NETGRAVITY INC, 424B4, 1998-06-12

NETGRAVITY INC
424B4, 1998-06-12
PREPACKAGED SOFTWARE

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<PAGE>

3,000,000 SHARES
COMMON STOCK

All of the 3,000,000 shares of Common Stock offered hereby are being sold by
NetGravity, Inc. ("NetGravity" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. See
"Underwriting" for information relating to the method of determining the initial
public offering price. The Company's Common Stock has been approved for
quotation on the Nasdaq National Market under the symbol "NETG."

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
-----------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................. $9.00 $0.63 $8.37
Total(3).................................. $27,000,000 $1,890,000 $25,110,000
</TABLE>

(1) The Company and certain of the Company's stockholders (the "Selling
Stockholders") have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting expenses of the offering payable by the Company, estimated
at $1,300,000.

(3) The Company and the Selling Stockholders have granted to the Underwriters a
30-day option to purchase up to an additional 250,000 and 200,000 shares of
Common Stock, respectively, solely to cover over-allotments, if any. See
"Principal and Selling Stockholders" and "Underwriting." If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Stockholders will
be $31,050,000, $2,173,500, $27,202,500 and $1,674,000, respectively. See
"Underwriting."

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

The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order in
whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco,
California, on or about June 17, 1998.

BANCAMERICA ROBERTSON STEPHENS

NATIONSBANC MONTGOMERY SECURITIES LLC

FAC/EQUITIES

THE DATE OF THIS PROSPECTUS IS JUNE 11, 1998

<PAGE>
EDGAR COLORWORK DESCRIPTIONS:

INSIDE FRONT COVER OF PROSPECTUS:

TITLE: Software solutions for online advertising and direct marketing

INTRO PARAGRAPH: NetGravity is the leading provider of mission-critical
software solutions for online advertising and direct marketing. At the core
of NetGravity's solutions is its AdServer product family, which is designed
to enable customers to improve response rates by targeting advertisements to
individual users and to increase efficiency by automating certain
advertising and direct marketing business processes. These features are
designed to enhance customers' ability to generate revenue from sales of
advertising space and from direct marketing campaigns.

GRAPHIC DEPICTING FUNCTIONS OF ADSERVER

CAPTION 1:

1) MANAGE AND SCHEDULE ADVERTISING AND DIRECT MARKETING OFFERS. NetGravity
solutions analyze historical data, forecast advertising inventory
capacities and deliver up-to-date availability reports.

CAPTION 2:

2) DELIVER THE RIGHT MESSAGE TO THE RIGHT PERSON. AdServer is designed to
enhance customers' ability to generate revenue through capabilities such
as targeting advertisements to individual users and groups of users.

CAPTION 3:

3) TEST, TRACK AND FINE-TUNE MESSAGES. Report-generating functions reveal
important information about how an online advertisement, group of
advertisements or direct marketing message is performing.

INSIDE GATEFOLD:

TITLE: NetGravity helps businesses build online relationships with
consumers.

INTRO PARAGRAPH:

The competitive nature of the global marketplace requires merchants to
continually seek out and obtain new customers while preserving their
relationships with current customers. To help build these relationships
online, NetGravity markets and supports three solutions, AdServer
Enterprise, AdServer Network and AdCenter, designed to support the needs of
companies in the online advertising and direct marketing industry.

NetGravity's solutions, together with its broad range of professional
services and support capabilities, are designed to enhance the effectiveness
and efficiency of the entire online advertising and direct marketing supply
chain: merchants (vendors of products and services), advertising agencies,
and content publishers (including advertising networks).

UPPER RIGHT-HAND CORNER CAPTIONS:
- Manage and schedule advertising and direct marketing offers.
- Deliver the right message to the right person.
- Test, track and fine-tune messages.

GRAPHIC INTRO: How NetGravity AdServer solutions can be used to facilitate
Internet business.

GRAPHIC DEPICTING ADSERVER'S ROLE IN ONLINE ADVERTISING AND DIRECT MARKETING

CAPTIONS 1-7:

1) An individual consumer surfs the Web.

2) The consumer encounters a site that piques interest.

3) A targeted advertisement is delivered to the consumer in real-time by
NetGravity AdServer.

4) The consumer clicks on the advertisement.

5) By means of a link, the consumer is sent to the merchant's site.

6) NetGravity AdServer delivers a targeted direct marketing offer to the
consumer.

7) NetGravity AdServer assists the merchant in collecting data for
future use.

INSIDE BACK COVER OF PROSPECTUS:

TITLE: A Few of Our Customers

INTRO PARAGRAPH:

NetGravity provides mission-critical online advertising and direct marketing
software solutions for merchants, advertising agencies and content
publishers.

CONTENT: 10 branded logos above a textual list of ~ 100 customer names.

Company logos for this sheet:

Netscape Communications

J. Walter Thompson

CNN Interactive

Time Inc. New Media

WhoWhere?

E*TRADE

Real Cities (Knight-Ridder New Media)

ONSALE

Virgin Net

@Home Network

NetGravity is a trademark of NetGravity, Inc. This Prospectus also contains
additional trademarks and tradenames of NetGravity and of other companies.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, BY ANY SELLING STOCKHOLDER OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

UNTIL JULY 6, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
Summary................................................................... 4
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 22
Dividend Policy........................................................... 22
Capitalization............................................................ 23
Dilution.................................................................. 24
Selected Consolidated Financial Data...................................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 26
Business.................................................................. 38
Management................................................................ 56
Certain Transactions...................................................... 67
Principal and Selling Stockholders........................................ 70
Description of Capital Stock.............................................. 72
Shares Eligible for Future Sale........................................... 75
Underwriting.............................................................. 77
Legal Matters............................................................. 79
Experts................................................................... 79
Additional Information.................................................... 79
Index to Consolidated Financial Statements................................ F-1
</TABLE>

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The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and to make available
quarterly reports containing unaudited summary financial information for the
first three fiscal quarters of each fiscal year.

The Company was incorporated in Delaware in September 1995. The Company's
principal executive offices are located at 1700 S. Amphlett Blvd., Suite 350,
San Mateo, California 94402 and its telephone number at that address is (650)
655-4777.

3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS
SHOULD CONSIDER CAREFULLY THE INFORMATION DISCUSSED UNDER "RISK FACTORS." THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS BASED UPON CURRENT EXPECTATIONS
THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS AND THE
TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.

THE COMPANY
NetGravity is the leading provider of software solutions for online
advertising and direct marketing. A pioneer in the online advertising management
software market, the Company believes that it was the first company to provide
such commercial software to major online content publishers and has recently
expanded into the newly-emerging market for online direct marketing software
solutions. The Company develops, markets and supports its mission-critical
AdServer family of software products which, together with its full range of
professional services and support capabilities, are designed to enhance the
effectiveness and efficiency of each constituent in the online advertising and
direct marketing supply chain: merchants (vendors of products and services),
advertising agencies and content publishers (including advertising networks).
The Company markets and sells its products and services primarily through its
field sales and telesales organizations and maintains sales and support
operations in North America, Europe and Asia Pacific. To date, the Company has
sold its software and services to over 225 customers, including 34 of the
content publishers listed in CMR's Interwatch (formerly Jupiter's AdSpend) list
of the top 100 revenue-generating online content publishers for the eight months
ended August 31, 1997. The Company's customers include @Home Network, CNN
Interactive, E*TRADE, J. Walter Thompson, Netscape Communications, ONSALE, Real
Cities (Knight-Ridder New Media), Time Inc. New Media, Virgin Net and WhoWhere?.

The dramatic growth of the Internet in recent years has led, and continues
to lead, merchants, advertising agencies and content publishers to devote
increasing resources toward developing and improving their utilization of the
Internet as a medium for advertising and direct marketing. The Web provides
advertisers with the opportunity to cost-effectively reach global audiences and
to target their advertising based on consumers' demographic characteristics,
specific interests and geographic location. IDC has estimated that online
advertising spending in the United States would increase from $551 million in
1997 to $4.0 billion in 2001. Similarly, the Internet has the potential to
enable direct marketers to increase response rates and reduce
cost-per-transaction by targeting and delivering direct marketing campaigns to
consumers based on their specific demographics, characteristics and interests.
Jupiter Communications estimates that expenditures on online direct marketing
were $86.0 million in 1997 and will exceed $1.3 billion in 2002.

As merchants, advertising agencies and content publishers increase their
online presence, they require comprehensive, reliable and scalable software
solutions to allow them to effectively and efficiently leverage the power of the
Internet for advertising and direct marketing. To address this need, the
NetGravity AdServer family of software products is designed to enable customers
to increase their revenue from online advertising and direct marketing by
improving response rates through consumer targeting and to enable customers to
reduce their administrative expenses by automating certain advertising and
direct marketing business processes. In addition, as the Company's software
delivers advertisements, it gathers consumer viewing and response data. This
data is retained by the Company's customers and can be used to more precisely
target future advertisements. NetGravity's solutions, which include AdServer
Enterprise, AdServer Network and the AdCenter service, are designed to be
extensible and robust systems for deploying advertising and direct marketing
management solutions on the Internet. The NetGravity AdServer family of software
products utilizes a common fault-tolerant, scalable architecture for real-time
delivery of targeted advertisements, a management system for tracking
advertising inventory and a customizable reporting and analysis system allowing
AdServer users to better understand their customers.

To complement its software solutions, the Company offers worldwide
consulting, technical support and training to its customers through its
professional services organization. To help customers develop strong online
advertising and direct marketing businesses, the Company has built a consulting
organization capable of offering technical and business expertise to implement
customer solutions. These services consist of implementation, system extension
and migration services as well as other advanced services. The Company also
provides its customers with an extensive array of ongoing support services,
including software updates, telephone support and product and Internet
advertising education.

The Company's objective is to extend its leadership position in the online
advertising and direct marketing software industry by establishing AdServer as
the standard customer acquisition and retention solution for online merchants,
advertising agencies and content publishers. The Company is seeking to meet its
objective by extending its leadership in online advertising software solutions,
establishing leadership in online direct marketing solutions, maximizing
customer value, enabling efficient advertising buying on the Internet, expanding
and leveraging alliances with key business and technology partners and expanding
its international presence.

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<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company............... 3,000,000 shares

Common Stock to be outstanding after the
Offering........................................ 13,257,210 shares(1)

Use of Proceeds................................... For repayment of certain indebtedness, working
capital and general corporate purposes. See
"Use of Proceeds."

Nasdaq National Market symbol..................... NETG
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(3)
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BALANCE SHEET DATA:
Cash and cash equivalents.......................................................................... $ 6,318 $ 28,383
Working capital.................................................................................... 2,682 25,886
Total assets....................................................................................... 11,832 33,897
Notes payable...................................................................................... 1,745 --
Stockholders' equity............................................................................... 3,559 27,369
</TABLE>

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(1) Based on shares outstanding as of April 30, 1998. Excludes, as of April 30,
1998, (i) 1,723,441 shares of Common Stock issuable upon exercise of options
outstanding under the Company's 1995 Stock Option Plan at a weighted average
exercise price of $1.83 per share and 241,639 shares of Common Stock
reserved for future issuance thereunder and (ii) 27,650 shares of Common
Stock issuable upon exercise of outstanding warrants at a weighted average
exercise price of $0.22 per share. Also excludes an aggregate of 2,400,000
shares of Common Stock reserved for future issuance after April 30, 1998
under the Company's 1998 Stock Plan, 1998 Employee Stock Purchase Plan and
1998 Director Option Plan. See "Management--Employee Benefit Plans" and Note
5 of Notes to Consolidated Financial Statements.

(2) See Note 1 of Notes to Consolidated Financial Statements for the
determination of shares used in computing basic and diluted net loss per
share.

(3) Adjusted to reflect the sale of 3,000,000 shares of Common Stock by the
Company at the initial public offering price of $9.00 per share (after
deducting the underwriting discounts and commissions and estimated offering
expenses payable by the Company) and the application of the estimated net
proceeds therefrom.

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

EXCEPT AS OTHERWISE INDICATED HEREIN, ALL INFORMATION IN THIS PROSPECTUS
ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. SEE
"PRINCIPAL AND SELLING STOCKHOLDERS" AND "UNDERWRITING." EXCEPT AS OTHERWISE
NOTED, ALL INFORMATION IN THIS PROSPECTUS (I) HAS BEEN ADJUSTED TO GIVE EFFECT
TO A 1-FOR-2.2 REVERSE SPLIT OF THE COMPANY'S COMMON STOCK EFFECTED PRIOR TO THE
DATE OF THIS PROSPECTUS, (II) REFLECTS THE CONVERSION OF ALL OUTSTANDING SHARES
OF PREFERRED STOCK IMMEDIATELY PRIOR TO THE CLOSING OF THE OFFERING AND (III)
REFLECTS THE FILING OF AN AMENDMENT TO THE COMPANY'S AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION WHICH, AMONG OTHER THINGS, INCREASED THE AUTHORIZED
NUMBER OF SHARES OF COMMON STOCK TO 50,000,000 AND AUTHORIZED 5,000,000 SHARES
OF UNDESIGNATED PREFERRED STOCK. SEE "DESCRIPTION OF CAPITAL STOCK" AND NOTE 5
OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. UNLESS OTHERWISE INDICATED,
REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" OR TO "NETGRAVITY" REFER TO
NETGRAVITY, INC., A DELAWARE CORPORATION, TOGETHER WITH ITS WHOLLY-OWNED
SUBSIDIARIES, NETGRAVITY EUROPE LIMITED AND NETGRAVITY ASIA PACIFIC K.K.

5
<PAGE>
RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING SHARES OF THE COMMON STOCK OFFERED HEREBY.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND
ELSEWHERE IN THIS PROSPECTUS.

LIMITED OPERATING HISTORY; HISTORY OF LOSSES; ANTICIPATED CONTINUED LOSSES

The Company was incorporated in September 1995 and therefore has a limited
operating history upon which an evaluation of the Company and its prospects can
be based. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving
markets, such as the markets for online advertising and direct marketing
solutions. To address these risks, the Company must, among other things,
effectively develop new relationships and maintain existing relationships with
its customers, business and technology partners and other third parties, develop
and upgrade its technology, improve its technical support and service, respond
to competitive developments, implement and improve operational, financial and
managerial information systems and attract, retain and motivate qualified
personnel. There can be no assurance that the Company will succeed in addressing
such risks, and the failure to do so could have a material adverse effect on the
Company's business, results of operations or financial condition. Additionally,
the limited operating history of the Company makes the prediction of future
operating results difficult or impossible, and there can be no assurance that
the Company's revenues will increase or even continue at their current level or
that the Company will achieve or maintain profitability or generate cash from
operations in future periods. Since inception, the Company has incurred
significant operating and net losses. The Company's loss from operations and net
loss were each $6.9 million in the year ended December 31, 1997 and $2.8 million
for the three months ended March 31, 1998. Loss from operations exceeded total
revenues in each of such periods. As of March 31, 1998, the Company had an
accumulated deficit of $14.5 million. The Company anticipates that its operating
expenses will increase substantially in the foreseeable future as it exploits
new market opportunities for its products and services, funds greater levels of
research and development, increases its sales and marketing operations, develops
new distribution channels, improves its operational and financial systems and
broadens its customer support capabilities. Accordingly, the Company expects to
incur additional losses and continued negative cash flow from operations for the
foreseeable future, and such losses are anticipated to increase significantly
from current levels, which in turn will increase the Company's accumulated
deficit. Additionally, although the Company has experienced revenue growth in
recent periods, due to the Company's limited operating history, such results are
not necessarily meaningful and should not be relied upon as an indication of
future performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY; POSSIBLE
PRICE EROSION

As a result of the Company's limited operating history, the Company does not
have relevant historical financial data for a significant number of periods on
which to base planned operating expenses. Accordingly, the Company's expense
levels are based in part on the Company's expectations as to future revenues.
Since the Company's expenses are to a large extent fixed in the short term, the
Company may be unable to, or may elect not to, adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Therefore, any
significant shortfall in revenues in relation to the Company's expectations
would have an immediate material adverse effect on the Company's business,
results of operations and financial condition and net losses in a given quarter
would be even greater than expected.

6
<PAGE>

introduction of new or enhanced online advertising or direct marketing solutions
by the Company or its competitors, (iv) changes in the market demand for online
advertising and direct marketing software, (v) market acceptance of new products
and services offered by the Company, (vi) the timing and size of individual
license transactions, (vii) the sales and implementation cycles of the Company's
customers, (viii) the addition or loss of customers, (ix) the mix between
software licenses, software upgrades and consulting and support revenues, (x)
the mix between domestic and international revenues, (xi) the amount of
advertising budgets committed to online advertising and direct marketing
activities by the Company's current and prospective customers, (xii) price
changes or changes in pricing models by the Company or its competitors, (xiii)
the mix of distribution channels through which the Company's products are sold,
(xiv) increasing complexity of the Company's products resulting in higher costs
to develop and maintain, which may not be recouped by increased prices, (xv) the
loss of key employees and the time required to train new hires, particularly
sales, consulting and customer support personnel, (xvi) the ability to penetrate
markets outside of North America, (xvii) the incurrence of costs relating to
possible acquisitions of technology or businesses, (xviii) seasonality related
to slower European sales in the third quarter and a shorter implementation
period in the fourth quarter, (xix) the amount and timing of capital
expenditures and other costs relating to the expansion of the Company's
operations and (xx) general economic conditions.

Historically, a significant portion of the Company's revenue for a given
quarter has been recognized in the last month of that quarter, and the Company
expects this trend to continue. In particular, because the Company's revenue
recognition policy requires that the implementation of AdServer be substantially
completed before recognition of software license revenue, any delay in the
implementation of the Company's products at the end of a quarter could
materially adversely affect operating results for that quarter. The Company's
revenues are also likely to fluctuate due to factors that impact prospective
customers of the Company's products. Expenditures by these customers tend to
vary in cycles that reflect overall economic conditions and budgeting and buying
patterns. The Company's business could be materially adversely affected by a
decline in the economic prospects of its customers or the economy generally,
which could alter current or prospective customers' spending priorities or
budget cycles or extend the Company's sales cycle with respect to certain
customers. In addition, the Company plans to increase its operating expenses to
exploit new market opportunities for its products and services, fund greater
levels of research and development, increase its sales and marketing operations,
develop new distribution channels, improve its operational and financial systems
and broaden its customer support capabilities. To the extent that such expenses
precede or do not correspond with increased revenues, the Company's business,
results of operations or financial condition could be materially adversely
affected and net losses in a given quarter would be even greater than expected.

Since the markets for online advertising and direct marketing are in the
early stages of development, there can be no assurance that the Company's model
for pricing of its products and services will remain an acceptable pricing
model. If pricing or gross margins on the Company's products and services
decline because a new pricing model develops or the Company's competitors offer
products and services at lower prices than the Company, the Company's business,
results of operations or financial condition could be materially adversely
effected. The terms of the Company's agreement with its customers typically
contain a perpetual license, a one-year renewable subscription for product
upgrades and a one-year renewable support agreement. If the Company's customers
do not renew their subscription and support agreements, the Company's business,
results of operations and financial condition would be materially adversely
effected.

7
<PAGE>
corresponding period of 1998, overall gross margins fell from 81.7% to 41.4%, in
part due to this shift in the mix of revenues. The effect of the shift in
revenue mix was amplified by an increase of the cost of consulting and support
revenues as a percentage of such revenues from 52.4% for the three months ended
March 31, 1997 to 140.2% for the corresponding period of 1998, which increased
costs were largely attributable to new-hire expenses and other inefficiencies
associated with quickly adding and training numerous new consulting and support
personnel during the three months ended March 31, 1998. There can be no
assurance that such adverse fluctuations in the mix of revenue or costs of
revenues will not recur in the future.

Due to all of the foregoing factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Furthermore it is possible that in some future quarters the Company's results of
operations may fall below the expectations of securities analysts and investors.
In such event, the trading price of the Company's Common Stock will likely be
materially and adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Results of Operations."

RISKS ASSOCIATED WITH EMERGING MARKETS

As with other emerging markets, the market for online advertising and direct
marketing solutions is being served by companies which have adopted differing
business models, and there can be no assurance that the Company's business model
will prove competitive. The Company's core business model is to sell
software-based solutions designed to enable customers to directly manage their
online advertising and direct marketing activities and to control and retain the
data gathered from such activities. An alternate business model employed by
certain of the Company's competitors (including DoubleClick) is to provide
outsourced, service-based solutions to customers who choose not to directly
manage their online advertising and direct marketing activities with
software-based solutions. In the outsourced service model, customers are
relieved of certain administrative burdens (and may even choose to outsource
advertisement sales functions), but may not be able to retain the same level of
control over their online systems and the data generated from their online
advertising and direct marketing activities as would be the case with
software-based solutions. Although the Company has recently begun offering
AdCenter, its outsourcing solution for customers who wish to retain advertising
sales functions but who do not wish to retain full control over system
administration and resultant data, revenues from AdCenter to date have not been
significant. If the outsourced service model were to gain popularity to the
detriment of the software-based model, then any failure of the Company to
respond in a timely and efficient manner would have a material adverse effect on
the Company's business, results of operations and financial condition. In
particular, if, in such event, AdCenter was not competitive with other
service-based offerings or was unable to be offered by the Company at required
volumes or on a cost-effective basis, the Company would be required to devote
significant engineering, marketing, sales, consulting and customer support
resources to enhance AdCenter's competitiveness, scalability and
cost-effectiveness. There can be no assurance that such efforts would be
successful. See "Business--Competition."

The market for online advertising and direct marketing has only recently
begun to develop, is rapidly evolving and is characterized by an increasing
number of market entrants. As is typical in the case of a new and rapidly
evolving industry, demand and market acceptance for recently introduced products
and services are subject to a high level of uncertainty. Since the Company
expects to derive substantially all of its revenues in the foreseeable future
from sales of its online advertising and direct marketing software solutions,
the Company is highly dependent on the continued use of the Internet for
information, entertainment and other purposes and, in particular, on the
increased use of the Internet as an advertising and direct marketing medium.

ONLINE ADVERTISING. The Internet as an advertising medium has not been
available for a sufficient period of time to gauge its effectiveness as compared
with traditional advertising media (such as print, television and radio). Many
advertisers have limited or no experience using the Internet as an advertising
medium, have not devoted a significant portion of their advertising expenditures
to online advertising and may not find online advertising to be effective for
promoting their products and services relative to advertising using traditional
media. The adoption of online advertising, particularly by those entities that
have historically relied upon traditional media for advertising, requires the
acceptance of a new way of conducting business and exchanging information.
Advertisers that have

8
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historically relied on traditional media for advertising may be particularly
reluctant or slow to adopt online advertising. In addition, most of the
Company's current and potential Web publisher customers have limited or no
experience in generating revenues from the sale of advertising space on their
Web sites. Further, advertisers and advertising agencies that have invested
substantial resources in traditional methods of advertising may be reluctant to
reallocate their media buying resources to online advertising. The Internet must
therefore compete for a share of advertisers' total advertising budgets with
traditional advertising media. Additionally, there are no widely accepted
standards for the measurement of the effectiveness of online advertising, and
there can be no assurance that such standards will develop sufficiently to
support online advertising as a significant advertising medium. To the extent
that the Internet is perceived to be a limited or ineffective advertising
medium, advertisers may be reluctant to devote a significant portion of their
advertising budget to online advertising, which could limit the growth of online
advertising and would have a material adverse effect on the Company's business,
results of operations and financial condition. Because initial growth of online
advertising was driven by a limited number of early adopters, there can be no
assurance that the market for online advertising will continue to emerge or
become sustainable. To the extent the market does not attain widespread
acceptance or develops more slowly than expected, the Company's business,
results of operations or financial condition could be materially and adversely
affected.

Further, there can be no assurance that advertisers will determine that
banner advertising, the delivery method which currently comprises substantially
all of the advertising delivered via the Company's products, is an effective or
attractive advertising medium, and there can be no assurance that the Company
will effectively transition to any other forms of online advertising should they
develop and achieve market acceptance. Moreover, "filter" software programs that
limit or prevent advertising from being delivered to a Web user's computer are
available. Widespread adoption of such filter software by users could have a
material adverse effect upon the commercial viability of online advertising,
which would have a material adverse effect on the Company's business, results of
operations and financial condition.

ONLINE DIRECT MARKETING. Adoption of online direct marketing, particularly
by those entities that have historically relied upon traditional means of direct
marketing (such as telemarketing and direct mail), requires the broad acceptance
of a new and substantially different approach to direct marketing. As with
online advertising and other new markets, intensive marketing and sales efforts
may be necessary to educate prospective customers regarding the uses and
benefits of the Company's products and services in order to generate demand for
the Company's solutions. Enterprises that have already invested substantial
resources in other methods of conducting business may be reluctant or slow to
adopt a new approach that may replace, limit or compete with their existing
systems. In addition, since online direct marketing is emerging as a new and
distinct market apart from online advertising, potential adoptees of online
direct marketing solutions will increasingly demand functionality tailored to
their specific requirements.

Additionally, online direct marketers may delay adoption of any direct
marketing solutions offered by the Company until the market for online
advertising has reached a broader level of acceptance. Although AdServer's
largely advertising-oriented features can be deployed for online direct
marketing, the Company has not yet developed products with the custom features
required by online direct marketers and there can be no assurance that the
Company will develop any such products, or if such products are developed, that
they will achieve a satisfactory level of market acceptance.

NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE

The market in which the Company competes is characterized by: rapidly
changing technology; evolving industry standards; frequent new product and
service announcements, introductions and enhancements; and changing customer
demands. These market characteristics are exacerbated by the emerging nature of
the Web, in general, and online advertising and direct marketing in particular.
Accordingly, the Company is dependent upon its ability to adapt to rapidly
changing technologies, its ability to adapt its solutions to meet evolving
industry standards and its ability to continually improve the performance,
features and reliability of its solutions in response

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to both changing customer demands and competitive product and service offerings.
The failure of the Company to successfully adapt to such changes in a timely
manner could have a material adverse effect on the Company's business, results
of operations or financial condition.

If the Company is unable, for technological or other reasons, to develop on
a timely basis the next release of AdServer or other new software products,
enhancements to existing products or corrections to errors or defects or
performance problems in products, or if such new products or enhancements do not
achieve a significant degree of market acceptance or if such products, in order
to be released on a timely basis, contain material defects or errors or
performance problems, the Company's business, results of operations and
financial condition would be materially adversely affected. In addition, there
can be no assurance that the introduction or announcement of new product
offerings by the Company or one or more of its competitors will not cause
customers to decline or defer licensing of existing Company products. Any
decline or deferral of purchases could have a material adverse effect on the
Company's business, results of operations or financial condition. Further, if
the Company's current or future products do not meet the scalability
requirements of its customers due to vastly increased use of the Internet, the
Company would have to incur substantial expenditures and resources to address
such issue, and there can be no assurance that the Company would be successful
in scaling the capabilities of its products to such level.

Although the Company sells products to each of the constituents in the
online advertising and direct marketing supply chain (merchants, advertising
agencies and content publishers), it does not currently offer products
automating the online advertising purchasing process among such constituents. If
demand for a comprehensive solution develops and the Company fails to develop
such a solution on a timely basis, or at all, such failure could have a material
adverse effect on the Company's business, results of operations or financial
condition. In addition, as more customers demand online advertising and direct
marketing solutions, the Company must tailor its products to the specific
requirements of both online advertisers and direct marketers and provide a
solution for supplying demographic and behavioral data. Specifically, the online
direct marketing market will require more narrowly targeted advertisements than
the online advertising market and will be even more reliant on demographic data
than the online advertising market. Although AdServer's largely
advertising-oriented features can be used for online direct marketing, the
Company has not yet developed products with the custom features required by
online direct marketers. If the Company does not develop a satisfactory product
to address the online direct marketing market, future growth of the Company
could be impaired, and the Company could lose customers to competitors with more
comprehensive solutions. The occurrence of any such event could have a material
adverse effect on the Company's business, results of operations or financial
condition. See "--Risks Associated with Emerging Markets" and
"Business--Competition."

The Company's products are designed to operate on a variety of hardware and
software platforms employed by its customers in their individual networks. The
Company must continually modify and enhance its products to keep pace with
changes in hardware and software platforms and database technology. As a result,
uncertainties related to the timing and nature of new product announcements,
introductions or modifications by operating systems vendors, particularly
Microsoft and Sun, by vendors of relational database software, particularly
Oracle and Microsoft, and browsers, particularly Netscape and Microsoft, could
materially adversely impact the Company's business, results of operations or
financial condition. See "Business--Technology."

COMPETITION

The market for online advertising and direct marketing is relatively new,
highly fragmented, intensely competitive, rapidly evolving and subject to rapid
technological change. The Company expects competition to continue to increase
both from existing competitors and new market entrants. There are no substantial
barriers to entry in these markets, and the Company believes that its ability to
compete is dependent upon many factors within and beyond its control, including
the timing and market acceptance of new solutions and enhancements to existing
solutions developed by the Company and its competitors, customer service and
support, sales and marketing efforts and the ease of use, performance, features,
price and reliability of the Company's solutions.

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Historically, participants in the online advertising and direct marketing
supply chain have used internally developed systems to manage their own online
advertising and direct marketing functions. However, the Company believes that
its primary competition will increasingly come from vendors that provide online
advertising and direct marketing software or service solutions. In the online
advertising market, the Company competes directly with DoubleClick, CMG (through
its Engage/Accipiter unit) and Excite (through its MatchLogic unit), and a
variety of other online advertising service providers. Some of these companies
(such as DoubleClick) have adopted a business model focused on outsourcing of
advertising and direct marketing management. Although the Company has recently
begun to offer AdCenter, if the outsourcing model increases in popularity for
the Company's targeted markets and if AdCenter does not achieve market
acceptance, the Company will be required to devote additional resources to keep
AdCenter competitive. Any failure by the Company to successfully design, develop
and market an advanced outsourced solution under such circumstances would have a
material adverse effect on the Company's business, results of operations and
financial condition. In the online direct marketing market, the Company expects
to face indirect competition from the vendors of electronic commerce systems,
including BroadVision, Interworld and Open Market, among others. Additionally,
providers of electronic commerce could build online direct marketing solutions
that would obviate the need for any current or future products of the Company
targeted to the online direct marketing industry. The Company also encounters
competition from Netscape and Microsoft, which build or bundle advertising
management products with their Internet commerce solutions. Both Netscape and
Microsoft have significantly greater resources than the Company, and due to
their control of the browser market, if either of them were to offer online
advertising and direct marketing management solutions with features comparable
to those offered by the Company, there can be no assurance that the Company
would be able to compete effectively against any such product offerings.

Many of the Company's current and potential competitors have longer
operating histories and significantly greater financial, technical, marketing
and other resources than the Company and thus may be able to respond more
quickly to new or changing opportunities, technologies and customer
requirements. Also, many current and potential competitors have greater name
recognition, more extensive customer bases and larger proprietary consumer
databases that could be leveraged, thereby gaining market share to the Company's
detriment. Such competitors may be able to undertake more extensive promotional
activities, adopt more aggressive pricing policies, or offer more attractive
terms to purchasers than the Company. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to enhance their products. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share.

Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any one of which could have a material adverse
effect on the Company's business, results of operations or financial condition.
There can be no assurance that the Company will be able to compete successfully
against existing or potential competitors or that competitive pressures will not
have a material adverse effect on the Company's business, results of operations
or financial condition.

DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL QUALIFIED PERSONNEL

The Company is dependent, to a significant extent, upon members of senior
management, product development personnel, the Company's sales and marketing and
customer support staff and other key employees. Given the Company's early stage
of development, the loss of one or more key employees could have a material
adverse effect on the business, results of operations or financial condition of
the Company. The Company does not have employment agreements with its executive
officers requiring their service for any particular term and does not carry key
person life insurance covering such persons. In addition, the Company is
dependent upon its ability to attract, hire, train and retain a substantial
number of highly skilled technical, managerial, finance, sales and marketing and
support personnel, especially experienced consulting and customer support
personnel. The Company must also recruit, and plans to recruit, senior
executives with industry expertise in online advertising and direct marketing.
Competition for personnel in the Company's industry is very intense, and the
Company has at times experienced and continues to experience difficulty in
recruiting qualified personnel, and there can be no

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assurance that the Company will be successful at attracting, hiring, training or
retaining such personnel. The failure of the Company to attract, hire, train or
retain such personnel could have a material adverse effect on the Company's
business, results of operations or financial condition.

In addition, the Company plans to expand its sales and marketing and
customer support organizations both domestically and internationally. Based on
the Company's experience, it takes at least six months, if not longer, for a
salesperson to become fully productive. There can be no assurance that the
Company will be successful in increasing the productivity of its sales
personnel, and the failure to do so could have a material adverse effect on the
Company's business, results of operations or financial condition. Additionally,
as the Company continues to expand internationally, it will require the services
of individuals in the countries in which it conducts operations. The Company has
had limited experience hiring foreign personnel. There can be no assurance that
the Company will be successful in attracting, hiring, training and retaining
such foreign personnel, and the failure to do so could have a material adverse
effect on the Company's business, results of operations or financial condition.
See "Business-- Professional Services."

MANAGEMENT OF GROWTH; RISKS OF POTENTIAL FUTURE ACQUISITIONS

The Company has recently experienced a period of rapid growth and expansion
that has placed and continues to place a significant strain upon the Company's
management, systems and resources. The Company has grown from 10 employees as of
December 31, 1995 to 94 employees as of March 31, 1998 and currently plans to
expand its staff both domestically and internationally. See "--Dependence on Key
Personnel; Need for Additional Qualified Personnel." The Company's ability to
compete effectively and manage future growth, if any, will require the Company
to continue to implement and improve operational, financial and management
information systems on a timely basis and to attract, hire, train and retain
additional technical, managerial, finance, sales and marketing and support
personnel. Any failure to implement and improve the Company's operational,
financial and management systems or to attract, hire, train or retain employees
could have a material adverse effect on the Company's business, results of
operations or financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Employees."

