SCIENTIFIC LEARNING CORP, S-1/A, 1999-05-28

SCIENTIFIC LEARNING CORP
S-1/A, 1999-05-28
EDUCATIONAL SERVICES

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1999

REGISTRATION NO. 333-77133

AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

SCIENTIFIC LEARNING CORPORATION

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 8200 94-3234458
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>

1995 UNIVERSITY AVENUE, SUITE 400
BERKELEY, CA 94704
(510) 665-9700

(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

SHERYLE J. BOLTON
CHIEF EXECUTIVE OFFICER
1995 UNIVERSITY AVENUE, SUITE 400
BERKELEY, CA 94704
(510) 665-9700

(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------

COPIES TO:

JEFFREY S. ZIMMAN NORA L. GIBSON
ISOBEL A. JONES KIMBERLEY E. HENNINGSEN
LAURA RANDALL WOODHEAD COLBY R. GARTIN
STEVE R. DAETZ BROBECK, PHLEGER & HARRISON LLP
COOLEY GODWARD LLP SPEAR STREET TOWER
ONE MARITIME PLAZA, 20TH FLOOR ONE MARKET
SAN FRANCISCO, CA 94111 SAN FRANCISCO, CA 94105
(415) 693-2000 (415) 442-0900

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
------------------------------

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) OFFERING PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
Common Stock, par value $0.001 per share 2,645,000 shares $16.00 $42,320,000 $12,788
</TABLE>

(1) Includes 345,000 shares of Common Stock which the Underwriters may purchase
solely to cover over-allotments, if any

(2) Estimated solely for the purpose of computing the registration fee under
Rule 457 of the Securities Act of 1933.

(3) Previously paid.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED , 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS

2,300,000 SHARES

[LOGO]

COMMON STOCK

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

This is Scientific Learning Corporation's initial public offering of common
stock and consequently no public market currently exists for the shares.

We expect the public offering price to be between $14.00 and $16.00 per
share. After pricing of the offering, we expect that the common stock will be
quoted on the Nasdaq National Market System under the symbol "SCIL."

INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS.

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

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ---------
<S> <C> <C>
Public Offering Price................................................ $ $

Underwriting Discount................................................ $ $

Proceeds, before expenses, to Scientific Learning Corporation........ $ $
</TABLE>

The underwriters may also purchase up to an additional shares, at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus to cover over-allotments.

Neither the Securities and Exchange Commission nor any other state
securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.

The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.

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

MERRILL LYNCH & CO.

THOMAS WEISEL PARTNERS LLC

PACIFIC GROWTH EQUITIES, INC.

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

The date of this prospectus is , 1999.
<PAGE>

[Scientific Learning
A Neuroscience Company]

<TABLE>
<S> <C>
[Fast ForWord Logo with the following [Fast ForWord Two Logo with the following
caption: "Intensive computer-based caption: "Computer-based training program
training program that builds that continues to build language and
the oral language skills critical for reading skills."]
learning to read or becoming a
better reader."]

[Away We Go Logo with the following [Away We Go Bookshelf Logo with the
caption: "Research-based software games following caption: "Proprietary stories
that build key language and cognitive in books, CD-ROM and CD formats for
skills needed in pre-K to grade 2. children ages 4 to 7 to supplement Away
Available in home and professional We Go! software games. Available in home
versions."] and professional versions."]

[BrainConnection.com Logo with the [Professional Development Logo with
following caption: "Internet site that the following caption: "Professional
will provide information on how the development training for educators and
brain functions and on learning products other professionals on learning,
and services."] language and reading and brain
research."]
</TABLE>

[ScientificLearning.com Logo with the
following caption: "Internet site that
provides information about Scientific Learning and
its products and services and facilitates the
performance monitoring of Fast ForWord participants."]

<PAGE>

[Inside Gatefold]

[Picture of boy reading with the following caption: "Fast ForWord programs for
language and reading."]

[Picture of man and woman with a young child who is pointing to a book that the
woman is holding with the following caption appearing as an overlay to a portion
of the picture: "Away We Go! software and books."]

[Picture of three children and a woman standing next to a globe with the
following captions appearing as an overlay to a portion of the picture:
"BrainConnection.com," "ScientificLearning.com" and "Professional Development."]

[Picture of children in a classroom with their hands raised to ask questions.]

[Picture of a girl in front of a computer.] [Scientific Learning]

<PAGE>
PROSPECTUS SUMMARY

THIS SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO
YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL DATA AND
RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. UPON COMPLETION OF THIS
OFFERING, THE ONLY CLASS OF OUR CAPITAL STOCK OUTSTANDING WILL BE OUR COMMON
STOCK. EXCEPT WHERE OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (A)
ASSUMES A TWO-FOR-THREE REVERSE STOCK SPLIT OF OUR COMMON STOCK AND PREFERRED
STOCK TO BE EFFECTED PRIOR TO THIS OFFERING, (B) ASSUMES THE AUTOMATIC
CONVERSION OF OUR OUTSTANDING PREFERRED STOCK INTO COMMON STOCK ON A ONE-FOR-ONE
BASIS UPON CLOSING OF THIS OFFERING AND (C) ASSUMES THE UNDERWRITERS' OPTION TO
PURCHASE ADDITIONAL SHARES IN THIS OFFERING WILL NOT BE EXERCISED. SEE
"DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING."

OUR COMPANY

We develop, market and sell proprietary software and other educational
products and services. Our products and services are based on research on how
the brain learns and are designed to increase human learning and performance.
Language and reading skills are the foundation for all learning, and we have
developed products to help children learn how to read or become better readers.
We have developed these products based on scientific research and have field
tested them using scientific methods. Our Fast ForWord products are intensive,
computer-based training programs that focus on improving critical language and
reading skills. Our current products, Fast ForWord and Fast ForWord Two, focus
primarily on the learning needs of children aged four to 13. In research studies
conducted by our founders in 1994 and 1995 as well as in field studies organized
by us in 1996, 90% of participants identified as having language or reading
difficulties showed gains in language comprehension skills that statisticians
consider to be significant. On average, these children achieved one to two years
of improvement in language and reading skills after completion of Fast ForWord
programs in four to eight weeks. Based upon more than twenty-five years of
research by our founders and other scientists on the brain's ability to adapt to
stimuli, our Fast ForWord family of products uses computer-controlled,
repetitive training exercises that automatically adapt to each user's
performance to modify the manner in which the brain processes language. Our
research and results have been published in prestigious, peer-reviewed
scientific journals, including SCIENCE and NATURE.

We intend to continue expanding our product offerings through new products
and services, as well as extensions of our current product lines. We have an
additional four language-learning products scheduled for launch in the second
quarter of 1999 and six more targeted for launch in the year 2000. We also offer
professional development seminars in which educators, speech and language
professionals and other professionals can learn about recent developments in
brain research and the practical application of our programs, as well as earn
continuing education credit. In addition, our software products have secure
links to our web site, ScientificLearning.com, which enable parents, educators
and other professionals to upload performance data from our Fast ForWord
products and track progress daily to maximize the benefit of our products and
services. ScientificLearning.com also provides information and forums for the
exchange of ideas about our products as well as how language and reading are
learned. In the second quarter of 1999, we will launch BrainConnection.com to
provide recent developments in brain research. We plan to offer our products as
well as other companies' learning products directly to consumers on
BrainConnection.com. We believe that BrainConnection.com will significantly
expand our Internet presence, interactions with consumers and e-commerce
activities.

Our products are delivered through a variety of distribution channels,
including sales to public schools, speech and language professionals in private
practice and direct-to-consumer channels, such as the Internet. Our Fast ForWord
programs are designed to integrate with school curricula and support educators,
parents and speech and language and other professionals to help children improve
their language and reading skills. As of March 31, 1999, we have sold more than
13,000 copies of Fast ForWord and Fast ForWord Two and have trained more than
3,600 individuals in administering our programs. We have sold our programs in
nearly 300 school districts, including districts in Chicago, Orlando, Las Vegas,
New Orleans, Houston, Detroit and Los Angeles. The majority of our public school
sales have occurred since we formed a dedicated sales force in the fall of 1998.

3
<PAGE>
OUR MARKET

While we believe our products and services can benefit children and adults
of virtually all ages and capabilities, we are currently concentrating on
schools with students in kindergarten through high school, or K-12, in the
United States in order to reach the largest number of children who are learning
to read or need to become better readers. Based on data from the U.S. Department
of Education, we estimate that more than 52.7 million students attend over
110,000 K-12 public and private schools in the United States in the 1998-99
school year. Our initial focus is children between the ages of four and 13.
Based on Bureau of the Census data, there are approximately 40 million children
in this age group. According to the National Institute of Child Health and Human
Development, as much as 40% of the population, or 16,000,000 of these children,
have reading problems. With ten grade levels represented by children between the
ages of four and 13, we estimate that one-tenth of this group, or 1,600,000
children, enter this category each year.

Consistent with our strategy to reach the broadest market, we are developing
and plan to introduce products for improving the reading and language
comprehension skills of adolescents and adults, including those who are
functionally illiterate, have limited English proficiency or suffer from
language loss due to stroke. According to the National Adult Literacy Study
conducted in 1992, more than 40 million adults in the United States are
functionally illiterate. In October 1996, the National Center on Adult Literacy
estimated that among functionally illiterate adults there were 12 to 14 million
non-native English speaking adults living in the United States with limited
proficiency in the English language. According to 1998 National Stroke
Association data, nearly four million people in the United States were living
with the after effects of a stroke.

OUR STRATEGY

Our goal is to establish Scientific Learning as the leading provider of
proprietary software and other education and training products and services
based on neuroscience, the study of how the brain functions. Key elements of our
growth strategy include:

- INTRODUCE ADDITIONAL NEUROSCIENCE-BASED SOFTWARE PRODUCTS AND SERVICES. We
believe our expertise in neuroscience, language learning and technology
positions us well for the successful introduction of new education and
training products and services applicable to children and adults of all
ages and capabilities.

- RAPIDLY EXPAND OUR SALES AND MARKETING EFFORTS. We intend to continue to
hire sales people, implement additional direct-to-consumer e-commerce
capabilities and explore and develop other channels of distribution,
including potential strategic alliances with for-profit educational
companies, day care providers and private schools.

- IMPLEMENT EXPANDED INTERNET STRATEGY. Our current web site,
ScientificLearning.com, will continue as a resource for people using our
products, seeking information about our products or interested in how
language and reading are learned. In addition, in the second quarter of
1999 we will launch BrainConnection.com which will provide the latest
brain research and will make our and other companies' products available
directly to consumers. We believe that BrainConnection.com will
significantly expand our web presence, interactions with consumers and
e-commerce capabilities. To date, all of our Internet and e-commerce
activities are conducted through our ScientificLearning.com web site.

- BUILD A TRUSTED BRAND. We intend to continue to build recognition of our
company and product brands among parents, educators, speech and language
professionals and other professionals and use that recognition to
successfully commercialize other neuroscience-based products.

Please see "Risk Factors" for a discussion of the risks which may restrict
our ability to achieve our growth strategy, including "Risk Factors--Our
business depends on whether we can achieve and maintain market acceptance and
increase the number of programs we commercially introduce and sell,"

4
<PAGE>

"--Any difficulty in penetrating necessary markets could adversely affect our
business" and "--Our business will suffer if we are unable to introduce new
products as scheduled or if new products are unsuccessful."

OUR HISTORY OF LOSSES

We have a history of significant losses. Since our formation in 1995 through
March 31, 1999, we have lost $21.8 million. We anticipate incurring losses in
the foreseeable future which may be significant. Since our formation, the sale
of Fast ForWord programs and related seminars and services has accounted for
substantially all of our revenues and we anticipate that this will continue to
be the case for the foreseeable future. We operate in a highly competitive
market.

THE OFFERING

<TABLE>
<S> <C>
Common stock offered:.................... 2,300,000 shares
Shares outstanding after this 10,341,573 shares (1)
offering:................................
Use of Proceeds.......................... Sales and marketing, research and product
development and other general corporate
purposes. See "How We Intend to Use the
Proceeds from this Offering."
Risk Factors............................. See "Risk Factors" for a discussion of
factors you should carefully consider
before deciding to invest in the shares
of the common stock.
Proposed Nasdaq National Market symbol... SCIL
</TABLE>

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

(1) Based on the number of shares outstanding as of March 31, 1999. Excludes:

- 1,400,306 shares of common stock issuable upon exercise of options and
warrants outstanding as of March 31, 1999 with a weighted average
exercise price of $2.57 per share;

- 763,590 shares of additional common stock reserved for issuance under
our 1999 Equity Incentive Plan;

- 75,000 shares of common stock reserved for issuance under our 1999
Non-Employee Directors' Stock Option Plan; and

- 350,000 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan. See "Management--Employee Benefit Plans,"
"Certain Transactions" and "Description of Capital Stock."

CORPORATE INFORMATION

We are a Delaware corporation. We incorporated in 1995 in California under
the name Scientific Learning Principles Corporation and reincorporated in 1997
in Delaware under our present name. Our principal executive office is located at
1995 University Avenue, Suite 400, Berkeley, California 94704 and our telephone
number is (510) 665-9700. We maintain a World Wide Web site at
www.ScientificLearning.com. The reference to our World Wide Web site does not
constitute incorporation by reference of the information contained at the site.
In this prospectus, the "Company," "Scientific Learning," "we," "us" and "our"
refer to Scientific Learning Corporation but not to the underwriters listed in
this prospectus. In addition, "common stock" refers to our common stock, $0.001
par value per share. See "Description of Capital Stock."

Fast ForWord-Registered Trademark-, Fast ForWord Two-TM-, Language Takes Us
Everywhere-TM-, A Bridge to Reading-TM-, Away We Go!-TM-, Away We Go!
Bookshelf-TM-, ScientificLearning.com-TM-, BrainConnection.com-TM-, the Fast
ForWord logo and the names of products and services we offer are trademarks,
registered trademarks, service marks or registered service marks of Scientific
Learning. This prospectus also includes product names, trade names and
trademarks of other companies that are their property.

5
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................................. $ -- $ 2,962 $ 5,166 $ 647 $ 1,340
Gross profit................................... -- 2,013 3,768 486 1,007
Operating loss................................. (2,611) (5,135) (9,918) (1,768) (3,625)
Net loss....................................... (2,497) (5,058) (10,748) (1,748) (3,537)
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------
AS ADJUSTED
ACTUAL (1)
--------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 7,249 $ 38,434
Working capital (deficit)............................ 5,003 36,188
Total assets......................................... 10,421 41,606
Long-term debt, including current portion............ 319 319
Redeemable convertible preferred stock............... 23,836 --
Stockholders' equity (deficit) (2)................... (17,393) 37,628
</TABLE>

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

(1) As adjusted to reflect our sale of 2,300,000 shares of common stock at an
assumed initial public offering price of $15.00 per share after deducting
the underwriting discount and estimated offering expenses and the
application of the estimated net proceeds from this sale and the conversion
of outstanding preferred stock into 5,232,146 shares of common stock upon
completion of this offering. See "How We Intend to Use the Proceeds from
this Offering" and "Capitalization."

(2) We have paid no cash dividends since our inception.

6
<PAGE>
RISK FACTORS

INVESTING IN OUR COMMON STOCK WILL PROVIDE YOU WITH AN EQUITY OWNERSHIP
INTEREST IN SCIENTIFIC LEARNING CORPORATION. AS A STOCKHOLDER, YOUR INVESTMENT
MAY BE SUBJECT TO RISKS INHERENT IN OUR BUSINESS. THE PERFORMANCE OF YOUR SHARES
WILL REFLECT THE PERFORMANCE OF OUR BUSINESS RELATIVE TO, AMONG OTHER THINGS,
OUR COMPETITION, GENERAL ECONOMIC AND MARKET CONDITIONS AND INDUSTRY CONDITIONS.
THE VALUE OF YOUR INVESTMENT MAY INCREASE OR DECLINE AND COULD RESULT IN A LOSS.
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AS WELL AS OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN SHARES OF THE COMMON
STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY AND ADVERSELY AFFECTED.
IN SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU MAY
LOSE ALL OR PART OF YOUR INVESTMENT.

WE RELY PRIMARILY ON A SINGLE FAMILY OF PRODUCTS AND ANY FAILURE TO INCREASE OUR
SALES OF THE FAST FORWORD FAMILY OF PRODUCTS COULD CAUSE OUR BUSINESS TO SUFFER

Since our formation, the sale and servicing of our Fast ForWord family of
products has accounted for substantially all of our revenues. We anticipate that
this will continue to be the case for the foreseeable future. Our business will
suffer if we are unable to increase our sales of the Fast ForWord family of
products.

WE ONLY HAVE A LIMITED HISTORY UPON WHICH YOU CAN GAUGE THE SUCCESS OF THE FAST
FORWORD FAMILY OF PRODUCTS

We only recently expanded our Fast ForWord family of products beyond Fast
ForWord, through the introduction of Fast ForWord Two. Consequently, we only
have a limited history upon which you can gauge the success of the Fast ForWord
family of products. We also have not yet introduced other product line
extensions planned for Fast ForWord. We cannot assure you that our Fast ForWord
family of products will receive the same or greater level of commercial
acceptance as Fast ForWord.

OUR BUSINESS DEPENDS ON WHETHER WE CAN ACHIEVE AND MAINTAIN MARKET ACCEPTANCE
AND INCREASE THE NUMBER OF PROGRAMS WE COMMERCIALLY INTRODUCE AND SELL

Our future success depends on acceptance of the Fast ForWord family of
products and our other products by public schools, administrators, educators,
parents and speech and language and other professionals. Sales of our products
depend on many factors, including:

- our ability to incorporate our products into traditional school programs;

- the willingness of educators and speech and language and other
professionals to adopt new teaching and training methods;

- the cost of our programs compared to other available programs;

- the availability of government funding;

- competitive developments;

- our ability to continue to demonstrate the efficacy and acceptance of our
products;

- our ability to adapt to evolving technology and standards; and

- the public's ability and willingness to use the Internet.

Our business will suffer if we do not achieve and maintain market acceptance
for our existing products or if we fail to increase the number of programs we
commercially introduce and sell.

7
<PAGE>

OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO INTRODUCE NEW PRODUCTS AS SCHEDULED
OR IF NEW PRODUCTS ARE UNSUCCESSFUL

Our future success will significantly depend on whether we are able to
enhance our existing products and develop new products based on our proprietary
technology. While we have four language-learning products scheduled for
commercial launch in the second quarter of 1999 and six more targeted for
commercial launch in the year 2000, we cannot assure you that we will be
successful in developing and marketing these or any other new products or that
we will be able to introduce new products as scheduled. We may not have
sufficient resources to make the investments to develop and market the products
necessary to maintain our competitive position. Our business will suffer if we
are unable to introduce new products as scheduled, or if new products are
unsuccessful.

ANY DIFFICULTY IN PENETRATING NECESSARY MARKETS COULD ADVERSELY AFFECT OUR
BUSINESS

Our target markets include public schools, speech and language professionals
in private practice and direct sales to parents. Any difficulty in penetrating
these markets could adversely affect our business. We began selling Fast ForWord
to public schools in May 1997 and initiated our public schools sales force in
the fall of 1998. We believe that our success in the public school market will
depend largely on the following factors:

- our ability to continue to hire and retain experienced sales personnel;

- convincing educators and other key public school decision-makers to use
our products even though the learning methods required by our products
differ from the way schools have traditionally addressed language and
learning problems; and

- convincing schools and teachers to incorporate our intensive training
programs into their curriculum since our products are generally designed
to be used for 90 to 100 minutes per day, five days per week.

Our ability to penetrate the market of speech and language professionals in
private practice may not occur as quickly or as broadly as we would like, for
the following reasons:

- our programs require use of computers and other technology; and

- we may be unable to convince speech and language professionals that our
programs are a tool that can be used in their practice and will enable
them to supervise multiple clients at a time.

We also have had limited experience selling our products directly to parents
and may have difficulty doing so for the following reasons:

- we may be unable to develop a remote or at-home course delivered by video,
CD Rom and/or the Internet to train parents in supervising and
administering our products; and

- our ability to sell programs to parents and other private customers
depends upon word-of-mouth referrals which could take considerable time to
develop.

OUR QUARTERLY OPERATING RESULTS ARE SUSCEPTIBLE TO FLUCTUATIONS WHICH COULD
CAUSE OUR STOCK PRICE TO DECLINE

Since our formation, our quarterly operating results have fluctuated
significantly. For example, our operating revenues for the fiscal quarter
commencing March 31, 1998 were approximately $647,000 and our operating revenues
for the fiscal quarter commencing March 31, 1999 were approximately $1,340,000.
We expect these fluctuations to continue for a number of reasons, including
factors described elsewhere in this "Risk Factors" section of the prospectus.
One reason we expect quarterly

8
<PAGE>

operating results to fluctuate is the long sales cycle for our products, which
is the result of many factors, including the following:

- the nature of our products requires us to provide a significant level of
education to prospective educators, parents and speech and language and
other professionals regarding the use and benefits of our programs and
services;

- prospective purchasers need to consider that our programs involve a
significant commitment of time and resources;

- sales to schools are subject to budgeting constraints, which may require
schools to find available discretionary funds, obtain grants or wait until
subsequent budget cycles; and

- school-wide or district-wide sales can require multiple levels of
approval.

An additional reason we expect our quarterly operating results to fluctuate
is that demand for our programs and services is subject to seasonal influences.
We believe that demand for our programs from speech and language professionals
in private practice will be lower during the school year than in the summer,
because the intensive nature of Fast ForWord is more conducive to training
during school vacation. We also believe we will experience seasonality in the
public school market due to public school calendars and budget cycles. We do not
have sufficient operating experience to predict the overall effect of various
seasonal factors and their effect on future quarterly operating results.

Any significant shortfall of revenues in relation to our expectations could
cause significant fluctuations in quarterly operating results, and our stock
price could suffer. Prediction of future revenues and expenses is difficult
because of our limited operating history and the emerging nature of our market.
Our expense levels are based on our expectations of future revenues and are
primarily fixed in the short term. We cannot guarantee that we will be able to
predict our future revenues accurately or that we will be able to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall.

WE HAVE GENERATED LIMITED REVENUES TO DATE AND HAVE A HISTORY OF OPERATING
LOSSES

We started operations in February 1996 and began generating revenues in the
first quarter of 1997. Because we have generated limited revenues to date, we
have incurred significant operating losses and negative cash flow since
inception. Our net operating losses were approximately $2.5 million for the year
ended December 31, 1996, $5.1 million for the year ended December 31, 1997,
$10.7 million for the year ended December 31, 1998 and $3.5 million for the
quarter ended March 31, 1999. Our cash flows used in operating activities were
approximately $1.7 million for the year ended December 31, 1996, $4.0 million
for the year ended December 31, 1997, $6.8 million for the year ended December
31, 1998 and $3.7 million for the quarter ended March 31, 1999. We have an
accumulated deficit of approximately $21.8 million from inception through March
31, 1999.

WE EXPECT TO INCUR ADDITIONAL LOSSES FOR AT LEAST THE NEXT 18 MONTHS

We expect to incur additional losses for at least the next 18 months,
because of substantial increases in sales and marketing and research and
development expenses. We cannot assure you that our cash resources after this
offering will be sufficient to fund our negative cash flow and expected capital
expenditures for this period.

WE CANNOT GUARANTEE THAT WE WILL EVER GENERATE SUFFICIENT REVENUES TO ACHIEVE OR
SUSTAIN PROFITABILITY

We cannot guarantee that we will ever generate sufficient revenues to
achieve or sustain profitability or generate positive cash flow. As a result, we
may need to obtain additional equity or debt financing in the future, which may
not be available on acceptable terms, if at all.

9
<PAGE>

OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR CURRENT
BUSINESS AND PROSPECTS

It is difficult for us to evaluate our current business and prospects
because we have a limited operating history of approximately three years and
limited experience penetrating necessary markets and selling our products.
Companies with limited operating histories, including ours, encounter high risks
and uncertainties, particularly in new and rapidly evolving markets such as
technology-based educational products and services. These risks include, but are
not limited to, (1) uncertain demand for technology-based learning products and
our products and services in particular; (2) attracting and retaining key
personnel and managing growth; (3) failure to select an appropriate growth
strategy; (4) institutions or other barriers that hinder our ability to
penetrate our target markets; and (5) competition. To address these risks, we
must, among other things:

- successfully gain market acceptance for our Fast ForWord family of
products, particularly in the public school market;

- successfully introduce and gain market acceptance for related new products
and services;

- respond to competitive developments and execute our growth strategy;

- attract, integrate, retain and motivate qualified personnel, particularly
sales and marketing professionals; and

- address new or evolving technologies and standards.

We cannot assure you that we will be successful in addressing the risks we
face and our failure to address those risks will materially and adversely affect
our business and financial condition.

OUR BUSINESS WILL SUFFER IF CUSTOMERS DELAY OR FOREGO PURCHASES OF OUR PRODUCTS
BECAUSE OF OUR PRODUCT ENHANCEMENTS OR NEW PRODUCTS OR BECAUSE OF COMPETITORS'
SUPERIOR PRODUCTS

The demand for our existing products may be reduced or eliminated by our own
enhancements or new products and any resulting loss of revenues from our
existing products may not be adequately offset by the revenues generated from
our enhancements or new products. Customers may also delay their purchases of
our products in anticipation of the release of our product enhancements or new
products. Finally, products introduced by our competitors may be superior to the
products we offer and reduce the demand for our products. Our business will
suffer if customers delay or forego purchases of our products because of our own
enhancements or new products or because of our competitors' products.

