CYBERIAN OUTPOST INC, 10-K, 2000-05-18

CYBERIAN OUTPOST INC
10-K, 2000-05-18
COMPUTER & COMPUTER SOFTWARE STORES

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

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FORM 10-K

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

For the fiscal year ended February 29, 2000

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

For the transition period to

Commission file number: 000-24659

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CYBERIAN OUTPOST, INC.
(a/k/a OUTPOST.COM)
(Exact name of registrant as specified in its charter)

Delaware 06-1419111
(State or other (IRS Employer
jurisdiction Identification No.)
of incorporation or
organization)

23 North Main Street, PO Box 636
Kent, Connecticut 06757
(Address of principal (Zip Code)
executive offices)

(860) 927-2050
Registrant's telephone number, including area code

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Securities registered pursuant to Section 12(b) of the Exchange Act:

None

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common Stock, $.01 Par Value Per Share
(Title of Class)

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

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

The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant (without admitting that any person whose shares
are not included in such calculation is an affiliate) on May 1, 2000, was
$169,082,828 based on the last sale price as reported by the Nasdaq National
Market System.

As of May 1, 2000, the registrant had 28,474,710 shares of common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's definitive proxy statement for its 2000 annual
meeting of stockholders are incorporated by reference in Part III of this
report. With the exception of those portions that are specifically incorporated
by reference in this report, such proxy statement shall not be deemed to be
filed with this report or incorporated herein by reference.

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PART I

Item 1. BUSINESS

Overview

Outpost.com ("Cyberian Outpost, Inc.," or the "Company") is a leading global
Internet-only retailer featuring over 170,000 consumer technology and related
products for the home and office. As of February 29, 2000, we had 630,000
customers world-wide, the majority of which have shopped at Outpost.com duing
the last 24 months. We offer an online "superstore" at www.Outpost.com that
provides one-stop shopping for domestic and international customers, 24 hours a
day, seven days a week. Our superstore features computer hardware, software and
accessories. We work with the computer industry's foremost suppliers, and we
are an authorized Internet reseller for most leading manufacturers including
IBM, Apple, Compaq, Sony, Hewlett Packard, Acer and Toshiba. We also sell
software for leading publishers including Microsoft, Symantec, Adobe, Apple
Software and Intuit. Additionally, we offer downloadable software and online
licensing. We offer a full range of consumer electronics in the
Tweeter.Outpost.com store, unique and innovative consumer products in the
Brookstone.Outpost.com store and a wide selection of photographic equipment and
services offered via our unique partnership with Wolf Camera. Our online store
features;

. an easy to navigate, intuitive interface;

. outstanding twenty-four hour customer service seven days per week;

. free overnight delivery;

. extensive product information;

. powerful search capabilities;

. competitive pricing; and

. a flexible returns policy including pick-up from any location in the
U.S..

Since December 1998, our store has consistently received the top rating of 4
stars (out of 5) from Bizrate.com. Outpost.com has become one of the most
widely known and used e-commerce sites. We have the #1 ranking in the Computing
category of the Forrester PowerRankings, by Forrester Research. We were also
named Best of the Web by Fortune Magazine, Favorite Destination by PC Magazine,
and #1 Rated in Category by Fortune Magazine.

We have expanded our business beyond the online "superstore" targeted to
retail consumers to include our newly developed "Your Office at Outpost.com"
specifically to address the needs of small and medium size businesses. The B2b
sector of online retailing has distinct needs that diverge from the traditional
consumer in both the quantity and pricing of the selections that businesses
need to purchase. We have a dedicated team of customer service professionals to
assist corporate buyers in making their selections, creating accounts and
managing payment and leasing terms. Our free overnight delivery on most orders
and the newly offered same day delivery options are key features that encourage
businesses to consider using Outpost.com to fulfill their purchasing
requirements. Corporate customers always have the ability to order their
products directly online. Additionally, our newly formed eBusiness Services
unit, allows us to further diversify our revenue stream and create a new source
of customers and products for our businesses.

Our business has grown rapidly since we started in 1995. Net sales increased
from $1.9 million for our fiscal year ended February 29, 1996 to $189 million
for our fiscal year ended February 29, 2000. In addition, of the approximately
630,000 individual customers in over 150 countries who have purchased from us
since we started, nearly 338,000 have become customers since March 1, 1999.

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Our business model takes advantage of the unique characteristics of the
Internet, which has become an increasingly significant global medium for
commerce, communication and information. We believe that growth in Internet
usage has been fueled by a number of factors including:

. a large and growing installed base of PCs and Internet devices in the
workplace and home;

. advances in the performance and speed of PCs, Internet devices and
modems;

. improvements in network infrastructure;

. easier and cheaper access to the Internet; and

. increased awareness of the Internet.

Our Market Opportunity

The Internet retailing industry is characterized by a number of factors
which present unique challenges to retailers including, the limited
availability of many of the top selling products across a broad array of
categories, rapid product obsolescence and continuous new product
introductions. The unique flexibility of e-tailing enables us to fully address
these challenges in order to take full advantage of the growing worldwide
market for consumer technology, computer hardware and software.

We understand the key business challenges of the Internet retailing industry
and we use this unique environment to address those challenges. Our online
superstore was created to provide retail consumers, and now small businesses,
with a convenient, compelling and enjoyable shopping experience in a Web-based
retail environment. Key attributes of our business include:

. Efficient economics of our "virtual" store. As an Internet-only
merchant, we enjoy structural economic advantages that we believe will
ultimately allow us to achieve greater operating margins relative to
traditional computer retailers. These advantages include, low-cost
unlimited "shelf space"; lower personnel requirements; scaleable
technology; and our ability to serve a global customer base from a
single, domestic location.

. Broad array of product offerings. Our unlimited, low-cost "shelf space",
allows us to offer more than 170,000 products including, computer
hardware, software and accessory products, home electronic products
(televisions, DVD players, VCRs and high end audio electronics), and
sports and fitness equipment for both home and office use. We carry
products from the industry's foremost developers and manufacturers and
are an authorized Internet reseller for many leading vendors for both
their consumer and commercial product lines.

. The ability to reach a global customer base. The global reach of the
Internet allows us to deliver a broad selection of products to customers
in international, rural or other locations that cannot support large
scale physical stores or to which catalogs cannot be easily or cost
effectively distributed.

. The availability of value-added online content. To assist our customers,
valuable information, including extensive product descriptions, is
available on our Web site and through our free e-mail newsletter.

. Convenient 24-hour shopping. Our online superstore which is available 24
hours a day, seven days a week, may be reached from the customer's home
or office and features sophisticated browsing and search technology.

Business Strategy

Our goal is to become an e-commerce market leader for the Internet retail
sale of a broad array of consumer technology products for consumers and small
businesses, and to provide e-commerce solutions for a large cross section of
businesses that have the need to implement an e-commerce strategy. Outpost.com
has

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recently expanded its business model beyond Business to Consumer (B2C) to
target small businesses (B2b) and eBusiness Services (eBS). We intend to build
upon our current strengths by (a) expanding our efforts in online and off-line
brand development, (b) expanding our product offerings with new, but related
product categories (c) developing a customized, personalized and transparent
one-to-one marketing approach and (d) diversifying into additional areas of
Internet commerce. We believe that these steps support our strategy, which is
to build an internationally known Internet brand and provide a unique and
satisfying shopping experience for our domestic and international customers.

eBusiness Services--eBS

Through ebusiness services, Ouptost.com has been developing relationships
with some of the country's premier retailers as well as building alliances with
established Internet brands. We began our "Clicks & Mortar" partnership
strategy in 1999 by combining forces with Tweeter Home Entertainment Group,
Inc. in a joint venture company to sell consumer electronics on the Internet.
This type of relationship allows us to develop and provide either end to end
co-branded or private label sites. These partnerships include:

. Tweeter.Outpost.com: This site combines the strengths of two companies
dedicated to providing unparalleled customer service and offers elite
brands of consumer electronics products to customers that shop on the
Web. Tweeter Home Entertainment Group, Inc. operates 84 top quality
merchandise stores throughout the United States.

. Innovations By Brookstone: Brookstone, Inc. of Nashua, NH, with over 200
stores nationwide, is known for creating and marketing innovative
products that appeal to the strong demographic customer base we attract.
Brookstone is also an eBS client for whom we are preparing a complete
eCommerce solution (www.brookstone.com).

. Cameras by Wolf Camera: Wolf Camera, based in Atlanta, GA, will shortly
appear on the Outpost.com site providing a vast selection of digital and
traditional cameras as well as other photographic equipment and
accessories that can be found in their over 1,000 retail stores around
the country.

We are also focusing our efforts in developing lasting e-commerce extensions
on-line with established Internet companies. These extensions give us access to
a broad audience. Our on-line relationships include Sandbox.com and
Computer.com where Outpost.com delivers shopping content for these popular
Websites. Finally, through ebusiness services, we are always working to develop
additional stores within our site to provide exciting new products for our
customers.

Through our retail partnerships and e-commerce extensions, Outpost.com now
has relationships with a diverse group of leading retailers who give us access
to over 1,200 U.S. storefronts.

Our Web Site

We believe our attractive, intuitive and easy-to-shop online superstore
delivers a superior shopping experience and provides a competitive advantage
for our customers. Browsing, shopping and check-out are simple and
straightforward. As with a physical retail store, customers can browse the
departments of the store, search for specific needs, look at promoted products,
obtain product information, order products and ask for customer service. In
contrast to a physical retail store, however, the consumer can look at over
170,000 products and accomplish the shopping experience in the comfort and
convenience of his or her home or office. The key features of our online store
include:

Browsing. We have categorized the products that we currently offer into
tabs, departments and sub-departments. We have also developed a series of tabs
that are dedicated to products brought to us by our partners. Our convenient
store map lists all of our departments and product categories. By clicking on
the tab

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or department name, the consumer can quickly target products of interest.
Permanent categories, such as Computers, Games, Electronics by Tweeter,
Innovations by Brookstone, and Cameras by Wolf Camera are dedicated stores
displayed with tabs.

Searching. A primary feature of our Web site is its interactive search
engine. We provide a selection of search tools that allows customers to find
items based on pre-selected criteria such as product type, platform,
manufacturer or publisher. Customers are also able to use more complex and
precise search tools such as search queries.

Checkout. To purchase a product, a customer can simply click on a button to
add the product to their virtual shopping cart. Just as in a physical store, a
customer may add and/or subtract products as they browse through our
merchandise prior to making a final purchase decision. Once a customer is
finished shopping and clicks on the "Proceed to Checkout" button, we feature a
simple three-step checkout process. To complete the checkout process the
customer simply:

. enters his or her billing and shipping information;

. reviews the merchandise being purchased and chooses from the differing
shipping options; and

. enters credit card information for payment.

Once the checkout process is complete, the customer then clicks the "Submit
Order" button. Customers may also set up an Express Account with us using the
"Remember Me" feature with their email address and a password for quick
checkouts on return shopping trips.

Advertising. We have designated many feature locations on our home page and
throughout our store that are available to advertisers wishing to increase
their Internet presence and target our sophisticated user base. Our in-store
promotional banners advertise a variety of our manufacturers' and publishers'
products on a continual basis. Additional promotional opportunities are
available throughout our store in the form of sponsorships of products in
specialty shops, manufacturer showcases, featured product spots, targeted e-
mail offers, and banners and buttons for special offers.

Merchandising. We actively work with manufacturers to create special bundles
of products and to secure special offers exclusively for our customers. Such
specials are featured prominently throughout our Web site. Weekly, seasonal,
holiday and special promotions are displayed on banners or tabs and can also be
targeted directly to interested customers via e-mail.

Product Information. We provide detailed product information throughout our
store. After selecting a product, the customer is supplied with comprehensive
descriptions, system requirements, screen shots, product packaging and pricing
information. One of the unique advantages of an Internet retail store is the
ability to interweave editorial content and product information. We have a team
of writers that creates product information and other content for the site. We
believe that fresh, entertaining content adds to the customer experience,
increases conversion rate (the number of visitors to the site who make
purchases) and differentiates us from other online retailers. Throughout our
store we use "advisors" to help customers choose the correct component needed
for their individual system, such as laptop batteries, cables and memory
upgrades.

TruePrice SM. With TruePrice, we include free overnight delivery (up to $100
of shipping charges) to any location within the United States. This policy
assures our customers that the price they see is the price they pay. There are
no surprising shipping and handling costs added. International customers are
given the option of express courier delivery to overseas destinations. We also
provide a 30-day money back guarantee and for $10.00 will arrange for the pick
up of any product return from the location specified by the customer.

International Translations. We have translated portions of our home page and
the customer service and ordering information on our Web site into twelve
foreign languages. These pages are accessed by simply

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selecting the language of choice from a drop down menu. A currency converter is
also available to provide immediate local pricing information.

Our Customers

Since our inception, our customer base has grown dramatically. As of
February 28, 1998, the number of customers who had made a purchase from us was
81,000. Since that date, our number of customers grew as follows:

. to 280,000 customers for the fiscal year ended February 28, 1999;

. to 332,000 customers at the end of the first quarter ended May 31, 1999;

. to 391,000 customers at the end of the second quarter ended August 31,
1999;

. to 464,000 customers at the end of the third quarter ended November 30,
1999; and

. to 630,000 customers at the end of the fourth quarter ended February 29,
2000.

According to our Customer Satisfaction Survey, Outpost.com customers are
very satisfied with their shopping and purchase experience on our site. Nearly
9 out of 10 customers were "Extremely" or "Very" satisfied with the result of
their visit to Outpost.com whether they were just "shopping" or they actually
made a purchase. Our customers reported that Outpost.com strongly delivers on
the following qualities and features:

. fast, free, dependable delivery

. easy to place orders

. simple checkout

. offers brand name products

Marketing

Our marketing strategy is to promote and increase our brand awareness, cost
effectively acquire new customers, build customer loyalty, promote repeat
purchases and increase our market share. We are implementing this strategy
through the following channels:

. advertising on leading Web sites and through traditional media channels
worldwide;

. employing customer relationship marketing to retain existing and to
attract potential new customers;

. optimizing our affiliates network; and

. developing e-commerce vertical integrations with selected partners.

We believe that the use of multiple marketing channels reduces reliance on
any one source of customers, lowers customer acquisition costs and maximizes
brand awareness.

Online and Traditional Advertising. We have implemented a broad-based,
multi-media advertising campaign that includes both online and traditional
advertising, designed to drive high-value traffic to our Web site. Our current
online advertising focuses on a variety of Web sites that have a proven ability
to drive buyers to our site. We optimize the performance of our online efforts
through the use of dynamic tools.

Customer Relationship Marketing. Jupiter Communications, a market research
firm, projects that by 2002 consumer e-mail volume will rise by 58% to 576
million messages per day, up from 335 million per day in 1999. In order to
expand our customer retention and acquisition efforts, we have developed a
concentrated customer relationship marketing campaign. At Outpost.com, we
believe that e-mail direct marketing offers significant advantages over
traditional "snail" mail marketing including: ease of personalization; lower
cost; more rapid delivery and response.

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We developed and implemented technology-based systems that customize the
content of targeted e-mails based on order history, platform of choice and
other buying criteria. In addition, we are creating plans for increased loyalty
programs beyond our current efforts to maximize the lifetime value of our
customers. At times, we work in conjunction with our suppliers to notify our
customers of specific product opportunities that are available. We also send
our Gamer's Express newsletter to interested opt-in gaming enthusiasts.

We have implemented in-box promotions and advertising for every package that
we ship. In light of the fact that most all of our deliveries arrive at the
customers door or desk the following morning, we feel that one of the best
times to reach a customer is at the conclusion of a positive shopping
experience. In every package we include a thank you note, a free in-box gift
and a vendor sponsored promotional insert. We feel strongly that immediate
acknowledgement of the time a customer transacted business with us deserves our
immediate appreciation and will serve to increase a customer's loyalty to
shopping at Outpost.com.

Outpost Affiliate Network Program. The Outpost affiliate program is an
established network of Web sites that post links to Outpost.com and receive a
commission on sales they generate on a direct click through to Outpost.com. We
partner with LinkShare Corporation, a leading provider of affiliate program
management. We believe this partnership has helped make the Outpost Affiliate
Network one of the leading programs in the industry today. The affiliate
network program was launched in December 1997 and since that time has
experienced substantial growth. By the close of fiscal 2000, our network
membership had grown to more than 85,000. Through the Outpost Affiliate
Network, we feel that we are building brand awareness, reinforcing customer
loyalty and attracting new customers to our Web site.

Strategic Online Advertising Relationships. We continue to forge strategic
relationships with selected Internet sites including CNET, MSN Shopper and
DEJA.com to increase market share and attract new customers. We are also a
founding member of ShopperConnection (www.shopperconnection.com), a network
connecting some of the Internet's leading online specialty retailers and
services.

Market Intelligence and Research. We have created a group to study the
productivity and behavior of our customer base in order to determine the
effectiveness of our marketing efforts. The market intelligence program works
with both our internal data, mining session behavior and retention programs as
well as with syndicated third party data provided by research firms such as
Forrester, Biz Rate.com and NetRatings. We have commissioned proprietary
studies to gain better understanding of our customers and use data produced
from these studies to help determine the likelihood that our customers will
return to us to purchase again and again and to determine what other product
selections might appeal to our established customers.

Merchandising

Outpost.com is a destination for customers who embrace advances in
technology as soon as they are available. Our approach to merchandising allows
Outpost.com distinct advantages such as:

. dynamic pricing;

. the ability to offer a vast array of products;

. the potential to cross-sell and up-sell products;

. our virtually unlimited display and shelf space; and

. Instantaneous updates of "Hot" promotional items to our site.

Working with our eBS partners and clients, we purchase and maintain
inventory on many popular products that are difficult to obtain for Internet
resale. Many of our purchasing decisions in the non-computer categories are
guided by the experience and skills that have made our partners successful
traditional Brick and Mortar retailers. Because of our approach to
merchandising, we are able to realize pricing opportunities considerably more
quickly than traditional retailers. When prices from the manufacturer change,
we can immediately update

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the prices in our store. Additionally, we have the ability to test the
attractiveness of products and generate interest through unique product
bundling, feature and product presentation without the shelf-space limitations
that constrain catalog and traditional retail stores. The retail merchandise
display capabilities of our store allow us to carry an extraordinarily deep
product selection. Outpost.com is able to provide the full array of a
manufacturer's products, not just the top selling items. Our product
descriptions are very detailed and are continually updated with new
information. We believe we have strong relationships with our suppliers and by
providing entire lines of products, we are able to more solidly support our
customers with accessories and enhancements to the major purchases they make.
Our ability to cross-sell throughout our store bolsters cooperative association
with manufacturers. For example, we link related products with one another such
as combining laptop computers, leather carrying cases and extra batteries. Our
intention is to expose our customer to as much value added sales support as
possible.

At Outpost.com, we take advantage of special product purchasing
opportunities and joint advertising relationships with manufacturers and
distributors, both within our store and in other venues as well. We run weekly
merchandise specials on products that are specifically allocated by
manufactures to Outpost.com. Our home page has rotating feature spots that
attract attention to additional specials and specific product categories. We
believe we are skilled at marketing by theme. We tailor our home page from
season to season along traditional holiday themes, and we create our own
seasonal offerings such as Mother's and Father's day promotions, sport
championship sweepstakes and prizes. At times we have even created offerings
specializing in the latest blockbuster movie from Hollywood. Furthermore, our
strong relationships with product manufacturers enhance our ability to respond
quickly to world-wide events affecting technology, such as virus scares. We can
make solutions available to our customers extremely rapidly through
downloadable software updates.

Corporate Advertising

Our stores provide a compelling destination for shoppers and customers with
the highly attractive demographic profile that advertisers seek to reach.
During the fourth quarter of fiscal 2000, our average order size was more than
$240.00 and our revenue for the quarter exceeded $76 million. Advertisers can
place a variety of advertising formats on our site or in co-sponsored e-mail
distributions. We plan to develop innovative programs and dedicate more
resources to driving the lucrative revenue opportunities that are available
through opening up our site to nationally branded companies wishing to target
their messages to the Outpost.com audience.

Customer Service

Understanding and serving the customer is a core strength at Outpost.com.
Since December 1998, we have earned the top-ranking for customer service in the
computer hardware and software categories from BizRate.com, an independent
online rating service. Satisfying our customers is central to our strategy and
goals for the future. At Outpost.com, we concentrate on making shopping as
effortless and enjoyable as possible. We have implemented a broad array of
scaleable site management, customer interaction, transaction-processing and
fulfillment services and systems. The Customer Service area of our Web site
contains extensive information about shopping, ordering and returning products
as well as tracking the current status of orders. We are developing online
email "help" conversation ability in order to assist our customers while they
are in our site. In addition, TruePrice, payment and leasing options, and other
policies are clearly defined. Help buttons on every page of the site take
customers to the specific customer service topic they need.

Because Internet retail is new to many people, we prominently display our
toll-free number throughout our site. Our highly trained team of sales and
customer service agents are available 24 hours daily, seven days a week, to
answer customer questions about products, process orders, assist in tracking
shipments and streamline the entire shopping experience.

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Warehousing, Fulfillment and Distribution

Outpost.com offers free overnight delivery, our hallmark of customer
service, from our warehouse facility in Wilmington, Ohio located at the
Airborne Express Hub. This 120,000 square-foot facility contains our inventory,
warehousing and fulfillment operations. We have partnered with Airborne
Logistics Services to manage this operation for us. We have the ability to
expand our operations within this location upon demand. Our flexible customer
service and fulfillment systems allow us to accept orders for in-stock items
until midnight eastern time for next morning delivery in the United States and
two to three day international delivery.

We regularly "cross dock" (i.e., receive products from third party vendors
and distributors and ship those same products to customers the same day) and
are therefore able to deliver even non-inventoried products to customers
typically within two to three days We obtain our products from a network of
distributors, hardware manufacturers and software publishers. We carry a
limited amount of our most popular products (typically about 5,000 SKU's) in
inventory and rely to a large extent on rapid fulfillment to our warehouse from
major distributors and wholesalers that carry a broad selection of products and
titles. We purchase a substantial portion of our products from large
distributors such as Tech Data and Ingram Micro who have inventory at
distribution centers around the country. Due to our heavy sales volume in
certain products, we have established relationships with manufacturers, such as
Apple, that ship their products into our warehouse directly.

We have redundant dedicated connections to our information system. As a
result, we have real-time data on inventory receiving, shipping, quantities and
location. In addition, we offer a real-time order tracking system for our
customers on the Web. The moment a package is shipped and assigned an Airborne,
UPS or DHL airbill tracking number, the customer's order information is updated
and an e-mail notification of shipment is sent to the customer. Product return
processing is also handled using this system, allowing returned products to be
promptly returned to the manufacturer for credit.

We have negotiated attractive shipping terms with our major distributors.
Thus, most purchase orders placed with our major suppliers for in-stock items
are received within 48 hours of order. To help maintain our ability to turn
inventory quickly, we have established Electronic Data Interchange (EDI)
connections with our top vendors' inventory information. Such connections will
help to automate the ordering process, facilitate price comparisons between
vendors and allow us to provide real-time, online in-stock status information
to customers that details product availability not only in our warehouse, but
also at vendor locations.

Technology

In the fall of 1999, we launched an upgrade to our customer interface design
that was based on research of online shopping behavior and functionality. We
realize that there are many paths that can be taken to reach the same
destination and we have provided additional "intuitive" approaches to browsing
and shopping.

We have implemented a broad array of scaleable site management, search,
customer support, transaction processing and fulfillment services systems.
These systems use a combination of proprietary technologies and commercially
available, licensed technologies. Our transaction-processing systems are
integrated with our accounting and financial systems.

Our Web front-end is an integrated suite of commercially available software
packages. Most Web site interaction, including our personalization
functionality, is handled by software licensed from Netscape, Oracle,
BroadVision, Engage and Verity. The various software applications share
information according to a proprietary integration plan using internally
developed interfaces. This software runs on industry standard hardware
platforms, including Sun Ultra Sparc servers and the Solaris operating system.
Our system includes redundant hardware on mission critical components. Capacity
can be quickly and easily expanded without additional development. Our policy
is to run key systems at no more than 60% of capacity to support rapid growth.

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Smith-Gardner and Associates' MACS II system handles our back-end
transaction processing. MACS II is a mature, highly scaleable, widely used
application which handles order management, validation, inventory, purchasing,
shipping and accounting. The system handles multiple shipment methods, credit
card transaction processing and automated customer communications.

We subcontract the hosting of our Web servers to two Internet data center
specialists; Digital Island and Exodus Communications, Inc., both of whom have
extensive national network infrastructures. This gives the Company redundant
Internet connections to multiple Internet access points, a secure physical
environment, climate control and redundant power. In addition, these
specialists provide us with 24 hour, seven day a week system monitoring and
escalation and there is more than adequate available floor space to support
possible future expansion. Additionally, we are able to support a distributed,
redundant site by placing some of our servers in other locations around the
world.

Competition

We compete in a highly fragmented, rapidly evolving and intensely
competitive industry. Current and new competitors can launch new sites quickly
and inexpensively. In addition, Internet retail is highly competitive and the
industry is evolving and consolidating rapidly. Our current or potential
competitors include:

. traditional electronics such as CompUSA and Circuit City;

. mail-order retailers such as CDW, Micro Warehouse, Insight, PC
Connection and Creative Computers;

. Internet-only computer retailers including Egghead.com, Buy.com and
Crutchfield.com.

. manufacturers that sell directly over the Internet or by telephone such
as Dell and Gateway and many software companies;

. a number of online service providers including America Online and the
Microsoft Network that offer computer products directly or in
partnership with other retailers;

. some all purpose retailers such as Wal-Mart that sell a limited
selection of electronic products in their stores; and

. electronic products distributors that may develop direct channels to the
consumer market.

Many of these competitors have longer operating histories, larger customer
bases, greater brand recognition, and significantly greater financial,
marketing and other resources. We believe that the principal competitive
factors in our market include 24 X 7 customer service, brand recognition,
varied product selection, convenience, price and shipping costs.

Some of our competitors have adopted aggressive pricing policies. Moreover,
companies that control access to Internet commerce transactions through network
access or Web browsers currently promote, and will likely continue to promote,
some of our competitors. This could require us to establish pricing, marketing
and other programs or to seek out additional strategic alliances or
acquisitions that may be less favorable to us than we could otherwise establish
or obtain. This could have a material adverse effect on our business,
prospects, financial condition and results of operations.

In addition, as use of the Internet and other online services increases, we
believe that competition may increase as online retailers are acquired by,
receive investments from, or enter into other commercial relationships with,
large, well-established and well-financed companies. Such increased competition
may result in reduced operating margins, loss of market share and a diminished
brand franchise. This could have a material adverse effect on our business,
prospects, financial condition and results of operations.

10
<PAGE>

Intellectual Property

We have registered United States service marks for "Cyberian Outpost" and
"Outpostauctions.com." We claim a common law trademark for our newsletter name
"Cyberian Express." We also use the following marks for which applications in
the United States Patent and Trademark Office are pending: our logo,
"TruePrice", "Outpost.com" and "Transparent Personalization." In addition, we
have trademark and service mark applications pending in foreign countries.

Government Regulation

We are subject, both directly and indirectly, to various laws and
governmental regulations relating to our business. There are currently few laws
or regulations uniquely applicable to commercial online services or the
Internet. One such law, the Children's Online Privacy Protection Act ("COPPA")
recently went into effect. The COPPA regulates the collection, use, and/or
disclosure of personal information obtained from children under the age of 13.
Currently we fully comply with the provisions of COPPA. Due to the increasing
popularity and use of commercial online services and the Internet, it is
possible that additional of laws and regulations may be adopted. These laws and
regulations may cover issues including, for example, general user privacy,
pricing and characteristics and quality of products and services. Moreover, the
applicability to commercial online services and the Internet of existing laws
governing issues including, for example, property ownership, libel and personal
privacy is uncertain and could expose us to substantial liability. Any new
legislation or regulation or the application of existing laws and regulations
to the Internet could have a material and adverse effect on our business.

In addition, because our services and products are available over the
Internet anywhere in the world, multiple jurisdictions may claim that we are
required to qualify to do business as a foreign corporation in each of those
jurisdictions. Our failure to qualify as a foreign corporation in a
jurisdiction where we are required to do so could subject us to taxes and
penalties for the failure to qualify. It is possible that state and foreign
governments might also attempt to regulate our transmissions of content on our
Web site or prosecute us for violations of their laws. There can be no
assurance that violations of local laws will not be alleged or charged by state
or foreign governments, that we might not unintentionally violate these laws or
that these laws will not be modified, or new laws enacted, in the future.

