketing
alliance contracts in which the Company receives a fee for displaying
impressions or is compensated for generating leads or transactions.
Impression-based contracts are generally structured to provide a fixed number of
impressions on a fee-per-impression basis without regard to a specific period of
time. These contracts tend to be short-term in nature and the Company's
obligations are typically fulfilled over a period of a few months. Sponsorship
contracts typically involve integration with the Company's portal site, such as
placement of buttons that provide users with direct links to the advertiser's
Web site. These contracts generally are for a fixed term and during 1999, the
typical length of sponsorship contracts tended to be less than one year.
Strategic marketing alliance contracts are generally structured over longer
specific periods of time, ranging from a few months to several years. Strategic
marketing alliance contracts generally provide the Company with guaranteed
payments as advances against various forms of revenue-sharing for generating
leads or transactions, or for producing and displaying impressions.

Revenues generated by advertising and strategic marketing alliance contracts
are generally recognized as earned, provided that the Company does not have any
significant remaining obligations and collection is probable. Remaining
obligations include the fulfillment of a fixed or guaranteed minimum number of
impressions to be displayed or the achievement of performance targets. The
earnings process typically coincides with when the impressions are displayed,
leads or transactions are generated, or services performed. To the extent that
guaranteed minimum impressions or performance targets exist for a specific time
period, revenue is recognized at the lesser of the ratio of the obligations
delivered over total obligations, or on a straight-line basis for the term of
the contract. To the extent that guaranteed minimum impressions or performance
targets exist and are not met, the Company defers recognition of the
corresponding revenues until the remaining guaranteed impressions are displayed
or performance targets are achieved.

Costs associated with advertising and strategic marketing alliance
contracts, principally transmission, development, production and campaign
management costs, are expensed as incurred.

Revenues from direct product sales and delivery fees are recognized upon
shipment of products to subscribers.

63
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenues are reported net of a provision for sales allowances. Sales
allowances and bad debt expenses were $449, $616 and $233 in 1999, 1998 and
1997, respectively.

Deferred revenue consists of monthly and annual prepaid subscriber fees
related to billable subscription services and advertising and transaction fees
billed in advance of the performance of all or a portion of the related service.

FIXED ASSETS

Fixed assets are stated at cost, net of accumulated depreciation and
amortization, which is calculated on a straight-line basis over lives ranging
from 3 to 5 years or, for leasehold improvements, over the life of the lease, if
shorter.

LONG-LIVED ASSETS

The Company periodically evaluates the net realizable value of long-lived
assets, including fixed assets and other assets, relying on a number of factors
including operating results, business plans, economic projections and
anticipated future cash flows. In addition, the Company's evaluation considers
nonfinancial data such as market trends, product and development cycles, and
changes in management's market emphasis. An impairment in the carrying value of
an asset is recognized when the expected future operating cash flows derived
from the asset are less than its carrying value.

FOREIGN CURRENCY TRANSLATION

The functional currency of the Company's foreign subsidiary in India is the
local currency. Accordingly, all assets and liabilities of the foreign
subsidiary are translated into U.S. dollars at period-end exchange rates and
expenses are translated using the average rates during the period. The effects
of foreign currency translation adjustments have been accumulated and are
included as a separate component of stockholders' equity.

ADVERTISING AND SUBSCRIBER ACQUISITION COSTS

The Company accounts for advertising and subscriber acquisition costs
pursuant to Statement of Position ("SOP") 93-7, "Reporting on Advertising
Costs." Accordingly, the Company expenses all costs of advertising as incurred.
Advertising expenses for 1999, 1998 and 1997 were $39,871, $2,389 and $1,878,
respectively.

MAINTENANCE AND REPAIRS

These costs are charged to expense as incurred. Major renewals, betterments
and additions are capitalized.