As part of its growth strategy, the Company may in the future pursue
acquisitions of product lines, technologies or businesses. Future acquisitions
by the Company may result in the use of significant amounts of cash, potentially
dilutive issuances of equity securities, incurrence of debt or amortization
expenses related to goodwill and other intangible assets, any of which could
materially adversely affect the Company's business, results of operations or
financial condition. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, technologies, products and
personnel of the acquired company, the diversion of management's attention from
other business concerns, risks of entering markets in which the Company has no
or limited direct prior experience and the potential loss of key employees of
the acquired company. From time to time, the Company has engaged in discussions
with third parties concerning potential acquisitions of product lines,
technologies and businesses. However, there are currently no active
negotiations, commitments or agreements with respect to any such acquisition. In
the event that such an acquisition does occur, however, there can be no
assurance that the Company's business, results of operations or financial
condition will not be materially adversely effected.

RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION

A significant component of the Company's strategy is to aggressively expand
its international operations and international sales and marketing efforts.
Through its two subsidiaries, NetGravity Europe Limited and NetGravity Asia
Pacific K.K., the Company has recently commenced operations in a number of
markets in Europe and Asia Pacific. International revenues comprised
approximately 7.7% of the Company's total revenues in 1997 and are expected to
comprise a significant portion of the Company's total revenues in 1998. Although
the Company believes that localized versions of its products will be extremely
important for the Company to achieve any significant international growth, to
date, the Company has not developed localized versions of its products (which
will likely involve a significant amount of the Company's resources) and has
limited experience in marketing, selling and distributing its products and
services internationally. Additionally, international markets for online

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advertising and direct marketing are in earlier stages of development than in
the United States, and there can be no assurance that the market for, and use,
of online advertising and direct marketing in international markets will be
significant in the future. Factors that may further account for slower growth in
the online advertising and direct marketing markets in Europe and Asia include:
slower growth in the number of individuals using the Internet internationally;
privacy concerns; a lower rate of advertising spending internationally than in
the United States; and a greater reluctance internationally to use the Internet
for advertising and direct marketing. Further, any future success of the Company
in selling its products and services internationally may be conditioned on the
Company delivering improved versions of its products (including localized
versions of its products) and having additional international personnel
available for service and support. Due to all of the foregoing, there can be no
assurance that the Company will be able to successfully market, sell and deliver
its products and services in these markets. In addition, there are certain risks
and challenges inherent in doing business in international markets, such as
difficulties in collecting accounts receivable and longer collection periods,
multiple and continual changes in regulatory requirements, conflicting
regulatory requirements (for example, Germany has imposed laws limiting the use
of "cookies," and there can be no assurance that other countries will not also
place limitations on the use of "cookies"), potentially adverse tax
consequences, export restrictions, export controls relating to encryption
technology, tariffs and other trade barriers, difficulties in staffing and
managing foreign operations, political instability, fluctuations in currency
exchange rates, seasonal reductions in business activity during the summer
months in Europe and certain other parts of the world, and the impact of local
economic conditions and practices, any of which could have a material adverse
effect on the success of the Company's international operations and,
consequently, on the Company's business, results of operations or financial
condition.

The Company currently invoices its European customers in local currencies
and its customers in Asia Pacific in U.S. currency. The Company expects to
eventually invoice all of its international customers in local currencies.
Although the Company pays certain of the expenses of its European operations in
local currencies, the Company has not engaged in foreign currency hedging
activities, and international revenues are currently subject to currency
exchange fluctuation rates. Historically, fluctuations in foreign currency
exchange rates have not had a material effect on the Company's revenues or
expenses. However, to the extent that international revenues increase as a
percentage of total revenues in the future, foreign currency fluctuation
exposure may also increase. Additionally, recent weakness in many of the Asian
economies as well as weakness in the Japanese yen may result in the Company's
products being too expensive for customers in Japan and other countries in Asia
Pacific resulting in decreased sales and profitability in such countries. There
can be no assurance that one or more of the factors discussed above will not
have a material adverse effect on the Company's future international operations
and, consequently, on the Company's business, results of operations or financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Strategy."

LENGTHY SALES AND IMPLEMENTATION CYCLES

Sales of the Company's software products generally require the Company to
engage in a lengthy sales effort, including significant education of prospective
customers regarding the use and benefits of the Company's products. As a result,
the sales cycle for the Company's products is long, currently averaging
approximately four months. In particular, the sales cycle for the Company's
online direct marketing solutions is likely to be comparatively longer than the
sales cycle for the online advertising solutions, since online direct marketing
is less established and will require more education of the Company's potential
customers. In addition, the implementation of the Company's products often
involves a significant commitment of resources by customers and/or the Company's
consultants over an extended period of time. The Company's sales and customer
implementation cycles are subject to a number of potential delays. These include
delays related to product defects or errors as well as delays over which the
Company has little or no control, including customers' budgetary constraints,
internal acceptance reviews and the complexity of customers' online advertising
or direct marketing needs. To the extent the use of the Internet becomes a more
widely accepted means of conducting advertising campaigns and targeting
potential customers, the Company believes that the average sales size of its
transactions may increase. An increase in the average sales size of

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transactions would also likely result in a longer sales cycle as the license of
the Company's software products becomes more of an enterprise-wide decision by
prospective customers requiring a significant commitment of resources. Delays
due to lengthy sales cycles or delays in customer deployment of a product could
have a material adverse effect on the Company's business, results of operations
or financial condition. For example, due to errors contained in early versions
of AdServer 3.0 and the complexity involved in its implementation, deployment of
the product required a significant amount of time and resources on the part of
the Company and its customers. Partly as a result, the Company's license revenue
declined in the fourth quarter of 1997 from the prior quarter due to the delay
in revenue recognition and greater than anticipated utilization of the Company's
personnel and other resources in deploying such products. See "--Potential
Fluctuations in Quarterly Operating Results; Seasonality; Possible Price
Erosion," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Sales and Marketing."

PRODUCT CONCENTRATION

To date, the Company has generated all of its revenues from the license and
related upgrade, consulting and support of its AdServer family of software
products. The Company believes that its current AdServer family of software
products and software products in development, together with the related
consulting and support services, will continue to account for substantially all
of its revenues for the foreseeable future. The Company's future financial
performance is dependent, in significant part, upon the successful development,
introduction and customer acceptance of new and enhanced versions of AdServer
and of new products and services that the Company may develop. There can be no
assurance that the Company will be successful in upgrading and continuing to
market AdServer or that the Company will successfully develop new products and
services or that any new product or service will achieve market acceptance.
Consequently, factors affecting the pricing of and demand for AdServer, such as
competition, technological changes, failure of the market for online advertising
and direct marketing solutions to develop as the Company anticipates or lack of
customer acceptance of AdServer could have a material adverse effect on the
Company's business, results of operations or financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET

The Company's future success is largely dependent upon the widespread
acceptance and continued use of the Internet as an advertising and direct
marketing medium. The Internet may not be accepted as a viable commercial medium
for a number of reasons, including potentially inadequate development of the
necessary network infrastructure, failure of enabling technologies to be
developed in a timely manner or insufficient commercial support of online
advertising and direct marketing. To the extent that the Internet continues to
experience an increase in users, an increase in frequency of use or an increase
in the bandwidth requirements of users, there can be no assurance that the
Internet infrastructure will be able to support the demands placed upon it. In
addition, the Internet could lose its viability as a commercial medium due to
the delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity, or due to increased
government regulation. Changes in, or insufficient availability of,
telecommunications services to support the Internet also could result in slower
response times and could adversely affect use of the Internet generally. If use
of the Internet does not continue to grow or grows more slowly than expected, or
if the Internet infrastructure, standards, protocols or complementary products,
services or facilities do not effectively support any growth that may occur, the
Company's business, results of operations and financial condition would be
materially adversely affected. See "Business--Industry Background." Even if the
required infrastructure, standards, protocols or complementary products,
services or facilities are developed, there can be no assurance that the Company
will not be required to incur substantial expenditures in order to adapt its
solutions to changing or emerging technologies. The occurrence of any such event
could have a material adverse effect on the Company's business, results of
operations or financial condition. Moreover, critical issues concerning the
commercial use and government regulation of the Internet (including security,
cost, ease of use and access, intellectual property ownership and other legal
liability issues) remain unresolved and could materially and adversely impact
both the growth of the Internet and the Company's business, results of
operations or financial condition.

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RELIANCE ON THIRD PARTIES AND THIRD PARTY SOFTWARE PLATFORMS

The Company's products are designed to operate on a variety of hardware and
software platforms employed by its customers in their networks. The Company must
continually modify and enhance its products to keep pace with changes in
hardware and software platforms and database technology. As a result,
uncertainties related to the timing and nature of new product announcements,
introductions or modifications by vendors of operating systems, particularly
Microsoft and Sun, by vendors of relational database management software,
particularly Oracle and Microsoft, and by vendors of browsers, particularly
Netscape and Microsoft, could materially adversely impact the Company's
business, results of operations or financial condition. The failure of the
Company's products to operate effectively across the various existing and
evolving versions of hardware and software platforms and database environments
employed by customers could have a material adverse effect on the Company's
business, results of operations or financial condition. The Company also relies
upon the licensing of certain software from third parties, including database
access technology and other tools from Rogue Wave, and there can be no assurance
that the Company's third-party technology licenses will continue to be available
to the Company on commercially reasonable terms, if at all. The loss or
inability to maintain any of these technology licenses could result in delays in
the sale of the Company's products and services until equivalent technology, if
available, is identified, licensed, and integrated, which could have a material
adverse effect on the Company's business, results of operations or financial
condition. See "Business--Product Development."

In order for the Company to provide adequate demographic data (which is
essential for more narrowly targeted advertising and direct marketing) for its
customers without their own demographic data or without access to their
demographic data, the Company will need to partner with companies offering such
demographic data. The failure of the Company to form such partnerships could
have a material adverse effect on the business, results of operations or
financial condition of the Company.

EVOLVING DISTRIBUTION CHANNELS

The Company has historically sold its products and services primarily
through its field sales and telesales organization, but its future success will
depend in part upon its ability to increase sales of its products through Web
hosting organizations and Internet systems integrators (collectively,
"Resellers"). Web hosting organizations centrally house and maintain Internet
connectivity equipment, server hardware and software for their customers. The
following Web hosting organizations have provided hosting services to NetGravity
customers: ANS Communications, BBN Corporation, Digex Incorporated, EUnet
International B.V., Exodus Communications, Inc., Frontier GlobalCenter, Inc.,
Proxicom, Inc. and TCG CERFnet (the data and Internet service business unit of
Teleport Communications Group Inc.). Internet systems integrators assist online
content publishers and merchants in the design, procurement and deployment of
their Web sites. The following Internet systems integrators have worked with
NetGravity customers: CKS--Enterprise, a systems integration and consulting
organization within CKS Group, Inc., Fort Point Partners, Horizon Technologies,
Organic Inc. and Poppe Tyson Interactive. All of the foregoing Resellers have
entered into reseller agreements with the Company, whereby they are permitted to
resell NetGravity's products, and, in some cases, to customize the products. The
Company works with these Resellers to develop re-sale and co-marketing programs
and to generate business referrals that lead to sales. The Company does not
provide exclusive sales territories and does not impose minimum purchase
requirements in connection with its reseller agreements.

The Company expects that any material increase in sales through Resellers as
a percentage of total revenues will adversely affect the Company's gross margins
due to discounts offered to Resellers. Another potential adverse consequence of
the Company's focus on increasing sales through Resellers is the diversion of
management resources and attention from field sales and telesales, which could
adversely affect field sales and telesales revenue. Moreover, there can be no
assurance that the Company will be able to attract and retain Resellers that
will be able to market the products effectively, particularly due to the
sophisticated nature of the Company's products, and that will be qualified to
provide timely and cost-effective customer support and service. In the event
that a Reseller provides inadequate support and service to the Company's
customers, the Company's future revenues could be negatively

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impacted and the Company's reputation could be seriously damaged. The occurrence
of any of such events could have a material adverse effect on the Company's
business, results of operations or financial condition. See "Business--Marketing
Alliances."

PRIVACY CONCERNS; DEPENDENCE ON COOKIES FOR AD TARGETING; SECURITY

The Company's software uses "cookies" to deliver targeted advertising, to
help compile demographic information, and to limit the frequency with which an
advertisement is shown to the user. Cookies are bits of information keyed to a
specific server, file pathway or directory location that are stored on a user's
hard drive and passed to a Web site's server through the user's browser
software. Cookies are placed on the user's hard drive without the user's
knowledge or consent. Due to privacy concerns, some Internet commentators,
advocates and governmental bodies have suggested that the use of cookies be
limited or eliminated. In addition, certain currently available Internet
browsers allow a user to delete cookies or prevent cookies from being stored on
the user's hard drive. Germany has imposed laws limiting the use of cookies, and
there can be no assurance that other countries will not also place limitations
on the use of cookies. See "--Risks Associated with International Expansion."
Any significant reduction or limitation in the use of cookies would likely
require the Company to switch to other technology allowing the gathering of
information for ad targeting. Switching to other technology could require
significant reengineering time and resources, and there can be no assurance that
the Company would be able to switch to such technology on a timely basis, if at
all. The failure to do so could have a material adverse effect on the Company's
business, results of operations or financial condition.

The Company has included basic security features in certain of its products
that are intended to protect the privacy and integrity of customer data.
However, in the Company's AdServer product, passwords for certain operations are
not encrypted and therefore are susceptible to hacker interception, break-ins
and disruption. Such computer break-ins and other disruptions may jeopardize the
security of information stored in and transmitted through the computer systems
of the Company's customers. Alleviating problems caused by third parties may
require significant expenditures of capital and resources by the Company which
may have a material adverse effect on the Company's business, results of
operations or financial condition. Additionally, as e-commerce becomes more
prevalent (and consequently the focus of the Company's development of direct
marketing products), security concerns will become of increasing concern to
consumers and the Company's customers. If not addressed, these security concerns
could limit or slow the development of e-commerce and, consequently, the
development of online direct marketing. If the Company does not add sufficient
security features to future product releases, the Company's products may not
achieve an acceptable level of market acceptance, or if purchased by customers,
may result in liability for damages. The occurrence of any of the foregoing
could have a material adverse effect on the Company's business, results of
operations or financial condition.

RISK OF PRODUCT DEFECTS; PRODUCT LIABILITY

Software products as complex as AdServer frequently contain errors or
defects or performance problems, especially when first introduced or when new
versions or enhancements are released. Despite extensive product testing by the
Company prior to introduction, the Company's products have in the past contained
software errors that were discovered after commercial introduction. For example,
AdServer 3.0, although functional when released, had a number of software errors
that affected the product's performance, reliability and compatibility with
certain operating environments. As a result of such errors, the Company had to
allocate significant customer support resources to addressing such errors. There
can be no assurance that, despite testing by the Company and by current and
potential customers, serious defects and errors or performance problems will not
be found in new versions or enhancements of the Company's current products after
commencement of commercial shipments. Any future software defects or errors or
performance problems discovered after delivery of the Company's products could
result in the re-allocation of valuable resources away from customer service and
product development or lost revenues or delays in customer acceptance of the
Company's products and would be detrimental to the Company's market reputation,
which, in each case, could have a material adverse effect on the Company's
business, results of operations or financial condition. The Company's customers
and potential customers may be particularly sensitive

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<PAGE>
to any such software defects or errors or performance problems given that a
failure of a Web site's advertising management and delivery system often
immediately and directly results in lost or reduced advertising revenue during
such failure. See "Business--Product Development."

Since the Company's products are used by its customers for advertising
management, errors or defects or performance problems in the Company's products,
misuse of the Company's products or other potential problems within or out of
the Company's control that may arise from the use of the Company's products
could result in financial or other damages to the Company's customers. Such
customers could seek damages from the Company for any such losses, which, if
successful, could have a material adverse effect on the Company's business,
results of operations or financial condition. Additionally, although the
Company's license agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential claims as well as any
liabilities arising from such claims, such provisions may not effectively
protect the Company against such claims and the liability and costs associated
therewith as a result of existing or future federal, state or local laws or
ordinances or unfavorable judicial decisions. Although the Company has not
experienced any product liability claims to date, there can be no assurance that
the Company will not be subject to such claims in the future. Because the
Company's software products are used in business-critical applications, a
successful product liability claim brought against the Company could have a
material adverse effect on the Company's business, results of operations or
financial condition. Moreover, defending such a suit, regardless of its merits,
could entail substantial expense and require the time and attention of key
management personnel, either of which could have a material adverse effect on
the Company's business, results of operations or financial condition.

DEPENDENCE ON PROPRIETARY RIGHTS; RISK OF INFRINGEMENT

The Company's success and ability to compete are dependent in part upon its
proprietary technology. The Company relies on trademark, trade secret and
copyright law to protect its technology. Legal standards relating to the
validity, enforceability and scope of protection of certain proprietary rights
in Internet-related industries are uncertain and still evolving, and no
assurance can be given as to the future viability or value of any proprietary
rights of the Company or other companies within the industry. Furthermore, the
Company believes that factors such as the technological and creative skills of
its personnel, new product developments, product enhancements, name recognition
and reliable product maintenance are more essential to establishing and
maintaining its technology leadership position than the legal protection of its
technology. There can be no assurance that others will not develop technologies
that are similar or superior to the Company's technology.

The Company generally provides its products to end users under nonexclusive,
nontransferable licenses during the term of the agreement, which is usually in
perpetuity. Under the general terms and conditions of the Company's standard
license agreements, the licensed software may be used pursuant to NetGravity's
published licensing practices. The source code for the Company's proprietary
software is protected both as a trade secret and as a copyrighted work. In
addition, some of the Company's agreements with its customers contain provisions
requiring release of source code for limited, non-exclusive use by the customer
in the event that the Company ceases to do business or the Company fails to
support its products. This release of source code may increase the likelihood of
misappropriation by third parties. The Company's policy is to enter into
confidentiality and intellectual property assignment agreements with its
employees, consultants, and vendors and generally to control access to and
distribution of its software, documentation, and other proprietary information.
Notwithstanding these precautions, it may be possible for a third party to copy
or otherwise obtain and use the Company's software or other proprietary
information without authorization or to develop similar software independently.
Policing unauthorized use of the Company's products is difficult, particularly
because the global nature of the Internet makes it difficult to control the
ultimate destination or security of software or other data transmitted. The laws
of other countries may afford the Company little or no effective protection of
its intellectual property. There can be no assurance that the steps taken by the
Company will prevent misappropriation of its technology or that agreements
entered into for that purpose will be enforceable. In addition, litigation may
be necessary in the future to enforce the Company's intellectual property
rights, to protect the Company's trade secrets, to determine the validity and
scope of the proprietary rights

17
<PAGE>
of others, or to defend against claims of infringement or invalidity. Such
litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could have a material adverse
effect on the Company's business, results of operations or financial condition.

Although the Company believes that its products do not infringe the
proprietary rights of third parties, there can be no assurance that the
Company's products or business activities will not infringe upon the patent or
other proprietary rights of others, or that other parties will not assert or
prosecute infringement or invalidity claims (or claims for indemnification
resulting from infringement claims) against the Company or that any such
assertions or prosecutions will not materially adversely affect the Company's
business, results of operations or financial condition. From time to time the
Company has been, and expects to continue to be, subject to claims in the
ordinary course of its business, including claims of alleged infringement of the
copyrights, trade secrets and other intellectual property rights of third
parties by the Company. Although such claims have not resulted in litigation or
had a material adverse effect on the Company's business, results of operations
or financial condition, such claims and any resultant litigation, should they
occur, could subject the Company to significant liability for damages and could
result in invalidation of the Company's proprietary rights and, even if not
meritorious, could be time-consuming and expensive to defend, and could result
in the diversion of management time and attention, any of which could have a
material adverse effect on the Company's business, results of operations or
financial condition. If any such claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that under
such circumstances, a license would be available on reasonable terms or at all.

GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES

Due to concerns arising in connection with the increasing popularity and use
of the Web, a number of laws and regulations may be adopted covering issues such
as user privacy, pricing, characteristics, acceptable content, taxation and
quality of products and services. Such legislation could dampen the growth in
use of the Web generally and decrease the acceptance of the Web as a
communications and commercial medium, which could have a material adverse effect
on the Company's business, results of operations or financial condition. In
addition, because the growing popularity and use of the Web has burdened the
existing telecommunications infrastructure, many areas with high Web use have
begun to experience interruptions in phone service. Certain local telephone
carriers have petitioned governmental bodies to regulate Internet service
providers ("ISPs") and online service providers ("OSPs") in a manner similar to
long distance telephone carriers and to impose access fees on ISPs and OSPs. If
any of these petitions or the relief sought therein is granted, the costs of
communicating on the Web could increase substantially, potentially adversely
affecting the growth in use of the Web which could in turn decrease the demand
for the Company's products or otherwise have a material adverse effect on the
Company's business, results of operations or financial condition. Further, due
to the global nature of the Web, it is possible that multiple federal, states or
foreign jurisdictions might attempt to concurrently and inconsistently regulate
the transmissions of the Company or its customers or levy sales or other taxes
relating to the Company's activities. There can be no assurance that violations
of local laws will not be alleged or charged by state or foreign governments,
that the Company might not unintentionally violate such laws or that such laws
will not be modified, or new laws enacted, in the future. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, libel and personal privacy is uncertain. Any of the foregoing
developments could have a material adverse effect on the Company's business,
results of operations or financial condition. See "Privacy Concerns; Dependence
on Cookies for Ad Targeting; Security."

YEAR 2000 COMPLIANCE

18
<PAGE>
Company's AdServer family of software products is not yet fully Year 2000
compliant. While the Company believes that date code fields in other components
of its products are Year 2000 compliant, there can be no assurance that all or
any of such date code fields are Year 2000 compliant. The Company is currently
taking steps to make the date code fields in the user interface portion of its
AdServer products Year 2000 compliant, which action the Company intends to
complete by the end of June 1998. However, there can be no assurance that the
Company will be successful in making its products fully Year 2000 compliant by
the end of June 1998 or thereafter or that the actual internal and external
personnel and resources required to achieve such compliance will not materially
exceed the Company's current estimates. Any failure by the Company to make its
products Year 2000 compliant could result in a decrease in sales of the
Company's products, deferral of revenue recognition on contracts in which the
Company has warranted (or may in the future warrant) compliance with Year 2000
requirements, an increase in the allocation of resources to address Year 2000
problems of the Company's customers without additional revenue commensurate with
such dedication of resources, or an increase in litigation costs relating to
losses suffered by the Company's customers due to such Year 2000 problems. In
addition, the Company believes that the purchasing patterns of customers and
potential customers may be impacted by Year 2000 issues. Further, many companies
are expending significant resources to correct or patch their current software
systems. These expenditures of funds may result in reduced funds available to
purchase software products such as those offered by the Company. The occurrence
of any of such events could have a material adverse effect on the Company's
business, results of operations or financial condition.

As of March 31, 1998, in compliance with SOP 97-2, the Company had deferred
approximately $128,000 of otherwise recognizable revenue from contracts in which
the Company has warranted that its products will be made Year 2000 compliant,
and the Company will not be able to recognize any such deferred revenue until it
meets its warranty obligations. In addition, if additional deferred revenue from
contracts containing such warranty obligations becomes otherwise recognizable
before the Company's products are made Year 2000 compliant, such additional
revenue would also continue to be deferred until such warranty obligations are
met. The occurrence of any such extended deferral could have a material adverse
effect on the Company's business, results of operations or financial condition.
Finally, the Company has conducted a preliminary review of its internal computer
systems to identify the systems that could be affected by the Year 2000 issue
and to develop a plan to resolve the issue. Based on this preliminary review,
the Company has determined that certain of its software systems are not
currently Year 2000 compliant, and that certain of its computer hardware may not
be able to be made Year 2000 compliant. If the higher incremental costs of
making such software and hardware Year 2000 compliant exceed the Company's
preliminary estimates, the Company's business results of operations or financial
condition could be materially adversely effected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Overview" and
Note 1 of Notes to Consolidated Financial Statements.

UNCERTAIN NEED AND AVAILABILITY OF ADDITIONAL FUNDING

Although the Company believes that, following the offering, its cash
reserves and cash flows from operations will be adequate to fund the Company's
operations for at least the next 12 months, there can be no assurance that such
sources will be adequate or that additional funds will not be required either
during or after such 12 month period. No assurance can be given that additional
financing will be available or that, if available, it will be available on terms
favorable to the Company or its stockholders. If additional funds are raised
through the issuance of equity securities, the percentage ownership of the then
current stockholders of the Company will be reduced and such equity securities
may have rights, preferences or privileges senior to those of the holders of the
Company's Common Stock. If adequate funds are not available to satisfy either
short or long-term capital requirements, the Company may be required to limit
its operations significantly. The Company's capital requirements are dependent
upon many factors, including, but not limited to, the rate at which the Company
develops and introduces its products, the market acceptance and competitive
position of such products, the level of promotion and advertising required to
market such products and attain a competitive position in the marketplace, and
the response of competitors to the Company's products. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Capital
Stock--Preferred Stock."

19
<PAGE>
CONTROL BY EXISTING STOCKHOLDERS

Immediately after the closing of this offering, 52.1% of the outstanding
Common Stock (50.5% if the Underwriter's over-allotment option is exercised in
full) will be beneficially owned by the directors and executive officers of the
Company, together with certain entities affiliated with them. As a result, these
stockholders, if acting together, will be able to control substantially all
matters requiring approval by the stockholders of the Company, including the
election of all directors and approval of significant corporate transactions.
See "Principal and Selling Stockholders."

BENEFITS OF THE OFFERING TO EXISTING STOCKHOLDERS

The existing stockholders of the Company will recognize significant benefits
from this offering. These benefits include the creation of a public market for
the Company's Common Stock, which will afford existing stockholders the ability
to liquidate their investments, subject, in certain cases, to volume limitations
and other limitations and restrictions upon the sale of the Common Stock. See
"Shares Eligible For Future Sale." If the Underwriters' over-allotment option is
exercised, certain of the Company's stockholders will sell shares in this
offering. See "Principal and Selling Stockholders." As of March 31, 1998,
existing stockholders held 10,261,861 shares of Common Stock (on an as converted
basis) which shares were originally purchased from the Company at prices ranging
from $0.06 to $4.93 per share, with an aggregate consideration paid to the
Company of $18,173,115. Based on the initial public offering price of $9.00 per
share, after this offering (assuming no exercise of the Underwriters'
over-allotment option) the aggregate value of the shares owned by the Company's
existing stockholders will be $92,356,749, reflecting unrealized gains of
$74,183,634 over the aggregate consideration paid to the Company for such shares
(assuming that such shares continue to be held by the original purchasers
thereof). Further, as of March 31, 1998, there were 1,304,029 shares of Common
Stock issuable upon exercise of outstanding options and 27,650 shares of Common
Stock issuable upon exercise of outstanding warrants, at a weighted average
exercise price of $0.27 and $0.22 per share, respectively. Such options and
warrants have an aggregate potential realizable gain of $11,384,173 and
$242,767, respectively. Accordingly, after this offering, existing stockholders
and optionholders will have substantial unrealized gains on their retained
shares and options. See "Dilution" and "Principal and Selling Stockholders."

ANTITAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS, BYLAWS AND DELAWARE LAW

Pursuant to the terms of the Company's Amended and Restated Certificate of
Incorporation, as amended, the Board of Directors has the authority to issue up
to 5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the Company's stockholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future (including, but not limited to, preferences by the Preferred Stock
with respect to the payment of dividends and upon liquidation, dissolution or
winding up). The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. The Company
has no present plans to issue shares of Preferred Stock. Further, certain
provisions of the Company's Amended and Restated Certificate of Incorporation,
as amended, and of the Amended and Restated Bylaws and of Delaware law could
delay or make difficult a merger, tender offer or proxy contest involving the
Company. See "Description of Capital Stock--Preferred Stock" and "--Antitakeover
Effects of Provisions of Certificate of Incorporation, Bylaws and Delaware Law."

Section 203 of the General Corporation Law of the State of Delaware, which
is applicable to the Company, prohibits certain business combinations with
certain stockholders for a period of three years after they acquire 15% or more
of the outstanding voting stock of a corporation. See "Description of Capital
Stock--Effect of Delaware Antitakeover Statute."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of significant amounts of Common Stock in the public market after the
offering or the perception that such sales will occur could materially and
adversely affect the market price of the Common Stock or the future

20
<PAGE>

ability of the Company to raise capital through an offering of its equity
securities. Of the 13,257,210 shares of Common Stock to be outstanding upon the
closing of the offering, the 3,000,000 shares offered hereby will be eligible
for immediate sale in the public market without restriction unless the shares
are purchased by "affiliates" of the Company within the meaning of Rule 144
promulgated under the Securities Act of 1933, as amended (the "Securities Act").
The remaining 10,257,210 shares of Common Stock held by existing stockholders
upon the closing of the offering are "restricted securities" as that term is
defined in Rule 144 under the Securities Act. Restricted securities may be sold
in the public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act. The Company's directors and officers and certain of its stockholders have
agreed that they will not sell, directly or indirectly, any Common Stock without
the prior consent of the representatives of the Underwriters for a period of 180
days from the date of this Prospectus. Subject to these lock-up agreements and
the provisions of Rules 144, 144(k) and 701, additional shares will be available
for sale in the public market (subject in the case of shares held by affiliates
to compliance with certain volume restrictions) as follows: (i) 34,322 shares
will be eligible for immediate sale on the date of this Prospectus, (ii) an
additional 31,929 shares will be eligible for sale beginning on the date 90 days
after the date of this Prospectus, (iii) an additional 7,582,325 shares will be
eligible for sale upon the expiration of lock-up agreements 180 days after the
date of this Prospectus and (iv) thereafter, the remaining 2,608,634 shares will
be eligible for sale (in some cases, subject to volume limitations) from time to
time after the one-year holding period required by Rule 144 has elapsed. In
addition, there are outstanding options to purchase 1,723,441 shares of Common
Stock which will be eligible for sale in the public market from time to time
subject to vesting and the expiration of lock-up agreements. In addition,
certain stockholders, representing approximately 9,305,070 shares of Common
Stock, and certain optionholders, with respect to an aggregate of 113 shares of
Common Stock issuable upon the exercise of stock options, have the right,
subject to certain conditions, to include their shares in future registration
statements relating to the Company's securities and/or to cause the Company to
register certain shares of Common Stock owned by them.

After the date of this Prospectus, the Company intends to file a Form S-8
registration statement under the Securities Act to register all shares of Common
Stock issuable under the Company's 1995 Stock Option Plan, 1998 Stock Plan, 1998
Employee Stock Purchase Plan and 1998 Directors' Option Plan. Such registration
statement is expected to become effective immediately upon filing, and shares
covered by that registration statement will thereupon be eligible for sale in
the public markets, subject to certain lock-up agreements and, in the case of
affiliates of the Company, Rule 144 volume limitations. See
"Management--Employee Benefit Plans," "Description of Capital
Stock--Registration Rights of Certain Holders," "Shares Eligible for Future
Sale" and "Underwriting."

NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY

Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or be sustained after this offering. The initial
public offering price has been determined by negotiations among the Company and
the representatives of the Underwriters based on several factors and may not be
indicative of the future market price of the Common Stock after this offering.
The market price of the Company's Common Stock is likely to be highly volatile
and may be subject to significant fluctuations in response to actual or
anticipated variations in quarterly operating results and other factors, such as
announcements of technological innovations, new products or new contracts by the
Company or its competitors, conditions and trends in the software and other
technology industries, adoption of new accounting standards affecting the
software industry, changes in earning estimates or recommendations by securities
analysts, general market conditions or other events. In addition, the stock
market has also experienced extreme volatility that has particularly affected
the market prices of equity securities of many high technology companies and
that has often been unrelated or disproportionate to the operating performance
of such companies. Broad market fluctuations, as well as economic conditions
generally and in the software industry specifically, may result in a substantial
decline in the market price of the Company's Common Stock. There can be no
assurance that the market price for the Company's Common Stock will not decline
below the initial public offering price. In the past, following periods of
volatility in the market price of a particular company's securities, securities
class action litigation has often been brought against that company. There can
be no assurance that such litigation will not occur

21
<PAGE>
in the future with respect to the Company. Such litigation could result in
substantial costs and a diversion of management's attention and resources, which
could have a material adverse effect upon the Company's business, operating
results or financial condition. See "Underwriting."

DILUTION; DIVIDEND POLICY

Investors participating in this offering will incur immediate and
substantial dilution of net tangible book value per share of $6.94 from the
initial public offering price and may incur additional dilution upon the
exercise of outstanding stock options. See "Dilution."

The Company has never paid or declared any cash dividends on the Common
Stock or other securities and intends to retain any future earnings to finance
the development and expansion of its business. The Company does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future.
Additionally, the Company's debt facilities contain covenants that restrict the
Company's ability to pay cash dividends. See "Dividend Policy."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby are estimated to be approximately $23,810,000
(approximately $25,902,500 if the Underwriters' over-allotment option is
exercised in full) at the initial public offering price of $9.00 per share and
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company.

The primary purposes of this offering are to create a public market for the
Common Stock, to facilitate future access to public markets and to obtain
additional working capital. The Company expects to use the net proceeds of this
offering for working capital and other general corporate purposes, capital
expenditures and repayment of certain indebtedness. In particular, the Company
intends to repay three outstanding notes payable which totaled $1,745,000 at
March 31, 1998. One of such notes, in the amount of $655,000, which bears
interest at the Company's bank's prime rate (8.50% as of December 31, 1997) plus
0.75%, matured on May 5, 1998, and the Company is currently negotiating an
extension or renewal with the lender. The two other notes in the amounts of
$524,000 and $566,000, respectively, mature on June 15, 2000 and bear interest
at the prime rate of the Company's bank. See Note 3 of Notes to Consolidated
Financial Statements. The Company expects to use approximately $2.0 million of
such proceeds for capital expenditures during 1998, particularly in connection
with the Company's expansion of its California, New York and Asia facilities.
Further, the Company intends to use a portion of the net proceeds to fund
operating expenses related to entering new markets for the Company's products
and services, increasing research and development spending, increasing its sales
and marketing operations, developing new distribution channels, improving its
operational and financial systems and broadening its customer support
capabilities. A portion of the net proceeds may also be used for the acquisition
of businesses, products and technologies that are complementary to those of the
Company. The Company has no present plans, agreements or commitments and is not
currently engaged in any negotiations with respect to any such transactions.
Pending such uses, the net proceeds of this offering will be invested in
investment-grade, interest-bearing securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."