We do not currently collect sales or other similar taxes with respect to
shipments of goods into states other than Connecticut and Ohio, the only states
in which we have a physical presence. Any new operation by us in other states
could subject shipments into such states to state sales taxes. In October 1998,
Congress enacted the Internet Tax Freedom Act (ITFA). For a period of three
years, the ITFA effectively bars state or local governments from imposing taxes
that would subject online commerce transactions to taxation in multiple states.
The ITFA does not prohibit state or local taxation on online commerce products
or services that would otherwise be taxed, such as in states where a company
has a physical presence. The ITFA also provides for the establishment of a
commission to study online commerce and to recommend a fair method of taxing
Internet transactions. We cannot be certain that upon expiration of the ITFA,
we will not be subject to further taxation by state or local governments on the
sale of merchandise.

Employees

We believe our success depends, to a significant extent, on our ability to
attract and retain highly skilled management and employees. Accordingly, we
focus on incentive programs such as a company-wide employee stock option plan
and provide competitive compensation and benefits for our employees. We also
seek to foster a corporate culture that is challenging, rewarding and fun. As
of February 29, 2000, we had 234 full-time and five part-time employees. We
also employ a limited number of independent contractors and temporary employees
on a periodic basis. None of our employees is represented by a labor union and
we consider our labor relations to be good.

11
<PAGE>

Item 2. PROPERTIES

We currently lease an aggregate of 44,900 square feet of office space in two
Connecticut towns. The following is a summary of the office space that we are
currently leasing by location:

<TABLE>
<CAPTION>
Location Business Use Square Footage Lease Expiration
-------- ------------ -------------- ----------------
<C> <S> <C> <C>
Kent, CT. Corporate Headquarters, 5,381 11/30/2001
Technology, Purchasing
and Marketing
Kent, CT. Corporate Headquarters, 1,374 11/30/2000
Technology, Purchasing
and Marketing
Kent, CT. Corporate Headquarters, 670 11/15/2000
Technology, Purchasing
and Marketing
Kent, CT. Corporate Headquarters, 18,000 11/15/2000
Technology, Purchasing
and Marketing
Kent, CT. Corporate Headquarters, 2,475 6/9/2000
Technology, Purchasing
and Marketing
Bethel, CT. Sales, Customer Service, 17,000 9/30/2004
Finance and Accounting
</TABLE>

We also contract with Airborne Logistics Services who manages a 120,000 foot
facility that houses our inventory warehousing and fulfillment operations. We
believe that we have adequate space for our current needs. As we expand, we
expect that suitable additional space will be available on commercially
reasonable terms, although we cannot guarantee this. We do not own any real
estate. We continue to use a contract warehouse for our fulfillment and
logistics requirements.

Item 3. LEGAL PROCEEDINGS

There are no material legal proceedings pending against us.

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

No matters were submitted to a vote of our security holders during the
fourth quarter of the year ended February 29, 2000.

12
<PAGE>

PART II

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

Market Information

Our common stock began trading on The Nasdaq Stock Market on July 31, 1998
under the symbol "COOL." The following table sets forth, for the periods
indicated, the high and low sales prices for the common stock, as reported by
the Nasdaq National Market since the common stock commenced public trading.

<TABLE>
<CAPTION>
Common Stock
---------------
Fiscal Year Ended February 29, 2000 High Low
----------------------------------- ------- -------
<S> <C> <C>
First Quarter ended May 31, 1999......................... $ 22.50 $ 11.25
Second Quarter ended August 31, 1999..................... $ 13.50 $8.1875
Third Quarter ended November 30, 1999.................... $ 14.75 $ 7.81
Fourth Quarter ended February 29, 2000................... $13.063 $ 7.75
<CAPTION>
Fiscal Year Ended February 28, 1999
-----------------------------------
<S> <C> <C>
Second Quarter ended August 31, 1998 (from July 31,
1998)................................................... $ 25.00 $ 8.25
Third Quarter ended November 30, 1998.................... $ 45.50 $ 5.938
Fourth Quarter ended February 28, 1999................... $ 40.50 $15.375
</TABLE>

Stockholders

As of May 1, 2000, there were approximately 438 registered stockholders.

Dividends

We have not paid cash dividends to our stockholders since our inception and
we do not plan to pay cash dividends in the foreseeable future. We currently
intend to retain earnings, if any, to finance our growth.

Unregistered Sales of Securities

None

Use of Proceeds

In connection with our initial public offering, we sold 4,000,000 shares of
our common stock, par value $.01 per share, and received net offering proceeds
of approximately $65.5 million. On July 30, 1998, the Securities and Exchange
Commission declared our Registration Statement on Form S-1 (File No. 333-55819)
effective. The following table sets forth our cumulative use of the net
offering proceeds as of February 29, 2000:

<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Construction of plant, building and facilities.............. $ 1,900
Purchase and installation of machinery and equipment........ 9,100
Purchase of real estate..................................... --
Acquisition of other businesses............................. --
Repayment of indebtedness................................... 700
Working Capital............................................. 29,900
Temporary investments....................................... 7,700
Cash and cash equivalents................................... 13,300
Investment in joint venture................................. 2,700
All other purposes, net..................................... 200
</TABLE>

The foregoing use of net proceeds does not represent a material change in
the use of net proceeds described in the registration statement.

13
<PAGE>

Item 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
Years Ended
---------------------------------------------------
3/6/1995
thru
2/29/2000 2/28/1999 2/28/1998 2/28/1997 2/29/1996
--------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Net sales.................... $188,605 $ 85,203 $22,681 $10,790 $1,852
Cost of sales................ 166,847 76,919 20,525 9,535 1,689
-------- -------- ------- ------- ------
Gross profit............... 21,758 8,284 2,156 1,255 163
Operating expenses:
Sales and marketing........ 41,667 26,865 5,943 1,407 218
General and
administrative............ 10,809 5,214 1,623 805 259
Technology and
development............... 7,001 3,717 1,058 382 54
-------- -------- ------- ------- ------
Total operating
expenses................ 59,477 35,796 8,624 2,594 531
-------- -------- ------- ------- ------
Operating loss............. (37,719) (27,512) (6,468) (1,339) (368)
Other income (expense), net.. 2,103 2,292 (624) 1 (4)
-------- -------- ------- ------- ------
Net loss................... $(35,616) $(25,220) $(7,092) $(1,338) $ (372)
======== ======== ======= ======= ======
Net loss applicable to
common stockholders (1)... $(35,616) $(26,043) $(7,092) $(1,338) $ (372)
======== ======== ======= ======= ======
Basic and diluted net loss
per common share (1)........ $ (1.52) $ (1.64) $ (1.07) $ (0.22) $(0.07)
======== ======== ======= ======= ======
Weighted average basic and
diluted common shares
outstanding (1)............. 23,382 15,886 6,633 6,145 5,244
======== ======== ======= ======= ======
Pro forma basic and diluted
net loss per
common share (2)............ $ (1.52) $ (1.24) $ (0.86) $ (0.22) $(0.07)
======== ======== ======= ======= ======
Pro forma weighted average
basic and diluted
common shares outstanding
(2)......................... 23,382 20,312 8,260 6,145 5,244
======== ======== ======= ======= ======
</TABLE>

<TABLE>
<CAPTION>
As of
--------------------------------------------------------------
Proforma
2/29/2000(3) 2/29/2000 2/28/1999 2/28/1998 2/28/1997 2/29/1996
------------ --------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $48,618 $13,293 $26,828 $ 7,325 $ 119 $ 41
Short term investments.. 7,694 7,694 28,735 -- -- --
Working capital
(deficit).............. 46,359 11,033 52,854 824 (182) (1,336)
Total assets............ 73,963 52,843 71,464 10,940 525 755
Capital lease
obligations, excluding
current portion........ 718 718 778 136 -- 23
Redeemable convertible
preferred stock........ -- -- -- 5,991 -- --
Common stock............ 284 237 230 67 60 65
Total stockholders'
equity (deficit)....... $59,845 $24,520 $58,421 $(3,671) $ (33) $(1,161)
</TABLE>
- --------
(1) See Note 1(k) to our financial statements for an explanation of the
determination of the number of common shares used in computing the amount
of basic and diluted net loss per common share and net loss applicable to
common stockholders.
(2) Pro forma net loss per share has been computed under SFAS No. 128, except
that it reflects the conversion of the convertible preferred stock as of
the beginning of the earliest period presented or date of issuance,
whichever is later. Therefore, the pro forma net loss per share does not
include the accretion of or dividends on the Series C Redeemable
Convertible Preferred Stock before it converted into common stock upon
completion of our initial public offering on August 5, 1998. The pro forma
weighted average shares outstanding includes the common stock resulting
from the conversion of the convertible stock as of the beginning of the
earliest period presented or the date of issuance, whichever is later.
(3) The Company completed a private equity placement shortly after year end
which is being presented in this proforma balance sheet. See Note 11 to
our financial statements for further explanation.

14
<PAGE>

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

Overview

Outpost.com is a leading global Internet-only retailer featuring over
170,000 consumer technology and related products for the home and office. With
over 630,000 customers world-wide, we offer an online "superstore" at
www.Outpost.com that provides one-stop shopping for domestic and international
customers, 24 hours a day, seven days a week. Our superstore features computer
hardware, software, electronics and accessories.

Although we have grown rapidly since our inception in 1995, we continue to
incur significant net losses. We believe that in order to continue our growth
and expansion, operating expenses will increase as a result of the financial
commitments required to further develop multiple marketing channels and enhance
our Web site's features and functionality. As such, we expect to continue to
incur losses and generate negative cash flows from operations for the near
term. Since computer retailers typically have low product gross margins, our
ability to achieve profitability is dependent upon our ability to substantially
increase net sales and to broaden our range of product offerings to include
higher margin products. To the extent that our marketing efforts do not result
in significantly higher net sales, we will be materially adversely affected.
There can be no assurance that sufficient revenues will be generated from the
sale of our products to enable us to reach or maintain profitability on a
quarterly or annual basis. Although we have experienced significant revenue
growth since inception, such growth rates may not be sustainable in the future.
In view of the rapidly evolving nature of our business and our limited
operating history, we believe that period-to-period comparisons of our
operating results, including our gross profit and operating expenses as
percentage of net sales, are not necessarily meaningful and should not be
relied upon as an indication of future performance.

We anticipate that international sales will continue to represent a portion
of our overall revenue. Our international sales are denominated in U.S. dollars
and, therefore, those sales are not affected by foreign currency translation.
However, foreign currency fluctuations may affect demand for our products. In
addition, international sales are subject to diverse market factors such as the
economic conditions of a given country or region.

We believe that the key factor affecting our long-term financial success is
our ability to attract and retain customers in a cost effective manner.
Currently, we seek to expand our customer base and encourage repeat buying
through multiple sales and marketing programs. Such programs include: (i) brand
development, (ii) online and offline marketing and promotional campaigns, (iii)
linking programs with targeted Web sites, (iv) personalized direct marketing
programs designed to generate repeat sales from existing customers and (v)
alliances with Internet content providers and portal sites.

We expect to experience significant fluctuations in our future operating
results due to a variety of factors, many of which are outside our control.
Factors that may affect our operating results include the frequency of new
product releases, success of business alliances, mix of product sales and
seasonality of sales typically experienced by retailers. Sales in the computer
retail industry are significantly affected by the release of new products.
Infrequent or delayed new product releases, when they occur, negatively impact
the overall growth in computer retail sales. Gross profit margins for hardware,
software and accessories vary widely, with computer hardware generally having
the lowest gross profit margins. While we have some ability to affect our
product mix through effective upselling and cross-selling of high margin
products, our sales mix will vary from period to period and our gross margins
will fluctuate accordingly.

15
<PAGE>

Results of Operations

The following table sets forth certain items from our statement of
operations data as a percentage of net sales for the periods indicated:

<TABLE>
<CAPTION>
Years Ended
-----------------------------
2/29/2000 2/28/1999 2/28/1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales.................................... 100.0% 100.0% 100.0%
Cost of sales................................ 88.5 90.3 90.5
----- ----- -----
Gross profit............................. 11.5 9.7 9.5
Operating expenses:
Sales and marketing........................ 22.1 31.5 26.2
General and administrative................. 5.7 6.1 7.1
Technology and development................. 3.7 4.4 4.7
----- ----- -----
Total operating expenses............... 31.5 42.0 38.0
----- ----- -----
Operating loss........................... (20.0) (32.3) (28.5)
Other income (expense), net.................. 1.1 2.7 (2.8)
----- ----- -----
Net loss................................. (18.9)% (29.6)% (31.3)%
===== ===== =====
</TABLE>

Year Ended February 29, 2000 Compared to the Year Ended February 28, 1999

Net Sales

Net sales are comprised of product sales, net of returns and allowances, and
advertising revenue derived from hardware manufacturers and software publishers
that pay for promotional placements on our Web site. Product sales are
comprised of computer hardware, software, accessories, electronics and high end
consumer products and are recognized when the products are shipped to
customers. The Company records a reserve for estimated sales returns at the
time of shipment based on historical return rates. The majority of our net
sales are merchandise to customers using credit cards. The remainder is to
customers that are invoiced directly under credit terms and amounts received
from vendors for advertising.

Net sales increased by $103.4 million to $188.6 million in fiscal 2000 from
$85.2 million in fiscal 1999. This increase was primarily a result of increases
in our customer base and repeat purchases from existing customers. At the end
of fiscal 2000, we had approximately 630,000 customer accounts. International
sales represented approximately 8% of net sales in fiscal 2000 compared to
approximately 14% in fiscal 1999. This decrease was primarily a result of an
increase in domestic sales attributable to the development and implementation
of certain domestic marketing programs during fiscal 2000.

Cost of Sales and Gross Profit

Cost of sales consists of the cost of the merchandise we sell. Cost of sales
increased $89.9 million to $166.8 million in fiscal 2000 from $76.9 million in
fiscal 1999. This increase was primarily the result of an increase in product
sales volume. Our gross profit increased by $13.5 million to $21.8 million in
fiscal 2000 from $8.3 million in fiscal 1999. This increase was a result of our
growth in revenues and improved margins on those revenues. As a percentage of
net sales, our gross profit increased to 11.5% in fiscal 2000 from 9.7% in
fiscal 1999. The increase in gross margin is attributable to our ability to
successfully market higher margin products than in the previous year.

Operating Expenses

Operating expenses consist of sales and marketing expenses, general and
administrative expenses and technology and development expenses. These are
further described as follows:

Sales and Marketing. Sales and marketing expense consists primarily of three
components;

16
<PAGE>

Direct Selling Expenses. These expenses consist primarily of shipping
expense net of shipping revenue under our TruePrice program, contract warehouse
fulfillment expense and bank and credit card fees.

Advertising and Promotional Costs. This consists of both on-line and off-
line advertising. This includes advertising placement fees for strategic
partner alliances with major Internet content and portal sites. This also
consists of expenses related to building our brand, increasing customer
awareness and driving traffic to our web site. The types of expenses incurred
include costs to design and send personalized direct marketing e-mail campaigns
and maintenance of e-mail customer lists.

Sales, Marketing and Customer Service Personnel Costs. This includes the
salaries and benefits paid to personnel and the incidental expenses incurred
during the course of their business. We do not allocate any material amount of
common expenses to Sales and Marketing.

Sales and marketing expenses increased by $14.8 million to $41.7 million in
fiscal 2000 from $26.9 million in fiscal 1999. The increase in absolute dollars
is primarily the result of an increase in the variable direct selling expenses
described above. As part of our TruePrice program we provide free overnight
shipping on most purchases. Therefore, this expense will increase with
additional sales volume. As a percentage of net sales, sales and marketing
expense decreased from 31.5% in fiscal 1999 to 22.1% in fiscal 2000. The
percentage decrease resulted from our ability to leverage sales and marketing
expenses such that net sales increased at a higher rate than those expenses.

General and Administrative. General and administrative expense includes
administrative, finance and purchasing personnel and related costs, general
office and depreciation expenses, as well as professional fees. General and
administrative expense increased by $5.6 million to $10.8 million in fiscal
2000 from $5.2 million in fiscal 1999. The dollar increase in general and
administrative expense was due to the increases in both executive and
administrative personnel, office expenses associated with such personnel,
depreciation, and professional and consulting fees. As a percentage of net
sales, general and administrative expense decreased from 6.1% in fiscal 1999 to
5.7% in fiscal 2000. This percentage decrease was due to our ability to
increase revenue without a commensurate increase in corporate expenses.

Technology and Development. Technology and development expense includes
systems personnel and related costs, software support, technology development
costs, Web site hosting and communications expenditures. Technology and
development expense increased by $3.3 million to $7.0 million in fiscal 2000
from $3.7 million in fiscal 1999. The dollar increases in technology and
development expense was primarily a result of systems and software upgrades and
enhancements required to support the growth in visitors to our Web site, as
well as increases in systems personnel to maintain and improve our Web site and
technology infrastructure. As a percentage of net sales, technology and
development expense decreased from 4.4% in fiscal 1999 to 3.7% in fiscal 2000.
The percentage decrease resulted from our ability to leverage technology and
development expenses such that net sales increased at a higher rate than those
expenses.

Other Income (Expense), Net

Other income (expense), net consists of interest income we earned on short-
term investments and overnight investments of our cash balances in money market
accounts and equity in the net income of [email protected], LLC, offset by
interest expense attributable to lease financing agreements. Other income, net
decreased by $0.2 million to $2.1 million for the year ended February 29, 2000
from $2.3 million for the year ended February 28, 1999 primarily as a result of
lower interest income because of lower short-term investment balances during
the year.

Net Loss

As a result of the foregoing factors, we incurred a net loss of $35.6
million in fiscal 2000 compared to a net loss of $25.2 million in fiscal 1999.

17
<PAGE>

Year Ended February 28, 1999 Compared to the Year Ended February 28, 1998

Net Sales

Net sales increased by $62.5 million to $85.2 million in fiscal 1999 from
$22.7 million in fiscal 1998 This increase was primarily a result of increases
in our customer base and repeat purchases from existing customers. At the end
of fiscal 1999, we had approximately 280,000 customer accounts. International
sales represented approximately 14% of net sales in fiscal 1999 compared to
approximately 36% in fiscal 1998. This decrease was primarily a result of an
increase in domestic sales due to our focus on the development and
implementation of certain domestic marketing programs during fiscal 1999.
Revenues from advertising and other sources in fiscal 1999 and 1998 were not
material.

Cost of Sales and Gross Profit

Cost of sales increased $56.4 million to $76.9 million in fiscal 1999 from
$20.5 million in fiscal 1998. This increase was primarily the result of an
increase in product sales volume. Our gross profit increased by $6.1 million to
$8.3 million in fiscal 1999 from $2.2 million in fiscal 1998 as a result of our
growth in revenues. As a percentage of net sales, our gross margin was 9.7% in
fiscal 1999 and 9.5% in fiscal 1998.

Sales and Marketing

Sales and marketing expenses increased by $20.9 million to $26.9 million in
fiscal 1999 from $5.9 million in fiscal 1998. As a percentage of net sales,
sales and marketing expense increased from 26.2% in fiscal 1998 to 31.5% in
fiscal 1999. This increase was primarily a result of costs associated with
increased advertising and promotion costs related to building brand recognition
and increasing sales, fixed monthly advertising and placement fees paid to
strategic partners and increased direct costs as well as the growth in sales
and marketing staff.

General and Administrative

General and administrative expense increased by $3.6 million to $5.2 million
in fiscal 1999 from $1.6 million in fiscal 1998. The dollar increase in general
and administrative expense was due to increases in both executive and
administrative personnel, office expenses associated with such personnel,
depreciation, and professional and consulting fees. As a percentage of net
sales, general and administrative expense decreased from 7.1% in fiscal 1998 to
6.1% in fiscal 1999. This percentage decrease was due to our ability to
increase revenue without a commensurate increase in corporate expenses.

Technology and Development

Technology and development expense increased by $2.6 million to $3.7 million
in fiscal 1999 from $1.1 million in fiscal 1998. As a percentage of net sales,
technology and development expense decreased from 4.7% in fiscal 1998 to 4.4%
in fiscal 1999. This percentage decrease in technology and development expense
primarily resulted from our installation in fiscal 1999 of a systems
infrastructure that allows us to increase our Web site capacity without a
corresponding increase in additional system resources.

Other Income (Expense), Net

Other income, net increased by $2.9 million to income of $2.3 million in
fiscal 1999 from an expense of $624,000 in fiscal 1998. This change was
primarily a result of interest income from short-term investment of our cash
balances from our sale of Redeemable Series C Convertible Preferred Stock in
February and March 1998 and common stock through our initial public offering on
August 5, 1998. All preferred stock was converted to common stock when we
completed our initial public offering.

18
<PAGE>

Net Loss

As a result of the foregoing factors, we incurred a net loss of $25.2
million in fiscal 1999 compared to a net loss of $7.1 million in fiscal 1998.

Liquidity and Capital Resources

Cash Inflows and Outflows

During fiscal 2000 the net decrease in cash and cash equivalents was $13.5
million compared to a net increase of $19.5 million in fiscal 1999. Details of
the company's cash inflows and outflows are as follows:

Operating Activities: We used $25.0 million in cash to fund operations
during fiscal 2000. During this period, our principal operating cash
requirements were to fund our net loss and for increases in accounts
receivable, inventories, prepaid expenses and other assets, offset in part, by
increases in accounts payable and decreases in accrued expenses. The increase
in accounts receivable represents the increase in our on-account credit sales
to small business, college and university customers, as well as the increase in
receivables from our Web site advertisers.

Investing Activities: We generated $10.6 million in cash from investing
activities during fiscal 2000. This consists of proceeds from the sale and
maturities of short-term investments of $32.4 million offset by purchases of
short term securities for $11.5 million, purchases of property and equipment of
$7.8 million and an investment of $2.5 million in the joint venture
[email protected], LLC.

Financing Activities: We generated $0.9 million in cash from financing
activities during fiscal 2000. Financing activities included proceeds for
issuance of common stock of $1.6 million offset by repayment of capital lease
obligations in the amount of $0.6 million.

Cash, Cash Equivalents and Commitments

At February 29, 2000, we had $13.3 million in cash and cash equivalents
compared to $26.9 million at February 28, 1999. Our cash is currently invested
in A1/P1 or better grade commercial paper. Additionally, we also had $7.7
million invested in short term corporate bonds with a minimum AA rating.

As of February 29, 2000, our material capital commitments consisted of $1.4
million in obligations outstanding under capital leases.

In November 1999, our "flooring" credit agreement with Deutsche Financial
Services Corporation ("DFS") was increased from $7.0 million to $12.0 million.
Pursuant to this agreement, DFS may, at its option, extend credit to us from
time to time to purchase inventory from DFS approved vendors or for other
purposes. Under this agreement, we can purchase inventory from certain vendors
and elect to have these vendors invoice DFS instead of us. DFS pays this
invoice and in turn bills us on a periodic basis throughout the month. If we
pay this note within 30 days, we pay no interest. If the note remains
outstanding after 30 days, we must pay a.25% fee and interest accrues at a
variable rate based on the prime rate plus 2.5%. If the note remains
outstanding after 181 days, interest begins to accrue at the prime rate plus
6.5%. To date, we have paid all notes within 30 days and have incurred no
interest expense under this facility. As a result of increasing our line to
$12.0 million, the amount of cash instruments pledged was increased from $2.5
million to $5.5 million. This pledge, in addition to all of our assets, secures
this facility. For the years ended February 29, 2000 and February 28, 1999 we
had an outstanding balance of $8.5 million and $5.2 million, respectively,
under this facility. These amounts are included in accounts payable.

Subsequent to year end, in March 2000, the Company completed a private
equity placement and issued 4,702,900 shares of its common stock to
institutional investors at a price of $7.87 per share. The Company received
approximately $35.3 million of cash, net of the underwriting discount and
offering expenses. As of the date of this filing these shares were
unregistered.

19
<PAGE>

We believe that our current cash and cash equivalents and short term
investments will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. If available
cash and cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or debt
securities or obtain a credit facility. The sale of additional equity or
convertible debt securities could result in dilution to our stockholders. There
can be no assurance that financing will be available in amounts or on terms
acceptable to us, if at all.

Recent Accounting Pronouncements

The AICPA Accounting Standards Executive Committee recently issued Statement
of Position ("SOP") 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software, and
is effective for fiscal years beginning after December 15, 1998. The statement
also requires that costs related to the preliminary project stage and post
implementation/operations stage in an internal-use computer software
development project be expensed as incurred. We have complied with the
provisions of SOP 98-1 in fiscal 1999 and 2000. The adoption of this SOP had no
material impact on our financial position or results of operations.

The AICPA Accounting Standards Executive Committee recently issued SOP 98-5,
Reporting on the Costs of Start-Up Activities. This statement requires that
costs incurred during start-up activities, including organization costs, be
expensed as incurred, and is effective for fiscal years beginning after
December 15, 1998. We have complied with the provisions of SOP 98-5 in fiscal
2000. The adoption of this SOP had no impact on our financial position or
results of operations.

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition, which
provides guidance on the recognition, presentation, and disclosure of revenue
in financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. Our revenue recognition policies
comply with the requirements of SAB 101.

In March 2000, Financial Accounting Standards Board Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation, was issued.
The interpretation clarifies, among other things, the application of APB
Opinion No. 25 for certain issues, including: (i) the definition of an
employee; (ii) the criteria for determining whether a plan qualifies as a non-
compensatory plan; (iii) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award; and (iv) the accounting
for an exchange of stock compensation awards in a business combination. This
interpretation generally is effective July 1, 2000, but certain conclusions in
the interpretation were effective for specific events that occurred after
either December 15, 1998, or January 12, 2000. The Company does not expect this
interpretation to have a material impact on its financial condition or its
results of operations.

Certain Factors That May Affect Our Results of Operations

This Annual Report on Form 10-K may contain forward-looking statements that
are subject to certain risks and uncertainties. These statements include
statements (i) the structural benefits of e-commerce, (ii) the expected
benefits of our systems in development that will customize our shopping
experience, (iii) our intention to pursue more branding and advertising
campaigns, (iv) our diversification into additional areas of Internet commerce,
(v) our expectation that our operating expenses will increase and that we will
continue to incur losses in the near term and (vi) the sufficiency of our cash,
cash equivalents and short term investments. Such statements are based on
management's current expectations and are subject to a number of factors and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. We caution investors that there
can be no assurance that actual results or business conditions will not differ
materially from those projected or suggested in such forward-looking statements
as a result of various factors, including, but not limited to, the following:
(i) our early stage of development, (ii) competition, (iii) our

20
<PAGE>

ability to expand internationally, (iv) uncertainty regarding the continued
growth of the Internet and online commerce, (v) uncertainty regarding
governmental regulation and (vi) reliance on strategic alliances. For further
information, refer to the more specific risk and uncertainties discussed
throughout this discussion and analysis.

Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We did not have any derivative financial instruments as of February 29,
2000. However, we are exposed to interest rate risk. We employ policies and
procedures to manage our exposure to changes in the market risk of our cash
equivalents and short term investments, which are classified as available-for-
sale securities as of February 29, 2000. We believe that the market risk
arising from holdings of our financial instruments is not material.

21
<PAGE>

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CYBERIAN OUTPOST, INC.

Index to Financial Statements and Financial Statement Schedule

<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Financial Statements:
Independent Auditors' Report........................................... 23
Balance Sheets......................................................... 24
Statements of Operations............................................... 25
Statements of Redeemable Preferred Stock and Changes in Stockholders'
Equity................................................................ 26
Statements of Cash Flows............................................... 27
Notes to Financial Statements.......................................... 28

Schedule:
Independent Auditors' Report........................................... 41
Schedule II, Valuation and Qualifying Accounts......................... 42
</TABLE>

22
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders of
Cyberian Outpost, Inc:

We have audited the accompanying balance sheets of Cyberian Outpost, Inc. as
of February 29, 2000 and February 28, 1999, and the related statements of
operations, redeemable preferred stock and changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended February 29,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of Cyberian Outpost, Inc. as
of February 29, 2000 and February 28, 1999 and the results of its operations
and its cash flows for each of the years in the three-year period ended
February 29, 2000, in conformity with generally accepted accounting principles.