OUR REVENUES DEPEND ON GOVERNMENT FUNDING AVAILABLE TO PUBLIC SCHOOLS AND ANY
SUBSTANTIAL DELAYS OR REDUCTIONS IN GOVERNMENT BUDGETS OR FUNDING FOR
EDUCATIONAL SOFTWARE OR TECHNOLOGY WOULD HARM OUR BUSINESS

To date, we have generated limited revenues from sales to public schools.
However, our future revenues will depend, in part, on our ability to increase
revenues from public schools. This, in turn, depends largely on federal, state
and local government funding. Federal funding for educational technology is
available primarily through legislation, including Title I of the Elementary and
Secondary Education Act of 1965, the Individuals with Disabilities Education
Act, Goals 2000, Technology Literacy Challenge Grants and the education rate
discount authorized by the Telecommunications Act of 1996. Many states have
enacted similar legislation. Substantial delays or reductions in government
budgets or funding for educational software or technology would have a material
adverse effect on our business and financial condition.

10
<PAGE>

WE ARE GROWING RAPIDLY AND MAY BE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH

We have recently experienced a period of significant expansion. We have
grown from five employees at March 31, 1996 to 139 full-time and 24 part-time
employees at March 31, 1999. Our historical growth has placed, and any further
growth will place, a significant strain on our managerial, operational,
financial and other resources. Our future success will depend, in part, upon
whether our senior management can manage growth effectively. This will require
us to implement additional management information systems and to develop
additional operating, administrative, financial and accounting systems and
controls. We will also have to maintain close coordination among our accounting,
finance, marketing, sales, customer support and professional service
organizations. If we are unsuccessful in managing growth, our business and
financial condition will be materially and adversely affected.

WE RELY ON OUR INTELLECTUAL PROPERTY RIGHTS AND MAY BE UNABLE TO PROTECT THESE
RIGHTS

Our ability to compete effectively will depend in part on whether we are
able to develop and maintain the proprietary aspects of our technology and to
operate without infringing on the proprietary rights of others. We rely on a
combination of patents, trademarks, copyrights, trade secret laws,
confidentiality procedures and contractual provisions to protect our proprietary
rights in our products and technology. We have filed patent applications in the
United States and internationally relating to our technology, including, as of
March 31, 1999, 38 applications with the U. S. Patent and Trademark Office, or
USPTO. We cannot assure you that additional pending patent applications will
result in the issuance of any patents or that any issued patents will offer
protection against competitors with similar technology. In addition, any patents
issued to us or our licensors could be challenged, invalidated or circumvented
in the future.

As a patent holder, it is possible we may become subject to patent
infringement claims and litigation or interference proceedings conducted in the
USPTO to determine the priority of inventions. The defense and prosecution of
intellectual property suits, USPTO interference proceedings and related legal
and administrative proceedings are both costly and time consuming.

Litigation may be necessary to enforce patents issued to us, to protect
trade secrets or know-how that we own or to determine the enforceability, scope
and validity of the proprietary rights of others. Any litigation or interference
proceedings will result in substantial expense and significant diversion of
effort by our technical and management personnel. An adverse determination in
litigation or interference proceedings to which we may become a party could
subject us to significant liabilities to third parties or require us to seek
licenses from third parties which may not be available on commercially
reasonable terms or at all.

FAILURE TO MAINTAIN OUR EXCLUSIVE LICENSE COVERING THE BASIC SPEECH AND SOUND
MODIFICATION ALGORITHMS IN OUR PRODUCTS COULD DELAY OUR INTRODUCTION OF NEW
PRODUCTS

We are the exclusive licensee of the technology owned by The Regents of the
University of California ("The Regents") and Rutgers, the State University of
New Jersey ("Rutgers") which is the subject of a patent issued in September
1998, covering the basic speech and sound modification algorithms used in our
programs. We obtained this license under a licensing agreement with The Regents.

If we lose or are unable to maintain the license agreement, this could delay
our introduction of new products and would require the recall of our products
from the market. Even if we could identify and license technology equivalent to
the technology covered by the license agreement, developing and integrating
alternative technology would likely delay our product line.

11
<PAGE>
The Regents may terminate the license agreement if we fail to perform or
violate its terms without curing the violation within 60 days of receiving
written notice of the violation. For example, The Regents could terminate the
agreement if we fail to perform any of the following obligations:

- make royalty and milestone payments;

- provide periodic progress reports;

- prepare, file and prosecute U.S. and foreign patent applications;

- provide indemnification;

- insure our activities in connection with work under the agreement; and

- maintain the confidentiality of information received from The Regents
relating to the agreement.

WE COULD LOSE REVENUES AS A RESULT OF SOFTWARE ERRORS OR DEFECTS

Software programs frequently contain errors or defects, especially when
first introduced or when new versions are released. We could, in the future,
lose revenues as a result of software errors or defects. We cannot assure you
that errors will not be found in new products or releases, even though products
are tested prior to release. Any errors could result in loss of revenue or delay
in market introduction or acceptance, diversion of development resources, damage
to our reputation or increased service and warranty costs.

OUR REFUND POLICY COULD ADVERSELY AFFECT OUR REVENUES AND FINANCIAL CONDITION

We have adopted a refund policy under which we provide a refund if a child's
performance on Fast ForWord products indicates (based on criteria we set forth
in the policy) that the program is too difficult or too easy for the child. In
the school setting, the school is entitled to enroll a new child in the program,
rather than receive a refund. We cannot guarantee that the policy will not have
a material adverse effect in the future on our business and financial condition.

WE COULD BE SUBJECT TO PRODUCT AND PROFESSIONAL LIABILITY CLAIMS FROM THE SALE
OF OUR PRODUCTS AND SERVICES

Because we market products to the public we face an inherent business risk
of financial exposure to product liability claims. In addition, to the extent we
provide professional or similar services, we may also face a risk of exposure to
professional liability claims. We currently carry product and professional
liability insurance that, in general, covers product and professional liability
claims up to the policy limits. We cannot assure you that we will continue to
have access to this insurance at a reasonable cost, if at all, or that the
insurance will be adequate to satisfy any liability or litigation expenses. Any
claim or claims against us, regardless of their merit or eventual outcome, could
materially and adversely affect our business.

THERE IS ACADEMIC DEBATE REGARDING THE SCIENTIFIC BASIS UNDERLYING OUR PRODUCTS
WHICH COULD SIGNIFICANTLY AFFECT THE MARKET FOR OUR PROGRAMS AND SERVICES

Our Fast ForWord family of products is based on particular theories of
neuroscience, the study of how the brain functions, and theories of language
acquisition. Our founders are actively involved in academic debate about their
own and opposing scientific theories of neuroscience and language acquisition.
As a result, the theories on which the Fast ForWord family of products are based
have been, and are likely to be, subject to public debate and challenges.
Although we believe that the Fast ForWord family of products is based primarily
upon non-controversial scientific theories, some of the principles and
methodologies underlying and associated with our products are opposed by some
academicians and educators, any of whom could influence the market for our
products and services.

12
<PAGE>
Consequently, academic publications and debate challenging the theories of
neuroscience and language acquisition propounded by the founders and others
could adversely affect the market for our products and services.

OUR BUSINESS WILL SUFFER IF INTERNET USE FAILS TO DEVELOP WITHIN SCHOOLS AND
AMONG SPEECH AND LANGUAGE PROFESSIONALS IN PRIVATE PRACTICE

One of the key features of the Fast ForWord family of products is its daily
uploading and downloading of information to and from our proprietary database
via the Internet. If the use of the Internet, particularly within schools and
among speech and language professionals in private practice, fails to develop or
develops more slowly than expected, our business will suffer.

ANY DELAYS OR MALFUNCTIONS OF THE INTERNET ON WHICH WE RELY FOR THE EFFECTIVE
FUNCTIONING OF OUR PRODUCTS AND THE GENERATION OF OUR REVENUE STREAMS COULD
ADVERSELY AFFECT OUR BUSINESS

We depend on technology, particularly on the Internet, for the effective
functioning of our products. One of the key features of the Fast ForWord family
of products is its daily uploading and downloading of information to and from
our proprietary database via the Internet. Additionally, the revenues we expect
to generate from electronic commerce depend on the availability of the Internet.
If commercially available browsers fail to provide access to the Internet due to
unexpected user demand or other delays or malfunctions, access to our
ScientificLearning.com and BrainConnection.com web sites, or other web sites we
develop or launch, could be harmed. Internet performance or reliability
problems, including those resulting from the "Year 2000 Problem," could
adversely affect our business.

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THE EDUCATIONAL TECHNOLOGY MARKET

The educational technology market in which we operate is very competitive.
We compete primarily with providers of traditional methods of remediation for
language and reading problems, which typically require several years of
one-on-one training for children with identified language and reading problems.
In addition, we compete to some extent with other companies offering educational
software products and reading and language skill building programs to schools
and to speech and language professionals in private practice. Existing
competitors may continue to broaden their product lines, and potential
competitors, including large software developers and educational publishers, may
enter or increase their focus on the school market. Moreover, we expect that we
will face additional competition from new entrants into the market. Many
competitors have substantially greater technical, marketing and distribution
resources than we do. We cannot assure you that we will continue to be able to
compete effectively in the educational technology market.

IF WE FAIL TO RETAIN OUR KEY PERSONNEL OR ATTRACT AND RETAIN KEY EMPLOYEES, OUR
BUSINESS WILL SUFFER

Our success depends to a significant extent upon the continued active
participation of key members of our management, including those identified in
the Management section of this prospectus. The loss of one or more of these
persons could have a material adverse effect on our business, financial
condition and results of operations. We believe that our future success will
depend upon our ability to continue to attract, motivate and retain highly
skilled managerial, sales and marketing and product development personnel.
Competition for such personnel is intense. Our failure in attracting or
retaining the necessary personnel could materially and adversely affect our
business.

WE FACE A NUMBER OF RISKS ASSOCIATED WITH TRYING TO BECOME YEAR 2000 COMPLIANT

Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs would not properly recognize a year that begins
with "20" instead of "19." This, in turn, could result in major system failures
or miscalculations that could disrupt our business. Although we believe that our
products and internal systems are compliant, we utilize third-party equipment
and software that may not be compliant. If any third-party equipment or software
is not Year 2000 compliant, we may have to

13
<PAGE>
incur unanticipated expenses to remedy any problems. Year 2000 compliance issues
could also affect the purchasing patterns of existing or potential customers as
educational institutions expend significant resources to correct their current
systems for compliance. These expenditures may result in reduced funds available
to purchase our products and services.

WE ARE SUBJECT TO GOVERNMENT REGULATIONS THAT COULD IMPOSE ADDITIONAL COSTS ON
THE CONDUCT OF OUR BUSINESS

Our business is potentially subject to or affected by a variety of federal,
state and local laws and regulations. These include, without limitation, laws
and regulations relating to:

- education;

- licensing of speech and language professionals in private practice and
delivery of speech and language testing and remediation services;

- consumer protection and anti-fraud and related protections, including the
regulation of referrals by professionals;

- laws regulating distributors or franchisers to the extent that we grant
any distribution territory or franchise to any person or entity; and

- government funding.

Compliance with these and other laws and regulations impose additional costs on
the conduct of our business, and failure to comply with these laws and
regulations, changes in these laws and regulations, or in their applicability to
our business may impose additional costs.

Although we believe our existing products are educational training tools not
subject to regulation by the U.S. Food and Drug Administration, we cannot assure
you that the U.S. Food and Drug Administration will not make a contrary
determination in the future with respect to other products under development or
to our existing products. Our business could suffer in the event we became
subject to such regulation.

OUR EXECUTIVE OFFICERS AND DIRECTORS AND THEIR AFFILIATES EFFECTIVELY CONTROL
THE VOTING POWER OF OUR COMPANY

Following the completion of this offering, our executive officers and
directors and their respective affiliates will beneficially own approximately
65.1% of the outstanding common stock (63.1% if the underwriters exercise their
over-allotment option in full). As a result, these stockholders, by acting in
concert, will be able to exercise significant influence over all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. This concentration of ownership may also
delay, prevent or deter a change in control of our company. In addition, we may
be required after this offering to nominate up to two individuals affiliated
with Warburg, Pincus Ventures, L.P. for election to the Board of Directors which
could increase the influence of Warburg, Pincus Ventures, L.P. over the
direction of our company.

THE MARKET PRICE OF OUR STOCK MAY BE HIGHLY VOLATILE

The market price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations for the following reasons, among others:

- the fluctuation of our quarterly results for reasons including the
seasonal demand for our products and our long sales cycle;

- the release of (or the failure to release) product enhancements or new
products;

- the timing of our competitors' product releases;

14
<PAGE>

- conditions in the economy that affect the resources available to schools,
speech and language professionals, and private parties to purchase our
products;

- publicity regarding our products or those of our competitors, including
publicity relating to new scientific studies about how the brain
functions;

- general economic conditions that influence stockholder interest in stocks
of companies with Internet or technology applications; and

- the application of new laws and regulations affecting us or the
educational technology industry.

- in response to the timing of our future product releases, if any;

- variations in our annual or quarterly financial results or those of our
competitors;

- changes by financial research analysts in their estimates of our future
earnings;

- conditions in the economy in general or in our industry in particular; and

- unfavorable publicity or changes in applicable laws and regulations
affecting us or the educational technology industry.

WE MAY BE SUBJECT TO LITIGATION IF OUR STOCK PRICE IS VOLATILE

Broad market fluctuations or a downturn in our competitive prospects may
adversely affect the market price of our common stock and result in class action
litigation. This litigation could result in substantial costs and would, at a
minimum, divert our management's attention and resources, which could materially
and adversely affect our business. Any adverse determination in this litigation
could also subject us to significant liabilities.

SALES OF OUR SHARES AFTER THIS OFFERING COULD NEGATIVELY AFFECT THE MARKET PRICE
OF OUR STOCK AND RESULT IN FURTHER DILUTION

Sales of substantial amounts of shares in the public market following this
offering could have a material adverse effect on the market price of our common
stock. Immediately following this offering, we will have 10,341,573 shares of
common stock outstanding assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants after
March 31, 1999. Of these shares, all the shares sold in this offering will be
freely tradable without restrictions or further registration under the
Securities Act of 1933. The remaining 8,041,573 shares of common stock will be
restricted securities as defined by Rule 144 adopted under the Securities Act of
1933. These shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 or Rule 701
adopted under the Securities Act of 1933. We cannot predict the effect that
future sales made under Rule 144, Rule 701 or otherwise will have on the market
price of our common stock.

In addition, following closing of this offering we intend to register shares
of common stock issuable upon the exercise of stock options granted under our
stock option plans. After the effective date of this registration, shares issued
upon the exercise of stock options generally will be available for sale in the
public market. Our executive officers and directors and stockholders
beneficially owning in the aggregate 7,992,457 shares of common stock as of
April 30, 1999 have agreed, subject to certain limited exceptions, not to offer,
sell, contract to sell, grant any option to purchase or otherwise dispose of any
shares of common stock, without the prior written consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") for a period of 180 days
after the first day any of the common stock to be sold in this offering is
released by the underwriters for sale to the public. Any shares subject to these
lock-up agreements may be released at any time by Merrill Lynch, with or without
notice. The holders of approximately 4,285,711 shares of common stock are
entitled to register their shares.

15
<PAGE>
OUR CHARTER PROVISIONS COULD HAVE THE EFFECT OF DELAYING OR PREVENTING CORPORATE
TAKEOVERS

Our certificate of incorporation authorizes our board of directors to issue
up to 1,000,000 shares of preferred stock and to determine the price, rights,
preferences and privileges, including voting rights, of those shares without any
further vote or action by the stockholders. The rights of the holders of common
stock will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The authority
to issue this preferred stock could enable our board of directors to deter
acquisitions of our company. Additionally, our certificate of incorporation and
bylaws also contain the following features which could have the effect of
delaying or preventing corporate takeovers:

- a board of directors classified into three classes, which makes it more
difficult to acquire immediate control of our board of directors because
only one third of the directors are elected each year;

- requiring stockholder actions to occur only at duly called meetings of the
stockholders, thereby reducing the ability of the stockholders to act
contrary to the interests of the board of directors;

- disallowing cumulative voting in the election of directors, which means
that the majority owner(s) of our voting common stock controls the
election of all directors; and

- requiring advance notice from stockholders for director nominations or
other stockholder proposals.

OUR MANAGEMENT HAS BROAD DISCRETION TO DETERMINE HOW TO USE THE FUNDS RAISED IN
THIS OFFERING AND MAY USE THEM IN WAYS THAT STOCKHOLDERS MAY NOT DEEM DESIRABLE

We plan to substantially increase sales and marketing expenses and research
and development expenses, which are expected to be funded in part by gross
profits and in part by use of a portion of the net proceeds of this offering.
The actual amount and timing of these expenditures will depend on business and
market developments. The remaining net proceeds have not been allocated for a
particular purpose. We intend to use the remaining net proceeds for general
corporate purposes, including working capital. As a result, our management will
have significant discretion as to the use of the net proceeds of this offering.
These proceeds may be applied to uses stockholders may not deem desirable.

YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS

This prospectus contains forward-looking statements. In some cases you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or continue or the negative of these terms or other
comparable terminology. The outcome of the events described in these
forward-looking statements is subject to known and unknown risks and you should
not rely on these forward-looking statements. These risks include, among other
things, those identified in this "Risk Factors" section of this prospectus. Our
actual results could differ materially from those discussed in the
forward-looking statements contained in this prospectus. We also undertake no
obligation to publicly update any forward-looking statement and the
forward-looking events discussed in this prospectus could change or might not
occur. This section and the sections entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
contain a discussion of some of the factors that could contribute to those
differences.

16
<PAGE>
HOW WE INTEND TO USE THE PROCEEDS FROM THIS OFFERING

The net proceeds from the sale of the 2,300,000 shares of common stock we
are offering, at an assumed initial public offering price of $15.00 per share,
are estimated to be approximately $31,185,000 ($35,998,000 if the underwriters'
over-allotment option is exercised in full), after deducting the underwriting
discount and estimated offering expenses that we will pay.

We expect to use the net proceeds of this offering for sales and marketing,
research and product development and other general corporate purposes. The
actual amount and timing of such expenditures will depend on business and market
developments, including those discussed under "Risk Factors." Pending such uses,
the net proceeds of this offering will be invested in short-term,
interest-bearing, investment grade securities.

DIVIDEND POLICY

We have never paid cash dividends and do not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay dividends
will be at the discretion of our board of directors and will be dependent upon
then existing conditions, including our financial condition, results of
operations, contractual restrictions, capital requirements, business prospects
and other factors our board of directors deems relevant. Furthermore, our bank
line of credit restricts the payment of dividends without the bank's prior
written consent.

17
<PAGE>
CAPITALIZATION

The following table sets forth our capitalization as of March 31, 1999, on
an actual basis and as adjusted to reflect: (i) our sale of the 2,300,000 shares
of common stock offered hereby at an assumed initial public offering price of
$15.00 per share after deducting the underwriting discount and estimated
offering expenses, and the application of the estimated net proceeds therefrom;
and (ii) the conversion of all outstanding shares of preferred stock into common
stock upon completion of this offering. This table should be read in conjunction
with the Financial Statements and Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
(IN THOUSANDS)
Long-term debt, including current portion................................................ $ 319 $ 319
Redeemable convertible preferred stock, $0.001 par value per share; 8,046,668 shares
authorized; 4,285,711 shares issued and outstanding actual, no shares issued and
outstanding as adjusted................................................................ 23,836 --
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value per share; 10,346,668 shares authorized
(including 8,046,668 shares designated as redeemable convertible preferred stock);
946,435 shares issued and outstanding actual; 1,000,000 shares authorized, no shares
issued and outstanding as adjusted..................................................... 2,355 --
Common stock, $0.001 par value per share; 37,346,668 shares authorized; 2,809,427 shares
issued and outstanding actual; 40,000,000 shares authorized, 10,341,573 shares issued
and outstanding as adjusted (1)........................................................ 3,504 60,880
Deferred compensation (2)................................................................ (1,412) (1,412)
Accumulated deficit...................................................................... (21,840) (21,840)
---------- -----------
Total stockholders' equity (deficit)................................................. (17,393) 37,628
---------- -----------
Total capitalization............................................................... $ 6,762 $ 37,947
---------- -----------
---------- -----------
</TABLE>

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

(1) Based on the number of shares outstanding as of March 31, 1999. Excludes:

- 1,400,306 shares of common stock issuable upon exercise of options and
warrants outstanding as of March 31, 1999 with a weighted average exercise
price of $2.57 per share;

- 763,590 shares of additional common stock reserved for issuance under our
1999 Equity Incentive Plan;

- 75,000 shares of common stock reserved for issuance under our 1999
Non-Employee Directors' Stock Option Plan; and

(2) See Note 5 of Notes to the Financial Statements included elsewhere in this
prospectus.

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<PAGE>
DILUTION

The pro forma net tangible book value at March 31, 1999 was approximately
$6,443,000 or $0.80 per share of common stock. Pro forma net tangible book value
per share represents the amount of our total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding after
giving effect to the automatic conversion of all outstanding shares of preferred
stock into an aggregate of 5,232,146 shares of common stock. After giving effect
to the sale of the 2,300,000 shares of common stock offered in this offering at
an assumed initial public offering price of $15.00 per share after deducting the
underwriting discount and estimated offering expenses we pay and applying the
estimated net proceeds from this offering, our adjusted net tangible book value
as of March 31, 1999 would have been approximately $37,628,000 or $3.64 per
share of common stock. This represents an immediate increase in net tangible
book value of $2.84 per share of common stock to existing stockholders and an
immediate dilution in net tangible book value of $11.36 per share to new
investors purchasing shares at the assumed initial public offering price. The
following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price................................ $ 15.00
Pro forma net tangible book value (deficit) per share.............. $ 0.80
Increase per share attributable to new investors................... 2.84
---------
Net tangible book value per share, as adjusted for this offering..... 3.64
---------
Dilution per share to new investors.................................. $ 11.36
---------
---------
</TABLE>

The following table summarizes as of March 31, 1999, on the pro forma basis
described above, the number of shares of common stock sold by us, the total
consideration paid and the average price per share paid by the existing
stockholders and by the new investors (at an assumed initial public offering
price of $15.00 per share for shares purchased in this offering, before
deducting the underwriting discount and estimated offering expenses):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
------------ ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................ 8,041,573 77.8% $ 27,174,000 44.1% $ 3.38
New investors.................................... 2,300,000 22.2% 34,500,000 55.9% $ 15.00
------------ ----- ------------- -----
Total............................................ 10,341,573 100.0% $ 61,674,000 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>

The foregoing table assumes no exercise of outstanding stock options and
warrants and excludes: (1) 1,400,306 shares of common stock issuable upon
exercise of options and warrants outstanding as of March 31, 1999 with a
weighted average exercise price of $2.57 per share; (2) 763,590 additional
shares of common stock reserved for issuance under our 1999 Equity Incentive
Plan; (3) 75,000 shares of common stock reserved for issuance under our 1999
Non-Employee Directors' Stock Option Plan; and (4) 350,000 shares of Common
Stock reserved for issuance under our 1999 Employee Stock Purchase Plan. See
"Capitalization," "Management--Employee Benefit Plans," "Certain Transactions"
and "Description of Capital Stock." To the extent that options or warrants are
exercised, there will be further dilution to new investors.

19
<PAGE>
SELECTED FINANCIAL DATA

The following table sets forth selected historical financial data as of and
for the years ended December 31, 1996, 1997 and 1998 and the three months ended
March 31, 1998 and 1999. The statement of operations data for the years ended
December 31, 1996, 1997 and 1998 and the balance sheet data as of December 31,
1997 and 1998 were derived from our Financial Statements that have been audited
by Ernst & Young LLP, independent auditors, and are included elsewhere in this
prospectus and are qualified by reference to these financial statements and the
notes thereto. The balance sheet data as of December 31, 1996 was derived from
audited financial statements not in this prospectus. The historical financial
data as of March 31, 1999 and for the three months ended March 31, 1998 and 1999
were derived from unaudited financial statements included elsewhere in this
prospectus. In the opinion of management, the historical financial data as of
March 31, 1999 and for the three months ended March 31, 1998 and 1999 have been
prepared on the same basis as the audited financial statements and include all
adjusting entries (consisting only of normal recurring adjustments) necessary
for a fair presentation of our financial position and results of operations for
those periods. The historical financial data presented below are not necessarily
indicative of the results of operations that may be expected for the year ending
December 31, 1999 or any other future period. When you read this selected
financial data, it is important that you also read the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Financial
Statements and related Notes appearing elsewhere in this prospectus.

20
<PAGE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Programs.............................................. $ -- $ 2,249 $ 4,462 $ 603 $ 1,076
Services.............................................. -- 713 704 44 264
--------- --------- --------- --------- ---------
Total revenues...................................... -- 2,962 5,166 647 1,340
Cost of revenues:
Programs.............................................. -- 481 784 127 181
Services.............................................. -- 468 614 34 152
--------- --------- --------- --------- ---------
Total cost of revenues.............................. -- 949 1,398 161 333
--------- --------- --------- --------- ---------
Gross profit............................................ -- 2,013 3,768 486 1,007
Operating expenses:
Sales and marketing................................... 164 2,646 6,057 768 2,730
Research and development.............................. 1,514 1,965 2,880 666 762
General and administrative............................ 933 2,537 4,749 820 1,140
--------- --------- --------- --------- ---------
Total operating expenses............................ 2,611 7,148 13,686 2,254 4,632
--------- --------- --------- --------- ---------
Operating loss.......................................... (2,611) (5,135) (9,918) (1,768) (3,625)
Interest income (expense), net.......................... 70 162 (832) 20 88
Other income (expense), net............................. 44 (85) 2 -- --
--------- --------- --------- --------- ---------
Net loss................................................ $ (2,497) $ (5,058) $ (10,748) $ (1,748) ($ 3,537)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic and diluted net loss per share.................... $ (1.02) $ (1.90) $ (3.87) $ (0.64) $ (1.26)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in computing basic and diluted net loss per
share................................................. 2,453 2,657 2,777 2,737 2,805
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma basic and diluted net loss per share (1)...... $ (1.74) $ (0.44)
--------- ---------
--------- ---------
Shares used in computing pro forma net loss per share
(1)................................................... 6,179 8,000
--------- ---------
--------- ---------
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
MARCH 31,
1996 1997 1998 1999
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................... $ 3,822 $ 2,699 $ 6,362 $ 7,249
Working capital............................................... 3,562 1,569 3,543 5,003
Total assets.................................................. 4,306 4,456 9,121 10,421
Long-term debt, including current portion..................... 35 330 417 319
Redeemable convertible preferred stock........................ 4,002 8,002 18,940 23,836
Stockholders' (deficit) (2)................................... (85) (5,064) (14,082) (17,393)
</TABLE>

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

(1) The pro forma net loss per share data gives effect to the conversion of all
outstanding shares of preferred stock into 5,232,146 shares of common stock
upon completion of this offering. See Note 1 of Notes to Financial
Statements included elsewhere in this prospectus for a further explanation
of the number of pro forma shares used in per share calculations.