PRODUCT DEVELOPMENT COSTS

The Company's product offerings are comprised of various features which
contribute to the overall functionality and are delivered through client-side
software, server-side software, and database applications which have been
principally developed internally. Software development costs include direct
labor

64
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

and related overhead for software produced by the Company and the cost of
software licensed from third parties. All costs in the software development
process which are classified as research and development are expensed as
incurred until technological feasibility has been established, at which time
such costs are capitalized until the software is generally available. To date,
the establishment of technological feasibility of the Company's products and the
general availability of such software have substantially coincided. As a result,
software development costs that qualify for capitalization have been
insignificant and therefore, the Company has not capitalized any software
development costs.

OPTION PLANS

On January 1, 1996, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), which permits entities to recognize as expense over the vesting
period the fair value of all equity-based awards on the date of grant.
Alternatively, SFAS 123 allows entities to continue to apply the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and provide pro forma disclosures for employee unit option grants
made in 1997 and future years as if the fair-value based method defined in
SFAS 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and apply the pro forma disclosure provisions
of SFAS 123.

INCOME TAXES

Income taxes are accounted for under the assets and liability method.
Deferred income taxes are recorded for temporary differences between financial
statement carrying amounts and the tax basis of assets and liabilities. Deferred
tax assets and liabilities reflect the tax rates expected to be in effect for
the years in which the differences are expected to reverse. A valuation
allowance is provided if it is more likely than not that some or all of the
deferred tax asset will not be realized.

Prior to the statutory merger on March 1, 1999, U.S. federal and state
income taxes had not been provided for because the partners report their
respective distributive share of the Company's income or loss on their
respective returns.

FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

The carrying values of the Company's cash and cash equivalents, accounts
receivable and accounts payable approximate fair value. Financial instruments
that potentially subject the Company to concentration of credit risk consist
principally of cash investments and trade receivables. The Company has limited
its cash investments to investment grade overnight securities. Credit is
extended to trade customers based on an evaluation of their financial condition.
The Company performs ongoing credit evaluations of its trade customers and
maintains an allowance for doubtful accounts. Credit risk with regard to the
sale of products and billable subscription services is mitigated by the
requirement of credit cards for purchases.

RECLASSIFICATION

Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.

65
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)

3. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted loss per
share.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------
TWO MONTHS TEN MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31,
FEBRUARY 28, DECEMBER 31, ---------------------------
1999 1999 TOTAL 1998 1997
----------------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss available to common stockholders...... $ (4,350) $ (51,484) $(55,834) $ (31,626) $ (33,739)
=========== =========== ======== ============ ============
Denominator:
Weighted average number of:
Class A limited partnership units............ 17,684,035 17,091,436 10,500,233
=========== ============ ============
Shares of common stock....................... 24,876,607
===========
Basic and diluted net loss per Class A
limited partnership unit................... $ (0.25) $ (1.85) $ (3.21)
=========== ============ ============
Basic and diluted net loss per share......... $ (2.07)
===========
</TABLE>

Net loss per share for the year ended December 31, 1999 is calculated
separately for the periods prior and subsequent to the March 1999 statutory
merger.

The pro forma information regarding net loss per share and weighted average
shares outstanding set forth below gives effect to the treatment of Class A
limited partnership units as shares of common stock and the conversion of
Series B Redeemable Convertible Preferred Stock for the period following the
March 1999 statutory merger.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Numerator:
Net loss.................................. $ (55,834) $ (31,626)
=========== ===========
Denominator:
Weighted average number of:
Shares of common stock................ 20,933,828
Class A limited partnership units
treated as shares of common stock... 17,091,436
Redeemable Convertible Preferred Stock
treated as shares of common stock:
Series B.............................. 2,380,301
Series A (Class A limited partnership
units prior to March 1, 1999)....... 7,025,165
----------- -----------
Denominator for pro forma basic and
diluted net loss per share.......... 30,339,294 17,091,436
=========== ===========
Pro forma basic and diluted net loss per
share..................................... $ (1.84) $ (1.85)
=========== ===========
</TABLE>

66
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)

4. FIXED ASSETS

Fixed assets consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Computers, network equipment and software................... $9,657 $5,672
Furniture and office equipment.............................. 196 187
Leasehold improvements...................................... 772 772
------ ------
Subtotal................................................ 10,625 6,631
Accumulated depreciation and amortization................... (4,941) (2,545)
------ ------
Total................................................... $5,684 $4,086
====== ======
</TABLE>

Included in fixed assets is equipment acquired under capital leases,
principally network equipment, of $4,621 and $1,995 as of December 31, 1999 and
1998, less accumulated amortization of $1,761 and $859, respectively.