KPMG LLP

Providence, Rhode Island
March 17, 2000

23
<PAGE>

CYBERIAN OUTPOST, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
2/29/2000 2/28/1999
--------- ---------
(in thousands,
except share and
per share data)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................ $ 13,293 $ 26,828
Short term investments (note 3).......................... 7,694 28,735
Accounts receivable, less allowance for doubtful accounts
of $525 in 2000 and $212 in 1999........................ 4,350 3,441
Inventories.............................................. 12,168 5,750
Prepaid expenses and other current assets................ 1,133 365
-------- --------
Total current assets................................... 38,638 65,119
Property and equipment, net (note 2)....................... 10,545 5,937
Investment in joint venture (note 10)...................... 2,709 --
Other assets (note 10)..................................... 951 408
-------- --------
Total assets........................................... $ 52,843 $ 71,464
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of capital lease obligations (note
5(b))................................................... 666 501
Accounts payable (note 5(c))............................. 24,381 8,985
Accrued expenses......................................... 2,558 2,779
-------- --------
Total current liabilities.............................. 27,605 12,265
Capital lease obligations, excluding current portion (note
5(b))..................................................... 718 778
-------- --------
Total liabilities...................................... 28,323 13,043
======== ========
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 authorized, no
shares issued and outstanding............................. -- --
Common stock, $0.01 par value, 50,000,000 shares
authorized, 23,765,117 shares issued and outstanding at
February 29, 2000 and 23,004,744 shares issued and
outstanding at February 28, 1999.......................... 237 230
Additional paid-in capital................................. 93,921 92,319
Accumulated other comprehensive loss....................... -- (106)
Accumulated deficit........................................ (69,638) (34,022)
-------- --------
Total stockholders' equity............................. 24,520 58,421
======== ========
Total liabilities and stockholders' equity............. $ 52,843 $ 71,464
======== ========
</TABLE>

See accompanying notes to financial statements.

24
<PAGE>

CYBERIAN OUTPOST, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Years Ended
-------------------------------
2/29/2000 2/28/1999 2/28/1998
--------- --------- ---------
(in thousands, except per
share data)
<S> <C> <C> <C>
Net sales...................................... $188,605 $ 85,203 $22,681
Cost of sales.................................. 166,847 76,919 20,525
-------- -------- -------
Gross profit................................. 21,758 8,284 2,156
Operating expenses:
Sales and marketing.......................... 41,667 26,865 5,943
General and administrative................... 10,809 5,214 1,623
Technology and development................... 7,001 3,717 1,058
-------- -------- -------
Total operating expenses................... 59,477 35,796 8,624
-------- -------- -------
Operating loss............................... (37,719) (27,512) (6,468)
Other income (expense), net:
Interest expense............................. (132) (66) (658)
Interest income.............................. 2,021 2,354 --
Other, net................................... 214 4 34
-------- -------- -------
Other income (expense), net................ 2,103 2,292 (624)
-------- -------- -------
Net loss..................................... $(35,616) $(25,220) $(7,092)
Accretion of premium on preferred stock........ -- (210) --
Dividends applicable to preferred
stockholders.................................. -- (613) --
-------- -------- -------
Net loss applicable to common stockholders
(note 1(k))................................. $(35,616) $(26,043) $(7,092)
======== ======== =======
Basic and diluted net loss per common share.... $ (1.52) $ (1.64) $ (1.07)
======== ======== =======
Weighted average basic and diluted common
shares outstanding............................ 23,382 15,886 6,633
======== ======== =======
Pro forma basic and diluted net loss per common
share (note 1(k)) (unaudited)................. $ (1.52) $ (1.24) $ (0.86)
======== ======== =======
Pro forma weighted average basic and diluted
common shares outstanding (unaudited)......... 23,382 20,312 8,260
======== ======== =======
</TABLE>

See accompanying notes to financial statements.

25
<PAGE>

CYBERIAN OUTPOST, INC.

STATEMENTS OF REDEEMABLE PREFERRED STOCK AND
CHANGES IN STOCKHOLDERS' EQUITY

(In thousands, except share data)

<TABLE>
<CAPTION>
Redeemable
Preferred Stock
--------------------
Shares Amount
---------- --------
<S> <C> <C>
Balance, February
28, 1997......... -- $ --
Issuance of
common stock
awards to
employees........ -- --
Issuance of
common stock for
services
rendered......... -- --
Sales of Series A
Convertible
Preferred Stock,
net of expenses
and value of
warrants issued.. -- --
Value of warrants
issued in
connection with
Series A
Convertible
Preferred Stock.. -- --
Sales of Series B
Convertible
Preferred Stock,
net of expenses.. -- --
Value of warrants
issued in
connection with
marketing
agreement........ -- --
Value of warrants
issued in
connection with
bridge
financing........ -- --
Sales of Series C
Redeemable
Convertible
Preferred Stock,
net of expenses
and value of
warrants issued.. 875,000 5,991
Warrants issued
in connection
with Series C
Redeemable
Convertible
Preferred Stock.. -- --
Contingent stock
purchase warrants
issued in
connection with
Series C
Redeemable
Convertible
Preferred Stock.. -- --
Net loss......... -- --
---------- --------
Balance, February
28, 1998......... 875,000 5,991
Sales of Series C
Redeemable
Convertible
Preferred Stock,
net of expenses
and value of
warrants issued.. 1,895,125 13,658
Warrants issued
in connection
with Series C
Redeemable
Convertible
Preferred Stock.. -- --
Contingent stock
purchase warrants
issued in
connection with
Series C
Redeemable
Convertible
Preferred Stock.. -- --
Conversion of
Debenture to
Series B
Convertible
Preferred Stock.. -- --
Accretion on
Redeemable Series
C Convertible
Preferred Stock.. -- 210
Dividends on
Redeemable Series
C Convertible
Preferred Stock.. -- 613
Conversion of
Convertible
Preferred Stock
to common stock.. (2,770,125) (20,472)
Sale of common
stock at initial
public offering
net of expenses.. -- --
Issuance of stock
options.......... -- --
Exercise of
employee stock
options.......... -- --
Exercise of
common stock
warrants......... -- --
Comprehensive
loss
Net loss........ -- --
Change in
unrealized
holding loss in
available for
sale
securities...... -- --
Comprehensive
loss............ -- --
---------- --------
Balance, February
28, 1999......... -- --
Sale of common
stock, net of
expenses......... -- --
Issuance of stock
options.......... -- --
Exercise of
employee stock
options.......... -- --
Exercise of
common stock
warrants......... -- --
Comprehensive
loss
Net loss........ -- --
Change in
unrealized
holding loss in
available for
sale
securities...... -- --
Comprehensive
loss............ -- --
---------- --------
Balance, February
29, 2000......... -- $ --
========== ========
<CAPTION>
Stockholders' Equity (Deficit)
------------------------------------------------------------------------------------------
Accumulated Total
Preferred Stock Common Stock Additional Other Stockholders'
-------------------- ------------------ Paid-in Accumulated Comprehensive Equity
Shares Amount Shares Amount Capital Deficit Income (Loss) (Deficit)
----------- -------- ----------- ------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February
28, 1997......... -- $ -- 6,451,648 $ 65 $ 485 $ (1,710) $ -- $ (1,160)
Issuance of
common stock
awards to
employees........ -- -- 216,149 2 243 -- -- 245
Issuance of
common stock for
services
rendered......... -- -- 12,489 -- 14 -- -- 14
Sales of Series A
Convertible
Preferred Stock,
net of expenses
and value of
warrants issued.. 682,738 1,949 -- -- -- -- -- 1,949
Value of warrants
issued in
connection with
Series A
Convertible
Preferred Stock.. -- -- -- -- 166 -- -- 166
Sales of Series B
Convertible
Preferred Stock,
net of expenses.. 163,043 665 -- -- -- -- -- 665
Value of warrants
issued in
connection with
marketing
agreement........ -- -- -- -- 704 -- -- 704
Value of warrants
issued in
connection with
bridge
financing........ -- -- -- -- 567 -- -- 567
Sales of Series C
Redeemable
Convertible
Preferred Stock,
net of expenses
and value of
warrants issued.. -- -- -- -- -- -- -- --
Warrants issued
in connection
with Series C
Redeemable
Convertible
Preferred Stock.. -- -- -- -- 236 -- -- 236
Contingent stock
purchase warrants
issued in
connection with
Series C
Redeemable
Convertible
Preferred Stock.. -- -- -- -- 35 -- -- 35
Net loss......... -- -- -- -- -- (7,092) -- (7,092)
----------- -------- ----------- ------ ---------- ----------- ------------- -------------
Balance, February
28, 1998......... 845,781 2,614 6,680,286 67 2,450 (8,802) -- (3,671)
Sales of Series C
Redeemable
Convertible
Preferred Stock,
net of expenses
and value of
warrants issued.. -- -- -- -- -- -- -- --
Warrants issued
in connection
with Series C
Redeemable
Convertible
Preferred Stock.. -- -- -- -- 474 -- -- 474
Contingent stock
purchase warrants
issued in
connection with
Series C
Redeemable
Convertible
Preferred Stock.. -- -- -- -- 71 -- -- 71
Conversion of
Debenture to
Series B
Convertible
Preferred Stock.. 163,043 750 -- -- -- -- -- 750
Accretion on
Redeemable Series
C Convertible
Preferred Stock.. -- -- -- -- (210) -- -- (210)
Dividends on
Redeemable Series
C Convertible
Preferred Stock.. -- -- -- -- (613) -- -- (613)
Conversion of
Convertible
Preferred Stock
to common stock.. (1,008,824) (3,364) 11,336,847 113 23,723 -- -- 20,472
Sale of common
stock at initial
public offering
net of expenses.. -- -- 4,000,000 40 65,451 -- -- 65,491
Issuance of stock
options.......... -- -- -- -- 378 -- -- 378
Exercise of
employee stock
options.......... -- -- 223,650 2 603 -- -- 605
Exercise of
common stock
warrants......... -- -- 763,961 8 (8) -- -- --
Comprehensive
loss
Net loss........ -- -- -- -- -- (25,220) -- (25,220)
Change in
unrealized
holding loss in
available for
sale
securities...... -- -- -- -- -- -- (106) (106)
-------------
Comprehensive
loss............ -- -- -- -- -- -- -- (25,326)
----------- -------- ----------- ------ ---------- ----------- ------------- -------------
Balance, February
28, 1999......... -- -- 23,004,744 230 92,319 (34,022) (106) 58,421
Sale of common
stock, net of
expenses......... -- -- 93,023 1 999 -- -- 1,000
Issuance of stock
options.......... -- -- -- -- 57 -- -- 57
Exercise of
employee stock
options.......... -- -- 287,506 3 524 -- -- 527
Exercise of
common stock
warrants......... -- -- 379,844 3 22 -- -- 25
Comprehensive
loss
Net loss........ -- -- -- -- -- (35,616) -- (35,616)
Change in
unrealized
holding loss in
available for
sale
securities...... -- -- -- -- -- -- 106 106
-------------
Comprehensive
loss............ -- -- -- -- -- -- -- (35,510)
----------- -------- ----------- ------ ---------- ----------- ------------- -------------
Balance, February
29, 2000......... -- $ -- $23,765,117 $237 $93,921 $(69,638) $ -- $ 24,520
=========== ======== =========== ====== ========== =========== ============= =============
</TABLE>

See accompanying notes to financial statements.

26
<PAGE>

CYBERIAN OUTPOST, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Years Ended
-------------------------------
2/29/2000 2/28/1999 2/29/1998
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(35,616) $(25,220) $(7,092)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 3,954 1,111 145
Amortization of original issue discount on
bridge financing............................ -- -- 568
Issuance of common stock for services
rendered.................................... -- -- 14
Issuance of common stock awards to
employees................................... -- -- 245
Issuance of common stock warrants............ -- -- 704
Issuance of common stock options to
employees................................... 57 378 --
Equity in net income of joint venture........ (209) -- --
Provision for doubtful accounts.............. 760 228 69
Loss on disposal of property and equipment... -- -- 2
Loss on sales and maturities of short term
investments................................. 250 38 --
Increase in operating assets:
Accounts receivable........................ (1,669) (3,195) (346)
Inventories................................ (6,418) (4,339) (1,097)
Prepaid expenses and other assets.......... (1,311) (655) (115)
Increase (decrease) in operating liabilities:
Accounts payable........................... 15,396 5,565 1,876
Accrued expenses........................... (222) 573 2,069
-------- -------- -------
Net cash used in operating activities.... (25,028) (25,516) (2,958)
-------- -------- -------
Cash flows from investing activities:
Investment in joint venture.................... (2,500) -- --
Purchases of property and equipment............ (7,833) (4,200) (1,322)
Purchases of short term investments............ (11,481) (40,680) --
Proceeds from sales and maturities of short
term investments.............................. 32,379 11,801 --
Proceeds from the sale of property and
equipment..................................... -- -- 1
-------- -------- -------
Net cash provided by (used) in investing
activities.............................. 10,565 (33,079) (1,321)
-------- -------- -------
Cash flows from financing activities:
Proceeds from borrowings of notes payable...... -- -- 2,632
Repayment of notes payable..................... -- (2,000) (150)
Repayment of capital lease obligations......... (624) (201) (28)
Proceeds from issuance of preferred stock...... -- -- 2,114
Proceeds from issuance of redeemable preferred
stock......................................... -- 13,658 5,991
Proceeds from issuance of common stock
warrants...................................... -- 545 1,004
Proceeds from issuance of common stock......... 1,552 66,096 --
-------- -------- -------
Net cash provided by financing
activities.............................. 928 78,098 11,563
-------- -------- -------
Net (decrease) increase in cash and cash
equivalents............................. (13,535) 19,503 7,284
Cash and cash equivalents at beginning of
period.................................. 26,828 7,325 41
-------- -------- -------
Cash and cash equivalents at end of
period.................................. $ 13,293 $ 26,828 $ 7,325
======== ======== =======
</TABLE>

See accompanying notes to financial statements.

27
<PAGE>

CYBERIAN OUTPOST, INC.

NOTES TO FINANCIAL STATEMENTS

(1) Description of Business and Summary of Significant Accounting Policies

(a) Description of Business

Cyberian Outpost, Inc. ("Outpost.com", or the "Company") was incorporated in
the state of Connecticut on March 6, 1995 and reincorporated in the state of
Delaware on July 8, 1998. Outpost.com is a leading global Internet-only
retailer featuring over 170,000 consumer technology and related products for
the home and office. In December 1998, the Company dissolved a non-operating
subsidiary, Cyberian Merchant Solutions, Inc.

(b) 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 gains and losses at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.

For purposes of the statements of cash flows, the Company considers all
investment instruments with original maturities of three months or less to be
cash equivalents. Cash equivalents at February 29, 2000 and February 28, 1999
included investments in overnight repurchase agreements, money market funds and
commercial paper.

(d) Inventories

Inventories are stated at the lower of cost or market. Cost is determined
using the weighted average cost method.

(e) Property and Equipment

Property and equipment are stated at cost. Equipment under capital lease
obligations is stated at the lesser of the present value of minimum rental and
other lease payments or fair value at the time of acquisition. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of the assets, or over the term of the lease if shorter.

Estimated useful lives for financial reporting purposes are as follows:

<TABLE>
<S> <C>
Computers.................... 3 years
Software..................... 2-3 years
Office equipment............. 3 years
Furniture and fixtures....... 7 years
Leasehold improvements....... Shorter of lease term or useful life, currently
ranging from 2-7 years
</TABLE>

In fiscal 1999, the Company adopted American Institute of Certified Public
Accountants Statement of Position ("SOP") 98-1, Accounting for Computer
Software Developed For or Obtained For Internal-Use. SOP 98-1 provides revised
guidance for the accounting treatment to all non-governmental entities for
software which is internally developed, acquired, or modified solely to meet
the entity's internal needs. SOP 98-1 did not have

28
<PAGE>

CYBERIAN OUTPOST, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

a material effect on the Company's financial statements or results of
operations. Internal use software which has been capitalized under this SOP is
categorized as property and equipment on the balance sheets.

(f) Revenue Recognition

Net sales are comprised of product sales, net of returns and allowances,
and advertising revenue derived from hardware manufacturers and software
publishers that pay for promotional placements on our Web site. Product sales
are comprised of computer hardware, software, accessories, electronics and
high end consumer products and are recognized when the products are shipped to
customers. The Company records a reserve for estimated sales returns at the
time of shipment based on historical return rates. The majority of our net
sales are merchandise to customers using credit cards. The remainder is to
customers that are invoiced directly under credit terms and amounts received
from vendors for advertising. No revenue was derived from barter transactions.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB No. 101"), Revenue Recognition in Financial
Statements. SAB No. 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Management believes the Company has complied with the provisions
of SAB No. 101.

(g) Sales and Marketing

Sales and marketing expense consists primarily of the following three
components;

Direct Selling Expenses. These expenses consist primarily of shipping
expense net of shipping revenue under our TruePrice program, contract
warehouse fulfillment expense and bank and credit card fees.

Advertising and Promotional Costs. This consists of both on-line and off-
line advertising. This includes advertising placement fees for strategic
partner alliances with major Internet content and portal sites. This also
consists of expenses related to building our brand, increasing customer
awareness and driving traffic to our web site. The types of expenses incurred
include costs to design and send personalized direct marketing e-mail
campaigns and maintenance of e-mail customer lists.

Advertising costs were $12.2 million, $8.4 million and $3.0 million in
2000, 1999 and 1998, respectively.

(h) Technology and Development

Technology and development expense includes systems personnel and related
costs, software support, technology development costs, Web site hosting and
communications expenditures.

(i) Income Taxes

The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. 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. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
operations in the period that includes the enactment date.

29
<PAGE>

CYBERIAN OUTPOST, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

(j) Stock-based Compensation

The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of stock-based
awards on the date of grant. For employee stock-based awards, SFAS No. 123
allows entities to continue to apply the provisions of Accounting Principles
Board ("APB") Opinion No. 25 and provide pro forma net earnings disclosures as
if the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure of SFAS No. 123.

The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the grant date fair value of
the equity instruments issued, whichever is more reliably measurable.

(k) Basic and Diluted Net Loss Per Common Share

Basic and diluted net loss per share is presented under the provisions of
SFAS No. 128, Earnings per Share. In accordance with the pronouncement, the net
loss applicable to common stockholders includes the accretion of and dividends
on the Series C Redeemable Convertible Preferred Stock through August 5, 1998,
the date of conversion to Common Stock. Weighted average shares outstanding
includes the Common Stock resulting from the conversion of the Series A and
Series B Convertible Preferred Stock and Series C Redeemable Convertible
Preferred Stock ("Convertible Stock") from the date of conversion through the
end of the year.

As the Company has been in a net loss position for all periods presented,
common stock equivalents of 5,496,892, 5,243,790 and 9,807,206 for fiscal years
2000, 1999 and 1998, respectively, were excluded from the diluted net loss per
share calculation as they would be antidilutive. As a result, diluted net loss
per share is the same as basic net loss per share, and has not been presented
separately.

Unaudited pro forma net loss per share has been computed under SFAS No. 128,
except that it reflects the conversion of the Convertible Stock as of the
beginning of the earliest period presented or date of issuance, whichever is
later. Therefore, the pro forma net loss per share does not include the
accretion of or dividends on the Series C Redeemable Convertible Preferred
Stock. The pro forma weighted average shares outstanding includes the Common
Stock resulting from the conversion of the Convertible Stock as of the
beginning of the earliest period presented or the date of issuance, whichever
is later.

Net loss for the year ended February 28, 1999 has been increased by $823,000
to arrive at net loss applicable to common stockholders, to give effect to
$613,000 of dividends and $210,000 of accretion on the Redeemable Series C
Convertible Preferred Stock.

(l) Recapitalization

In May 1997, the Company effected a 100-for-1 stock split in the form of a
stock dividend and amended its Articles of Incorporation to increase the number
of authorized shares to 13,000,000, of which 10,000,000 shares were designated
as Common Stock and 3,000,000 shares were designated as Preferred Stock, both
without nominal or par value. In February 1998, the Company amended its
Articles of Incorporation to increase the number of authorized shares to
15,000,000, of which 10,000,000 shares were designated as Common Stock and
5,000,000 shares were designated as Preferred Stock, both without nominal or
par value. In July 1998, the Company effected a 3-for-1 stock split in the form
of a stock dividend and amended its Articles of Incorporation to increase the
number of authorized shares to 60,000,000, of which 50,000,000 shares were

30
<PAGE>

CYBERIAN OUTPOST, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

designated as Common Stock and 10,000,000 shares were designated as Preferred
Stock, both with par values of $0.01. All references in the financial
statements to the number of shares and to per share amounts have been
retroactively restated to reflect these changes.

(m) Supplemental Disclosure of Non-Cash Investing and Financing Activities

During the year ended February 28, 1999, the Company (i) increased the
Redeemable Series C Convertible Preferred Stock and decreased additional paid-
in capital by $823,000 to record accumulated dividends of $613,000 and
accretion of $210,000 on the Redeemable Series C Convertible Preferred Stock,
(ii) converted the $750,000 debenture into 163,043 shares of Series B
Convertible Preferred Stock, (iii) converted all Convertible Stock to Common
Stock effective upon the consummation of the initial public offering, and (iv)
issued 763,961 shares of common stock for cashless exercises of warrants.

During the year ended February 29, 2000, the Company issued 370,422 shares
of common stock for the cashless exercise of a warrant.

The Company acquired office equipment, furniture and fixtures and leasehold
improvements by incurring capital lease obligations of $729,000, $1,242,000,
and $238,000 in the years ended February 29, 2000 and February 28, 1999 and
1998, respectively.

(n) Supplemental Disclosure of Cash Paid for Interest

During the years ended February 29, 2000 and February 28, 1999 and 1998, the
Company paid cash for interest of $132,000, $69,000 and $88,000, respectively.

(o) Comprehensive Income

On March 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net loss and net unrealized gains (losses) on
securities and is presented in the statements of redeemable preferred stock and
changes in stockholders' equity. SFAS No. 130 requires only additional
disclosures in the financial statements; it does not affect the Company's
financial position or results of operations.

(p) Investment Securities

Investment securities at February 29, 2000 and February 28, 1999 consist of
short term corporate and government-backed debt instruments with a minimum
rating of AA. The Company classifies its debt securities as available-for-sale.

Unrealized gains and losses, net of related tax effect, on holdings of
available-for-sale securities are excluded from earnings and are reported as a
separate component of other comprehensive income (loss) until realized.
Realized gains and losses from the sale of available-for-sale securities are
determined on a specific identification basis.

A decline in the market value of any available-for-sale security below cost
that is deemed to be other than temporary, results in a reduction in the
carrying amount to fair value. The impairment is charged to earnings and a new
cost basis for the security is established. Dividend and interest income are
recognized when earned.

31
<PAGE>

CYBERIAN OUTPOST, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

(q) Segment Reporting

SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, establishes standards for the way that public business enterprises
report selected information about operating segments in annual and interim
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
requires the use of the "management approach" in disclosing segment
information, based largely on how senior management generally analyzes business
operations. For the years ended February 29, 2000 and February 28, 1999 and
1998, the Company operated in only one segment.

(2) Property and Equipment

Property and equipment consist of the following at February 29, 2000 and
February 28, 1999:

<TABLE>
<CAPTION>
2000 1999
------- ------
(in thousands)
<S> <C> <C>
Computers.................................................... $ 5,070 $2,020
Software..................................................... 7,353 2,721
Office equipment............................................. 570 268
Furniture and fixtures....................................... 801 561
Leasehold improvements....................................... 2,010 1,672
------- ------
15,804 7,242
Less accumulated depreciation and amortization............... 5,259 1,305
------- ------
$10,545 $5,937
======= ======
</TABLE>

(3) Short Term Investments

The amortized cost, gross unrealized holding gains, gross unrealized holding
losses, fair value for available-for-sale securities and their maturity dates
by major security type at February 29, 2000 and February 28, 1999 were as
follows:

<TABLE>
<CAPTION>
Amortized Gross Unrealized Gross Unrealized Fair
Cost Holding Gains Holding Losses Value Maturity
--------- ---------------- ---------------- ------- -------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
At February 29, 2000
Commercial Paper........ $ 477 $ 19 $ -- $ 496 Due within one year
Corporate debt
securities............. 2,067 -- (19) 2,048 Due within one year
Municipal debt
securities............. 5,150 -- -- 5,150 Due within one year
------- ---- ----- -------
$ 7,694 $ 19 $ (19) $ 7,694
======= ==== ===== =======
At February 28, 1999
Government securities... $ 4,500 $-- $ (1) $ 4,499 Due within one year
Corporate debt
securities............. 16,091 -- (105) 15,986 Due within one year
Municipal debt
securities............. 8,250 -- -- 8,250 Due after ten years
------- ---- ----- -------
$28,841 $-- $(106) $28,735
======= ==== ===== =======
</TABLE>

Proceeds from the sale of investment securities available for sale were $6.9
million and $10.3 million in fiscal years 2000 and 1999, respectively.

32
<PAGE>

CYBERIAN OUTPOST, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

(4) Common Stock

(a) Common Stock Warrants

In December 1997, the Company issued a warrant to purchase 355,707 shares of
Common Stock at an exercise price of $2.6533 per share in connection with a
marketing agreement. The warrant expires in December 2007. Using the Black-
Scholes model, the Company calculated the fair value of the warrant for those
shares that vested immediately at $703,897. This amount was recorded as a
charge to marketing expense.

The contingent stock purchase warrants issued in fiscal 1998 and 1999 were
valued at $35,000 and $71,015, respectively, and recorded as a reduction to the
net proceeds of the Redeemable Series C Convertible Preferred Stock financing.
The contingent stock purchase warrants were cancelled upon the completion of
the Company's initial public offering. In July 1996, the Company issued a
warrant to purchase 180,000 shares of Common Stock at an exercise price of
$.0041 per share to a placement agent. Using the Black-Scholes model, the
warrant was valued at $60,000. This amount was recorded as an expense when
incurred since the placement agent was not successful in raising equity
financing for the Company. The warrant was exercised in August 1998 through a
net cashless exercise.

In January 1998, the Company issued a warrant to purchase 376,884.42 shares
of Common Stock at an exercise price of $2.6533 per share in connection with a
note payable. Using the Black-Scholes model, the warrant was valued at
$567,563. This amount was recorded as a reduction to the carrying value of the
note. The warrant was exercised in January 1999 through a net cashless
exercise.

In February 1998, the Company issued a warrant to purchase 157,500 shares of
Common Stock at an exercise price of $2.6667 per share to an investment banker
in connection with the Redeemable Series C Convertible Preferred Stock
financing. The warrant expires in February 2003. Using the Black-Scholes model,
the warrant was valued at $235,662. In March 1998 and also in connection with
the sale of the Redeemable Series C Convertible Preferred Stock, the Company
issued to an investment banker warrants to purchase 316,811.25 shares of Common
Stock at an exercise price of $2.6667 per share. Using the Black-Scholes model,
the warrants were valued at $474,035. These amounts were recorded as a
reduction in the carrying value of the Redeemable Series C Convertible
Preferred Stock and were amortized and included in the accretion to the
redemption value of the Redeemable Series C Convertible Preferred Stock through
August 5, 1998, the date the Redeemable Series C Convertible Preferred Stock
was converted to Common Stock. The warrant was exercised in July 1999 through a
net cashless exercise.

In connection with the Redeemable Series C Convertible Preferred Stock
financing, the Company issued contingent stock purchase warrants in fiscal 1998
and 1999 to the holders of the Redeemable Series C Convertible Preferred Stock
for the purchase of 393,750 shares and 852,806.25 shares, respectively, of
Common Stock at an exercise price of $3.3333 per share. The contingent warrants
were only exercisable upon the earlier of (i) the completion by the Company of
an initial public offering at a price per share of less than (x) 200% of the
then applicable conversion price if the initial public offering occurred within
12 months of the closing of the Redeemable Series C Convertible Preferred Stock
financing, or (y) 250% of the then applicable conversion price if the initial
public offering occurred after 12 months from the closing of such financing but
within 24 months of the closing, or (ii) the second anniversary of the closing
if the Company has not completed an initial public offering.

(b) Common Stock Options

During the year ended February 28, 1999, the Company's stockholders approved
the 1998 Employee, Director and Consultant Stock Plan that authorizes the grant
of options for up to 3,186,000 shares. During the

33
<PAGE>

CYBERIAN OUTPOST, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

year ended February 28, 1998, the Company's stockholders approved the 1997
Stock Option Plan and the 1998 Stock Option Plan (collectively "the Plans").
The 1997 and 1998 Plans authorized the grant of options for up to 900,000
shares and 1,620,000 shares, respectively, of Common Stock. During the year
ended February 29, 2000 the Company's shareholders increased the amount of
shares reserved by the 1998 Employee, Director and Consultant Stock Plan by
2,000,000 to an aggregate reserve of 5,186,000.

Options granted under the Plans are either (a) options intended to
constitute incentive stock options ("ISOs") under the Internal Revenue Code of
1986 ("the Code") or (b) non-qualified options. Incentive stock options may be
granted under the Plans to employees of the Company. Non-qualified options may
be granted to consultants, directors and officers (whether or not they are
employees), or employees of the Company. Options granted under the Plans vest
over periods up to five years and are exercisable for a period not to exceed 10
years from the date of grant. In fiscal 1999, the Company granted stock options
below the fair market value to two employees. Compensation expense of $378,000
was charged to operations related to these stock options in fiscal 1999.