(2) We have paid no cash dividends since our inception.

21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH "SELECTED FINANCIAL DATA" AND THE
FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, STATEMENTS OF OUR PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. OUR ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THIS PROSPECTUS. FACTORS THAT MAY CAUSE OR
CONTRIBUTE TO SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN "RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.

OVERVIEW

We develop, market and sell proprietary software and other educational
products and services. Our products and services are based on research on how
the brain learns and are designed to increase human learning and performance.
Language and reading skills are the foundation for all learning, and we have
developed products to help children learn how to read or become better readers.
Our Fast ForWord products are intensive, computer-based training programs that
focus on improving critical language and reading skills. Our current products,
Fast ForWord and Fast ForWord Two, focus primarily on the learning needs of
children aged four to 13 and are based on scientific research and have been
field tested using scientific methods. We also offer professional development
seminars in which educators, speech and language professionals and other
professionals can learn about recent developments in brain research and the
practical application of our programs as well as earn continuing education
credit. Our products are delivered through a variety of distribution channels,
including sales to public schools, referrals from speech and language
professionals in private practice and direct-to-consumer channels.

We commenced operations in February 1996, and, until April 1997, we devoted
substantially all of our efforts to developing the Fast ForWord program,
performing a field trial, recruiting and training personnel, establishing
relationships with and training educators and speech and language professionals
and raising capital. Since the commercial launch of Fast ForWord in April 1997,
we have also devoted efforts to sales and marketing activities. We have an
accumulated deficit of $21.8 million from inception through March 31, 1999. We
expect to incur additional losses for at least the next 18 months, due primarily
to substantial increases in sales and marketing related to increased
personnel-related costs and expenditures for travel, advertising, promotion, new
product launches and other activities, and increases in research and development
expenses due to continued increases in product development costs. We expect that
losses will fluctuate from quarter to quarter and that these fluctuations may be
substantial.

REVENUES. We derive revenues from program sales and service fees. Program
revenues are derived from the sale of programs including Fast ForWord and Fast
ForWord Two, which generally list for $850 per child and are typically
discounted for volume sales and in connection with the bundling of different
products. Customers license the right to use our program software during the
program period and do not acquire or otherwise gain unlimited rights to use the
software. The total value of products and services invoiced during a particular
period is recorded as deferred revenues until recognized. Revenues on sales of
our current programs are recognized only upon program activation and then
ratably over the average training period. Service revenues are derived from
training seminars for learning facilitators, from software installation at large
sites such as schools and from services provided to consumers who buy directly
from us. Revenues from services are recognized when the services are provided.
We only recently began offering our programs directly to consumers and revenues
to date have been minimal. Cancellations and refunds are allowed in limited
circumstances, and these amounts have not been significant. Our policy is to
grant refunds or exchanges if the participant exceeds or fails to achieve
specified standards of progress within the first few days of the program. Also,
we allow

22
<PAGE>

refunds and cancellations from time to time due to special circumstances such as
inability to complete training due to illness. Provisions are made for
cancellations and refunds as revenue is recorded.

Our revenues have been derived exclusively from the sale of Fast ForWord
programs and related seminars and services. While we are developing additional
products based upon our proprietary technology and neuroscience expertise, there
can be no assurance that we will be successful in doing so. In addition, to
date, the substantial majority of our sales of Fast ForWord have been through
public schools and speech and language professionals, with the majority of the
public school revenues recorded in the last nine months. Furthermore, due to the
inherent complexity of selling to schools and school districts, we expect that
our sales cycle could be significantly longer than that experienced historically
as we increasingly focus on sales to this market. As a result, we may have
limited visibility on our future revenues, and such revenues may fluctuate
substantially.

COST OF REVENUES. Cost of revenues consists of program costs and service
costs. Program costs consist of costs associated with program sales, including
royalties, manufacturing, packaging, documentation, fulfillment, Internet
hosting and technical support costs. Service costs consist primarily of the
costs of providing training seminars and installations and services to consumers
who buy directly from us, including personnel, materials, facilities and travel.
These costs of revenues are generally recognized as incurred. We generally
recognize significantly higher gross margins on our program revenues than on our
service revenues.

OPERATING EXPENSES. Our operating expenses consist of sales and marketing,
research and development and general and administrative expenses. Sales and
marketing expenses principally consist of salaries and compensation paid to
employees engaged in sales and marketing activities, advertising and promotional
materials, public relations costs and travel. Research and development expenses
principally consist of salaries and compensation paid to employees and
consultants engaged in research and product development activities, product
testing, and software and equipment costs. We expense all software development
costs associated with a product until technological feasibility is established,
after which time all these associated costs are capitalized until the product is
available for commercial release and are amortized over the estimated lives of
the related products. Technological feasibility is deemed established upon
completion of a working version. To date, capitalizable software development
costs have been insignificant and have been charged to research and development
expense. General and administrative expenses principally consist of salaries and
compensation paid to employees and consultants other than those engaged in
research and development and sales and marketing activities, facilities and
related depreciation, in-house and outside legal and accounting fees and related
costs, and travel.

We recorded deferred compensation of $2.1 million during the two years ended
December 31, 1998 and $571,000 during the three months ended March 31, 1999,
representing the difference between the exercise price and the deemed fair value
of certain stock options granted to employees. These amounts are being amortized
by charges to operations over the vesting periods of the individual stock
options. This amortization amounted to $1.0 million for the two years ended
December 31, 1998 and $223,000 for the three months ended March 31, 1999. The
remaining aggregate deferred compensation of $1.4 million will be amortized over
the remainder of the vesting periods of the options (generally five years).

23
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, various financial
data expressed as a percentage of revenues (unless otherwise noted). We
commenced operations, and were in the development stage, in 1996. As a result,
there were no revenues, cost of revenues or gross profits in 1996.

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
-------------------------- --------------------------
1997 1998 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Programs................. 75.9% 86.4% 93.2% 80.3%
Services................. 24.1 13.6 6.8 19.7
------------ ------------ ------------ ------------
Total revenues......... 100.0 100.0 100.0 100.0
Cost of revenues:
Programs (1)............. 21.4 17.6 21.1 16.8
Services (2)............. 65.6 87.2 77.3 57.6
------------ ------------ ------------ ------------
Total cost of
revenues............. 32.0 27.1 24.9 24.9
------------ ------------ ------------ ------------
Gross margin................. 68.0% 72.9% 75.1% 75.1%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>

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

(1) Program costs are expressed as a percentage of program revenues.

(2) Service costs are expressed as a percentage of service revenues.

THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998.

REVENUES. Revenues increased to $1.3 million in the three months ended
March 31, 1999 from $647,000 in the comparable period of 1998, an increase of
107.1%. Program revenues increased to $1.1 million from $603,000, an increase of
78.4%, due to increased program activations in speech and language professional
and public school markets. Services revenues increased to $264,000 from $44,000,
an increase of 500.0%, due to increased revenue from professional development
seminars for both public schools and speech and language professionals in
private practice.

COST OF REVENUES. Cost of revenues increased to $333,000 in the three
months ended March 31, 1999 from $161,000 in the comparable period of 1998, an
increase of 106.8%. As a percentage of revenues, cost of revenues was unchanged
at 24.9%. Cost of program revenues, as a percentage of revenues, declined to
16.8% from 21.1% due to lower royalties and because technical support and
Internet hosting costs declined as a percentage of revenues, reflecting growth
in program volume. Cost of services revenues, as a percentage of revenues,
declined to 57.6% from 77.3%, due to a higher volume of services in the current
period.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$2.7 million in the three months ended March 31, 1999 from $768,000 in the
comparable period in 1998, an increase of 255.5%. This increase was primarily
attributable to increased personnel, marketing and travel costs. We expect to
substantially increase sales and marketing expenses in the future as we increase
marketing efforts for current and future products.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $762,000 in the three months ended March 31, 1999 from $666,000 in
the comparable period in 1998, an increase of 14.4%. This increase was primarily
attributable to increased personnel and contractor costs. We expect to
substantially increase research and development expenses in the future as we
continue to refine current products and develop additional products based upon
our proprietary technology and neuroscience expertise.

24
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $1.1 million in the three months ended March 31, 1999 from $820,000
in the comparable period in 1998, an increase of 39.0%. This increase was
primarily attributable to increased personnel, consulting, legal and travel
costs.

PROVISION FOR INCOME TAXES. We recorded no provision for income taxes in
the quarters ended March 31, 1999 and March 31, 1998 as we incurred losses
during such periods.

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

REVENUES. Revenues increased to $5.2 million in 1998 from $3.0 million in
1997, an increase of 74.4%. Program revenues increased to $4.5 million from $2.2
million, an increase of 98.4%, due to increased program activations in speech
and language professional and public school markets. Services revenues were
$704,000, a slight decrease from $713,000 in the prior year, reflecting a
planned decline in professional development seminars for speech and language
professionals in private practice, offset partially by growth in public school
services revenues.

COST OF REVENUES. Cost of revenues increased to $1.4 million in 1998 from
$949,000 in 1997, an increase of 47.3%. As a percentage of revenues, cost of
revenues declined to 27.1% from 32.0%, due to growth in program revenues as a
percentage of total revenues. Cost of program revenues, as a percentage of
revenues, declined to 17.6% from 21.4%, due to a decline in costs of materials,
technical support and Internet hosting as a percentage of revenues, reflecting
growth in program volume. Cost of services revenues, as a percentage of
revenues, grew to 87.2% from 65.6% in 1997, due to introductory pricing of
professional development and installation services offered to schools.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$6.1 million in 1998 from $2.6 million in 1997, an increase of 128.9%. This
increase was primarily attributable to personnel, advertising and promotion,
travel and public relations costs.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $2.9 million in 1998 from $2.0 million in 1997, an increase of
46.6%. This increase was primarily attributable to increased personnel and to a
lesser extent to consulting, software and equipment-related costs.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $4.7 million in 1998 from $2.5 million in 1997, an increase of
87.2%. This increase was primarily attributable to fees and expenses related to
a proposed initial public offering withdrawn in 1998, personnel, facilities,
legal and travel costs.

INTEREST INCOME (EXPENSE). Interest expense, net of interest income, was
$832,000 in 1998, compared to interest income, net of interest expense, of
$162,000 in 1997. Interest expense in 1998 resulted principally from charges of
$780,000 which represented the fair value of warrants to acquire preferred and
common stock issued to a significant preferred stockholder in connection with a
loan from the stockholder and a bank loan guarantee provided by the stockholder.

PROVISION FOR INCOME TAXES. We recorded no provision for income taxes in
the years ended December 31, 1998 and 1997 as we incurred losses during such
periods. At December 31, 1998, we had net operating loss carryforwards for
federal income tax purposes of approximately $14.0 million. The net operating
loss carryforwards will expire in years 2011 through 2018. Utilization of the
net operating losses may be subject to a substantial annual limitation due to
the ownership change limitations provided by the Internal Revenue Code of 1986.
Previous or contemplated equity transactions may result in such an ownership
change. The annual limitation may result in the expiration of net operating
losses before becoming available to reduce future tax liabilities. We have not
determined whether completion of this offering will result in such an ownership
change. At December 31, 1998, we had

25
<PAGE>
approximately $6.6 million of deferred tax assets, comprised primarily of net
operating loss carryforwards. Realization of deferred tax assets is dependent
upon future earnings, if any, the timing and amount of which are uncertain.
Accordingly, the net deferred tax assets have been fully offset by a valuation
allowance.

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

REVENUES. Revenues were $3.0 million in 1997. Program revenues were $2.2
million following the commercial release of Fast ForWord in April 1997. Services
revenues of $713,000 were primarily attributable to training seminars which were
introduced in January 1997. We were in the development stage during 1996 and did
not have revenues.

COST OF REVENUES. Cost of revenues was $949,000 in 1997 and was primarily
attributable to costs associated with providing training seminars and costs of
the Fast ForWord program. We were in the development stage during 1996 and did
not have revenues or associated costs. As a percentage of program revenues,
program costs were 21.4%. Services costs were 65.6% of services revenue.

SALES AND MARKETING EXPENSES. Sales and marketing expenses were $2.6
million in 1997 consisting primarily of personnel costs, direct mail costs,
public relations costs, telemarketing service costs, advertising and other
promotional materials and services. We were in the development stage during 1996
and did not incur significant sales and marketing expenses.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $2.0 million in 1997 from $1.5 million in 1996, an increase of
29.8%. This increase was primarily attributable to increased personnel and to a
lesser extent to consulting, software and equipment-related costs. Research and
development expenses in 1996 included $554,000 associated with entering into the
University License.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $2.5 million in 1997 from $933,000 in 1996, an increase of 171.9%.
This increase was primarily attributable to personnel costs and facilities costs
related to our move to a new headquarters facility in September 1997.

PROVISION FOR INCOME TAXES. We recorded no provision for income taxes in
the years ended December 31, 1996 and 1997 as it incurred losses during these
periods.

QUARTERLY RESULTS OF OPERATIONS

Our quarterly operating results have varied significantly in the past and
are expected to fluctuate significantly in the future as a result of a variety
of factors, many of which are beyond our control. Factors that may affect our
quarterly operating results include among others:

- the demand for technology-based education and training products;

- the size and timing of product orders and implementation;

- the revenue mix between our products and services;

- the timely development, introduction and market acceptance of our existing
and future products, if any;

- the pricing of our programs and services:

- seasonality in product purchase and usage;

- competitive conditions;

- our ability to attract and retain experienced personnel;

26
<PAGE>
- the availability of government funding for public schools;

- public school calendars and budget cycles;

- the number and timing of Fast ForWord training seminars for educators,
speech and language professionals and other professionals; and

- general economic and market conditions.

We cannot assure you that we will be able to predict our future revenues
accurately, and we may not be able to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall of revenues in relation to our expectations could cause significant
fluctuations in quarterly operating results, which would have an adverse effect
on our business, financial condition and results of operations.

Demand for our programs and services is subject to various seasonal
influences which can vary depending on the distribution channel being employed.
We do not have sufficient operating experience in our various distribution
channels to predict the overall effect of various seasonal factors and their
effect on future quarterly operating results. We believe that, because of the
intensive nature of Fast ForWord, demand for our programs from speech and
language professionals in private practice may be lower during the school year
than in the summer. To the extent we penetrate the public school market, we may
experience seasonality due to public school calendars and budget cycles.

Due to all of the foregoing factors, our quarterly revenues and operating
results are difficult to forecast, and we believe that period-to-period
comparisons of our operating results will not necessarily be meaningful and
should not be relied upon as an indication of future performance.

LIQUIDITY AND CAPITAL RESOURCES

From inception through March 31, 1999, we used approximately $16.2 million
of cash for operating activities, resulting primarily from operating losses of
$21.8 million and increases in accounts receivable of $1.0 million, partially
offset by increases in accounts payable of $630,000, depreciation and
amortization charges of $1.9 million and amortization of deferred compensation
of $1.3 million.

During this same period, we used $2.8 million for investing activities,
consisting principally of the acquisition of computer equipment, furniture and
fixtures. These cash needs have been primarily financed through the sale of
equity securities and borrowings under our existing bank lines of credit. As of
March 31, 1999, we had cash and cash equivalents of $7.2 million.

In June 1998, we obtained a $3.0 million unsecured line of credit with
BankBoston N.A. Borrowings under the line of credit bore interest, at our
election, at the bank's base rate, or the adjusted LIBOR plus 1.75%. Borrowings
under the line of credit were repaid and the line of credit was terminated in
December 1998. There were no available borrowings under any lines of credit as
of March 31, 1999.

We believe that funds generated from operations together with the net
proceeds from this offering and available borrowings will be sufficient to
finance our presently anticipated operating losses, planned capital expenditure
requirements and internal growth for at least the next 18 months. However, we
cannot be certain that our cash resources following this offering will be
sufficient to fund negative cash flow and expected capital expenditures beyond
that period. We therefore may need to obtain additional equity or debt financing
in the future. We may not be able to obtain the additional financing to satisfy
our cash requirements on acceptable terms or at all.

We currently have no significant long-term obligations which extend beyond
18 months except in connection with the lease of our corporate office facility
which requires minimum lease payments of approximately $80,000 per month through
September 2002. See Note 6 of Notes to Financial Statements. During the next 18
months, we may need to expand our corporate office facilities which would
require us to commit to additional lease obligations.

27
<PAGE>
YEAR 2000 ISSUES

Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs would not properly recognize a year that begins
with "20" instead of "19." This, in turn, could result in major system failures
or miscalculations that could disrupt our business. We have formulated a Year
2000, otherwise referred to as Y2K, plan to address our Y2K issues and have
created a Y2K task force headed by our Director of Information Technology to
implement the plan. Our Y2K plan has six phases:

1. Organizational Awareness--educate our employees, senior management
and the board of directors about the Y2K issue;

2. Inventory--complete inventory of internal business systems and their
relative priority to continuing business operations. In addition,
this phase includes a complete inventory of critical vendors,
suppliers and services providers and their Y2K compliance status. Our
products have been Y2K compliant since they were developed and we
will continue to ensure Y2K compliance in future products;

3. Assessment--assessment of internal business systems and the Y2K
compliance status of our important vendors, suppliers and service
providers;

4. Planning--preparing the individual project plans and project teams
and other required internal and external resources to implement the
required solutions for Y2K compliance;

5. Execution--implementation of the solutions and fixes; and

6. Validation--testing the solutions for Y2K compliance.

Our Y2K plan will apply to two areas:

1. Internal business systems and our products; and

2. Compliance by external customers and providers.

INTERNAL BUSINESS SYSTEMS AND OUR PRODUCTS

Our internal business systems and workstation business applications will be
a primary area of focus. Since we began our business in 1996, we have
implemented and will continue to implement new enterprise-wide business
software. These solutions are represented by their vendors as being fully Y2K
compliant. All of our applications were developed after our formation in 1996.
Therefore, we do not have problems with more aged applications that will need to
be evaluated for Y2K compliance.

We completed the inventory, assessment and planning phases of substantially
all critical internal business systems in August 1998. We expect that the
execution and validation phases will be completed by August 31, 1999. We expect
to be Y2K compliant on all critical systems that rely on the calendar year,
before December 31, 1999.

We may not address the Y2K compliance of some non-critical systems until
after January 1, 2000. However, we believe these systems will not cause
significant disruptions in our operations.

Our product lines are already Y2K compliant and no patches will need to be
applied by our customers.

COMPLIANCE BY EXTERNAL PROVIDERS AND CONTRACTORS

We are in the inventory and assessment phases of our Y2K Plan with respect
to suppliers, service providers and contractors to determine the extent to which
our systems are susceptible to those third parties' failure to remedy their own
Y2K issues. We expect that assessment will be complete by

28
<PAGE>
mid-1999. To the extent that responses to Y2K readiness are unsatisfactory, we
intend to change suppliers, service providers or contractors to those that have
demonstrated Y2K readiness. We cannot assure you that we will be successful in
finding such alternative suppliers, service providers and contractors.

RISKS ASSOCIATED WITH Y2K

We believe the major risk associated with the Y2K issue is the ability of
our key business partners and vendors to resolve their own Y2K issues. We will
spend a great deal of time over the next several months working closely with
suppliers and vendors to assure their compliance.

Should a situation occur where a key partner or vendor is unable to resolve
its Y2K issues, we expect to be in a position to change to Y2K compliant
partners and vendors.

COSTS TO ADDRESS Y2K ISSUES

Because we are in the position of implementing new enterprise-wide business
solutions, there are few, if any, Y2K changes required to existing business
applications. We believe that all of the new business applications implemented,
or in the process of being implemented in 1999, are represented as being Y2K
compliant.

We currently believe that the cost of implementing our Y2K plan will not
exceed $500,000 and will not have a material effect on our financial position.

CONTINGENCY PLAN

We have not formulated a contingency plan at this time but expect to have
specific contingency plans in place prior to September 30, 1999.

SUMMARY

We anticipate that the Y2K issue will not have a material adverse effect on
our financial position or results of our operations. We can give no assurance,
however, that the systems of other companies or government entities, on which we
rely for supplies, cash payments and future business, will be timely converted
or that a failure to convert by another company or government entities would not
have a material adverse effect on our business. If third party suppliers,
service providers and contractors, due to Y2K issues, fail to provide us with
components, materials or services that are necessary to deliver our service and
product offerings, our business will suffer.

INTEREST RATE RISK

Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
The risk associated with fluctuating interest expense is limited, however, to
the exposure related to those debt instruments and credit facilities which are
tied to market rates. We do not use derivative financial instruments in our
investment portfolio. We ensure the safety and preservation of our invested
principal funds by limiting default risks, market risk and reinvestment risk. We
mitigate default risk by investing in safe and high-credit quality securities. A
hypothetical increase or decrease in market interest rates by 10% from the
market interest rates at March 31, 1999 would not cause the fair value of our
short-term investments or the interest expense paid with respect to our
outstanding debt instruments to change by a material amount. Declines in
interest rates over time will, however, reduce our interest income while
increases in interest rates over time will increase our interest expense.

29
<PAGE>
BUSINESS

THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN
THIS PROSPECTUS. FACTORS THAT MAY CAUSE OR CONTRIBUTE TO A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," AS WELL AS THOSE
DISCUSSED ELSEWHERE IN THIS PROSPECTUS.

OVERVIEW

We develop, market and sell products and services that are based on brain
research and are designed to increase human learning and performance. To date,
our primary focus has been on the language and reading skills that are the
foundation for learning. We have developed, have field tested and are selling
software to help children learn how to read or become better readers.

Because primary education involves a great deal of oral instruction, a child
with poor language comprehension is likely to have difficulty not only in
reading, but in all areas of learning. Poor oral language comprehension and
subsequent reading problems are often associated with low self esteem and
behavioral problems. Children identified as having the most severe language and
reading problems are often placed in multi-year remediation programs. Children
with less severe problems often go unidentified and their needs go unaddressed.

Our Fast ForWord family of products uses computer-controlled, repetitive
training exercises that automatically adapt to each user's performance to modify
the manner in which the brain processes language. Our initial products, Fast
ForWord and Fast ForWord Two, principally focus on the learning needs of
children aged four to 13. In field studies, 90% of participants identified as
having language or reading difficulties showed statistically significant gains
in language comprehension skills, achieving, on average, one to two years of
improvement in language and reading skills after completion of Fast ForWord
programs in four to eight weeks. Additionally, based on extensive interviews
with parents and educators, children who have completed the Fast ForWord program
are generally reported to have shown substantial improvements in both self
esteem and confidence as their communication skills improve.

THE SCIENTIFIC LEARNING SOLUTION

We combine more than twenty-five years of brain and language research with
the power of technology to create innovative language and reading programs. Our
initial products, which focus primarily on the learning needs of children aged
four to 13, help build the language comprehension skills that are critical to
learning to read or becoming a better reader. We believe that our programs have
applications beyond language and reading problems in children and can be used to
build reading and language comprehension skills in children, adolescents and
adults. Moreover, we believe our products address additional challenges, such as
adult literacy, greater English language proficiency for non-native English
speakers and language reacquisition for individuals who have suffered from a
stroke or other brain injury.

We believe the primary advantages of our products are as follows:

- RESEARCH-BASED PROGRAMS. Our programs are based on more than twenty-five
years of research on how the brain works as well as on language and
reading problems. Many problems children encounter with language and
reading can be attributed to difficulty in understanding oral language,
including distinguishing among phonemes. Phonemes are the smallest units
of sound that affect the meaning of words and are the basic building
blocks of language. We use repetitive computer-based training exercises to
enable a child to build better oral language skills, including the ability
to differentiate among sounds, before teaching the relationship between
letters and sounds. In contrast to traditional exercises, our programs
combine electronically modified speech

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with cross-training in critical language skills. These skills include (1)
vocabulary, (2) grammar, (3) morphology which is the system of word
formation, (4) syntax which is the way in which words are put together to
form phrases, clauses or sentences, (5) semantics which relates to meaning
in language and (6) executive function skills, which are the
organizational skills necessary for thinking such as short-term memory and
determining the sequence of events.

- PROVEN, RAPID AND MEASURABLE RESULTS. We design products that produce
demonstrable results that can be easily measured in scientifically
conducted field trials. Field studies of our Fast ForWord program show
that 90% of participants identified as having language and reading
problems showed statistically significant gains in language comprehension
skills, achieving, on average, one to two years of improvement in language
and reading skills after completion of Fast ForWord programs in four to
eight weeks.

- INTEGRATED APPROACH. We assist educators, parents and speech and language
and other professionals with integrating our programs into existing
educational programs. We provide professional training, installation and
implementation services and technical and other support. Through the
Internet, our programs automatically provide those supervising the
participants with performance tables and templates, enabling them to
establish a baseline analysis and monitor each participant's skill level
on a daily basis.