In the event that the Underwriters' over-allotment option is exercised, the
Company will not receive any proceeds from the sale of the shares of Common
Stock offered by the Selling Stockholders.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its capital stock.
The Company currently expects to retain future earnings, if any, for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future. The Company's debt facilities contain
restrictive covenants that limit the Company's ability to pay cash dividends or
make stock repurchases without the prior written consent of the lender. See
Notes 3 and 5 of Notes to Consolidated Financial Statements.

22
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company as of March
31, 1998, (i) on an actual basis, (ii) on a pro forma basis to reflect (A) the
filing of an amendment to the Company's Amended and Restated Certificate of
Incorporation to provide for authorized capital stock of 50,000,000 shares of
Common Stock and 5,000,000 shares of undesignated Preferred Stock and (B) the
conversion of all outstanding shares of Preferred Stock into 6,219,566 shares of
Common Stock immediately prior to the closing of this offering and (iii) on such
pro forma basis as adjusted to reflect the sale by the Company of 3,000,000
shares of Common Stock offered hereby at the initial public offering price of
$9.00 per share and the application by the Company of the estimated net proceeds
therefrom, after deducting underwriting discounts and commissions and estimated
offering expenses. See "Use of Proceeds." The capitalization information set
forth in the table below is qualified by the more detailed Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus and
should be read in conjunction with such Consolidated Financial Statements and
Notes.

<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------

<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................................... $ 6,318 $ 6,318 $ 28,383
---------- ----------- -----------
---------- ----------- -----------
Notes payable, less current portion......................................... 606 606 --
Stockholder's equity (1):
Convertible preferred stock, $0.001 par value; 26,540,194 shares
authorized; 12,600,525 shares issued and outstanding, actual; 5,000,000
shares authorized, no shares issued and outstanding, pro forma and pro
forma as adjusted........................................................ 13 -- --
Common stock, $0.001 par value; 35,000,000 shares authorized, 4,042,295
shares issued and outstanding, actual; 50,000,000 shares authorized,
10,261,861 shares outstanding, pro forma; 50,000,000 shares authorized,
13,261,861 shares issued and outstanding, pro forma as adjusted.......... 4 10 13
Additional paid-in capital.................................................. 19,859 19,866 43,673
Deferred stock compensation................................................. (1,813) (1,813) (1,813)
Accumulated deficit......................................................... (14,504) (14,504) (14,504)
---------- ----------- -----------
Total stockholders' equity.............................................. 3,559 3,559 27,369
---------- ----------- -----------
Total capitalization.................................................. $ 4,165 $ 4,165 $ 27,369
---------- ----------- -----------
---------- ----------- -----------
</TABLE>

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

(1) Excludes as of March 31, 1998: (i) 1,304,029 shares of Common Stock issuable
upon exercise of options outstanding under the Company's 1995 Stock Option
Plan at a weighted average exercise price of $0.27 per share and 383,928
shares of Common Stock reserved for future issuance thereunder and (ii)
27,650 shares of Common Stock issuable upon exercise of outstanding warrants
at a weighted average exercise price of $0.22 per share. Does not include:
(i) 419,412 shares of Common Stock issuable upon exercise of outstanding
options granted under the Company's 1995 Stock Option Plan in April 1998 and
(ii) an aggregate of 2,400,000 shares of Common Stock reserved for future
issuance after March 31, 1998 under the Company's 1998 Stock Plan, 1998
Employee Stock Purchase Plan and 1998 Director Option Plan. See
"Management--Employee Benefit Plans" and Note 5 of Notes to Consolidated
Financial Statements.

23
<PAGE>
DILUTION

The pro forma net tangible book value of the Company as of March 31, 1998,
after giving effect to the conversion of all outstanding shares of Preferred
Stock into Common Stock, was $3,559,000 or $0.35 per share of Common Stock. Pro
forma net tangible book value per share represents the Company's total tangible
assets less total liabilities, divided by the number of outstanding shares of
Common Stock on a pro forma basis. After giving effect to the sale of 3,000,000
shares of Common Stock offered by the Company hereby at the initial public
offering price of $9.00 per share and the application by the Company of the
estimated net proceeds therefrom, after deducting the underwriting discounts and
commissions and estimated offering expenses, the Company's pro forma net
tangible book value at March 31, 1998 would have been $27,369,000 or $2.06 per
share of Common Stock. This represents an immediate increase in pro forma net
tangible book value of $1.71 per share to existing stockholders and an immediate
dilution in pro forma net tangible book value of $6.94 per share to new
investors purchasing shares of Common Stock in this offering. The following
table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share...................................... $ 9.00
Pro forma net tangible book value per share as of March 31, 1998........... $ 0.35
Increase in pro forma net tangible book value per share attributable to new
investors................................................................. 1.71
---------
Pro forma net tangible book value per share after offering................... 2.06
---------
Dilution per share to new investors.......................................... $ 6.94
---------
---------
</TABLE>

The following table summarizes, on a pro forma basis as of March 31, 1998,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing stockholders and by new investors purchasing shares in this offering
(at the initial public offering price of $9.00 per share and before deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company).

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)........................... 10,261,861 77.4% $ 18,173,115 40.2% $ 1.77
New investors...................................... 3,000,000 22.6 $ 27,000,000 59.8 9.00
------------ ----- ------------- -----
Total.......................................... 13,261,861 100.0% $ 45,173,115 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>

The foregoing computations assume no exercise of the Underwriters'
over-allotment option or of any outstanding stock options after March 31, 1998.
As of March 31, 1998, there were (i) 1,304,029 shares of Common Stock issuable
upon exercise of options outstanding under the Company's 1995 Stock Option Plan
at a weighted average exercise price of $0.27 per share and 383,928 shares of
Common Stock reserved for future issuance thereunder and (ii) 27,650 shares of
Common Stock issuable upon exercise of outstanding warrants at a weighted
average exercise price of $0.22 per share. In addition, the foregoing
computations do not include 419,412 shares of Common Stock issuable upon
exercise of outstanding options granted under the Company's 1995 Stock Option
Plan in April 1998 and an aggregate of 2,400,000 shares of Common Stock reserved
for future issuance after March 31, 1998 under the Company's 1998 Stock Plan,
1998 Employee Stock Purchase Plan and 1998 Director Option Plan. To the extent
that any shares are issued upon exercise of options, warrants or rights that are
presently outstanding or to be granted in the future, or reserved for future
issuance under the Company's stock plans, there will be further dilution to new
investors. See "Management--Employee Benefit Plans" and Note 5 of Notes to
Consolidated Financial Statements.

- ---------

(1) If the Underwriters' over-allotment option is exercised in full, sales by
the Selling Stockholders in this offering will reduce the number of shares
of Common Stock held by existing stockholders to 10,061,861 or approximately
74.5% of the total shares of Common Stock outstanding after this offering
and will increase the number of shares held by new investors to 3,450,000 or
approximately 25.5% of the total shares of Common Stock outstanding after
this offering. See "Principal and Selling Stockholders."

24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below for the period from
September 5, 1995 (inception) through December 31, 1995 and for, and as of the
end of, each of the years in the two-year period ended December 31, 1997, are
derived from the consolidated financial statements of NetGravity, Inc. and its
subsidiary, which consolidated financial statements have been audited by KPMG
Peat Marwick LLP, independent certified public accountants, and are included
elsewhere in this Prospectus. The consolidated balance sheet data as of December
31, 1995 is derived from audited consolidated financial statements of the
Company that are not included herein. The consolidated statements of operations
data for the three-month periods ended March 31, 1997 and 1998 and the
consolidated balance sheet data at March 31, 1998 are derived from unaudited
consolidated financial statements included elsewhere in this Prospectus. In the
opinion of management, the unaudited consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the Company's results of operations for
such periods and financial condition at such dates. The results of operations
for the three months ended March 31, 1998 are not necessarily indicative of the
results to be expected for the full year or future periods. The selected
consolidated financial data set forth below is qualified in its entirety by, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER THREE MONTHS ENDED
SEPTEMBER 5, 1995 31, MARCH 31,
(INCEPTION) TO -------------------- --------------------
DECEMBER 31, 1995 1996 1997 1997 1998
----------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses................................... $ -- $ 1,262 2,901 $ 710 $ 775
Software upgrades................................... -- 107 1,123 185 402
Consulting and support.............................. -- 570 2,334 458 826
------- --------- --------- --------- ---------
Total revenues.................................... -- 1,939 6,358 1,353 2,003
------- --------- --------- --------- ---------
Cost of revenues:
Cost of software licenses........................... -- -- 76 7 15
Cost of consulting and support...................... -- 702 2,496 240 1,158
------- --------- --------- --------- ---------
Total cost of revenues............................ -- 702 2,572 247 1,173
------- --------- --------- --------- ---------
Gross profit...................................... -- 1,237 3,786 1,106 830
Operating costs and expenses:
Research and development............................ 39 1,764 3,033 678 996
Selling and marketing............................... 21 2,839 6,073 1,341 1,956
General and adminstrative........................... 131 1,315 1,552 241 708
------- --------- --------- --------- ---------
Total operating costs and expenses................ 191 5,918 10,658 2,260 3,660
------- --------- --------- --------- ---------
Loss from operations.............................. (191) (4,681) (6,872) (1,154) (2,830)
Other income (expense), net........................... (4) 54 (10) (6) 30
------- --------- --------- --------- ---------
Net loss.......................................... $ (195) $ (4,627) $ (6,882) $ (1,160) $ (2,800)
------- --------- --------- --------- ---------
------- --------- --------- --------- ---------
Basic and diluted net loss per share.................. $ (0.19) $ (2.19) $ (2.46) $ (0.55) $ (0.93)
Shares used in per share calculation(1)............... 1,006 2,111 2,799 2,121 3,025
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- MARCH 31,
1995 1996 1997 1998
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)............................................ $ (69) $ (221) $ 2,222 $ 2,682
Total assets......................................................... 486 3,159 9,887 11,832
Notes payable, less current portion.................................. -- 682 727 606
Accumulated deficit.................................................. (195) (4,822) (11,704) (14,504)
Total stockholders' equity (deficit)................................. (12) (164) 2,851 3,559
</TABLE>

- ---------

(1) See Note 1 of Notes to Consolidated Financial Statements.

25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY CONTAINS FORWARD-LOOKING
STATEMENTS RELATING TO THE FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF
THE COMPANY, WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE
SET FORTH UNDER "RISK FACTORS," "BUSINESS" AND ELSEWHERE IN THIS PROSPECTUS.

OVERVIEW

NetGravity, Inc. is the leading provider of software solutions for online
advertising and direct marketing. The Company develops, markets and supports its
mission-critical AdServer family of software products which, together with its
extensive consulting and support capabilities, is designed to enhance the
effectiveness and efficiency of the entire advertising and direct marketing
supply chain. From inception (September 5, 1995) to December 31, 1995 (the
"Inception Period"), the Company was in the development stage, and its
activities primarily related to raising capital, recruiting personnel,
conducting research and development activities, purchasing operating assets, and
building the NetGravity identity. From January 1996 through March 31, 1998, the
Company began shipping products, built a consulting and support organization,
continued to invest in research and development, built domestic and
international sales organizations, expanded its marketing activities and
developed its general and administrative infrastructure.

To date, the Company has generated all of its revenues from the license and
related upgrade, consulting and support of its AdServer family of software
products. In March 1996, the Company's initial release, AdServer 1.0, became
generally available. Subsequently, the Company has had two major releases of its
AdServer products: AdServer 2.0 in October 1996 and AdServer 3.0 in June 1997.
Revenues from software licenses in any given period are generally attributable
to the sale of the most recent version of the Company's products, and the
Company generally discontinues marketing older versions upon new version
introductions. The Company believes that its current AdServer family of software
products and software products in development, together with the related
consulting and support services, will continue to account for substantially all
of its revenues for the foreseeable future.

The Company records an account receivable and deferred revenue upon shipment
and invoicing of a software license to a customer. The Company recognizes
software license revenue upon completion of the product installation provided
that no significant vendor obligations exist, which the Company's management has
generally determined to occur at the point in time at which the customers begin
"serving ads" utilizing the Company's products. This methodology has been
applied consistently for all software license revenue since the inception of the
Company. A portion of the initial software product license fee is attributed to
the customer's right to receive at no additional charge significant software
upgrades released during the subsequent twelve months. Revenues attributable to
significant software upgrades are deferred and recognized ratably over the
period covered by the software license agreement, which is generally one year.
Revenue from consulting services are recognized as the services are performed.
Customer support revenue is deferred and recognized ratably over the period
covered by the customer support agreement, which is generally one year. In
October 1997, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 97-2, SOFTWARE REVENUE RECOGNITION, which the
Company adopted, effective January 1, 1998. Such adoption had no material effect
on the Company's methods of recognizing revenue from its software licenses,
software upgrades, and consulting and support activities. See Note 1 of Notes to
Consolidated Financial Statements.

Pricing for AdServer products is based on the number of copies licensed to
the customer, scaled to provide discounts based on the overall size of the
system being licensed. Initial license sales include a one-year subscription
entitling the licensee to free upgrades of major releases of the product. The
software upgrade revenue is broken out separately for every license in
accordance with SOP 97-2, based on vendor specific objective evidence for the
upgrade element, and the revenue allocated to the upgrade element is recognized
over the agreement term. For

26
<PAGE>
subsequent years, customers may subscribe on an annual basis for the right to
receive major product upgrades. The cost to subscribe to the upgrade program is
based on a percentage of the list price of software the customer has licensed.
Annual support contracts, which are generally purchased in conjunction with the
licensing of a product, are sold separately from the initial license for a fee,
which is also based on a percentage of the list price of the software. Support
packages typically include non-major product releases, on-line support and
telephone support. Consulting revenues consist of implementation services and
training. Consulting is charged at a per diem rate or on a fixed fee basis for a
package of services.

The Company sells its products and services primarily through its direct
sales force and telesales organizations and maintains sales and support
organizations in North America, Europe and Asia Pacific. See Note 7 of Notes to
Consolidated Financial Statements. Indirect sales channels, including resellers
and web hosting providers, also sell the Company's products. Indirect channels
generally provide less revenue per license to the Company since the channel
partner usually receives discounts. Through March 31, 1998, revenues through
indirect channels have not been material.

The Company's business has grown from inception through March 31, 1998, with
total revenues increasing from $1.9 million in the year ended December 31, 1996
to $6.4 million in the year ended December 31, 1997 and $2.0 million in the
three months ended March 31, 1998. However the Company has experienced net
losses over this entire period, and as of March 31, 1998 had an accumulated
deficit of $14.5 million. The Company's loss from operations and net loss were
each $6.9 million in the year ended December 31, 1997 and $2.8 million for the
three months ended March 31, 1998. Loss from operations exceeded total revenues
in each of such periods. These losses resulted from significant costs incurred
in the development and sale of the Company's products and services. During this
period, the number of Company employees increased from 10 at December 31, 1995
to 94 at March 31, 1998. The Company currently expects to expand its sales and
marketing operations, to continue international expansion, to increase its
investment in product development, to further expand its consulting and support
organizations and to improve its internal operating and financial infrastructure
in support of the Company's business plan, all of which will increase operating
expenses. As a result, the Company expects to incur additional losses and
continued negative cash flow from operations for the foreseeable future, and
such losses are anticipated to increase significantly from current levels.

The Company has recorded deferred stock compensation expense of $1,784,000
for the year ended December 31, 1997 and $390,000 for the three months ended
March 31, 1998 as a result of stock options granted during 1997 and the first
three months of 1998. In addition, the Company may record up to $1.7 million in
additional deferred stock compensation expense for options granted in April and
May 1998. The Company will determine how much additional deferred stock
compensation expense to record in connection with the preparation of its
financial statements for the quarter ending June 30, 1998. Amortization of
deferred stock compensation expense of approximately $115,000 was recognized in
1997, and $246,000 was recognized in the three months ended March 31, 1998.
Amortization of deferred stock compensation expense is allocated to costs of
consulting and support and to all operating expense lines identified on the
statement of operations. Deferred stock compensation expense is amortized over
the life of the options, generally four years. As a result, amortization of
deferred stock compensation expense will adversely impact the Company's
operating results for the next four years.

The Company believes that period-to-period comparisons of its operating
results are not meaningful and should not be relied upon as predictive of future
performance. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in the early stage
of development,

27
<PAGE>
particularly companies in new and rapidly evolving markets. There can be no
assurance that the Company will be successful in addressing such risks and
difficulties. In addition, although NetGravity has experienced significant
revenue growth recently, there can be no assurance that the Company will
increase or even sustain its current level of revenues or that the Company will
achieve profitability in the future. See "Risk Factors--Limited Operating
History; History of Losses; Anticipated Continued Losses," "--Potential
Fluctuations in Quarterly Operating Results; Seasonality; Possible Price
Erosion" and "--Management of Growth; Risks of Potential Future Acquisitions."

RESULTS OF OPERATIONS

The following table sets forth consolidated statement of operations data for
the periods indicated as a percentage of total revenues:

<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
---------------- ----------------
1996 1997 1997 1998
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Software licenses......................................... 65.1% 45.6% 52.5% 38.7%
Software upgrades......................................... 5.5 17.7 13.7 20.1
Consulting and support.................................... 29.4 36.7 33.8 41.2
------- ------- ------- -------
Total revenues.......................................... 100.0 100.0 100.0 100.0
------- ------- ------- -------
Cost of revenues(1):
Cost of software licenses(2).............................. -- 1.2 0.5 0.8
Cost of consulting and support(3)......................... 36.2 39.3 17.7 57.8
------- ------- ------- -------
Total cost of revenues.................................. 36.2 40.5 18.2 58.6
------- ------- ------- -------
Gross margin............................................ 63.8 59.5 81.7 41.4
Operating costs and expenses:
Research and development.................................. 91.0 47.7 50.1 49.7
Selling and marketing..................................... 146.4 95.5 99.1 97.7
General and administrative................................ 67.8 24.4 17.8 35.3
------- ------- ------- -------
Total operating costs and expenses...................... 305.2 167.6 167.0 182.7
------- ------- ------- -------
Loss from operations.................................... (241.4) (108.1) (85.3) (141.3)
Other income (expense), net................................. 2.8 (0.2) (0.4) 1.5
------- ------- ------- -------
Net loss................................................ (238.6)% (108.2)% (85.7)% (139.8)%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>

- ---------

(1) There are no material costs of revenues associated with software upgrades.

(2) As a percentage of software licenses revenues, cost of software licenses was
0.0%, 2.6%, 1.0% and 1.9% in the years ended December 31, 1996 and 1997 and
the three months ended March 31, 1997 and 1998, respectively.

(3) As a percentage of consulting and support revenues, cost of consulting and
support was 123.2%, 106.9%, 52.4% and 140.2% in the years ended December 31,
1996 and 1997 and the three months ended March 31, 1997 and 1998,
respectively.

REVENUES

The Company's total revenues increased from $1.4 million in the three months
ended March 31, 1997 to $2.0 million in the three months ended March 31, 1998.
Total revenues increased from $1.9 million in 1996 to $6.4 million in 1997. The
Company had no revenues in the Inception Period. International revenues,
primarily comprised of export revenues, as a percentage of total revenues were
0% and 29.3% in the three months ended

28
<PAGE>
March 31, 1997 and March 31, 1998, respectively; and 0% and 7.7% in 1996 and
1997, respectively. Growth in international revenues in all periods was
attributable to expanded sales and marketing efforts overseas and the opening of
a European regional office in April 1997. The increase in international revenues
in the last three months of 1997 and the first three months of 1998 more than
offset a decline in North American revenues in each of those
quarters. The decline in North American revenues in those periods was primarily
attributable to increased focus on international revenues, dedication of
resources in North America to implementation issues associated with the release
of AdServer 3.0 and insufficient North American sales personnel. Sales to
customers in each of England, Germany and Japan accounted for more than 10% of
the Company's total international revenues in both 1997 and the three months
ended March 31, 1998, and sales to customers in each of Australia and France
accounted for more than 10% of the Company's total international revenues in
1997. No customer, domestic or international, accounted for more than 10% of
total revenues in the three months ended March 31, 1997 or 1998 or in the years
ended December 31, 1996 or 1997.

SOFTWARE LICENSES. Software licenses revenues increased from $710,000 in
the three months ended March 31, 1997 to $775,000 in the three months ended
March 31, 1998, and increased from $1.3 million in 1996 to $2.9 million in 1997.
The increase in each period was attributable to an increase in the number of
AdServer Enterprise licenses sold and the March 1997 introduction of AdServer
Network, a version of AdServer Enterprise designed to manage multi-site
advertising and direct marketing. The Company anticipates that revenues
attributable to licenses of its AdServer Network product will increase as a
percentage of total software licenses revenues in future periods. The percentage
of the Company's total revenues attributable to software licenses revenues
decreased from 52.5% in the three months ended March 31, 1997 to 38.7% in the
three months ended March 31, 1998, and decreased from 65.1% in 1996 to 45.6% in
1997. The decrease in each period as a percentage of total revenues was
primarily a result of increased demand for consulting services and the increased
number of customers participating in software upgrade and support plans. Because
software upgrades revenues and consulting and support revenues are, to a large
extent, a function of software licenses revenues, the Company's future operating
results will be substantially dependent on growth of software licenses revenues,
and the failure to increase software licenses revenues would likely have a
material adverse effect on the Company's business, results of operations and
financial condition.

SOFTWARE UPGRADES. Software upgrades revenues increased from $185,000 in
the three months ended March 31, 1997 to $402,000 in the three months ended
March 31, 1998, and increased from $107,000 in 1996 to $1.1 million in 1997. The
increase in each period was a result of software upgrades being provided to a
larger installed customer base, which more than offset a reduction in the
software upgrades pricing from 45% to 25% of the list price of the related
software license made in the last half of 1997. The number of NetGravity's
customers increased from approximately 105 at March 31, 1997 to approximately
230 at March 31, 1998 and increased from approximately 70 at December 31, 1996
to approximately 190 at December 31, 1997. The percentage of the Company's total
revenues attributable to software upgrades revenues increased from 13.7% in the
three months ended March 31, 1997 to 20.1% in the three months ended March 31,
1998, and from 5.5% in 1996 to 17.7% in 1997.

CONSULTING AND SUPPORT. Consulting and support revenues increased from
$458,000 for the three months ended March 31, 1997 to $826,000 for the three
months ended March 31, 1998, and increased from $570,000 in 1996 to $2.3 million
in 1997. The increase in each period was primarily as a result of the increased
demand for consulting services, expansion into Europe and Asia, the larger
installed customer base, and customers electing to renew their support program.
Consulting services contributed $231,000 and $415,000 to revenues in the three
months ended March 31, 1997 and 1998, respectively, and contributed $251,000 and
$1.2 million to revenues in 1996 and 1997, respectively. The percentage of the
Company's total revenues attributable to consulting and support revenues
increased from 33.8% for the three months ended March 31, 1997 to 41.2% for the
three months ended March 31, 1998, and increased from 29% in 1996 to 37% in
1997.

COST OF REVENUES

Gross margins decreased from 81.7% in the three months ended March 31, 1997
to 41.5% in the three months ended March 31, 1998 as a result of the increase in
consulting and support revenues as a percentage of total

29
<PAGE>
revenues and the increased staffing levels in the consulting and support
organizations. Gross margins decreased from 63.8% in 1996 to 59.5% in 1997.
There were no costs of revenues in 1995. There are no material costs of revenues
associated with software upgrades revenues.

COST OF SOFTWARE LICENSES. Cost of software licenses consists of royalties
paid to third parties for licensed technology. Cost of software licenses was
$7,000 and $15,000 in the three months ended March 31, 1997 and 1998,
respectively, and $0 and $76,000 in 1996 and 1997, respectively. As a percentage
of software licenses revenues, cost of software licenses was 1.0% and 1.9% in
the three months ended March 31, 1997 and 1998, respectively, and 0.0% and 2.6%
in 1996 and 1997, respectively.

COST OF CONSULTING AND SUPPORT. Cost of consulting and support consists
primarily of personnel-related costs incurred in providing consulting, support
and training to customers. The cost of consulting and support increased from
$240,000 in the three months ended March 31, 1997 to $1.2 million in the three
months ended March 31, 1998, and increased from $702,000 in 1996 to $2.5 million
in 1997. The increase in each period was primarily due to an increase in
personnel and related overhead, as the Company increased staff to meet customer
demand, and increased outside services and travel costs associated with the
increased volume of service provided by the consulting and support
organizations. Personnel and related overhead accounted for $196,000 and
$846,000 of cost of consulting and support in the three months ended March 31,
1997 and 1998, respectively, and accounted for $511,000 and $2.0 million of such
costs in 1996 and 1997, respectively. Outside services accounted for $4,000 and
$200,000 of cost of consulting and support in the three months ended March 31,
1997 and 1998, respectively, and accounted for $105,000 and $226,000 of such
costs in 1996 and 1997, respectively. Travel costs accounted for $40,000 and
$112,000 of cost of consulting and support in the three months ended March 31,
1997 and 1998, respectively, and accounted for $86,000 and $300,000 of such
costs in 1996 and 1997, respectively. The Company expects that the cost of
consulting and support will continue to increase in absolute dollar amounts in
future periods as the Company continues to hire additional consulting, training
and customer support personnel. Cost of consulting and support increased as a
percentage of consulting and support revenues from 52.4% in the three months
ended March 31, 1997 to 140.2% in the three months ended March 31, 1998 due to
new-hire expenses and other inefficiencies associated with quickly adding and
training numerous consulting and support personnel. The number of personnel in
the consulting and support organization increased from eight at March 31, 1997
to 26 at March 31, 1998. Cost of consulting and support as a percentage of
consulting and support revenues decreased from 123.2% in 1996 to 106.8% in 1997,
primarily due to better utilization of consulting and support personnel
associated with an increased customer base.

Gross margins may be impacted by the mix of products sold by the Company,
the mix of software licenses revenues, software upgrades revenues and consulting
and support revenues, the mix of international and North American revenues, and
the mix of distribution channels used by the Company. The Company typically
realizes higher gross margins on software upgrades revenues than on software
licenses revenues, substantially higher gross margins on software licenses
revenues than on consulting and support revenues, and higher gross margins on
direct sales than on indirect sales. Shifts in the mix of revenues towards lower
margin revenues or a greater percentage of sales through indirect channels would
adversely impact the Company's overall gross margin and could materially
adversely impact the Company's operating results. For example, when consulting
and support revenues increased as a percentage of total revenues from 33.8% for
the three months ended March 31, 1997 to 41.2% for the corresponding period of
1998, overall gross margins fell from 81.7% to 41.4%, in part due to this shift
in the mix of revenues. The effect of the shift in revenue mix was amplified by
an increase of the cost of consulting and support revenues as a percentage of
such revenues from 52.4% for the three months ended March 31, 1997 to 140.2% for
the corresponding period of 1998, which increased costs were largely
attributable to new-hire expenses and other inefficiencies associated with
quickly adding and training numerous new consulting and support personnel during
the three months ended March 31, 1998. There can be no assurance that such
adverse fluctuations in the mix of revenue or costs of revenues will not recur
in the future.

RESEARCH AND DEVELOPMENT

Research and development expenses consist primarily of compensation and
consulting expenses and related equipment. To date, the Company has not
capitalized any such development costs under Statement of Financial

30
<PAGE>
Accounting Standards ("SFAS") No. 86; all research and development costs have
been expensed as incurred. Research and development expenses increased from
$678,000 in the three months ended March 31, 1997 to $996,000 in the three
months ended March 31, 1998, and increased from $39,000 in the Inception Period
to $1.8 million in 1996 to $3.0 million in 1997. The increase in absolute
dollars in all periods was primarily due to increased personnel and related
overhead, and, to a lesser extent, outside services, associated with
enhancements of existing products and development of new products. Personnel and
related overhead accounted for $656,000 and $850,000 of research and development
expenses in the three months ended March 31, 1997 and 1998, respectively, and
accounted for $1.6 million and $2.7 million of such costs in 1996 and 1997,
respectively. Outside services accounted for $15,000 and $130,000 of research
and development expenses in the three months ended March 31, 1997 and 1998,
respectively, and accounted for $62,000 and $240,000 in 1996 and 1997,
respectively. Research and development costs decreased as a percentage of total
revenues from 50.1% in the three months ended March 31, 1997 to 49.7% in the
three months ended March 31, 1998, and decreased from 91.0% in 1996 to 47.7% in
1997. The Company believes that continued investment in research and development
is critical to attaining its strategic objectives and, as a result, expects
research and development expenses to increase significantly in absolute dollars
in future periods.

SELLING AND MARKETING

Selling and marketing expenses consist primarily of salaries, commissions,
travel expenses, advertising expenses, trade show expenses, seminars and costs
of marketing materials. Selling and marketing expenses increased from $1.3
million in the three months ended March 31, 1997 to $2.0 million in the three
months ended March 31, 1998, and increased from $21,000 in the Inception Period
to $2.8 million in 1996 to $6.1 million in 1997. The increase in absolute
dollars in each period was due primarily to the increase in compensation paid to
sales and marketing personnel (including commissions) and related overhead, and
increased travel costs associated with the Company's direct selling efforts.
Compensation paid to selling and marketing personnel and related overhead
accounted for $851,000 and $1.2 million of sales and marketing expenses in the
three months ended March 31, 1997 and 1998, respectively, and accounted for $1.6
million and $4.1 million of such costs in 1996 and 1997, respectively. Travel
costs accounted for $175,000 and $250,000 of selling and marketing costs in the
three months ended March 31, 1997 and 1998, respectively, and accounted for
$189,000 and $761,000 of such costs in 1996 and 1997, respectively. The balance
of selling and marketing expenses during all periods consisted primarily of
costs of development and implementation of the Company's marketing campaign
(including general brand promotion) and did not vary significantly between
comparable periods. Selling and marketing expenses decreased as a percentage of
total revenues from 99.1% in the three months ended March 31, 1997 to 97.7% in
the three months ended March 31, 1998, and decreased from 146.4% in 1996 to
95.5% in 1997. The Company expects selling and marketing expenses to increase
significantly in absolute dollars in future periods, as the Company hires
additional personnel, expands into new markets and continues to promote the
NetGravity brand.

GENERAL AND ADMINISTRATIVE

General and administrative expenses consist primarily of salaries and
related costs for the Company's executive, administrative, finance and human
resources personnel, support services and professional services fees. General
and administrative expenses increased from $241,000 in the three months ended
March 31, 1997 to $708,000 in the three months ended March 31, 1998, and
increased from $131,000 in the Inception Period to $1.3 million in 1996 to $1.6
million in 1997. The increase in absolute dollars in each period was primarily a
result of increased personnel and related overhead necessary to support the
Company's increased scale of operations. Personnel and related overhead
accounted for $210,000 and $295,000 of general and administrative expenses in
the three months ended March 31, 1997 and 1998, respectively, and accounted for
$624,000 and $1.1 million of such costs in 1996 and 1997, respectively. General
and administrative expenses as a percentage of total revenues increased from
17.8% in the three months ended March 31, 1997 to 35.3% in the three months
ended March 31, 1998, primarily as a result of expansion of international
operations. General and administrative expenses decreased as a percentage of
total revenues from 67.8% in 1996 to 24.4% in 1997. The Company expects general
and

31
<PAGE>
administrative expenses to increase in absolute dollars in future periods as the
Company expands its staff, incurs additional costs related to expansion of its
operations, and is subject to the requirements of being a publicly traded
company.

INCOME TAXES

As of December 31, 1997, the Company had a net operating loss carryforward
for federal and state income tax purposes of approximately $9.8 million. In
addition, the Company had federal and state research and development credit
carryforwards of approximately $145,000 and $120,000, respectively. The
Company's federal net operating loss and research and development credit
carryforwards will expire in the years 2010 through 2012, if not utilized. The
Company's state net operating loss carryforwards will expire in the year 2003.
The state research and development credit can be carried forward indefinitely.

As of December 31, 1997, NetGravity Europe Limited had a net operating loss
carryforward in the United Kingdom of approximately $600,000, which can be used
to offset NetGravity Europe Limited's future income. The United Kingdom net
operating loss carryforward can be carried forward indefinitely.

Federal and state tax laws impose substantial restrictions on the
utilization of net operating loss and tax credit carryforwards in the event of
an "ownership change" as defined in Section 382 of the Internal Revenue Code of
1986, as amended. The Company has not yet determined whether such an ownership
change has occurred.

The Company has not recognized any benefit from the future use of such loss
carryforwards because management's evaluation of all the available evidence in
assessing the realizability of the tax benefits of such loss carryforwards
indicates that the underlying assumptions of future profitable operations
contain risks that do not provide sufficient assurance to recognize such tax
benefits currently. See Note 4 of Notes to Consolidated Financial Statements.