Had compensation cost for such plans been determined based on the fair value
at the grant dates for awards under these plans consistent with the provisions
of SFAS No. 123, the Company's net loss applicable to common stockholders and
basic and diluted net loss per common share would have been increased to the
pro forma amounts indicated below:

<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C> <C>
Net loss applicable to
common stockholders.... As reported $(35,616) $(26,043) $(7,092)
Pro forma for SFAS No. 123 $(47,478) $(35,938) $(7,125)
Basic and diluted loss
per share.............. As reported $ (1.52) $ (1.64) $ (1.07)
Pro forma for SFAS No. 123 $ (2.03) $ (2.26) $ (1.07)
</TABLE>

The weighted average fair value of options granted during 2000, 1999 and
1998 was $7.23, 12.04 and $0.59 per share, respectively. The Company estimates
the fair value of each option as of the date of grant using the Black-Scholes
pricing model with the following weighted average assumptions:

<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Expected volatility............................. 70% 70% 0%
Dividend yield.................................. 0% 0% 0%
Risk-free interest rate......................... 6.4% 5.5% 6.3%
Expected life................................... 7 years 7 years 8 years
</TABLE>

A summary of the status of the Company's stock option plans as of February
29, 2000 and February 28, 1999 and 1998 and changes during the years then ended
is presented below:

<TABLE>
<CAPTION>
2000 1999 1998
-------------------- ------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 4,404,350 $11.98 1,719,000 $1.49 -- --
Granted................. 2,816,050 9.59 3,054,800 16.81 1,719,000 1.49
Exercised............... (287,506) 1.83 (223,650) 2.71 -- --
Terminated.............. (1,791,709) 14.14 (145,800) 3.65 -- --
---------- --------- ---------
Outstanding at end of
year................... 5,141,185 10.40 4,404,350 11.98 1,719,000 1.49
========== ========= =========
Exercisable at end of
year................... 1,285,958 $11.99 391,981 $5.05 75,000 $1.13
========== ========= =========
Shares reserved at end
of year................ 116,150 932,200 801,000
========== ========= =========
</TABLE>

34
<PAGE>

CYBERIAN OUTPOST, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

The following table summarizes information about stock options outstanding
at February 29, 2000:

<TABLE>
<CAPTION>
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Shares Life Exercise Shares Exercise
Range of Exercise Prices Outstanding (years) Price Exercisable Price
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.13 to $1.53........... 782,460 7.5 $ 1.39 269,809 $ 1.43
2.67..................... 65,150 7.6 2.67 21,950 2.67
7.65 to 11.44............ 2,802,275 9.2 9.12 316,899 8.94
12.58 to 19.56........... 1,454,300 8.0 17.68 669,900 17.83
25.50.................... 37,000 8.9 25.50 7,400 25.50
--------- --- ---------
5,141,185 8.6 $10.40 1,285,958 $11.99
========= === ====== ========= ======
</TABLE>

During the years ended February 28, 1999 and 1998, the Company issued
451,647 and 228,639 shares, respectively, of Common Stock to employees and
consultants in exchange for services. The Company recorded expense of $259,000
and $151,000, respectively, in the corresponding periods related to these stock
issuances.

(5) Commitments

(a) Operating Leases

The Company is obligated under several operating leases for space rented at
its corporate headquarters as well as its sales and customer service center.
The Company is also obligated for various vehicle and office equipment leases
that expire at various dates during the next seven years. The building leases
require the Company to pay certain costs such as maintenance and insurance.
Rental payments for the vehicle lease include minimum rentals plus contingent
rentals based on mileage. Rental expense for operating leases was $455,000,
$193,000, and $101,000 in 2000, 1999 and 1998, respectively.

Future minimum lease payments under noncancelable operating leases with
initial terms in excess of one year are as follows at February 29, 2000:

<TABLE>
<CAPTION>
Fiscal year ending
------------------ (in thousands)
<S> <C>
February 28, 2001............................................. $ 507
February 28, 2002............................................. 481
February 28, 2003............................................. 433
February 29, 2004............................................. 437
February 28, 2005 and thereafter.............................. 365
------
$2,223
======
</TABLE>

(b) Capital Leases

The Company has capital lease arrangements for certain computers, furniture
and fixtures, and telephone equipment. The assets have an aggregate capitalized
cost of $2.2 million and related accumulated amortization of $0.9 million as of
February 29, 2000. Future minimum lease payments under capital lease
obligations are as follows at February 29, 2000:

35
<PAGE>

CYBERIAN OUTPOST, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
Year ending
----------- (in thousands)
<S> <C>
February 28, 2001............................................. $ 760
February 28, 2002............................................. 638
February 28, 2003............................................. 120
-----
Subtotal...................................................... 1,518
Less amount representing interest............................. 134
-----
Present value of future minimum lease payments................ 1,384
Less current portion.......................................... 666
-----
Long-term portion............................................. $ 718
=====
</TABLE>

The Company had a flooring line in effect during the years ended February
29, 2000 and February 28, 1999. In November 1999, the flooring credit agreement
with Deutsche Financial Services Corporation ("DFS") was increased from $7.0
million to $12.0 million for seasonal inventory purchases. As of February 29,
2000, the available credit under the flooring line is $10.0 million. Pursuant
to this agreement, DFS may, at its option, extend credit from time to time to
purchase inventory from DFS approved vendors or for other purposes. Under this
agreement, the Company can purchase inventory from certain vendors and elect to
have these vendors invoice DFS instead of us. DFS pays this invoice and in turn
bills us on a periodic basis throughout the month. No interest is incurred if
the note is paid within 30 days. If the note remains outstanding after 30 days,
the Company must pay a .25% fee and interest accrues at a variable rate based
on the prime rate plus 2.5%. If the note remains outstanding after 181 days,
interest begins to accrue at the prime rate plus 6.5%. To date, the Company has
paid all notes within 30 days and have incurred no interest expense under this
facility. As a result of increasing the line to $12.0 million, the amount of
cash instruments pledged was increased from $2.5 million to $5.5 million. This
pledge, in addition to all of our assets, secures this facility. For the years
ended February 29, 2000 and February 28, 1999, the Company had outstanding
balances of $8.5 and $5.2 million, respectively, under this facility. These
amounts are included in accounts payable.

(d) Legal Proceedings

The Company, from time to time, is involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's financial position, results of operations or
liquidity.

(6) Income Taxes

There was no income tax expense for fiscal 2000, 1999 and 1998. This
differed from the expected tax benefit computed by applying the statutory rate
of 34 percent to the net loss before taxes as a result of the following:
<TABLE>
<CAPTION>
2000 1999 1998
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
Computed "expected" tax benefit.................... $(12,109) $(8,575) $(2,411)
Increase (reduction) in income taxes resulting
from:
Change in the beginning-of-the-year balance of
the valuation allowance for deferred tax assets
allocated to income tax expense................. 13,149 10,211 2,877
State and local income taxes, net of federal
income tax benefit.............................. (1,083) (1,665) (468)
Other, net....................................... 43 29 2
-------- ------- -------
$ -- $ -- $ --
======== ======= =======
</TABLE>

36
<PAGE>

CYBERIAN OUTPOST, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at February
29, 2000 and February 28, 1999 are presented below:

<TABLE>
<CAPTION>
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts..................................... $ 193 $ 86
Inventories, principally due to reserves............... 38 62
Federal and state net operating loss carryforwards..... 26,222 13,297
Property and equipment, principally due to differences
in depreciation....................................... 117 22
Other assets........................................... 226 102
Other accrued liabilities.............................. 74 68
Stock-based compensation............................... 550 576
------- -------
Gross deferred tax assets............................ 27,420 14,213
Less valuation allowance against deferred tax assets... 27,326 14,177
------- -------
94 36
------- -------
Deferred tax liabilities:
Investment in joint venture............................ (77) --
Prepaid expenses....................................... (17) (36)
------- -------
Total deferred tax liabilities....................... (94) (36)
------- -------
Net deferred tax asset............................... $ -- $ --
======= =======
</TABLE>

The valuation allowance for deferred tax assets as of February 29, 2000 and
February 28, 1999 was $27.3 million and $14.2 million respectively. The net
change in the total valuation allowance for the years ended February 29, 2000
and February 28, 1999 and 1998 was an increase of $13.1 million, $10.6 million
and $2.9 million, respectively. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Taxable loss for the years ended February 29, 2000 and
February 28, 1999 and 1998 was $34.3 million, $25.4 million and $6.1 million,
respectively. Based upon the historical taxable losses of the company, the
limitations imposed on the future utilization of such losses, and the
uncertainty of generating sufficient taxable income of an appropriate character
over the periods in which the deferred tax assets are deductible, management
believes it is more likely than not that the Company will not realize the
benefits of these deductible differences at February 29, 2000.

Subsequent recognized tax benefits relating to the valuation allowance for
deferred tax assets as of February 29, 2000 will be allocated as follows:

<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Income tax benefit that would be reported in the statement of
operations.................................................... $25,874
Additional paid-in capital..................................... 1,452
-------
$27,326
=======
</TABLE>

At February 29, 2000, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $70.9 million which are
available to offset future federal taxable income, if any,

37
<PAGE>

CYBERIAN OUTPOST, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

through 2019. At February 29, 2000, the Company also had net operating loss
carryforwards for state income tax purposes of approximately $29.9 million and
$6.5 million in Connecticut and Ohio, respectively, which are available to
offset future state taxable income, if any, through 2004 and 2014,
respectively. However, during the year ended February 28, 1998, the Company
experienced an ownership change, as defined by Section 382 of the Internal
Revenue Code, due to additional sales of Preferred Stock. The Company has not
yet assessed the Section 382 implications of the additional stock issuances,
but the change in control may limit the utilization of the net operating loss
carryforwards incurred prior to the ownership change.

(7) 401 (k) Savings Plan

The Company has established a retirement savings plan under Section 401(k)
of the Internal Revenue Code (the "401(k) Plan"). The 401(k) Plan covers
substantially all employees of the Company who meet minimum age and service
requirements, and allows participants to defer a portion of their annual
compensation on a pre-tax basis. Company contributions to the 401(k) Plan may
be made at the discretion of the Board of Directors. The Company has not made
any contributions to the 401(k) Plan for the three-year period ended February
29, 2000.

(8) International Sales and Geographic Information

During fiscal 1999, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. Prior-period amounts have
been restated in accordance with the provisions of No. SFAS 131. There were no
sales to any individual customer during any of the years in the three-year
period ended February 29, 2000 that represented 10% or more of net sales. The
Company has no material long-lived assets located in foreign countries. The
Company attributes net sales to an individual country based upon the location
of the customer.

The Company operates in one principal business segment across domestic and
international markets. International sales all emanate from the United States,
and represented approximately 8%, 14%, and 36% of net sales for the years ended
February 29, 2000, and February 28, 1999 and 1998, respectively.

Summary geographic net sales information is as follows:

<TABLE>
<CAPTION>
Years ended,
-----------------------------
2/29/2000 2/28/1999 2/28/1998
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
United States..................................... $173,821 $72,973 $14,423
All foreign countries............................. 14,784 12,230 8,258
-------- ------- -------
$188,605 $85,203 $22,681
======== ======= =======
</TABLE>

38
<PAGE>

CYBERIAN OUTPOST, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

(9) Quarterly Results (Unaudited)

The following tables contain selected unaudited Statement of Operations data
for each quarter of fiscal years 2000 and 1999. The Company believes that the
following information reflects all normal recurring adjustments necessary for a
fair presentation of the information for the periods presented. The operating
results for any quarter are not necessarily indicative of results for any
future period.

<TABLE>
<CAPTION>
Year Ended February 29, 2000
-----------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(in thousands, except loss per share)
<S> <C> <C> <C> <C>
Net sales.................. $32,680 $36,689 $43,167 $76,069
Gross profit............... 3,413 4,220 5,084 9,041
Net loss................... (8,855) (8,393) (8,543) (9,825)
Basic and diluted net loss
per share (1)............. $ (0.38) $ (0.36) $ (0.36) $ (0.41)
Shares used in computation
of basic and diluted net
loss per share............ 23,024 23,252 23,559 23,697

<CAPTION>
Year Ended February 28, 1999
-----------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(in thousands, except loss per share)
<S> <C> <C> <C> <C>
Net sales.................. $11,562 $17,033 $23,515 $33,093
Gross profit............... 1,042 1,678 2,370 3,194
Net loss................... (4,156) (5,620) (7,629) (7,815)
Basic and diluted loss per
share (1)................. $ (0.69) $ (0.50) $ (0.34) $ (0.34)
Shares used in computation
of basic and diluted net
loss per share............ 6,680 12,036 22,298 22,748
</TABLE>
- --------
(1) The sum of quarterly per share amounts may not equal per share amounts
reported for year-to-date periods. This is due to changes in the number of
weighted average shares outstanding and the effects of rounding for each
period.

(10) Related Party Transactions

On October 1, 1999, the Company formed a joint venture, [email protected],
LLC with Tweeter Home Entertainment Group, Inc. ("Tweeter").
[email protected], LLC operates a fully authorized Internet consumer
electronics retail destination. The Company contributed $2.5 million in cash.
At February 29, 2000, both partners held 50% of the voting stock of the joint
venture and the Company had an ownership interest in the joint venture of
approximately 50%. There could be future dilution of the Company's interests if
further investments are made in the joint venture.

The investment is accounted for under the equity method of accounting with
profits and losses allocated in accordance with the joint venture agreement. As
of February 29, 2000, net income of $209,000 had been allocated to the Company
under the terms of the joint venture agreement. The Company has entered into
certain agreements with [email protected], LLC pursuant to which it will
provide services to, and act as an agent for, [email protected], LLC. Under
the terms of the agreements, these services are to be provided at cost plus an
overhead percentage. During fiscal 2000, the Company billed costs of $294,000
for marketing, technology and other services rendered. At February 29, 2000, a
receivable of $143,000 from [email protected], LLC was included in Other
Assets, net on the accompanying balance sheet.

As of March 1, 2000, the joint venture agreement between the Company and
Tweeter was amended. The effect of this amendment was to change certain
provisions of the Company's interest in the joint venture. As

39
<PAGE>

CYBERIAN OUTPOST, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

such, the Company will, as of March 1, 2000, begin consolidating the financial
statements of [email protected], LLC with those of Outpost.com as a
controlled subsidiary. All intercompany transactions will be eliminated.

(11) Subsequent Event

On March 7, 2000, the Company completed a private equity placement and
issued 4,702,900 shares of its common stock to institutional investors at a
price of $7.87 per share, reflecting a 5% discount of the market price at the
date of issue. The Company received approximately $35.3 million of proceeds,
net of the underwriting discount and offering expenses.

40
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders of
Cyberian Outpost, Inc:

Under date of March 17, 2000, we reported on the balance sheets of Cyberian
Outpost, Inc. as of February 29, 2000 and February 28, 1999, and the related
statements of operations, redeemable preferred stock and changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended February 29, 2000, as contained in the annual report on Form 10-K
for the fiscal year 2000. In connection with our audits of the aforementioned
financial statements, we also audited the related financial statement schedule
listed in Item 14(a)(2). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based on our audits.

In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.

KPMG LLP

Providence, Rhode Island
March 17, 2000

41
<PAGE>

SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Cost and End of
Description of Period Expenses Deductions Period
----------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Year ended February 29, 2000....... $212 $760 $(447) $525
Year ended February 28, 1999....... $ 47 $228 $ (63) $212
Year ended February 28, 1998....... $ 4 $ 69 $ (26) $ 47
</TABLE>

42
<PAGE>

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

Not applicable.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The response to this item is incorporated by reference from the discussion
responsive thereto under the captions "Information About Directors and
Executive Officers" and "Other Matters--Section 16(a) Beneficial Ownership
Reporting Compliance" in our Proxy Statement for the 2000 Annual Meeting of
Stockholders.

Item 11. EXECUTIVE COMPENSATION

The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Executive Compensation" in our Proxy
Statement for the 2000 Annual Meeting of Stockholders.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Information About Cyberian Outpost Common
Stock Ownership" in our Proxy Statement for the 2000 Annual Meeting of
Stockholders.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Related Party Transactions" and
"Executive Compensation--Employment Contracts and Change of Control
Arrangements" in our Proxy Statement for the 2000 Annual Meeting of
Stockholders.

43
<PAGE>

PART IV

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

Item 14(a). The following documents are filed as part of this annual report
on Form 10-K.

Item 14(a)(1) and (2). See "Index to Financial Statements and Financial
Statement Schedule" at Item 8 to this Annual Report on Form 10-K. Other
financial statement schedules have not been included because they are not
applicable or the information is included in the financial statements or notes
thereto.

Item 14(a)(3) Exhibits. The following is a list of exhibits filed as part of
this Annual Report on Form 10-K:

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
+3.1 Restated Certificate of Incorporation (Exhibit 4.2).
****3.2 Restated By-laws of Cyberian Outpost (Exhibit 3.1).
*4.1 Form of Common Stock Certificate (Exhibit 4.1).
*10.1 Lease, dated December 2, 1997, between Barton Kent LLC and Cyberian
Outpost (Exhibit 10.1)
*10.2 Lease, dated December 2, 1997, between Barton Kent LLC and Cyberian
Outpost (Exhibit 10.2)
*10.3 Lease, dated February 16, 1998, between Barton Kent LLC and
Cyberian Outpost (Exhibit 10.3)
*10.4 Lease, dated May 4, 1998, between Barton Kent LLC and Cyberian
Outpost (Exhibit 10.4)
**10.5 Lease, dated May 29, 1998, between Housatonic Enterprises and
Cyberian Outpost (Exhibit 10.5)
10.6 Lease, dated September 9, 1999 between Berkshire Industrial
Corporation and Cyberian Outpost
+*10.7 1997 Incentive Stock Plan (Exhibit 10.5).
+*10.8 1998 Incentive Stock Plan (Exhibit 10.6).
[email protected] Restated 1998 Employee, Director and Consultant Stock Plan (Exhibit
99).
+**10.10 Director Stock Option Policy, adopted by Cyberian Outpost on
February 11, 1999 (Exhibit 10.9).
+10.11 Director Stock Option Policy, adopted by Cyberian Outpost on June
15, 1999.
+***10.12 Employment Agreement, dated June 16, 1999, between Cyberian Outpost
, Inc. and Katherine N. Vick (Exhibit 10).
+****10.13 Employment Agreement, dated September 29, 1999, between Cyberian
Outpost, Inc. and Robert Bowman. (Exhibit 10.1).
11.1 Computation of Loss Per Share.
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule.
</TABLE>
- --------
+ Previously filed with the Commission as Exhibits to, and incorporated herein
by reference from, our Registration Statement filed on Form S-8, File No.
333-64403.
* Previously filed with the Commission as Exhibits to, and incorporated herein
by reference from, our Registration Statement filed on Form S-1, File No.
333-55819.
** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, our Annual Report on Form 10-K for the fiscal
year ended February 28, 1999.
*** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, our Quarterly Report on Form 10-Q for the
quarter ended August 31, 1999.
**** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, our Quarterly Report on Form 10-Q for the
quarter ended November 30, 1999.
@ Previously filed with the Commission as an Exhibit to and incorporated in
herein by reference from, our Registration Statement filed on Form S-8, File
No. 333-95899.
+ Management contract or compensatory plan, contract or agreement.

Where a document is incorporated by reference from a previous filing, the
Exhibit number of the document in that previous filing is indicated in
parentheses after the description of such document.

Item 14(b) Reports on Form 8-K.

We did not file any Current Reports on Form 8-K during the three months
ended February 29, 2000.

44
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in Kent,
Connecticut on May 17, 2000.

CYBERIAN OUTPOST, INC.

/s/ Robert A. Bowman
By:__________________________________
Robert A. Bowman
President and Chief Executive
Officer

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

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

<S> <C> <C>
/s/ Robert A. Bowman President, Chief Executive May 17, 2000
____________________________________ Officer and Director
Robert A. Bowman (Principal executive
officer)

/s/ Katherine N. Vick Executive Vice President and May 17, 2000
____________________________________ Director (Principal
Katherine N. Vick financial and accounting
officer)

/s/ Darryl Peck Chairman of the Board May 17, 2000
____________________________________
Darryl Peck

/s/ Charles H. Jackson, IV Director May 17, 2000
____________________________________
Charles H. Jackson, IV

/s/ William H. Lane, III Director May 17, 2000
____________________________________
William H. Lane, III

Director May 17, 2000
____________________________________
Michael Murray

/s/ James E. Preston Director May 17, 2000
____________________________________
James E. Preston
</TABLE>

<PAGE>

EXHIBIT 10.6

CYBERIAN OUTPOST, INC.

LEASE

Between

BERKSHIRE INDUSTRIAL CORPORATION

Landlord

And

CYBERIAN OUTPOST, INC.

Tenant
<PAGE>

TABLES OF CONTENTS

Premises ................................................... 1
Term ....................................................... 2
Basic Rental ............................................... 2
Completion and Occupancy ................................... 3
Use ........................................................ 4
Definitions for Additional Rental .......................... 5
Payment of Additional Rental ............................... 9
Security ................................................... 12
Utilities .................................................. 12
Repairs and Maintenance .................................... 12
Parking Facilities and Common Areas ........................ 13
Tenant Fit-out and Alternations ............................ 14
Signs ...................................................... 16
Outside Appearance and Displays ............................ 17
Changes or Alterations by Landlord ......................... 17
Covenants by Tenant ........................................ 18
Liability and Indemnity .................................... 19
Bankruptcy or Insolvency ................................... 20
Litigation ................................................. 20
Arbitration ................................................ 20
Attorney's Fees ............................................ 21
Hazardous Substances ....................................... 21
Assignment, Mortgaging and Sublease ........................ 25
Subordination; Tenant's Notice of Intent to Cancel ......... 27
Sale by Landlord ........................................... 28
Fire Insurance ............................................. 28
Damage ..................................................... 29
Eminent Domain ............................................. 30
Quiet Enjoyment ............................................ 31
Default by Tenant .......................................... 31
Waivers .................................................... 31
Abandonment ................................................ 32
Holdover ................................................... 32
Grace Period ............................................... 32
Notices .................................................... 32
Real Estate Brokers ........................................ 33
Option to Renew ............................................ 33
Future Expansion ........................................... 33
Landlord's Right to Relocate ............................... 34
Americans With Disabilities Act ............................ 34
Notice of Availability ..................................... 35
Effect ..................................................... 35
Execution .................................................. 36
Acknowledgments ............................................ 37

<PAGE>

LEASE

This lease dated this 9th day of September, 1999 between BERKSHIRE
INDUSTRIAL CORPORATION, hereinafter referred to as Landlord, a Connecticut
corporation with offices located at 2 Parklawn Drive, Bethel, CT 06801, and
Cyberian Outpost, Inc., a Delaware corporation with an office and principal
place of business located at 23 North Main Street, Kent, CT, hereinafter
referred to as Tenant.

PREFACE

Landlord is the owner of certain real property as described below
known as Berkshire Corporate Park (the "Park") as set forth below. The Premises
defined in this Lease and the Park are subject to a certain "Master Development
Agreement and Plan" (the "MDA"), which MDA is on file in the Land Records of the
Town of Bethel, County of Fairfield and State of Connecticut at Volume 568, Page
385. This Lease shall at all times be subject to said MDA in all respects, as
the MDA may be amended or revised from time to time. In the event there are any
terms or conditions of this Lease which may be contradictory or inconsistent
with or repetitious of the MDA, the MDA shall supersede and control this Lease.
Whenever used in this Lease, the term "MDA Property" shall mean the Park, as
defined in Paragraph 1.1 below, the "Bethel Health Care Site" as that property
is defined in Paragraph 4.1 of the MDA and the "Duracell Site" as that property
is defined in Paragraph 4.10 of the MDA.

1: PREMISES

1.1 Landlord is the owner of certain real property located in the Town
of Bethel Town of Brookfield and City of Danbury, all in the State of
Connecticut, known as Berkshire Corporate Park and described on Exhibit A
attached hereto and made a part hereof. All references in this Lease to the
"Park" shall mean the entire area owned by Landlord and any subsidiaries or
affiliates of Landlord as described in Exhibit A, as the same may, from time to
time, be increased or decreased by the addition of other contiguous lands, and
the entire development on said area, including any and all structures, parking
facilities and common facilities built thereon from time to time, or as the same
may from time to time be reduced by eminent domain taking or dedications to
public authorities.

1.2 Landlord hereby leases to Tenant and Tenant hereby rents from
Landlord, subject to all of the terms, covenants, conditions and provisions of
this Lease, the following space located in the Park: the floor space shown on
Exhibit B-l attached hereto, which floor space is a part of Building Number 8 in
the Park shown as Exhibit B-3 attached hereto having the address of 6 Berkshire
Boulevard, Bethel, CT 06801, hereinafter referred to as the "Premises". Said
Building Number 8 is located on a certain piece or parcel of land located in the
Town of Bethel, County of Fairfield, State of Connecticut, shown and described
as Lots 1 & 2 on a certain map consisting of two sheets, "Sheet 1 of 2" and
"Sheet 2 of 2", both sheets being entitled "Final Subdivision Showing Berkshire
Industrial Park Bethel, Connecticut Scale: l"=100', Total Area: 117.273 AC.,
Zone: LP, Date: Mar. 29, 1985" which map is on file in the Bethel Town Clerk's
office as Map 60 in File 19 (Sheet 1 of

1
<PAGE>

2) and Map 60-A in File 19 (Sheet 2 of 2). Landlord and Tenant hereby
acknowledge and agree that for the purposes of this Lease and the calculation(s)
of Basic Rental and all Additional Rental (as hereinafter defined) payable
hereunder, the Premises shall be deemed to contain 17,000 rentable square feet.
Landlord makes no representations concerning the specific area of the Premises,
and Tenant acknowledges that it has inspected the Premises and is satisfied in
all respects therewith, and accepts the Premises in "AS IS" condition, subject
to the work to be performed by Landlord as set forth in Exhibits B-2 and B-4
attached hereto.

1.3 Landlord specifically reserves to itself and excepts from the
demise of this Lease the use of the exterior walls of the building, the roof and
the right to install, maintain, alter, use, repair and replace pipes, ducts,
conduits and wires leading through the Premises in locations which will not
materially interfere with Tenant's use and enjoyment thereof Landlord further
reserves to itself and other Tenants of the building the right upon reasonable
notice from Landlord to access and use the elevator, telephone, HVAC systems and
other systems common to the Tenants of the building. Tenant, its agents,
servants, employees and invitees shall not enter upon the roof of the building
at any time. It is specifically agreed by the parties hereto that this lease
does not grant a continuance of light and air over any property adjoining the
Premises.

2: TERM

2. 1 The term of this lease shall be for the period of Five (5) years,
commencing on the Commencement Date, as hereinafter defined, and terminating on
September 30, 2004. The Commencement Date shall be whichever of the following
dates shall occur first: (a) the date when Tenant shall take possession of and
occupy all or any portion of the Premises for its business purposes; or (b)
October 1, 1999. If the Commencement Date shall occur on any day which is not
the first day of a calendar month, the monthly Basic Rental and Additional
Rental to be paid under this Lease for that month shall be apportioned on a per
diem basis based upon the actual number of days in that month, and shall be paid
on the Commencement Date. Landlord and Tenant shall execute a Lease Certificate
in the form attached hereto as Exhibit C setting forth the Commencement Date as
soon as the actual Commencement Date has been determined.

2.2 This lease shall terminate on the Termination Date as set forth in
the Lease Certificate attached as Exhibit C, without the necessity of any notice
from either Landlord or Tenant to terminate the same. Tenant hereby waives any
notice to vacate or quit the Premises, and agrees that Landlord shall be
entitled to the benefit of all provisions of law respecting the summary recovery
of possession of the Premises from a Tenant holding over to the same extent as
if statutory notice had been given.

3: BASIC RENTAL

3.1 Beginning at the Commencement Date, as rent for the Premises
Tenant agrees to pay Landlord the total rental sum of One Million Eighty Three
Thousand Seven hundred Fifty and 00/100 ($1,083,750.00) DOLLARS for the full
term of this Lease, payable in monthly installments

2
<PAGE>

of $ 18,062.00 on the first day of each month in advance, commencing on the
Commencement Date through and including August 1,2004. Said rent is hereinafter
referred to as "Basic Rental", and shall be payable without demand, deduction,
set-off or abatement of any kind, except as expressly provided herein. For the
first Two (2) months of the term of this Lease, if the Landlord does not receive
the monthly Basic Rental due by the fifteenth (15th) day of the calendar month
in which it is due, Tenant shall be liable to pay Landlord an additional sum
equal to five percent (5.00%) of the overdue monthly payment for each such
month. Thereafter if the Landlord does not receive the monthly Basic Rental due
by the tenth (10th) day of the calendar month in which it is due, Tenant shall
be liable to pay Landlord an additional sum equal to five percent (5.00%) of the
overdue monthly for each calendar month that said payment is not paid. The Basic
Rental shall never be less than the monthly rental each year per month as set
forth in this Paragraph 3.1.