- EFFECTIVE ALLOCATION OF RESOURCES. We believe that effective use of our
programs in a school's curriculum decreases the number of students who
will subsequently need expensive remedial help, saving scarce education
resources which can be used for other education programs. Moreover, by
enabling educators and speech and language professionals in public schools
to deliver individualized computer training simultaneously to multiple
children, rather than requiring one-on-one instruction, Fast ForWord
programs enable schools to more effectively use resources for remediation
programs.

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PROGRAMS AND SERVICES

A summary of our programs and services currently being offered and those
under development is outlined below:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
TARGET AUDIENCE
----------------
PROGRAM/SERVICE CHILDREN ADULTS DESCRIPTION
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
FAST FORWORD PRODUCT
FAMILY
- -------------------------------------------------------------------------------------------

FAST FORWORD X Intensive, computer-based training program, which
Launch: March 1997 has the look and feel of a computer game. Fast
ForWord is designed to keep children engaged and
entertained during the thousands of repetitions
necessary to improve a child's language skills.
The words and sentences used in these exercises
have been electronically modified to expand and
enhance the rapidly changing phonetic elements
within natural speech. As a child's skill level
advances, the exercises become increasingly
difficult, driving the child to continually
increase his or her rate of oral language
processing. At the most difficult level of each
exercise, the child is presented with natural,
unmodified speech. The exercises also cross-train
the child in other critical language skills and
executive function skills. These skills are
necessary for a solid foundation for learning to
read or becoming a better reader. The program
adjusts to the child's skill level and ongoing
performance so that the child is making correct
responses approximately 80% of the time. This
adjustment is designed to keep the program
challenging and engaging, while allowing the
child to generate a feeling of accomplishment and
to avoid repetitive failure, which can be
discouraging and detrimental to learning.

The Fast ForWord program is designed to be used
for 100 minutes per day, five days a week for
four to eight weeks. Results from each child's
Fast ForWord exercises are uploaded daily via the
Internet to our proprietary database for analysis
and comparison with the child's progress to date.
The Fast ForWord program automatically creates
performance charts and templates in various
discrete learning areas which can be downloaded
through the Internet by those supervising the
children, enabling them to monitor performance.
These charts and templates can also be used by
professionals to provide parents and children
with measurable results of the child's progress.
- ------------------------------------------------------------------------------------------------------
FAST FORWORD TWO X Computer-based training program that helps
Launch: October 1998 children practice and refine the language
comprehension skills they learned in Fast
ForWord, but at the more complex level necessary
for reading. Fast ForWord Two introduces new
skills that are now accessible to children who
have developed basic oral language proficiency.
Fast ForWord Two develops skills that are
critical to reading such as word decoding,
sound-letter recognition and visual tracking.
Word decoding enables a child to build
associations between word sounds, written
representations of words and meaning.
Sound-letter recognition is the ability to
translate letters into spoken words. We believe
that being able to process rapid sound-letter
associations is critical to being able to read.
Fast ForWord Two also provides training exercises
that reinforce left-to-right reading patterns for
children who may have visual tracking problems.

The Fast ForWord Two program is designed to be
used for 90 minutes per day, five days a week for
four to eight weeks. As with Fast ForWord, Fast
ForWord Two results are uploaded daily via the
Internet to our proprietary database which
automatically analyzes the data and creates
performance charts and reports.
- ------------------------------------------------------------------------------------------------------
</TABLE>

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<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
TARGET AUDIENCE
----------------
PROGRAM/SERVICE CHILDREN ADULTS DESCRIPTION
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
FAST FORWORD PRODUCT FAMILY
(CONTINUED)
- ------------------------------------------------------------------------------------------------------------------
FAST FORWORD THREE X Computer-based reading comprehension program that combines the
Anticipated Launch: Year 2000 essential components of word recognition and decoding with
reading comprehension skills.
- ------------------------------------------------------------------------------------------------------------------
FAST FORWORD FOR INCREASED X X Computer-based language specific program that focuses on
ENGLISH PROFICIENCY training the language skills found in English that are the
Anticipated Launch: Year 2000 most difficult for non-native English speakers to learn.
- ------------------------------------------------------------------------------------------------------------------
FAST FORWORD FOR ADOLESCENTS X X Computer-based training program with adolescent-tailored
Anticipated Launch: Year 2000 graphics, story lines and content. Fast ForWord for
adolescents combines electronically modified speech with
cross-training in critical language skills in a manner that
automatically adjusts to each user's performance. This program
enables participants to track their daily progress.
- ------------------------------------------------------------------------------------------------------------------
FAST FORWORD FOR ADULTS X Computer-based training program with adult-tailored graphics,
Anticipated Launch: Year 2000 story lines and content. Fast ForWord for adults combines
electronically modified speech with cross-training in critical
language skills in a manner that automatically adjusts to each
user's performance. This program enables participants to track
their daily progress.
- ------------------------------------------------------------------------------------------------------------------
FAST FORWORD FOR LANGUAGE X Computer-based training program designed for rehabilitation
REACQUISITION specialists to provide individualized exercises that meet the
Anticipated Launch: Year 2000 specific needs of individuals who have suffered a stroke or
other brain injury.
- ------------------------------------------------------------------------------------------------------------------
AWAY WE GO! PRODUCT FAMILY
- ------------------------------------------------------------------------------------------------------------------
AWAY WE GO! X Software product that focuses on key skills needed for success
SKILL-BUILDING SOFTWARE GAMES in grades pre-K through 2, such as recognition of colors and
Anticipated Launch: 2Q99 shapes, and provides practice in remembering, using and
manipulating phonemes, fine motor control, and hand-eye
coordination.
- ------------------------------------------------------------------------------------------------------------------
AWAY WE GO! X Proprietary stories in an interactive CD format, designed as a
CD ROM AND CD STORYBOOKS companion to the Away We Go! skill-building software games.
Anticipated Launch: 2Q99 These stories provide exposure to appropriate spoken and
written language content, thereby supporting the training
related to phonemes in the Away We Go! skill-building software
games.
- ------------------------------------------------------------------------------------------------------------------
AWAY WE GO! X Proprietary stories in an interactive CD format, designed as a
CD ROM AND CD STORYBOOKS - companion to the Away We Go! skill-building software games.
PROFESSIONAL VERSION. These stories provide exposure to appropriate spoken and
Anticipated Launch: 2Q99 written language content, thereby supporting the training
related to phonemes in the Away We Go! skill-building software
games. This version, which contains four different levels of
patented speech modification, is targeted only for delivery
through certified professionals and educators.
- ------------------------------------------------------------------------------------------------------------------
AWAY WE GO! X Proprietary stories in a four-color printed format, designed
PRINTED STORYBOOKS as a companion to the Away We Go! skill-building software
Anticipated Launch: 2Q99 games. These stories provide exposure to appropriate spoken
and written language content, thereby supporting the training
related to phonemes in the Away We Go! skill-building software
games.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

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<PAGE>

More than 3,600 individuals have been trained in administering
Fast ForWord through these seminars, including more than 1,400
educators in public schools and more than 2,200 speech and
language professionals in private practice. Participants in
the training seminars for the administration of the Fast
ForWord programs are eligible to receive continuing education
credit to support the ongoing educational certification
requirements of teachers and educators.
- ------------------------------------------------------------------------------------------------------------------
SCREENING / ASSESSMENT X X Computer-based screening and assessment product designed to
Anticipated Launch: Year 2000 evaluate language comprehension skills of children and adults.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

MARKET OPPORTUNITY

While our software and other educational products and services are
applicable to children and adults of virtually all ages and capabilities, we
believe our largest market opportunity is school children. Based on data from
the U.S. Department of Education, we estimate that more than 52.7 million
students are attending over 110,000 K-12 schools in the United States in the
1998-99 school year. Our current Fast ForWord family of language and reading
training programs and our Away We Go! skill-building games and storybooks have
been developed primarily for children between the ages of four and 13. Based on
Bureau of the Census data, there are approximately 40 million children in this
age group. According to the National Institute of Child Health and Human
Development, as much as 40% of the population, or 16,000,000 of these children,
have reading problems. With ten grade levels represented by children between the
ages of four and 13, we estimate that one-tenth of this group, or 1,600,000
children, enter this category each year. We believe that their language and
reading difficulties result in part from poor language comprehension skills.

Educators in public schools and speech and language professionals are our
target market for our Professional Development Seminars. Based on data from the
U.S. Department of Education, we estimate that as of 1997 there were 2.7 million
K-12 public school teachers in the United States. Based on American
Speech-Language-Hearing Association data, we estimate that there are
approximately 100,000 speech and language professionals practicing in the United
States, including 13,000 in private practice, 50,000 in public schools and
37,000 working part-time or in adult rehabilitation centers.

Public concern over the effectiveness of K-12 schools in teaching essential
academic skills, and the role of technology in the classroom, have created an
increased demand for technology-based educational programs. In addition, we
believe that the growing shortage of teachers in the United States will further
increase the demand for technology-based educational programs. According to the
Department of Education, schools in the United States will need to hire more
than 2,000,000 teachers over the next decade. According to reports from Quality
Education Data, while total spending on education in the United States has grown
at an average rate of five percent per year, spending on technology in public
schools in the United States has more than doubled since the 1991-92 school
year. Quality Education Data also reports that technology spending is projected
to reach $5.4 billion for the 1998-99 school year, a 12.5% increase from the
prior school year. These expenditures include computers, Internet connections,
other technology infrastructure components and software. We expect public school
spending on instructional software alone will be over $500 million, an increase
of

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<PAGE>

approximately 70% over the 1997-98 school year. According to Quality Education
Data, this increased demand for instructional software is driven in part by
plans to increase the inventory of multimedia personal computers in public
schools by over 30% in 1998-99. We have identified more than $13 billion of
specific federal and state funding sources that can be used for our products and
services, including Title I of the Elementary and Secondary Education Act of
1965, the Individuals with Disabilities Education Act, Goals 2000, Technology
Literacy Challenge Grants and the education rate discount authorized by the
Telecommunications Act of 1996. In addition to the 47 states that have adopted
programs to support the use of technology in the classroom, special reading
initiative funds also are available in many states, including California,
Florida and Texas. We estimate that foundations and corporations have set aside
more than $700 million in funding sources that could be used to implement our
products in classrooms.

In addition to the K-12 market, we are developing, and plan to introduce,
products for improving the reading and language comprehension skills of
adolescents and adults. Accordingly to the National Adult Literacy Study
conducted in 1992, more than 40 million adults in the United States are
functionally illiterate. Recently, there has been an increased focus by
educators, government officials and labor groups on the literacy problem. This
increased concern has resulted in part because jobs are demanding increasingly
higher levels of basic skills from workers, while millions of workers have
limited literacy skills. We believe that a significant opportunity exists to
address the adult literacy problem in the United States.

According to the National Center on Adult Literacy in October 1996, an
estimated 12 to 14 million non-native English speaking adults living in the
United States had limited proficiency in the English language. Many of these
adults require assistance from government agencies for English language
training. The demand for these services far exceeds the available sources.
Additionally, educators have discovered that instructional methods developed for
first language literacy instruction are inappropriate for many immigrants. We
believe that a significant opportunity exists to address this market.

According to 1998 National Stroke Association data, there are nearly four
million people in the United States who have survived a stroke and are living
with the after effects, including aphasia, an impairment of language and
speaking skills. These individuals struggle, alone and through therapy with
rehabilitation specialists, to reacquire their language skills. We believe that
a significant opportunity exists in developing neuroscience-based products and
training programs to meet the skill needs of a brain injured patient attempting
to reacquire language skills.

GROWTH STRATEGY

Our goal is to establish Scientific Learning as the leading provider of
proven, neuroscience-based software and other educational products and services.
Key elements of our growth strategy include:

INTRODUCE ADDITIONAL NEUROSCIENCE-BASED SOFTWARE PRODUCTS AND SERVICES. We
believe our expertise in neuroscience, language learning and technology
positions us well for the successful introduction of new education and training
products applicable to children and adults of all ages and capabilities. After
extensive research and substantial field testing, we introduced Fast ForWord in
April 1997 and Fast ForWord Two in October 1998, and intend to do the following:

- Introduce the following four new language-learning products in the second
quarter of 1999: Away We Go! skill-building software games, Away We Go! CD
ROM and CD storybooks, Away We Go! CD ROM and CD storybooks-professional
version and Away We Go! printed storybooks;

- Develop the following language-based products with a projected
introduction in the year 2000: Fast ForWord Three, Fast ForWord for
Increased Language Proficiency, Fast ForWord for

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<PAGE>
Adolescents, Fast ForWord for Adults, Fast ForWord for Language
Reacquisition and a Screening/Assessment product; and

- Examine ways to leverage our expertise in brain research into potential
non-language-based products, including products addressing tinnitus
(ringing in the ears) and repetitive stress injury.

See "--Programs and Services" and "--Research and Development." We cannot assure
you that we will be able to introduce these new products and services as
scheduled, or that if introduced, these products and services will perform as
intended or be accepted by the marketplace.

RAPIDLY EXPAND OUR SALES AND MARKETING EFFORTS. We recently expanded our
outside sales force by targeting and hiring experienced professionals with
established relationships in the education sector. We currently have more than
28 sales professionals. We intend to continue to expand our sales and marketing
efforts to increase our penetration of the public school, private practice
speech and language professional, direct-to-consumer and other distribution
channels. As of March 31, 1999, we have sold more than 13,000 copies of Fast
ForWord and Fast ForWord Two, and we have trained more than 3,600 individuals in
administering Fast ForWord. Specifically, we intend to:

- hire additional salespeople to focus exclusively on sales to the K-12
school market;

- implement direct-to-consumer e-commerce capabilities on
ScientificLearning.com to allow the purchase of our products and services
online as well as on BrainConnection.com to allow the purchase of our and
other companies' products and services online;

- hire additional salespeople to target speech and language professionals in
private practice;

- expand our direct marketing campaign to parents and consumers;

- explore and develop other channels of distribution, including potential
strategic alliances with for-profit educational services companies, day
care providers and private schools; and

- expand our Education Advisory Board, which provides access to leaders in
the fields of education, neuroscience, behavioral science, health and
public policy.

IMPLEMENT EXPANDED INTERNET STRATEGY. We use technology and the Internet to
implement our learning programs, to track and evaluate participants and to
provide an online environment that builds a sense of community among individuals
using our products, as well as among individuals interested in neuroscience and
learning. Through our ScientificLearning.com web site, we offer parents,
educators and other learning facilitators a wide variety of information and
forums for the exchange of ideas on our products as well as how language and
reading are learned.

We intend to significantly expand our web presence and e-commerce activities
through our new BrainConnection.com web site, to be launched in the second
quarter of 1999. We are designing BrainConnection.com to aggregate a vast
library of information about neuroscience and how the brain learns a variety of
complex tasks, not just language and reading, and to help people find
information, products and services through the use of sophisticated search
technology. We also are designing the site to allow the purchase of our products
and services online. We also plan on establishing relationships with other
companies so that consumers can purchase other products and services online at
BrainConnection.com. To date, we have not established any of these
relationships. We intend to drive activity to BrainConnection.com through
relationships with education, scientific and medical information web sites as
well as with web search and retrieval services and other high-traffic web sites.

In addition, we intend to leverage our proprietary Internet/database
capabilities to produce new products and services. Our database of performance
information is growing rapidly as our customer base grows. We intend to use our
database capabilities to further customize our training programs and to
facilitate the collection and analysis of data from a variety of sources.

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<PAGE>

BUILD A TRUSTED BRAND. We intend to continue to build recognition of our
company and product brands among parents, educators and speech and language and
other professionals and leverage that recognition to successfully commercialize
other products based on neuroscience, the study of how the brain functions.
Specifically, we intend to:

- promote the publication of media articles and stories regarding Scientific
Learning, our Fast ForWord family of products and our other products and
research;

- engage in direct marketing campaigns to educators and other key public
school decision-makers, as well as to speech and language professionals
and parents;

- encourage people interested in how language and reading are learned to
build a community online at ScientificLearning.com, encourage people
interested in the brain and how it works to build a community online at
BrainConnection.com and establish a community of people interested in our
products and services through our newsletters;

- continue to publish field test results; and

- build expertise through collaboration with our Education Advisory Board.

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<PAGE>

SUPPORT SERVICES

SUPPORT FOR EDUCATORS, PARENTS AND PROFESSIONALS. We provide a number of
support services for educators, parents and speech and language and other
professionals involved in improving reading and language skills. Through our
ScientificLearning.com web site, we offer parents, educators and other learning
facilitators a wide variety of information and forums for the exchange of ideas
regarding our products as well as how language and reading are learned. We
provide two to three hour seminars for parents interested in learning more about
brain research, the connection between language comprehension skills and
learning to read and the science behind our Fast ForWord programs. In addition,
we mail a Fast ForWord newsletter that contains items of interest on the program
and language and reading problems to the parents of participating children, as
well as to educators and speech and language professionals. We have a
professional relations staff dedicated to answering questions from and providing
support to professional providers and parents. Our professional relations staff
provides support over the Internet and a toll-free telephone information line.

TECHNICAL SUPPORT. Because many of the parents, educators and speech and
language and other professionals who administer our programs have limited
computer knowledge and have limited technical support on-site to assist them, we
provide a variety of technical support services. We employ an experienced staff
of technical service representatives to answer technical questions regarding our
programs, computer hardware and networks. In addition, at large sites such as
schools, we provide on-site software installation, technical training and
technical support.

SALES AND MARKETING

We market and sell our products through two primary channels of
distribution: public schools and speech and language professionals in private
practice. In addition, we are in the process of expanding direct-to-consumer
distribution channels, such as the Internet and other alternative distribution
channels. As of March 31, 1999, we have sold more than 13,000 copies of Fast
ForWord and Fast ForWord Two, including more than 3,400 copies to public schools
and more than 9,500 copies to speech and language professionals in private
practice. We have recently expanded our outside sales force, and currently have
23 sales representatives focused on the public school market and five sales
representatives focused on speech and language professionals in private
practice. Our hiring process has targeted experienced professionals who have
established relationships with prospective customers.

PUBLIC SCHOOLS. As of March 31, 1999, we have sold our programs to over 500
schools in nearly 300 school districts. The majority of our public school sales
have occurred since the formation in the fall of 1998 of a dedicated sales force
focused on that market. To date we have trained more than 1,400 teachers and
speech and language professionals in public schools in the administration of
Fast ForWord. We believe that, to date, the majority of leads have arisen from
our sales force and decision-makers within schools and districts who have
contacted us after learning about Fast ForWord from publications in industry
journals or the general press, presentations at education conferences,
attendance at our training seminars or from colleagues or parents. To more
rapidly introduce our products into public schools, we have undertaken a model
site program, in which participating schools agree to provide services in
exchange for a program discount. These services include acting as a reference
for other educators interested in our products, hosting tours, speaking at
events and with the press about program results, participating in studies and
cooperating in the publication of results. These sites provide educators and
administrators with the opportunity to see our products in use, which we believe
helps shorten the sales cycle in schools. As of March 31, 1999, we had
established more than 50 model school sites. Our Fast ForWord products generally
list for $850 per child and are typically discounted for volume sales and in
connection with the bundling of different products. In addition, we intend to
market and sell our Away We Go! family of products to schools to use with their
students prior to, and as a complement to, the Fast ForWord programs.

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<PAGE>

SPEECH AND LANGUAGE PROFESSIONALS. We have experienced positive
year-over-year retention rates with speech and language professionals operating
in private practice. Our year-over-year retention rates for professionals who
have two or more clients using our programs is 93%, and our overall year-over-
year retention rate is 76%. We intend to continue to expand the marketing of our
products to speech and language professionals operating in private practice,
private schools and hospitals and clinics.

To administer our products, we currently require that a speech and language
professional attend a training seminar. To date, these training seminars have
been held in more than 20 cities across the United States. We have trained more
than 2,200 speech and language professionals in private practice on how to
administer Fast ForWord and Fast ForWord Two. Generally, these seminars
currently involve two days of training and generally list for $695 per person.
Trained speech and language professionals in private practice recommend the use
of our products to parents in appropriate cases and then administer the program
in connection with providing traditional services. In such instances, Fast
ForWord and Fast ForWord Two are typically sold to parents for a list price of
$850 per child, minimizing the administrative burden on the speech and language
professional, who charges separately for time spent supervising the child. The
fees charged by the speech and language professional generally range from $2,000
to $5,000 per child. Our products could be used as supplemental to, or
potentially as a partial replacement of, traditional private reading remediation
programs provided by speech and language professionals, which we estimate
typically cost between $15,000 and $20,000. We believe that our programs
generally do not decrease the earnings of speech and language professionals who
use them in their practice because they allow the professionals to reach more
children in need of services and to focus their professional services on each
child's specific areas of need. In addition, we intend to market and sell our
Away We Go! family of products to the private speech and language professionals
for use by their students prior to and as a complement to the Fast ForWord
program.

We have been a pioneer in marketing computer-based training programs to
speech and language professionals and have developed a proprietary database of
information regarding thousands of speech and language professionals. We contact
speech and language professionals through telesales and other direct marketing
efforts to encourage them to attend our seminars and use Fast ForWord programs
in their practices. In addition, speech and language professionals learn of our
programs through our participation in trade conferences, publications in
journals and the general press and the distribution of our informational videos
and practice kits.

DIRECT-TO-CONSUMER SALES AND MARKETING. We believe that there is a
significant market for our products in sales directly to consumers. We are
currently focusing our direct distribution efforts on direct mail channels and
Internet-based sales. We currently market to consumers directly through mailings
to parents of Fast ForWord participants and other parents in select target
markets. We are developing a product catalog that would be sent directly to
parents and consumers enabling them to purchase products directly from us. For
our electronic-based sales, we are extending the capabilities of our web sites,
to make purchasing of products and services online easier.

OTHER CHANNELS OF DISTRIBUTION. We are exploring and developing other
channels of distribution, including strategic alliances with for-profit
educational services companies, day care providers and private schools.

Our future success is, in part, dependent on acceptance of our products by
public schools, administrators, educators, parents and speech and language and
other professionals and on penetration of the public school, speech and language
professional and parental markets. We may not be successful in developing and
penetrating these markets. See "Risk Factors--Our business depends on whether we
can achieve and maintain market acceptance and increase the number of programs
we commercially introduce and sell," "--Any difficulty in penetrating necessary
markets could adversely affect our business," and "--Our quarterly operating
results are susceptible to fluctuations which could cause our stock price to
decline."

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<PAGE>
INTERNET STRATEGY

Our current web site, ScientificLearning.com, is an important method of
daily communication between us and users of Fast ForWord and Fast ForWord Two
and enables our users to maximize the benefit of our Fast Forward programs. The
site includes:

- For everyone--a variety of information for anyone interested in learning
more about our products and services, how the brain learns language and
reading, upcoming seminars, professional meetings and parent meetings;

- For parents--a description of behaviors often exhibited by children who
could benefit from our products, and a searchable index to help find local
providers of our programs;

- For children--a section that includes coloring books and games on line;

- For educators in schools--information about public and private funding
sources, assistance in writing grants, help in selecting children for Fast
ForWord programs, tips from other educators on the use of Fast ForWord in
classrooms;

- For Fast ForWord providers in private practice--business support, such as
advice from other professionals on marketing Fast ForWord and effectively
running off-site programs for people training at home;

- For parents, educators and providers--chat sessions, forums and communal
e-mail lists where they can share information and experiences, ask
questions of other parents or providers, share tips and anecdotes about
the progress of Fast ForWord participants, or ask questions of our
scientists; and

- For Fast ForWord learning facilitators and parents--performance reports
and summary progress reports for each of the individuals or groups
participating in Fast ForWord, based on daily Internet transmission of
detailed training results.

We plan to launch a separate web site, BrainConnection.com, in the second
quarter of 1999, to provide parents, children, educators, researchers and speech
and language and other professionals with trusted educational resources and
services. BrainConnection.com is intended to focus on how the brain functions
generally, not just on how the brain learns language and reading, and is
designed to provide the latest neuroscience research and other related topics.
We believe BrainConnection.com will become an easily accessible site which
enables parents, children, educators, professionals, researchers and others
interested in reliable information on educational development to communicate and
interact, creating a community online. We also plan for it to aggregate global
education resources and information onto one site.

BrainConnection.com is being designed to provide an individualized
experience that allows access to, and interaction with, information that is
tailored to each visitor's particular interests and goals. The site will contain
a magazine/journal component providing a means through which new material may be
presented and written materials may be purchased. Community services such as
forums and chat rooms will be available to users who will receive periodic
updates on new information and material that can be accessed on the site.
BrainConnection.com will also allow visitors to purchase some of our products
and services, as well as the products and services of other companies, online.
We have not yet established relationships with other companies regarding the
sale of their products and services through BrainConnection.com.

TECHNOLOGY

Our products are cross-platform, software-based programs available for a
variety of hardware and software configurations. Our products are designed to
work with the computer technology widely

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available in schools and homes, minimizing the need for users to purchase new
equipment. We offer the programs in a variety of configurations, including an
on-site model where educators and speech and language and other professionals
supervise children in their offices, an off-site model where children can train
from their homes and a client/server-based model for larger scale deployments.
All of our existing products link to the ScientificLearning.com web site via
standard, secure Internet connections for data transfer and updates. Parents,
educators and other learning professionals can use any web browser to upload
program results to our database and monitor individuals under their supervision.

Products are typically delivered via a CD ROM which can be activated only by
receiving user access code delivered via the ScientificLearning.com web site.
Continued access to the program requires periodic uploads of performance data
over the Internet. If users do not upload data within a required time period,
access to the program is denied.

We use an object-oriented authoring environment for all our software
products. New products and product extensions can be built off our core object
model, allowing all products to benefit from improvements in the core code and
reducing new product development time. The Scientific Learning database
maintains a performance history on every user of a Fast ForWord product. The
database is unique and highly scalable, built on database technology from Oracle
Corporation, and capable of dynamic information queries. Using a proprietary set
of analytical tools, we automatically generate summaries and reports for use by
the educator, parent and speech and language or other professional. We can also
generate custom demographic reports from specific groups of users by defining
search characteristics such as school, classroom or common primary language. The
resulting reports show exactly how a given user is performing and what
challenges remain. The Fast ForWord databases at the client site are tightly
integrated with our databases to provide seamless service from professional and
technical support to accounting.