5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Trade accounts payable.................................... $ 5,738 $ 2,315
Personnel and related expenses............................ 5,437 4,038
Telecommunications services............................... 7,228 1,210
Customer service expenses................................. 1,199 857
Marketing expenses........................................ 5,430 756
Other..................................................... 4,768 1,990
------- -------
Total................................................. $29,800 $11,166
======= =======
</TABLE>

6. RELATED PARTY TRANSACTIONS

The Company is affiliated with a group of entities that are under control of
or are subject to substantial influence by D. E. Shaw & Co., Inc.
("DESCO, Inc."). In 1997, D.E. Shaw & Co., L.P. ("DESCO, L.P."), an affiliate of
DESCO, Inc., provided certain administrative and support services to the
Company. Subsequent to 1997, DESCO, L.P. continues to provide these services to
the Company at substantially reduced levels.

The Company also leases office space from DESCO, L.P. on a month-to-month
basis. DESCO, L.P. is paid a fee for certain occupancy costs.

Prior to May 1999, the Company was a party to a services agreement with an
India-based affiliate of DESCO, L.P. DESCO, L.P. was paid a fixed monthly fee
for engineering and operations services rendered, and was reimbursed for
incidental expenses. In May 1999, this agreement was terminated. The

67
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)

6. RELATED PARTY TRANSACTIONS (CONTINUED)

Company is currently obtaining occupancy and related services from an affiliate
of DESCO, L.P. on a month-to-month basis.

The aggregate amounts and nature of the expenditures made by DESCO, L.P. and
its affiliate on behalf of the Company were as follows:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
India-based engineering and operations expense.............. $ 870 $1,454 $ --
Personnel and related expenses.............................. 244 521 1,561
Depreciation and leased equipment........................... -- -- 617
Occupancy costs............................................. 867 338 784
Other operating expenses.................................... 150 375 1,362
------ ------ ------
Total................................................. $2,131 $2,688 $4,324
====== ====== ======
</TABLE>

In 1998, the Company transferred fixed assets with a net book value of $402
to DESCO, L.P.

GENERAL PARTNER FEES AND OTHER COMPENSATION

Prior to the Statutory Merger, the Partnership's general partner was
entitled to a monthly management fee equal to one-twelfth of one percent of the
aggregate value of all outstanding limited partnership Units (or other property
into which such Units have been converted) as of the most recent Valuation Event
(as specified in the limited partnership agreement, as amended) as compensation
for managing the affairs of the Partnership. In 1999, 1998 and 1997, the
Partnership's general partner elected to waive management fees of $52, $285 and
$81, respectively.

7. OBLIGATIONS UNDER CAPITAL LEASES

The following is a schedule, by year, of future minimum lease payments under
capital leases, together with the present value of the minimum lease payments as
of December 31, 1999:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
2000........................................................ $1,555
2001........................................................ 1,209
2002........................................................ 306
2003........................................................ 36
------
Total minimum lease payments.......................... 3,106
Less: Amount representing interest.......................... (228)
------
Present value of the minimum lease payments........... $2,878
======
</TABLE>

Included in total minimum lease payments above are $67 of obligations under
capital leases for network equipment that were assigned to the Company by DESCO,
L.P. As the original lessee, DESCO, L.P. remains responsible under these lease
agreements in the event of a default by the Company.