4: COMPLETION AND OCCUPANCY

4.1 Landlord shall cause to be performed the work set forth under the
terms of the Work Letter hereof, a copy of which is attached hereto and marked
as Exhibit B-4. Tenant shall be responsible for all other interior finish work
which is not the responsibility of the Landlord. Tenant shall be subject to the
requirements set forth in Paragraph 12 for such work and related design. Except
for the work set forth in the Work Letter hereof, Landlord offers the Premises
for lease to Tenant in "AS IS" condition and Tenant accepts the Premises as
such.

4.2 Landlord shall not be subject to any liability for failure to give
possession of the Premises to Tenant on the specific date hereinbefore
designated for the Commencement Date. No part of the Premises shall be deemed
unavailable for occupancy by Tenant if due to the noncompletion of details of
construction, decoration or mechanical adjustments which are minor in character
and the noncompletion of which does not materially interfere with Tenant's use
and enjoyment of such part of the Premises. In the event there is a delay in the
availability of the Premises for occupancy by Tenant which shall solely be due
to any act or omission of a material nature by Tenant which is a breach of
Tenant's obligations under this Lease, Tenant shall be liable for the payment of
one (1) day's rent for each day of such delay. In the event there is a delay in
the availability of the Premises for occupancy by Tenant which is not due to any
act or omission of a material nature by Tenant which is a breach of Tenant's
obligations under this Lease, Tenant shall not be liable for the payment of rent
until the Premises is made available by Landlord for occupancy by Tenant.

4.3 Tenant, by entering into occupancy of any part of the Premises,
shall be conclusively deemed to have agreed that Landlord, up to the time of
such occupancy, had performed all of its obligations hereunder with respect to
such part and that such part, except for latent defects and the minor details of
construction, decoration and mechanical adjustments hereinbefore referred to,
was in satisfactory condition as of the date of such occupancy, unless within
ten (10) days after such date tenant shall give written notice to Landlord
specifying the respects in which the same was not in such condition.

3
<PAGE>

4.4 If, by reason of any provision of this Lease, the Basic Rental
shall commence on any day other than the first day of a calendar month, the
Basic Rental for such calendar month shall be prorated.

5: USE

5.1 Tenant shall use and occupy the Premises solely for general
administrative office use, online internet sales and telemarketing services and
software development, consistent with a first class business use, only as
permitted by applicable laws and regulations and the MDA and for no other
purposes without Landlord's prior written consent, which consent may be granted
or withheld in Landlord's sole and absolute discretion. Tenant shall not use the
Premises or any part thereof, or permit the Premises or any part thereof to be
used, for any purpose other than the use hereinbefore specifically mentioned.

5.2 Tenant covenants and agrees that it shall not do anything which
shall, in any way, impair or interfere with any of the Building's services to be
supplied by Landlord or the proper and economical heating, cleaning, air
conditioning or other service of the Building or Premises or seriously impair or
interfere with the use of the Building or Premises by, or occasion discomfort,
inconvenience or annoyance to either Landlord or any other occupants of the
Building or of the Park.

5.3 Landlord hereby represents to Tenant that Tenant's use of the
Premises as set forth in Paragraph 5.1 hereof is not in violation of the MDA and
Landlord shall not seek to invoke the provisions of this Paragraph 5.3 against
Tenant so long as Tenant uses the Premises exclusively for the uses set forth in
Paragraph 5.1 above. In addition to the foregoing, Tenant agrees that its use
and occupancy of the Premises, the Building and the Park shall not, at any time,
be violative of or in contradiction to the terms and provisions of the MDA, and
Tenant shall defend and save Landlord harmless from any and all claims made
against Landlord thereunder, founded upon alleged action or inaction of Tenant
on, or in the Premises, the Building or the Park. In the event the MDA is
amended or modified subsequent to the date of the execution of this Lease,
Tenant shall be permitted to use and occupy the Premises as set forth in this
Lease and any such amendment or modification of the MDA shall not be effective
as to Tenant for the balance of the Initial Term of this Lease for the use and
occupancy permitted under this Lease. In the event the MDA is amended or
modified subsequent to the exercise by Tenant of Tenant's Option to Renew
pursuant to Paragraph 37 of this Lease, Tenant shall be permitted to use and
occupy the Premises as set forth in this Lease and any such amendment or
modification of the MDA shall not be effective as to Tenant for the balance of
the Option Term of this Lease for the use and occupancy permitted under this
Lease.

5.4 Tenant shall abide by all reasonable Rules and Regulations
promulgated by Landlord for the Park, as they may be amended or altered from
time to time, provided Landlord enforces the Rules and Regulations uniformly
among Park tenants subject to said Rules and Regulations and provided further
that the provisions of this Lease shall supersede any conflicting Rule or
Regulation. Landlord hereby represents to Tenant that, as of the date of the
execution of this Lease, Landlord has not yet promulgated any such Rules and
Regulations.

4
<PAGE>

6: DEFINITIONS FOR ADDITIONAL RENTAL

6.1.1 As used in this Lease, the term "Building Proportionate Share"
shall mean a percentage, the numerator of which shall be the number of rentable
square feet of floor area of the Premises as set forth in Paragraph 1.2 above
(17,000) and the denominator of which shall be the number of rentable square
feet of floor area of Buildings on Lots Number 1 and 2 referred to in Paragraph
1.2 above of which the Premises are a part as it may be expanded or contracted
from time to time, computed from the center line of all interior partition walls
and from the exterior face of all exterior walls. At the time of the execution
of this Lease that denominator number is One Hundred Four Thousand Nine Hundred
Twenty Eight (104,928.00).

6.1.2 "Taxes" shall mean (i) all real and personal property taxes,
assessments (including, but not limited to, assessments for public works,
improvements or benefits, whether or not begun or completed prior to the
commencement of this Lease and whether or not completed within said term) and
other governmental charges or levies of every kind, character and description
whatsoever, which at any time have been or may be assessed, levied or imposed by
any governmental authority upon or in respect of, or which may become a lien on
the lot on which the Building is located, any portion thereof, the Building or
any buildings, improvements or structures thereon, the parking facilities and
other common areas and facilities on the lot on which the Building is located,
or upon any property of Landlord, real or personal, located within or on the lot
on which the Building is located which is used in connection with the operation
of the lot on which the Building is located; (2) any taxes which may be
assessed, levied or imposed by any governmental authority in addition to or in
lieu of all or any part of such real or personal property taxes, assessments,
charges or levies; (3) all business license, use or other taxes which may be
assessed, levied or imposed upon the developed portion of the lot on which the
Building is located, the parking facilities and other common areas and
facilities or the personal property of the Landlord on account of the leasing or
use of the developed portions on the lot on which the Building is located; (4)
all charges made by state or local government for any services performed on or
for the developed portion of the on the lot on which the Building is located ,
the parking facilities and other common areas and facilities which are not
included in "Operating Costs" as defined hereafter; and (5) any and all sales,
excise and other taxes levied, imposed or assessed by federal, state or local
governments upon any rental payable under this Lease. However, notwithstanding
the foregoing, Taxes shall not include municipal county, state or federal income
or franchise taxes of Landlord, or penalties resulting from failure of Landlord
to pay taxes in a timely manner. In case a tax is imposed in lieu of or as a
substitute, in whole or in part, for the real property tax on the lot on which
the Building is located, any portion thereof the Building or any buildings,
improvement or structures thereon, the parking facilities and other common areas
and facilities on the lot on which the Building is located, or in case a tax is
levied on rentals, the Tenant shall pay Tenant's Building Proportionate Share of
the amount of such substitute as of the effective date of said substitute tax.
At the time of the execution of this Lease , Landlord represents that the
Building comprising the Premises is separately assessed, but not separately
billed, by the Town of Bethel. Landlord will obtain from the Town of Bethel Tax
Assessor's Office the information necessary to determine the pro-rata tax for
the Premises and will bill Tenant for its pro-rata share of the taxes. Tenant
hereby agrees to pay the proportionate share

5
<PAGE>

tax for said Building and proportional lot and improvement. Landlord further
represents that at the time of the execution of this Lease the Building
comprising the Premises is located on a tax lot with two (2) other buildings,
and the parking facilities and land for said tax lot are not separately assessed
by the Town of Bethel. Tenant hereby agrees to pay a pro-rata share of the taxes
assessed for the parking facilities, land and improvements on said tax lot based
upon the square footage Tenant occupies (17,000) to the total square footage of
all buildings on said tax lot, so long as said assessment method is used.

6.1.3 "Insurance" shall mean the aggregate of all commercially
reasonable costs and expenses of every kind or nature paid or incurred by
Landlord directly or indirectly in maintaining all insurance for the Premises,
the building of which the Premises is a part, the lot on which the Building is
located, the parking facilities and other common areas and facilities and the
buildings and improvements within, on or under the lot on which the Building is
located as they may collectively or individually be increased or reduced from
time to time. Insurance shall mean, but not be limited to, premiums for fire,
theft and other casualty insurance, including extended coverage, and including
rental value coverage for one year for minimum rent and for payment of Taxes and
Landlord's Building Operating Costs; premiums for public liability and property
damage insurance; and all risks property and casualty insurance.

6.1.4 "Building Operating Cost" shall mean the aggregate of all
commercially reasonable costs and expenses of every kind or nature paid or
incurred by Landlord directly or indirectly in operating, maintaining managing,
equipping, policing, securing, lighting, cleaning, painting, striping, signing,
and repairing the Building, the lot on which the Building is located, the
parking facilities and other common areas and facilities and the buildings and
improvements within, on or under the lot on which the Building is located as
they may collectively or individually be increased or reduced from time to time.
Building Operating Costs shall include, but not be limited to, the repair and
maintenance of buildings and other improvements on the lot on which the Building
is located; the cost of equipment and supplies used in the maintenance and
operation of the lot on which the Building is located (including seasonal
decorations); the cost of equipment maintenance contracts; costs and expenses of
repair or replacement of paving, curbs, walkways, drainage, pipes, ducts,
conduits and similar items, and plate glass, lighting facilities and the roof of
the Building and/or the lot on which the Building is located; resurfacing
driveways and parking areas on the lot on which the Building is located;
restriping driveways and parking areas on the lot on which the Building is
located; pedestrian and automobile traffic and directional signs and equipment
on the lot on which the Building is located; electrical, water, heating or other
utility charges for parking facilities and other common areas and facilities on
the lot on which the Building is located; installing, repairing, maintaining and
replacing utility systems, including, but not limited to, water, sanitary sewer
and storm water lines and other utility lines, pipes, conduits and similar
facilities on the lot on which the Building is located; sewer use charges for
the lot on which the Building is located; pest control on the lot on which the
Building is located; cleaning costs for the Building exterior and/or the lot on
which the Building is located; refuse removal for the Building exterior and/or
the lot on which the Building is located; snow removal for the lot on which the
Building is located; grass cutting on the lot on which the Building is located;
costs and expenses of planting,

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replanting, maintaining and replacing flowers, shrubbery, planters and trees on
the lot on which the Building is located; landscape maintenance on the lot on
which the Building is located; fire protection, including, but not limited to,
installation, maintenance, repair, testing and replacement of sprinkler systems,
alarm systems and/or other fire protection systems and their components for the
Building and/or on the lot on which the Building is located; repairing and
maintaining the elevator system; reasonable management, administration, legal,
accounting and engineering fees for the Building and/or the lot on which the
Building is located; cost of building alterations, modifications or equipment
for the Building and/or the lot on which the Building is located which are
required by governmental or regulatory authorities or which are made primarily
for the purpose of reducing Building Operating Costs; all compensation and
related costs (including overtime, holiday and premium pay) actually paid or
incurred to persons engaged in the general operation and management of the
Building and/or the lot on which the Building is located, including the cost of
social security, unemployment and other payroll taxes, worker's compensation
insurance and employee benefits such as, but not limited to, vacations,
pensions, group insurance and other fringe benefits. In Landlord's operating,
maintaining managing, equipping, policing, securing, lighting, cleaning,
painting, striping, signing, and repairing the Building and other facilities as
set forth herein, Landlord's performance of same shall not be defined,
determined or used in a manner so as to eliminate new design, new materials, new
systems, methods of construction or colors, provided that in all cases the
overall quality and appearance of same shall not be lower than the overall
quality and appearance as originally created. Notwithstanding the foregoing,
Tenant shall not be liable for any capital expense incurred by Landlord during
the last three (3) months of the term of this Lease, unless Tenant has exercised
its Option to Renew under Paragraph 37 hereof or has otherwise extended its
occupancy of the Premises beyond the term of this Lease.

6.2.1 The term "Proportionate Share of Limited Common Facilities
Maintenance Costs" shall mean a percentage, the numerator of which shall be the
number of rentable square feet of floor area of the Premises as set forth in
Paragraph 1.2 above (17,000) and the denominator of which shall be the number of
rentable square feet of floor area actually constructed in the Park as it may be
expanded or contracted from time to time computed from the center line of all
interior partition walls and from the exterior face of all exterior walls. At
the time of the execution of this Lease, the denominator number is 502,016.

6.2.2 "Limited Common Facilities Maintenance Costs" shall mean the
aggregate of all commercially reasonable costs and expenses of every kind or
nature paid or incurred by Landlord directly or indirectly in operating,
maintaining, managing, equipping, policing, securing, lighting, cleaning,
painting, striping, signing and repairing the common parking facilities and
other common areas, facilities, buildings, improvements, parks, trails, open
space, recreational facilities and/or a helipad within, on or under the Park as
they may collectively or individually be increased or reduced from time to time.
Limited Common Facilities Maintenance Costs shall include, but not be limited
to, the repair and maintenance of common areas, facilities, buildings and
improvements of the Park; the cost of equipment and supplies uses in the
maintenance and operation of the common areas, facilities, buildings and
improvements iii the Park (including seasonal decorations); the cost of
equipment maintenance contracts; costs and expenses of repair or replacement of
paving, curbs,

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walkways, drainage, pipes, ducts, conduits and similar items, and plate glass,
lighting facilities and the roof(s) of the common facilities, buildings and
improvements of the Park; resurfacing common driveways and parking areas of the
Park; restriping common driveways and parking areas of the Park; pedestrian and
automobile traffic and directional signs and equipment; electrical, water,
heating or other utility charges for common areas, facilities, buildings and
improvements of the Park; installing, repairing, maintaining and replacing
utility systems, including, but not limited to, water, sanitary sewer and storm
water lines and other utility lines, pipes, conduits and similar facilities for
the Park; costs to connect the Park and/or the common parking facilities and
other common areas and facilities of the Park to the public sewer system; sewer
use charges for the Park; pest control; cleaning costs; refuse removal; snow
removal; grass cutting; costs and expenses of planting, replanting, maintaining
and replacing flowers, shrubbery, planters and trees; landscape maintenance;
fire protection, including, but not limited to, installation, maintenance,
repair, testing and replacement of sprinkler systems for common areas,
facilities, buildings and improvements; reasonable management, administration,
legal, accounting and engineering fees for common areas, facilities, buildings
and improvements; costs of building alterations, modifications or equipment for
common areas, facilities, buildings and improvements which are required by
governmental or regulatory authorities or which are made primarily for the
purpose of reducing Limited Common Facilities Maintenance Costs; all
compensation and related costs (including overtime, holiday and premium pay)
actually paid or incurred to persons engaged in the general operation and
management of the Park, including the cost of social security, unemployment and
other payroll taxes, worker's compensation insurance and employee benefits such
as, but not limited to, vacations, pensions, group insurance and other fringe
benefits. In Landlord's operating, maintaining, managing, equipping, policing,
securing, lighting, cleaning, painting, striping, signing, and repairing the
private streets and roads within the Park as they may exist from time to time,
the common parking facilities and other common areas, facilities, buildings and
improvements within, on or under the Park as set forth herein, Landlord's
performance of same. shall not be defined, determined or used in a manner so as
to eliminate new design, new materials, new systems, methods of construction or
colors, provided that in all cases the overall quality and appearance of same
shall not be lower than the overall quality and appearance as originally
created. It is understood and agreed that Limited Common Facilities Maintenance
Costs shall include both reasonable, necessary and customary costs directly
incurred by Landlord and reasonable, necessary and customary costs incurred
under outside contracts.

6.3.1 The term "Road and Park Proportionate Share" shall mean a
percentage, the numerator of which shall be the number of rentable square feet
of floor area of the Premises as set forth in Paragraph 1.2 above (17,000) and
the denominator of which shall be the number of total floor area actually
constructed on the MDA property. At the time of the execution of this Lease that
denominator number is 863,241.

6.3.2 "Road and Park Operating Costs" shall mean the aggregate of all
commercially reasonable costs and expenses of every kind or nature paid or
incurred by Landlord directly or indirectly in operating, maintaining, managing,
equipping, policing, securing, lighting, cleaning, painting, striping, signing
and repairing the developed portions of all private and public streets and

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<PAGE>

roads that may exist from time to time within the MDA Property. Road and Park
Operating Costs shall include, but not be limited to, the repair and maintenance
of road improvements, which shall include restriping and traffic and directional
signs and equipment, electrical or other utility charges for such common roads
and for the common signage on the MDA Property (which signage includes, but
shall not be limited to, the four illuminated signs identifying the MDA
Property), maintaining utility lines, drains and similar facilities, removal of
exterior litter and debris, sweeping and sand removal, snow and ice removal,
grounds maintenance and grass cutting, tree and landscape maintenance,
reasonable, necessary and customary premium payments for fire, liability,
property damage and other casualty insurance, real estate or other taxes if
applicable, reasonable, necessary and customary administration, management,
legal, accounting and engineering fees, and costs of alterations, modifications
or equipment that are required by governmental or regulatory authorities but not
treated as capital items under proper accounting practices. Road and Park
Operating Costs shall include a reasonable allocation of all compensation and
related costs (including overtime, holiday and premium pay) actually paid or
incurred to persons engaged in the genera] operation and management of the roads
and streets in the developed portions of the MDA Property, including the cost of
social security, unemployment and other payroll taxes, worker's compensation
insurance, and employee benefits such as, but not limited to, vacations,
pensions, group insurance and other fringe benefits. It is understood and agreed
that Road and Park Operating Costs shall include both reasonable, necessary and
customary costs directly incurred by Landlord and reasonable, necessary and
customary costs incurred under outside contracts.

6.4 Landlord agrees to use reasonable commercial efforts to minimize
Building Operating Costs, Limited Common Facilities Maintenance Costs and Road
and Park Operating Costs. Notwithstanding anything to the contrary, the
following items shall be specifically excluded from Building Operating Costs,
Limited Common Facilities Maintenance Costs and Road and Park Operating Costs:
(i) advertising, commissions tenant improvements and all other expenses incurred
in leasing or procuring new tenants; (2) expenses for repairs or improvements to
other tenant's leased space; (3) interest, principal, rental, late fees or other
costs of any indebtedness or ground lease; (4) the costs of any work or service
performed for any tenant at such tenant's cost; (5) the capital costs of
correcting structural defects in the Premises or design flaws in any major
Premises system; (6) the cost of any items for which Landlord is reimbursed by
insurance, any tenant or otherwise; (7) salaries, wages and benefits of Landlord
officers, directors and employees above the level of a building manager's
salary; (8) any late fees, penalties, interest charges or other similar fees;
(9) any Tenant Improvement Allowance or other payment from Landlord to Tenant;
(10) taxes excluded from the definition of "Taxes"; (11) bad debt losses or
reserves for bad debt losses: (12) costs of selling, syndicating, financing,
mortgaging or hypothecating any of the Premises or Park or Landlord's interest
in the Premises or the Park; (13) expenses resulting from tortious conduct of
Landlord, its employees, agents or contractors; and (14) the cost of
construction of any new building in the Park.

7: PAYMENT OF ADDITIONAL RENTAL

7.1 Commencing on the first anniversary of the Commencement Date and
on each

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anniversary of the Commencement Date thereafter (said anniversary dates
hereinafter referred to as "computation dates"), the Tenant shall pay to
Landlord as Additional Rental a sum calculated based upon the cost of living as
reflected in the "Consumers Price Index, New York-New Jersey Area-All Items"
(hereinafter called the "CPI") published in the Monthly Labor Review of the
Bureau of Labor Statistics of the United States Department of Labor. Said
Additional Rental sum shall be in effect commencing from the computation date
until the next computation date or the end of the term. The amount of said
Additional Rental shall be arrived at by multiplying the monthly Basic Rental
($18,062.50) as set forth in Paragraph 3.1 above by a fraction, the numerator of
which shall be the CPI number for August preceding such computation date, and
the denominator of which shall be the CPI number for August, 1999. The sum of
the Additional Rental thereby obtained shall be payable on the first day of each
calendar month until the next computation date. If there be no CPI number or
comparable successor thereto, then the sum of Additional Rental contemplated
herein shall be established by arbitration in accordance with the rules of the
American Arbitration Association.

7.2 As Additional Rental under this Lease Tenant shall pay to Landlord
Tenant's Building Proportionate Share of Taxes, Insurance, and Building
Operating Costs; Proportionate Share of Limited Common Facilities Maintenance
Costs, and; Road and Park Proportionate Share of Road and Park Operating Costs.

7.3 Tenant shall pay to Landlord its Building Proportionate Share of
Taxes, Insurance and Building Operating Costs; Proportionate Share of Limited
Common Facilities Maintenance Costs, and; Road and Park Proportionate Share of
Road and Park Operating Costs as Additional Rental under this Lease during each
year of the term of this Lease an amount equal to the product obtained by
multiplying Tenant's Building Proportionate Share by the total of Taxes, the
total of Insurance, and the total of Building Operating Costs; Tenant's
Proportionate Share of Limited Common Facilities Maintenance Costs by the total
of Limited Common Facilities Maintenance Costs and; Tenant's Road and Park
Proportionate Share of Road and Park Operating Costs for such year. The Tenant
shall pay on the first day of each month, in advance, 1/12 of the amount
reasonably estimated by the Landlord, on the basis of the most current
information concerning Taxes, Insurance, Building Operating Costs, Limited
Common Facilities Maintenance Costs and Road and Park Operating Costs available
to Landlord, to be Tenant's Building Proportionate Share of the Taxes, Insurance
and Building Operating Costs; Proportionate Share of Limited Common Facilities
Maintenance Costs and; Road and Park Proportionate Share of Road and Park
Operating Costs. Landlord shall have the right to amend its estimate of Taxes,
Insurance and Building Operating Costs; Limited Common Facilities Maintenance
Costs and; Road and Park Operating Costs at any time based upon current
information and to adjust Tenant's Additional Rental payable under this
paragraph by written notice to Tenant. Upon such adjustment and notice to
Tenant, Tenant shall thereafter pay as Additional Rental 1/12 of the adjusted
amount of Tenant's Building and/or Limited Common Facilities and/or Road and
Park Proportionate Share (as the case may be) commencing with the first day of
the first calendar month after such written notice. Within ninety (90) days
after the end of Landlord's fiscal year, Landlord shall furnish Tenant a
statement in reasonable detail of Taxes, Insurance, Building Operating Costs,
Limited Common Facilities Maintenance Costs and Road and Park Operating Costs
for Landlord's fiscal year just ended and the Landlord and Tenant shall make an
adjustment, with

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<PAGE>

payment to Landlord or credit to Tenant so that the Landlord shall receive the
entire amount of Tenant's Building Proportionate Share of Taxes, Insurance, and
Building Operating Costs; Proportionate Share of Limited Common Facilities
Maintenance Costs and; Road and Park Proportionate Share of Road and Park'
Operating Costs and no more. A pro-rata adjustment of Tenant's Building and/or
Limited Common Facilities and/or Road and Park Proportionate Share (as the case
may be) payable as Additional Rental shall be made for the beginning and end of
this Lease term. provided the Lease term has terminated by lapse of time.

7.4 In the event Landlord incurs any expenses which meet the
definitions above as Taxes, Insurance, Building Operating Costs, Limited Common
Facilities Maintenance Costs and/or Road and Park Operating Costs, which
expenses are unanticipated or not usually incurred by Landlord on a regular or
scheduled basis (hereinafter referred to as "Non-Recurring Expenses"), Tenant
shall pay its pro-rata share of such Non-Recurring Expenses on a lump sum basis.
Upon Landlord incurring such Non-Recurring Expenses, Landlord shall calculate
Tenant's share of same based upon the applicable formula set forth above and the
type of expense incurred. Landlord shall give Tenant written notice of Tenant's
share of said Non-Recurring Expense, and Tenant shall have a period of thirty
(30) days from Tenant's receipt of said written notice to pay its share of the
Non-Recurring Expense in full. Notwithstanding the foregoing, Tenant shall not
be liable for any Non-Recurring Expense incurred by Landlord during the last
three (3) months of the term of this Lease, unless Tenant has exercised its
Option to Renew under Paragraph 37 hereof or has otherwise extended its
occupancy of the Premises beyond the term of this Lease in which case Tenant
shall not be liable for any Non-Recurring Expense during the last three (3)
months of the Option Term.

7.5 In the event said Tenant, or Tenant's use and occupancy of the
Premises, causes, for any reason whatsoever, any additional charge or increase
in the rate of fire insurance on the building of which the Premises are a part,
the Tenant shall, from time to time immediately upon receipt of notice, do
whatever is deemed necessary. and follow whatever recommendations may be made,
by the Landlord or its Agents, or any other duly constituted authorized body, in
order that such additional charge or increase in rate of fire insurance on the
building so caused by such tenancy, use or occupancy of the Premises, by the
Tenant may be removed, or, in the event conditions are such that nothing can be
done, by way of improvements or otherwise, to remove such extra and additional
charge or increase of rate of fire insurance on the building, or the expense
involved is excessive, then the Tenant shall pay the Landlord as Additional
Rental the increased or additional cost of such fire insurance on the building.

7.6 It is the intention of the Landlord and Tenant that the Basic
Rental shall be completely "net" to Landlord such that all Taxes, Insurance,
Building Operating Costs, Limited Common Facilities Maintenance Costs and Road
and Park Operating Costs which are applicable to the Building and/or the Limited
Common Facilities and/or the Roads and Park (as the case may be) shall either be
paid directly by the various tenants of the Building and/or the Park (as the
case may be) or paid by the Landlord and allocated among such tenants, except
for those costs and expenses excluded in Paragraph 6.4 above.

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<PAGE>

8. SECURITY

8.1 Landlord acknowledges receipt of the sum of Forty Two Thousand
Three Hundred Eighty Six and 66/100 ($42,386.66) Dollars which sum is equivalent
to Two (2) months of Basic Rental and Additional Rental, which shall be returned
to Tenant, without interest, on the day set forth for the expiration of the term
herein, provided, however, that Tenant has fully and faithfully carried out all
of the terms, covenants and conditions on its part to be performed, and which
sum shall be held by Landlord as a security for the full and faithful of Tenant
to so perform under the conditions and terms of this Lease. Landlord shall have
the right to require Tenant to increase the amount of said security deposit or
to post a bond as set forth in Paragraph 12.4 to financially secure Landlord
against the faithful performance of Tenant's obligation to repair or restore the
Premises at the termination of this Lease under Paragraph 12.4 hereunder, said
increased security deposit or bond to be determined by Landlord in its
reasonable commercial judgment. Upon such written notice to Tenant, Tenant shall
pay such additional security deposit or post said bond within Thirty (30) days.
Landlord may apply security deposit, or so much thereof, or so much thereof as
may be necessary, towards the remedying of any condition which an inspection
shall disclose. Nothing hereinabove contained shall, in any way, limit the right
of Landlord to recover against Tenant for any damage or other condition arising
out of the failure of Tenant to so perform. In no event shall Tenant have the
right to cause or direct Landlord to apply the security deposit against any
monthly rental installment, including the last month's rental installment.

9: UTILITIES

9.1 The Tenant shall pay directly or reimburse the Landlord as
Additional Rental for all utility charges or services, including, but not
limited to, electric, water, fuel oil, gas, heat, sewer and telephone charges,
furnished to or used by Tenant in the use of the Building. Because the utilities
for the Premises are not separately metered within the Building, Tenant shall
pay as Additional Rental a pro-rata share of the utilities based upon a formula,
which may be adjusted from time to time, which accounts for the size of the
Premises within the Building, Tenant's actual use of utilities and Tenant's
hours of operation. Tenant shall obtain its electricity from the Landlord, which
electrical consumption shall be measured through a separate sub-meter. Landlord
shall not be under any responsibility or liability in any way whatsoever for the
quality, impairment, interruption, stoppage, or other interference with service
involving water, heat, gas, electric current for light and power, telephone, or
any other service by any utility.