RESEARCH AND DEVELOPMENT

Approximately one third of our employees are engaged in research and
development activities, which include both product development and outcomes
research. Our research and development organization includes neuroscientists,
psychologists, engineers, programmers, statisticians, graphic artists and
animators. We believe that our future success depends in large part on our
ability to develop new products and maintain and enhance our current product
line. Our success also depends on our ability to enhance our market positioning
by leveraging our expertise in neuroscience and technology, which we believe has
broad applicability. Accordingly, we plan to expand our research and development
activities with respect to present and future products based on our expertise in
neuroscience. We also are examining ways to leverage our expertise in
neuroscience research into other potential non-language-based products,
including computer-based remediation programs for repetitive stress injury and
tinnitus (ringing in the ears).

We can not assure you that: (1) we will be successful in developing and
marketing new products or responding to technological developments, evolving
industry standards or changing customer requirements; (2) we will not experience
difficulties that could delay or prevent the successful development,
introduction and sale of new products; or (3) any new products will adequately
meet the requirements of the marketplace and achieve any significant degree of
market acceptance. If release dates of any new products are delayed or if these
products fail to achieve market acceptance when released, our business,
operating results and financial condition could be materially and adversely
affected. See "Risk Factors--Our business will suffer if we are unable to
introduce new products as scheduled or if new products are unsuccessful."

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THE LANGUAGE LEARNING PROCESS

Humans are born with the potential to learn any language, and one of a
child's early tasks is to learn to extract meaning from speech by identifying
its basic auditory building blocks or phonemes. Children must be able to
recognize and process the phonemes relevant to their language before they can
become skilled in the understanding and use of language and reading. In the
first 12 to 16 months of a child's development, the brain learns to recognize
the phonemes that are relevant to the child's native language. For example, in
order for children to understand or speak the word "dog," they must first
recognize the three phonemes "duh," "ah" and "guh." To read the word "dog,"
children must also associate these phonemes with the three letters "d," "o" and
"g." Our founders working at Rutgers noted that children with language-based
learning problems often have difficulty distinguishing between closely related
phonemes, such as "bah" and "dah." With these particular phonemes, the "b" and
"d" sounds are succeeded by the identical "ah" sound after approximately 40
milliseconds. Spoken language is made up of numerous, frequent and rapid sound
transitions such as this. Independently-conducted longitudinal research has
found that children who have difficulty distinguishing among related phonemes
have problems understanding and using language. These individuals frequently
have difficulty with other language skills, including morphology, syntax,
semantics and grammar, and executive function skills, such as short-term memory
and event sequencing capabilities. In a 1998 published study, the National
Institute of Child Health and Human Development at the National Institutes of
Health has found that there is a strong correlation between these language-based
learning problems and difficulties in learning to read.

Our scientific founders working at UCSF noted that the human brain changes
in response to stimuli, a trait known as brain plasticity. Their work
demonstrated that specific training techniques drive the brain to change over
time, adjusting how it processes information and thereby permitting more rapid
learning. Bringing together their work at Rutgers and UCSF, our scientific
founders discovered that with the help of computers, the rapid acoustic changes
within speech sounds could be slowed, emphasized and then differentiated by
children with language-based learning problems. The scientists used the
computers and their knowledge of language learning techniques and neuroscience
to design exercises that continually adjust to challenge each child
appropriately with customized training. Through thousands of repetitions of
individualized exercises focused on important aspects of language, these
children could gradually master natural speech sounds and develop other language
skills, such as morphology, syntax, semantics and grammar, and executive
function skills, such as short-term memory and event sequencing capabilities,
critical to learning to read and to becoming a better reader. Our founders
established our company to move this research as rapidly as possible from
laboratories into products and services designed to improve human learning and
performance.

Our scientific founders postulated that the gain in oral language
comprehension skills demonstrated by children in the initial study, resulted
from a fundamental change in the organization of neural pathways involved in the
way their brains process language. This theory differs from research by others
which postulates that a particular area of the brain processes language, that
speech and non-speech sounds are processed differently and that auditory
processing problems are not a primary cause of many language difficulties. We
believe that the manner in which the brain processes speech and language is not
yet fully understood. When we refer to Fast ForWord as proven, it refers to the
fact that the program has proven results and not that it "proves" any particular
theory of the manner in which the brain functions. See "Risk Factors--There is
academic debate regarding the scientific basis underlying our products which
could significantly affect the market for our programs and services."

EFFICACY STUDIES

We were founded by scientists who have spent over twenty-five years
researching neuroscience and the causes of language-based learning problems at
UCSF and Rutgers. The original research studies combining the work of our
founders were funded by UCSF and Rutgers and certain results were

42
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published in the peer-reviewed scientific journal SCIENCE. The primary study
included 22 children with language-based learning problems who played
computerized versions of games such as "Simon Says" over a 20-day period. The
experimental group received commands in slowed, stretched and emphasized speech
while the control group received normal speech. Additionally, the experimental
group's exercises adapted to their individual skill level. The results of these
studies were widely noted because the children in the experimental group showed
significant gains of 1.5 years in critical language skills in just four weeks
through the use of the computer-based language training program that became the
basis for Fast ForWord. Six-month follow-up studies demonstrated that the
language skills of these children continued to improve after the completion of
the four-week training period. Children randomly assigned to the control group
did not demonstrate comparable gains.

We have funded two additional large-scale trials. The first study, conducted
in 1996, included approximately 500 children between the ages of four and 14
trained in private clinics and schools across the country and was designed to
test the effectiveness of the Fast ForWord training program in a variety of
settings. Each of the 60 professionals in the 35 locations was an independent
collaborator who agreed to follow the protocols we mandated and supply pre- and
post-assessment testing data on each child. Most of the children in the study
were already identified as needing specific help in language skills and were
involved in remediation programs through regular sessions with a speech and
language professional in private practice or at a school. As part of the study,
the children used the Fast ForWord program for 100 minutes a day, five days a
week for four to eight weeks. On average, regardless of age or grade, children
involved in the study demonstrated performance gains of one to two years on
standardized tests.

The independent speech and language professionals involved in the 1996 field
trial were asked to test the children before and after the trial on those
standardized tests which the independent professionals typically used to measure
language performance. The largest number of children were tested on the TOLD-I:2
and TOLD-P:2 tests, which are individually administered comprehensive language
tests. These TOLD tests are widely accepted tests among speech and language
professionals that assess a child's performance in various aspects of language
performance and compare those results to results of the general population. A
total of 196 children in the study were tested before and after the Fast ForWord
training on these TOLD tests. Other standardized tests used by professionals
involved in the 1996 field trials were generally less comprehensive and
administered to fewer children. However, the pre- and post- assessment data
based on these other tests was generally consistent with the results reported on
the TOLD-I:2 and TOLD-P:2. As indicated by the following chart, prior to
participation in the Fast ForWord program, only 19% of the children scored at or
above the population mean. After completion of the Fast ForWord program, 52% of
the children scored at or above the average performance level of the general
population, or the population mean.

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[GRAPHIC: Side by side graphs subtitled "Before Fast ForWord" and "After
Fast ForWord," respectively, showing test scores of 196 children on certain
tests of language development before and after such children used Fast ForWord,
superimposed on bell curves representing the normal distribution of scores on
such tests. The graphs, together, are titled "Test Results" and are accompanied
by the following text footnotes:

"1 Represents the results from the TOLD-I:2 and TOLD-P:2 tests. Statisticians
express this group's result as t(195)=18.21, p < .0001, to communicate that
the changes in the scores reflected in the above graphs, or histograms,
indicate with more than 99% confidence that the rightward shift in scores
(representing improved performance on the tests) following completion of
Fast ForWord training results from the Fast ForWord training rather than
from factors of chance.

2 In order to combine the test results of children of different ages for
comparison to the table of the normal curve, which represents the expected
distribution of test scores among the general population, test scores are
converted by statistical methods into what are known as "Z-scores." Using
Z-scores, the average test score obtained by the general population (50(th)
percentile) is represented by zero. In the general population, the -1.0
Z-score represents the 16(th) percentile in test performance and the 1.0
Z-score represents the 84(th) percentile in test performance. A bell curve
is superimposed on the results to show the normal distribution of results in
the general population.

3 Prior to the beginning of Fast ForWord training, the tested group of 196
children achieved an average Z-score of -1.0, representing the 16(th)
percentile in performance for this test which indicates that on average
these children achieved a score higher than only 15% of the general
population. Counting those children who performed at the same level as the
average of the general population as well as those performing above that
level, we can say that before the training, some 19% scored at or above the
average of the general population, or the population mean.

4 After completion of the Fast ForWord program, the tested group of 196
children achieved an average Z-score of -0.2, representing approximately the
42(nd) percentile in performance for this test which indicates that on
average these children achieved a score higher than 41% of the general
population. Counting those children who performed at the same level as the
average of the general population as well as those performing above that
level, we can say that some 52% scored at or above population mean. The bell
curve indicates that after training, the group's results approximated those
found in the general population."]

The second large-scale study, in the fall of 1997, included approximately
500 children in 19 public schools in nine public school districts in five states
across the country. This second study was designed to test Fast ForWord efficacy
with a new population of children, namely children who were observed by teachers
as likely to be at risk for later academic failure. The children were selected
for participation in the study by their teachers. Most of these children had not
been identified as needing specific help in language skills, nor had they been
assigned to special education classes or other remediation programs outside the
classroom. As part of this study, some of the children were randomly assigned to
a control group which did not receive Fast ForWord training but instead received
the traditional classroom curriculum for the same amount of time. The children
trained for 100 minutes a day, five days a week for four to eight weeks. Again,
a substantial majority of the children using Fast ForWord demonstrated similar
gains to those made in earlier studies, making achievements significantly beyond
those made by the control group. Similar results have also been observed in the
overall group of children who have used the Fast ForWord program commercially.

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<PAGE>
INTELLECTUAL PROPERTY

We have a broad intellectual property strategy addressing both product
technology and product concepts. We aggressively protect our proprietary rights
in our products and technology through a combination of patents, trademarks,
copyrights, trade secret laws, confidentiality procedures and contractual
provisions. As of March 31, 1999, we have filed patent applications in the
United States and internationally relating to our technology, including 38 with
the USPTO. To date, one patent has been granted and we have received
notification of allowance on five additional patents. Additionally, pursuant to
a license with The Regents of the University of California, we are the exclusive
licensee of the technology owned by UCSF and Rutgers with respect to the basic
speech and sound modification algorithms used in Fast ForWord. The licensed
technology is subject of a patent issued in September 1998. We cannot be certain
that any of our or the licensor's additional pending patent applications will
result in the issuance of any patents, or that, if issued, any of these patents
will offer protection against competitors with similar technology. We cannot
assure you that any patents issued to us or the licensors will not be
challenged, invalidated or circumvented in the future or that the rights created
thereunder will provide a competitive advantage. In addition, our competitors
may apply for and obtain patents covering technologies that are more effective
than our technologies. This could render our technologies or products obsolete
or uncompetitive or prevent, limit or interfere with our ability to make, use or
sell our products either in the United States or in international markets.

Our current products incorporate technologies which are the subject of
patents issued to, and patent applications filed by, others. We have obtained
licenses for certain of these technologies and may be required to obtain
licenses for others. We do not believe that we are currently using technology
that is subject to patents held by third parties without a license. However, if
needed we may not be able to obtain licenses for technology patented by others
on commercially reasonable terms, or at all. We also may not be able to develop
alternative approaches if we are unable to obtain necessary licenses. We cannot
assure you that our current and future licenses will be adequate for the
operation of our business. The failure to obtain necessary licenses or identify
and implement alternative approaches could have a material adverse effect on our
business, financial condition and results of operations.

Under the terms of the license with The Regents of the University of
California, we must pay royalties and milestone payments based upon cumulative
net sales of our products, subject to certain minimum royalty amounts. In
connection with this license, we issued 114,526 shares of Series A preferred
stock, which is convertible into 114,526 shares of common stock upon completion
of this offering, to Rutgers and made other up-front payments. Unless otherwise
terminated by operation of law or acts of the parties, the license remains in
effect until the later of the expiration of the last-to-expire patent licensed
or the abandonment of the last patent application licensed. The Regents may
terminate the license agreement if we fail to perform or violate its terms
without curing the violation within 60 days of receiving written notice of the
violation. For example, The Regents could terminate the agreement if we fail to
perform the following obligations:

- make royalty and milestone payments;

- provide periodic progress reports;

- prepare, file and prosecute U.S. and foreign patent applications;

- provide indemnification;

- insure our activities in connection with work under the agreement; and

- maintain the confidentiality of information received from The Regents
relating to the agreement.

If we lose or are unable to maintain the license agreement, this could delay
our introduction of new products or could require the recall of our products
from the market. Even if we could identify

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<PAGE>
and license technology equivalent to the technology covered by the license
agreement, developing and integrating alternative technology would likely delay
our product line.

We also rely upon trade secrets, technical know-how and continuing invention
to develop and maintain our competitive position. There is some risk that others
may independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets or disclose this
technology. We may also be unable to meaningfully protect our right to our trade
secrets. Any of these could have a material adverse effect on our business,
financial condition and results of operations. See "Risk Factors--We rely on our
intellectual property rights and may be unable to protect these rights."

COMPETITION

The educational technology market in which we operate is very competitive.
We believe that the principal competitive factors in the industry are efficacy,
ability to deliver measurable results, cost, efficiency of delivery, ability to
provide training to educators, parents and speech and language and other
professionals and ability to complement and supplement public school curriculum.
We believe that we compete favorably on the basis of these factors. We compete
primarily against providers of traditional methods of remediation for language
and reading problems, which typically require several years of one-on-one
training for children with identified language and reading problems. Although
the traditional approach to language and reading problems is fundamentally
different from the approach we take, these programs are more widely known and
accepted and, therefore, represent significant competition. In addition, we
compete to some extent with other companies offering educational software
products to schools and to speech and language professionals in private
practice. Existing competitors may continue to broaden their product lines, and
potential competitors, including large software developers and educational
publishers, may enter or increase their focus on the school market, resulting in
greater competition. Moreover, we expect that we will face additional
competition from new entrants into the market. Many competitors have
substantially greater technical, marketing and distribution resources than we
do. There can be no assurance that we will continue to be able to market our
products successfully or compete effectively in the educational technology
market. See "Risk Factors--Our business will suffer if customers delay or forego
purchases of our products because of our product enhancements or new products or
because of competitors' superior products."

EMPLOYEES

As of March 31, 1999, we had 139 full-time and 24 part-time employees. We
believe our relations with employees are good. None of our employees is
represented by a union or subject to collective bargaining agreements. See "Risk
Factors--If we fail to retain our key personnel or attract and retain key
employees, our business will suffer."

PROPERTIES

We lease a 34,257 square-foot facility in Berkeley, California under a
five-year lease that expires in September 2002. We believe our facilities are
adequate for our current operations but we may need to seek additional space
within the next 18 months.

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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table sets forth various information concerning our directors,
executive officers and certain key employees as of March 31, 1999:

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- ----------- ------------------------------------------------------------
<S> <C> <C>
Sheryle J. Bolton............................ 52 President, Chief Executive Officer and Member of the Board
of Directors
Dr. Michael M. Merzenich..................... 56 Chief Scientific Officer and Member of the Board of
Directors
Dr. Paula A. Tallal.......................... 51 Executive Vice President and Chairman of the Board of
Directors
Frank M. Mattson............................. 44 Chief Financial Officer, Vice President, Finance, and
Secretary
Diane H. Church.............................. 52 Vice President, Private Channel Sales
Bernard G. Fraenkel.......................... 40 Vice President, Engineering
Dr. William M. Jenkins....................... 48 Vice President, Product Development
Anita M. Kopec............................... 52 Senior Vice President, School Group
Dr. Steven L. Miller......................... 35 Vice President, Outcomes Research
James A. Mills............................... 43 Vice President, Marketing
Patricia A. Murphy........................... 43 Vice President, Human Resources
Dr. Bret E. Peterson......................... 36 Vice President, Internet and Database Systems
Dr. Kathleen M. Hocker....................... 58 Director, Public School Sales
Carleton A. Holstrom (1)(2).................. 63 Member of the Board of Directors
Rodman W. Moorhead, III (1).................. 55 Member of the Board of Directors
James E. Thomas (2).......................... 38 Member of the Board of Directors
David A. Tanner (2).......................... 40 Member of the Board of Directors
</TABLE>

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

(1) Member of the compensation committee.

(2) Member of the audit committee.

SHERYLE J. BOLTON has served as our Chief Executive Officer and as a
director since November 1996 and as our President since June 1997. From January
1994 to July 1995, Ms. Bolton served as President and Chief Operating Officer of
Physicians' Online, Inc., a physicians' online service provider. From June 1993
to December 1994 and from July 1995 to October 1996, Ms. Bolton consulted for a
number of international companies, including many in the Internet, health care
and technology sectors, specifically in the areas of strategy, operations and
finance. Ms. Bolton's experience also includes senior management positions at
Rockefeller & Co., Inc., a global investment management firm, and Merrill Lynch
Capital Markets, Investment Banking Division. Earlier in her career, she was a
teacher of English as a second language in Africa and a language arts teacher in
public schools in the State of Georgia. Ms. Bolton is a director or trustee of
several mutual funds of Scudder Kemper Investments, Inc. and is a director of
HealthCentral.com, a private Internet consumer healthcare information company.
Ms. Bolton holds a B.A. in English and an M.A. in Linguistics from the
University of Georgia, and an M.B.A. from Harvard Business School.

DR. MICHAEL M. MERZENICH is one of our founders. He has served as our Chief
Scientific Officer since November 1996 and as a director since inception. From
January 1996 to November 1996, Dr. Merzenich served as the Chief Executive
Officer and President of the Company. During 1997, Dr. Merzenich worked
full-time with us during a sabbatical from his faculty position at UCSF. In
January 1998, Dr. Merzenich returned to his faculty position at UCSF, but
continues to direct our

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research and development activities under a consulting agreement. Since 1971,
Dr. Merzenich has been a member of the faculty, and since 1980 a full professor,
in Neuroscience, Physiology, Biomedical Engineering and Otolaryngology at UCSF.
He is currently the Francis A. Sooy Professor of Otolaryngology at UCSF. Dr.
Merzenich has more than 25 years of experience in managing large,
multidisciplinary brain science/behavior/engineering research projects that have
led to commercial products and numerous publications and awards. Dr. Merzenich
holds a B.S. in General Science from the University of Portland and a Ph.D. in
Physiology from The Johns Hopkins University, with additional training from the
University of Wisconsin.

DR. PAULA A. TALLAL is one of our founders. She has served as our Executive
Vice President and Chairman of the board of directors since January 1996 and as
a director since our inception. During 1997, Dr. Tallal worked full-time with us
during a sabbatical from her faculty position at Rutgers. In January 1998, Dr.
Tallal returned to her faculty position at Rutgers, but continues to consult
with us pursuant to a consulting agreement. Since 1988, Dr. Tallal has served as
co-director of the Center for Molecular and Behavioral Neuroscience at Rutgers.
Dr. Tallal is an active participant in many scientific advisory boards and
governmental committees for both developmental language disorders and learning
disabilities. Dr. Tallal has over 20 years experience managing multi-site,
multi-disciplinary federally funded contracts and grants that have resulted in
over 150 publications, as well as national and international honors. Dr. Tallal
holds a B.A. in Art History from New York University and a Ph.D. in Experimental
Psychology from Cambridge University with additional training from The Johns
Hopkins University.

FRANK M. MATTSON has served as our Chief Financial Officer and Vice
President, Finance since January 1997 and as our Secretary since June 1997. From
August 1994 to January 1997, Mr. Mattson served as Vice President of Finance and
Operations, Executive Vice President, Chief Financial Officer and as a director
of MNI Interactive, Inc., a startup entertainment marketing company. From June
1992 to August 1994, Mr. Mattson was Vice President of Distribution and
Strategic Planning for Ingram Entertainment, Inc. ("Ingram"), a unit of the
Ingram Distribution Group, one of the world's largest distribution companies. At
Ingram, Mr. Mattson directed the post-merger integration of Ingram and Commtron
Corporation ("Commtron"), the largest distributor in the home video industry
until its acquisition by Ingram in 1992. From 1986 to 1992, Mr. Mattson served
in a variety of management positions at Commtron, a publicly traded company,
most recently as Vice President of Operations and as a director of the company.
Mr. Mattson holds a B.S. in Business from Miami University (Ohio) and an M.A. in
Economics from the University of Wisconsin in Milwaukee. Mr. Mattson has also
served on the faculty of Drake University.

DIANE H. CHURCH has served as our Vice President, Private Channel Sales
since August 1997. From February 1997 to August 1997, Ms. Church was Georgia
Account Team Manager with Compuware Corporation, an information systems software
and services company. Ms. Church was Mid-Atlantic Regional Director and Regional
Director for Telecommunications Accounts at Candle Corporation from April 1994
to September 1995 and at Legent Corporation Regional Director for Mid-Atlantic
and then South-Eastern Regional Director from April 1990 to April 1994, both of
which are information systems software and services companies. Prior to that
time, Ms. Church held senior management positions with Wang Laboratories, a
computer and office equipment company. Ms. Church also worked as an educator in
public schools in the State of Georgia. Ms. Church holds a B.A. in English and
Education from Georgia Southwestern College and an M.B.A. from Emory University.

BERNARD G. FRAENKEL has served as our Vice President, Engineering since
April 1999. From August 1996 until April 1999, Mr. Fraenkel served as Vice
President of Engineering at One Touch Systems, a joint venture of Hughes Network
Systems and Apollo Group, Inc., which is a leading provider of interactive
distance learning systems. From January 1996 until July 1996, he was a founder
of Pixel Engines, a developer of DVD authoring systems. From December 1993 until
December 1995, Mr. Fraenkel was Director of Research and Development with Sigma
Designs, a provider of MPEG

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products and integrated circuits for personal computers. He previously served as
Director of Engineering with Teknekron Communications Systems, where he led an
engineering team on consulting projects in the areas of data and wireless
communications, multimedia and VLSI design. Mr. Fraenkel holds Graduate Engineer
degrees from Ecole Polytechnique and Ecole National Superieure des University
Paris IX and an M.S. in Electrical Engineering and Computer Science from the
University of California at Berkeley.

DR. WILLIAM M. JENKINS is a founder and has served as our Vice President,
Product Development since June 1997. From March 1996 to June 1997, Dr. Jenkins
was our Vice President, Research and Development. Since 1990, Dr. Jenkins has
also served as an Adjunct Associate Professor at UCSF. Dr. Jenkins currently
serves on the editorial board in the Systems Plasticity section of RESTORATIVE
NEUROLOGY AND NEUROSCIENCE. Dr. Jenkins is the principal developer of our
current training programs. Dr. Jenkins holds a B.S. in Psychology, an M.A. in
Psychobiology and a Ph.D. in Psychobiology from Florida State University, with
additional post-doctoral training from UCSF.

ANITA M. KOPEC has served as our Senior Vice President, Public Schools since
October 1998. From July 1997 to October 1998, Ms. Kopek was President and CEO of
Educational Consulting Services, Inc., a company she founded to provide
strategic consulting to educational, technology and publishing companies.
Previously, Ms. Kopec was President and Chief Executive Officer of Steck-Vaughn
Publishing Company and held management positions with Computer Curriculum
Corporation and Macmillan/McGraw-Hill School Division. Ms. Kopec began her
career in education as a classroom teacher. Ms. Kopec holds a B.A. in Education
from the University of Akron.

DR. STEVEN L. MILLER is a founder and has served as our Vice President,
Outcomes Research since June 1997. From May 1996 to June 1997, Dr. Miller was
our Vice President, Professional Relations and Outcomes. From September 1991 to
May 1996, he held research appointments at the Center for Molecular and
Behavioral Neuroscience at Rutgers. Dr. Miller has extensive experience in
organizing clinical research studies and conducting longitudinal studies of
children and adults who have language and reading problems. Dr. Miller holds a
B.A. in Psychology from Bloomsburg University of Pennsylvania, an M.A. in
Neuroscience from the University of Hartford and a Ph.D. in Psychology from the
University of North Carolina at Greensboro. He received additional training in
Clinical Neuropsychology at the Bowman Gray School of Medicine at Wake Forest
University.

JAMES A. MILLS has served as our Vice President, Marketing, since April,
1999, having previously served as Director of Marketing since August, 1998. He
joined our company in July, 1997, as Director, Business Development. Prior to
joining our company, Mr. Mills was a consultant advising California-based
clients on financial and operational issues. From 1986 to 1996, Mr. Mills was
with Citibank, holding positions with various sales and marketing
responsibilities, most recently as a Vice President responsible for domestic and
overseas-based clients. Mr. Mills previously worked in cable television
marketing, promotion and public affairs for Viacom International, Inc., as well
as for a cable programming start-up venture and a national cable marketing trade
association. Mr. Mills holds a B.S. from Stanford University and an M.B.A. from
Harvard Business School.

PATRICIA A. MURPHY has served as our Vice President of Human Resources since
November 1998. From 1990 to November 1998, Ms. Murphy served as Vice President,
Human Resources with Broderbund Software, a leading publisher of educational
software and games. Ms. Murphy has also worked as Personnel Manager with
Lucasfilm Ltd, and as an organization development consultant to Kaiser
Permanente and local school districts offering management development, conflict
resolution and strategic planning. Ms. Murphy currently serves on the board of
the Carlston Foundation. Ms. Murphy holds a B.A. in Mass Communication and
Sociology from the University of California, Santa Cruz and an M.A. in Human
Resources and Organization Development from the University of San Francisco.