68
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)

8. BORROWINGS

SENIOR NOTE

On March 31, 1998, the Company borrowed $10,000 from D. E. Shaw Securities
Group, L.P. ("Shaw Securities"), pursuant to an unsecured Senior Note (the
"Senior Note"). Shaw Securities, whose general partner is DESCO, L.P. is an
affiliate of the Company. The Senior Note, as amended, had an interest rate
computed at the Federal Funds Rate plus 0.375%. In June 1999, the Company repaid
the balance of the Senior Note in the amount of $8,634, including accrued
interest.

The Company's interest expense under the Senior Note was approximately $182
and $418 for the years ended December 31, 1999 and 1998, respectively.

CREDIT FACILITY

On July 28, 1999, the Company entered into a credit facility with a bank
(the "Facility") that provides for borrowings up to $10,000. Borrowings can be
in the form of advances and/or standby letters of credit. The Facility expires
on July 27, 2000. The Facility is collateralized by substantially all of the
assets of the Company. It is not collateralized by assets established pursuant
to capital leases. Advances outstanding under the facility bear interest at the
bank's prime rate (8.50% at December 31, 1999). All outstanding borrowings under
the Facility are due upon the expiration of the Facility. The Company also pays
specified fees on the unused portion of the Facility and on any standby letters
of credit. Under the terms of the Facility, the Company is required to maintain
certain quarterly financial and operational ratios and to obtain bank approval
for certain mergers or acquisitions and fixed asset financing. As of
December 31, 1999 there were no amounts outstanding under the Facility.

9. COMMITMENTS AND CONTINGENCIES

COMMITMENTS

The Company has committed to minimum usage levels for certain
telcommunications services. In connection with the Company's expansion of its
free basic service to include full Internet access announced in December 1999,
the Company entered into a port leasing agreement for telecommunications
services requiring minimum payments of $13.3 million. The remaining commitments
as of December 31, 1999, under these agreements are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
2000........................................................ $11,470
2001........................................................ 1,947
-------
Total minmum lease payments................................. $13,417
=======
</TABLE>

Telecommunications services expense for the years ending December 31, 1999,
1998 and 1997 was $14,394, $8,772 and $7,155, respectively.

The Company has also entered into various non-cancellable operating leases.
DESCO, L.P. has also entered into a leasing arrangement for office space used by
the Company. A portion of the Company's operations are located in a single
location that is leased by DESCO, L.P. The Company, which benefits from the use
of this office space, has agreed to assume performance of DESCO, L.P.'s payment
obligations

69
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)

9. COMMITMENTS AND CONTINGENCIES (CONTINUED)

under the lease to the extent the Company occupies such office space. Minimum
lease payments below include $3,189 related to this arrangement with DESCO, L.P.
The remaining commitments under these operating leases and this arrangement are
as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
2000........................................................ $1,067
2001........................................................ 981
2002........................................................ 1,000
2003........................................................ 245
------
Total minimum lease payments................................ $3,293
======
</TABLE>

The Company's rental expense under operating leases in the years ended
December 31, 1999, 1998 and 1997, was approximately $2,100, $1,070 and $889,
respectively.

CONTINGENCIES

Various claims and actions have been asserted or threatened against the
Company in the ordinary course of business. There are no threats, asserted
claims or actions, the outcome of which, in the opinion of management, would
have a materially adverse effect on the Company's consolidated financial
position, results of operations, and cash flows.

10. STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL

INITIAL PUBLIC OFFERING

On May 25, 1999, the Company completed its initial public offering of
6,500,000 shares of common stock at $13.00 per share. Net proceeds received by
the Company, after deducting offering costs, totaled $77,285.

REDEEMABLE CONVERTIBLE PREFERRED STOCK

In 1999, the Company, after giving effect to the Statutory Merger, received
$61,859 in proceeds net of $3,200 of issuance costs, for the issuance of
10,138,716 shares of Series B Redeemable Convertible Preferred Stock ("Series B
Preferred"), $0.01 par value. In addition, 17,684,035 shares of Series A
Redeemable Convertible Preferred Stock ("Series A Preferred") were issued to the
holders of Series A Partnership Units in connection with the Statutory Merger.
Each share of the Series A Preferred and Series B Preferred were automatically
converted into one share of Common Stock upon consummation of the initial public
offering of the Company's common stock on May 25, 1999.