10: REPAIRS AND MAINTENANCE

10.1 The Landlord shall repair and maintain in good order and
condition throughout the term of this Lease, the exterior and structure of the
Premises and the building containing the Premises, including, without
limitation, the Premises' roof, walls and foundation, all common areas and
improvements in the Park, the plumbing, sewer and electrical lines and systems
serving the Premises, and all parts of the elevator heating, plumbing, ,
electrical and heating, ventilation air conditioning systems within or serving
the Premises installed or provided by Landlord, and the Landlord shall make any
repairs necessary to make all exterior doors and windows air and water

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<PAGE>

tight and in a safe condition.

10.2 Throughout the term of this Lease the Tenant shall repair and
maintain in good order and condition the entire interior of the Premises
including all glass in windows, doors or skylights, all parts of the plumbing
and electrical systems within or on the Premises, and the lighting fixtures
within the Premises. Tenant, at Tenant's expense, shall purchase and install all
lamps (including, but not limited to, incandescent and fluorescent) and ballasts
used in the Premises. The Tenant agrees to keep both sides of all outside glass
areas in a neat and clean condition, and to store all trash and garbage within
the Premises or in "dumpsters" or other receptacles located outside the Premises
in a location designated by Landlord which dumpsters and other receptacles shall
be provided at Tenant's expense as set forth in Paragraph 14.1 below. It is
understood and agreed that the heating, ventilation and air conditioning units
located on and/or serving the Premises which are installed or provided by
Landlord shall be repaired and maintained by the Landlord and will be, at the
Commencement Date, in good working order. It is understood and agreed that the
heating, ventilation and air conditioning units located on and/or serving the
Premises which are installed or provided by Tenant (if any) shall be repaired
and maintained by Tenant. Tenant hereby acknowledges that said heating and air
conditioning units and systems serve only the Premises and no other premises in
the Park. Therefore, Tenant hereby agrees to pay as Additional Rental to
Landlord upon demand any and all bills, invoices or other reasonable costs and
expenses incurred by Landlord for the maintenance, repair of said heating and
air conditioning units and systems, subject to the limitations of Paragraph 6.4
above.

10.3 Notwithstanding the foregoing, each party hereto shall make any
repairs of any kind necessitated by its own act, default or negligence, or that
of its agents, servants, employees, licensees or contractors. In the event such
repairs are necessitated by the act, default or negligence of Tenant, or that of
its agents, servants, employees, licensees or contractors, Landlord may make or
cause the same to be made, but shall not be obligated to do so, and Tenant
agrees to pay the Landlord promptly upon Landlord's demand, as Additional
Rental, the full cost of such repairs, if made. In the event Landlord elects not
to make such repairs caused by the act, default or negligence of Tenant, or that
of its agents, servants, employees, licensees or contractors, Landlord may
require Tenant to promptly make such repairs at Tenant's sole cost and expense.

11: PARKING FACILITIES AND COMMON AREAS

11.1 Landlord hereby grants to Tenant, its agents, servants,
employees, visitors, licensees, customers and contractors a non-exclusive
license to use up to 80 spaces of the parking facilities and other common areas
and facilities of the Park in common with others during the term of this Lease
as shown on Exhibit B-3, subject to the exclusive control and management thereof
by Landlord and subject, further, to the rights of the Landlord to make changes,
additions to, subtractions from, rearrangements of, alterations of,
modifications of and/or supplements to the parking facilities and other common
areas and facilities, the Park or the real property of which it is a part,
provided, however, that Landlord shall always provide Tenant with 80 parking
spaces. Landlord further agrees to provide Tenant with up to an additional 30
parking spaces, provided Tenant gives Landlord 30 days prior written notice of
Tenant's need for any or all of said spaces. Tenant shall not be

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<PAGE>

required to use all of said 30 spaces until July 1, 2000, at which time Tenant
shall use all of said 30 spaces. Upon utilization by Tenant of each of said
parking spaces, Tenant shall pay the Landlord as Additional Rental under this
Lease, the sum of Five Hundred and 00/100 ($500.00) Dollars per year per parking
space for each of the 30 additional parking spaces to be provided by Landlord to
Tenant under this Paragraph, payable on a monthly basis on the first day of each
month in advance. Landlord hereby represents to Tenant that Landlord has not
received any notices from any governmental authority that the parking area for 6
Berkshire Drive is not in compliance with applicable laws.

11.2 Landlord will, or will cause others to, operate, maintain,
manage, equip, police, light, repair, clean, plow, shovel and repave the parking
facilities and other common areas and facilities in a manner deemed by Landlord
to be reasonable and appropriate and in the best interests of the Park. Landlord
shall have the right (1) to establish, modify and enforce reasonable rules and
regulations with respect to the Park and parking facilities and other common
areas and facilities; (2) to enter into, modify and terminate easement and other
agreements pertaining to the use and maintenance of the Park and parking
facilities and other common areas and facilities; (3) to close temporarily any
or all portions of the Park and parking facilities and other common areas and
facilities; and (4) to do and perform such other acts in and to the Park and
parking facilities and other common areas and facilities and improvements as, in
the reasonable business judgment of the Landlord, is advisable. Tenant shall
conform to all reasonable and uniform rules and regulations which the Landlord
may make in the management and use of the parking facilities and other common
areas and facilities.

11.3 Tenant and its employees shall not park cars except in areas
which shall be designated by Landlord for Tenant parking as shown in Exhibit B-3
attached hereto. All loading and unloading of goods shall be made at the rear
entrance or truck dock. Tenant agrees that upon written notice from Landlord, it
will, within ten (10) days, furnish Landlord with the state automobile license
numbers assigned to the cars of all its employees. Landlord may require Tenant
to cause its employees to identify their vehicles by way of stickers issued by
Landlord or other means of identification evidencing authority to use, the MDA
property. Landlord reserves the right to require Tenant to remove "junk" and/or
unregistered motor vehicles from the parking area if, in Landlord's judgment,
said vehicle make the parking area unsightly or if said vehicles interfere with
free ingress and egress. No portion of any parking area shall be used for the
repair or storage of vehicles or equipment (other than on an emergency or
day-to-day transient basis by Tenant, its agents, servants, employees, visitors,
licensees, customers and contractors). The foregoing shall not prohibit Tenant
from parking a normal and customary fleet of company cars in the parking area,
provided that no vehicle maintenance (which term includes, but is not limited
to, gasoline pumping and automobile repair) may be performed.

12: TENANT FIT-OUT AND ALTERATIONS

12.1 Prior to Tenant's occupancy of the Premises the Tenant is
specifically prohibited from renovating, altering, improving, and/or making any
interior or exterior changes, or installing any

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<PAGE>

equipment (other than normal office equipment) in the Premises without the prior
approval of Landlord, said approval may be granted or withheld in Landlord's
sole and absolute discretion. Tenant shall have its designer consult with
Landlord during the design process so that Landlord can be apprised of the
proposed design of the Premises by Tenant for Tenant's fit-up and Landlord can
guide the designer during the design process and notify it of any aspect of the
Tenant fit-up which may be unacceptable to Landlord. Landlord shall prepare the
Demised premises for Tenant's occupancy in accordance with architectural,
electrical and mechanical plans and specifications, hereinafter referred to as
the "Plans and Specifications" that (a) are in conformity with all applicable
building codes and ordinances; (b) in Landlord's reasonable opinion, do not
create any aesthetic or other conflict with the design and function of the
Building; and (c) have been approved by Tenant. Except as may be otherwise
approved by Landlord in writing, all work to prepare the Demised Premises for
Tenant's occupancy shall be performed by Landlord's contractors. Except as
provided by Landlord in Exhibit "B-4" the cost of all additional work shall be
borne by Tenant. Tenant shall be provided with a proposal for approval from the
Landlord for such additional costs prior to Landlord commencing the additional
work. Tenant shall reimburse Landlord for the cost of such additional work plus
overhead and profit, within fifteen (15) days after receipt of Landlord's
invoice therefore.

12.2 If requested by Tenant, Landlord will cause its designer to
prepare the Plans and Specifications for Tenant based upon a space plan
submitted and approved by Tenant. If the Plans and Specifications are prepared
by Landlord's designer, Landlord will bear the cost of these services. However,
if Tenant's space plan requires the use of an architect, or other design
consultants, than a proposal for these costs will be submitted to Tenant for
approval. Within Five (5) days after receipt of Landlord's proposal Tenant shall
advise Landlord of their approval or disapproval of the proposal. Landlord will
invoice Tenant for the additional cost of Landlord's architect or design
consultant's services which are attributable thereto.

12.3 In the event Landlord permits Tenant to enter upon the Demised
Premises prior to the Commencement Date for the purpose of moving or installing
any of Tenant's furniture, equipment fixtures, business machines or other
personal property into or upon the Demised Premises, or for any other purposes
the provisions of Paragraph 26 (Fire Insurance) and Paragraph 27 (Damage) of
this Lease Agreement shall apply and become effective as of the date of the
first such entry by Tenant.

12.4 Subsequent to the initial Tenant fit-out, the Tenant is
specifically prohibited from renovating, altering, improving, and/or making any
interior or exterior changes, or installing any equipment (other than normal
office equipment) in the Premises without the prior approval of Landlord, said
approval may be granted or withheld in Landlord's sole and absolute discretion.
Prior to the commencement of the work, Tenant shall deposit with landlord a sum
of cash equivalent to Ten (10.00%) per cent of the cost of the work as
determined by Landlord, or at Landlord's option, an amount determined by
Landlord, as security to assure the proper completion of the approved work. If
Tenant completes said work in accordance with the approved plans and
specifications, Landlord shall return said sum to Tenant, without interest,
within Thirty (30) days of the issuance

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<PAGE>

of the Certificate of Occupancy as set forth below. Prior to the commencement of
any work approved by Landlord, Tenant shall provide Landlord with a copy of a
Building Permit for the approved work issued by the appropriate authority. Upon
completion of the approved work, Tenant shall provide Landlord with a copy of
the Certificate of Occupancy for the approved work issued by the appropriate
authority. All of such work conducted by Tenant or at its direction shall be
done at Tenant's sole cost and expense, shall conform in all respects to
Landlord's standards and specifications, shall be done in a workmanlike manner,
shall at all times comply with all applicable laws, rules, ordinances and
regulations and in no way harm the structure of the Premises or the building of
which the Premises are a part, provided that at the expiration of this Lease, or
any extension thereof, Tenant, at its expense, restores the within Premises to
its original condition, ordinary wear and tear excepted, and repairs any damage
to the Premises resulting from the installation or removal of such partitions,
fixtures, or equipment as may have been installed by Tenant, or repairs and
restores the Premises to the condition it was in during the term of this Lease,
at Landlord's option if requested to do so by Landlord. Landlord reserves the
right, before approving any such changes, additions or alterations and to secure
Landlord against Tenant's obligation to repair or restore the Premises at the
end of the term of the Lease to require the Tenant to furnish it a good and
sufficient bond. All of such changes, additions or alterations shall be made
solely at the expense of the Tenant; and the Tenant agrees to protect, indemnify
and save harmless the Landlord on account of any injury to third persons or
property, by reason of any such changes, additions, or alterations, and to
protect, indemnify and save harmless the Landlord from the payment of any claim
of any kind or character on account of bills for labor or material in connection
therewith. Before Tenant may do any work at the Premises pursuant to this
paragraph, Tenant must provide Landlord with a Certificate of Insurance in an
amount reasonably satisfactory to Landlord, which insurance must provide the
coverage required under this paragraph. All of such work conducted by Tenant or
at its direction shall be performed only by contractors or subcontractors
selected by Tenant from a list of same prepared by Landlord. Tenant is
specifically prohibited from using any contractor or subcontractor not listed by
Landlord as approved, and the use of any contractor or subcontractor not on the
approved list provided by Landlord shall be a default under this Lease. Tenant
shall make no structural changes, roof penetrations, exterior wall penetrations
or alterations unless prior approval from the Landlord is obtained in writing,
which approval may be granted or withheld in Landlord's sole discretion. As to
any structural changes, roof penetrations, exterior wall penetrations or
alterations Landlord shall have the absolute right, in Landlord's sole
discretion, to designate the contractor(s) which may perform said work.

12.5 Tenant, may, at its expense install any interior lighting
fixtures or other trade fixtures or equipment, and may at its expense repair,
redecorate and/or paint the Premises with the prior approval of the Landlord in
writing, after submission of such plans and specifications to Landlord, said
approval not to be unreasonably withheld. All work done by Tenant hereunder
shall be in accordance with all requirements of Paragraph 12.4 above.

13: SIGNS

13.1 Tenant shall have the right to install signage (including
exterior signage on the

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Building) in conformance with all applicable laws, the MDA and Landlord's
requirements, subject to Landlord's approval. The Tenant shall not display any
sign, picture, advertisement, awning, merchandise or notice on the outside of
the building of which the Premises are a part, nor on the outside or inside of
the Premises, except as shall conform to the requirements of the Landlord and
any governmental agencies having jurisdiction thereof. Having been granted
authority to erect and maintain a sign or signs, Tenant shall maintain said
sign(s) in a first class condition and state of repair. Missing, broken, blocked
or malfunctioning letters or other elements of signage shall be replaced or
repaired by Tenant at Tenant's sole cost and expense within 30 days of such
condition occurring. If, after such 30 day period, such repair or replacement
has not been accomplished by Tenant as required hereunder, Tenant shall, upon
notice from Landlord, cover such sign in its entirety with brown or black opaque
material until the repair or replacement has been accomplished. If Tenant fails
or refuses to make such repair or replacement or cause the sign to be covered as
required, Landlord may, but shall not be obligated to, cause such repair or
replacement to be done and Tenant shall pay to Landlord on demand, as Additional
Rental, any costs or expenses incurred or paid by Landlord making such repair or
replacement in accordance with the provisions of this Paragraph.

14: OUTSIDE APPEARANCE AND DISPLAYS

14.1 Tenant shall maintain the Premises in a neat and clean condition,
shall keep sidewalks adjoining the Premises clean and free from rubbish and
shall store all trash and garbage within the Premises or in such place as
Landlord may designate, and shall arrange for the regular pick up of trash and
garbage. Tenant shall not burn any trash of any kind in and about the building,
shall not permit rubbish, refuse or garbage to accumulate or fire hazards to
exist about the Premises.

14.2 The Tenant shall not display any merchandise or show cases or
other obstructions on the outside of the building, or the Premises, or in any
lobby or passageway adjoining the same which shall extend beyond the border line
of the Premises.

15. CHANGES OR ALTERATIONS BY LANDLORD

15.1 Without liability or allowance to Tenant on the part of Landlord,
Landlord reserves the right to make such changes, alterations, additions,
improvements, repairs or replacements in or to the Building (including the
Premises) and the fixtures and equipment thereof, and to erect, maintain and use
pipes, ducts and conduits in and through the Premises. In the exercise of said
rights Landlord agrees to reasonably attempt to not cause material interference
with Tenant's business. Tenant agrees that, if in Tenant's reasonable judgment,
Landlord's work is or will cause material interference with Tenant's business,
Tenant shall so notify Landlord immediately upon said interference becoming
apparent so that Landlord may take measures, if possible and viable in
Landlord's reasonable judgment, to alleviate said material interference.
Landlord agrees, except in case of emergency, to give Tenant prior reasonable
notice before proceeding with any changes or alterations and to proceed with due
diligence so as to minimize interference with Tenant's business. In addition,
Landlord agrees not to unreasonably interfere with the use and enjoyment of the

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<PAGE>

Premises and covenants that all changes shall be consistent with high quality
office/business Buildings.

15.2 Landlord reserves the right to name or renumber the Building and
to change the name or address of the Building at any time and from time to time,
and to so indicate on any interior or exterior surface of the Building. If
Landlord exercises said right(s), Landlord will reimburse Tenant a reasonable
amount for Tenant's costs arising directly from such change(s), including,
without limitation, replacing a reasonable amount of Tenant's stationary,
business cards and the like.

15.3 So long as Landlord has complied with the provisions of Paragraph
15.1 above, there shall be no allowance to Tenant for a diminution of rental
value and no liability on the part of Landlord by reason of inconvenience,
annoyance or injury to business arising from Landlord, Tenant or others making
any changes, alterations, additional, improvements, repairs or replacements in
or to any portion of the Building or the Premises, or in or to the fixtures,
appurtenances or equipment thereof; and no liability upon Landlord for failure
of Landlord or others to make any changes, alterations, additions, improvements,
repairs or replacements in or to any portion of the Building or the Premises, or
in or to the fixtures, appurtenances or equipment thereof, except as required by
Landlord under this Lease; however, Landlord agrees to use due diligence when
making any changes, alterations, additions, improvements, repairs or
replacements so as to attempt to cause minimum inconvenience to Tenant's
business operation.

16: COVENANTS BY TENANT

16.1 Tenant shall pay promptly when due all Basic Rental, Additional
Rental and other charges under this Lease at the time and in the manner set
forth in this Lease.

16.2 Tenant shall procure and maintain in effect at all times any
licenses and permits required for any use made of the Premises by Tenant. Upon
the expiration or termination of this Lease, to remove its goods and effects and
those of all persons claiming under it, and to yield up peaceable to Landlord
the Premises in the condition required by this Lease, damage by fire, taking,
casualty, structural defects (other than those caused by Tenant, its agents,
servants, employees, invitees and/or contractors) and reasonable wear and tear
only excepted.

16.3 Tenant shall not make any use of the Premises which is improper,
offensive or contrary to any law, ordinance or regulation, nor permit any act or
thing to be done on the Premises which shall constitute a nuisance or which may
make void or voidable any insurance on said Premises, the building of which they
are a part, the Park, or the parking facilities or other common areas or
facilities against fire, and to pay any increased or extra premium payable for
any such insurance resulting from any act done by Tenant, its agents, servants,
employees, invitees and/or contractors.

16.4 Tenant shall pay promptly when due the entire cost of any work to
the Premises undertaken by Tenant so that the Premises the building of which
they are a part, the Park, and the parking areas and other common areas arid
facilities, shall at all times be free of liens for labor and

18
<PAGE>

materials; to procure all necessary permits before undertaking such work; to do
all of such work in a good and workmanlike manner, employing materials of good
quality and complying with all government requirements; and to save Landlord
harmless and indemnified from all injury, loss, claims or damage (including, but
not limited to, Landlord's costs of defense and reasonable attorney's fees) to
any person or property occasioned by or growing out of such work.

16.5 Tenant shall give to Landlord prompt written notice of any damage
to, or defective condition in, any part of the Building's plumbing, electrical,
heating, air conditioning or other systems serving, located in, or passing
through the Premises. Such condition shall be remedied by Landlord and, if the
same was caused by Tenant, the cost of remedy thereof shall be paid by Tenant.
In no event shall Tenant be entitled to claim any damages arising out of or from
such damage or defective condition. Nothing, however, in this paragraph is
intended to relieve Landlord from its negligence.

17: LIABILITY AND INDEMNITY

17.1 Subject to the provisions of Paragraph 26.2 hereof, the Tenant
shall save the Landlord harmless and indemnified from all injuries, loss, claims
or damage (including, but not limited to, Landlord's costs of defense and
reasonable attorney's fees) to any person or property while within or on the
Premises unless caused by the act, negligence or default of the Landlord, its
agents, servants, employees, invitees and/or contractors, and from and against
all injury, loss, claims or damage (including, but not limited to, Land1ord's
costs of defense and reasonable attorney's fees) to any person or property
anywhere occasioned by any act, neglect or default of Tenant. Tenant shall
furnish liability insurance naming Landlord as a co-insured, in the amount of
$3,000,000.00, combined single limit policy for bodily injury and property
damage. Landlord shall have the right to require Tenant to increase the amount
of Tenant's insurance coverage set forth above based upon Landlord's reasonable
commercial judgment. The Tenant shall furnish to Landlord a certificate of
insurance which will provide by suitable endorsements (a) that the contractual
liability of Tenant is covered thereby, and (b) that the insurance will not be
canceled or substantially changed without at least ten (10) days prior written
notice to Landlord.

17.2 Subject to the provisions of Paragraph 26.2 hereof, the Landlord
shall save the Tenant harmless and indemnified from all injury, loss, claims or
damage to any person or property while on the parking facilities or other common
areas and facilities, or any portion of the Park premises not within the
Tenant's Premises, unless caused by the act, neglect or default of Tenant, its
agents, servants, employees, invitees and/or contractors. Landlord shall
maintain public liability insurance in amounts Landlord in its reasonable
commercial judgment deems necessary and appropriate, in companies qualified to
do business in said state insuring Landlord against injury to persons or damage
to properly as herein provided.

17.3 Tenant shall deliver to Landlord certificates of such insurance
at or prior to the commencement of the term of this Lease, and thereafter within
ten (10) days prior to the expiration of such policies.

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<PAGE>

18: BANKRUPTCY OR SOLVENCY

18.1 To more effectually secure the Landlord against loss of the rent
and other payments herein provided to be made by the Tenant, it is agreed as a
further condition of this Lease that the filing of any petition of bankruptcy or
insolvency by or against the Tenant, or the adjudication in Bankruptcy of the
Tenant, or the appointment of a Receiver for Tenant by any court, or Tenant's
assignment of its property for the benefit of creditors shall be deemed to
constitute a breach of this lease, if said petition is not dismissed or Receiver
discharged within sixty (60) days after the filing or appointment, and thereupon
without entry or other action by the Landlord, this Lease shall, at the option
of the Landlord, become and be terminated and not withstanding any other
provisions of this Lease, the Landlord shall forthwith upon any such termination
be entitled to recover the rent reserved in this Lease for the residue of the
term hereof less the fair rental value of the Premises for the residue of said
term.

19: LITIGATION

19.1 In the event the Landlord or its Agents, without fault on
its/their part, or default under the terms of this Lease, become involved,
through or on account of the occupancy of the Premises by the Tenant, or the
conduct of Tenants business upon the Premises, in any controversy or litigation,
with any Third Party, the Tenant shall upon notice from Landlord or its Agent,
immediately take all necessary steps, and do whatever may be necessary to remove
said Landlord's connection with, or liability under such controversy or
litigation, and particularly if such controversy or litigation throws any cloud
or encumbrance upon the title of said Landlord to its real estate; provided,
that if the Tenant believes it has a good and valid defense, or claim, in such
controversy or litigation which Tenant desires to set up and maintain by and
throughout court procedure and litigation, the Tenant shall have the right to do
so, provided it first executes and delivers to the Landlord an indemnifying bond
with surety, and discharges any and all final judgments, liens, costs, damages,
expenses and obligations of Landlord whatsoever, in or arising out of the
controversy or litigation involving the Landlord or its Agents, including all
costs, expenses and reasonable attorney's fees incurred by Landlord or its
agents in protecting their interest or defending themselves in such controversy
or litigation.

20: ARBITRATION

20.1 Any and all controversies, disputes or claims arising out of or
related to this Lease, or the breach hereof, shall, so far as the law may allow,
be resolved and settled by Arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association (AAA).

20.2 Notice of demand for Arbitration shall be filed in writing with
the other party and with the AAA at its office having jurisdiction ever
arbitrations in Hartford, Connecticut. The situs of the Arbitration proceedings
shall be Hartford, Connecticut, or such other location as may be mutually
agreeable to the parties.

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<PAGE>

20.3 A demand for Arbitration must be made within two (2) years after
the controversy, dispute or claim has arisen and becomes known to the claimant,
but in no event after the date when institution of legal or equitable
proceedings based on such claim would be barred by the applicable statute of
limitations of the State of Connecticut

20.4 The number of arbitrators shall be determined in accordance with
the then prevailing rules of the AAA. Arbitrators shall meet the qualifications
for arbitrators as designated by AAA.

20.5 The award rendered by the arbitrator(s) shall be final and
judgment may be entered upon it in accordance with applicable law in any court
of competent jurisdiction.

21: ATTORNEY'S FEES

21.1 If the Landlord or Tenant shall at any time be at default
hereunder, and if the Landlord or Tenant shall institute an action, summary
proceeding or arbitration against the other party based upon any such default,
or if the Landlord or Tenant shall cure such default or defaults for the act of
the other party, then the Landlord or Tenant will reimburse the other party for
the expense of attorney's fees and disbursements thereby incurred by the other
party, so far as the same are reasonable in amount. Also so long as the Tenant
shall be a Tenant hereunder the amount of such expenses shall be deemed to be
"Additional Rent" hereunder and shall be due from the Tenant to the Landlord on
the first day of the month following the incurring of such respective expenses.
Similarly, if Landlord is required to reimburse Tenant under this Paragraph,
Landlord shall pay said reimbursement on the first day of the month following
the incurring of such respective expenses.

22: HAZARDOUS SUBSTANCES

22.1 The term "Hazardous Substance" shall mean any substance, chemical
or waste that is or shall be listed or defined as hazardous, toxic or dangerous
under Applicable Environmental Law and any petroleum products.

22.2 The term "Applicable Environmental Law" shall include, but shall
not be limited to, CERCLA, RCRA, the Federal Water Pollution Control Act, 33
U.S.C. ss.ss.1251, et. seq., the Clean Air Act, 42 U.S.C. ss.7401, et. seq., and
the regulations thereunder, and any other local, state and/or federal laws or
regulations, whether currently in existence or hereinafter enacted, that govern:
(i) the existence, cleanup and/or remedy of contamination on
property;
(ii) the protection of the environment from spilled, deposited or
otherwise emplaced contamination;
(iii) the control of hazardous wastes; or
(iv) the use, generation, transport, treatment, removal or
recovery of hazardous substances, including building
materials.

22.3 Tenant shall not use, store, generate, treat, transport or
dispose of any hazardous waste

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<PAGE>

or Hazardous Substances on the Premises or the Park without first obtaining
Landlord's written approval. Tenant shall notify Landlord and seek such approval
in writing at least thirty (30) days prior to bringing any Hazardous Substances,
as defined by any Federal, State or local law or regulation, onto the Premises.
Landlord may withdraw approval of any such Hazardous Substances at any time, for
reasonable causes related to the threat of contamination, or damage or injury to
persons, property or resources on the Premises, the Building of which the
Premises are a part or the Park. Upon receipt of such disapproval, Tenant shall
remove the Hazardous Substances from the Premises or the Park. Landlord's
failure to approve the use of a Hazardous Substance under this paragraph shall
not limit or affect Tenant's obligations under this Lease, including Tenant's
duty to remedy or remove releases or threatened releases; and to comply with all
applicable laws, federal, state and local relating to the use, storage,
generation, treatment, transportation and/or disposal of such hazardous waste
and/or Hazardous Substances.

22.4 For any years in which Tenant has used, generated, treated,
stored or transported Hazardous Substances on or in the Premises or the Park,
Tenant shall provide Landlord with a written report (i) listing the substances
which were present on or in the Premises or the Park (and provide copies of
Material Safety Data Sheets [MSDS] with respect to same and copies of all
manifests required by State or Federal laws with regard to disposal of any
Federally-regulated hazardous waste or Connecticut-regulated waste); (ii) all
releases of Hazardous Substances that occurred or were discovered on the
Premises or the Park; (iii) all Hazardous Substance-related compliance
activities, including all contacts with administrative agencies in any way
concerning Hazardous Substances and all requests from third parties for cleanup
or compliance occurring or received; and (iv) all plans relating to the use of
the Premises or the Park, consent agreements or other contracts relating to
Hazardous Substances executed or requested during that time period. The report
shall include copies of all documents and correspondence related to such
activities and written reports of verbal contacts. Tenant shall designate one
individual or position to be responsible to provide information to Landlord with
respect to Hazardous Substances and/or environmental matters.

22.5 In the event Tenant applies for any permits or approvals with
respect to storage, generation, treatment, transportation and/or disposal of
hazardous waste or Hazardous Substances, Tenant shall notify Landlord and
provide copies of said applications prior to submission of same to governmental
authorities for approval.

22.6 Tenant further agrees to promptly contain, remove and mitigate
the effect of any such pollution or contamination or hazardous waste or
Hazardous Substances on the Premises or the Park resulting from the act or
omission or negligence of Tenant, its agents, servants, employees, invitees or
contractors, in compliance with all applicable laws and regulations; and take
all such steps which may be required to satisfy and/or remove any lien placed
upon said Premises or the Park by the Commissioner of the Connecticut Department
of Environmental Protection pursuant to Connecticut statutes or regulations, the
United States Environmental Protection Agency pursuant to Federal statutes or
regulations, the local government or any legal authority, or any agents of any
of said entities, or any other entity or person, be it a public agency or
private, pursuant to any federal, state

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<PAGE>

or local law, ordinance or regulation.