DR. BRET E. PETERSON has served as our Vice President, Internet and Database
Systems since June 1996. From January 1995 to March 1996, Dr. Peterson served as
a research scientist at Yale

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<PAGE>

University and he was a post-doctoral fellow at Los Alamos National Laboratory
from January 1994 to December 1995. From September 1993 to November 1993, Dr.
Peterson provided consulting services to Bio-Rad Laboratories, Inc. Previously,
he worked as an engineer at Apple Computer, Inc. Dr. Peterson holds an A.B. in
Computer Science from the University of California at Berkeley, and an M.S. and
Ph.D. in Bioengineering from a joint program with the University of California
at Berkeley and UCSF. Dr. Peterson is the principal developer of our Internet
database performance tracking system.

DR. KATHLEEN M. HOCKER has served as our Director, Public School Sales,
since March 1998. From November 1996 to December 1997, Dr. Hocker was the
National Sales Manager, Interactive Products for Steck-Vaughn Company, a leading
publisher of educational materials. From February 1995 to November 1996, Dr.
Hocker was the Director of Curriculum and Assessment for the Northeastern United
States for Computer Curriculum Corporation, a division of Simon & Schuster. From
October 1993 to January 1995, she was Marketing Director for Ligature, Inc., a
curriculum development company. Her previous experience includes a position as
Regional Senior Consultant for Houghton Mifflin Company and educational
consulting for Addison Wesley Publishing Company. She also has eight years of
teaching experience at the elementary, special and higher education levels. Dr.
Hocker holds a B.A. in Elementary Education and an M.Ed. in Special Education
from Antioch University and an Ed.D. from Nova University.

CARLETON A. HOLSTROM is a founder and has been a director since February
1996. From February 1996 to January 1997, Mr. Holstrom also served as our Chief
Financial Officer. Mr. Holstrom retired in 1987 as Senior Vice President-Finance
of The Bear Stearns Companies. He is a director of Custodial Trust Company and
is a trustee, overseer or director of a number of non-profit organizations. Mr.
Holstrom has served as a member of the Board of Trustees and Board of Governors
of Rutgers, including as chairman and vice-chairman of both. He is currently a
member of the Board of Overseers of the College of Letters and Science at the
University of Wisconsin-Madison. Mr. Holstrom holds a B.S. in Economics from
University of Wisconsin-Madison and an M.A. in Economics from Rutgers.

RODMAN W. MOORHEAD, III has been a director since June 1998. Mr. Moorhead
has been employed since 1973 by E.M. Warburg, Pincus & Co., LLC, a specialized
private equity firm (or its predecessors), where he currently serves as Senior
Managing Director. Mr. Moorhead was nominated to our Board in accordance with
rights held by Warburg, Pincus Ventures, relating to an equity agreement. Upon
the completion of this offering and so long as Ventures owns a requisite
percentage of outstanding shares of common stock, the Board must nominate Mr.
Moorhead, or another individual designated by Ventures and reasonably acceptable
to the Board, and use its best efforts to cause Mr. Moorhead or such other
individual to be elected to the Board. See "Certain Transactions--Board
Representation Right." Mr. Moorhead is a director of Coventry Health Care, Inc.,
ElderTrust, NeXstar Pharmaceuticals, Inc., Transkaryotic Therapies, Inc. and
Xomed Surgical Products, Inc. and a number of privately held companies. He is a
trustee of The Taft School and a member of the Overseers' Committee on
University Resources at Harvard College. Mr. Moorhead holds an A.B. in Economics
from Harvard University and an M.B.A. from Harvard Business School.

JAMES E. THOMAS has been a director since November 1996. Since 1989, he has
been employed by E.M. Warburg, where he currently serves as Managing Director.
Prior to 1989, Mr. Thomas was a Vice President of Goldman Sachs International in
London. Mr. Thomas was nominated to our Board in accordance with rights held by
Ventures, relating to an equity agreement. Upon the completion of this offering
and so long as Ventures owns a requisite percentage of outstanding shares of
common stock, the Board must nominate Mr. Thomas, or another individual
designated by Ventures and reasonably acceptable to the Board, and use its best
efforts to cause Mr. Thomas or such other individual to be elected to the Board.
See "Certain Transactions--Board Representation Right." Mr. Thomas is also a
director of Celtrix Pharmaceuticals, Inc., Menley & James Laboratories, Inc.,
Xomed Surgical Products, Inc., Transkaryotic Therapies, Inc., Oxford
GlycoSciences plc and a number of privately held

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<PAGE>
companies. Mr. Thomas holds a B.S. in Finance and Economics from The Wharton
School of Business at the University of Pennsylvania and an M.Sc. from The
London School of Economics.

DAVID A. TANNER has been a director since January 1999. Since June 1998, Mr.
Tanner has been a Managing Director of Lazard Freres & Co. LLC. From 1993 until
1997, he served as a Managing Director at E.M. Warburg, having worked in other
capacities at E.M. Warburg since 1986. Mr. Tanner holds a J.D. from New York
University School of Law, a degree in Economics from the London School of
Economics and a B.A. from Princeton University. Mr. Tanner serves as a director
of several privately-held companies.

EDUCATION ADVISORY BOARD

We have established an Education Advisory Board consisting of members that
are leaders in the fields of education, neuroscience, behavioral science, health
and public policy. The advisory board provides us with experienced counsel on
matters relevant to ongoing research and development of our products. The
advisory board reflects our multi-disciplinary approach by offering a broad base
of knowledge, including research from neuroscience, cognitive neuropsychology,
education, reading and language, engineering, bioethics, public health and
medicine. Members of the advisory board are appointed for a three-year term.

The members of the advisory board are set forth below. Except as otherwise
noted, each of the members of the advisory board was appointed in April 1999.

JOAN ELIZABETH BALDWIN is an educator with more than 25 years of experience
focusing on early elementary reading instruction and childhood learning
disabilities. She is the recipient of the 1999 Outstanding Educator of the Year
Award from the Learning Disabilities Association of America, as well as the
recipient of the Pennsylvania Learning Disabilities Association's 1998
Outstanding Educator of the Year Award. Ms. Baldwin is also a Fellow in the
National Writing Project.

DR. CHARLES I. BERLIN is professor of Otorhinolaryngology and Physiology and
Director of the Kresge Hearing Research Laboratory of the South at LSU Medical
School in New Orleans. He is also a practicing licensed audiologist. His
clinical activities specialize in fitting hearing aids with real ear measurement
to children and adults. He is the recipient of numerous awards and a founding
member of the Advisory Board to the National Institute of Deafness and Other
Communications Disorders. He has authored numerous articles relating to hearing
and speech. Dr. Berlin will become an active participant on the Education
Advisory Board on June 1, 1999.

DR. FERNANDO A. GUERRA currently serves as Director of Health for the San
Antonio Metropolitan Health District. He is also a clinical professor at the
University of Texas in the Department of Pediatrics. In addition to his training
as a medical doctor, Dr. Guerra has served on numerous associations and task
forces as a public health professional. He is a frequent speaker on public
health matters affecting children, including immunization and disease
prevention, and has served in an advisory capacity to local, state and national
childhood development programs, including Head Start.

ALAN T. OLKES is a founder and chief of operations for Cambridge Academic, a
company that forms and operates private schools, and manages charter schools. He
has been a consultant to Haskell Education Services, where he wrote and
successfully attained charters for three schools. He is a former superintendent
of schools in Dade County, Florida, having served in the Dade County school
system for more than 30 years. He has taught music, mathematics, English and
social studies and has served in numerous administrative positions, including
principal, director of management information systems and supervisor of support
operations.

DR. ALBA A. ORTIZ is a professor in the Department of Special Education and
director of the Office of Bilingual Education at The University of Texas at
Austin. She has served as co-chair of the Exceptional Needs Standards Committee
for the National Board for Professional Teaching Standards

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<PAGE>
and is a member of the National Educational Research Policy and Priorities
Board. Dr. Ortiz is a former President of the International Council for
Exceptional Children.

DR. CHARLES R. THOMAS has served in various educational and administrative
positions for more than 30 years. He is associated with Plath, Nielsen, Rodger
Associates, a management consulting firm, and has previously served as assistant
superintendent of the Illinois State Board of Education and superintendent of
both North Chicago Community Unit School District 187 and North Chicago
Elementary School District 64. He is currently the Professor of Educational
Leadership at National Louis University in Evanston, Illinois.

P. MICHAEL TIMPANE currently serves as a Senior Advisor for Education Policy
with RAND. From 1994 to 1997, he served as Vice President and Senior Scholar at
the Carnegie Foundation for the Advancement of Teaching. He previously served at
Teachers College, Columbia University, as president, dean and professor of
education. He serves on the boards of Children's Television Workshop, the
Southern Education Foundation, Jobs for the Future and the Visiting Committee of
the Harvard Graduate School of Education.

OCTAVIO J. VISIEDO is currently an educational consultant with OV
Educational Concepts, having served as the superintendent of schools in Dade
County, Florida from 1990 until 1996. In his capacity as superintendent, Mr.
Visiedo managed the United States' fourth-largest school district with 330,000
K-12 students and 150,000 adult students.

BOARD COMPOSITION

We currently have authorized eight directors. In accordance with the terms
of the certificate of incorporation that will become effective upon the closing
of this offering, the terms of office of the directors will be divided into
three classes: Class I, Class II and Class III. The terms for each class will
expire at the annual meetings of stockholders to be held in 2000, 2001 and 2002
(or special meetings held in lieu thereof). The Class I directors are Messrs.
Holstrom and Thomas and Dr. Tallal, the Class II directors are Ms. Bolton and
Mr. Tanner, and the Class III directors are Dr. Merzenich and Mr. Moorhead. At
each annual meeting of stockholders after the initial classification or special
meeting in lieu of an annual meeting, the successors to directors whose terms
will then expire will be elected to serve from the time of election and
qualification until the third annual meeting following election or special
meeting held in lieu of the third annual meeting. In addition, the certificate
of incorporation provides that the authorized number of directors may be changed
only by resolution of the directors. Any additional directorships resulting from
an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the directors. This classification of the board of directors may have the effect
of delaying or preventing changes in control or management. Although directors
may be removed for cause by the affirmative vote of the holders of a majority of
the common stock, the certificate of incorporation provides that directors may
be removed without cause only by the affirmative vote of holders of at least
66 2/3% of the voting power of all the then-outstanding shares of our voting
stock.

BOARD COMMITTEES

The board of directors has an audit committee and a compensation committee.
The audit committee, currently composed of Messrs. Holstrom, Thomas and Tanner,
reviews our internal accounting procedures and consults with and reviews the
services provided by our independent auditors. The compensation committee,
currently composed of Messrs. Holstrom and Moorhead, reviews and recommends the
compensation and benefits matters to the board of directors. The compensation
committee also administers the issuance of stock options and other awards under
our equity incentive plans.

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<PAGE>
DIRECTOR COMPENSATION

We currently provide cash compensation to directors who are not our
employees or consultants and do not hold five percent or more of our voting
securities for services as directors. This compensation includes $1,000 per
regular meeting of the board of directors attended in person and $500 per
committee meeting and per meeting of the board of directors attended by
telephone. Directors will also be reimbursed for various expenses in connection
with attendance at board and committee meetings. Directors are currently
eligible to participate in our stock option plan. Beginning with the completion
of this offering, employee directors will also be eligible to participate in our
1999 Employee Stock Purchase Plan and non-employee directors will be eligible to
participate in the 1999 Non-Employee Directors' Stock Option Plan. See
"--Employee Benefit Plans."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of the members of the compensation committee have been an officer or
employee, except that Mr. Holstrom served as our Chief Financial Officer from
February 1996 to March 1997. No executive officer serves as a member of the
board of directors or compensation committee of any entity that has one or more
executive officers serving on our board of directors or compensation committee.

EXECUTIVE COMPENSATION

The following table sets forth the compensation awarded or paid during the
fiscal year ended December 31, 1998 to our Chief Executive Officer and the other
most highly compensated officer receiving compensation in excess of $100,000 in
1998 (the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE (1)

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -------------------
SECURITIES
------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION (2) SALARY ($) BONUS OPTIONS COMPENSATION ($)
- ------------------------------------------------------ ----------- ----------- ------------------- -------------------
<S> <C> <C> <C> <C>
Sheryle J. Bolton, Chief Executive Officer............ 220,000 -- 16,666 225(3)
Frank M. Mattson, Chief Financial Officer............. 166,000 -- 19,000 --
Diane H. Church, Vice President, Private Channel
Sales............................................... 127,000 -- 2,333 368(4)
James A. Mills, Vice President, Marketing............. 103,757 -- 10,332 --
</TABLE>

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

(1) In accordance with the rules of the Securities and Exchange Commission, the
compensation described in this table does not include medical, group life
insurance or other benefits received by the Named Executive Officers that
are available generally to all salaried employees and various perquisites
and other personal benefits received by the Named Executive Officers, which
do not exceed the lesser of $50,000 or 10% of any officer's salary and bonus
disclosed in this table.

(2) In determining compensation packages for our officers, we currently take
into consideration the equity held by the officer. Accordingly, some
officers may receive smaller compensation packages than other officers with
comparable responsibilities.

(3) Represents the costs of membership in an airline club.

(4) Represents the costs of membership in a health club.

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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth each grant of stock options made during the
year ended December 31, 1998 to each of the Named Executive Officers:

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL RATES
OF STOCK
NUMBER OF INDIVIDUAL GRANTS APPRECIATION FOR
SECURITIES % OF TOTAL OPTIONS ---------------------------- OPTION TERM (4)
UNDERLYING OPTIONS GRANTED IN FISCAL EXERCISE PRICE EXPIRATION ----------------------
NAME GRANTED (1) 1998 (2) ($/SHARE) (3) DATE 5% ($) 10% ($)
- ---------------------------------- ------------------- --------------------- --------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sheryle J. Bolton................. 16,666 4.8 $ 6.00 12/16/08 $ 307,488 $ 547,478
Frank M. Mattson.................. 15,000 4.3 2.25 4/30/08 333,000 549,000
4,000 1.2 6.00 12/16/08 73,800 131,400
Diane H. Church................... 2,333 0.7 6.00 12/16/08 43,044 76,639
James E. Mills.................... 333 0.1 0.75 1/13/08 7,892 12,687
9,999 2.9 6.00 12/16/08 184,482 328,467
</TABLE>

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

(1) Each of the options was granted under our 1999 Equity Incentive Plan and has
a term of 10 years, subject to earlier termination upon the occurrence of
events related to termination of employment. The option grants for Ms.
Bolton and Mr. Mattson vest as to 1/48(th) of the total shares on a monthly
basis from the date of grant. The option grants for Ms. Church and Mr. Mills
vest as to 1/60(th) of the total shares on a monthly basis from the date of
grant.

(2) Based on an aggregate of 346,488 shares subject to options granted to our
employees in 1998, including the Named Executive Officers.

(3) The exercise price per share of each option was equal to the fair market
value of the common stock as determined by the board on the date of grant.

(4) The potential realizable values are computed by (a) multiplying the number
of shares of common stock subject to a given option by an assumed initial
public offering price of $15.00 per share, (b) assuming that the aggregate
stock value derived from that calculation compounds at the annual 5% or 10%
rate shown in the table for the entire ten-year term of the option and (c)
subtracting from that result the aggregate option exercise price. The 5% and
10% assumed annual rates of stock price appreciation are mandated by the
rules of the SEC and do not represent our estimate or projection of future
common stock prices.

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<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL 1998
AND YEAR-END OPTION VALUES

The following table sets forth for each of the Named Executive Officers the
number and value of securities underlying unexercised options held by such Named
Executive Officer at December 31, 1998:

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 1998 (1) AT DECEMBER 31, 1998 (2)
ACQUIRED ON VALUE ------------------------------ -----------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ------------- ------------- ----------- ----------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Sheryle J. Bolton............. -- -- 333,333 -- $ 1,899,999 $ --
16,666 0
Frank M. Mattson.............. 1,666 9,496 45,000 -- 256,500 --
8,333 44,998
15,000 56,250
4,000 0
Diane H. Church............... -- -- 33,333 -- 100,000 --
2,333 0
James E. Mills................ -- -- 10,000 -- 54,000 --
333 1,748
9,999 0
</TABLE>

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

(1) Options may be exercised immediately under early exercise provisions
contained in option agreements. Any unvested shares issued under such early
exercise provisions are subject to a repurchase option in favor of the
company upon termination of employment. Such repurchase option terminates at
a rate reflecting the vesting schedule of the underlying option.
Accordingly, such repurchase option terminates at a rate of 1/48th per month
for Ms. Bolton and Mr. Mattson and at a rate of 1/60th per month for Ms.
Church and Mr. Mills. See "Principal Stockholders."

(2) Based on the difference between the deemed fair market value of the common
stock at December 31, 1998 ($6.00 per share) and the exercise price.

EMPLOYEE BENEFIT PLANS

1999 EQUITY INCENTIVE PLAN. Our 1999 Equity Incentive Plan was adopted by
the board of directors in April 1999 and was approved by our stockholders in May
1999. The incentive plan amends and restates our existing option plan adopted in
February 1996 and amended in September 1996. As of April 30, 1999, there were
options outstanding to purchase an aggregate of 1,193,474 shares of our common
stock under the prior plan. The incentive plan will become effective upon
completion of this offering. There are currently 1,911,398 shares of common
stock reserved for future issuance under the incentive plan.

The incentive plan provides for the grant of incentive stock options, as
defined under the Internal Revenue Code of 1986, as amended, to employees
(including officers). The incentive plan also provides for the grant of
nonstatutory stock options, restricted stock purchase awards, stock bonuses and
stock appreciation rights to employees (including officers), directors and
consultants. The incentive plan is administered by the compensation committee,
which determines recipients and types of options to be granted, including the
exercise price, number of shares subject to the option and the exercisability
thereof.

The terms of stock options granted under the incentive plan generally may
not exceed 10 years. The compensation committee determines the exercise price of
options granted under the incentive plan. The exercise price for an incentive
stock option cannot be less than 100% of the fair market value of

55
<PAGE>
the common stock on the date of grant. Prior to our stock being publicly traded,
the exercise price for a nonstatutory stock option cannot be less than 85% of
the fair market value of the common stock on the date of grant. Options granted
under the incentive plan vest at the rate specified in the option agreement.
Generally, the optionee may not transfer a stock option other than by will or
the laws of descent or distribution unless the optionee holds a nonstatutory
stock option that provides otherwise. However, an optionee may designate a
beneficiary who may exercise the option following the optionee's death. An
optionee whose service relationship with us or any affiliate of ours ceases for
any reason may exercise vested options for the term provided in the option
agreement.

No incentive stock option (and prior to our stock being publicly traded, no
nonstatutory stock option) may be granted to any person who, at the time of the
grant, owns (or is deemed to own) stock possessing more than 10% of our total
combined voting power or any affiliate, unless the option exercise price is at
least 110% of the fair market value of the stock subject to the option on the
date of grant and the term of the option does not exceed five years from the
date of grant. In addition, the aggregate fair market value, determined at the
time of grant, of the shares of common stock with respect to which incentive
stock options are exercisable for the first time by an optionee during any
calendar year (under all our plans and those of our affiliates) may not exceed
$100,000.

When we become subject to Section 162(m) of the Internal Revenue Code (which
denies a deduction to publicly held corporations for certain compensation paid
to specified employees in a taxable year to the extent that the compensation
exceeds $1,000,000), no person may be granted options under the incentive plan
covering more than 420,000 shares of common stock in any calendar year.

Shares subject to stock options that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the incentive plan. Under its general authority to grant options,
the compensation committee has the implicit authority to reprice outstanding
options or to offer optionees the opportunity to replace outstanding options
with new options for the same or a different number of shares. Both the original
and new options will count toward the Section 162(m) limitation set forth above.

Restricted stock purchases may be at any price determined by the board of
directors in its sole discretion, and stock bonuses may be awarded in
consideration of past services without a purchase payment. Rights under a stock
bonus or restricted stock bonus agreement may not be transferred other than by
will, the laws of descent and distribution or a domestic relations order during
the time the stock awarded under a stock bonus or restricted stock bonus
agreement remains subject to the agreement.

In the event of specified changes in control, all outstanding options under
the incentive plan either will be assumed or substituted for by any surviving
entity. If the surviving entity determines not to assume or substitute for these
awards, the vesting provisions of these stock awards will be accelerated and
these stock awards will be terminated upon the change in control if not
previously exercised. In the event of an acquisition under Section 13(d) or
14(d) of the Securities Exchange Act of 1934 of securities representing at least
fifty percent (50%) of our combined voting power, the vesting of stock awards
will be accelerated immediately upon the occurrence of this event.

1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN. Our 1999 Non-Employee
Directors' Stock Option Plan was adopted by the Board of Directors in April 1999
and was approved by our stockholders in May 1999. The Plan provides for the
automatic grant of options to purchase shares of common stock to non-employee
directors. The board of directors administers the directors' plan, unless the
board of directors delegates administration to a committee. The aggregate number
of shares of common stock that may be issued pursuant to options granted under
the directors' plan is 75,000 shares.

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<PAGE>
Each non-employee director will automatically be granted an option to
purchase shares of our common stock upon the completion of this offering and
each anniversary thereafter. Any individual who becomes a non-employee director
after this offering will automatically be granted an initial grant upon being
elected to the board of directors and an annual grant on each anniversary of the
date the non-employee director was first elected as a member of the Board during
his or her service as a non-employee director.

The exercise price of the options granted under the directors' plan will be
equal to the fair market value of the common stock on the date of grant. Options
granted under the directors' plan generally are non-transferable. However, an
optionee may designate a beneficiary who may exercise the option following the
optionee's death. An optionee whose service relationship with us or any
affiliate of ours (whether as a non-employee director or subsequently as an
employee, director or consultant of either the company or an affiliate) ceases
for any reason may exercise vested options for the term provided in the option
agreement (12 months generally, 18 months in the event of death).

In the event of specified changes in control, all outstanding options under
the directors' plan either will be assumed or substituted for by any surviving
or acquiring entity. If the surviving or acquiring entity determines not to
assume or substitute the options, the options will be accelerated prior to the
change in control and will be terminated if not exercised prior to the change in
control. In the event of the acquisition under Section 13(d) or 14(d) of the
Securities Exchange Act of 1934 of securities representing at least fifty
percent (50%) of our combined voting power, the vesting of options will be
accelerated immediately upon the occurrence of such event.

1999 EMPLOYEE STOCK PURCHASE PLAN. Our 1999 Employee Stock Purchase Plan
was adopted by the Board of Directors in April 1999 and was approved by our
stockholders in May 1999. The plan authorizes the issuance of 350,000 shares of
common stock under purchase rights granted to our employees or to employees of
any affiliate of ours. The purchase plan is intended to qualify as an employee
stock purchase plan within the meaning of Section 423 of the Code.

The purchase plan provides a means by which employees may purchase our
common stock through payroll deductions. The purchase plan is implemented by
offerings of rights to eligible employees. Under the plan, we may specify
offerings with a duration of not more than 27 months, and may specify shorter
purchase periods within each offering. The first offering will begin on the
effective date of this offering and be approximately 12 months in duration with
purchases occurring every six months. Unless otherwise determined by the board
of directors, common stock is purchased for accounts of employees participating
in the purchase plan at a price per share equal to the lower of (i) 85% of the
fair market value of a share of common stock on the date of commencement of
participation in the offering or (ii) 85% of the fair market value of a share of
common stock on the date of purchase. Generally, all regular employees,
including executive officers, who work at least 20 hours per week and are
customarily employed by us or by an affiliate of ours for at least five months
per calendar year may participate in the purchase plan and may authorize payroll
deductions of up to 15% of their base compensation for the purchase of stock
under the purchase plan.

Eligible employees may be granted rights only if the rights together with
any other rights granted under employee stock purchase plans do not permit the
employee's rights to purchase our stock to accrue at a rate which exceeds
$25,000 of fair market value of the stock for each calendar year in which the
rights are outstanding. No employee shall be eligible for the grant of any
rights under the purchase plan if immediately after the rights are granted, such
employee has voting power over 5% or more of our outstanding capital stock. As
of the date hereof, no shares of common stock had been purchased under the
purchase plan.

401(K) PLAN. In January 1996, we adopted a tax-qualified employee savings
and retirement plan covering all of our employees. Under this 401(k) Plan,
employees may elect to reduce their current compensation by up to the lesser of
20% of eligible compensation or the statutorily prescribed annual

57
<PAGE>
limit ($10,000 in 1998) and have the amount of this reduction contributed to the
401(k) plan. The trustee under the 401(k) plan, at the direction of each
participant, invests the assets of the 401(k) plan in any of four investment
options. The 401(k) plan is intended to qualify under Section 401 of the
Internal Revenue Code so that contributions by employees to the 401(k) Plan, and
income earned on plan contributions, are not taxable to employees until
withdrawn, and so that the contributions by employees will be deductible by us
when made. We may make matching or additional contributions to the 401(k) plan,
in amounts to be determined annually by the board of directors.

CONSULTING AGREEMENTS

In September 1996, we entered into consulting agreements with Dr. Merzenich
and Dr. Tallal. The agreement with Dr. Merzenich enables him to continue to
direct our research and development activities through December 31, 2001. The
agreement with Dr. Tallal generally provides, among other things, that she will
devote an average of one day per week on consulting activities for us through
December 31, 2001. The amounts paid to Dr. Merzenich or Dr. Tallal under their
consulting agreements did not exceed $60,000 in 1998. See "Certain
Transactions."

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

In June 1998, the board of directors authorized us to enter into indemnity
agreements with each of our directors and executive officers. The form of
indemnity agreement provides that we will indemnify against any and all expenses
of the director or executive officer who incurred expenses because of his or her
status as a director or executive officer, to the fullest extent permitted by
our bylaws.