PARTNERS' CAPITAL

Prior to the Statutory Merger, interests in the Partnership, in the form of
Units, were comprised of Class A Units and Class B Units. As of the date of the
Statutory Merger, an aggregate of 17,768,035 Class A Units were issued and
outstanding and no Class B Units had been issued. In connection with the
Statutory Merger, the Class A Units of the Partnership were converted into
Series A Redeemable

70
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)

10. STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL (CONTINUED)

Convertible Preferred Stock, and accumulated losses of the Partnership were
reclassified to additional paid-in capital (see Note 1, Organization and
Business).

REVERSE STOCK SPLIT

On April 19, 1999, the Company's Board of Directors authorized a reverse
stock split. Accordingly, all share data and limited partnership units have been
restated for the retroactive effect of the reverse split as if it had occurred
at the beginning of the earliest period presented.

11. INCOME TAXES

Subsequent to the Statutory Merger, the Company elected to be treated as a C
Corporation under the Internal Revenue Code ("IRC"). Since March 1, 1999, the
date of the Statutory Merger, the Company has incurred losses and generated a
net operating loss carryforward of approximately $63,054 at December 31, 1999.
This carryforward is available to offset future taxable income and expires in
2019.

Section 382 of the IRC, as amended, places a limitation on the utilization
of federal net operating loss carryforwards upon the occurrence of an ownership
change. In general, a change in ownership occurs when a greater than 50 percent
change in ownership takes place over a three year testing period. The annual
utilization of net operating loss carryforwards generated prior to such change
is limited, in any one year, to a percentage of the entity's fair value at the
time of the change in ownership.

Significant components of the deferred tax asset (estimated at an effective
rate of 40%) at December 31, 1999 and March 1, 1999 are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1999 MARCH 1, 1999
----------------- --------------
<S> <C> <C>
Deferred tax assets:
Net operating loss........................................ $25,222 $ --
Start-up costs, capitalized for tax purposes.............. 767 1,314
Accruals, reserves and other.............................. 1,423 3,433
Depreciation.............................................. 511 499
------- -------
Total deferred tax assets............................... 27,923 5,246

Less: valuation allowance................................... (27,923) (5,246)
------- -------
Deferred tax asset, net..................................... $ -- $ --
======= =======
</TABLE>

The net operating loss carryforward and temporary differences between
carrying amounts of assets and liabilities for financial reporting and income
tax purposes result in a net deferred tax benefit of $27,923 at December 31,
1999. The Company's operating plans anticipate taxable income in future periods;
however, such plans make significant assumptions which cannot be reasonably
assured. Therefore, in consideration of the Company's losses and the uncertainty
of its ability to utilize this deferred tax benefit in the future, the Company
has recorded a valuation allowance in the amount of $27,923 at December 31, 1999
to offset the deferred tax benefit amount.

Prior to the Statutory Merger on March 1, 1999, U.S. federal and state
income taxes had not been provided because the partners reported their
respective share of the Partnership's losses on their

71
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)

11. INCOME TAXES (CONTINUED)

respective returns. The Partnership had incurred accumulated book and tax losses
of $96,516 and $82,513, respectively, through February 28, 1999. Had the
Partnership been subject to corporate income taxes, it would have recorded a
deferred tax asset, subject to a full valuation allowance.

The deferred tax asset at March 1, 1999, subject to a full valuation
allowance, was generated by the Partnership, through March 1, 1999, the date of
the Statutory Merger. This deferred tax asset was made available to Juno Online
Services, Inc., as the successor company following the Statutory Merger.