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<PAGE>
QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited consolidated statement of
operations data for each of the nine quarters ended March 31, 1998, as well as
such data expressed as a percentage of the Company's total revenues for the
periods indicated. In the opinion of management, this information has been
prepared substantially on the same basis as the audited consolidated financial
statements appearing elsewhere in this Prospectus, and all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly the unaudited consolidated
quarterly results of operations data. The consolidated quarterly data should be
read in conjunction with the audited Consolidated Financial Statements of the
Company and the Notes thereto appearing elsewhere in this Prospectus. The
operating results for any quarter should not be considered indicative of results
of any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
MAR. 31 JUNE 30 SEP. 30 DEC. 31
1996 1996 1996 1996
-------- ------- ------- -------
(IN THOUSANDS, EXCEPT AS A
PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C>
Revenues:
Software licenses............................. $ -- $ 172 $ 597 $ 493
Software upgrades............................. -- 1 16 90
Consulting and support........................ 11 60 155 344
-------- ------- ------- -------
Total revenues.............................. 11 233 768 927
-------- ------- ------- -------
Costs of revenues(1):
Cost of software licenses..................... -- -- -- --
Cost of consulting and support................ -- 217 274 211
-------- ------- ------- -------
Total cost of revenues...................... -- 217 274 211
-------- ------- ------- -------
Gross profit................................ 11 16 494 716
Operating costs and expenses:
Research and development...................... 261 333 521 649
Selling and marketing......................... 103 568 925 1,243
General and adminstrative..................... 270 181 254 610
-------- ------- ------- -------
Total operating costs and expenses.......... 634 1,082 1,700 2,502
-------- ------- ------- -------
Loss from operations........................ (623 ) (1,066 ) (1,206 ) (1,786)
Other income (expense), net..................... 17 24 16 (2)
-------- ------- ------- -------
Net loss.................................... $ (606 ) $(1,042) $(1,190) $(1,788)
-------- ------- ------- -------
-------- ------- ------- -------

Revenues:
Software licenses............................. -- 73.8% 77.7% 53.2%
Software upgrades............................. -- 0.4 2.1 9.7
Consulting and support........................ 100.0% 25.8 20.2 37.1
-------- ------- ------- -------
Total revenues.............................. 100.0 100.0 100.0 100.0
-------- ------- ------- -------
Cost of revenues(1):
Cost of software licenses(2).................. -- -- -- --
Cost of consulting and support(3)............. -- 93.1 35.7 22.8
-------- ------- ------- -------
Total cost of revenues...................... -- 93.1 35.7 22.8
-------- ------- ------- -------
Gross profit................................ 100.0 6.9 64.3 77.2
Operating costs and expenses:
Research and development...................... 2,372.7 142.9 67.8 70.0
Selling and marketing......................... 936.4 243.8 120.4 134.1
General and administrative.................... 2,454.5 77.7 33.1 65.8
-------- ------- ------- -------
Total operating costs and expenses.......... 5,763.6 464.4 221.3 269.9
-------- ------- ------- -------
Loss from operations........................ (5,663.6) (457.5 ) (157.0 ) (192.7)
Other income (expense), net..................... 154.5 10.3 2.0 (0.2)
-------- ------- ------- -------
Net loss.................................... (5,509.1)% (447.2 )% (155.0 )% (192.9)%
-------- ------- ------- -------
-------- ------- ------- -------

MAR. 31 JUNE 30 SEP. 30 DEC. 31 MAR. 31
1997 1997 1997 1997 1998
------- ------- ------- ------- -------

<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses............................. $ 710 $ 665 $ 824 $ 702 $ 775
Software upgrades............................. 185 266 303 369 402
Consulting and support........................ 458 470 614 792 826
------- ------- ------- ------- -------
Total revenues.............................. 1,353 1,401 1,741 1,863 2,003
------- ------- ------- ------- -------
Costs of revenues(1):
Cost of software licenses..................... 7 21 7 41 15
Cost of consulting and support................ 240 513 728 1,015 1,158
------- ------- ------- ------- -------
Total cost of revenues...................... 247 534 735 1,056 1,173
------- ------- ------- ------- -------
Gross profit................................ 1,106 867 1,006 807 830
Operating costs and expenses:
Research and development...................... 678 782 677 896 996
Selling and marketing......................... 1,341 1,410 1,558 1,764 1,956
General and adminstrative..................... 241 353 310 648 708
------- ------- ------- ------- -------
Total operating costs and expenses.......... 2,260 2,545 2,545 3,308 3,660
------- ------- ------- ------- -------
Loss from operations........................ (1,154 ) (1,678 ) (1,539 ) (2,501 ) (2,830 )
Other income (expense), net..................... (6 ) (8 ) (27 ) 31 30
------- ------- ------- ------- -------
Net loss.................................... $(1,160) $(1,686) $(1,566) $(2,470) $(2,800)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Revenues:
Software licenses............................. 52.5% 47.5% 47.3% 37.7% 38.7%
Software upgrades............................. 13.7 19.0 17.4 19.8 20.1
Consulting and support........................ 33.8 33.5 35.3 42.5 41.2
------- ------- ------- ------- -------
Total revenues.............................. 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- -------
Cost of revenues(1):
Cost of software licenses(2).................. 0.5 1.5 0.4 2.2 0.7
Cost of consulting and support(3)............. 17.7 36.6 41.8 54.5 57.8
------- ------- ------- ------- -------
Total cost of revenues...................... 18.2 38.1 42.2 56.7 58.5
------- ------- ------- ------- -------
Gross profit................................ 81.7 61.9 57.8 43.3 41.5
Operating costs and expenses:
Research and development...................... 50.1 55.8 38.9 48.1 49.7
Selling and marketing......................... 99.1 100.6 89.5 94.7 97.7
General and administrative.................... 17.8 25.2 17.8 34.8 35.3
------- ------- ------- ------- -------
Total operating costs and expenses.......... 167.0 181.6 146.2 177.6 182.7
------- ------- ------- ------- -------
Loss from operations........................ (85.3 ) (119.7 ) (88.4 ) (134.3 ) (141.2 )
Other income (expense), net..................... (0.4 ) (0.6 ) (1.6 ) 1.7 1.5
------- ------- ------- ------- -------
Net loss.................................... (85.7 )% (120.3 )% (90.0 )% (132.6 )% (139.7 )%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>

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

(1) There are no material costs of revenues associated with software upgrades
revenues.

(2) As a percentage of software licenses revenues, costs of software licenses
have been 0.0%, 0.0%, 0.0%, 0.0%, 1.0%, 3.2%, 0.8%, 5.8% and 1.9%,
respective to the quarters presented chronologically above.

(3) As a percentage of consulting and support revenues, costs of consulting and
support have been 0.0%, 361.7%, 176.8%, 61.3%, 52.4%, 109.1%, 118.6%, 128.2%
and 140.2%, respective to the quarters presented chronologically above.

33
<PAGE>
The Company's total revenues have increased in each quarter presented. The
increases have been generally due to increased acceptance of the Company's
AdServer family of products, expansion of the Company's direct sales force, the
introduction of AdServer Network in April 1997 and increased software upgrades
and consulting and support revenues as the installed customer base has grown.
Total costs of revenues have generally increased in absolute dollars over the
quarters presented due to the Company's increased staffing in customer support,
consulting and training. Cost of revenues as a percentage of total revenues has
increased every quarter since the three months ended March 31, 1997 to the three
months ended March 31, 1998 as a result of the increased percentage of
consulting and support revenues over this period of time. Total operating
expenses have generally increased in absolute dollar amounts over the quarters
shown due to the Company's increased staffing in research and development, sales
and marketing and general and administrative functions.

FACTORS AFFECTING OPERATING RESULTS

The Company's results of operations may fluctuate significantly in the
future as a result of a variety of factors, many of which are beyond the
Company's control. These factors include: (i) varying demand for the Company's
products and services, (ii) the Company's success in addressing new and related
market opportunities, (iii) the introduction of new or enhanced online
advertising or direct marketing solutions by the Company or its competitors,
(iv) changes in the market demand for online advertising and direct marketing
software, (v) market acceptance of new products and services offered by the
Company, (vi) the timing and size of individual license transactions, (vii) the
sales and implementation cycles of the Company's customers, (viii) the addition
or loss of customers, (ix) the mix between software licenses, software upgrades
and consulting and support revenues, (x) the mix between domestic and
international revenues, (xi) the amount of advertising budgets committed to
online advertising and direct marketing activities by the Company's current and
prospective customers, (xii) price changes or changes in pricing models by the
Company or its competitors, (xiii) the mix of distribution channels through
which the Company's products are sold, (xiv) increasing complexity of the
Company's products resulting in higher costs to develop and maintain, which may
not be recouped by increased prices, (xv) the loss of key employees and the time
required to train new hires, particularly sales, consulting and customer support
personnel, (xvi) the ability to penetrate markets outside of North America,
(xvii) the incurrence of costs relating to possible acquisitions of technology
or businesses, (xviii) seasonality related to slower European sales in the third
quarter and a shorter implementation period in the fourth quarter, (xix) the
amount and timing of capital expenditures and other costs relating to the
expansion of the Company's operations, and (xx) general economic conditions.

34
<PAGE>
research and development, increase its sales and marketing operations, develop
new distribution channels, improve its operational and financial systems and
broaden its customer support capabilities. To the extent that such expenses
precede or do not correspond with increased revenues, the Company's business,
results of operations or financial condition could be materially adversely
affected and net losses in a given quarter would be even greater than expected.

Due to all of the foregoing factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Furthermore it is possible that in some future quarters the Company's results of
operations may fall below the expectations of securities analysts and investors.
In such event, the trading price of the Company's Common Stock will likely be
materially and adversely affected. See "Risk Factors--Potential Fluctuations in
Quarterly Operating Results; Seasonality; Possible Price Erosion."

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries or otherwise
be able to distinguish 21st century dates from 20th century dates. As a result,
in less than two years, computer systems and/or software used by many companies
will need to be upgraded to comply with "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance issues. A number of date code fields in the user
interface portion of the Company's AdServer products are not currently
programmed to correctly accept and process 21st century dates and, as a result,
the Company's AdServer family of software products is not yet fully Year 2000
compliant. While the Company believes that date code fields in other components
of its products are Year 2000 compliant, there can be no assurance that all or
any of such date code fields are Year 2000 compliant. The Company is currently
taking steps to make the date code fields in the user interface portion of its
AdServer products Year 2000 compliant, which action the Company intends to
complete by the end of June 1998. The Company currently estimates that no
external personnel or other resources will be needed to complete such action and
that the cost of the re-allocated engineering personnel will be approximately
$25,000. However, there can be no assurance that the Company will be successful
in making its products fully Year 2000 compliant by the end of June 1998 or
thereafter or that the actual internal and external personnel and resources
required to achieve such compliance will not materially exceed these estimates.
Any failure by the Company to make its products Year 2000 compliant could result
in a decrease in sales of the Company's products, deferral of revenue
recognition on contracts in which the Company has warranted (or may in the
future warrant) compliance with Year 2000 requirements, an increase in the
allocation of resources to address Year 2000 problems of the Company's customers
without additional revenue commensurate with such dedication of resources, or an
increase in litigation costs relating to losses suffered by the Company's
customers due to such Year 2000 problems. In addition, the Company believes that
the purchasing patterns of customers and potential customers may be impacted by
Year 2000 issues. Further, many companies are expending significant resources to
correct or patch their current software systems. These expenditures of funds may
result in reduced funds available to purchase software products such as those
offered by the Company. The occurrence of any of such events could have a
material adverse effect on the Company's business, results of operations or
financial condition.

35
<PAGE>
2000 compliant, and that certain of its computer hardware may not be able to be
made Year 2000 compliant. Although the Company believes that such software will
become compliant through updates and upgrades that would have been purchased in
the ordinary course of business for reasons unrelated to the Year 2000 issue and
that the cost to replace such hardware, if necessary, would be less than
$60,000, there can be no assurance that the incremental costs of such software
and hardware will not materially exceed these preliminary estimates, which
higher incremental costs could have a material adverse effect on the Company's
business, results of operations or financial condition. See "Risk Factors--Year
2000 Compliance."

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has financed its operations primarily
through the private sale of equity securities and, to a lesser extent, bank and
investor borrowings. As of March 31, 1998, the Company had raised approximately
$17.4 million from the issuance of Preferred Stock and approximately $2.3
million from the issuance of notes payable. As of March 31, 1998, the Company
had approximately $6.3 million of cash and cash equivalents.

The Company has a revolving credit facility with a bank in the amount of
$1.0 million which bears interest at the prime rate (8.50% as of December 31,
1997) plus 0.75%, which matured in May 1998. Borrowings are limited to the
lesser of $1.0 million or 70% of the net amount of eligible accounts receivable
and are secured by the Company's accounts receivable. As of December 31, 1997
and March 31, 1998, borrowings under this credit facility were $655,000 and
$655,000, respectively. The Company is currently negotiating an extension or
renewal of such credit facility. The Company has an equipment line of credit
with the same bank that provides up to $1.0 million, bears interest at the prime
rate, and expires in June 2000. The line of credit is secured by the Company's
fixed assets. As of December 31, 1996 and 1997, and March 31, 1998, $682,000,
$584,000 and $524,000, respectively, had been advanced under this agreement with
the principal amount due in 30 monthly installments of $19,467 beginning
December 31, 1997. The Company also has a second equipment line of credit with
the same bank that provides up to $1.2 million, bears interest at the prime
rate, and expires in June 2000. The line of credit is secured by the Company's
fixed assets. As of December 31, 1997 and March 31, 1998, $628,000 and $566,000,
respectively, had been advanced under this agreement with the principal amount
due in 30 monthly installments of $20,933 beginning December 31, 1997. As of
December 31, 1997 and March 31, 1998, the Company was not in compliance with
certain financial covenants on all of the aforementioned credit facilities, and
the Company has received a waiver of such non-compliance.

Net cash used in operating activities was $1.1 million and $2.1 million in
the three months ended March 31, 1997 and 1998, respectively, and was $146,000,
$3.3 million and $5.1 million in the Inception Period and in 1996 and 1997,
respectively. In each period, cash used by operating activities was primarily a
result of a net loss.

Net cash used in investing activities was $2.7 million and $358,000 in the
three months ended March 31, 1997 and 1998, respectively, and was $62,000,
$854,000 and $1.2 million in the Inception Period and in 1996 and 1997,
respectively. Cash used in investing activities in each period was primarily
related to purchases of property and equipment, except for the three months
ended March 31, 1997, in which cash used in investing activities related
primarily to short-term investments.

Net cash provided by financing activities of $4.5 million and $3.1 million
in the three months ended March 31, 1997 and 1998, respectively, was primarily
attributable in each period to net proceeds from the issuance of Preferred
Stock. Net cash provided by financing activities of $633,000 for the Inception
Period consisted primarily of $450,000 from the issuance of promissory notes
convertible into Series A Preferred Stock and $183,000 from the issuance of
Common Stock. Net cash provided by financing activities of $4.2 million for the
year ended December 31, 1996 primarily consisted of net proceeds of $4.0 million
from the issuance of Preferred Stock. Net cash provided by financing activities
of $10.8 million for the year ended December 31, 1997 primarily consisted of net
proceeds of $9.7 million from the issuance of Preferred Stock and bank
borrowings of $1.2 million on an equipment line of credit and an accounts
receivable line.

36
<PAGE>
The Company's deferred revenue balance includes deferred software licenses
revenues and revenues attributable to uncompleted consulting engagements, as
well as the unamortized portion of the revenues from software upgrades and
support contracts. The Company records an accounts receivable and deferred
revenue upon shipment and invoicing of a software license to a customer. The
Company's accounts receivable balance is relatively large in comparison to
quarterly and annual revenues because the Company generally recognizes revenue
from the licensing of software later than shipment and invoicing. Further, the
Company's deferred revenue balance or changes therein may not be indicative of
changes in the ordering patterns of customers or the Company's backlog.

Although the Company has no other material commitments other than its
facilities leases (see Note 6 of Notes to Consolidated Financial Statements),
management anticipates that it will experience an increase in its capital
expenditures and lease commitments consistent with its anticipated growth in
operations, infrastructure and personnel. The Company expects that capital
expenditures for 1998 will be at least $2.0 million. In particular, the Company
anticipates incurring capital expenditures in connection with its expansion of
its California, New York and Asia facilities in 1998, and its Europe facilities
in 1999. The Company currently anticipates that it will continue to experience
significant growth in its operating expenses for the foreseeable future related
to entering new markets for the Company's products and services, increasing
research and development spending, increasing its sales and marketing
operations, developing new distribution channels, improving its operational and
financial systems and broadening its customer support capabilities. Such
operating expenses will be a material use of the Company's cash resources,
including a portion of the net proceeds of this offering. Although, the Company
believes that the net proceeds of the offering, together with its existing cash
and cash equivalents and available bank borrowings, will be sufficient to meet
its anticipated cash needs for working capital and capital expenditures for at
least the next 12 months, there can be no assurance that such sources will be
adequate or that additional funds will not be required either during or after
such 12 month period.

37
<PAGE>
BUSINESS

THE FOLLOWING DISCUSSION OF THE COMPANY'S BUSINESS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE
SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.

OVERVIEW

NetGravity is the leading provider of software solutions for online
advertising and direct marketing. A pioneer in the online advertising management
software market, the Company believes that it was the first company to provide
such commercial software to major online content publishers and has recently
expanded into the newly-emerging market for online direct marketing software
solutions. The Company develops, markets and supports its mission-critical
AdServer family of software products which, together with its full range of
professional services and support capabilities, is designed to enhance the
effectiveness and efficiency of each constituent in the online advertising and
direct marketing supply chain: merchants (vendors of products and services),
advertising agencies and content publishers (including advertising networks). In
particular, AdServer is designed to enable customers to increase their revenue
from online advertising and direct marketing by improving response rates through
consumer targeting and to enable customers to reduce their administrative
expenses by automating certain advertising and direct marketing business
processes. The Company markets and sells its products and services primarily
through its field sales and telesales organizations and maintains sales and
support operations in North America, Europe and Asia Pacific. To date, the
Company has sold its software and services to over 225 customers, including 34
of the content publishers listed in CMR's Interwatch (formerly Jupiter's
AdSpend) list of the top 100 revenue-generating online content publishers for
the eight months ended August 31, 1997. The Company's customers include @Home
Network, CNN Interactive, E*TRADE, J. Walter Thompson, Netscape Communications,
ONSALE, Real Cities (Knight-Ridder New Media), Time Inc. New Media, Virgin Net
and WhoWhere?.

INDUSTRY BACKGROUND

The competitive nature of the global marketplace requires merchants to
continually seek out and obtain new customers while preserving their
relationships with existing customers. Historically, merchants have communicated
with consumers through advertising in traditional media (such as print,
television and radio) and through traditional direct marketing channels (such as
telemarketing and direct mail) to establish and maintain their brand identities,
introduce new products, announce improved product features and target offers to
potential and current customers. International Data Corporation ("IDC") has
estimated that $175 billion would be spent on traditional media advertising in
the United States during 1997. The Direct Marketing Association has estimated
that $153 billion would be spent on direct marketing in the United States during
1997.

ADVERTISING AND DIRECT MARKETING SUPPLY CHAIN. The traditional advertising
and direct marketing industries together can be viewed as a supply chain with
three primary constituents: merchants (vendors of products and services),
advertising agencies and content publishers (including advertising networks). As
the driving force in the supply chain, merchants seek to increase their sales
and brand awareness by targeting advertisements and offers to current and
prospective consumers of their products and services. To build relationships
with new and existing customers, merchants work with advertising agencies to
purchase advertising space targeted at the types of consumers that the merchants
desire. Advertising agencies, in turn, identify and secure advertising space
from content publishers that meets the merchants' criteria. Content publishers,
such as magazines, newspapers, radio stations and television programs, attract
audiences of consumers by offering them compelling entertainment and information
and deliver these audiences to merchants. Established, larger content publishers
generally work directly with advertising agencies in order to retain greater
control over their advertising inventories, which, in turn, allows them to
maintain and enhance the long-term value of their advertising space to
advertising agencies and merchants. Smaller, less established content publishers
generally work with advertising agencies through advertising representatives or
networks, which provide these content publishers with an outsourced sales force
for their

38
<PAGE>
advertising space. As depicted below, advertising and direct marketing
expenditures flow down the supply chain from merchants to advertising agencies
and then to content publishers. In turn, audiences of consumers attracted by
content publishers flow up to merchants as prospective customers.

ADVERTISING AND DIRECT MARKETING SUPPLY CHAIN

[GRAPHIC: SUPPLY CHAIN]

GROWTH OF THE WEB AND WEB COMMERCE. IDC estimates that by the end of 1998
there will be over 51 million users of the World Wide Web (the "Web") in the
United States and over 97 million users worldwide. IDC projects that, by the end
of 2001, the number of Web users will increase to over 106 million in the United
States and over 227

39
<PAGE>
million worldwide. The Company believes that the number of Web users and the
amount of time users spend on the Web will continue to increase as Internet
access becomes more widely available, as Internet bandwidth and reliability are
enhanced and as Internet content improves and becomes more multimedia intensive.

Because online transactions can be faster, less expensive and more
convenient than transactions conducted via traditional means, a growing number
of consumers are transacting business over the Web. Examples of such
transactions include buying consumer goods, trading securities, purchasing
airline tickets and paying bills. Jupiter Communications has estimated that 27%
of adult Web users made online purchases in 1997 and that 50% of adult Web users
will make online purchases in 2000. IDC estimates that purchases of goods and
services over the Internet will increase from $32.4 billion in 1998 to $237.2
billion in 2001. The Company believes that as electronic commerce expands,
advertisers and direct marketers will increasingly seek to use the Web to locate
customers, advertise their products and services and facilitate transactions.

ONLINE ADVERTISING AND DIRECT MARKETING. The Web continues to emerge as a
promising new medium for advertisers due to the growth in the number of Web
users, the attractive demographic profiles of Web users, the ability to quickly
gather response data and other feedback, the interactive nature of the Web, the
potential for reduced costs-per-transaction, the Web's global reach and a
variety of other factors. The Web provides advertisers with the opportunity to
cost-effectively reach broad, global audiences and to target their advertising
based on consumers' demographic characteristics, specific interests and
geographic location. Online advertising also has the potential to allow
advertisers to measure, in real time, the number of times that a particular
advertisement has been viewed, the responses to the advertisement and certain
characteristics of the viewers of the advertisement. In addition, the
interactive nature of the Web gives advertisers the potential to establish
dialogues and one-on-one relationships with consumers, to receive direct
feedback on their advertising and to quickly refine their advertising based on
such feedback. Accordingly, the Company believes that the Web has the potential
to become a more effective and efficient means for advertisers and direct
marketers to reach their target audiences as compared to traditional media.

The unique characteristics of online advertising, combined with the growth
in the number of Internet users and their attractive demographic profiles, have
led to a significant increase in online advertising. IDC has estimated that
online advertising expenditures in the United States would increase from $551
million in 1997 to $4.0 billion in 2001, representing a 64% compounded annual
growth rate. Historically, the leading online advertisers have generally been
technology companies, Internet search engines and Web content publishers.
However, many of the largest advertisers on traditional media, including mass
marketers such as consumer products companies and automobile manufacturers, have
recently expanded their use of online advertising. The Company believes that
online advertising will become an increasing component of such merchants'
advertising budgets and that this trend will drive demand for sophisticated
online advertising and direct marketing solutions.

Because highly targeted product offers can be made to consumers at their
personal computers, the Company believes that the Internet represents an
attractive new medium for direct marketing, which has traditionally been
conducted through direct mail and telemarketing. The success of a direct
marketing campaign is generally measured by either an increase in response rate
(e.g., number of leads, sales or other transactions as a percentage of
impressions viewed) or a reduction in cost-per-transaction. The Internet has the
potential to enable direct marketers to increase response rates and reduce
cost-per-transaction by targeting and delivering direct marketing campaigns to
consumers based on their specific demographics, characteristics and interests.
Jupiter Communications estimates that expenditures on online direct marketing
were $86.0 million in 1997 and will exceed $1.3 billion in 2002.

SUPPLY CHAIN CONSTITUENTS REQUIRE ENABLING TECHNOLOGY. As the constituents
of the advertising and direct marketing supply chain increase their online
presence, they seek technologies and solutions to allow them to exploit the
attractive demographics, highly-targeted messages, real-time feedback, business
process efficiencies and other potential advantages of online advertising and
direct marketing. Merchants, advertising agencies and content publishers require
comprehensive, reliable and scalable solutions to allow them to effectively and
efficiently leverage the power of the Internet for advertising and direct
marketing. In particular, the Company believes that

40
<PAGE>
larger, more established content publishers will generally require solutions
that allow them to continue to closely control their advertising inventory.
Moreover, because the process of directly managing the sale and delivery of
online advertisements can generate valuable consumer profile and behavioral
data, the Company believes that the desirability of maintaining direct control
over consumer data may be even greater than with respect to traditional media.

NETGRAVITY SOLUTION

NetGravity is the leading provider of software solutions for online
advertising and direct marketing. A pioneer in the online advertising management
software market, the Company believes that it was the first company to provide
such commercial software to major online content publishers and has recently
expanded into the newly-emerging market for online direct marketing software
solutions. The Company develops, markets and supports its mission-critical
AdServer family of software products which, together with its full range of
professional services and support capabilities, is designed to enhance the
effectiveness and efficiency of each constituent in the online advertising and
direct marketing supply chain: merchants, advertising agencies and content
publishers. In particular, AdServer is designed to enable customers to increase
revenue from online advertising and direct marketing by improving response rates
through consumer targeting and to enable customers to reduce their
administrative expenses by automating certain advertising and direct marketing
business processes. In addition, as the Company's software delivers
advertisements, it gathers consumer viewing and response data which are retained
by the Company's customers and can be used to more precisely target future
advertisements.

The Company's AdServer products provide benefits to each of the three
primary constituents in the online advertising and direct marketing supply
chain:

MERCHANTS. Merchants with an online presence are focused on attracting
consumers to their Web sites and on maximizing revenue per customer. The
Company's products are designed to allow merchants to gather consumer behavior
data on their sites and correlate this information with other information, such
as purchase history, to build detailed customer-profile databases using third
party technology. Merchants can then use AdServer to target advertisements
promoting new or complementary products to particular consumers based on their
profiles. Merchants can also use AdServer to centrally manage advertising
campaigns and place targeted advertisements on other Web sites in order to drive
interested consumers back to the merchant's Web site. For such campaigns,
AdServer can be used to track purchases made by consumers responding to
particular advertisements and thereby determine the cost-per-transaction for
each campaign.

ADVERTISING AGENCIES. Advertising agencies seek to maximize the impact of
their clients' online campaigns to promote brand awareness or to solicit
transactions. AdServer is designed to enable advertising agencies to manage
their clients' online campaigns, to make changes to campaigns in real-time and
to collect information about consumer behavior that can be mined to create
sophisticated profiles. These profiles can be used to improve targeting for both
current and future campaigns.

CONTENT PUBLISHERS. Content publishers seek to attract consumers to their
Web sites to maximize the value of their advertising space and/or to solicit
transactions. Using AdServer, content publishers can maintain control of their
own advertising inventory, consumer data, mission-critical advertising business
processes and relationships with advertisers and advertising agencies. AdServer
is designed to allow content publishers to predict inventory available for sale,
to deliver targeted advertisements to consumers and to provide reports and
analysis to advertisers. Additionally, AdServer can be integrated with content
management, billing and commerce systems.

The Company's software is designed to be fault tolerant, scalable,
extensible and platform independent to meet the needs of even its largest
customers. For example, Netscape, which operates one of the most visited Web
sites on the Internet, has served up to 33 million impressions per day with the
Company's software. The Company's software also supports industry standard
operating environments including popular Unix systems, Microsoft Windows NT,
standard relational databases, Web servers from Netscape and Microsoft and
Java-enabled Web browsers.

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STRATEGY

EXTEND LEADERSHIP IN ONLINE ADVERTISING SOFTWARE SOLUTIONS. The Company
intends to extend its leadership position in the market for online advertising
software solutions by continuing to enhance its technology through investment in
research and development activities and by incorporating industry-leading
components into its products. The Company believes that maintaining and
enhancing its products and services is critical to its ability to solidify its
market leadership, strengthen its relationships with current customers and
enable it to acquire new customers.

ESTABLISH LEADERSHIP IN ONLINE DIRECT MARKETING SOLUTIONS. The Company
seeks to foster the growth of the emerging market for online direct marketing
software solutions and to establish leadership in this market. Recognizing the
potential of the Web as a direct marketing channel, many of the Company's
customers are leveraging AdServer's largely advertising-oriented features to
deploy online direct marketing systems. The Company believes that online direct
marketing is emerging as a distinct market from online advertising and that
customers focusing on online direct marketing will increasingly demand
functionality tailored to their specific requirements. Therefore, the Company
intends to continue to add features to AdServer designed to meet the specific
requirements of direct marketers as well as to enhance its sales, marketing,
professional services and support capabilities to promote these new features.
The Company believes that this strategy will allow it to address the needs of
its direct marketing customers, to help foster the development of the overall
market for online direct marketing software solutions and to establish itself as
a leader in this emerging market.

MAXIMIZE CUSTOMER VALUE. The Company seeks to continuously increase the
value of its solutions to its customers by offering customers additional and
improved products and services. In pursuit of this strategy, the Company intends
to enhance and extend AdServer to improve functionality through feature
refinement and through the addition of complementary product modules coupled
with value-added professional services. The Company believes its close
relationships with its customers will allow the Company to determine the
functionality its customers require. The Company believes that its focus on
delivering compelling, high-value solutions to customers will enhance its
opportunity to sell additional products and services to existing and future
customers, particularly as the requirements of these customers grow and evolve.

ENABLE EFFICIENT ADVERTISING BUYING ON THE INTERNET. The Company intends in
the future to develop products to link together its merchant, advertising agency
and content publisher customers to allow them to automate the process of buying
and selling online advertising space. One of the key limitations of the Internet
as compared to other media is the difficulty merchants and advertising agencies
experience when trying to create and manage a campaign across many selected
content publishers. Because online audiences tend to be less concentrated than
those in traditional media, advertisers seeking a given number of impressions
for a particular campaign will generally need to purchase advertising space from
comparatively more content publishers for online campaigns. By developing
technology to enable the Company's customers from each of the constituents of
the advertising and direct marketing supply chain to network with each other to
automate the buying and selling of advertising, the Company believes that
advertising agencies will be able to purchase online advertising as efficiently
as advertising on traditional media. The Company believes that its relationships
with existing customers will assist it in designing and developing such
technology.

EXPAND AND LEVERAGE ALLIANCES WITH KEY BUSINESS AND TECHNOLOGY
PARTNERS. The Company continues to develop cooperative alliances with leading
Internet systems integrators, Web hosting organizations and technology vendors
in order to accelerate the acceptance of the Company's products and to increase
operating leverage. The

42
<PAGE>
Company believes that these alliances will provide additional marketing and
sales channels for the Company's products and allow the Company to leverage its
professional services capacity by utilizing these third parties to assist with
AdServer deployment and support.

EXPAND INTERNATIONAL PRESENCE. The Company plans to aggressively expand its
international operations to address the global adoption of the Internet and the
international demand for online advertising and direct marketing solutions. The
Company believes that there are multiple international opportunities for its
AdServer products and has established sales and support operations in Europe and
Asia Pacific with regional headquarters in London and Tokyo. As part of this
expansion, the Company intends to create reselling and systems integration
relationships in Europe and Asia Pacific to leverage its sales and consulting
forces in these regions. The Company also intends to develop localized versions
of its product. The Company believes that an early presence in these markets
will enhance its long-term competitive position in these regions.

PRODUCTS

The Company develops, markets and supports its AdServer family of online
advertising and direct marketing management software solutions and offers
associated services. The following illustrates the role of AdServer in a typical
consumer interaction with a customer's Web site.

[GRAPHIC: CONSUMER INTERACTION WITH WEB SITE THAT USES NETGRAVITY ADSERVER]

CAPTIONS:

1) CONSUMER VISITS WEB SITE THAT USES NETGRAVITY ADSERVER SOLUTION.

2) BROWSER REQUESTS PAGE FROM WEB SITE.

3) NETGRAVITY ADSERVER LOOKS UP CONSUMER PROFILE, AND CHOOSES MOST
APPROPRIATE ADVERTISEMENTS.

4) CONTENT PAGE WITH TARGETED ADVERTISEMENTS DELIVERED TO CONSUMER'S
BROWSER.

5) NETGRAVITY ADSERVER LOGS DELIVERY AND RESULTS FOR FUTURE ANALYSIS AND
REPORTING.

- SITE ADMINISTRATORS USE NETGRAVITY ADSERVER TO MANAGE FORECASTING, AD
INVENTORY, SCHEDULING AND RESULTS ANALYSIS.

NetGravity markets three primary solutions to support the needs of companies in
the online advertising and direct marketing industry: AdServer Enterprise,
AdServer Network and AdCenter. The Company's solutions are designed to be
extensible and robust systems for deploying advertising and direct marketing
management solutions on the

43
<PAGE>
Internet. The AdServer solutions utilize a common fault-tolerant, scalable
architecture for real-time delivery of targeted advertisements, a management
system for tracking advertising inventory and a customizable reporting and
analysis system allowing AdServer users to better understand their customers.

ADSERVER ENTERPRISE. AdServer Enterprise is designed to manage advertising
and direct marketing on individual Web sites. It allows tracking of consumer
action and movement on a Web site and captures consumer responses to
advertisements. AdServer Enterprise is designed to be integrated with other
systems, such as customer databases, to create rich consumer profiles for more
effective targeting. AdServer Enterprise comes pre-configured to address many
common targeting requirements and can be extended to perform more specific
targeting. AdServer Enterprise's scalable architecture allows Web sites to
reliably serve high volumes of targeted advertisements. AdServer Enterprise also
collects and summarizes user interaction data to allow detailed analysis and
reporting to advertisers and direct marketers.

ADSERVER NETWORK. AdServer Network is an enhanced version of AdServer
Enterprise designed to manage multi-site advertising and direct marketing.
AdServer Network is designed to allow central management of advertising
inventories of multiple Web sites, delivery of targeted advertisements to
multiple remote Web sites based on centralized targeting data, centralized
collection and analysis of user information and targeting of advertisements to
consumers on remote Web sites. These features make AdServer Network an
attractive solution for a variety of applications. For example, AdServer Network
can be used by content publishers to deliver targeted advertisements to a set of
affiliated Web sites or by advertising agencies to manage campaigns for their
clients across all of the Web sites in the campaign.

ADCENTER. AdCenter, introduced in April 1998, is an outsourced service
solution based on AdServer software which is designed to allow customers to
outsource certain advertising management functions to the Company. NetGravity
works with Web hosting organizations to manage this centralized solution for
customers that do not wish to hire a technical staff or to maintain their
Internet systems. To date, revenues from AdCenter have not been significant.