22.7 Tenant shall permit Landlord and its agents to enter into and
upon the Premises at all reasonable times for the purpose of inspecting the
Premises and all activities thereon, including activities involving
environmental matters and/or Hazardous Substances, or for the purposes of
maintaining the Building. As to inspection or maintenance of the Premises in the
normal course of Landlord's business, Landlord will provided Tenant forty eight
(48) hours notice of such inspection or maintenance, and Tenant shall have the
right to have a representative of Tenant present at all such times. As to
inspection or maintenance which Landlord reasonably considers to be an emergency
or require immediate attention, Landlord shall not be required to give any prior
notice to Tenant, nor to wait for any Tenant representative, but will give
Tenant notice of said inspection or maintenance within a reasonable time
thereafter.

22.8 No spill, deposit, emission, leakage or other release of
hazardous waste or Hazardous Substances in or on the Premises or the Park, soil,
groundwater and/or water shall be deemed to result in wear and tear that would
be normal for the period of Tenant's occupancy.

22.9 Tenant shall surrender the Premises free of any contamination or
other damage caused by such occurrences during the term of this Lease by Tenant,
its agents, servants, employees, contractors or invitees.

22.10 The Tenant hereby irrevocably and unconditionally agrees to
indemnify and hold the Landlord and Owner harmless, at all times, from and
against all liabilities, claims, liens, losses, costs, damages and expenses,
including, but not limited to reasonable attorney's fees and costs of defense
and experts incurred by the Landlord or Owner, claims paid whether as a result
of final judgment or in the settlement of contested claims, which the Landlord
or Owner may incur, sustain or be liable for, directly or indirectly, as the
result of any acts, omissions or negligence by the Tenant, its agents, servants,
employees, invitees or contractors which results in the exercise by the United
States Environmental Protection Agency, the Connecticut Department of
Environmental Protection, the local government or any legal authority, or any
agents of any of said entities, or any other entity or person, be it a public
agency or private, of any legal tights it may now or hereafter be entitled to
exercise with respect to Chapter 445 or 446K of the Connecticut General Statutes
(C. G. S. ss.22a-l 14, et. seq. and C.G.S. ss.22a-416 et. seq. respectively and
C.G.S. ss.22a-45 1 et. seq.), the Resource Conservation and Recovery Act of 1976
(42 U.S.C. ss.6901 et. seq.), the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (42 U.S.C. ss.9601 et. seq.), the
Hazardous Materials Transportation Act (49 U.S.C. ss. 1801 et. seq.), the
Federal Water Pollution Control Act (33 U.S.C. ss.1251 et. seq.), the Clean Air
Act (42 U.S.C. ss.7401 et. seq.), the Toxic Substances Control Act (15 U.S.C.
ss.2601 et. seq.). the Clean Water Act (33 U.S.C. ss. 1251 et. seq.), the Safe
Drinking Water Act (42 U.S.C. ss.ss.300f through 300j) and the Occupational
Safety and Health Act (29 U.S.C. ss.651 et. seq.) or any amendment, supplement
or modification thereof or regulations or other authority promulgated
thereunder, or any other similar Federal, State or local law, ordinance or
regulation and for any other matter arising directly or indirectly as a result
of said laws or regulations including, but not limited to, the removal of any
"Hazardous Waste" as defined in the Federal laws or regulations or the
Connecticut General Statutes or regulations, or Hazardous

23
<PAGE>

Substance as defined above, whether or not ordered by the respective Government
agencies referred to above or any Federal, State or local law or regulation or
any other claim at law or in equity. In the event the Landlord or Owner incurs
any of such expenses, or any of the above mentioned authorities exercises any of
the powers or rights set forth above as a result of the activities of Tenant as
set forth above, then the Landlord or owner may require the Tenant to post a
bond in favor of the Landlord or Owner in an amount sufficient to indemnify
Landlord or Owner under this paragraph, the amount of said bond to be determined
by the Landlord or Owner. Failure of the Tenant to post said bond when required
by Landlord or Owner shall be a default under this lease. The provisions of this
paragraph shall be binding on the Tenant, its successors and assigns, and inure
to the benefit of the Landlord and Owner, their successors and assigns.

22.11 Landlord at its cost shall remove all Hazardous Substances
(which shall include, without limitation, asbestos), if any, from the Premises
prior to delivering possession to Tenant. Notwithstanding anything to the
contrary, however, Tenant shall not have any responsibility for managing,
monitoring or abating, nor be the owner of, nor have any liability for any
asbestos containing materials that it has not disturbed or any other Hazardous
Substance that Tenant, its agents, servants, employees, contractors or invitees
has not brought into the Premises or the Park. Without limiting the foregoing,
Tenant shall have no liability to Landlord under Paragraph 22.10 hereof in
connection with any Hazardous Substances present in the Premises or the Park
prior to Tenant's possession of the Premises, nor for any Hazardous Substances
present in the Premises or the Park during the term of this Lease, unless caused
by Tenant. Subject to this Paragraph 22, Tenant may use and store the following
materials in the ordinary course of its business, in compliance with all
applicable environmental laws: Fuel for generators permitted by Landlord (if
any) in order to supply an uninterrupted power source (UPS); acid contained
within batteries for back-up power, reasonable amounts of standard cleaning
fluid and materials customarily used in conjunction with business machines;
cleaning supplies in reasonable quantities; coolant for any Tenant installed
HVAC system, if permitted by Landlord, and; halon used in fire suppression.

22.12 Excluding any act or omission of any other tenant in the Park,
Landlord hereby irrevocably and unconditionally agrees to indemnify and hold the
Tenant harmless, at all times, from and against all liabilities, claims, liens,
losses, costs, damages and expenses, including, but not limited to reasonable
attorney's fees and costs of defense and experts incurred by the Tenant, claims
paid whether as a result of final judgment or in the settlement of contested
claims, which the Tenant may incur, sustain or be liable for, directly or
indirectly, as the result of any acts, omissions or negligence by the Landlord,
its agents, servants employees, invitees or contractors which results in the
exercise by the United States Environmental Protection Agency, the Connecticut
Department of Environmental Protection, the local government or any legal
authority, or any agents of any of said entities, or any other entity or person,
be it a public agency or private, of any legal rights it may now or hereafter be
entitled to exercise with respect to Chapter 445 or 446K of the Connecticut
General Statutes (C. 0.5. ss.22a-l 14, et. seq. and C.G.S. ss.22a-.416 et. seq.
respectively and C.G.S. ss.22a-45 1 et. seq.), the Resource Conservation and
Recovery Act of 1976 (42 U.S.C. ss.6901 et. seq.), the Comprehensive
Environmental Response, Compensation and Liability Act of 1980(42 U.S.C. ss.9601
et. seq.), the Hazardous Materials Transportation Act (49 U.S.C. ss.1801 et.
seq.), the Federal Water

24
<PAGE>

24 Pollution Control Act (33 U.S.C. ss.1251 et. seq.), the Clean Air Act (42
U.S.C. ss.7401 et. seq.), the Toxic Substances Control Act (15 U.S.C. ss.2601
et. seq.), the Clean Water Act (33 U.S.C. ss. 1251 et. seq.), the Safe Drinking
Water Act (42 U.S.C. ss.ss.300f through 300j) and the Occupational Safety and
Health Act (29 U.S.C. ss.651 et. seq.) of any amendment, supplement or
modification thereof or regulations or other authority promulgated thereunder,
or any other similar Federal, State or local law, ordinance or regulation and
for any other matter arising directly or indirectly as a result of said laws or
regulations including, but not limited to, the removal of any "Hazardous Waste"
as defined in the Federal laws or regulations or the Connecticut General
Statutes or regulations, or Hazardous Substance as defined above, whether or not
ordered by the respective Government agencies referred to above or any Federal,
State or local law or regulation or any other claim at law or in equity. The
provisions of this paragraph shall be binding on the Landlord, its successors
and assigns, and inure to the benefit of the Tenant, its successors and assigns.

22.13 This Paragraph 22 shall survive the termination or expiration of
this Lease.

23: ASSIGNMENT MORTGAGING AND SUBLEASE

23.1 Tenant covenants and agrees, for Tenant and its successors,
assigns and legal representatives, that neither this Lease nor the term and
estate hereby granted, nor any part hereof or thereof will be assigned,
mortgaged, pledged, encumbered or otherwise transferred (whether voluntarily,
involuntarily, by operation of law, or otherwise), and that neither the
Premises, nor any part thereof, will be encumbered in any manner by reason of
any act or omission on the part of Tenant, or will be used or occupied, or
permitted to be used or occupied, or utilized for desk space or for mailing
privileges or as a concession, by anyone other than Tenant, or for any purpose
other than as hereinbefore set forth, or will be sublet, or offered or
advertised for subletting, without the prior written consent of Landlord in
every case; provided, however, that if Tenant is a corporation, the assignment
or transfer of this Lease and the term and estate hereby granted, to any
corporation into which the Tenant is merged or with which the Tenant is
consolidated (such corporation being hereinafter, in this Paragraph 23, called
"Assignee") without the prior written consent of Landlord shall not be deemed to
be prohibited hereby if, and upon the express condition that, Assignee shall
have executed, acknowledged and de1iv~red to Landlord an agreement, in form and
substance satisfactory to Landlord, whereby Assignee shall assume and agree to
perform, and to be personally bound by and upon, all the covenants, agreements,
terms provisions and conditions set forth in this Lease on the part of the
Tenant to be performed, and whereby Assignee shall expressly agree that the
Provisions of this Paragraph 23 shall, notwithstanding such assignment or
transfer, continue to be binding upon it with respect to all future assignments
and transfers, and further conditioned that Tenant shall execute and deliver to
Landlord a Guaranty of payment and performance of Assignee in form and substance
satisfactory to Landlord. Notwithstanding anything to the contrary, Tenant may
assign this Lease, without Landlord's consent (but with notice to Landlord), to
any parent, subsidiary or affiliate of Tenant, or to any person, firm or
corporation that controls Tenant, is controlled by or is under common control
with Tenant, or to any business entity into which Tenant may be merged or
consolidated or that purchases all or substantially all of the assets of Tenant
(hereinafter referred to as a "Business Assignment") and such Assignee shall
have all of the rights

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and obligations of Tenant under this Lease including, without limitation, the
rights to extend the Lease term, but Tenant shall not be released from any
obligation under this Lease.

23.2 Notwithstanding anything hereinbefore contained in this Paragraph
23, in the event Tenant desires Landlord's consent to an assignment or
subletting of all or any part of the Premises, Tenant, by notice in writing,
shall notify Landlord of the name of the proposed assignee or subtenant, such
information as to proposed assignee's or subtenant's financial responsibility
and standing as Landlord may reasonably require, and of the covenants,
agreements, terms, provisions and conditions contained in the propose assignment
or sublease.

23.3 Landlord covenants not to unreasonably withhold its consent to
such proposed assignment or subletting by Tenant of such space to the proposed
assignee or subtenant on said covenants, agreements, terms, provisions and
conditions set forth in the notice to Landlord referred to above , provided,
however, that Landlord shall not in any event be obligated to consent to any
such proposed assignment or subletting unless

(a) in the reasonable judgment of Landlord, the proposed assignee
or subtenant is of a character and engaged in a business such
as are in keeping with the standards of Landlord in those
respects for the building and occupancy;

(b) in the reasonable judgment of Landlord, the purposes for which
the proposed assignee or subtenant intends to use the portion
of the Premises sublet to it are such as are in keeping with
the standards of Landlord in those respects for the Building
and its occupancy;

(c) such subletting will result in there being no more than two
occupants of the Premises, including Tenant and all subtenants;

(d) the space so to be sublet shall be regular in shape with
appropriate means of ingress and egress and suitable for normal
renting purposes;

(e) the proposed assignee or subtenant under such proposed
subletting shall not be a government or any subdivision or
agency thereof nor then be a tenant or subtenant of Landlord or
an occupant of any part of the Building;

(f) Tenant shall reimburse Landlord for any reasonable expenses
that may be incurred by Landlord in connection with the said
assignment or sublease, including, without limitation, the
costs of making investigations as to the acceptability of a
proposed assignee or subtenant and reasonable legal expenses
incurred in connection with the granting of any requested
consent to an assignment or subletting;

(g) the proposed subletting shall be at a rate not less than the
rental rates at which Landlord is offering comparable space in
the Building for a comparable term; and

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23.4 Each subletting to this Paragraph 23 shall be subject to all the
covenants, agreements, terms, provisions and conditions contained in this Lease
and the MDA. Tenant covenants and agrees that, notwithstanding such assignment
or any such subletting to any tenant and/or acceptance of Basic Rental and
Additional Rental by Landlord from any subtenant, Tenant shall and will remain
fully liable for the payment of the Basic Rental and Additional Rental due and
to become due hereunder and for the performance of all the covenants,
agreements, terms, provisions and conditions contained in this Lease on the part
of the Tenant to be performed. Tenant further covenants and agrees that,
notwithstanding any such assignment or subletting, no other and further
assignment, underletting or subletting of the Premises or any portion thereof
shall or will be made except upon compliance with and subject to the provisions
of this Paragraph 23. Tenant shall promptly furnish to Landlord a copy of such
sublease.

23.5 If this Lease be assigned or if the Premises or any part thereof
be subject or occupied by any entity other than Tenant, Landlord may, after
default by Tenant, collect rent from the assignee, subtenant or occupant, and
apply the net amount collected to the rent herein reserved, but no such
assignment, subletting, occupancy or collection shall be deemed a waiver of any
of Tenant's covenants contained in this Paragraph 23; or the acceptance of the
assignee, subtenant or occupant as tenant, or a release of Tenant from the
further performance by Tenant of covenants on the part of Tenant herein
contained.

24: SUBORDINATION: TENANT'S NOTICE OF INTENT TO CANCEL

24.1 This Lease shall be subject and subordinate at all times, to the
lien of the mortgages now on the Premises, and to all advances made or hereafter
to be made upon the Premises, and subject and subordinate to any Lease or other
arrangement or right to possession under which Landlord is in control of the
Premises and to the rights of the owner or owners of the Premises and of the
land or buildings of which the Premises are a part, provided, however, that in
the absence of any failure by the Tenant to perform the terms of this Lease, the
Tenant's possession of the Premises on the terms and conditions set forth in
this Lease shall not be disturbed during the term of this Lease. If the
mortgagee or proposed mortgagee requests Tenant to execute an estoppel
certificate or other similar document, Tenant shall execute said estoppel
certificate and return same to Landlord within seven (7) days of Tenant's
receipt of same. Failure of Tenant to execute and return said estoppel
certificate or similar document within said seven (7) day period shall be a
default under this Lease.

24.2 Tenant shall, upon the request of Landlord in writing and at no
charge or expense to Landlord, subordinate this lease and the lien hereof to the
lien of any present or future mortgage or mortgages upon the Premises or any
property of which the Premises are a part irrespective of the time of execution
or the time of recording of any such mortgage or mortgages, provided that the
holder of any such mortgage shall enter into a written agreement with Tenant to
the effect that in the event of foreclosure or other action taken under the
mortgage by the holder thereof this Lease and "the rights of the Tenant
hereunder shall not be disturbed but shall continue in full force and effect

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so long as Tenant shall not be in default hereunder beyond any applicable cure
period. The word "mortgage" as used herein includes mortgages deeds of trust or
other similar instruments, and modifications, extensions, renewals and
replacements thereof; and any and all advances thereunder.

24.3 Anything to the contrary notwithstanding, the Tenant shall not
elect to exercise any right or option to cancel and terminate this Lease for any
default by the Landlord without having first given any assignee of the rents
hereunder or mortgagee of the Premises or Park prior written notice of its
election to so cancel and terminate, and the assignee and/or mortgagee, their
successors and assigns, shall have thirty (30) days after the receipt of such
notice in which to remedy or have remedied any default of the Landlord and
thereby void Tenant's election to cancel and terminate this Lease.

25: SALE BY LANDLORD

25.1 If Landlord, or any subsequent owner of the Park, Premises or
Building sells the same, Landlord's liability for the performance of its
agreements in this Lease will end on the date of the sale of the Park, Premises
or Building and Tenant will look solely to the purchaser for the performance of
those agreements. For the purposes of this Paragraph, any holder of a mortgage
or deed of trust that affects the Park, Premises or Building at any time, and
any landlord in any lease to which this Lease is subordinate, at any time, will
be a subsequent owner of the Park, Premises or Building when it succeeds to the
interest of the Landlord or any subsequent owner of the Park, Premises or
Building. Tenant will attorn to any subsequent owners of the Park, Premises or
Building. Any and all security deposits paid by Tenant hereunder shall be held
by such subsequent owner and Tenant shall look only to such subsequent owner for
a return thereof upon the expiration of this Lease.

26: FIRE INSURANCE

26.1 Landlord shall, from and after the date of the execution of this
Lease, keep the Premises, the building of which the Premises are a part, the
Park and the parking facilities and other common areas and facilities, as the
case may be, insured against loss or damage by fire and any casualties included
in the extended coverage or supplementary contract endorsements, in an amount
not less than eighty (80%) percent of the full replacement value thereof,
exclusive of foundation, all concrete improvements and utilities. Landlord will
not, and shall not have any obligation to, provide coverage for the personal
property, trade fixtures Tenant's improvements or equipment of Tenant, as Tenant
is required to provide its own insurance coverage for same as set forth in
Paragraph 26.3 below.

26.2 Each of Landlord and Tenant hereby releases the other from any
and all liability or responsibility (to the other or anyone claiming through or
under them by way of subrogation or otherwise) for loss or damage to property
caused by fire or any of the extended coverage or supplementary contract
casualties, even if such fire or other casualty shall have been caused by the
fault or negligence of the other party, or anyone from whom such party may be
responsible,

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provided, however, that this release shall be applicable and in force and effect
only with respect to loss or damages occurring during such time as the
releasor's policies shall contain a clause or endorsement to the effect that any
such release shall not adversely affect or impair said policies or prejudice the
right of the releasor to recover thereunder. Each of the Landlord and Tenant
agrees that its policies will include such a clause or endorsement so long as
the same shall be obtainable without extra cost, or if extra cost shall be
chargeable therefor, each party shall advise the other thereof and of the amount
of the extra cost, and the other party, at its election, may pay the same, but
shall not be obligated to do so.

26.3 The Tenant shall, at its own cost and expense carry fire and
casualty insurance covering all property of the Tenant and all interior
installations, partitions, equipment, systems and improvements installed or made
by it in the Premises, any loss payable under such insurance being payable
directly to the Tenant. Tenant shall provide Landlord with a copy of the
certificate for said insurance, which policy shall provide that it will not be
canceled without a Thirty (30) day written notice to Landlord by the insurer.

27: DAMAGE

27.1 In case of partial or total destruction of the Premises, the
Tenant will give immediate notice thereof to the Landlord. If the Premises shall
have been damaged or destroyed to an extent less than 25% of the insurable value
thereof, the Landlord will restore the Premises to their former condition within
a reasonable time at its expense. If the Premises shall have been damaged or
destroyed to an extent of 25% or more of the insurable value thereof, the
Landlord may within Ninety (90) days elect to (a) restore the Premises to their
former condition within One Hundred Twenty (120) days of Landlord's election
date at its expense, or (b) terminate this Lease by giving notice of termination
to the Tenant. If Landlord elects to restore the Premises and does not
substantially complete said restoration within One Hundred Twenty (120) days
(excluding noncompletion of details of construction, decoration or mechanical
adjustments which are minor in character and the noncompletion of which does not
materially interfere with Tenant's use of such part of the Premises), Tenant
shall have the right to terminate this Lease by giving written notice to
Landlord. A just proportion of the Basic Rent, according to the nature and
extent of the damage or destruction, will be abated from the time of the same
until the Premises shall have been restored (as hereinabove provided) or this
Lease terminated, excepting, however, that if the nature of the damages is such
as to render the Premises wholly unsuitable for Tenant's use, then unless this
Lease is terminated by Landlord, as hereinbefore provided, all rent shall abate
and Tenant's obligations under this Lease shall be suspended until such time as
the Premises shall have been fully restored by the Landlord. There shall be no
obligation upon the part of the Landlord to repair or rebuild during the last
year of the term of this Lease. Landlord's obligation to repair or rebuild
pursuant to this paragraph shall be limited to the basic building, systems and
equipment and replacement of any interior work which may have been installed at
Landlord's cost. Landlord's obligation to repair or rebuild shall also be
limited to the extent of insurance proceeds made available by any mortgagee
having control over disposition of such proceeds and shall be further limited to
not include the restoration, repair or rebuilding of any portion of the Premises
for which Tenant is required to

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maintain insurance under Paragraph 26.3 of this Lease. Tenant shall be
responsible to promptly restore, repair or replace any portion of the Premises
for which Tenant is required to maintain insurance under Paragraph 26.3 of this
Lease.

28: EMINENT DOMAIN

28.1 If any person, authority or corporation public, private or
otherwise, shall at any time during the term of this Lease or any renewal
thereof lawfully condemn or take under power of eminent domain or condemnation
the whole or any part of the Premises, then at the option of the Landlord this
Lease shall immediately cease and terminate upon possession being taken
thereunder of the Premises or any part thereof, and the Basic Rental and
Additional Rental provided for hereunder shall be apportioned and adjusted as of
the time of such termination. The Landlord shall notify the Tenant of any such
proceedings pertaining to or in any way involving the Premises, and the Tenant
shall have the right, at Tenant's sole cost and expense, to interpose and
prosecute in any such proceeding a claim for the value of its leasehold
interests in the Premises or any part thereof and for the value of any fixtures
or improvements installed in or made to the Premises by the Tenant, and all sums
recovered or awarded on the basis of such claims by the Tenant shall belong to
and be payable to the Tenant. If, in the event of a partial taking which taking
materially interferes with Tenant's business operations, then Tenant, at its
election, may terminate this Lease by giving notice to Landlord of its election
and in such event the Basic Rental and Additional Rental shall be apportioned
and adjusted as of the date of termination. If the term of this Lease shall not
be terminated as aforesaid, then the term of this Lease shall continue in full
force and effect, and Landlord shall within a reasonable time after possession
is physically taken (subject to delays due to shortage of labor, materials or
equipment,, labor difficulties, breakdown of equipment, government restrictions,
fires, other casualties or other causes beyond the reasonable control of
Landlord) repair or rebuild what may remain of the Premises for the occupancy of
Tenant; and a just proportion of the Basic Rental and Additional Rental shall be
abated, according to the nature and extent of the part of the Premises acquired
or condemned, in proportion to the area of the Premises rendered unusable for
Tenant to conduct its ordinary business as previously conducted at the Premises
for the balance of the term of the Lease.

28.2 Landlord reserves to itself, and Tenant assigns to Landlord, all
rights to damages accruing on account of any such taking or condemnation except
as hereinafter stated or by reason of any act of any public or quasi public
authority for which damages are payable. Tenant agrees to execute such
instruments of assignment as may be required by Landlord, to join with Landlord
in any petition for the recovery of damages, if requested by Landlord, and to
turn over to Landlord any such damages as may recovered in any `such proceeding.
If Tenant shall fail to execute such instruments as may be required by Landlord,
or to undertake such other steps as may be as may requested as herein stated,
Tenant shall be in default under this Lease. It is agreed and understood,
however, that Landlord does not reserve to itself, and Tenant does not assign to
Landlord, any damages payable for trade fixtures installed by Tenant at its own
cost and expense and which are not a part of the realty, and any damages payable
to Tenant for moving expenses.

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29: QUIET ENJOYMENT

29.1 Landlord covenants and agrees with Tenant that upon Tenant paying
all Basic Rental, Additional Rental and all other charges which may become due
under this Lease and observing and performing all of the terms covenants and
conditions on Tenant's part to be observed and performed Tenant may peaceably
and quietly have, hold occupy and enjoy the Premises and all rights under this
Lease and all said common facilities of the Park without hindrance or
disturbance by Landlord.

30: DEFAULT BY TENANT

30.1 Upon Tenant's failure to pay any installment of Basic Rental,
Additional Rent or any other payment under this Lease when due, or if Tenant
shall fail to observe and perform any of the other conditions, agreements or
provisions of this Lease, it shall be lawful thereupon, after ten (10) days
written notice as to monetary default (subsequent to the grace period set forth
in Paragraph 3.1 above) and thirty (30) days notice as to any other default
(unless Tenant shall have remedied the failure within said ten (10) or thirty
(30) day period as the case may be or shall have commenced in good faith within
said ten (10) or thirty (30) day period as the case may be to remedy said
failure and diligently continues thereafter until said failure is remedied) for
Landlord to: (1) re-enter and repossess the Premises, to remove all persons
therefrom and to take exclusive possession of and remove all property therefrom;
and/or (2) perform on behalf of and at the expense of Tenant, any obligation of
Tenant under this Lease which Tenant has failed to perform, provided, however,
that Landlord may exercise the remedy described in this clause without a default
by, or notice to Tenant if Landlord, in its good faith judgment, believes it
would suffer material or substantial damage by failure to take rapid action or
if the unperformed obligation of Tenant constituted an emergency. Upon any
occurrence of default by Tenant hereunder, beyond any applicable cure period,
any and all rights of Tenant as a tenant shall, at the option of Landlord,
immediately cease and terminate. Nothing provided herein shall be deemed to
obligate or require Landlord to take any action or do any thing for or on behalf
of Tenant, or otherwise. The failure on the part of the Landlord to re-enter or
repossess the Premises, or to exercise any of its fights hereunder upon any
default shall not be deemed a waiver of any of the terms and conditions of this
Lease, and shall not preclude said Landlord from the exercise of any of such
rights upon any subsequent occurring default or defaults.

30.2 Any reasonable costs or expenses incurred by Landlord (including,
but not limited to, attorney's fees) in enforcing any of its rights or remedies
under this Lease shall be deemed to be Additional Rental and shall be paid to
Landlord by Tenant upon demand.

31: WAIVERS

31.1 The failure of either party to insist in any one or more
instances, upon a strict performance of any of the covenants of this Lease, or
to exercise any option herein contained, shall not be construed as a waiver or a
relinquishment for the future of such covenant or option, but the same shall
continue and remain in full force and effect. The receipt by Landlord of Basic
Rent

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and/or Additional Rent with knowledge of the breach of any covenant hereof shall
not be deemed a waiver of such breach and no waiver by the Landlord of any
provision hereof shall be deemed to have been made unless expressed in writing
and signed by the Landlord. Even though the Landlord shall have consented to an
assignment of this Lease, no further assignment shall be made without the
express consent in writing by the Landlord.

32: ABANDONMENT

32.1 if Tenant shall abandon or vacate said Premises before the end of
the term or otherwise default under any other provision of this Lease agreement,
Landlord may take possession of said Premises and relet the same, without such
action being deemed an acceptance of a surrender of this Lease, or in any way
terminating the Tenant's liability hereunder, and the Tenant shall remain liable
for payment of the Basic Rent and Additional Rent herein reserved, less the net
amount realized by the Landlord from reletting, after deduction of any expenses
incident to such repossession and reletting.

33: HOLDOVER

33.1 If the Tenant shall occupy the Premises with the consent of the
Landlord, after the expiration of this Lease, and/or Landlord and Tenant are
negotiating in good faith for the extension or renewal of this Lease, and rent
is accepted from said Tenant, such occupancy and payment shall be construed as
an extension of this Lease for the term of one month only from the date of such
expiration and occupation thereafter shall operate to extend the term of this
Lease for but one month at a time unless other terms of such extension are
endorsed hereon in writing and signed by the parties hereto. In such event if
either Landlord or Tenant desires to terminate said occupancy at the end of any
month after the termination of this Lease, the party so desiring to terminate
the same shall give the other parry at least thirty (30) days written notice to
that effect. Failure on the part of the Tenant to give such notice shall
obligate it to pay rent for an additional calendar month, following the month in
which the Tenant has vacated the demised premises. If such occupancy continues
without the consent of the Landlord, Tenant shall pay to Landlord, as liquidated
damages, one and one-half times the amount of Basic Rent and Additional Rent at
the highest rate specified in this Lease for the time Tenant retains possession
of the Premises or any part thereof after termination of the term by lapse of
time or otherwise.

34: GRACE PERIOD

34.1 In any case where either party hereto is required to do any act,
the time for performance thereof shall be extended by a period equal to any
delay caused by or resulting from Act of God, war, civil commotion, fire or
other casualty, labor difficulties, shortages of labor, materials or equipment,
government regulations or any other causes beyond such party's reasonable
control, whether such time be designated by a fixed date, a fixed time or a
"reasonable time".

35: NOTICES

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35.1 Any notice required to be given hereunder shall be deemed duly
given if mailed in any Post Office by registered or certified mail, or sent by
commercial overnight delivery addressed to the Landlord at 2 Parklawn Drive,
Bethel, Connecticut 06801 and addressed to the Tenant at 27 North Main Street
Kent, CT or at such other address as either party may give to the other in
writing.