The benefit for income taxes differs from the amount of income tax
determined by applying the applicable U.S. tax rate to net loss as follows:

<S> <C>
Expected federal income tax at the statutory rate........... (35.0)%
Losses incurred prior to Statutory Merger................... 2.7
State income taxes, net of federal tax benefit.............. (5.0)
Exercise of nonqualified stock options...................... (3.4)
Other....................................................... 0.1
Increase in valuation allowance............................. 40.6
-----
Income tax rate as recorded................................. --%
=====
</TABLE>

12. EMPLOYEE BENEFIT PLANS

STOCK OPTION PLANS

In March 1999, the Company implemented its 1999 Stock Incentive Plan (the
"1999 Plan"). The 1999 Plan serves as the successor equity incentive program to
the 1997 Class B Unit Option/Issuance Plan (the "1997 Plan"). Under the 1999
Plan, 5,768,611 shares have been authorized subject to automatic increases in
January of each year. On the effective date of the 1999 Plan, shares authorized
for issuance and options issued and outstanding under the 1997 Plan were
incorporated into the 1999 Plan. No further option grants will be made under the
1997 Plan. The exercise price shall not be less than the fair market value on
the date of grant of the option and shall not be less than 110% of the fair
market value on the date of grant to any 10% owners of the Company. In general,
the options vest at a rate of 25% annually on the anniversary of the grant date
and expire 10 years from the date of grant.

For the years ended December 31, 1999 and 1998, the Company recorded
unearned compensation of $433 and $762, respectively, for options issued below
deemed fair value for accounting purposes. This amount is being charged to
compensation expense over a four year period (the vesting period of the
options).

The 1999 Stock Incentive Plan includes four programs. The first provides for
the discretionary grant of options to purchase common shares to employees,
consultants, and members of the board of directors. The second allows
individuals to purchase shares or receive them as a bonus tied to the
performance of services. The third allows executive officers and other highly
compensated employees to apply a portion of their salary to the acquisition of
special below-market stock option grants. No such grants have been made to date.
The fourth program automatically grants options at periodic intervals to
eligible non-employee board members.

72
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)

12. EMPLOYEE BENEFIT PLANS (CONTINUED)

The following information relates to options issued to purchase common stock
under the 1999 Plan:

<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year... 2,584,369 $0.67 1,360,103 $0.45 -- $ --
Options granted.......................... 2,798,843 13.06 1,577,437 0.84 1,495,546 0.45
Options exercised........................ (510,762) 0.99 -- -- -- --
Options forfeited........................ (515,883) 4.49 (353,171) 0.45 (135,443) 0.45
--------- --------- ---------

Options outstanding, end of year......... 4,356,567 $8.15 2,584,369 $0.67 1,360,103 $0.45
========= ========= =========
</TABLE>

<TABLE>
<CAPTION>
OPTIONS WEIGHTED
OUTSTANDING WEIGHTED AVERAGE
AT AVERAGE REMAINING
DECEMBER 31, EXERCISE CONTRACTUAL
1999 PRICE LIFE IN YEARS
------------- -------- -------------
<S> <C> <C> <C>
At $0.45 to $0.90.......................................... 1,272,417 $0.46 7.8
At $1.35 to $5.18.......................................... 503,103 1.43 8.8
At $8.94 to $13.00......................................... 1,447,969 11.33 9.3
At $14.25 to $19.88........................................ 1,116,278 15.50 9.7
At $22.94 to $45.00........................................ 16,800 28.19 9.6
</TABLE>

The Company accounts for its equity-based compensation in accordance with
APB Opinion No. 25 and its related interpretations.

Had the Company's equity-based employee compensation been determined by the
fair-value based method of SFAS 123, the Company's net loss on a pro-forma basis
for the years ended December 31, 1999 would have been $(58,662). Net loss on a
pro-forma basis was not materially impacted for the years ended December 31,
1998 and 1997.

For disclosure purposes, the fair value of all options granted during 1999
was determined using the Black-Scholes option-pricing model. The fair value for
1999 option grants was based on an average risk-free interest rate of 4.92%,
zero dividend yield, volatility of 85%, and an expected life of 5 years.