<TABLE>
<S> <C> <C> <C>
PRODUCT MARKET BENEFITS INTRODUCTION DATES
AdServer SINGLE-SITE Provides single-site Version 1.0: March 1996
Enterprise merchants and management of user Version 2.0: September
content publishers information, targeting 1996
of advertisements, and Version 2.1: March 1997
analysis and reporting Version 3.0: June 1997
capabilities.
AdServer Network MULTI-SITE Provides the capability Version 2.1: March 1997
merchants, to target Version 3.0: June 1997
advertising advertisements to
agencies, content consumers on remote Web
publishers and sites, while
advertising aggregating all
networks consumer information
and providing
centralized management
capabilities.
AdCenter SINGLE AND Provides a service to April 1998
MULTI-SITE allow customers to
merchants, outsource advertising
advertising management to the
agencies, content Company.
publishers and
advertising
networks
</TABLE>

44
<PAGE>
PROFESSIONAL SERVICES

The Company's professional services organization as of March 31, 1998
consisted of 29 individuals, including 14 consultants, who provide the following
range of services:

CONSULTING. The Company offers consulting services to customers that
address each of the activities its customers require for the initial
implementation and long-term operation of their NetGravity products. NetGravity
offers: implementation services to assist its customers in deploying AdServer;
system extension services that enable customers to extend NetGravity's products
to meet their specific business needs or technical requirements; and migration
services that enable customers to migrate to NetGravity's current products from
earlier versions of NetGravity's products or from their in-house systems. A
typical AdServer implementation requires up to 10 days of professional services.
The Company also offers other consulting services, including project management,
requirements definition, business process re-engineering, system and solutions
design, technical architecture design, systems integration design, custom
reporting and software development.

TECHNICAL SUPPORT. The Company provides product support services, including
telephone support and upgrade rights to new minor releases, under its standard
maintenance agreements. All of the Company's license customers have entered into
standard maintenance agreements. The annual maintenance fee for these services
is payable in advance and is based upon a percentage of the then-current list
price for the licensed software. A dedicated team of engineers trained to answer
questions on the installation and usage of AdServer products provides telephone
support from 6:30 a.m. to 4:30 p.m., Pacific time, Monday through Friday, from
the Company's corporate offices in San Mateo, California. The Company also
offers telephone support 24 hours a day, seven days a week through a call-back
procedure to certain customers who pay an additional fee for this service. The
Company believes that providing high quality customer service and technical
support is necessary to achieve rapid product implementation which, in turn, is
essential to customer satisfaction and revenue growth. Accordingly, the Company
is committed to continued recruiting and maintenance of a high-quality technical
support team.

EDUCATION. NetGravity provides training for both the users of AdServer and
the technical staffs who maintain AdServer. The Company also offers training in
advertising on the Internet, managing advertising sales with AdServer, and
administering AdServer. NetGravity will soon be offering training in developing
custom extensions to the AdServer product line. All training is made available
at either the customer's location or at NetGravity's facilities in San Mateo,
California or New York, New York.

TECHNOLOGY

NetGravity's AdServer is designed to be a robust architecture for customers
to implement flexible, scalable and reliable online advertising and direct
marketing solutions, as well as to integrate these solutions with external
systems such as electronic commerce and dynamic content generation systems. The
AdServer architecture is also extensible through documented application
programming interfaces ("APIs") and adheres to numerous industry standards. In
addition, the Company believes that the AdServer system architecture is flexible
enough to serve as the foundation for related future products.

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<PAGE>
[GRAPHIC: ADSERVER SYSTEM MODULES]

CAPTIONS:

- ADMANAGER PROVIDES FORECASTING, INVENTORY MANAGEMENT, AND SCHEDULING.

- ADINSIGHT PROVIDES AUTOMATIC REPORT GENERATION AND PUBLISHING.

- ADCONSOLE PROVIDES SYSTEM STATUS AND CONTROL.

- SITE AND CONSUMER DATA IS USED FOR REPORTING AND ANALYSIS.

PRIMARY ADSERVER SUBSYSTEMS

ADSERVER ADVERTISING DELIVERY ENGINE. The Company's AdServer advertising
delivery engine performs the actual content delivery function for the AdServer
System. The AdServer engine was designed to deliver highly targeted messages
with low latency to Web browsers, Web servers and proprietary content delivery
systems. The AdServer delivery engine architecture is designed to be highly
scalable, reliable and extensible. The Company has also incorporated several
performance and reliability enhancing technologies into the AdServer engine,
including built-in load balancing, automatic fail-over, automatic restart and
monitoring tools that notify technicians in the event of system failure.

ADMANAGER BUSINESS PROCESS MANAGEMENT APPLICATION. AdManager is a
three-tier application (comprised of user interface, application server and
database tiers) designed to allow customers to manage certain online advertising
and direct marketing business processes and associated data. In particular,
AdManager utilizes proprietary software to automate certain inventory
management, scheduling and availability functions that enable more efficient use
of available inventory.

ADINSIGHT ADVERTISING PERFORMANCE AND REPORTING SYSTEM. The Company
believes that the information resulting from online advertising and direct
marketing placements and consumer response is extremely valuable for
understanding consumer behavior and measuring return on investment. The
AdInsight measurement and reporting system has been designed to permit detailed
reporting and analysis for Web sites and networks. Because of the volume of data
gathered from high-traffic sites and networks, AdInsight offers customizable
summarization and reporting functions to reduce database size and storage
requirements. AdInsight also implements a scheduling system to generate reports
for automatic delivery to advertisers and others directly over the Internet.

ADCONSOLE SYSTEM MANAGEMENT APPLICATION. AdConsole is designed to simplify
the process of maintaining and administering the entire AdServer System by
providing system administrators with a user interface for common

46
<PAGE>
system management tasks. For example, AdConsole permits centralized starting,
stopping, monitoring and administering of multiple AdServer engines. AdConsole
allows system administrators to schedule routine tasks and monitor and
administer AdServer engines across multiple CPUs which increases the reliability
of the entire system by reducing opportunities for administration or
configuration errors.

OPEN ARCHITECTURE AND EXTENSIBILITY

The Company designed the AdServer System with numerous extensibility
features to allow integration into existing systems and creation of new
functionality. The Company's open targeting architecture allows customers to
augment AdServer's standard targeting functionality through the addition of
external targeting capabilities. The Company's advertising delivery API allows
integration into custom electronic commerce systems, dynamic content delivery
systems and other kinds of advertising delivery mechanisms. In addition,
AdServer stores business process data, including advertisements, targeting
information, delivery statistics and reporting data in a standard relational
database management system (RDBMS) in documented data structures, allowing
industry standard reporting and query tools to be used to view and manipulate
this data. These open extensibility features allow AdServer to be integrated
with customers' legacy systems and/or third-party systems, such as sophisticated
targeting engines, content delivery systems and customized data mining and
analysis tools.

INDUSTRY STANDARDS

The Company uses many widely accepted standards in developing its products,
including SQL for accessing RDBMSs, HTTP for Internet access, NSAPI (Netscape
Application Programming Interface) for access to Netscape's Internet servers,
ISAPI (Internet Server Application Programming Interface) for access to
Microsoft's Internet servers and HTML for formatting advertisements. Most of the
Company's software is written in C++, a widely accepted standard programming
language for developing object-oriented applications. Adherence to industry
standards provides compatibility with existing applications, enables ease of
modification, and reduces the need for software to be rewritten, thus protecting
the customer's investment. In addition, the Company is active in formulating
standards for advertising measurement on the Internet. For example, an officer
of the Company serves on the Board of Directors of the Internet Advertising
Bureau, a standards setting body for Web publishers.

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<PAGE>
CUSTOMERS AND MARKETS

As of March 31, 1998, NetGravity had over 225 customers. The Company
licenses its AdServer products to merchants, advertising agencies, content
publishers and advertising networks. The following is a partial list of the
Company's customers:

MERCHANTS:

Cendant
Commercial Dynamics
Corbis Corporation
Didax Online
DIRECTV, Inc.
E*TRADE Group, Inc.
Impluse! Buy Network
Ingram Micro, Inc.
International Billing Systems
Internet Travel Network
N2K Inc.
ONSALE
Planet Direct Corporation
Sallie Mae
SRDS
Ticketmaster Corporation
TUCOWS Interactive Limited
West Group

ADVERTISING AGENCIES:

Dentsu Inc. (CCI)
J. Walter Thompson

CONTENT PUBLISHERS:

Advanta (GoodCompany)
Alexa
Asahi Shimbun
Associated Media Base (Electronic Telegraph)
Associated Press
Big Network
Bloomberg
Blue Window
British Telecommunications
Cinetic GmbH
CondeNet
Continental Internet Services
Detroit Newspaper
Family Education Company
Forbes
Fujitsu
General Internet, Inc.
Geosystems (Map Quest)
GolfWeb
Hachette Filipacchi Interactions SA
Harris Publishing Systems Corporation
Healthgate Data Corp.
Hearst New Media and Technology
Hitachi Business International
Hollywood Online Inc.
Hollywood Stock Exchange
HotWired
Houston Chronicle
Inc. Online
InfoSeek
IVI Publishing, Inc.
iVillage
Knight Ridder New Media
La Tribune Interactive
Las Vegas Review-Journal
Los Angeles Times
LiveWorld Productions
Matrix
Macroview Communications
MCA/Universal Studios
McGraw Hill (Business Week)
Medscape, Inc.
Merrill Lynch
Miller Freeman PLC
Minneapolis Star Tribune Interactive
Mirror Group
Motorola (audioSENSE)
Mpath Interactive
MTV Interactive
Netscape Communications Corporation
Nettavisen
New Media Publisher
News Corporation (TVgen)
Newsday
NewTimes, Inc.
Nihon Keizai Shimbun
Nikkei Business Publications, Inc.
Northern Telecom (Nortel)
Online Career Center
PC World Communications
Planet Internet
Quote.com, Inc.
Red Herring
relationships.com, Inc.
Reuters Ltd. (Europe)
Rodale Press
Scientific American Inc.
Straylight
Streamix Corporation
Telecom New Zealand
The AmerUS Group Inc.
The Boston Globe
The Weather Channel
Third Age Media, Inc.
Time Inc. New Media
Toronto Morning Star
Toshiba Corporation
Travel Channel
TriCast Media
Turner Broadcasting (CNN Interactive)
USA.NET
USA Today
U S West (Dex)
U S West (IRG)
ViewCall Canada Inc.
Wire Networks
Virgin Net
Warner Bros. Online
Worldview Systems

ADVERTISING NETWORKS:

Active Agent
@Home Network
AudioNet, Inc.
Canadian Broadcasting Company
Canoe, Canadian Online Explorer
CDA Investment Technology
China Internet Corp.
Clickthrough Canada
Cyberfirst, Inc.
Digital Skies
EMC(2)
GoGlobal.net
GTE Gov't Sys. Corp.
HongKong Telecom IMS
Interealty Corp.
MediaLinx
Nippon Telegraph and Telephone Corporation
Overseas Connections
Riks New Media
Scandinavia Online
StarMedia Network, Inc.
Tele Danmark
Telstra Corporation Ltd.
WhoWhere?
www.yellowpages.com inc.

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<PAGE>
SELECTED CUSTOMER CASE STUDIES

CNN INTERACTIVE. Since August 1995, Cable News Network, Inc. has operated
CNN Interactive, a family of Web sites which now includes CNN.com, CNNfn,
CNN-Time All Politics, CNN enEspanol, CNN emPortugues and CNN-Sports
Illustrated. CNN Interactive is consistently ranked as one of the most visited
families of sites on the Web, and currently averages over 75 million page views
per week. CNN Interactive initially relied on an internally developed system to
manage its online advertising. Daily advertisement rotations were done manually
by CNN Interactive personnel using spreadsheets to track advertising inventory.
As user traffic and advertising inventory grew dramatically, CNN Interactive
concluded that it needed to automate and streamline its online advertising
management activities to keep pace with such growth. CNN Interactive turned to
NetGravity and, in December 1996, deployed AdServer Enterprise to replace its
internal advertising management system. AdServer Enterprise now performs
automatic, real-time impression-based advertisement rotation on the CNN
Interactive sites. In addition, CNN Interactive uses AdServer's reporting
features to generate individualized weekly reports for each of its more than 150
advertisers.

KNIGHT RIDDER REAL CITIES. Knight Ridder, a major domestic newspaper
publisher, through its Knight Ridder New Media division, manages Real Cities, a
network of approximately 40 Web sites, each of which is affiliated with a local
newspaper. Real Cities sites include MercuryCenter.com from the San Jose Mercury
News, Freep.com from the Detroit Free Press and PhillyNews.com from the
Philadelphia Inquirer and Philadelphia Daily News. Together, the Real Cities
sites receive an average of more than 12.5 million page views per week. Knight
Ridder sells local advertising space on individual Real Cities sites and
national advertising space on multiple Real Cities sites. Knight Ridder
initially attempted to manage these multiple inventories manually. As the number
of Real Cities sites increased and as user traffic at each site grew, their
system began to fail. Unable to precisely and quickly determine the aggregate
impressions delivered for an advertisement across all Real Cities sites, Knight
Ridder often over-delivered advertisements, thereby effectively reducing salable
inventory. Using both AdServer Network and AdServer Enterprise, Knight Ridder is
now able to more precisely and efficiently manage national campaigns while at
the same time allowing local control over individual Real Cities sites. The
impression-based scheduling and other controls provided by AdServer have allowed
Knight Ridder to significantly increase salable inventory while at the same time
reducing the resources dedicated to advertising management. In addition, Knight
Ridder has a long-term strategy of increasing the value of its advertising
inventory through the use of AdServer's targeting capabilities.

NETNOIR ONLINE. NetNoir Online offers a variety of Afrocentric content on
its Web site designed to promote black cultural values and to create an
interactive online black "community." Initially, NetNoir attempted to manually
manage advertising placement and rotation for its site, which, at the time,
served approximately 100,000 advertisement impressions per month. This method
was time-consuming, prone to human error and did not allow dynamic targeting of
advertisements. NetNoir attempted to outsource tracking and reporting functions
to reduce the administrative burden of advertising management but was
unsatisfied with the infrequency of the monthly reports that the tracking and
reporting firm was providing it. As NetNoir prepared for anticipated growth, it
engaged a leading Web hosting organization to host the NetNoir site and to
assist NetNoir in upgrading its advertising management capabilities. Through
NetGravity's AdHost program, the Web hosting organization purchased an AdServer
Enterprise license from the Company, installed and configured the software at
the hosting organization's facilities and allowed NetNoir to pay for the use of
AdServer through a monthly fee based on number of advertisements served. This
arrangement allowed NetNoir to access the sophisticated features of AdServer
Enterprise without a significant initial investment and without the need to hire
additional technical personnel to maintain its Internet systems. AdServer has
significantly reduced the administrative burdens of advertising placement,
rotation, tracking and reporting for NetNoir and has scaled smoothly with
NetNoir's rapid growth. NetNoir has also begun to use AdServer's targeting
features and expects to increase its use of targeting for advertisements and
other content in the future.

SALES AND MARKETING

The Company markets and sells its products and services primarily through
its field sales and telesales organizations and maintains sales and support
operations in North America, Europe and Asia Pacific. On

49
<PAGE>
March 31, 1998, the Company's sales organization consisted of 21 individuals.
The Company has sales and support offices in San Mateo, California, New York,
New York, London and Tokyo. The Company sells its products in Europe and Asia
Pacific through its subsidiaries in the United Kingdom and Japan. The Company
intends to broaden its presence in international markets by aggressively
expanding its international sales force and by entering into distribution
agreements with foreign distributors. See "Risk Factors--Dependence on Key
Personnel; Need for Additional Qualified Personnel" and "--Risks Associated with
International Expansion."

The Company's sales process begins with the generation of sales leads. Sales
leads are obtained primarily from telesales, customer referrals, the Company's
Web site, responses to the Company's public relations and marketing efforts and
through trade shows. The majority of the Company's sales leads to date have come
from content publishers seeking online advertising management software. Initial
sales activity normally includes a product demonstration of AdServer directly
over the Internet to the prospective customer. This demonstration is followed by
one or more technical discussions where the customer's issues and concerns are
addressed. For interested accounts, a field sales representative and a sales
engineer make an on-site visit where the needs of such customer are assessed.
Soon thereafter, a proposal is generated containing a statement of work for
NetGravity consulting and training services and a quote for the package of
software license and services to be delivered. In addition, the Company has
developed pre-configured packages suitable for many common customer
applications.

The Company uses a variety of marketing programs (including general brand
promotion) to: stimulate demand for its products; build market awareness through
the press and industry analysts; produce and maintain marketing information and
sales tools; generate and develop customer leads; and establish and manage
marketing alliances. As of March 31, 1998, eight employees were engaged in a
variety of marketing activities, including: preparing marketing research and
collateral marketing materials; product planning; managing press coverage and
other public relations; identifying potential customers; attending trade shows,
seminars and conferences; establishing and maintaining close relationships with
recognized industry analysts; and maintaining the Company's Web site.

Sales of the Company's software products generally require the Company to
engage in a lengthy sales effort including significant education of prospective
customers regarding the use and benefits of the Company's products. As a result,
the sales cycle for the Company's products is long, currently averaging
approximately four months. In particular, the sales cycle for the Company's
online direct marketing solutions is likely to be comparatively longer than the
sales cycle for the online advertising solutions, since online direct marketing
is less established and will require more education of the Company's potential
customers. In addition, the implementation of the Company's products often
involves a significant commitment of resources by customers and/or the Company's
consultants over an extended period of time. The Company's sales and customer
implementation cycles are subject to a number of potential delays. These include
delays related to product defects or errors as well as delays over which the
Company has little or no control, including customers' budgetary constraints,
internal acceptance reviews and the complexity of customers' online advertising
or direct marketing needs. See "Risk Factors--Lengthy Sales and Implementation
Cycles."

MARKETING ALLIANCES

An important element of the Company's sales strategy is to form business
alliances to assist the Company in marketing and selling its products and
developing customer applications. This approach is intended to increase the
resources available to perform application design and development services for
the Company's customers and to enhance the Company's market credibility,
potential for lead generation and access to large accounts. Additionally,
business partners can provide online advertising and direct marketing expertise
in solving the business problems of the Company's customers. Certain of
NetGravity's business partners have entered into reseller agreements with the
Company, whereby they are permitted to resell NetGravity's products, and, in
some cases, to customize the products. The Company works with these partners to
develop re-sale and co-marketing programs and to generate business referrals
that lead to sales. The Company does not provide exclusive sales territories and
does not impose minimum purchase requirements in connection with its reseller
agreements. The Company has reseller agreements with the following
organizations:

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<PAGE>
WEB HOSTING ORGANIZATIONS. Web hosting organizations centrally house and
maintain Internet connectivity equipment, server hardware and software for their
customers. Many Web sites utilize the services of hosting organizations and rely
on their advice and recommendations in selecting Internet software solutions.
Because of their influence in the market, the Company strives to maintain good
business relationships with these organizations. The following Web hosting
organizations have provided hosting services to NetGravity customers: ANS
Communications, BBN Corporation, Digex Incorporated, EUnet International B.V.,
Exodus Communications, Inc., Frontier GlobalCenter, Inc., Proxicom, Inc. and TCG
CERFnet, the data and Internet service business unit of Teleport Communications
Group Inc.

INTERNET SYSTEMS INTEGRATORS. Internet systems integrators assist online
content publishers and merchants in the design, procurement and deployment of
their Web sites. These Internet systems integrators often recommend advertising
management and other Internet solutions to their clients. The following Internet
systems integrators have worked with NetGravity customers: CKS--Enterprise, a
systems integration and consulting organization within CKS Group, Inc., Fort
Point Partners, Horizon Technologies, Organic Inc. and Poppe Tyson Interactive.

PRODUCT DEVELOPMENT

The Company believes that its future success will depend in large part on
its ability to enhance the AdServer System, develop new products, maintain
technological leadership, and satisfy an evolving range of customer requirements
for large scale online advertising and direct marketing applications. The
Company's product development organization is responsible for product
architecture, core technology, product testing and quality assurance, writing
user documentation, and expanding the ability of NetGravity products to operate
with the leading hardware platforms, operating systems, database management
systems, content management systems and electronic commerce systems. Since
inception, the Company has made substantial investments in product development
and related activities. In addition, certain technologies have been acquired and
integrated into NetGravity products through licensing arrangements. As of March
31, 1998, there were 23 employees in the Company's product development
organization. The Company's research and development expenses were $39,000, $1.8
million, and $3.0 million in the period ended December 31, 1995 and the years
ended December 31, 1996 and 1997, respectively. To date, the Company has not
capitalized any software development costs. The Company expects to continue to
devote substantial resources to its product development activities. The Company
plans to release its next major version of AdServer in 1999. The Company may
also release one or more less significant updates prior to the release of the
next major version.

51
<PAGE>
products do not meet the scalability requirements of its customers due to vastly
increased use of the Internet, the Company would have to incur substantial
expenditures and resources to address such issue and there can be no assurance
that the Company would be successful in scaling the capabilities of its products
to such level.

Although the Company sells products to each of the constituents in the
online advertising and direct marketing supply chain (merchants, advertising
agencies and content publishers), it does not currently offer products
automating the online advertising purchasing process among such constituents. If
demand for a comprehensive solution develops and the Company fails to develop
such a solution on a timely basis, or at all, it could have a material adverse
effect on the Company's business, results of operations or financial condition.
In addition, as more customers demand online advertising and direct marketing
solutions, the Company must tailor its products to the specific requirements of
both online advertisers and direct marketers and provide a solution for
supplying demographic and behavioral data. Specifically, the online direct
marketing market will require more narrowly targeted advertisements than the
online advertising market and will be even more reliant on demographic data than
the online advertising market. Although AdServer's largely advertising-oriented
features can be used for online direct marketing, the Company has not yet
developed products with the custom features required by online direct marketers.
If the Company does not develop a satisfactory product to address the online
direct marketing market, future growth of the Company could be impaired and the
Company could lose customers to competitors with more comprehensive solutions.
The occurrence of any such event could have a material adverse effect on the
Company's business, results of operations or financial condition.

The Company's products are designed to operate on a variety of hardware and
software platforms employed by its customers in their individual networks. The
Company must continually modify and enhance its products to keep pace with
changes in hardware and software platforms and database technology. As a result,
uncertainties related to the timing and nature of new product announcements,
introductions or modifications by operating systems vendors, particularly
Microsoft and Sun, by vendors of relational database software, particularly
Oracle and Microsoft, and browsers, particularly Netscape and Microsoft could
materially adversely impact the Company's business, results of operations or
financial condition.

COMPETITION

The market for online advertising and direct marketing is relatively new,
highly fragmented, intensely competitive, rapidly evolving and subject to rapid
technological change. Although the Company is currently the leading provider of
software solutions for online advertising and direct marketing, there can be no
assurance that such leadership will be maintained by the Company in the future.
Historically, the Company's competitive position with respect to prospective
customers who favor outsourced solutions has not been as strong given that the
Company has not, until recently, offered outsourced solutions. Even with the
introduction of AdCenter, the Company's outsourced solution, there can be no
assurance that the Company's competitive position will improve among such
customers given that several competitors have substantially more experience
marketing outsourced solutions. The Company's competitive position in its market
(or portions thereof) as compared to its competitors is otherwise difficult to
characterize, due principally to the variety of current and potential
competitors and the emerging nature of the market. The Company expects
competition to continue to increase both from existing competitors and new
market entrants. There are no substantial barriers to entry in these markets,
and the Company believes that its ability to compete is dependent upon many
factors within and beyond its control, including the timing and market
acceptance of new solutions and enhancements to existing solutions developed by
the Company and its competitors, customer service and support, sales and
marketing efforts and the ease of use, performance, features, price and
reliability of the Company's solutions.

Historically, participants in the online advertising and direct marketing
supply chain have used internally developed systems to manage their own online
advertising and direct marketing functions. However, the Company believes that
its primary competition will increasingly come from vendors that provide online
advertising and direct marketing software or service solutions or service
solutions. In the online advertising market, the Company competes directly with
DoubleClick, CMG (through its Engage/Accipiter unit) and Excite (through its
MatchLogic unit), and a variety of other online advertising service providers.
Some of these companies (such as DoubleClick)

52
<PAGE>
have adopted a business model focused on outsourcing of advertising and direct
marketing management. If this model increases in popularity for the Company's
targeted markets, the Company will be required to devote additional resources to
keep its own outsourcing solution competitive. Any failure by the Company to
successfully design, develop and market an advanced outsourced solution under
such circumstances would have a material adverse effect on the Company's
business, results of operations and financial condition. In the online direct
marketing market, the Company expects to face indirect competition from the
vendors of electronic commerce systems, including BroadVision, Interworld and
Open Market, among others. Additionally, providers of electronic commerce could
build online direct marketing solutions that would obviate the need for any
current or future products of the Company targeted to the online direct
marketing industry. The Company also encounters competition from Netscape and
Microsoft, which build or bundle advertising management products with their
Internet commerce solutions. Both Netscape and Microsoft have significantly
greater resources than the Company, and due to their control of the browser
market, if either of them were to offer online advertising and direct marketing
management solutions with features comparable to those offered by the Company,
there can be no assurance that the Company would be able to compete effectively
against any such product offerings.

The principal competitive factors affecting the market for the Company's
products are depth and breadth of functionality offered, ease of deployment,
expense of maintenance relative to service offerings, outsourcing capability,
control over consumer profile data, product quality, price, and consulting and
customer support. The Company believes it presently competes favorably with
respect to each of these factors. However, the Company's market is still
evolving, and there can be no assurance that the Company will be able to compete
successfully with current or future competitors, or that competitive pressures
faced by the Company will not have a material adverse effect on the Company's
business, results of operations or financial condition.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

53
<PAGE>
The Company generally provides its products to end users under nonexclusive,
nontransferable licenses during the term of the agreement, which is usually in
perpetuity. Under the general terms and conditions of the Company's standard
license agreements, the licensed software may be used pursuant to NetGravity's
published licensing practices. The source code for the Company's proprietary
software is protected both as a trade secret and as a copyrighted work. In
addition, some of the Company's agreements with its customers contain provisions
requiring release of source code for limited, non-exclusive use by the customer
in the event that the Company ceases to do business or the Company fails to
support its products. This release of source code may increase the likelihood of
misappropriation by third parties. The Company's policy is to enter into
confidentiality and intellectual property assignment agreements with its
employees, consultants, and vendors and generally to control access to and
distribution of its software, documentation, and other proprietary information.
Notwithstanding these precautions, it may be possible for a third party to copy
or otherwise obtain and use the Company's software or other proprietary
information without authorization or to develop similar software independently.
Policing unauthorized use of the Company's products is difficult, particularly
because the global nature of the Internet makes it difficult to control the
ultimate destination or security of software or other data transmitted. The laws
of other countries may afford the Company little or no effective protection of
its intellectual property. There can be no assurance that the steps taken by the
Company will prevent misappropriation of its technology or that agreements
entered into for that purpose will be enforceable. In addition, litigation may
be necessary in the future to enforce the Company's intellectual property
rights, to protect the Company's trade secrets, to determine the validity and
scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Such litigation, whether successful or unsuccessful,
could result in substantial costs and diversions of resources, either of which
could have a material adverse effect on the Company's business, results of
operations or financial condition.

54
<PAGE>
the sale of the Company's products and services until equivalent technology, if
available, is identified, licensed, and integrated, which could have a material
adverse effect on the Company's business, results of operations or financial
condition.

EMPLOYEES

As of March 31, 1998, the Company had 94 employees, including 29 in sales
and marketing, 23 in research and development, 29 in professional services,
customer support and education, and 13 in finance and administration. Of these,
five are located in Asia, nine are located in Europe and the remainder are
located in North America. None of the Company's employees is represented by a
labor union. The Company has experienced no work stoppages and believes its
relationship with its employees is good.

FACILITIES

The Company is headquartered in San Mateo, California where it leases
approximately 13,000 square feet pursuant to a term lease that expires on May
31, 1998. The Company is seeking to lease a larger facility in the San Mateo
area for its headquaters and expects to occupy its current San Mateo facility on
a month-to-month basis until a new facility is leased and prepared for
occupancy. In the event the Company's month-to-month lease is terminated on
short notice, there can be no assurance that the Company will be able to find
alternate facilities on a timely basis or at reasonable cost. In addition, the
Company maintains a regional office in New York, New York where it leases
approximately 3,000 square feet of office space pursuant to a lease that expires
in 2003. The Company also leases space in London and Tokyo to support its
international operations. See Note 6 of Notes to Consolidated Financial
Statements.

LEGAL PROCEEDINGS

The Company is not currently subject to any material legal proceedings. The
Company may from time to time become a party to various legal proceedings
arising in the ordinary course of its business.

55
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company, and their ages as of
March 31, 1998, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- --------------------------------------------------
<S> <C> <C>
John W. Danner......... 31 Chairman of the Board and Chief Executive Officer
Stephen E. Recht....... 46 Chief Financial Officer and Secretary
Susan Atherton......... 41 Vice President of Sales
Rick E. D. Jackson 37
IV................... Vice President of Marketing
Douglas S. Kaplan(1)... 32 Vice President and General Manager of Asia Pacific
Martin G. Lane-Smith... 50 Vice President of Engineering
Thomas A. Shields...... 30 Vice President, Chief Technology Officer
Jitendra Valera........ 40 Vice President and General Manager of Europe
Larry C. Wear.......... 32 Vice President of Support and Service
John D. D. Kohler(2)... 44 Director
Jonathan D. 47
Lazarus(3)........... Director
Alexander R. 30
Slusky(2)(3)......... Director
</TABLE>

- ----------

(1) Mr. Kaplan is an employee of Asia Pacific Ventures Co., a consulting firm
providing management services to NetGravity Asia Pacific K.K., and is not
directly employed by the Company or by NetGravity Asia Pacific K.K. See
"Certain Transactions."

(2) Member of Audit Committee.

(3) Member of Compensation Committee.

JOHN W. DANNER co-founded the Company in 1995, served as its President from
inception until April 1998 and has served as Chief Executive Officer and as a
Director since inception. In April 1998, Mr. Danner was elected Chairman of the
Board. From 1994 to 1995, Mr. Danner was a technical lead/architect for Silicon
Graphics, Inc. ("Silicon Graphics"), where he architected the set-top and server
side of a component of Silicon Graphics' interactive television system. From
1990 to 1994, Mr. Danner was a development manager at Oracle Corporation
("Oracle"), where he oversaw product development for Oracle Book, a multimedia
browser. Since January 1998, Mr. Danner has served on the Board of Directors of
the Internet Advertising Bureau, an online advertising advocacy group and
standards-setting body for online content publishers. Mr. Danner received
B.S.E.E. and M.S.E.E. degrees from Stanford University.

STEPHEN E. RECHT has served as the Chief Financial Officer and Secretary of
the Company since 1996. From 1995 to 1996, Mr. Recht was the Chief Financial
Officer of AuraVision Corporation, a fabless, multimedia semiconductor company,
where Mr. Recht was responsible for all financial operations, investor
relations, contract administration, human resources and facilities. From 1992 to
1995, Mr. Recht was the Vice President, Finance and Administration and the Chief
Financial Officer of ViewStar Corporation, a client/server, business process
automation software company, where Mr. Recht directed all financial operations
and investor relations. Mr. Recht received a B.A. degree in Economics from
Stanford University and an M.B.A. degree from the Wharton School at the
University of Pennsylvania.

SUSAN ATHERTON has served as the Company's Vice President of Sales since
April 1998. From 1996 to 1998, Ms. Atherton was the Vice President, Worldwide
Sales, of Datamind Corporation, a developer of data mining client/server and
Web-enhanced products, where Ms. Atherton managed the company's direct and
indirect channels sales organization worldwide and helped develop key strategic
relationships with several technology companies. From 1995 to 1996, Ms. Atherton
was the Vice President, Worldwide Sales, of Red Pepper Software, a supply chain
management software developer, where Ms. Atherton managed the company's direct
and indirect channels sales organization worldwide. From 1993 to 1995, Ms.
Atherton was the Area Vice President of Ross Systems, Inc., a

56
<PAGE>
provider of supply chain management solutions and client/server business
software for enterprise resource planning, where Ms. Atherton helped manage the
company's Western U.S. sales force. Ms. Atherton received a B.S. degree in
Economics from the University of California, Riverside.

RICK E. D. JACKSON IV has served as the Company's Vice President of
Marketing since 1997. From 1996 to 1997, Mr. Jackson was the Vice President,
Marketing for mFactory, Inc., an advanced multimedia authoring tool company,
where Mr. Jackson assembled and led a team of professionals responsible for all
aspects of product and corporate marketing. From 1994 to 1996, Mr. Jackson was
the Director of Product Marketing for Taligent, Inc. ("Taligent"), a software
company, where Mr. Jackson managed the marketing organization responsible for
various Taligent products. From 1990 to 1994, Mr. Jackson was the Director of
Product Marketing for NeXT Computer, Inc., a desktop computer and software
manufacturer, where Mr. Jackson assembled, managed and led the company's product
marketing team. Mr. Jackson received a B.S. degree in Computer Science from
California State University, Northridge.

DOUGLAS S. KAPLAN, a non-employee consultant to the Company, has served as
the Company's Vice President and General Manager of Asia Pacific since 1997. Mr.
Kaplan is an employee of Asia Pacific Ventures Co., a consulting firm providing
management services to NetGravity Asia Pacific K.K. From 1995 to 1997, Mr.
Kaplan was the Vice President of Nikkei BP BizTech Inc. ("Nikkei"), a Japanese
business and technology publisher, which Mr. Kaplan founded. At Nikkei, Mr.
Kaplan defined the company's business plan and developed Nikkei as a consulting
and research company. From 1990 to 1995, Mr. Kaplan was a Representative
Director and a co-founder of CMP Japan, the Japanese subsidiary of CMP Media,
Inc., a technology publisher. At CMP Japan, Mr. Kaplan developed the company's
business plan and implemented the business of consulting with U.S. technology
companies interested in conducting business in Japan. Mr. Kaplan received a B.A.
degree in Asian Studies and Economics from the University of California,
Berkeley.