36: REAL ESTATE BROKERS

36.1 Landlord and Tenant acknowledge that CB Richard Ellis (Andrew
Decry), acting as a licensed real estate broker, was instrumental in the
consummation of this Lease. Landlord agrees to pay any commission that may be
due said real estate broker. Tenant represents and warrants to Landlord that it
has not had any dealing with any other real estate broker or finder with respect
to the subject matter of this Lease, and agrees to hold Landlord harmless from
and against any and all damages, costs and expenses, including, but not limited
to, court costs, costs of defense, costs of settlement and reasonable attorneys
fees; resulting from any claim(s) for a brokerage commission or finder's fee
that may be asserted against Landlord by any other broker or finder with whom
Tenant has dealt.

37: OPTION TO RENEW

37.1 Provided Tenant is not in default under this Lease beyond any
applicable cure period, Landlord hereby grants Tenant an option to renew a lease
under such terms and conditions as Landlord is offering at that time, except for
Basic Rental, which shall be at the then fair market value for similar space in
Berkshire Corporate Park for an additional period of Five (5) years (hereinafter
referred to as the "Option Term"), commencing on the Termination Date of the
Initial Term as set forth above. Said Option shall only be exercisable during
the Initial Term of this Lease, must be exercised at least Nine (9) months prior
to the Termination Date of the Initial Term and shall expire upon the
termination of the Initial Term of this Lease, whether by lapse of time or
otherwise. Said option may only be exercised by a notice in writing addressed to
the Landlord stating that this option is being exercised, which notice must be
actually received by Landlord at or prior to the date which is Nine (9) months
prior to the Termination Date of the Initial Term.

38: FUTURE EXPANSION

38.1 Tenant has expressed to Landlord an interest in potentially
expanding Tenant's occupancy of space within the Park. As of the date of the
execution of this Lease, Tenant has not undertaken any obligation to expand its
occupancy within the Park or otherwise, nor has Landlord undertaken any
obligation to provide any expanded occupancy to Tenant within the Park or
otherwise. If and when Tenant notifies Landlord that tenant does desire to
expand its occupancy within the Park, Landlord has agreed to coordinate with
Tenant for such potential future expansion as Landlord is able to accommodate
where possible within the existing buildings in the Park located at 4,6 or 8
Berkshire Boulevard.

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39: LANDLORD'S RIGHT TO RELOCATE

39.1 Subject to the terms and conditions set forth in this Paragraph
39.1 Landlord may relocate Tenant during the first four (4) years of the Option
Term only of this Lease to other space within the Park. If Landlord shall desire
to relocate Tenant, Landlord shall give Tenant written notice of Landlord's
exercise of Landlord's right to relocate Tenant not less than One Hundred Eighty
(180) days before the date on which Tenant must move from the original Premises
to the new space. If Landlord exercises the right to relocate the Tenant,
Landlord shall provide Tenant with new space in the Park at no relocation
expense to Tenant. The new space shall be comparable to and contain at least the
same number of rentable square feet as the original Premises. Landlord shall
improve the new space in accordance with the improvements performed by Tenant to
the Premises at the time of the exercise of this option by Landlord, all at
Landlord's expense. Landlord shall also, at Tenant's option, arrange for a
moving service to move Tenant's property to the new space or pay the reasonable
cost of such moving service that the Tenant may choose. Such moving shall be
conducted promptly and diligently at such times as to minimize interference with
Tenant's business. Tenant shall not be required to move until Landlord has
improved the new space in the above manner and a certificate of occupancy has
been issued for the new space. the new space shall be the new Premises, the new
space shall be substituted for the original Premises, and all references in this
Lease to the Premises shall mean the new space and the building in which the new
space is located, and the Tenant shall from that date have no further rights in
the original Premises. All other terms and conditions of this Lease shall remain
the same and in full force and effect.

40: AMERICANS WITH DISABILITIES ACT

40.1 The parties acknowledge that Title III of the Americans with
Disabilities Act of 1990 and the regulations promulgated thereunder (ADA)
establish requirements for accessibility and barrier removal, and that such
requirements may or may not apply to the leased Premises. To the extent that the
ADA applies on the Commencement Date and/or the date the Certificate of
Occupancy is issued, the parties agree that responsibility for compliance shall
be allocated as follows:

(1) The Tenant shall be responsible for ADA compliance within the portion
of the leased Premises within Tenant's exclusive possession and control
to the extent such compliance is necessitated as a result of Tenant's
fit up, construction, renovations, alterations or repairs made within
the leased Premises if such fit up, construction, renovations,
alterations or repairs are made by Tenant at Tenant's expense. Tenant
shall indemnify and hold Landlord harmless, including costs of defense
and reasonable attorney's fees, from any claims for enforcement or
damages brought under the ADA for items within Tenant's responsibility.

(2) The Landlord shall be responsible for ADA compliance: (a) for all
interior and exterior portions of the leased Premises not within
Tenant's exclusive possession and control; (b) for the leased Premises
to the extent such compliance is not necessitated by tenant's occupancy
of the Premises, or; (c) necessitated as a result of Landlord's
construction, renovations,

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alterations or repairs made within the leased Premises if such
construction, renovations, alterations or repairs are made by
Landlord. Landlord shall indemnify and hold Tenant harmless, including
costs of defense and reasonable attorneys fees, from any claims for
enforcement or damages brought under the ADA for items within
Landlord's responsibility.

41: NOTICE OF AVAILABILITY

41.1 Landlord hereby discloses to Tenant that MCI Telecommunications,
Inc. (hereinafter o referred to as "MCI") has a right of first notice of
availability of space for the top floor of 6 Berkshire Boulevard and the entire
building of 4 Berkshire Boulevard. Landlord further represents to Tenant that so
long as Tenant is occupying the Premises, which, at the time of the execution of
this Lease, constitutes the top floor of 6 Berkshire Boulevard, MCI has waived
its right of notice of availability for the Premises. Landlord hereby agrees
that, subject to MCI's rights as set forth above, Landlord will notify Tenant of
the availability of space at 4 Berkshire Boulevard, 6 Berkshire Boulevard and/or
8 Berkshire Boulevard

41: EFFECT

41.1 Except as otherwise provided herein, terms and provisions of this
Lease shall be binding on and inure to the benefit of the parties hereto and
their respective heirs, representatives, executors, administrators, successors
and permitted assigns. This Lease constitutes the entire agreement between the
parties and may not be changed except by a writing signed by the party or
parties against whom enforcement of arty waiver, change, modification,
extension, estoppel or discharge is sought. Whenever used, the singular number
shall include the plural, the plural the singular, and the use of any gender
shall be applicable to all genders as the circumstances require. This Lease
shall be construed under the laws of the State of Connecticut. The Landlord and
Tenant hereby agree that any claims, disputes or litigation arising out of the
terms, conditions and covenants of this Lease shall be adjudicated in the State
of Connecticut, and the parties further hereby consent to the jurisdiction of
the State of Connecticut over any such claims, disputes or litigation. It is
agreed that if any provision of this Lease shall be determined to be void by any
Court of competent jurisdiction, then such determination shall not affect any
other provision of this Lease, all of which other provisions of this Lease shall
remain in full force and effect; and it is the intention of the parties hereto
that if any provision of this Lease is capable of two constructions, one of
which would render the provision valid, then the provision shall have the
meaning which renders it valid. At the request of either party, Landlord and
Tenant shall execute, acknowledge and deliver to each other a recordable Notice
of Lease pursuant to Connecticut statutes to give notice of Tenant's lease. At
the termination of this Lease, whether by lapse of time or otherwise, Tenant
shall execute, acknowledge and deliver to Landlord a quitclaim or other
appropriate document in recordable form to evidence that Tenant's Lease has
ended.

IN WITNESS WHEREOF, the parties hereto have executed this lease under
seal this 9th day of September, 1999.

35
<PAGE>

/s/ signature illegible BERKSHIRE INDUSTRIAL CORPORATION
- -----------------------------

By /s/ Richard E. Steiner
------------------------------
/s/ signature illegible
- -----------------------------

/s/ signature illegible
- -----------------------------

By /s/ Katherine N. Vick
------------------------------
/s/ signature illegible
- -----------------------------

State of Connecticut :
:ss. Bethel September 14, 1999
County of Fairfield :

Personally appeared Richard E. Steiner, Vice President of Berkshire Industrial
Corporation, duly authorized, Signer and Sealer of the foregoing instrument, who
acknowledges the foregoing to be his free act and deed and the free act and deed
of said corporation, before me.

36
<PAGE>

/s/ Martin W. Ryan
----------------------------
Commissioner of the Superior Court
Notary Public
My Commission Expires June 30, 2004

State of Connecticut :
:ss. 9/9, 1999
County of Ditchfield :

Personally appeared Kate Vick, EVP & CFO of Cyberian Outpost duly authorized,
Signer and Sealer of the foregoing instrument, who acknowledges the foregoing to
be his free act and deed and the free act and deed of said corporation, before
me.

/s/ Melanie Chernak
----------------------------
Commissioner of the Superior Court
Notary Public
My Commission Expires 6-30-03

37
<PAGE>

EXHIBIT A

BETHEL CONNECTICUT

I. All those certain pieces or parcels of land together with the building and
improvements incited thereon, situated in the Town of Bethel, County of
Fairfield and State of Connecticut shown and designated as:

"1&2 305,873 S.F. 7.024 AC.";
"8&9 294205 S.F. 6.754 AC.";
"10 322.049 S.F. 7.393 AC.";
"15 241,596 S.F. 5.546 AC.9';
"19 81,328 S.F. 1.881 AC.";
"20 80,574 S.F. 1.850 AC.";
"22 81,575 S.F. 1.973 AC.";
"Water Tank Parcel 129,064 S.F. 2.953 AC.":
"23 80,012 S.F. 1.837 AC.";
"Par.? 22202 'Z' 0.510 AC.";
"25 85,892 S.F. 1.972 AC.";
"24 96.780 S.F. 2.222 AC.";
"26 136,083 S.F. 3.124AC"; and
"27 117,758 S.F. 2,703 AC."

on a map consisting of two sheets, "Sheet 1 of 2" and "Sheet 2 of 2", both
sheets being entitled "Final Subdivision Showing Berkshire Industrial Park
Bethel, Connecticut Scale: 1'.100' Total Area: 117.273 AC. Zone: 1.P. Date: Mar.
29. 1985" which map is a Class A2 Survey which was prepared and is certified
substantially correct by Paul M. Fagan LS #7755 Surveying Associates and which
map is on file in the Bethel Town Clerk's office as Map 50 in File 19 (Sheet I
of 21 and Map 60-A in File 19 (Sheet 2 or 2).

II. All those certain pieces or parcels of land, together with the buildings and
improvements, if any, located thereon situated in the Town of Bethel. County of
Fairfield, and State of Connecticut and shown and designated as "Parcel `Y1'
80,000 sf 1.837 Acres' and Parcel `Y3' 80,000 of 1.837 Acres" en a map entitled
"Resubdivision Map Parcel "Y' Berkshire Industrial Park And Other Land Of
Berkshire Industrial Corporation Bethel. Connecticut Scale 1" = 80' Total Area:
17.515 Acres Zone: 1.P & R-20 Date: March 1, 1991" which map is a Class A-2
survey which was prepared and is certified as substantially correct by Paul M.
Fagan LS. #7758 of Surveying Associates. P.C. and which map is on file in the
Bethel Town Clerk's office as Map 33 in File 22.

III. All that certain piece or parcel of land, together with the buildings and
improvements, if any. situated thereon, located in the Town of Bethel, County of
Fairfield, and State of Connecticut, containing 4.7 acres, more or less, and
being bounded and described as follows:

Commencing at a point, which point is the most northerly point of the lot
identified as "7 188,554 S.F. 4.329 AC.", and the southwesterly corner of the
lot identified as "8&9 294,205 S.F. 5.754 AC." both as shown on the map
described in Paragraph l above and on file in the Bethel Town Clerk's office as
Map 60 in File 19; then proceeding in a northeasterly direction along hod now or
formerly owned being the lots identified as "8&9" and "10" on the maps on file
is the Bethel Town Clerk's office as Maps 60 & 60A in File 19. N 16 (degrees)
43' 40" E 490.00 feet, 19 (degrees) 39' 30' E 51.96 feet and N 16 (degrees) 40'
35" E 280.68 feet to a point, which point marks the northeasterly corner of the
herein described premises and which point is also identified by a drill hole
shown an a map entitled independent Resurvey Prepared Far Berkshire industrial
Corporation Bethel, Connecticut Scale: 1" = 100' Total Area: 43.801 Acres Zone:
IP Date: March 14, 1994 Rev. March 15. 1994 Rev. May 2, 1994" which map is a
Class A2 Survey which was prepared and is certified Substantially correct by
Paul M. Fagan R.L.S. #7756 and which map is on file in the Bethel Land Records
(herein "Independent Resurvey" thence turning and proceeding westerly along
other land now or formerly owned by Berkshire Industrial Corporation S 85
(degrees) 21' 24" W 109.97 feet to a point marked by an iron pipe on the

<PAGE>

Independent Resurvey: thence turning and proceeding south southwesterly, then
southwesterly, and then westerly, still along land now or formerly owned by the
said Berkshire Industrial Corporation the following three courses and distances;
S 16 (degrees) 43' 40" W 751.26 feet to an iron pipe: S 50 (degres) 47' 30" W
136.21 feet to an iron pipe: and S 87 (degrees) 21' 34" W 211.20 feet to an iron
pipe in the Bethel-Danbury Town Line, all three of said iron pipes being shown
on the Independent Resurvey: thence turning and proceeding in a southerly
direction along the Bethel-Danbury Town Line, along land now or formerly owned
by Peter Scalzo, to a point in said Bethel-Danbury Town Line, which point marks
the north- westerly corner of land now or formerly owned by David F. and
Lorraine Karrakar; thance turning, and proceeding easterly along the northerly
boundary line of said Karraker land to a point, which point marks the
southwesterly corner of the lot referred to above and identified as "7 188,544
S.F. 4.329 AC." on the map on file as Map 60 in File 19 in the Bethel Town
Clerk's office; thence turning and proceeding in a northerly, then
northeasterly, then northerly again, then northeasterly again direction along
said lot" 7", being land owned now or formerly by the Estate of Caroline L.
Steiner, the following courses and distances:

N 3 (degrees) 30' W 292.81 feet;
N 28 (degrees) 56' E 305.91 feet;
N 9 (degrees) 44' 20" E 57.81 feet; and
H 50 (degrees) 47' 30" E 166.84 feet to the point and place of beginning.

IV. All those certain pieces or Parcels of land, together with the buildings and
improvements located thereon, situated in Town of Bethel, County of Fairfield,
and State of Connecticut and shown and designated as "16 (degrees) 102.086 S.F.
2.344 AC.", 17 97.073 S.F. 2.229 AC.", "18 (degrees) 152,270 S.F. 3.496 AC.",
and 21 81,576 S.F. 1.873 AC." On a map entitled "Sheet 2 of 2 Final Subdivision
Showing Berkshire Industrial Park Bethel, Connecticut Scale: 1" = 100' Total
Area: 117.273 AC. Zone: I.P. Date: Mar 29, 1985" which map is a Class A-2 Survey
which was prepared and is certified substantial 1y correct by Paul M. Fagan L.S.
#7756 Surveying Associates, P.C. and which map is on file in the Bethel Town
Clerk's office as 60-A in File 19.

V. All those certain pieces or parcels of land, together with the buildings and
improvements located thereon, situated in the Town of Bethel, County of
Fairfield, and State of Connecticut and shown and designated as "3R 495,113 S.F.
11.367 AC.", "4 153.026 S.F. 3.513 AC.", "5 81,933 S.F. 1.881 AC.", "6 114.286
S.F. 2.624 AC.", and "7 188,554 S.F. 4.329 AC." On a map entitled "Sheet 1 of 2
Final Subdivision Showing Berkshire Industrial Park Bethel, Connecticut Scale:
1" = 100' Total Area: 117.273 AC. Zone: IP Date: Mar. 29 1985" which map is a
Class A-2 Survey prepared and certified substantially correct by Paul M. Fagan
L.S. #7756 Surveying Associates P.C. and which map is on file in the Bethel Town
Clerk's office as Map 60 in File 19.

DANBURY, CONNECTICUT

All those certain pieces or parcels of land, together with the
buildings and improvements, it any, located thereon, situated in the City of
Danbury, County or Fairfield and State of Connecticut and shown and designated
as "Parcel 'A' 12.763 Acres", "Parcel 'B' 18.245 Acres", "Parcel 'C' 27.762
Acres", and "Parcel 'D' 14.184 Acres", on a map entitled "Berkshire Corporate
Park Danbury, Connecticut Final Subdivision Map Area: 75.279 Acres Scale: 1' =
100" Date: May 17, 1993 Revisions Aug. 31, 1993 Sept. 13, 1993" which map is a
Class A-2 Survey which was prepared and is certified substantially correct by
Paul M. Fagan #7756 Surveying Associates, P.C. and which map is on file in the
Danbury Land Records as Ma; #9917.
<PAGE>

BROOKFIELD, CONNECTICUT PARCELS

SHOWN ON MAP ENTITLED:

"ZONE CHANGE MAP PREPARED FOR BERKSHIRE
INDUSTRIAL CORPORATION BROOKFIELD, CONNECTICUT
SCALE: 1" = 100' TOTAL AREA PROPOSED IL/C~80 SE ZONE:
77.158 ACRES DATE: MARCH 17, 1994."

BEGINNING AT A POINT LYING APPROXIMATELY ON THE BROOKFIELD/DANBURY TOWN LINE,
WHICH POINT MARKS THE SOUTHWESTERLY CORNER OF THE HEREIN DESCRIBED PARCEL AND
WHICH POINT LIES APPROXIMATELY ALONG THE RAILROAD CENTERLINE OF LAND OF
CONSOLIDATED RAIL CORPORATION: THENCE RUNNING THROUGH SAID LAND OF CONSOLIDATED
RAIL CORPORATION ALONG SAID APPROXIMATE RAILROAD CENTERLINE. ALONG THE ARC OF A
CURVE TO THE RIGHT. HAVING A RADIUS OF 5,729.65'. A DISTANCE OF 1,064.14' TO A
POINT; THENCE CONTINUING THROUGH SAID LAND OF CONSOLIDATED RAIL CORPORATION
ALONG MID APPROXIMATE RAILROAD CENTERLINE, ALONG THE ARC OF A CURVE TO THE
RIGHT. HAVING A RADIUS OF 1,907.01. A DISTANCE OF 1,257.29 TO A POINT; THENCE
CONTINUING THROUGH SAID LAND OF CONSOLIDATED RAIL CORPORATION, ALONG SAID
APPROXIMATE RAILROAD CENTERLINE ON A COURSE BEARING N 86 52' 23" E. A DISTANCE
OF 663.23' TO A POINT. WHICH POINT MARKS THE NORTHEASTERLY CORNER OF THE HEREIN
DESCRIBED PARCEL THENCE TURNING AND RUNNING THROUGH LAND OP CONSOLIDATED RAIL
CORPORATION. IN PART. THROUGH LAND NOW OR FORMERLY OF CONNECTICUT LIGHT & POWER
COMPANY. IN PART, AND THROUGH LAND OF BERKSHIRE INDUSTRIAL CORPORATION, IN PART,
ON A COURSE BEARING S 3 (degrees) 06' 00' E. A DISTANCE OF 900.94' TO A POINT:
THENCE TURNING AND CONTINUING THROUGH LAND OF BERKSHIRE INDUSTRIAL CORPORATION
ON A COURSE BEARING S 47 (degrees) 55' 00' W. A DISTANCE OF 268.00' TO A POINT;
THENCE TURNING AND CONTINUING THROUGH LAND OF BERKSHIRE INDUSTRIAL CORPORATION.
IN PART AND ALONG LAND NOW OR FORMERLY OF THE ESTATE OF ERNEST STEINER, IN PART.
ON A COURSE BEARING S 23 (degrees) 01' 35" E. A DISTANCE OF 481.42' TO A POINT:
THENCE TURNING AND CONTINUING ALONG SAID LAND NOW OR FORMERLY OF THE ESTATE OF
ERNEST STEINER ON A COURSE BEARING N 66 (degrees) 52' 45" E, A DISTANCE OF
198.52' TO A POINT. WHICH POINT LIES ALONG THE WESTERLY BOUNDARY LINE OF LAND
NOW OR FORMERLY OF PETER P. & WILMA ATANASOFF THENCE TURNING AND RUNNING ALONG
SAID LAND NOW OR FORMERLY OF ATANASOFF. IN PART, ALONG LAND NOW OR FORMERLY OF
DONALD & HENRIETTE MARTIN, IN PART, ALONG LAND NOW OR FORMERLY OF LYNETTE COUTO,
IN PART AND ALONG LAND NOW OR FORMERLY OF WINDALL G. & MARY L WHITE, IN PART. ON
A COURSE BEARING S 23 (degrees) 07' 15" E. A DISTANCE OF 654.87' TO A POINT
WHICH POINT MARKS THE SOUTHEASTERLY CORNER OF THE HEREIN DESCRIBED PARCEL AND
WHICH POINT LIES APPROXIMATELY ALONG THE BROOKFIELD/BETHEL TOWN LINE, THENCE
TURNING AND RUNNING APPROXIMATELY ALONG SAID BROOKFIELD/BETHEL TOWN LINE, ALONG
OTHER LAND OF BERKSHIRE INDUSTRIAL CORPORATION. IN PART ALONG OTHER LAND OF
RICHARD E. STEINER & THOMAS J..DOLAN, TRUSTEES. IN PART. AGAIN ALONG OTHER LAND
OF BERKSHIRE INDUSTRIAL CORPORATION. IN PART, AGAIN ALONG OTHER LAND OF RICHARD
E. STEINER:. AND THOMAS J. DOLAN. TRUSTEES. IN PART AND AGAIN ALONG OTHER LAND
OF BERKSHIRE INDUSTRIAL CORPORATION. ON A COURSE BEARING N 75 (degrees) 22' 38'
W. A DISTANCE OF 2,460.80' TO A POINT, WHICH POINT MARKS THE APPROXIMATE
INTERSECTION OF THE BROOKFIELD/BETHEL TOWN LINE WITH THE BROOKFIELOIDANBLIRY
TOWN LINE; THENCE RUNNING APPROXIMATELY ALONG SAID BROOKFIELDZDANBURY TOWN LINE.
ALONG OTHER LAND OP BERKSHIRE INDUSTRIAL CORPORATION, IN PART AND THROUGH LAND
OF CONSOLIDATED RAIL CORPORATION. IN PART. ON A COURSE BEARING N 75 (degrees)
19' 13" W,. A DISTANCE OF 664.42' TO THE POINT OF BEGINNING.

THE ABOVE DESCRIPTION INCLUDES AN AREA OF 770.158 ACRES.

<PAGE>

Exhibit 10.11

CYBERIAN OUTPOST, INC.
DIRECTOR RETAINER AND STOCK OPTION POLICY

The Board of Directors of Cyberian Outpost, Inc. (the "Company") has
determined to adopt a policy whereby each director of the Company who is not an
employee of the Company or any Affiliate (each, an "Outside Director") will
receive stock options and an annual retainer and fees to provide an inducement
to obtain and retain the services of qualified persons to serve as members of
the Company's Board of Directors.

Accordingly, effective after the Company's July 27, 1999 Annual Meeting,
Outside Directors will receive an annual retainer of $10,000 to serve on the
Board of Directors and will receive $1,500 for each Board or Committee meeting
attended in person and $500 for each Board or Committee meeting attended by
telephone.

In addition, subject to the availability of shares under the Amended and
Restated Cyberian Outpost, Inc. 1998 Employee, Director and Consultant Stock
Plan (the "Plan") and beginning on July 27, 1999, each Outside Director shall be
granted a Non-Qualified Option to purchase 25,000 Shares upon his or her initial
election or appointment. Upon each reelection of such Outside Director
thereafter, each Outside Director shall be granted a Non-Qualified Option to
purchase 25,000 Shares, provided that on such dates such Outside Director has
been in the continued and uninterrupted service of the Company as a director of
the Company since his or her election or appointment and is a director and is
not an employee of the Company at such times.

Each Option shall (i) have an exercise price equal to the Fair Market Value
(per share) of the Shares on the date of grant of the Option, (ii) have a term
of ten years, and (iii) shall be immediately exercisable. Any director entitled
to receive an Option grant under this Policy may elect to decline the Option.

Except as otherwise provided in the pertinent Option Agreement, if a director
who receives an Option pursuant to this Policy:

a. ceases to be a member of the Board of Directors for any reason other
than death or Disability, any then unexercised Options granted to such
director may be exercised by the director within a period of 90 days
after the date the director ceases to be a member of the Board of
Directors and in no event later than the expiration date of the
Option; or

b. ceases to be a member of the Board of Directors by reason of his or
her death or Disability, any then unexercised Options granted to such
director may be exercised by the director (or by the director's
personal representative, or the director's Survivors) within a period
of 180 days after the date the director ceases to be a member of the
Board of Directors and in no event later than the expiration date of
the Option.

This policy shall be governed by and administered in accordance with the
Plan. Terms not otherwise defined herein shall have the meanings set forth in
the Plan.

DATED: June 15, 1999

<PAGE>

EXHIBIT 11.1

CYBERIAN OUTPOST, INC.

Computation of Loss per Share
(In thousands, except per share data)
(Unaudited)

<TABLE>
<CAPTION>
Three Months Ended Years Ended
------------------------ ------------------------
2/29/2000 2/28/1999 2/29/2000 2/28/1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic:
Net loss............................................ $ (9,825) $ (7,815) $ (35,616) $ (25,220)
Accretion of premium on preferred stock............. - - - (210)
Dividends applicable to preferred stockholders...... - - - (613)
---------- ---------- ---------- ----------
Net loss applicable to common stockholders.......... $ (9,825) $ (7,815) $ (35,616) (26,043)
========== ========== ========== ==========
Basic weighted average common shares
outstanding........................................ 23,697 22,748 23,382 15,886
---------- ---------- ---------- ----------
Basic net loss per common share..................... $ (0.41) $ (0.34) $ (1.52) $ (1.64)
========== ========== ========== ==========

Diluted:
Net loss applicable to common stockholders.......... $ (9,825) $ (7,815) $ (35,616) $ (26,043)
Diluted weighted average common shares
outstanding........................................ 23,697 22,748 23,382 15,886
---------- ---------- ---------- ----------
Diluted net loss per common share................... $ (0.41) $ (0.34) $ (1.52) $ (1.64)
========== ========== ========== ==========

Pro forma basic and diluted:
Pro forma net loss applicable to common
stockholders....................................... $ (9,825) $ (7,815) $ (35,616) $ (25,220)

Basic and diluted weighted average shares
outstanding........................................ 23,697 22,748 23,382 20,312
---------- ---------- ---------- ----------
Basic and diluted pro forma net loss per common
share.............................................. $ (0.41) $ (0.34) $ (1.52) $ (1.24)
========== ========== ========== ==========
</TABLE>

<PAGE>

EXHIBIT 23.1

ACCOUNTANT'S CONSENT

The Board of Directors
Cyberian Outpost, Inc.

We consent to incorporation by reference in the registration statement (Nos.
333-95899 and 333-64403) on Form S-8 of Cyberian Outpost, Inc. of our reports
dated March 17, 2000, relating to the balance sheets of Cyberian Outpost, Inc.
as of February 29, 2000 and February 28, 1999, and the related statements of
operations, redeemable preferred stock and stockholders' equity, and cash flow
for each of the years in the three-year period ended February 29, 2000, and
related schedule, which reports appear in the February 29, 2000 annual report on
Form 10-K of Cyberian Outpost, Inc.

KPMG LLP

Providence, Rhode Island
May 17, 2000

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CYBERIAN OUTPOST, INC. AS OF FEBRUARY 29, 2000 AND FOR
THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-START> MAR-1-1999
<PERIOD-END> FEB-29-2000
<CASH> 13,293
<SECURITIES> 7,694
<RECEIVABLES> 4,875
<ALLOWANCES> 525
<INVENTORY> 12,168
<CURRENT-ASSETS> 38,638
<PP&E> 15,804
<DEPRECIATION> 5,259
<TOTAL-ASSETS> 52,843
<CURRENT-LIABILITIES> 27,605
<BONDS> 718
0
0
<COMMON> 237
<OTHER-SE> 24,283
<TOTAL-LIABILITY-AND-EQUITY> 52,843
<SALES> 188,605
<TOTAL-REVENUES> 188,605
<CGS> 16,847
<TOTAL-COSTS> 59,477
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 132
<INCOME-PRETAX> (35,616)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,616)
<EPS-BASIC> (1.52)
<EPS-DILUTED> (1.52)

</TABLE>