STOCK PURCHASE PLAN

In April, 1999, the Company adopted the 1999 Employee Stock Purchase Plan
(the "1999 ESPP"). A total of 555,556 shares are available to be issued under
the 1999 ESPP. The 1999 ESPP allows eligible employees to purchase shares of
common stock at semi-annual intervals, through periodic payroll deductions of up
to 15% of cash earnings, as defined. The purchase price per share is 85% of the
lower of the fair market value on the eligible employee's entry date or the fair
market value on the semi-annual purchase date. The 1999 ESPP will terminate no
later than the last business day in July 2009.

73
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)

12. EMPLOYEE BENEFIT PLANS (CONTINUED)

DEFINED CONTRIBUTION PLAN

The Company is a participating employer in a tax-qualified retirement plan
(the "Savings Plan") under Section 401(k) of the IRC. Under the Savings Plan,
participating employees may defer a portion of their pre-tax earnings, up to the
Internal Revenue Service ("IRS") annual contribution limit. The Company matches
50% of each employee's contribution up to a maximum of 6% of the employee's
eligible earnings. In 1999, 1998 and 1997 the Company match was $394, $238 and
$159, respectively. Company matching payments vest over 7 years.

13. SUBSEQUENT EVENTS

SAVINGS PLAN

Effective January 1, 2000, the Company implemented the Juno Online
Services, Inc. 401(k) Plan (the "2000 Savings Plan") under Section 401(k) of the
IRC. Under the 2000 Savings Plan, eligible employees may defer a portion of
their pre-tax earnings, up to 15% of their pre-tax earnings not to exceed the
IRS annual limit. The Company will match 50% of each employee's contribution up
to a maximum of 12% of the employee's eligible earnings. Company matching
contributions vest over 4 years. Concurrent with this implementation, all
balances from the Savings Plan were rolled into the 2000 Savings Plan and the
vesting periods were retroactively adjusted to 4 years for all Company matching
contributions.

FOLLOW-ON OFFERING

On February 14, 2000, the Company completed its follow-on offering of
3,600,000 shares of common stock at $24.00 per share. Net proceeds received by
the Company, after deducting offering costs, totaled $81,080.

74
<PAGE>
PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Reference is made to the information contained in the Company's proxy
statement to be mailed to stockholders on or about April 15, 2000, which
information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Reference is made to the information contained in the Company's proxy
statement to be mailed to stockholders on or about April 15, 2000, which
information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Reference is made to the information contained in the Company's proxy
statement to be mailed to stockholders on or about April 15, 2000, which
information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Reference is made to the information contained in the Company's proxy
statement to be mailed to stockholders on or about April 15, 2000, which
information is incorporated herein by reference.

PART IV.

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

(a)(1)Financial Statements

References is made to the consolidated financial statements included in
Item 8 to this Report on Form 10-K.

(a)(2)Financial Statement Schedules

Schedule II - Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING COSTS AND END OF
CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS(A) PERIOD
- -------------- ---------- --------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1999:
Allowance for doubtful accounts............... $296 $ 449 $(201) $ 544
Valuation allowance-deferred tax assets....... $ -- $27,923 $ -- $27,923
Year ended December 31, 1998:
Allowance for doubtful accounts............... $106 $ 377 $(187) $ 296
Year ended December 31, 1997:
Allowance for doubtful accounts............... $ 9 $ 233 $(136) $ 106
</TABLE>

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

(a) Represents sales concessions and accounts written-off as uncollectible.