MARTIN G. LANE-SMITH has served as the Company's Vice President of
Engineering since 1997. From 1991 to 1997, Mr. Lane-Smith was the Vice
President, Engineering of Edify Corporation, a provider of software solutions
for interactive online services, where Mr. Lane-Smith was responsible for all
aspects of product development, product support and the management of the
company's engineering team. Mr. Lane-Smith received a B.A. degree and an M.A.
degree, each in Natural Sciences (Math and Physics), from the University of
Cambridge.

THOMAS A. SHIELDS co-founded the Company in 1995 and served as the Company's
Vice President of Engineering and Secretary until 1996. Since 1996 Mr. Shields
has served as the Company's Vice President, Chief Technology Officer. From 1992
to 1995, Mr. Shields was a Development Manager and a Project Lead for Oracle,
where he led the Oracle Book project through two release cycles and designed the
entire feature set of Oracle Book version 2. Mr. Shields received a A.B. degree
in Computer Science from Harvard University.

JITENDRA VALERA has served as its Vice President and General Manager of
Europe since 1997. From 1996 to May 1998, Mr. Valera was an employee of Protege
Software (Holdings) Limited, a consulting firm providing management services to
NetGravity Europe Ltd. From 1994 to 1996, Mr. Valera was the Managing Director
of Applix (UK) Ltd., the United Kingdom subsidiary of Applix Inc., a producer
and marketer of enterprise software, where Mr. Valera was responsible for
management of the company. From 1989 to 1993, Mr. Valera held various positions
with Data Logic Ltd. ("Data Logic"), a computer services company, including most
recently, Director of Sales, Professional Services Division (International
Territory) and Director, International Sales and Marketing, Professional
Services Division. Among Mr. Valera's responsibilities at Data Logic was
establishing sales groups and strategies. Mr. Valera received a Business Studies
degree from Havering Technical College and an HND degree in Business Studies
from Hatfield Polytechnic.

LARRY C. WEAR has served as the Company's Vice President of Support and
Service since 1995. From 1994 to 1995, Mr. Wear was the Director of Customer
Support for Mercury Interactive Corporation, an automated client/ server testing
software company, where Mr. Wear was responsible for all customer support,
training, consulting and pre-sales engineering in North America. From 1992 to
1993, Mr. Wear was the Vice President of Software

57
<PAGE>
Development for XALT Software Corporation, a producer of personal and group
productivity tools, where he oversaw the design, development, testing, porting
and release of a suite of products. Mr. Wear received a B.S.E.E. degree from the
University of California, Davis, and an M.S.E.E. degree from Stanford
University.

JOHN D. D. KOHLER has served as a Director of the Company since inception.
In 1996, Mr. Kohler founded Redleaf Venture Management, L.L.C., a venture
management firm, of which he is currently a Managing Member. From 1994 to 1995,
Mr. Kohler was Vice President and General Manager, Customer Solutions, at
Netscape Communications Corporation. From 1991 to 1993, Mr. Kohler was a Vice
President and General Manager at Silicon Graphics. Over the previous 15 years,
Mr. Kohler held executive positions at Hewlett Packard Company, Convergent
Technologies and Unisys Corporation. Mr. Kohler received a B.A. degree in
International Relations and Economics from the University of California, Los
Angeles.

JONATHAN D. LAZARUS has served as a Director of the Company since 1996. From
1985 to 1996, Mr. Lazarus worked at Microsoft Corporation ("Microsoft"), where
he served most recently as Vice President, Strategic Relations. Mr. Lazarus is
an advisor to Microsoft, the Universal Studios New Media Group and ZDTV. Mr.
Lazarus currently serves on the boards of directors of Ziff-Davis, Inc. and
several private companies. Mr. Lazarus received a B.S. degree in Communications
from Temple University.

ALEXANDER R. SLUSKY has served as a Director of the Company since 1997.
Since April 1998, Mr. Slusky has been the Managing Member of Vector Capital
Partners, L.L.C., the General Partner of Vector Capital, L.P. ("Vector
Capital"), a technology equity fund affiliated with Ziff Brothers Investments
("ZBI"). Since 1995, Mr. Slusky has been a Principal of ZBI and from 1996 to
April 1998 was a General Partner of Vector Capital. From 1992 to 1995, Mr.
Slusky was an Associate at New Enterprise Associates ("NEA"), a venture capital
fund, and from 1993 until 1995 a Special Limited Partner of NEA VI, an entity
affiliated with NEA. Mr. Slusky serves on the boards of directors of several
private companies. Mr. Slusky received an A.B. degree in Economics from Harvard
University and an M.B.A. from the Harvard Business School.

BOARD COMMITTEES

The Board of Directors has a Compensation Committee and an Audit Committee.

COMPENSATION COMMITTEE. The Compensation Committee of the Board of
Directors reviews and makes recommendations to the Board regarding all forms of
compensation provided to the executive officers and directors of the Company and
its subsidiaries including stock compensation and loans. In addition, the
Compensation Committee reviews and makes recommendations on bonus and stock
compensation arrangements for all employees of the Company. As part of the
foregoing, the Compensation Committee also administers the Company's 1995 Stock
Option Plan, 1998 Stock Plan and 1998 Employee Stock Purchase Plan. The current
members of the Compensation Committee are Messrs. Lazarus and Slusky.

AUDIT COMMITTEE. The Audit Committee of the Board of Directors reviews and
monitors the corporate financial reporting and the internal and external audits
of the Company and its subsidiaries, including, among other things, the
Company's internal audit and control functions, the results and scope of the
annual audit and other services provided by the Company's independent auditors
and the Company's compliance with legal matters that have a significant impact
on the Company's financial reports. The Audit Committee also consults with the
Company's management and the Company's independent auditors prior to the
presentation of financial statements to stockholders and, as appropriate,
initiates inquiries into aspects of the Company's financial affairs. In
addition, the Audit Committee has the responsibility to consider and recommend
the appointment of, and to review fee arrangements with, the Company's
independent auditors. The current members of the Audit Committee are Messrs.
Kohler and Slusky.

58
<PAGE>
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS

Directors of the Company do not receive cash compensation for their service
as directors. Each non-employee director will automatically receive an option to
purchase 25,000 shares of Common Stock upon joining the Board of Directors. Each
incumbent director will automatically be granted an option to purchase an
additional 5,000 shares of Common Stock annually. See "Management--Employee
Benefit Plans."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors currently consists of
Messrs. Lazarus and Slusky. No interlocking relationship exists between any
member of the Company's Board of Directors or the Company's Compensation
Committee and any member of the board of directors or compensation committee of
any other company, and no such interlocking relationship has existed in the
past.

EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS

Pursuant to the Founder's Stock Purchase Agreements entered into in
September 1995 between the Company and each of John W. Danner, the Company's
Chairman of the Board and Chief Executive Officer, and Thomas A. Shields, the
Company's Vice President, Chief Technology Officer, the vesting of the stock
purchased under such agreements will accelerate upon certain changes of control
of the Company. See "Certain Transactions."

Pursuant to various agreements entered into between the Company and each of
Stephen E. Recht, the Company's Chief Financial Officer and Secretary, Susan
Atherton, the Company's Vice President of Sales, and Jitendra Valera, the
Company's Vice President and General Manager of Europe, upon certain changes of
control, certain benefits will be provided to each of such individuals under
certain circumstances in accordance with their respective agreements. See
"Certain Transactions--Employment and Severance Agreements."

EXECUTIVE COMPENSATION

The following table sets forth in summary form information concerning the
compensation awarded to, earned by or paid for services rendered to the Company
in all capacities during fiscal 1997 by (i) the Company's Chief Executive
Officer; (ii) the Company's four other most highly compensated executive
officers whose salary and bonus for such year exceeded $100,000, including one
former officer; and (iii) two other executive officers whose salary and bonus
for fiscal 1997 would have exceeded $100,000, had they served as officers during
the entire fiscal 1997 (collectively, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
FISCAL 1997
-------------
LONG-TERM
COMPENSATION
-------------
FISCAL 1997
--------------------- AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#)
- ---------------------------------------------------------------------------- ---------- --------- -------------
<S> <C> <C> <C>
John W. Danner, Chairman of the Board and Chief Executive Officer........... $ 124,280 $ -- --
Stephen E. Recht, Chief Financial Officer and Secretary..................... 154,517 -- 78,408
Rick E. D. Jackson IV, Vice President of Marketing (1)...................... 78,462 -- 150,000
Martin G. Lane-Smith, Vice President of Engineering (2)..................... 21,346 25,000 214,603
Thomas A. Shields, Vice President, Chief Technology Officer................. 100,500 -- --
Larry C. Wear, Vice President of Support and Service........................ 137,922 -- 81,817
Stephen Reade, former Vice President of Sales (3)........................... 104,000 149,876 79,545
</TABLE>

- ----------
(1) Mr. Jackson joined the Company in June 1997; his annualized base salary for
fiscal 1997 was $150,000.

(2) Mr. Lane-Smith joined the Company in November 1997; his annualized base
salary for fiscal 1997 was $185,000.

(3) Mr. Reade resigned as an employee of the Company in January 1998 and has
been retained by the Company as a consultant since that time. See "Certain
Transactions."

59
<PAGE>
OPTION GRANTS IN FISCAL 1997

The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the fiscal year ended December
31, 1997. All such options were awarded under the Company's 1995 Stock Option
Plan. No stock appreciation rights were granted to these individuals during such
year.

<TABLE>
<CAPTION>
POTENTIAL REALIZED
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------------
NAME GRANTED(#) FISCAL 1997(%) SHARE($)(2)(3) DATE(4) 5%($) 10%($)
- --------------------------- ----------- ----------------- --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John W. Danner, Chairman of
the Board and Chief
Executive Officer........ -- -- -- -- -- --

Stephen E. Recht, Chief
Financial Officer and
Secretary................ 72,727 5.5% $ 0.22 3/20/2007 $ 1,050,182 $ 1,681,716
5,681 0.4 0.22 11/20/2007 82,034 131,366
Rick E. D. Jackson IV, Vice
President of Marketing... 150,000 11.4 0.22 6/16/2007 2,166,008 3,468,552

Martin G. Lane-Smith, Vice
President of
Engineering.............. 214,603 16.3 0.22 11/3/2007 3,098,878 4,962,412

Thomas A. Shields, Vice
President, Chief
Technology Officer....... -- -- -- -- -- --

Larry C. Wear, Vice
President of Support and
Service.................. 34,090 2.6 0.22 3/20/2007 497,261 788,286
47,727 3.6 0.22 11/20/2007 689,180 1,103,624
Stephen Reade, former Vice
President of Sales (5)... 79,545 6.0 0.22 3/20/2007 1,148,634 1,839,373
</TABLE>

- ----------

(1) The 5% and 10% assumed rates of appreciation are prescribed by the rules and
regulations of the Securities and Exchange Commission and do not represent
the Company's estimate or projection of the future trading prices of its
Common Stock. There can be no assurance that any of the values reflected in
this table will be achieved. Actual gains, if any, on stock option exercises
are dependent on numerous factors, including the future performance of the
Company, overall market conditions and the option holder's continued
employment with the Company throughout the entire vesting period and option
term, which factors are not reflected in this table. The potential
realizable value is calculated by assuming that the initial public offering
price of $9.00 per share was the fair market value of the Company's Common
Stock at the time of grant and that the Common Stock appreciates at the
indicated rate for the entire term of the option and that the option is
exercised at the exercise price and sold on the last day at the appreciated
price.

(2) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock, as determined by the Board of Directors on the
date of grant. The exercise price per share of each option was based upon
such factors as the purchase price paid by investors for shares of the
Company's Preferred Stock, the absence of a trading market for the Company's
securities, the Company's financial outlook and results of operations and,
in the last half of 1997, the allocation of resources to address the
software errors contained in AdServer 3.0. Such exercise prices are
significantly lower than prices paid by investors purchasing shares of the
Company's Preferred Stock in transactions taking place approximately

60
<PAGE>
contemporaneously with the grant of such options. In making its
determination as to the exercise price of such options, the Board considered
the fact that the Company's Preferred Stock carried certain rights,
preferences and privileges, including a preference upon liquidation, sale or
merger, enhanced voting rights, and antidilution rights, and purchasers of
such Preferred Stock received additional contractual rights, including
registration rights, information rights and rights of first offer on new
issuances of the Company's securities. See "Certain Transactions" and Note 5
of Notes to Consolidated Financial Statements.

(3) Exercise price may be paid (i) in cash, (ii) by check, (iii) by promissory
note, (iv) by delivery of already-owned shares of the Company's Common Stock
subject to certain conditions, (v) by delivery of a properly executed
exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Company the amount of sale or loan proceeds required
to pay the exercise price or (vi) by any combination of the foregoing
methods of payment under applicable law.

(4) Twenty-five percent (25%) of the shares issuable upon exercise of options
granted under the Company's 1995 Stock Option Plan become vested on the
first anniversary of the vesting commencement date and the balance vests at
the rate of 1/48th of such shares for each month thereafter.

(5) Mr. Reade resigned as an employee of the Company in January 1998 and has
been retained by the Company as a consultant since that time. See "Certain
Transactions."

AGGREGATE OPTION EXERCISES IN FISCAL 1997 AND DECEMBER 31, 1997 OPTION VALUES

The following table provides information with respect to the Named Executive
Officers concerning unexercised options held as of December 31, 1997. No options
were exercised by the Named Executive Officers during the last fiscal year.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED OPTIONS VALUE OF UNEXERCISED
AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997(#) DECEMBER 31, 1997($)(1)
-------------------------------- ------------------------------
NAME EXERCISABLE(2) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------- ------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
John W. Danner, Chairman of the Board and Chief Executive
Officer.................................................. -- -- -- --
Stephen E. Recht, Chief Financial Officer and Secretary.... 187,498 -- $ 61,874 --
Rick E. D. Jackson IV, Vice President of Marketing......... 150,000 -- 49,500 --
Martin G. Lane-Smith, Vice President of Engineering........ 214,603 -- 70,819 --
Thomas A. Shields, Vice President, Chief Technology
Officer.................................................. -- -- -- --
Larry C. Wear, Vice President of Support and Service....... 81,817 -- 27,000 --
Stephen Reade, former Vice President of Sales (3).......... 79,545 -- 26,250 --
</TABLE>

- ----------

(1) Represents the difference between the fair market value of the shares of
Common Stock underlying the options at December 31, 1997 ($0.55 per share,
as determined by the Board of Directors) less the exercise price of such
options ($0.22 per share).

(2) The option shares are immediately exercisable, subject to the Company's
repurchase option at the original exercise price upon the optionee's
cessation of service prior to vesting in such option shares. The repurchase
option lapses or the option shares become vested as follows: 25% of the
option shares vest upon the completion of one year of service from the
vesting commencement date and an additional 1/48th of such shares become
exercisable each month thereafter.

(3) Mr. Reade resigned as an employee from the Company in January 1998 and has
been retained by the Company as a consultant since such time. See "Certain
Transactions."

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EMPLOYEE BENEFIT PLANS

1995 STOCK OPTION PLAN. The Company's 1995 Stock Option Plan (the "1995
Plan") was adopted by the Board of Directors in September 1995 and was approved
by the Company's stockholders in October 1995. At April 30, 1998, a total of
3,000,297 shares of Common Stock had been reserved for issuance under the 1995
Plan. The 1995 Plan provides for grants of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), to employees (including officers and employee directors) and
nonstatutory stock options to employees (including officers and employee
directors) and consultants of the Company. Directors who are not also employees
are not eligible to receive grants under the 1995 Plan once the Company
registers any class of any equity security pursuant to the Exchange Act. The
purposes of the 1995 Plan are to attract and retain the best available personnel
for positions of substantial responsibility, to provide additional incentive to
employees and consultants of the Company and its subsidiaries and to promote the
success of the Company's business. The 1995 Plan is administered by the Board of
Directors or by a committee appointed by the Board which identifies optionees
and determines the terms of options granted, including the exercise price,
number of shares subject to the option and the exercisability thereof.

The terms of options granted under the 1995 Plan may not exceed ten years.
The term of all incentive stock options granted to an optionee who, at the time
of grant, owns stock representing more than 10% of the voting power of all
classes of stock of the Company or a parent or subsidiary of the Company (a "Ten
Percent Stockholder"), may not exceed five years, however. Generally, options
granted under the 1995 Plan vest and become exercisable starting one year after
the date of grant, with 25% of the shares subject to the option becoming
exercisable at that time and an additional 1/48th of such shares becoming
exercisable each month thereafter. Holders of options granted under the 1995
Plan may exercise their options prior to complete vesting of shares, provided
that such holders enter into a restricted stock purchase agreement granting the
Company an option to repurchase any unvested shares at a price per share equal
to the original exercise price per share for the option in the event of a
termination of the optionee's employment or consulting relationship. The
exercise price of incentive stock options granted to an employee under the 1995
Plan must be at least equal to the fair market value of the shares on the date
of grant. The exercise price of any incentive stock option granted to a Ten
Percent Stockholder must equal at least 110% of the fair market value of the
Common Stock on the date of grant. The exercise price of nonstatutory stock
options granted to a Ten Percent Stockholder under the 1995 Plan must be no less
than 110% of the fair market value of the Common Stock on the date of grant. The
exercise price of nonstatutory stock options granted to a non-Ten Percent
Stockholder may be no less than 85% of the fair market value of the Common Stock
on the date of grant for non-Ten Percent Stockholder employees and consultants.
The consideration for exercising any incentive stock option or any nonstatutory
stock option is determined by the Board of Directors and may consist of (i)
cash, (ii) check, (iii) promissory note, (iv) delivery of already-owned shares
of the Company's Common Stock subject to certain conditions, (v) delivery of a
properly executed exercise notice together with irrevocable instructions to a
broker to promptly deliver to the Company the amount of sale or loan proceeds
required to pay the exercise price or (vi) any combination of the foregoing
methods of payment under applicable law.

No option granted under the 1995 Plan may be transferred by the optionee
other than by will or the laws of descent or distribution, and each option may
be exercised, during the lifetime of the optionee, only by such optionee. An
optionee whose relationship with the Company or any related corporation ceases
for any reason (other than death or permanent and total disability) may exercise
options in the three-month period following such cessation (unless such options
terminate or expire sooner by their terms). In the event of a proposed sale of
all or substantially all of the Company's assets or merger of the Company with
or into another corporation, all outstanding options may either be assumed or an
equivalent option may be substituted by the surviving entity. If such options
are not assumed or substituted, each optionee may exercise options as to all of
the shares subject to the option agreement, including shares as to which such
options would not otherwise be exercisable and the options become fully vested,
or to the extent such options have been exercised and unvested shares remain
subject to a restricted stock purchase agreement, the Company's repurchase
option will lapse entirely. In the event that the options become

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fully vested in connection with a sale of assets or merger of the Company, the
optionees will be notified that the options are fully vested for a period of
fifteen (15) days from the date of such notice, and that the options will
terminate upon the expiration of such period.

As of April 30, 1998, 1,205,861 shares of Common Stock had been issued upon
exercise of options outstanding under the 1995 Plan. Options to purchase
1,723,441 shares of Common Stock at a weighted average exercise price of $1.83
were also outstanding.

1998 STOCK PLAN. The Company's 1998 Stock Plan (the "1998 Plan") was
adopted by the Board of Directors on April 23, 1998 and was approved by the
Company's stockholders effective as of May 8, 1998. As of the date of this
Prospectus, no shares had been issued and no stock options had been granted
under the 1998 Plan.

The 1998 Plan provides for the grant of incentive stock options, within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, (the
"Code") to employees (including officers and employee directors) and for the
grant of nonstatutory stock options and stock purchase rights ("SPRs") to
employees, directors and consultants. A total of 2,000,000 shares of Common
Stock, plus annual increases equal to the lesser of (i) 1,000,000 shares, (ii)
5% of the outstanding shares, or (iii) a lesser amount determined by the Board
of Directors, are currently reserved for issuance pursuant to the 1998 Plan.
Unless terminated sooner, the 1998 Plan will terminate automatically in April
2008.

The 1998 Plan may be administered by the Board of Directors or a committee
of the Board (as applicable, the "Administrator"). The Administrator has the
power to determine the terms of the options or SPRs granted, including the
exercise price of the option or SPR, the number of shares subject to each option
or SPR, the exercisability thereof, and the form of consideration payable upon
such exercise. In addition, the Administrator has the authority to amend,
suspend or terminate the 1998 Plan, provided that no such action may affect any
share of Common Stock previously issued and sold or any option previously
granted under the 1998 Plan.

Options and SPRs granted under the 1998 Plan are generally not transferable
by the optionee, and each option and SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the 1998 Plan must
generally be exercised within three months after the end of optionee's status as
an employee, director or consultant of the Company, or within twelve months
after such optionee's termination by death or disability, but in no event later
than the expiration of the option's term.

In the case of SPRs, unless the Administrator determines otherwise, the
Restricted Stock Purchase Agreement shall grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment or consulting relationship with the Company for any reason (including
death or disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.

The exercise price of all incentive stock options granted under the 1998
Plan must be at least equal to the fair market value of the Common Stock on the
date of grant. The exercise price of nonstatutory stock options and SPRs granted
under the 1998 Plan is determined by the Administrator, but with respect to
nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the exercise
price must be at least equal to the fair market value of the Common Stock on the
date of grant. With respect to any participant who owns stock possessing more
than 10% of the voting power of all classes of the Company's outstanding capital
stock, the exercise price of any incentive stock option granted must equal at
least 110% of the fair market value on the grant date and the term of such
incentive stock option must not exceed five years. The term of all other options
granted under the 1998 Plan may not exceed ten years.

The 1998 Plan provides that in the event of a merger of the Company with or
into another corporation, or a sale of substantially all of the Company's
assets, each option and SPR shall be assumed or an equivalent option substituted
for by the successor corporation. If the outstanding options and SPRs are not
assumed or substituted for by the successor corporation, the Administrator shall
provide for the optionee to have the right to exercise the option or SPR as to
all of the optioned stock, including shares as to which it would not otherwise
be exercisable. If an

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option or SPR becomes exercisable in full in connection with a merger or sale of
assets, the Administrator shall notify the optionee that the option or SPR shall
be fully exercisable for a period of fifteen (15) days from the date of such
notice, and the option or SPR will terminate upon the expiration of such period.

1998 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1998 Employee Stock
Purchase Plan (the "1998 Purchase Plan") was adopted by the Board of Directors
on April 23, 1998 and was approved by the Company's stockholders effective as of
May 8, 1998. A total of 200,000 shares of Common Stock have been reserved for
issuance under the 1998 Purchase Plan, plus annual increases equal to the lesser
of (i) 750,000 shares, (ii) 4% of the outstanding shares on such dates or (iii)
a lesser amount determined by the Board.

The 1998 Purchase Plan, which is intended to qualify under Section 423 of
the Code, contains consecutive, overlapping, twenty-four month offering periods.
Each offering period includes four six-month purchase periods. The offering
periods generally start on the first trading day on or after February 1 and
August 1 of each year, except for the first such offering period which commences
on the first trading day on or after the effective date of this Offering and
ends on the last trading day on or before July 31, 2000.

Employees are eligible to participate if they are customarily employed by
the Company or any participating subsidiary for at least 20 hours per week and
more than five months in any calendar year. However, any employee who (i)
immediately after grant owns stock possessing 5% or more of the total combined
voting power or value of all classes of the capital stock of the Company, or
(ii) whose rights to purchase stock under all employee stock purchase plans of
the Company accrues at a rate which exceeds $25,000 worth of stock for each
calendar year may not be granted an option to purchase stock under the 1998
Purchase Plan. The 1998 Purchase Plan permits participants to purchase Common
Stock through payroll deductions of up to 10% of the participant's
"compensation." Compensation is defined as the participant's base straight time
gross earnings and commissions but excludes payments for overtime, shift
premium, incentive compensation, incentive payments, bonuses and other
compensation. The maximum number of shares a participant may purchase during a
single purchase period is 5,000 shares.

Amounts deducted and accumulated by the participant are used to purchase
shares of Common Stock at the end of each purchase period. The price of stock
purchased under the 1998 Purchase Plan is 85% of the lower of the fair market
value of the Common Stock (i) at the beginning of the offering period or (ii) at
the end of the purchase period; provided, however, that under certain
circumstances, the purchase price may be adjusted to a price not less than 85%
of the lower of the fair market value on the Common Stock on (i) the date the
Company's stockholders approve an increase in shares reserved for issuance under
the 1998 Purchase Plan or (ii) at the end of the purchase period. In the event
the fair market value at the end of a purchase period is less than the fair
market value at the beginning of the offering period, the participants will be
withdrawn from the current offering period following exercise and automatically
re-enrolled in a new offering period. The new offering period will use the lower
fair market value as of the first date of the new offering period to determine
the purchase price for future purchase periods. Participants may end their
participation at any time during an offering period, and they will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with the Company.

Rights granted under the 1998 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1998 Purchase Plan. The 1998 Purchase Plan provides
that, in the event of a merger of the Company with or into another corporation
or a sale of substantially all of the Company's assets, each outstanding option
may be assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute for the outstanding options, the
offering period then in progress will be shortened and a new exercise date will
be set that is before the date of the Company's proposed sale or merger. The
1998 Purchase Plan will terminate in April 2008. The Board of Directors has the
authority to amend or terminate the 1998 Purchase Plan, except that no such
action may adversely affect any outstanding options under the 1998 Purchase
Plan.

1998 DIRECTOR OPTION PLAN. The 1998 Director Option Plan (the "Director
Plan") was adopted by the Board of Directors on April 23, 1998 and was approved
by the Company's stockholders effective as of May 8, 1998. The Director Plan
provides for the grant of nonstatutory stock options to non-employee directors.
The Director Plan has

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a term of ten years, unless terminated sooner by the Board. A total of 200,000
shares of Common Stock have initially been reserved for issuance under the
Director Plan. In addition, the Director Plan provides for annual increases
equal to the lesser of (i) the number of shares needed to restore the maximum
aggregate number of shares available for sale under the Director Plan to 200,000
shares or (ii) a lesser number of shares determined by the Board.

The Director Plan provides that each non-employee director shall
automatically be granted an option to purchase 25,000 shares of Common Stock
(the "First Option") on the later of (i) the effective date of the Director Plan
or (ii) the date which such person first becomes a non-employee director. In
addition to the First Option, each non-employee director shall automatically be
granted an option to purchase 5,000 shares (a "Subsequent Option") on the date
of each of the Company's annual meeting of stockholders, if on such date he or
she shall have served on the Board for at least six months. Each First Option
and Subsequent Option shall have a term of 10 years. The shares subject to the
First Option and Subsequent Option shall vest as to 25% of the optioned stock
one year from the date of grant, and 1/48 of the optioned stock shall vest each
month thereafter, provided the person continues to serve as a director on such
dates. Holders of options granted under the Director Plan may exercise their
options prior to complete vesting of shares, subject to such holders entering
into restricted stock purchase agreements granting the Company an option to
repurchase, any unvested shares at a price per share equal to the original
exercise price per share for the option in the event of a termination of the
optionee's directorship. The exercise price of each First Option and each
Subsequent Option shall be 100% of the fair market value per share of the Common
Stock on the date of grant.

In the event of a merger of the Company or the sale of substantially all of
the assets of the Company, each option may be assumed or an equivalent option
substituted for by the successor corporation. If an option is assumed or
substituted for by the successor corporation, it shall continue to vest as
provided in the Director Plan. However, if a non-employee director's status as a
director of the Company or the successor corporation, as applicable, is
terminated other than upon a voluntary resignation by the non-employee director,
each option granted to such non-employee director shall become fully vested and
exercisable upon such termination date. If the successor corporation does not
agree to assume or substitute for the option, each option shall become fully
vested and exercisable for a period of fifteen days from the date the Board
notifies the optionee of the option's full exercisability, after which period
the option shall terminate. Options granted under the Director Plan must be
exercised within three months of the end of the optionee's tenure as a director
of the Company, or within twelve months after such director's termination by
death or disability, but in no event later than the expiration of the option's
ten-year term. Options granted under the Director Plan are generally not
transferable by the optionee other than by will or the laws of descent and
distribution, and each option is exercisable, during the lifetime of the
optionee, only by such optionee.

401(K) PLAN. The Company participates in a tax-qualified employee savings
and retirement plan (the "401(k) Plan") which covers all of the Company's
full-time employees who are at least 21 years of age. Pursuant to the 401(k)
Plan, eligible employees may defer up to 20% of their pre-tax earnings, subject
to the Internal Revenue Service's annual contribution limit. The 401(k) Plan
permits additional discretionary matching contributions by the Company on behalf
of all participants in the 401(k) Plan in such a percentage amount as may be
determined annually by the Board of Directors. To date, the Company has made no
such matching contributions. The 401(k) Plan is intended to qualify under
Section 401 of the Internal Revenue Code of 1986, as amended, so that
contributions by employees or by the Company to the 401(k) Plan, and income
earned on plan contributions, are not taxable to employees until withdrawn from
the 401(k) Plan, and so that contributions by the Company, if any, will be
deductible by the Company when made. The trustee under the 401(k) Plan, at the
direction of each participant, invests the assets of the 401(k) Plan in any of a
number of investment options.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Amended and Restated Certificate of Incorporation, as amended,
limits the liability of directors to the maximum extent not prohibited by
Delaware law. Delaware law provides that a corporation's certificate of
incorporation may contain a provision eliminating or limiting the personal
liability of a director for

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monetary damages for breach of their fiduciary duties as directors, except for
liability (i) for any breach of their duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit.

The Company's Amended and Restated Bylaws provide that the Company shall
indemnify its directors, officers and employee benefit plan fiduciaries, and may
indemnify its employees and agents to the fullest extent permitted by law. The
Company believes that indemnification under its Amended and Restated Bylaws
covers at least negligence and gross negligence on the part of indemnified
parties. The Company's Amended and Restated Bylaws also permit the Company to
advance expenses incurred by an indemnified director or officer in connection
with the defense of any action or proceeding arising out of such director's or
officer's status or service as a director or officer of the Company upon an
undertaking by such director or officer to repay such advances if it is
ultimately determined that such director or officer is not entitled to such
indemnification.

The Company has entered into agreements to indemnify its directors and
officers, in addition to the indemnification provided for in the Company's
Amended and Restated Bylaws. These agreements, among other things, indemnify the
Company's directors and officers for certain expenses (including attorneys' fees
and associated legal expenses), judgments, fines and amounts paid in settlement
amounts if such settlement is approved in advance by the Company, which approval
shall not be unreasonably withheld, actually and reasonably incurred by any such
person in any action, suit, proceeding or alternative dispute resolution
mechanism arising out of such person's services as a director or officer of the
Company, any subsidiary of the Company or any other company or enterprise to
which the person provides services at the request of the Company. The Company
believes that these provisions and agreements are necessary to attract and
retain qualified directors and officers.

At present, there is no pending litigation or proceeding involving any
director, officer, employee benefit plan fiduciary, employee or agent of the
Company where indemnification will be required or permitted. The Company is not
aware of any threatened litigation or proceeding that might result in a claim
for such indemnification.

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CERTAIN TRANSACTIONS

Since the Company's inception in September 1995, there has not been any
transaction or series of similar transactions to which the Company was or is a
party in which the amount involved exceeded or exceeds $60,000 and in which any
Director, executive officer, holder of more than 5% of any class of the
Company's voting securities or any member of the immediate family of any of the
foregoing persons had or will have a direct or indirect material interest, other
than the transactions described below.

EQUITY AND CONVERTIBLE DEBT FINANCINGS

INITIAL SALES OF COMMON STOCK TO FOUNDERS. In September 1995, the Company
issued and sold 1,636,363 shares of Common Stock to John W. Danner, the
Company's Chairman of the Board and Chief Executive Officer, and 818,181 shares
of Common Stock to Thomas A. Shields, the Company's Vice President, Chief
Technology Officer, for an aggregate purchase price of $150,000 or approximately
$0.06 per share. Such shares are subject to pro-rata monthly vesting over a
four-year period commencing on the purchase date. This vesting will accelerate
in full upon certain changes of control of the Company. In March 1997, the
Company repurchased 89,212 and 356,850 shares of such Common Stock from Messrs.
Danner and Shields, respectively, for an aggregate purchase price of $98,134 or
$0.22 per share.

COMMON STOCK AND BRIDGE NOTE FINANCING. From September through November
1995, the Company issued and sold an aggregate of 818,181 shares of Common Stock
for an aggregate purchase price of $49,999.98, or approximately $0.06 per share,
and issued bridge notes in the aggregate amount of $450,000, the principal and
interest of which were convertible into Preferred Stock (the "Common Stock and
Bridge Note Financing"). The investors in the Common Stock and Bridge Note
Financing included, among others, (1) a trust controlled by Alden E. and Ann
Danner, parents of John W. Danner, which trust purchased 163,636 shares of
Common Stock and lent the Company $90,000 at an annual simple interest rate of
5.91%, which principal and interest converted into Series A Preferred Stock in
the Company's Series A Preferred Stock financing (the "Series A Preferred Stock
Financing"); (2) Thomas A. Shields, Sr., the father of the Company's Vice
President, Chief Technology Officer, who purchased 81,818 shares of Common Stock
and lent to the Company $45,000 at an annual simple interest rate of 5.91%,
which principal and interest converted into Series A Preferred Stock in the
Series A Preferred Stock Financing; and (3) a trust controlled by John D. D.
Kohler, a Director of the Company, which trust purchased 163,636 shares of
Common Stock and lent the Company $90,000 at an annual simple interest rate of
5.91%, which principal and interest converted into Series A Preferred Stock in
the Series A Preferred Stock Financing.