Our certificate of incorporation and bylaws contain provisions relating to
the limitation of liability and indemnification of directors and officers. The
certificate of incorporation provides that directors will not be personally
liable to us or our stockholders for monetary damages for any breach of
fiduciary duty as a director, except for liability: (1) for any breach of the
directors' duty of loyalty to us or our stockholders; (2) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law; (3) in respect of certain unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law; or (4) for any transaction from which the director
derives any improper personal benefit. The certificate of incorporation also
provides that if the Delaware General Corporation Law is amended after the
approval by our stockholders of the certificate of incorporation to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of the directors will be eliminated or limited to
the fullest extent permitted by the Delaware law. In addition, as permitted by
Section 145 of the Delaware General Corporation Law, our bylaws provide that we
will indemnify our directors and executive officers and may indemnify our other
officers, employees and other agents to the fullest extent not prohibited by
Delaware law. These provisions do not affect a director's responsibilities under
any other laws, such as the federal securities laws or state or federal
environmental laws. We have purchased a directors' and officers' liability
insurance policy providing coverage up to specified amounts for losses incurred
by us, our directors or officers in connection with specified claims against
them, including specified claims under state and federal securities laws.

58
<PAGE>

TRANSACTIONS AND RELATIONSHIPS WITH RELATED PARTIES

From April to September 1996, we issued an aggregate of 963,101 shares of
our Series A preferred stock, of which 761,951 shares were sold at a price of
$2.55 per share to investors and 61,728 shares were sold at a price of $2.43 per
share to Drs. Merzenich, Holstrom and Jenkins under an employee stock purchase
plan. In October and November 1996, we issued an aggregate of 1,499,999 shares
of Series B preferred stock at a price of $2.70 per share. In connection with
the sale of Series B preferred stock, we also issued warrants to purchase a
total of 952,380 shares of Series C preferred stock with an exercise price of
$4.20 per share (all of which warrants have since been exercised). From December
1998 to January 1999, we issued an aggregate of 1,833,332 shares of Series D
preferred stock at a price of $9.00 per share. In connection with the sale of
Series D preferred stock, we also issued a warrant to purchase 7,222 shares of
Series D preferred stock with an exercise price of $11.25 per share. Listed
below are the directors, executive officers and five percent stockholders who
have made equity investments to purchase shares of our preferred stock or common
stock. See "Principal Stockholders."

<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D
COMMON PREFERRED PREFERRED PREFERRED PREFERRED AGGREGATE
INVESTOR STOCK STOCK STOCK STOCK STOCK CONSIDERATION
- --------------------------------------- --------- ----------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dr. Michael M. Merzenich............... 833,333 20,576 -- -- -- $ 51,000
Dr. Paula A. Tallal.................... 833,333 -- -- -- -- $ 1,000
Dr. William M. Jenkins................. 555,558 20,576 -- -- -- $ 50,667
Dr. Steven L. Miller................... 123,450 -- -- -- -- $ 148
Warburg, Pincus Ventures, L.P. (1)..... -- -- 1,481,481 952,380 1,111,111 $ 17,999,994
Carleton A. Holstrom (2)............... 154,315 40,184 -- -- -- $ 100,186
David A. Tanner (3).................... -- -- -- -- 555,555 $ 4,999,995
</TABLE>

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

(1) Messrs. Moorhead and Thomas, our directors, are affiliated with Warburg,
Pincus Ventures. Does not include warrants to purchase 116,666 shares of our
common stock issued to Warburg, Pincus Ventures in June and October 1998 in
connection with Warburg, Pincus Ventures' guarantee of an unsecured line of
credit obtained by the Company.

(2) Includes 19,608 shares of Series A preferred stock held by the Solon Edward
Trust #2, for which Mr. Holstrom serves as trustee.

(3) Includes 555,555 shares held by LF SL Holding LLC. Mr. Tanner is affiliated
with Lazard Capital Partners LLC, the Managing Member of LF SL Holding LLC.

The holders of our Series B, C and D preferred stock are entitled to
registration rights with respect to the common stock issued or issuable upon
conversion of the Series B, C or D preferred stock. See "Description of Capital
Stock--Registration Rights."

In connection with the issuance of Series B preferred stock and the warrants
to purchase Series C preferred stock referenced above, we entered into an
agreement that requires us, following the completion of this offering and as
long as Warburg, Pincus Ventures owns at least 10% or 20% of the outstanding
common stock, to nominate and use our best efforts to elect one or two
individuals, respectively, designated by Warburg, Pincus Ventures for election
to the board or directors. See "Risk Factors--Our executive officers and
directors and their affiliates hold a majority of our outstanding capital stock"
and "Description of Capital Stock--Board Representation Rights."

In June 1998, we obtained a $3 million unsecured line of credit from
BankBoston, N.A. which was guaranteed by Warburg, Pincus Ventures. This line of
credit has since been paid off in full. In connection with Warburg, Pincus
Ventures providing this guarantee, we issued to Warburg, Pincus Ventures
warrants to purchase 116,666 shares of our common stock at $9.00 per share.
These warrants expire on May 31, 2003. Additionally, in order to enable us to
repay the outstanding balance on lines of

59
<PAGE>
credit, Warburg, Pincus Ventures agreed to purchase up to 333,333 shares of our
capital stock at $9.00 per share if requested by us. Our right to require
Warburg, Pincus Ventures to purchase such securities was cancelled in connection
with the closing of our Series D preferred stock financing in December 1998.

Under our license with the Regents of the University of California, we are
obligated to make license-issue fee payments, royalty payments, milestone
payments and other payments to the Regents in exchange for a license to
commercially develop and sell products that make use of a patent filed by Drs.
Tallal, Merzenich, Jenkins and Miller, among others, and subsequently assigned
to the Regents. This patent was granted by the USPTO in September 1998. Drs.
Tallal and Merzenich are members of our board of directors, and Drs. Jenkins and
Miller are vice presidents with us. These payments include our obligation to
make minimum royalty payments which commenced the year of our first commercial
sale. In 1999, and for each year thereafter during the term of the license, the
minimum royalty payment will be $150,000. To date, we have paid $200,000 and
issued a net of 114,526 shares of Series A preferred stock, convertible upon the
closing of this offering into 114,526 shares of our common stock, in
satisfaction of all license-issue fees owed under the license and are current on
all royalty payments due under the license. To date, a milestone payment of
$50,000 has become due under the license. However, total aggregate milestone
payments under the license are expected to be $350,000, with individual
milestone payments being dependent upon our achieving specified net sales. We
expensed an aggregate of $415,000 for royalty and milestone payments under the
license for the year ended December 31, 1998. Pursuant to separate patent
policies of the UCSF and Rutgers, as well as understandings between inventors
affiliated with each university, each university distributes to those inventors
affiliated with the university, on an annual basis, a portion of the payments
received from us. To date, the amounts distributed to each inventor under the
universities' patent policies have not exceeded $60,000 per year. The amount of
any future university distributions to the inventors are indeterminable at this
time because these figures are tied to our future performance; however, we
estimate that less than 0.5% of product sales during the term of the license
will be payable by the universities to each inventor. The license was negotiated
by us on an arms-length basis, without involvement by the inventors.

Ms. Bolton's husband, Stephen Shane, is a principal of TouchStar
Communications, which has produced some of our promotional and training videos.
The total compensation paid to TouchStar for production services was
approximately $58,000 in 1998 and approximately $28,000 through April 1999.

We believe that the foregoing transactions were in our best interest. As a
matter of policy these transactions were, and all future transactions between us
and any of our officers, directors or principal stockholders will be, approved
by a majority of the disinterested members of the board of directors, on terms
no less favorable to us than could be obtained from unaffiliated third parties
and in connection with bona fide business purposes. See "Management--Consulting
Agreements."

60
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth information with respect to the beneficial
ownership of our common stock as of April 30, 1999 (except as otherwise
indicated) and as adjusted to reflect the sale of the common stock being offered
hereby by (assuming no exercise of the underwriters' over-allotment option): (1)
each person (or group of affiliated persons) who is known by us to own
beneficially more than five percent of the common stock; (2) each of the Named
Executive Officers; (3) each of our directors; and (4) all directors and
executive officers as a group. Unless otherwise noted, the address for the
individuals listed below is: c/o Scientific Learning Corporation, 1995
University Avenue, Suite 400, Berkeley, CA 94704.

<TABLE>
<CAPTION>
PERCENTAGE OWNED (1)
------------------------
BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNERS SHARES (1) OFFERING OFFERING
- -------------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Warburg, Pincus Ventures, L.P. (2).............................................. 3,661,638 44.8% 35.0%
466 Lexington Avenue
New York, NY 10017
LF SL Holding LLC (3)........................................................... 555,555 6.8 5.3
30 Rockefeller Plaza, 62(nd) Floor
New York, NY 10020
Sheryle J. Bolton (4)........................................................... 346,667 4.1 3.3
Dr. Michael M. Merzenich (5).................................................... 670,574 8.2 6.4
Dr. Paula A. Tallal (6)......................................................... 803,843 9.8 7.7
Frank M. Mattson (7)............................................................ 73,999 *
Dr. William M. Jenkins.......................................................... 565,022 6.9 5.4
Diane H. Church (8)............................................................. 35,666 * *
James A. Mills (9).............................................................. 30,332 * *
Carleton A. Holstrom (10)....................................................... 194,449 2.4 1.9
Rodman W. Moorhead, III (2)(11)................................................. 3,661,638 44.8 35.0
James E. Thomas (2)(11)......................................................... 3,661,638 44.8 35.0
David A. Tanner (12)............................................................ 555,555 6.8 5.3
All directors and executive officers as a group (11 persons) (13)............... 6,937,745 83.0% 65.1%
</TABLE>

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

* Less than one percent.

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them.
Percentage of beneficial ownership is based on 8,170,509 shares of common
stock outstanding as of April 30, 1999 and 10,470,509 shares of common stock
outstanding upon completion of this offering.

(2) Includes 116,666 shares issuable upon the exercise of an immediately
exercisable warrant issued in June 1998. Messrs. Moorhead and Thomas,
directors of the Company, are affiliated with Warburg, Pincus Ventures. The
sole general partner of Warburg, Pincus Ventures is Warburg, Pincus & Co., a
New York general partnership. E.M. Warburg, Pincus & Co., LLC, a New York
limited liability company, manages Warburg, Pincus Ventures. The members of
E.M. Warburg, Pincus & Co., LLC are substantially the same as the partners
of Warburg, Pincus & Co. Lionel I. Pincus is the managing partner of
Warburg, Pincus & Co. and the managing member of E.M. Warburg, Pincus & Co.
LLC and may be deemed to control both Warburg, Pincus & Co. and E.M.
Warburg, Pincus & Co. LLC. Warburg, Pincus & Co. has a 15% interest in the
profits of Warburg, Pincus

61
<PAGE>
Ventures as the general partner and also owns approximately 1.5% of the
limited partnership interests in Warburg, Pincus Ventures. See "Certain
Transactions."

(3) Mr. Tanner, a director of the Company, is affiliated with Lazard Capital
Partners LLC, the Managing Member of LF SL Holding LLC. Mr. Tanner is a
Managing Director of Lazard Freres & Co. LLC, the Managing Member of Lazard
Capital Partners LLC.

(4) Includes 283,333 shares subject to immediately exercisable stock options,
150,695 shares of which will be vested as of June 29, 1999 and the remaining
132,638 shares which would be subject to repurchase if purchased prior to
vesting.

(5) Includes 249,999 shares of common stock beneficially owned directly by Dr.
Merzenich, 403,909 shares of common stock held in the Merzenich Family Trust
and 16,666 shares subject to vested stock options.

(6) Includes 670,510 shares of common stock beneficially owned directly by Dr.
Tallal and 133,333 shares held by the Colleen Osburn 1998 Irrevocable Trust,
for which Dr. Tallal serves as trustee. Dr. Tallal disclaims beneficial
ownership of the shares held by the Colleen Osburn 1998 Irrevocable Trust
within the meaning of Rule 13d-3 under the Securities Act of 1934.

(7) Includes 46,223 shares subject to immediately exercisable stock options,
8,371 of which will be vested as of June 29, 1999 and the remaining 37,852
shares which would be subject to repurchase if purchased prior to vesting.

(8) Includes 24,996 shares subject to immediately exercisable stock options,
1,745 shares of which will be vested as of June 29, 1999 and the remaining
23,251 shares which would be subject to repurchase if purchased prior to
vesting.

(9) Includes 30,332 shares subject to immediately exercisable stock options,
7,562 shares of which will be vested as of June 29, 1999 and the remaining
22,770 shares which would be subject to repurchase if purchased prior to
vesting.

(10) Includes 154,315 shares held by the Holstrom Family Limited Partnership and
19,608 shares held in the Solon Edward Trust #2, for which Mr. Holstrom
serves as trustee. Mr. Holstrom disclaims beneficial ownership of the shares
held in the Solon Edward Trust #2 within the meaning of Rule 13d-3 under the
Securities Act of 1934.

(11) All of the shares indicated as owned by Messrs. Moorhead and Thomas are
owned directly by Warburg, Pincus Ventures, L.P. and are included because of
each individual's affiliation with Warburg, Pincus Ventures, L.P. Messrs.
Moorhead and Thomas are both our directors. Mr. Thomas is a Managing
Director of E.M. Warburg, Pincus & Co., LLC and a general partner of
Warburg, Pincus & Co. Mr. Moorhead is a Senior Managing Director of E.M.
Warburg, Pincus & Co., LLC and a general partner of Warburg, Pincus & Co. As
such, Mr. Moorhead and Mr. Thomas may be deemed to have an indirect
pecuniary interest (within the meaning of Rule 16a-1 under the Securities
Exchange Act of 1934) in an indeterminate portion of the shares beneficially
owned by Warburg, Pincus Ventures. Each of Messrs. Moorhead and Thomas
disclaims beneficial ownership of these shares within the meaning of Rule
13d-3 under the Securities Exchange Act of 1934. The address for Messrs.
Moorhead and Thomas is: c/o Warburg, Pincus Ventures, L.P., 466 Lexington
Avenue, New York, NY 10017.

(12) Includes 555,555 shares held by LF SL Holding LLC. Mr. Tanner is affiliated
with Lazard Capital Partners LLC, the Managing Member of LF SL Holding LLC.

(13) Includes the information in notes (1) through (11), as applicable.

62
<PAGE>
DESCRIPTION OF CAPITAL STOCK

The following description of our capital stock and provisions of our
certificate of incorporation and bylaws is a summary and is qualified in its
entirety by the provisions of the certificate of incorporation and bylaws, which
have been filed as exhibits to the Registration Statement, of which this
prospectus is a part.

Upon the closing of this offering, our authorized capital stock will consist
of 40,000,000 shares of common stock, $0.001 par value per share, and 1,000,000
shares of preferred stock, $0.001 par value per share.

COMMON STOCK

As of April 30, 1999, there were 8,170,509 shares of common stock
outstanding held by 133 holders of record, which reflects the conversion of all
outstanding shares of preferred stock into common stock. The holders of common
stock are entitled to one vote for each share held of record on all matters
submitted to a vote of the stockholders. The holders of common stock are not
entitled to cumulative voting rights with respect to the election of directors,
and as a consequence, minority stockholders will not be able to elect directors
on the basis of their votes alone. Subject to preferences that may be applicable
to any shares of preferred stock issued in the future, holders of common stock
are entitled to receive ratably dividends as may be declared by the Board out of
funds legally available therefor. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of our company, holders of the common
stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding preferred
stock. Holders of common stock have no preemptive rights and no right to convert
their common stock into any other securities. There are no redemption or sinking
fund provisions applicable to the common stock. All outstanding shares of common
stock are, and all shares of common stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.

PREFERRED STOCK

Upon the completion of this offering, all outstanding shares of Series A, B,
C and D preferred stock will be converted into 5,232,146 shares of common stock.
See Note 5 to Financial Statements for a description of currently outstanding
preferred stock.

Upon the completion of this offering, the board of directors will have the
authority, without further action by the stockholders, to issue up to 1,000,000
shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions of these shares of preferred stock,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of the series, without any further
vote or action by stockholders. The issuance of preferred stock could adversely
affect the voting power of holders of common stock and the likelihood that the
holders will receive dividend payments and payments upon liquidation and could
have the effect of delaying, deferring or preventing a change in control. We
have no present plan to issue any shares of preferred stock.

REGISTRATION RIGHTS

Under a registration rights agreement, some of our stockholders are entitled
to rights with respect to the registration of approximately 4,285,711 shares of
common stock under the Securities Act of 1933. If we propose to register any of
our securities under the Securities Act, these stockholders are entitled to
notice of registration and are entitled to include their shares therein at our
expense, subject to certain limitations. In addition, these stockholders may
require us at our expense to register their shares on Form S-3 when the form
becomes available for use by us. Our stockholders who have registration rights
include Warburg, Pincus Ventures, LF SL Holding LLC, GC&H Investments and HLM/CB
Fund, L.P.

63
<PAGE>
BOARD REPRESENTATION RIGHTS

Under a purchase agreement with Warburg, Pincus Ventures, among others, we
are required, following the completion of this offering and for so long as
Warburg, Pincus Ventures owns beneficially and of record at least 20% of the
outstanding shares of common stock, to nominate and use our best efforts to have
two individuals designated by Warburg, Pincus Ventures and reasonably acceptable
to us, elected to the board of directors. In addition, we are required,
following the completion of this offering and for so long as Warbug, Pincus
Ventures owns beneficially and of record at least 10% of the outstanding shares
of common stock, to nominate and use our best efforts to have one individual,
designated by Warburg, Pincus Ventures and reasonably acceptable to us, elected
to the board of directors.

DELAWARE ANTI-TAKEOVER LAW AND CHARTER PROVISIONS

We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, the statute prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203 of the Delaware General Corporation Law, a "business combination" includes a
merger, asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior, did
own) 15% or more of the corporation's voting stock.

Effective upon the closing of this offering, our certificate of
incorporation and bylaws, among other things, require that any action required
or permitted to be taken by stockholders be effected at a duly called annual or
special meeting of the stockholders and may not be effected by a consent in
writing, require that advance notice be given of stockholder proposals and
director nominations and prohibit cumulative voting in the election of
directors. Both the certificate of incorporation and the bylaws will also
require the affirmative vote of the holders of at least 66 2/3% of the voting
power of the outstanding shares to remove a director without cause or amend our
bylaws. In addition, a 66 2/3% vote will be required to amend specified
provisions of the certificate of incorporation, including provisions regarding
managing our business, indemnification of directors, classification of the board
of directors, the manner by which vacancies may be filled on the board of
directors, the manner by which stockholders may act and notice requirements when
stockholders want to make nominations for elections of directors or bring other
business before a stockholder meeting. The certificate of incorporation
authorizes the board of directors to issue up to 1,000,000 shares of preferred
stock and to determine the rights, preferences and privileges of these shares of
preferred stock without any further vote or action by the stockholders, provides
for a classified board of directors and specifies that the authorized number of
directors may be changed only by a resolution of the board of directors. Special
meetings of the stockholders may be called only by the board of directors, the
chairman of the board of directors or the chief executive officer. The
provisions described above could have the effect of making it more difficult for
a third party to acquire a majority of our outstanding voting stock, or delay,
prevent or deter a merger, acquisition or tender offer in which our stockholders
could receive a premium for their shares, a proxy contest or other change in our
management. See "Risk Factors--Our charter provisions could have the effect of
delaying or preventing corporate take-overs."

TRANSFER AGENT AND REGISTRAR

BankBoston, N.A. has been appointed as the transfer agent and registrar for
our common stock. The transfer agent's address is 150 Royall Street, Canton,
Massachusetts and its telephone number is (781) 575-2000.

64
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Upon the completion of this offering, we will have outstanding 10,470,509
shares of common stock, based on the number of shares of common stock
outstanding as of April 30, 1999 and assuming no exercise of the underwriters'
over-allotment option. Of these shares, all the shares sold in this offering
will be freely tradable without restrictions or further registration under the
Securities Act of 1933. The remaining 8,170,509 shares of common stock held by
existing stockholders are restricted securities within the meaning of the
Securities Act. These restricted shares may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act of 1933. We have granted
holders of 4,285,711 restricted shares rights with respect to the registration
of these shares. See "Description of Capital Stock--Registration Rights."

Holders of 7,992,457 shares of our common stock, including all executive
officers and directors, have entered into lock-up agreements with the
representatives of the underwriters. See "Underwriting." As a result of
contractual restrictions and the provisions of Rule 144 and 701, additional
shares will be available for sale in the public market as follows: (i) 106,601
restricted shares will be eligible for immediate sale on the date of this
prospectus; (ii) 681,273 shares of common stock issuable upon exercise of
currently outstanding options will be eligible for sale 180 days after the date
of this prospectus upon expiration of lock-up agreements; (iii) 6,148,014
restricted shares will be eligible for sale 180 days after the date of this
prospectus upon expiration of lock-up agreements; and (iv) 123,888 shares of
common stock issuable upon exercise of currently outstanding warrants and
1,844,443 other shares will be eligible for sale in the public market upon
expiration of the one-year holding period. Depending on the method of exercise,
the one year holding period is calculable either from the date of the issuance
of the warrant or the date of exercise.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, any holder, including an affiliate of ours within
the meaning of Rule 405 under the Securities Act of 1933, of restricted shares
as to which at least one year has elapsed since the date of the holder's
acquisition of such shares from us or from an affiliate, would be entitled
within any three-month period to sell a number of shares that does not exceed
the greater of one percent of the then outstanding shares of common stock
(approximately 104,705 shares immediately after the completion of this offering,
assuming no exercise of the underwriters' over-allotment option) or the average
weekly trading volume of the common stock on the Nasdaq National Market during
the four calendar weeks preceding the date on which notice of the sale is filed
with the Securities and Exchange Commission. Sales under Rule 144 are subject to
various requirements relating to manner of sale, notice and availability of
current public information about us. However, a person (or persons whose shares
are aggregated) who is not deemed to have been an affiliate of ours at any time
during the 90 days immediately preceding the sale and who beneficially owns
restricted shares is entitled to sell shares under Rule 144(k) without regard to
the limitations described above, provided that at least two years have elapsed
since the date the shares were acquired from us or from an affiliate of ours.
The foregoing is a summary of Rule 144 and is not intended to be a complete
description of that rule.

Subject to various limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from us by our employees,
directors, officers, consultants or advisors prior to the completion of this
offering, pursuant to written compensatory benefit plans or written contracts
relating to the compensation of these persons. In addition, the Securities and
Exchange Commission has indicated that Rule 701 will apply to stock options
granted by us before this offering, along with the shares acquired upon exercise
of such options. Securities issued in reliance on Rule 701 are deemed to be
restricted shares and, beginning 90 days after the date of this prospectus
(unless subject to the contractual restrictions described above), may be sold by
persons other than affiliates, subject only to the manner of sale

65
<PAGE>
provisions of Rule 144 and by affiliates under Rule 144 without compliance with
its one-year minimum holding period requirement.

We intend to file a registration statement on Form S-8 under the Securities
Act covering shares of common stock reserved for issuance under our option
plans. See "Management--Employee Benefit Plans." This registration statement is
expected to be filed and become effective as soon as practicable after the
completion of this offering. Accordingly, shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to affiliates of ours, be available for sale in the open market, unless such
shares are subject to vesting restrictions or the lock-up agreements described
above. As of April 30, 1999, options to purchase 1,193,474 shares of common
stock were issued and outstanding. See "Management--Executive Compensation" and
"--Employee Benefit Plans."

Prior to this offering, there has been no public market for our common
stock, and there can be no assurance that an active public market for the common
stock will develop or be sustained after this offering. As described herein,
only a limited number of shares will be available for sale shortly after this
offering because of certain contractual and legal restrictions on resale. Sales
of substantial amounts of common stock in the public market after completion of
this offering could materially and adversely affect the prevailing market price
and our ability to raise equity capital in the future.

66
<PAGE>
UNDERWRITING

GENERAL

We intend to offer our common stock through a number of underwriters.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Thomas
Weisel Partners LLC and Pacific Growth Equities, Inc. are acting as
representatives of each of the underwriters named below. Subject to the terms
and conditions set forth in a purchase agreement among our company and the
underwriters, we have agreed to sell to the underwriters, and each of the
underwriters severally and not jointly has agreed to purchase from us the number
of shares of common stock indicated below opposite its name, at the public
offering price less the underwriting discount.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ---------------------------------------------------------------------------------- -----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................................
Thomas Weisel Partners LLC........................................................
Pacific Growth Equities, Inc......................................................
-----------
Total.........................................................................
-----------
-----------
</TABLE>

In the purchase agreement, the several underwriters have agreed, subject to
the terms and conditions set forth in the agreement, to purchase all of the
shares of common stock being sold under the terms of the agreement if any of the
shares are purchased. In the event of a default by an underwriter, the purchase
agreement provides that, under some circumstances, the purchase commitments of
the nondefaulting underwriters may be increased or the purchase agreement may be
terminated.

We have agreed to indemnify the underwriters against some liabilities,
including some liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of those
liabilities.

The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of various legal matters by counsel for the underwriters and other
conditions. The underwriters reserve the right to withdraw, cancel or modify
this offer and to reject orders in whole or in part.

In this prospectus, references to "underwriters" means any person who
purchases shares of common stock directly from us in connection with the
distribution of shares in this offering. References to "representatives" means
Merrill Lynch, Thomas Weisel Partners LLC and Pacific Growth Equities, Inc. who
have entered into an agreement with us and are acting on behalf of the
underwriters in the offering. References to "dealers" means any person who acts
as an agent, broker or principal in the business of dealing or trading in
securities issued by another person. In connection with this offering, a
"dealer" is an agent, broker or principal who buys our common stock from the
underwriters to sell to others. Dealers will not buy directly from us. "Selling
group members" are the group of dealers who sell our securities in the public
market.