75
<PAGE>
(a)(3)Exhibit Index

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------------------- ------------------------------------------------------------ --------
<C> <S> <C>
3.1** Certificate of Incorporation................................
3.2** Certificate of Amendment to Certificate of Incorporation,
filed March 1, 1999.......................................
3.3** Certificate of Amendment to Certificate of Incorporation,
filed March 1, 1999.......................................
3.4** Certificate of Amendment to Certificate of Incorporation,
filed March 4, 1999.......................................
3.5** Form of Amended and Restated Certificate of Incorporation in
effect following our initial public offering..............
3.6** Bylaws......................................................
3.7** Form of Amended and Restated Bylaws in effect following our
initial public offering...................................
4.1** Specimen Common Stock certificate...........................
4.2** See Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6 for provisions
defining the rights of holders of common stock of the
registrant................................................
10.1** 1999 Stock Incentive Plan...................................
10.2** 1999 Employee Stock Purchase Plan...........................
10.3** Amended and Restated Registration Rights Agreement..........
10.4**+ Marketing Services Agreement, dated September 30, 1998,
among the registrant and Hartford Fire Insurance Company
and its affiliates/subsidiaries...........................
10.5**+ Marketing Services Agreement, dated December 11, 1998,
between the registrant and AT&T Wireless Services, Inc....
10.6**+ Distributor Agreement, dated March 12, 1998, between the
registrant and LCI International Telecom Corp.............
10.7**+ Financial Services Marketing Agreement, dated February 17,
1999, between the registrant and First USA Bank, N.A......
10.8**+ Master Service Agreement, dated August 1, 1998, between the
registrant and Softbank Services Group....................
10.9** India Services Agreement, dated November 1, 1997, between
the registrant and D. E. Shaw & Co., L.P..................
10.10** Services Agreement, dated January 1, 1998, between the
registrant and D. E. Shaw & Co., L.P......................
10.11** Advertising Agreement, dated March 1, 1999, between the
registrant and News America Incorporated..................
10.12(a)** Employment Agreement, dated September 2, 1998, between the
registrant and Charles Ardai..............................
10.12(b)** Employment Agreement, dated April 26, 1999, between the
registrant and Charles Ardai..............................
10.13(a)** Employment Agreement, dated June 10, 1998, between the
registrant and Robert Cherins.............................
10.13(b)** Employment Agreement, dated April 26, 1999, between the
registrant and Robert Cherins.............................
10.14(a)** Employment Agreement, dated April 6, 1998, between the
registrant and Mark Moraes................................
10.14(b)** Employment Agreement, dated October 6, 1999, between the
registrant and Mark Moraes................................
</TABLE>

76
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------------------- ------------------------------------------------------------ --------
<C> <S> <C>
10.15** Employment Agreement, dated September 25, 1998, between the
registrant and Richard Eaton..............................
23.2 Consent of PricewaterhouseCoopers LLP.......................
27.1** Financial Data Schedule for the twelve months ended
December 31, 1998.........................................
27.2** Financial Data Schedule for the twelve months ended
December 31, 1999.........................................
</TABLE>

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

** Previously filed.

+ Confidential treatment requested for portions of this agreement.

(b) Reports on Form 8-K

None

77
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on February 15, 2000:

<TABLE>
<S> <C> <C>
JUNO ONLINE SERVICES, INC.

/s/ CHARLES E. ARDAI
------------------------------------------------
Charles E. Ardai
Name:
President, Chief Executive Officer and
Director
Title:
</TABLE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on its behalf by the following persons on behalf of the
registrant and in the capacities indicated on February 15, 2000.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<C> <S>
/s/ CHARLES E. ARDAI President, Chief Executive Officer and
- -------------------------------------------- Director
Charles E. Ardai (principal executive officer)

/s/ RICHARD M. EATON, JR.
- -------------------------------------------- Chief Financial Officer and Treasurer
Richard M. Eaton, Jr. (principal accounting and financial officer)

/s/ EDWARD J. RYEOM
- -------------------------------------------- Director
Edward J. Ryeom

/s/ LOUIS K. SALKIND
- -------------------------------------------- Director
Louis K. Salkind

/s/ DAVID E. SHAW
- -------------------------------------------- Director
David E. Shaw
</TABLE>

<PAGE>
EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-79273) of Juno Online Services, Inc. of our
report dated January 19, 2000, except as to the follow-on offering described in
Note 13, which is as of February 14, 2000, relating to the financial statements,
which is incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report dated January 19, 2000 relating to the
financial statement schedule, which appears in this Form 10-K.

/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
February 15, 2000