SERIES A PREFERRED STOCK FINANCING. In January and April 1996, the Company
issued and sold an aggregate of 4,404,578 shares of Series A Preferred Stock for
an aggregate purchase price of $4,448,623.78, or $1.01 per share. The investors
in such shares included, among others, (1) Vector Capital, L.P. ("Vector
Capital"), a general partner of which is Vector Capital Partners, L.L.C., of
which Alexander R. Slusky, a Director of the Company, is the Managing Member,
which limited partnership purchased 500,000 shares of Series A Preferred Stock;
(2) a trust controlled by Alden E. and Ann Danner, parents of John W. Danner,
which trust purchased 90,623 shares of Series A Preferred Stock; (3) a trust
controlled by Thomas A. Shields, Sr., which trust purchased 45,117 shares of
Series A Preferred Stock; (4) a trust controlled by John D. D. Kohler, which
trust purchased 90,609 shares of Series A Preferred Stock; (5) Larry C. Wear,
Vice President of Support and Services, who purchased 49,504 shares of Series A
Preferred Stock; and (6) certain entities affiliated with an institutional
investor that was a holder of more than 5% of the Company's securities and that
held a seat on the Board of Directors of the Company until March 1998, which
entities purchased 3,073,738 shares of Series A Preferred Stock, all of which
stock was sold by such investor and its affiliated entities in March 1998 to
other institutional investors in the Company for an aggregate selling price of
approximately $3,688,485. Upon consummation of this offering, the outstanding
shares of Series A Preferred Stock will automatically convert into an aggregate
of 2,494,147 shares of Common Stock.

SERIES B PREFERRED STOCK FINANCING. In March 1997, the Company issued and
sold an aggregate of 4,307,969 shares of Series B Preferred Stock at an
aggregate purchase price of $4,299,999.24, or approximately $1.00 per share. The
investors in such shares included, among others, (1) Vector Capital which
purchased 3,506,487 shares of

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Series B Preferred Stock; (2) Redleaf Venture I, L.P. and Redleaf Associates I,
L.P. (together, "Redleaf"), the general partner of which is Redleaf Venture
Management, L.L.C. of which John D. D. Kohler, a Director of the Company, is a
Managing Member, which limited partnerships purchased an aggregate of 300,556
shares of Series B Preferred Stock; (3) Jonathan D. Lazarus, a Director of the
Company, who purchased 75,139 shares of Series B Preferred Stock; and (4)
certain entities affiliated with an institutional investor that was a holder of
more than 5% of the Company's securities and that held a seat on the Board of
Directors of the Company until March 1998, which entities purchased 400,741
shares of Series B Preferred Stock, all of which stock was sold by such investor
and its affiliated entities in March 1998 to other institutional investors in
the Company for an aggregate selling price of approximately $480,889. Upon
consummation of this offering, the outstanding shares of Series B Preferred
Stock will automatically convert into an aggregate of 1,958,158 shares of Common
Stock.

SERIES C PREFERRED STOCK FINANCING. In November 1997 and March 1998, the
Company issued and sold an aggregate of 3,887,978 shares of Series C Preferred
Stock for aggregate net proceeds to the Company of $8,683,000, or approximately
$2.24 per share. The investors in such shares included, among others, (1) London
Pacific Life & Annuity Company, an owner of more than 5% of the Company's Common
Stock, which purchased 2,437,241 shares of Series C Preferred Stock and (2)
Vector Capital, which purchased 669,571 shares of Series C Preferred Stock. Upon
consummation of this offering, the outstanding shares of Series C Preferred
Stock will automatically convert into an aggregate of 1,767,261 shares of Common
Stock.

REGISTRATION RIGHTS AGREEMENT

Certain holders of Preferred Stock have certain registration rights with
respect to their shares of Common Stock issuable upon conversion of their
Preferred Stock. See "Description of Capital Stock--Registration Rights of
Certain Holders."

EMPLOYMENT AND SEVERANCE AGREEMENTS

JITENDRA VALERA EMPLOYMENT AGREEMENT. In May 1998, the Company and Mr.
Valera, the Company's Vice President and General Manager of Europe, entered into
an employment agreement under which Mr. Valera is entitled to receive severance
benefits under certain circumstances. In the event Mr. Valera is involuntarily
terminated from the Company or a successor Company without cause within 12
months of a Change of Control, defined to include (i) the acquisition of the
Company, (ii) the merger or consolidation of the Company with any other
corporation, (iii) a sale of all or substantially all of the Company's assets or
(iv) the acquisition by any person of beneficial ownership of 50% or more of the
total voting power of the Company's then outstanding securities, Mr. Valera
would be entitled to a lump sum payment equal to 18 months of Mr. Valera's base
salary as in effect immediately prior to the Change of Control, which lump sum
payment would equal approximately 123,750 pounds sterling, based on Mr. Valera's
current base salary. In the event of any other involuntary termination of Mr.
Valera's employment with less than six months notice, Mr. Valera would be
entitled to continued monthly payment of his base salary for six months
following such notice.

SUSAN ATHERTON EMPLOYMENT AGREEMENT. In April 1998, the Company and Ms.
Atherton, the Company's Vice President of Sales, entered into an employment
agreement under which Ms. Atherton is entitled to receive severance benefits
under certain circumstances. Pursuant to her employment agreement, Ms. Atherton
was granted an option to purchase up to 176,802 shares of the Company's Common
Stock, subject to the Company's standard vesting provisions. In the event that
Ms. Atherton's employment with the Company is involuntarily terminated by the
Company without cause prior to October 23, 1998, such option would become
immediately vested as to 22,100 shares of Common Stock. In the event Ms.
Atherton is involuntarily terminated by the Company or a successor company
without cause within 12 months of a Change of Control, defined to include (i)
the acquisition of the Company, (ii) the merger or consolidation of the Company
with any other corporation or (iii) a sale of all or substantially all of the
Company's assets, Ms. Atherton would be entitled to a lump sum payment equal to
18 months of Ms. Atherton's base salary as in effect immediately prior to the
Change of Control, which lump sum payment would equal approximately $225,000,
based on Ms. Atherton's current base salary.

68
<PAGE>
STEPHEN E. RECHT EMPLOYMENT AND SEVERANCE AGREEMENT. In March 1998, the
Company and Mr. Recht, Chief Financial Officer and Secretary of the Company,
entered into an employment and severance agreement under which Mr. Recht is
entitled to receive certain benefits generally in the event Mr. Recht is
involuntarily terminated by the Company or a successor company without cause (i)
upon the acquisition of the Company, (ii) upon the merger or consolidation of
the Company with any other corporation, (iii) upon a sale of all or
substantially all of the Company's assets (each a "Change of Control") or (iv)
within 12 months of a Change of Control. Upon such a termination, Mr. Recht
would be entitled to (i) a total of 18 monthly payments equal to Mr. Recht's
monthly base salary as in effect immediately prior to the Change of Control,
currently $13,750 per month, and (ii) reimbursements for a period of 18 months
for the cost of Mr. Recht's group health and dental plan coverage.

STEPHEN READE SEPARATION AGREEMENT. In March 1998, the Company and Mr.
Reade, the Company's former Vice President of Sales, entered into a separation
agreement and release of all claims with the Company. Pursuant to such
agreement, Mr. Reade agreed to provide consulting services to the Company for a
six-month period following his resignation date (the "Consulting Period"), to
continue to be subject to certain competitive restrictions during the Consulting
Period and to release the Company from all claims related to his employment. The
Company also agreed to pay Mr. Reade $50,000 for his consulting services, to
allow the continued vesting of his outstanding stock options during the
Consulting Period and to release Mr. Reade from all claims related to his
employment.

MARTIN LANE-SMITH EMPLOYMENT AGREEMENT. In October 1997, the Company and
Mr. Lane-Smith, the Company's Vice President of Engineering, entered into an
employment agreement under which Mr. Lane-Smith was granted an option covering
an aggregate of 214,603 shares of Common Stock. The employment agreement, as
amended, also provides for the grant of an additional option to purchase up to
78,021 additional shares of the Company's Common Stock, which option will be
granted in October 1998 in the event Mr. Lane-Smith meets certain performance
criteria established by the Company.

The Company also has granted options to certain of its executive officers
pursuant to at-will employment agreements. Such options are described further in
the Management section under "Executive Compensation" and "Option Grants in
Fiscal 1997."

PROTEGE SOFTWARE PROFESSIONAL SERVICES AGREEMENT. In March 1997, the
Company and Protege Software (Holdings) Limited ("Protege") entered into a
professional services agreement (the "Professional Services Agreement") under
which Protege agreed to act as general manager for the Company in Europe. In
addition, Protege agreed to perform certain professional services for the
Company. In connection with the Professional Services Agreement, Jitendra Valera
the Company's Vice President and General Manager of Europe, served in such
capacity via the Professional Services Agreement as an employee of Protege from
March 1997 through May 1998. In May 1998, the Company and Protege amended the
Professional Services Agreement to, among other things, allow the Company to
hire Mr. Valera directly. Effective May 1998, Mr. Valera became an employee of
NetGravity Europe Limited and continued to serve as the Company's Vice President
and General Manager of Europe. See "Management--Executive Officers and
Directors."

ASIA PACIFIC VENTURES CO. CONSULTANT AND REPRESENTATIVE AGREEMENT. In June
1998, the Company and Asia Pacific Ventures Co. ("Asia Pacific Ventures")
entered into a consultant and representative agreement (the "Consultant and
Representative Agreement") under which Asia Pacific Ventures has agreed to
advise and represent the Company in Asia. In connection with the Consultant and
Representative Agreement, Douglas Kaplan, an employee of Asia Pacific Ventures,
serves as the Company's Vice President and General Manager of Asia Pacific. See
"Management--Executive Officers and Directors."

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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 30, 1998 and as adjusted to
reflect the sale of the 3,000,000 shares of Common Stock offered hereby by (i)
each person or entity who is known by the Company to own beneficially 5% or more
of the Company's outstanding Common Stock, (ii) each director of the Company,
(iii) each of the Named Executive Officers and (iv) all directors and executive
officers of the Company as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED(1)(3)
SHARES ------------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OWNED(1) OFFERING OFFERING
- -------------------------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
Vector Capital, L.P.(2) ........................................................ 3,449,504 33.6% 26.0%
c/o Ziff Brothers Investments
153 East 53rd Street, 43rd Floor
New York, NY 10022
London Pacific Life & Annuity Company .......................................... 1,377,461 13.4 10.4
3109 Poplarwood Court, Suite 108
Raleigh, NC 27604
John W. Danner(3)(8)............................................................ 1,545,809 15.1 11.7
John D. D. Kohler(4)............................................................ 621,181 6.1 4.7
Alexander R. Slusky(2).......................................................... 3,449,504 33.6 26.0
Jonathan D. Lazarus(5).......................................................... 52,335 * *
Stephen E. Recht(6)............................................................. 193,292 1.8 1.4
Rick E. D. Jackson IV(7)........................................................ 172,839 1.7 1.3
Thomas A. Shields(3)(8)......................................................... 461,444 4.5 3.5
Martin G. Lane-Smith(9)......................................................... 219,261 2.1 1.6
Larry C. Wear(3)(10)............................................................ 195,206 1.9 1.5
Stephen Reade(3)(11)............................................................ 248,007 2.4 1.9
All directors and executive officers as a group (13 people)(12)................. 7,437,875 66.0 52.1
</TABLE>

- ----------
* Represents beneficial ownership of less than 1% of the outstanding shares of
Common Stock.

(1) Applicable percentage ownership is based on 10,257,210 shares of Common
Stock and Preferred Stock (on an as converted to Common Stock basis)
outstanding as of April 30, 1998 and 13,257,210 shares immediately following
the completion of this offering (assuming no exercise of the Underwriters'
over-allotment option). Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and generally
includes voting or investment power with respect to securities, subject to
community property laws, where applicable. Shares of Common Stock subject to
options or warrants that are presently exercisable or exercisable within 60
days of April 30, 1998 are deemed to be beneficially owned by the person
holding such options or warrants for the purpose of computing the percentage
ownership of such person but are not treated as outstanding for the purpose
of computing the percentage ownership of any other person.

(2) Includes all shares held by Vector Capital, L.P. Vector Capital Partners,
L.L.C. is the General Partner of Vector Capital, L.P. Mr. Slusky, a Director
of the Company, is the Managing Member of Vector Capital Partners, L.L.C.
Mr. Slusky disclaims beneficial ownership of the shares held by Vector
Capital, L.P. except to the extent of his pecuniary interests therein from
his membership interest in Vector Capital Partners, L.L.C.

(3) This column assumes no exercise of the Underwriter's over-allotment option.
If, however, the Underwriters' over-allotment option is exercised in full,
the Selling Stockholders will sell an aggregate of 200,000 shares of Common
Stock. Specifically, in such event, in addition to those share amounts set
forth in the table above, (i) John W. Danner, Chairman of the Board and
Chief Executive Officer of the Company, will sell an aggregate of 77,290
shares and will beneficially own 1,468,519 shares, which is 10.9% of the
Company's outstanding Common Stock, after completion of this offering, (ii)
Thomas A. Shields, the Company's Vice President, Chief Technology Officer,
will sell an aggregate of 22,727 shares and will beneficially own 438,717
shares, which is 3.2% of the Company's outstanding Common Stock, after
completion of this

70
<PAGE>

offering, (iii) Larry C. Wear, the Company's Vice President of Support and
Service, will sell an aggregate of 4,545 shares and will beneficially own
190,661 shares, which is 1.4% of the Company's outstanding Common Stock,
after completion of this offering, (iv) Stephen Reade, a former Vice
President of the Company, will sell an aggregate of 2,272 shares and will
beneficially own 245,735 shares, which is 1.8% of the Company's outstanding
Common Stock, after completion of this offering, (v) a trust controlled by
Bradley V. Husick, a former Vice President of the Company, will sell an
aggregate of 65,680 shares and will beneficially own 98,805 shares, which is
less than 1% of the Company's outstanding Common Stock, after completion of
this offering, (vi) a trust controlled by Alden and Ann Danner will sell an
aggregate of 10,727 shares and will beneficially own 204,225 shares, which
is 1.5% of the Company's outstanding Common Stock, after completion of this
offering, (vii) Arthur and Vida Goldstein will sell an aggregate of 10,727
shares and will beneficially own 96,680 shares, which is less than 1% of the
Company's outstanding Common Stock, after completion of this offering,
(viii) John Krystynak, an employee of the Company, will sell 1,000 shares
and will beneficially own 104,350 shares, which is less than 1% of the
Company's outstanding Common Stock, after completion of this offering, and
(ix) the estate of Richard Wood, a former director of the Company, will sell
an aggregate of 5,032 shares and will beneficially own 24,533 shares, which
is less than 1% of the Company's outstanding Common Stock, after completion
of this offering.

(4) Includes 163,636 shares held by the Kohler Family Trust, of which Mr. Kohler
is a trustee. Also includes 5,607 shares held by Redleaf Associates I, L.P.
and 451,938 shares held by Redleaf Venture I, L.P. (collectively, the
"Redleaf Limited Partnerships"). Mr. Kohler, a Director of the Company, is
the Managing Member of Redleaf Venture Management, L.L.C., the General
Partner of the Redleaf Limited Partnerships. Mr. Kohler disclaims beneficial
ownership of the shares held by the Redleaf Limited Partnerships except to
the extent of his pecuniary interest therein.

(5) Consists of 52,335 shares held by Lazarus Family Investments LLC, of which
Mr. Lazarus is a Managing Member.

(6) Includes 193,179 shares issuable upon the exercise of stock options
exercisable within 60 days of April 30, 1998.

(7) Consists of 172,839 shares of Common Stock issuable upon the exercise of
stock options exercisable within 60 days of April 30, 1998.

(8) Includes 113 shares of Common Stock issuable upon the exercise of stock
options exercisable within 60 days of April 30, 1998.

(9) Consists of 219,261 shares of Common Stock issuable upon the exercise of
stock options exercisable within 60 days of April 30, 1998.

(10) Includes 104,656 shares of Common Stock issuable upon the exercise of stock
options exercisable within 60 days of April 30, 1998.

(11) Includes 79,545 shares of Common Stock issuable upon the exercise of stock
options exercisable within 60 days of April 30, 1998.

(12) Includes 1,010,367 shares of Common Stock issuable upon the exercise of
stock options exercisable within 60 days of April 30, 1998.

71
<PAGE>
DESCRIPTION OF CAPITAL STOCK

GENERAL

Upon the completion of this offering, the Company will be authorized to
issue 50,000,000 shares of Common Stock, $0.001 par value, and 5,000,000 shares
of undesignated Preferred Stock, $0.001 par value. Immediately after the
completion of this offering and assuming no exercise of the Underwriters'
over-allotment option, there will be an aggregate of 13,257,210 shares of Common
Stock outstanding, 1,723,441 shares of Common Stock will be issuable upon
exercise of outstanding options and no shares of Preferred Stock will be issued
and outstanding.

The following description of the Company's capital stock and certain
provisions of the Company's Amended and Restated Certificate of Incorporation,
as amended, and Amended and Restated Bylaws does not purport to be complete and
is subject to and qualified in its entirety by the Company's Amended and
Restated Certificate of Incorporation and Bylaws, which are included as exhibits
to the Registration Statement of which this Prospectus forms a part, and by
applicable provisions of Delaware law.

COMMON STOCK

As of April 30, 1998, there were 4,037,644 shares of Common Stock
outstanding that were held of record by approximately 79 stockholders. There
will be 13,257,210 shares of Common Stock outstanding (assuming no exercise of
the Underwriters' over-allotment option and no exercise of options then
outstanding) after giving effect to the sale of Common Stock offered to the
public hereby. The holders of Common Stock are entitled to one vote per share
held of record on all matters submitted to a vote of stockholders. Holders of
Common Stock do not have cumulative voting rights, and, therefore, holders of a
majority of the shares voting for the election of directors can elect all of the
directors. In such event, the holders of the remaining shares will not be able
to elect any directors.

Holders of the Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any existing or future agreements
between the Company and its debtholders. The Company has never declared or paid
cash dividends on its capital stock, expects to retain future earnings, if any,
for use in the operation and expansion of its business, and does not anticipate
paying any cash dividends in the foreseeable future. In addition, the Company's
bank line of credit agreement contains a restrictive covenant that limits the
Company's ability to pay cash dividends or make stock repurchases without the
prior written consent of the lender. See "Dividend Policy." In the event of the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets legally available for
distribution after payment of all debts and other liabilities and subject to the
prior rights of holders of Preferred Stock then outstanding, if any.

PREFERRED STOCK

Effective upon the closing of this offering, the Company will be authorized
to issue 5,000,000 shares of undesignated Preferred Stock. The Board of
Directors has the authority to issue the Preferred Stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting a series or the designation of such series, without any
further vote or action by the Company's stockholders. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders and may adversely affect the market price of, and the
voting and other rights of, the holders of Common Stock. The issuance of
Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of Common Stock, including the loss of voting
control to others. The Company has no current plans to issue any shares of
Preferred Stock.

72
<PAGE>
ANTITAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION, BYLAWS AND
DELAWARE LAW

The Company's Amended and Restated Certificate of Incorporation, as amended
(the "Certificate") provides that all stockholder actions must be effected at a
duly called annual or special meeting and may not be effected by written
consent. The Company's Amended and Restated Bylaws provide that, except as
otherwise required by law, special meetings of the stockholders can only be
called pursuant to a resolution adopted by a majority of the Board of Directors
or by the chief executive officer of the Company. In addition, the Amended and
Restated Bylaws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders, including proposed
nominations of persons for election to the Board. Stockholders at an annual
meeting may only consider proposals or nominations specified in the notice of
meeting or brought before the meeting by or at the direction of the Board of
Directors or by a stockholder who was a stockholder of record on the record date
for the meeting, who is entitled to vote at the meeting and who has delivered
timely written notice in proper form to the Company's Secretary of the
stockholder's intention to bring such business before the meeting. The
Certificate and the Amended and Restated Bylaws provide that the affirmative
vote of holders of at least a majority of the total votes eligible to be cast in
the election of directors is required to amend, alter, change or repeal certain
of their provisions.

The foregoing provisions of the Company's Certificate and Amended and
Restated Bylaws are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions which may involve an actual or threatened change of control of the
Company. Such provisions are designed to reduce the vulnerability of the Company
to an unsolicited acquisition proposal and, accordingly, could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. Such provisions are also intended to discourage certain tactics
that may be used in proxy fights but could, however, have the effect of
discouraging others from making tender offers for the Company's shares and,
consequently, may also inhibit fluctuations in the market price of the Company's
shares that could result from actual or rumored takeover attempts. These
provisions may also have the effect of preventing changes in the management of
the Company. See "Risk Factors--Antitakeover Effects of Certain Charter
Provisions, Bylaws and Delaware Law."

EFFECT OF DELAWARE ANTITAKEOVER STATUTE

The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by the employee stock plans in which employee participants do
not have the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or (iii) on or
subsequent to such date, the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder.

Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition involving the interested stockholder
of 10% or more of the assets of the corporation; (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,

73
<PAGE>
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person. See "Risk Factors--Antitakeover Effects of
Certain Charter Provisions, Bylaws and Delaware Law."

REGISTRATION RIGHTS OF CERTAIN HOLDERS

After this offering, the holders of 9,305,068 shares of Common Stock will be
entitled upon expiration of lock-up agreements with the Underwriters to certain
rights with respect to the registration of such shares under the Securities Act.
Under the terms of the agreement between the Company and the holders of such
registrable securities, if the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other securities holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled to include shares
of such Common Stock therein. Holders of registration rights may also require
the Company to file a registration statement under the Securities Act at the
Company's expense with respect to their shares of Common Stock, and the Company
is required to use its best efforts to effect such registration. Further,
holders may require the Company to file registration statements on Form S-3 at
the Company's expense when such form becomes available for use to the Company.
All such registration rights are subject to certain conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares to be included in such registration.

WARRANTS

As of April 30, 1998, warrants to purchase 27,650 shares of Common Stock of
the Company at an aggregate exercise price of $0.22 were outstanding.

TRANSFER AGENT

The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services. Its address is 235 Montgomery Street, 23rd Floor, San
Francisco, California 94109, and its telephone number at this location is (415)
743-1444.

LISTING

The Company's Common Stock has been approved for quotation on the Nasdaq
National Market under the trading symbol "NETG."

74
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.

Upon completion of this offering, the Company will have outstanding an
aggregate of 13,257,210 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, the 3,000,000 shares sold in this offering will be freely
tradeable without restriction or further registration under the Securities Act
of 1933, as amended (the "Securities Act"), unless such shares are purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act (the "Affiliates"). The remaining 10,257,210 shares of Common
Stock held by existing stockholders are "restricted securities" as that term is
defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted
Shares may be sold in the public market only if registered or if they qualify
for an exemption from registration under Rules 144, 144(k) or 701 promulgated
under the Securities Act, which rules are summarized below. As a result of the
contractual restrictions described below and the provisions of Rules 144, 144(k)
and 701, additional shares will be available for sale in the public market as
follows: (i) 34,322 shares will be eligible for immediate sale on the date of
this Prospectus, (ii) an additional 31,929 shares will be eligible for sale
beginning on the date 90 days after the date of this Prospectus, (iii) an
additional 7,582,325 shares will be eligible for sale upon expiration of the
lock-up agreements 180 days after the date of this Prospectus and (iv) the
remaining 2,608,634 shares will be eligible for sale upon expiration of their
respective one-year holding periods, subject to the volume limitations described
below, if applicable.

Upon completion of this offering, the holders of 9,305,068 shares of Common
Stock, or their transferees, will be entitled to certain rights with respect to
the registration of such shares under the Securities Act. See "Description of
Capital Stock--Registration Rights." Registration of such shares under the
Securities Act would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by Affiliates)
immediately upon the effectiveness of such resignation.

All officers and directors, and 70 stockholders and 52 option holders of the
Company have agreed not to sell, make any short sale of, grant any option for
the purchase of, or otherwise transfer or dispose of, any shares of Common Stock
or any securities convertible into or exercisable or exchangeable for Common
Stock for a period of 180 days after the date of this Prospectus, without the
prior written consent of BancAmerica Robertson Stephens. BancAmerica Robertson
Stephens currently has no plans to release any portion of the securities subject
to lock-up agreements. When determining whether or not to release shares from
the lock-up agreements, BancAmerica Robertson Stephens will consider, among
other factors, the stockholder's reasons for requesting the release, the number
of shares for which the release is being requested and market conditions at the
time.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 132,572 shares immediately after
this offering); or (ii) the average weekly trading volume of the Common Stock on
the Nasdaq National Market during the four calendar weeks preceding the filing
of a notice on Form 144 with respect to such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an Affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of any
prior owner except an Affiliate), is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions

75
<PAGE>
of Rule 144; therefore, unless otherwise restricted, "144(k) shares" may be sold
immediately upon the completion of this offering. In general, under Rule 701 of
the Securities Act as currently in effect, any employee, consultant or advisor
of the Company who purchased shares from the Company in connection with a
compensatory stock or option plan or other written agreement is eligible to
resell such shares 90 days after the effective date of this offering in reliance
on Rule 144, but without compliance with certain restrictions, including the
holding period, contained in Rule 144.

The Company intends to file a registration statement on Form S-8 under the
Securities Act covering shares of Common Stock reserved for issuance under the
Company's 1995 Plan, 1998 Plan, 1998 Director Plan and 1998 Purchase Plan. Based
on the number of options outstanding and shares reserved for issuance at April
30, 1998 under such plans, such registration statement would cover approximately
4,365,080 shares. Such registration statement is expected to be filed and become
effective as soon as practicable after the effective date of this offering.
Accordingly, shares registered under such registration statement will, subject
to Rule 144 volume limitations applicable to Affiliates, be available for sale
in the open market, unless such shares are subject to vesting restrictions with
the Company or the lock-up agreements described above. As of April 30, 1998,
options to purchase 1,723,441 shares of Common Stock were issued and outstanding
under the 1995 Plan, and no options to purchase shares had been granted under
the Company's 1998 Plan, 1998 Director Plan, and 1998 Purchase Plan. See
"Management--Employee Benefit Plans."

76
<PAGE>
UNDERWRITING

The Underwriters, BancAmerica Robertson Stephens, NationsBanc Montgomery
Securities LLC and FAC/Equities, a division of First Albany Corporation, have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement, to purchase from the Company the numbers of shares of Common Stock
set forth opposite their respective names below. The Underwriters are committed
to purchase and pay for all such shares if any are purchased.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
BancAmerica Robertson Stephens................................................... 1,500,000
NationsBanc Montgomery Securities LLC............................................ 1,200,000
First Albany Corporation......................................................... 300,000
----------
Total........................................................................ 3,000,000
----------
----------
</TABLE>

The Underwriters have advised the Company that the Underwriters propose to
offer the shares of Common Stock to the public at the price to the public set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession of not more than $0.36 per share, of which $0.10 may be
reallowed to other dealers. After the public offering, the public offering
price, concession and reallowance to dealers may be reduced by the Underwriters.
No such reduction shall change the amount of proceeds to be received by the
Company as set forth on the cover page of this Prospectus.

The Company and the Selling Stockholders have granted to the Underwriters an
option, exercisable during the 30-day period after the date of this Prospectus,
to purchase up to an aggregate of 450,000 additional shares of Common Stock at
the initial public offering price per share set forth on the cover of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of the
total number of shares offered hereby. If purchased, such additional shares will
be sold by the Underwriters on the same terms as those on which the shares
offered hereby are being sold.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
Underwriting Agreement.

Pursuant to the terms of lock-up agreements, the holders of 10,190,959
shares of the Company's Common Stock (including 6,191,254 shares of Common Stock
issuable upon conversion of outstanding Preferred Stock), have agreed, for a
period of up to 180 days after the date of this Prospectus, that, subject to
certain exceptions, they will not contract to sell or otherwise dispose of any
shares of Common Stock, any options or warrants to purchase shares of Common
Stock or any securities convertible into, or exchangeable for, shares of Common
Stock, owned directly by such holders or with respect to which they have the
power of disposition, without the prior written consent of BancAmerica Robertson
Stephens. BancAmerica Robertson Stephens may, in its sole discretion, and at any
time without notice, release all or any portion of the securities subject to the
lock-up agreements. All of the shares of Common Stock subject to the lock-up
agreements will be eligible for sale in the public market upon the expiration of
the lock-up agreements, subject in the case of any restricted shares to Rule
144.

In addition, the Company has agreed that until 180 days after the date of
this Prospectus, the Company will not, without the prior written consent of
BancAmerica Robertson Stephens, subject to certain exceptions, offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock, any options
or warrants to purchase any shares of Common Stock or any securities convertible
into, exercisable for or exchangeable for shares of Common Stock other than the
Company's sale of shares in this offering, the issuance of shares of Common
Stock upon the

77
<PAGE>
exercise of outstanding options and warrants and the conversion of shares of
preferred stock and the grant of options to purchase shares of Common Stock
under existing employee stock option or stock purchase plans. See "Shares
Eligible for Future Sale."

Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock offered hereby was determined through negotiations among the Company and
the Underwriters. Among the factors considered in such negotiations were
prevailing market conditions, certain financial information of the Company,
market valuations of other companies that the Company and the Underwriters
believe to be comparable to the Company, estimates of the business potential of
the Company, the present state of the Company's development and other factors
deemed relevant.

The Underwriters have reserved for sale, at the initial public offering
price, up to 150,000 shares of the Common Stock offered hereby for certain
persons designated by the Company who have expressed an interest in purchasing
such shares of Common Stock in the offering. The number of shares available for
sale to the general public will be reduced to the extent such persons purchase
such reserved shares. Any reserved shares not so purchased will be offered by
the Underwriters to the general public on the same basis as other shares offered
hereby.

The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

The Underwriters have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the Underwriters to reclaim the selling concession otherwise accruing
to an Underwriter or syndicate member in connection with the offering if the
Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Underwriters in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Underwriters have advised the Company that such transactions may be effected
on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

78
<PAGE>
LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California, is acting as counsel for the Underwriters in connection
with certain legal matters relating to the shares of Common Stock offered
hereby. Certain members of Wilson Sonsini Goodrich & Rosati beneficially own an
aggregate of 14,016 shares of Common Stock through an investment trust. In
addition, a member of Wilson Sonsini Goodrich & Rosati beneficially owns an
additional 164,485 shares which were issued to the spouse of such member in
connection with such spouse's former employment with the Company. If the
Underwriters' over-allotment option is exercised in full, 65,680 of such shares
will be sold in the offering.

EXPERTS

The consolidated financial statements and related schedule of NetGravity,
Inc. and subsidiary as of December 31, 1996 and 1997 and for the period from
September 5, 1995 (inception) to December 31, 1995 and each of the years in the
two-year period ended December 31, 1997, have been included herein and in the
Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.

Effective March 1997, the Company's Board of Directors engaged KPMG Peat
Marwick LLP ("KPMG") as the Company's principal accountants to audit the
Company's financial statements. Prior to such engagement, KPMG and the Company
discussed matters including the application of accounting principles and
auditing standards. Such discussions occurred in the normal course of business,
and KPMG's responses were not a condition to its engagement by the Company.
Ernst & Young LLP ("Ernst & Young") served as the Company's independent auditors
from the Company's inception until the Company's dismissal of Ernst & Young
effective March 1997, which dismissal was approved by the Company's Board of
Directors. Ernst & Young performed the first full fiscal year audit of the
Company's financial statements for the then fiscal year ended March 31, 1996
(the "March 31, 1996 Audit"), which was the only audit of the Company performed
by Ernst & Young. The report of Ernst & Young on the financial statements of the
Company prepared in connection with the March 31, 1996 Audit did not contain an
adverse opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles. Furthermore, in connection
with the March 31, 1996 Audit and during the subsequent interim period prior to
the dismissal of Ernst & Young, there were no disagreements between Ernst &
Young and the Company on any matters of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which, if not
resolved to the satisfaction of Ernst & Young, would have caused Ernst & Young
to make reference to the subject matter of such disagreements in connection with
its report.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended, with respect to the
securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock, reference is made to the Registration Statement and the exhibits
and schedules filed as a part thereof. Statements contained in this Prospectus
as to the contents of any contract or any other document referred to are not
necessarily complete. In each instance, reference is made to the copy of such
contract or document filed as an exhibit to the Registration Statement, and each
such statement is qualified in all respects by such reference. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Seven World Trade Center, Suite 1300, New York, New York
10048 and Northwestern Atrium Center, 500 Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Information concerning the Company is also available
for inspection at the offices of the Nasdaq National Market, Reports Section,
1735 K Street, N.W., Washington, D.C. 20006. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the Commission's Web site is http://www.sec.gov.

79
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2

Consolidated Balance Sheets as of December 31, 1996 and 1997 and March 31,
1998 (unaudited)........................................................ F-3

Consolidated Statements of Operations for the Period from September 5,
1995 (Inception) to December 31, 1995, and the Years ended December 31,
1996 and 1997, and Three Months ended March 31, 1997 and 1998
(unaudited)............................................................. F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the Period
from September 5, 1995 (Inception) to December 31, 1995, and the Years
ended December 31, 1996 and 1997, and Three Months ended March 31, 1998
(unaudited)............................................................. F-5

Consolidated Statements of Cash Flows for the Period from September 5,
1995 (Inception) to December 31, 1995, and the Years ended December 31,
1996 and 1997, and Three Months ended March 31, 1997 and 1998
(unaudited)............................................................. F-6

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

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
NetGravity, Inc.:

We have audited the accompanying consolidated balance sheets of NetGravity,
Inc. and subsidiary as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the period from September 5, 1995 (inception) to December 31, 1995 and
each of the years in the two-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
NetGravity, Inc. and subsidiary as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for the period from September
5, 1995 (inception) to December 31, 1995 and for each of the years in the
two-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.

KPMG PEAT MARWICK LLP

San Francisco, California,
April 17, 1998, except as to Note 8,
which is as of May 8, 1998

F-2
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1998
-------------------- ----------------------
1996 1997 ACTUAL PRO FORMA
--------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 1,020 $ 5,637 $ 6,318 $ 6,318
Accounts receivable, net of allowances of $169, $223 and $137 at
December 31, 1996 and 1997, and as of March 31, 1998,
respectively....................................................... 1,218 2,739 3,812 3,812
Prepaid expenses and other current assets........................... 182 155 219 219
--------- --------- --------- -----------
Total current assets.............................................. 2,420 8,531 10,349 10,349
Property and equipment, net........................................... 695 1,356 1,483 1,483
Other assets.......................................................... 44 -- -- --
--------- --------- --------- -----------
$ 3,159 $ 9,887 $ 11,832 $ 11,832
--------- --------- --------- -----------
--------- --------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable.................................... $ -- $ 1,140 $ 1,139 $ 1,139
Accounts payable.................................................... 257 305 289 289
Accrued liabilities................................................. 666 1,344 1,612 1,612
Deferred revenue.................................................... 1,718 3,520 4,627 4,627
--------- --------- --------- -----------
Total current liabilities......................................... 2,641 6,309 7,667 7,667
Notes payable, less current portion................................... 682 727 606 606

Commitments

Stockholders' equity (deficit):
Convertible preferred stock; $0.001 par value; 26,540,194 shares
authorized; 4,404,578, 11,149,788 and 12,600,525 shares issued and
outstanding at December 31, 1996 and 1997, and as of March 31,
1998, respectively; aggregate liquidation preference of $14,216 as
of December 31, 1997; 5,000,000 shares authorized, none outstanding
on a pro forma basis as of March 31, 1998.......................... 4 11 13 --
Common stock, $0.001 par value; 35,000,000 shares authorized;
4,234,511, 3,979,125 and 4,042,295 shares issued and outstanding at
December 31, 1996, 1997, and March 31, 1998, respectively;
50,000,000 shares authorized; 10,261,861 shares issued and
outstanding on a pro forma basis as of March 31, 1998.............. 4 4 4 10
Additional paid-in capital.......................................... 4,650 16,209 19,859 19,866
Deferred stock compensation......................................... -- (1,669) (1,813) (1,813)
Accumulated deficit................................................. (4,822) (11,704) (14,504) (14,504)
--------- --------- --------- -----------
Total stockholders' equity (deficit).............................. (164) 2,851 3,559 3,559
--------- --------- --------- -----------
$ 3,159 $ 9,887 $ 11,832 $ 11,832
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ------------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock for cash.............................. -- $ -- 3,822 $ 4 $ 146
Issuance of common stock upon exercise of stock options........ -- -- 542 1 32
Net loss....................................................... -- -- -- -- --
--------- --- ----- --- -------------
Balances as of December 31, 1995............................... -- -- 4,364 5 178
Issuance of common stock upon exercise of stock options........ -- -- 310 -- 62
Repurchases of common stock.................................... -- -- (439) (1) (27)
Compensation expense related to non-employee option grants..... -- -- -- -- 8
Issuance of Series A preferred stock, net of issuance costs of
$15.......................................................... 4,405 4 -- -- 4,429
Net loss....................................................... -- -- -- -- --
--------- --- ----- --- -------------
Balances as of December 31, 1996............................... 4,405 4 4,235 4 4,650
Issuance of common stock for cash.............................. -- -- 17 -- 4
Issuance of common stock upon exercise of stock options........ -- -- 301 -- 67
Compensation expense related to non-employee option grants..... -- -- -- -- 120
Deferred compensation related to grants of stock options....... -- -- -- -- 1,784
Amortization of deferred compensation.......................... -- -- -- -- --
Repurchases of common stock in connection with revaluation..... -- -- (446) -- (98)
Repurchases of common stock.................................... -- -- (126) -- (26)
Issuance of Series B preferred stock, net of issuance costs of
$18.......................................................... 4,308 4 -- -- 4,277
Issuance of Series C preferred stock, net of issuance costs of
$566......................................................... 2,437 3 -- -- 5,431
Net loss....................................................... -- -- -- -- --
--------- --- ----- --- -------------
Balances as of December 31, 1997............................... 11,150 $ 11 3,979 $ 4 $ 16,209
Issuance of common stock for cash (unaudited).................. -- -- 11 -- 2
Issuance of common stock upon exercise of stock options
(unaudited).................................................. -- -- 56 -- 12
Repurchases of common stock (unaudited)........................ -- -- (4) -- (1)
Issuance of Series C preferred stock, net of issuance costs of
$1 (unaudited)............................................... 1,451 2 -- -- 3,247
Deferred compensation related to grants of stock options
(unaudited).................................................. -- -- -- -- 390
Amortization of deferred stock compensation (unaudited)........ -- -- -- -- --
Net loss (unaudited)........................................... -- -- --
--------- --- ----- --- -------------
Balances as of March 31, 1998 (unaudited)...................... 12,601 $ 13 4,042 $ 4 $ 19,859
--------- --- ----- --- -------------
--------- --- ----- --- -------------

<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
STOCK ACCUMULATED EQUITY
COMPENSATION DEFICIT (DEFICIT)
------------- ------------ --------------
<S> <C> <C> <C>
Issuance of common stock for cash.............................. $ -- $ -- $ 150
Issuance of common stock upon exercise of stock options........ -- -- 33
Net loss....................................................... -- (195) (195)
------------- ------------ -------
Balances as of December 31, 1995............................... -- (195) (12)
Issuance of common stock upon exercise of stock options........ -- -- 62
Repurchases of common stock.................................... -- -- (28)
Compensation expense related to non-employee option grants..... -- -- 8
Issuance of Series A preferred stock, net of issuance costs of
$15.......................................................... -- -- 4,433
Net loss....................................................... -- (4,627) (4,627)
------------- ------------ -------
Balances as of December 31, 1996............................... -- (4,822) (164)
Issuance of common stock for cash.............................. -- -- 4
Issuance of common stock upon exercise of stock options........ -- -- 67
Compensation expense related to non-employee option grants..... -- -- 120
Deferred compensation related to grants of stock options....... (1,784) -- --
Amortization of deferred compensation.......................... 115 -- 115
Repurchases of common stock in connection with revaluation..... -- -- (98)
Repurchases of common stock.................................... -- -- (26)
Issuance of Series B preferred stock, net of issuance costs of
$18.......................................................... -- -- 4,281
Issuance of Series C preferred stock, net of issuance costs of
$566......................................................... -- -- 5,434
Net loss....................................................... -- (6,882) (6,882)
------------- ------------ -------
Balances as of December 31, 1997............................... $ (1,669) $ (11,704) $ 2,851
Issuance of common stock for cash (unaudited).................. -- -- 2
Issuance of common stock upon exercise of stock options
(unaudited).................................................. -- -- 12
Repurchases of common stock (unaudited)........................ -- -- (1)
Issuance of Series C preferred stock, net of issuance costs of
$1 (unaudited)............................................... -- -- 3,249
Deferred compensation related to grants of stock options
(unaudited).................................................. (390) -- --
Amortization of deferred stock compensation (unaudited)........ 246 -- 246
Net loss (unaudited)........................................... -- (2,800) (2,800)
------------- ------------ -------
Balances as of March 31, 1998 (unaudited)...................... $ (1,813) $ (14,504) $ 3,559
------------- ------------ -------
------------- ------------ -------
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 5, 1995 YEAR ENDED DECEMBER THREE MONTHS ENDED
(INCEPTION) TO 31, MARCH 31,
DECEMBER 31, -------------------- --------------------
1995 1996 1997 1997 1998
------------------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................................... $ (195) $ (4,627) $ (6,882) $ (1,160) $ (2,800)
Adjustments to reconcile net loss to net cash used in
operating activities:........................................
Depreciation................................................ 5 172 540 86 231
Amortization of deferred stock compensation................. -- -- 115 -- 246
Compensation from grant of non-employee stock options....... -- 8 120 -- --
Changes in operating assets and liabilities:
Accounts receivable, net.................................. -- (1,218) (1,521) (897) (1,073)
Prepaid expenses and other assets......................... (4) (178) 27 135 (64)
Accounts payable.......................................... 18 239 48 (94) (16)
Accrued liabilities....................................... 30 635 678 114 268
Deferred revenue.......................................... -- 1,718 1,802 718 1,107
----- --------- --------- --------- ---------
Net cash used in operating activities................... (146) (3,251) (5,073) (1,098) (2,101)
----- --------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures.......................................... (62) (810) (1,201) (261) (358)
Purchases of short-term investments........................... -- (2,705) (2,466) (2,466) --
Proceeds from maturities of short-term investments............ -- 2,705 2,466 -- --
Other assets.................................................. -- (44) 44 -- --
----- --------- --------- --------- ---------
Net cash used in investing activities................... (62) (854) (1,157) (2,727) (358)
----- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from notes payable................................... 450 683 1,185 173 --
Repayment of notes payable.................................... -- (450) -- -- (122)
Proceeds from issuance of preferred stock, net................ -- 4,433 9,715 4,281 3,249
Proceeds from issuance of common stock........................ 183 62 71 -- 14
Repurchases of common stock................................... -- (28) (124) -- (1)
----- --------- --------- --------- ---------
Net cash provided by financing activities............... 633 4,700 10,847 4,454 3,140
----- --------- --------- --------- ---------
Net increase in cash and cash equivalents....................... 425 595 4,617 629 681
Cash and cash equivalents at beginning of year/period........... -- 425 1,020 1,020 5,637
----- --------- --------- --------- ---------
Cash and cash equivalents at end of year/period................. $ 425 $ 1,020 $ 5,637 $ 1,649 $ 6,318
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid for interest........................................ $ -- $ 18 $ 91 $ 15 $ 41
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
Non-cash financing activities:
Deferred compensation cost on employee stock option
grants..................................................... $ -- $ -- $ 1,784 $ -- $ 390
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1995, 1996 AND 1997

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS

ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

NetGravity, Inc. (the Company), a Delaware corporation, was incorporated in
September 1995. The Company is the leading provider of online advertising and
direct marketing software solutions. The Company maintains its US headquarters
in California and incorporated a subsidiary in the UK in April 1997 for its
European operations. The Company incorporated a subsidiary in Japan in April
1998 for its Asia Pacific operations.

LIQUIDITY

The Company has experienced operating losses and negative cash flows from
operating activities since inception. The Company currently expects that it will
have sufficient cash and investments and available credit facilities to fund its
projected operations through at least December 31, 1998; however, if the Company
is unable to achieve projected operating results and/or obtain sufficient
financing, management will be required to curtail growth plans and implement
cost controls. Management believes that achievement of the Company's growth
goals beyond December 31, 1998 will require additional financing. No assurances
can be given that the Company will be successful in maintaining its available
credit facilities or raising additional financing.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
the Company and its subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.

CASH AND CASH EQUIVALENTS

Cash equivalents are highly liquid investments with remaining maturities of
three months or less at the date of purchase.

INVESTMENTS

The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. SFAS
No. 115 requires entities to classify investments in debt and equity securities
with readily determined fair values as "held-to-maturity," "available-for-sale"
or "trading" and establishes accounting and reporting requirements for each
classification. The Company generally has classified its investment securities
as available-for-sale and accounts for them at estimated fair value. Realized
and unrealized gains and losses were not significant for all periods presented.
As of December 31, 1996 and 1997, the Company did not hold any marketable
securities.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, less accumulated depreciation.
Depreciation of property and equipment is provided over the estimated useful
lives of the respective assets, estimated to be three years on a straight-line
method.

F-7
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1996 AND 1997

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS

ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
SOFTWARE DEVELOPMENT COSTS

In accordance with SFAS No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED, development costs related to
the software products are expensed as incurred until the technological
feasibility of the product has been established. Technological feasibility in
the Company's circumstances occurs when a working model is completed. The
Company believes its process for developing software is essentially completed
concurrent with the establishment of technological feasibility, and,
accordingly, no research and development costs have been capitalized to date.

REVENUE RECOGNITION

In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, SOFTWARE REVENUE RECOGNITION (SOP 97-2).
Effective January 1, 1998, the Company adopted SOP 97-2. SOP 97-2 generally
requires revenue earned on software arrangements involving multiple elements
such as software products, upgrades, enhancements, post-contract customer
support, installation and training to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be based
on evidence which is specific to the vendor. The revenue allocated to software
products, including specified upgrades or enhancements, generally is recognized
upon delivery of the products. The revenue allocated to unspecified upgrades and
updates and post contract customer support generally is recognized as the
services are performed. If evidence of the fair value for all elements of the
arrangement do not exist, all revenue from the arrangement is deferred until
such evidence exists or until all elements are delivered. There was no material
change to the Company's accounting for revenues as a result of the adoption of
SOP 97-2.

INCOME TAXES

The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.

F-8
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1996 AND 1997

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS

ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CONCENTRATION OF CREDIT RISK

Accounts receivable potentially subject the Company to concentrations of
credit risk. The Company performs ongoing credit evaluations of its customers'
financial condition and generally does not require collateral for accounts
receivable. When required, the Company maintains allowances for credit losses,
and to date such losses have been within management's expectations.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Financial Accounting Standards Board's SFAS No. 107, DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS, defines the fair values of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties. The fair values of the Company's cash, cash
equivalents, accounts receivable, accounts payable and notes payable approximate
their carrying values due to the short maturity or variable-rate structure of
those instruments.

ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS

The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of their carrying amount or fair value less cost to
sell.

USE OF ESTIMATES

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

STOCK-BASED COMPENSATION

The Company accounts for its stock-based compensation arrangements using the
intrinsic-value method pursuant to APB Opinion No. 25. As such, compensation
expense is recorded when on the date of grant the fair value of the underlying
common stock exceeds the exercise price for stock options or the purchase price
for issuance or sales of common stock. Pursuant to SFAS No. 123, the Company
discloses the pro forma effects of using the fair value method of accounting for
stock-based compensation arrangements.

ADVERTISING EXPENSE

The cost of advertising is generally expensed as incurred. Such costs are
included in selling and marketing expense and totalled approximately $37,000,
$783,000, $831,000, $225,000 and $266,000 during the period from September 5,
1995 (inception) to December 31, 1995, for the years ended December 31, 1996 and
1997, and for the three-month periods ended March 31, 1997 and 1998,
respectively.

F-9
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1996 AND 1997

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS

ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FOREIGN CURRENCY TRANSACTIONS

The functional currency of the Company's UK subsidiary is the US dollar.
Resulting foreign exchange gains and losses are included in operating results
and have not been significant to the Company's consolidated operating results in
any period.

COMPREHENSIVE INCOME

In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME,
which establishes standards for reporting and disclosure of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997 and requires reclassification of financial
statements for earlier periods to be provided for comparative purposes. The
Company has not determined the manner in which it will present the information
required by SFAS No. 130 in its annual financial statements for the year ending
December 31, 1998. The Company's total comprehensive income (loss) for all
periods presented herein would not have differed from those amounts reported as
net loss in the consolidated statements of operations.

PER SHARE INFORMATION

Basic and diluted net loss per share are computed using the weighted average
number of outstanding shares of common stock. Pursuant to SEC Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock issued for nominal
consideration, prior to the anticipated effective date of the IPO, are included
in the calculation of basic and diluted net loss per share as if they were
outstanding for all periods presented. To date, the Company has not had any
issuances or grants for nominal consideration.

Net loss per share for the year ended December 31, 1997 does not include the
effect of approximately 11,150,000 (5,563,000 on an as-if converted basis)
shares of convertible preferred stock outstanding, 1,312,399 stock options with
a weighted average exercise price of $0.22 per share, 15,908 common stock
warrants with a weighted average exercise price of $0.22 per share, or 1,171,546
shares of common stock issued and subject to repurchase by the Company at a
weighted average price of $0.22 per share, because their effects are
anti-dilutive.

Net loss per share for the quarter ended March 31, 1998 does not include the
effect of approximately 12,601,000 (6,220,000 on an as-if converted basis)
shares of convertible preferred stock outstanding, 1,304,029 stock options with
a weighted average exercise price of $0.27 per share, 27,650 common stock
warrants with a weighted average exercise price of $0.22 per share, or 1,017,229
shares of common stock issued and subject to repurchase by the Company at a
weighted average price of $0.22 per share, because their effects are
anti-dilutive.

Unaudited pro forma basic and diluted net loss per share is presented below
to reflect per share data assuming the conversion of all outstanding shares of
convertible preferred stock into common stock as if the conversion had taken
place at the beginning of 1997 or at the date of issuance, if later.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, 1997 MARCH 31, 1998
------------------- ---------------------
<S> <C> <C>
Pro forma basic and diluted net loss per share....... $ (1.00) $ (0.32)
------ ------
------ ------
Shares used in pro forma per share calculation (in
thousands)......................................... 6,856 8,807
------ ------
------ ------
</TABLE>

F-10
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1996 AND 1997

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS

ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The following table sets forth the reconciliation of shares used in
calculating basic and diluted, and pro forma basic and diluted net loss per
share (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, 1997 MARCH 31, 1998
------------------- ---------------------
<S> <C> <C>
Shares used in basic and diluted per share
calculation........................................ 2,799 3,025
Conversion of preferred stock--weighted average (pro
forma)............................................. 4,057 5,782
------ ------
Shares used in pro forma basic and diluted per share
calculation........................................ 6,856 8,807
------ ------
------ ------
</TABLE>

UNAUDITED INTERIM FINANCIAL INFORMATION

The consolidated financial information as of March 31, 1998 and for the
three months ended March 31, 1997 and 1998 is unaudited, but includes all
adjustments (consisting only of normal recurring adjustments) that the Company
considers necessary for fair presentation of the financial position at such
dates and the operations and cash flows for the periods then ended. Operating
results for the three months ended March 31, 1998 are not necessarily indicative
of results that may be expected for the entire year.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for the
way public business enterprises report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS No. 131 is effective for financial statements for periods
beginning after December 31, 1997. The Company has not yet determined the manner
in which it will present the information required by SFAS No. 131.

(2) PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of December 31, 1996
and 1997 (in thousands):

<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Computer equipment and software............................................. $ 817 $ 1,837
Furniture and fixtures...................................................... 55 236
--------- ---------
872 2,073
Accumulated depreciation.................................................... (177) (717)
--------- ---------
Property and equipment, net............................................... $ 695 $ 1,356
--------- ---------
--------- ---------
</TABLE>

F-11
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1996 AND 1997

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS

ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(3) NOTES PAYABLE

The Company has a revolving credit facility with a bank in the amount of
$1,000,000 which bears interest at the prime rate (8.50% as of December 31,
1997) plus 0.75%, and expires in May 1998. Borrowings are limited to the lesser
of $1,000,000 or 70% of the net amount of eligible accounts receivable and are
secured by the Company's accounts receivable. As of December 31, 1997 and March
31, 1998, borrowings under this credit facility were $655,000 and $655,000,
respectively.

The Company has an equipment line of credit with the same bank that provides
up to $1,000,000, bears interest at the prime rate, and expires in June 2000.
The line of credit is secured by the Company's fixed assets. As of December 31,
1996 and 1997, and March 31, 1998, $682,000, $584,000 and $524,000,
respectively, had been advanced under this agreement with the principal amount
due in 30 monthly installments of $19,467 beginning December 31, 1997.

The Company also has a second equipment line of credit with the same bank
that provides up to $1,200,000, bears interest at the prime rate, and expires in
June 2000. The line of credit is secured by the Company's fixed assets. As of
December 31, 1997 and March 31, 1998, $628,000 and $566,000, respectively, had
been advanced under this agreement with the principal amount due in 30 monthly
installments of $20,933 beginning December 31, 1997.

As of December 31, 1997 and March 31, 1998, the Company was not in
compliance with certain financial covenants on all of the aforementioned credit
facilities. The Company has received a waiver of such non-compliance from the
bank.

The aggregate maturities of long-term debt for each of the years in the
three-year period subsequent to December 31, 1997 are as follows: 1998,
$1,140,000; 1999, $485,000; and 2000, $242,000.

(4) INCOME TAXES

The domestic and foreign components of loss before income taxes are as
follows (in thousands):

<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER
SEPTEMBER 5, 1995 31,
(INCEPTION) TO --------------------
DECEMBER 31, 1995 1996 1997
------------------- --------- ---------
<S> <C> <C> <C>
Domestic............................................. $ (195) $ (4,627) $ (6,244)
Foreign.............................................. -- -- (638)
----- --------- ---------
Loss before income taxes......................... $ (195) $ (4,627) $ (6,882)
----- --------- ---------
----- --------- ---------
</TABLE>

The difference between the amount of income tax benefit recorded and the
amount of income tax benefit calculated using the U.S. federal statutory rate of
34% is due to net operating losses not being benefited.

F-12
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1996 AND 1997

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS

ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(4) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets as of December 31, 1996 and 1997 are
presented below (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Various accruals and reserves not deductible for tax purposes............ $ 113 $ 229
Property and equipment................................................... 34 134
Capitalized start-up expenditures........................................ 117 89
Net operating loss carryforward.......................................... 1,855 4,446
Research and development credit carryforward............................. 86 265
--------- ---------
Total deferred tax assets............................................ 2,205 5,163
Valuation allowance...................................................... (2,205) (5,163)
--------- ---------
Net deferred tax assets.............................................. $ -- $ --
--------- ---------
--------- ---------
</TABLE>

As of December 31, 1997, NetGravity Europe Limited had net operating loss
carryforwards in the UK of approximately $600,000, which can be used to offset
NetGravity Europe Limited's future income. The UK net operating loss can be
carried forward indefinitely.

As of December 31, 1997, the Company has a net operating loss carryforward
for federal and state income tax purposes of approximately $9,800,000. In
addition, the Company had federal and state research and development credit
carryforwards of approximately $145,000 and $120,000, respectively. The
Company's federal net operating loss and research and development credit
carryforwards will expire in the years 2010 through 2012, if not utilized. The
Company's state net operating loss carryforwards will expire in the year 2003.
The state research and development credit can be carried forward indefinitely.

Federal and state tax laws impose substantial restrictions on the
utilization of net operating loss and tax credit carryforwards in the event of
an "ownership change" as defined in Section 382 of the Internal Revenue Code.
The Company has not yet determined whether an ownership change has occurred.

(5) STOCKHOLDERS' EQUITY

CONVERTIBLE PREFERRED STOCK

As of December 31, 1997, the Company had authorized 8,809,156, 8,615,938 and
4,874,482 shares of Series A, B and C convertible preferred stock, respectively.
On March 13, 1998, the Company increased the authorized shares of Series C
convertible preferred stock to 9,115,100.

F-13
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1996 AND 1997

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS

ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(5) STOCKHOLDERS' EQUITY (CONTINUED)
Convertible preferred stock outstanding consisted of the following numbers
of shares (in thousands):

<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------
PRO FORMA NUMBER
DECEMBER 31, OF COMMON SHARES
-------------------- ISSUABLE UPON
SERIES 1996 1997 ACTUAL CONVERSION
- ------------------------------------------------ --------- --------- --------- -----------------
<S> <C> <C> <C> <C>
A............................................... 4,405 4,405 4,405 2,495
B............................................... -- 4,308 4,308 1,958
C............................................... -- 2,437 3,888 1,767
--------- --------- --------- -----
4,405 11,150 12,601 6,220
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>

The rights, preferences and privileges of the holders of preferred stock are
as follows:

- The holders of Series A, B and C convertible preferred stock are entitled
to non-cumulative dividends, if and when declared by the Board of
Directors, of $0.08, $0.08 and $0.18 per share, respectively.

- Shares of convertible preferred stock are convertible to common stock at
any time at the conversion prices of $1.78, $2.20 and $4.93 per share, for
Series A, B and C convertible preferred stock, respectively (as adjusted
for the reverse stock split) (See Note 8). The preferred stock
automatically converts to common stock upon the closing of an underwritten
public offering of the Company's common stock at a per share price of not
less than $8.78 per share and gross proceeds of not less than $10,000,000.

- The holders of convertible preferred stock are protected by certain
anti-dilutive provisions.

- Shares of Series A, B and C convertible preferred stock have a liquidation
preference of $1.01, $1.00 and $2.24 per share, respectively, plus any
declared and unpaid dividends.

- The convertible preferred stock votes equally with shares of common stock
on an "as if converted" basis.

No dividends have been declared or paid on the convertible preferred stock
or common stock since inception of the Company.

COMMON STOCK

In connection with the Board of Directors' revaluation of the Company's fair
value in March 1997, the Company repurchased and retired approximately 446,000
shares of common stock previously held by two of the Company's founders, at an
average purchase price of $0.22 per share. Additionally, the Company adjusted
the conversion price of Series A convertible preferred stock to $1.78 per share
of common stock; previously the conversion price was $2.22 per share of common
stock. Approximately 494,340 additional shares of common stock (after giving
effect to the approved 1-for-2.2 reverse stock split) were in-substance issuable
to the holders of Series A convertible preferred stock due to the reduction in
the conversion price. The fair value of the assumed in-substance dividend on
reported basic and diluted net loss per share for fiscal 1997 was not
significant.

Common stock issued to certain individuals is subject to repurchase at the
option of the Company, at the original issuance price, in the event an
individual ceases to be employed by the Company. Such shares are subject to

F-14
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1996 AND 1997

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS

ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(5) STOCKHOLDERS' EQUITY (CONTINUED)
repurchase on a pro rata basis over a four-year period from the date of
issuance. As of December 31, 1996 and 1997 and March 31, 1998, there were
approximately 1,688,000, 628,000 and 524,000 shares, respectively, subject to
repurchase, at a weighted average price of $0.07 per share. During 1996 and
1997, and the three months ended March 31, 1998, approximately 439,000, 126,000
and 4,000 shares, respectively, were repurchased.

As of December 31, 1997, a total of 2,727,570 shares of common stock were
authorized for issuance under the 1995 Stock Option Plan (the Plan). Options may
be granted at an exercise price not less than 100% of the fair market value, as
determined by the Board of Directors, for incentive stock options and 85% of
fair market value for nonqualified stock options at the grant date. All options
are granted at the discretion of the Company's Board of Directors and have a
term not greater than 10 years from the date of grant. Options issued are
generally immediately exercisable and generally vest 25% on the first
anniversary date and 1/48th of the shares each month thereafter, so that all the
shares are vested 48 months after the vesting commencement date.

As of December 31, 1996 and 1997 and March 31, 1998, approximately 155,000,
569,000, and 742,000, shares, respectively, with weighted-average exercise
prices of $0.22 per share, were fully vested.

A summary of the status of the Company's options under the Plan is as
follows:

<TABLE>
<CAPTION>
PERIOD FROM SEPTEMBER
5, 1995 (INCEPTION) TO YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
DECEMBER 31, 1995 1996 1997 MARCH 31, 1998
----------------------- ----------------------- ----------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period..................... -- $ -- 5,000 $ 0.07 456,509 $ 0.22 1,312,399 $ 0.22
Granted at market value...... 547,426 0.07 833,418 0.22 475,193 0.22 17,045 6.60
Granted at less than market
value...................... -- -- -- -- 845,092 0.22 77,785 0.51
Exercised.................... (542,426) 0.07 (309,418) 0.22 (301,009) 0.22 (56,011) 0.22
Canceled..................... -- -- (72,491) 0.22 (163,386) 0.22 (47,189) 0.22
---------- ---------- ---------- ----------
Options at end of period..... 5,000 0.07 456,509 0.22 1,312,399 0.22 1,304,029 0.27
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Options vested at
period-end................. -- 154,540 569,086 741,953
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted-average fair value
of options granted during
the period with exercise
prices equal to market
value at date of grant..... $ 0.02 $ 0.07 $ 0.07 $ 1.78
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted-average fair value
of options granted during
the period with exercise
prices less than market
value at date of grant..... -- -- $ 2.05 $ 4.55
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>

F-15
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1996 AND 1997

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS

ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(5) STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
as of December 31, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- -----------------------------------------------
WEIGHTED-AVERAGE
REMAINING
CONTRACTUAL LIFE OPTIONS
EXERCISE PRICE NUMBER (YEARS) VESTED
- -------------- ---------- ------------------- -------------
<S> <C> <C> <C>
$0.22 1,311,717 9.36 569,086
$0.55 682 9.92 --
- -------------- ---------- -------------
$0.22 - $0.55 1,312,399 569,086
- -------------- ---------- -------------
- -------------- ---------- -------------
</TABLE>

The Company uses the intrinsic value-based method to account for all its
employee stock-based compensation arrangements. Accordingly, no compensation
cost has been recognized for its stock options in the accompanying consolidated
financial statements because the fair value of the underlying common stock
equals or exceeds the exercise price of the stock options at the date of grant,
except with respect to certain options granted in 1997 and during the first
three months of 1998. The Company has recorded deferred stock compensation
expense of $1,784,000 and $390,000 for the difference at the grant date between
the exercise price and the fair value of the common stock underlying the options
granted in 1997 and the first three months of 1998, respectively. Amortization
of deferred compensation of approximately $115,000 and $246,000 was recognized
in 1997 and the first three months of 1998, respectively.

Had compensation cost for the Company's stock-based compensation plans been
determined consistent with the fair value approach set forth in SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company's net losses for the period
from September 5, 1995 (inception) to December 31, 1995 and the years ended
December 31, 1996 and 1997, would have been as follows (in thousands, except per
share amounts):

<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER
SEPTEMBER 5, 1995 31,
(INCEPTION) TO --------------------
DECEMBER 31, 1995 1996 1997
------------------- --------- ---------
<S> <C> <C> <C>
Net loss--as reported........................................... $ (195) $ (4,627) $ (6,882)
Net loss--pro forma............................................. $ (195) $ (4,635) $ (6,883)
Basic and diluted net loss per share--as reported............... $ (0.19) $ (2.19) $ (2.46)
Basic and diluted net loss per share--pro forma................. $ (0.19) $ (2.20) $ (2.46)
</TABLE>

The fair value of options granted during the period from September 5, 1995
(inception) to December 31, 1995 and the years ended December 31, 1996 and 1997
is estimated on the date of grant using the minimum value method with the
following weighted-average assumptions: no dividend yield, risk-free interest
rates of 5.6%, 6.0% and 6.1%, respectively, and expected lives of 5 years.

WARRANTS

In March 1997, in connection with a lease termination agreement, the Company
issued the building landlord a warrant to purchase 6,818 shares of common stock
at a purchase price of $0.22 per share. The warrant expires upon the earlier of
(i) five years from the date of issuance or (ii) the closing of an IPO by the
Company. The value of the warrant was not significant at the date of grant.

F-16
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1996 AND 1997

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS

ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(5) STOCKHOLDERS' EQUITY (CONTINUED)
In October 1997, in connection with certain consulting activities, the
Company committed to deliver a warrant to purchase 9,090 shares of common stock
at a purchase price of $0.22 per share. The value of the warrant was not
significant at the date of grant.

In January 1998, in connection with a non-employee compensation matter, the
Company committed to deliver a warrant to purchase 11,742 shares of common stock
at a purchase price of $0.22 per share. The value of the warrant was not
significant at the date of grant.

(6) COMMITMENTS

The Company leases its facilities under various operating lease agreements
that expire on various dates through May 1998. As of December 31, 1997, the
remaining future minimum payments for these facilities total $147,000. Total
rent expense, including month to month arrangements, was $13,000, $149,000 and
$313,000 for the period from September 5, 1995 (inception) to December 31, 1995
and for the years ended December 31, 1996 and 1997, respectively.

(7) GEOGRAPHIC AND SEGMENT INFORMATION

The Company licenses and markets its products primarily from its operations
in the United States, and operates in a single industry segment. Information
regarding operations in different geographic regions is as follows (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Export sales to customers located in:
Europe................................................................. $ -- $ 250
Asia................................................................... -- 237
--------- ---------
Total................................................................ $ -- $ 487
--------- ---------
--------- ---------
Loss from operations:
United States.......................................................... $ (4,681) $ (6,072)
Europe................................................................. -- (800)
--------- ---------
Total................................................................ $ (4,681) $ (6,872)
--------- ---------
--------- ---------
Identifiable assets:
United States.......................................................... $ 3,159 $ 9,139
Europe................................................................. -- 748
--------- ---------
Total................................................................ $ 3,159 $ 9,887
--------- ---------
--------- ---------
</TABLE>

For the period from September 5, 1995 (inception) to December 31, 1995,
there were no significant export sales or operations in Europe or Asia. The
Company began operations in Japan in April 1998.

No single customer accounted for greater than 10% of revenues in any period
reported.

F-17
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1996 AND 1997

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS

ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(8) SUBSEQUENT EVENTS

On April 23, 1998, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission (SEC)
permitting the Company to sell shares of the Company's common stock in
connection with a proposed initial public offering (IPO). If the offering is
consummated under the terms presently anticipated, all currently outstanding
shares of preferred stock will automatically convert into approximately
6,220,000 shares of common stock upon the closing of the proposed IPO. The
conversion of the preferred stock has been reflected in the pro forma balance
sheet as of March 31, 1998. Effective upon the closing of the IPO, the Company
will be authorized to issue 5,000,000 shares of undesignated preferred stock.

The Company's Board of Directors approved a 1-for-2.2 reverse split of the
Company's common stock (approved by the stockholders effective as of May 8,
1998) to be effected at or prior to the effectiveness of the IPO. All common
share amounts in the accompanying consolidated financial statements have been
adjusted retroactively.

The Company's Board of Directors adopted the 1998 Stock Plan (the "1998
Plan") on April 23, 1998 (approved by the stockholders effective as of May 8,
1998). The 1998 Plan provides for the grant of incentive and nonstatutory stock
options and stock purchase rights to employees, directors and consultants. A
total of 2,000,000 shares of common stock, plus annual increases equal to the
lesser of (i) 1,000,000 shares, (ii) 5% of the outstanding shares, or (iii) a
lesser amount determined by the Board of Directors, are proposed to be reserved
for issuance pursuant to the 1998 Plan.

The Company's Board of Directors adopted the 1998 Employee Stock Purchase
Plan (the "1998 Purchase Plan") on April 23, 1998 (approved by the stockholders
effective as of May 8, 1998). A total of 200,000 shares of common stock are
proposed to be reserved for issuance under the 1998 Purchase Plan, plus annual
increases equal to the lesser of (i) 750,000 shares, (ii) 4% of the outstanding
shares on such date, or (iii) a lesser amount determined by the Board of
Directors.

The Company's Board of Directors also adopted the 1998 Director Option Plan
(the "Director Plan") on April 23, 1998 (approved by the stockholders effective
as of May 8, 1998). The Director Plan provides for the grant of nonstatutory
stock options to non-employee directors of the Company or affiliates thereof. A
total of 200,000 shares of common stock have been proposed to be reserved for
issuance under the Director Plan plus annual increases to maintain 200,000
shares of common stock reserved for additional option grants.

F-18
<PAGE>
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