OVER-ALLOTMENT OPTION

We have granted an option to the underwriters, exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate of 345,000
additional shares of our common stock at the public offering price set forth on
the cover page of this prospectus, less the underwriting discount. The
underwriters may exercise this option solely to cover over-allotments, if any,
made on the sale of the common stock offered hereby. To the extent that the
underwriters exercise this option, each

67
<PAGE>
underwriter will be obligated to purchase a number of additional shares of
common stock proportionate to the underwriter's initial amount reflected in the
foregoing table.

COMMISSIONS AND DISCOUNTS

The representatives of the underwriters have advised us that the
underwriters propose initially to offer the shares of common stock to the public
at the initial public offering price set forth on the cover page of this
prospectus, and to certain dealers at that price less a concession not in excess
of $ per share of common stock. The underwriters may allow, and such
dealers may reallow, a discount not in excess of $ per share of common
stock to certain other dealers. After the initial public offering, the public
offering price, concession and discount may change.

The following table shows the per share and total underwriting discount to
be paid by us to the underwriters and the proceeds before expenses to us. This
information is presented assuming either no exercise or full exercise by the
underwriters of their over-allotment option.

<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
---------- ---------- ---------
<S> <C> <C> <C>
Public offering price..................................................... $ $ $
Underwriting discount..................................................... $ $ $
Proceeds, before expenses, to Scientific Learning......................... $ $ $
</TABLE>

The expenses of the offering, exclusive of the underwriting discount, are
estimated at $900,000 and are payable entirely by us.

RESERVED SHARES

At our request, the underwriters have reserved for sale, at the initial
public offering price, up to five percent of the shares offered hereby to be
sold to people associated with us or our directors, officers or employees, such
as vendors, suppliers, existing stockholders and other persons that have
relationships with or are interested in us. No shares have been reserved for our
directors, officers or employees. The number of shares of our common stock
available for sale to the general public will be reduced to the extent that
those persons purchase the reserved shares. Any reserved shares which are not
orally confirmed for purchase within one day of the pricing of this offering
will be offered by the underwriters to the general public on the same terms as
the other shares offered by this prospectus.

NO SALES OF SIMILAR SECURITIES

We and our officers and directors and existing stockholders holding 78.0% of
our capital stock outstanding after this offering have agreed, with certain
exceptions, without the prior written consent of Merrill Lynch on behalf of the
underwriters for a period of 180 days after the date of this prospectus not to,
directly or indirectly:

- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant for the sale of, lend otherwise dispose of or transfer any
shares of our common stock or securities convertible into or exchangeable
or exercisable for or repayable with our common stock, or file a
registration statement under the Securities Act relating to any shares of
our common stock or

- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of our common stock, whether
any such swap or transaction is to be settled by delivery of our common
stock or other securities, in cash or otherwise.

68
<PAGE>
QUOTATION ON THE NASDAQ NATIONAL MARKET

We expect our common stock to be approved for quotation on the Nasdaq
National Market, subject to official notice of issuance, under the symbol
"SCIL." Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through negotiations
among us and the representatives. The factors to be considered in determining
the initial public offering price, in addition to prevailing market conditions,
are the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us, our financial information, the
history of, and the prospectus for, our company and the industry in which we
compete, and an assessment of our management, its past and present operations,
the prospects for, and timing of, future revenues of our company, the present
state of our development, and the above factors in relation to market values and
various valuation measures of other companies engaged in activities similar to
ours. We cannot assure you that an active trading market will develop for our
common stock or that our common stock will trade in the public market subsequent
to this offering at or above the initial public offering price.

The underwriters do not expect sales of the common stock to any accounts
over which they exercise discretionary authority to exceed five percent of the
number of shares being offered in this offering.

PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS

Until the distribution of our common stock is completed, the rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
certain selling group members to bid for and purchase our common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of our common stock. These transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of our common stock.

If the underwriters create a short position in our common stock in
connection with this offering, that is, if they sell more shares of our common
stock than are set forth on the cover page of this prospectus, the
representatives may reduce that short position by purchasing our common stock in
the open market. The representatives may also elect to reduce any short position
by exercising all or part of their over-allotment option.

The representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares of
our common stock in the open market to reduce the underwriters' short position
or to stabilize the price of our common stock, they may reclaim the amount of
the selling concession from the underwriters and selling group member who sold
those shares.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of these purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that it
discourages resales of our common stock.

Neither our company nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
our company nor any of the underwriters makes any representation that the
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.

Thomas Weisel Partners LLC, one of the representatives, was organized and
registered as a broker-dealer in December 1998. Since December 1998, Thomas
Weisel Partners has been named as a lead or co-manager on 36 filed public
offerings of equity securities, of which 16 have been completed, and has acted
as a syndicate member in an additional 10 public offerings of equity securities.
Thomas

69
<PAGE>
Weisel Partners does not have any material relationship with us or any of our
officers, directors or other controlling persons, except with respect to its
contractual relationship with us under the purchase agreement entered into in
connection with this offering.

LEGAL MATTERS

The validity of the shares of common stock offered hereby is being passed
upon by Cooley Godward LLP, San Francisco, California. Certain legal matters
will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, San
Francisco, California. An investment partnership affiliated with Cooley Godward
owns 18,518 shares of our preferred stock which will convert into 18,518 shares
of our common stock upon the closing of this offering.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1997 and 1998, and for each of the three
years in the period ended December 31, 1998, as set forth in their report. We
have included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.

AVAILABLE INFORMATION

We have filed with the Commission a registration statement on Form S-1 under
the Securities Act of 1933 with respect to the common stock offered by this
prospectus. This prospectus does not contain all of the information set forth in
the registration statement and the exhibits and schedules to the registration
statement. For further information about us and the common stock we are
offering, you should refer to the registration statement and the exhibits and
the financial statements, notes and schedules filed as part of the registration
statement. You may obtain a copy of the registration statement without charge at
the Commission's principal office at the public reference facility maintained by
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part thereof
may be obtained from the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, upon the payment of certain fees prescribed by the Commission. The
Commission maintains a web site that contains reports, proxy statements and
other information regarding registrants, including our reports and information.
The address of the Commission's web site is http://www.sec.gov.

Upon completion of this offering, we will be subject to the informational
requirements of the Securities Exchange Act of 1934. So long as we are subject
to periodic reporting requirements of the Securities Exchange Act of 1934, we
will file with the Commission the reports, proxy statements and other
information required thereby. We intend to furnish our stockholders with annual
reports containing financial statements audited by an independent public
accounting firm and quarterly reports containing unaudited financial information
for the first three quarters of each fiscal year.

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

70
<PAGE>
SCIENTIFIC LEARNING CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Balance Sheets........................................................................ F-3
Statements of Operations.............................................................. F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity
(Deficit)........................................................................... F-5
Statements of Cash Flows.............................................................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>

F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Scientific Learning Corporation

We have audited the accompanying balance sheets of Scientific Learning
Corporation as of December 31, 1997 and 1998, and the related statements of
operations, redeemable convertible preferred stock and stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1998. 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 Scientific Learning
Corporation at December 31, 1997 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.

Walnut Creek, California /s/ ERNST & YOUNG LLP

January 15, 1999

F-2
<PAGE>
SCIENTIFIC LEARNING CORPORATION

BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY
-------------------- MARCH 31, MARCH 31,
1997 1998 1999 1999
--------- --------- ----------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 2,699 $ 6,362 $ 7,249
Accounts receivable.............................................. 44 799 1,048
Prepaid expenses and other current assets........................ 157 307 389
--------- --------- -----------
Total current assets............................................... 2,900 7,468 8,686
Restricted cash deposit............................................ 350 280 280
Property and equipment, net........................................ 1,120 1,278 1,359
Other assets....................................................... 86 95 96
--------- --------- -----------
Total assets....................................................... $ 4,456 $ 9,121 $ 10,421
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................. $ 419 $ 731 $ 630
Accrued liabilities.............................................. 356 1,249 868
Deferred revenue................................................. 342 1,649 1,942
Current portion of borrowings under bank line of credit.......... 193 278 230
Current portion of capital lease obligations..................... 21 18 13
--------- --------- -----------
Total current liabilities.......................................... 1,331 3,925 3,683

Borrowings under bank line of credit............................... 97 121 76
Capital lease obligations.......................................... 19 -- --
Other liabilities.................................................. 71 217 219
--------- --------- -----------
Total liabilities.................................................. 1,518 4,263 3,978

Commitments

Redeemable convertible preferred stock, $0.001 par value, issuable
in series:
Authorized shares-8,046,668 (none pro forma)
Issued and outstanding shares-2,452,379 in 1997, 3,730,156 in
1998, 4,285,711 in 1999, and none pro forma (liquidation
preference-- $19,550).......................................... 8,002 18,940 23,836 $ --

Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value:
Authorized shares-10,346,668 (including 8,046,668 shares
designated as redeemable convertible preferred stock)
(1,000,000 pro forma)
Issued and outstanding shares-946,435 in 1997, 1998 and 1999,
and none pro forma (liquidation preference--$2,413).......... 2,355 2,355 2,355 --
Common stock, $0.001 par value:
Authorized shares-37,346,668 (40,000,000 pro forma)
Issued and outstanding shares-2,657,788 in 1997, 2,795,781 in
1998, 2,809,427 in 1999, and 8,041,573 pro forma............. 520 2,930 3,504 29,695
Deferred compensation............................................ (384) (1,064) (1,412) (1,412)
Accumulated deficit.............................................. (7,555) (18,303) (21,840) (21,840)
--------- --------- ----------- -------------
Total stockholders' equity (deficit)............................... (5,064) (14,082) (17,393) $ 6,443
--------- --------- ----------- -------------
-------------
Total liabilities and stockholders' equity (deficit)............... $ 4,456 $ 9,121 $ 10,421
--------- --------- -----------
--------- --------- -----------
</TABLE>

See accompanying notes.

F-3
<PAGE>
SCIENTIFIC LEARNING CORPORATION

STATEMENTS OF OPERATIONS

(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues:
Programs................................. $ -- $ 2,249 $ 4,462 $ 603 $ 1,076
Services................................. -- 713 704 44 264
------------ ------------ ------------ ------------ ------------
Total revenues............................. -- 2,962 5,166 647 1,340

Cost of revenues:
Programs................................. -- 481 784 127 181
Services................................. -- 468 614 34 152
------------ ------------ ------------ ------------ ------------

Total cost of revenues..................... -- 949 1,398 161 333
------------ ------------ ------------ ------------ ------------
Gross profit............................... -- 2,013 3,768 486 1,007

Operating expenses:
Sales and marketing...................... 164 2,646 6,057 768 2,730
Research and development................. 1,514 1,965 2,880 666 762
General and administrative............... 933 2,537 4,749 820 1,140
------------ ------------ ------------ ------------ ------------
Total operating expenses................... 2,611 7,148 13,686 2,254 4,632
------------ ------------ ------------ ------------ ------------
Operating loss............................. (2,611) (5,135) (9,918) (1,768) (3,625)
Interest income (expense), net............. 70 162 (832) 20 88
Other income (expense), net................ 44 (85) 2 -- --
------------ ------------ ------------ ------------ ------------
Net loss................................... $ (2,497) $ (5,058) $ (10,748) $ (1,748) $ (3,537)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Basic and diluted net loss per share....... $ (1.02) $ (1.90) $ (3.87) $ (0.64) $ (1.26)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Shares used in computing basic and diluted
net loss per share....................... 2,452,621 2,657,222 2,776,775 2,736,811 2,805,044
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Pro forma basic and diluted net loss per
share (unaudited)........................ $ (1.74) $ (0.44)
------------ ------------
------------ ------------
Shares used in computing pro forma basic
and diluted net loss per share
(unaudited).............................. 6,179,110 8,000,175
------------ ------------
------------ ------------
</TABLE>

See accompanying notes.

F-4
<PAGE>
SCIENTIFIC LEARNING CORPORATION
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
STOCKHOLDER'S EQUITY (DEFICIT)
----------------------------------------------
REDEEMABLE
CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------------- ---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock.................................. -- $ -- -- $ -- 2,656,769 $ 12
Issuance of common stock under stock option plan.......... -- -- -- -- 149 --
Issuance of Series A preferred stock, net of issuance
costs................................................... -- -- 831,909 2,046 -- --
Issuance of Series A preferred stock in connection with
license agreement....................................... -- -- 131,192 354 -- --
Issuance of Series B preferred stock, net of issuance
costs................................................... 1,499,999 4,002 -- -- -- --
Net loss and comprehensive loss........................... -- -- -- -- -- --
--------- ----------- --------- ----------- --------- -----------
Balances at December 31, 1996............................... 1,499,999 4,002 963,101 2,400 2,656,918 12
Issuance of common stock under stock option plan.......... -- -- -- -- 870 --
Issuance of Series C preferred stock upon exercise of
warrant, net of issuance costs.......................... 952,380 4,000 -- -- -- --
Reduction of Series A preferred stock issued in connection
with license agreement.................................. -- -- (16,666) (45) -- --
Deferred compensation related to grant of stock options... -- -- -- -- -- 508
Amortization of deferred compensation..................... -- -- -- -- -- --
Net loss and comprehensive loss........................... -- -- -- -- -- --
--------- ----------- --------- ----------- --------- -----------
Balances at December 31, 1997............................... 2,452,379 8,002 946,435 2,355 2,657,788 520
Issuance of common stock under stock option plan.......... -- -- -- -- 137,993 44
Issuance of Series D preferred stock, net of issuance
costs................................................... 1,277,777 10,938 -- -- -- --
Issuance of common stock warrants to preferred stockholder
in connection with guarantee of line of credit and loan
obtained from stockholder............................... -- -- -- -- -- 780
Deferred compensation related to grant of stock options... -- -- -- -- -- 1,586
Amortization of deferred compensation..................... -- -- -- -- -- --
Net loss and comprehensive loss........................... -- -- -- -- -- --
--------- ----------- --------- ----------- --------- -----------
Balances at December 31, 1998............................... 3,730,156 18,940 946,435 2,355 2,795,781 2,930
Issuance of common stock under stock option plan
(unaudited)............................................. -- -- -- -- 13,646 3
Issuance of Series D preferred stock, net of issuance
costs (unaudited)....................................... 555,555 4,896 -- -- -- --
Deferred compensation related to grant of stock options
(unaudited)............................................. -- -- -- -- -- 571
Amortization of deferred compensation (unaudited)......... -- -- -- -- -- --
Net loss and comprehensive loss (unaudited)............... -- -- -- -- -- --
--------- ----------- --------- ----------- --------- -----------
Balances at March 31, 1999 (unaudited)...................... 4,285,711 $ 23,836 946,435 $ 2,355 2,809,427 $ 3,504
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------

<CAPTION>
TOTAL
STOCKHOLDERS'
DEFERRED ACCUMULATED EQUITY
COMPENSATION DEFICIT (DEFICIT)
--------------- ------------ ---------------
<S> <C> <C> <C>
Issuance of common stock.................................. $ -- $ -- $ 12
Issuance of common stock under stock option plan.......... -- -- --
Issuance of Series A preferred stock, net of issuance
costs................................................... -- -- 2,046
Issuance of Series A preferred stock in connection with
license agreement....................................... -- -- 354
Issuance of Series B preferred stock, net of issuance
costs................................................... -- -- --
Net loss and comprehensive loss........................... -- (2,497) (2,497)
------- ------------ ---------------
Balances at December 31, 1996............................... -- (2,497) (85)
Issuance of common stock under stock option plan.......... -- -- --
Issuance of Series C preferred stock upon exercise of
warrant, net of issuance costs.......................... -- -- --
Reduction of Series A preferred stock issued in connection
with license agreement.................................. -- -- (45)
Deferred compensation related to grant of stock options... (508) -- --
Amortization of deferred compensation..................... 124 -- 124
Net loss and comprehensive loss........................... -- (5,058) (5,058)
------- ------------ ---------------
Balances at December 31, 1997............................... (384) (7,555) (5,064)
Issuance of common stock under stock option plan.......... -- -- 44
Issuance of Series D preferred stock, net of issuance
costs................................................... -- -- --
Issuance of common stock warrants to preferred stockholder
in connection with guarantee of line of credit and loan
obtained from stockholder............................... -- -- 780
Deferred compensation related to grant of stock options... (1,586) -- --
Amortization of deferred compensation..................... 906 -- 906
Net loss and comprehensive loss........................... -- (10,748) (10,748)
------- ------------ ---------------
Balances at December 31, 1998............................... (1,064) (18,303) (14,082)
Issuance of common stock under stock option plan
(unaudited)............................................. -- -- 3
Issuance of Series D preferred stock, net of issuance
costs (unaudited)....................................... -- -- --
Deferred compensation related to grant of stock options
(unaudited)............................................. (571) -- --
Amortization of deferred compensation (unaudited)......... 223 -- 223
Net loss and comprehensive loss (unaudited)............... -- (3,537) (3,537)
------- ------------ ---------------
Balances at March 31, 1999 (unaudited)...................... $ (1,412) $ (21,840) $ (17,393)
------- ------------ ---------------
------- ------------ ---------------
</TABLE>

See accompanying notes.

F-5
<PAGE>
SCIENTIFIC LEARNING CORPORATION

STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- ----------------------------
1996 1997 1998 1998 1999
--------- --------- --------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $ (2,497) $ (5,058) $ (10,748) $ (1,748) $ (3,537)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 77 326 1,328 117 177
Loss on disposal of property and equipment.............. -- 85 -- -- --
Preferred stock issued in connection with license
agreement............................................. 354 (45) -- -- --
Amortization of deferred compensation................... -- 124 906 168 223
Changes in operating assets and liabilities:
Accounts receivable................................... -- (44) (755) (13) (249)
Prepaid expenses and other assets..................... (18) (225) (160) (36) (82)
Accounts payable...................................... 115 304 312 (133) (101)
Accrued liabilities................................... 138 218 894 123 (381)
Deferred revenue...................................... 1 341 1,307 118 293
Other liabilities..................................... 100 (29) 146 55 2
--------- --------- --------- ------------- -------------
Net cash used in operating activities..................... (1,730) (4,003) (6,770) (1,349) (3,655)

INVESTING ACTIVITIES
Restricted cash deposit................................... -- (350) 70 -- --
Purchase of property and equipment, net................... (506) (1,045) (700) (39) (259)
--------- --------- --------- ------------- -------------
Net cash used in investing activities..................... (506) (1,395) (630) (39) (259)

FINANCING ACTIVITIES
Proceeds from issuance of preferred stock................. 6,048 4,000 10,938 -- 4,896
Proceeds from issuance of common stock.................... 12 -- 44 27 3
Borrowings under bank line of credit...................... -- 355 6,363 -- --
Repayments of borrowings under bank line of credit........ -- (65) (6,254) (48) (94)
Repayments of capital lease obligations................... (2) (15) (28) (6) (4)
--------- --------- --------- ------------- -------------
Net cash provided by (used in) financing activities....... 6,058 4,275 11,063 (27) 4,801
--------- --------- --------- ------------- -------------
Increase (decrease) in cash and cash equivalents.......... 3,822 (1,123) 3,663 (1,415) 887
Cash and cash equivalents at beginning of period.......... -- 3,822 2,699 2,699 6,362
--------- --------- --------- ------------- -------------
Cash and cash equivalents at end of period................ $ 3,822 $ 2,699 $ 6,362 $ 1,284 $ 7,249
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
SUPPLEMENTAL DISCLOSURES:
Interest paid........................................... $ 1 $ 32 $ 142 $ 10 $ 8
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease obligations incurred...................... $ 37 $ 20 $ 6 $ 6 $ --
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
Issuance of common stock warrants in connection with
guarantee of line of credit and loan obtained from
stockholder........................................... $ -- $ -- $ 780 $ -- $ --
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
</TABLE>

See accompanying notes.

F-6
<PAGE>
SCIENTIFIC LEARNING CORPORATION

NOTES TO FINANCIAL STATEMENTS

(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Scientific Learning Corporation (the "Company") was incorporated on November
30, 1995 in the State of California and was reincorporated on May 2, 1997 in the
State of Delaware. The Company commenced operations in February 1996. The
Company operates in one business segment, which is the development, marketing
and sales of proprietary software and other educational products and services
designed to increase human learning and performance. The Company's revenues have
been derived primarily from two products, Fast ForWord and Fast ForWord Two,
which focus on children aged four to 13. The Company's products are delivered
through a variety of distribution channels, including sales to public schools,
speech and language professionals in private practice and direct-to-consumer
channels.

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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

INTERIM FINANCIAL INFORMATION

The interim financial information as of March 31, 1999 and for the three
months ended March 31, 1998 and 1999 is unaudited, but includes all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of its financial position at such date and its
results of operations and cash flows for those periods. Operating results for
the three months ended March 31, 1999 are not necessarily indicative of results
that may be expected for any future periods.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash and highly liquid short-term
investments with original maturities of three months or less.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets which
range from three to five years.

SOFTWARE DEVELOPMENT COSTS

The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("FAS") No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed," under
which certain software development costs incurred subsequent to the
establishment of technological feasibility are capitalized and amortized over
the estimated lives of the related products. Technological feasibility is
established upon completion of a working version. Through December 31, 1998,
such capitalizable software development costs have been insignificant and all
such costs have been charged to research and development expense.

F-7
<PAGE>
SCIENTIFIC LEARNING CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company accounts for employee stock options using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25 ("APB 25")
and makes the pro forma disclosures required by FAS No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123") (Note 5).

REVENUE RECOGNITION

Program revenues are derived from the sale of Fast ForWord programs.
Customers license the right to use the Fast ForWord software during the program
period and do not acquire or otherwise gain unlimited rights to use the
software. Service revenues are derived from the Company's Fast ForWord training
seminars for learning facilitators and from services provided to customers.

Revenues on sales of Fast ForWord are recognized over the average duration
of the program. Revenues from seminars are recognized when the seminar is held.
Revenues from services provided to customers are recognized over the average
duration of the program. Cancellations and refunds are allowed in limited
circumstances, and such amounts have not been significant. Provisions are made
for cancellations and refunds as revenue is recorded. Costs of revenues are
recognized as such costs are incurred.

ADVERTISING

Advertising costs are expensed as incurred. Advertising expense was $342,000
and $292,000 for the years ended December 31, 1997 and 1998, respectively (none
for 1996).

INCOME TAXES

The Company uses the liability method to account for income taxes as
required by FAS No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities. Deferred tax assets
and liabilities are measured using enacted tax rates and laws that will be in
effect when the differences are expected to reverse.

COMPREHENSIVE INCOME

In June 1997, the Financial Accounting Standards Board issued FAS No. 130,
"Reporting Comprehensive Income" ("FAS 130"), which established new standards
for reporting and displaying comprehensive income and its components in a full
set of general purpose financial statements. There is no difference in the
Company's historical net losses as reported and the comprehensive net losses
under the provisions of FAS 130 for all periods presented. Accordingly, the
adoption of FAS 130 had no effect on the Company's reported results of
operations.

NET LOSS PER SHARE

Basic and diluted net loss per share information for all periods is
presented under the requirement of FAS No. 128, "Earnings per Share" ("FAS
128"). Basic earnings per share has been computed using

F-8
<PAGE>
SCIENTIFIC LEARNING CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the weighted-average number of shares outstanding during the period and excludes
any dilutive effects of stock options, warrants, and convertible securities.
Potentially dilutive securities have been excluded from the computation of
diluted net loss per share as their inclusion would be antidilutive.

Pro forma net loss per share has been computed as described above and also
gives effect, under Securities and Exchange Commission guidance, to the
conversion of preferred shares not included above that will automatically
convert upon completion of the Company's initial offering, using the
if-converted method (Note 5).

The calculation of historical and pro forma basic and diluted net loss per
share is as follows (in thousands, except share and per share amounts):

<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------- ------------------------
1996 1997 1998 1998 1999
--------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Historical:
Net loss............................... $ (2,497) $ (5,058) $ (10,748) $ (1,748) $ (3,537)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Weighted average shares of common stock
outstanding used in computing basic
and diluted net per loss share....... 2,452,621 2,657,222 2,776,775 2,736,811 2,805,044
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Basic and diluted net loss per share... $ (1.02) $ (1.90) $ (3.87) $ (0.64) $ (1.26)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Pro forma (unaudited):
Net loss............................... $ (2,497) $ (5,058) $ (10,748) $ (1,748) $ (3,537)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Shares used in computing basic and
diluted net loss per share (from
above)............................... 2,452,621 2,657,222 2,776,775 2,736,811 2,805,044
Adjustment to reflect the effect of the
assumed conversion of preferred stock
from the date of issuance............ 3,402,335 5,195,131
--------- -----------
Weighted average shares used in
computing pro forma basic and diluted
net loss per share................... 6,179,110 8,000,175
--------- -----------
--------- -----------
Pro forma basic and diluted net loss
per share............................ $ (1.74) $ (0.44)
--------- -----------
--------- -----------
</TABLE>

If the Company had reported net income, the calculation of diluted earnings
per share would have included approximately an additional 24,000, 906,000,
955,000, 956,000 and 987,000 common equivalent shares related to the outstanding
options and warrants not included above (determined using the treasury stock
method at the estimated fair value) for the years ended December 31, 1996, 1997
and 1998 and for the three months ended March 31, 1998 and 1999, respectively.

F-9
<PAGE>
SCIENTIFIC LEARNING CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)

2. PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Computer equipment.......................................................... $ 1,168 $ 1,707
Office furniture and equipment.............................................. 300 466
Leasehold improvements...................................................... 21 22
--------- ---------
1,489 2,195
Less accumulated depreciation............................................... 369 917
--------- ---------
$ 1,120 $ 1,278
--------- ---------
--------- ---------
</TABLE>

3. BANK LINE OF CREDIT

The Company has a $400,000 line of credit with a bank which was used to
finance equipment purchases during 1997. Borrowings under the line of credit
bear interest at the bank's prime rate plus 3% (11.5% at December 31, 1998) and
are secured by substantially all of the Company's assets, excluding intellectual
property. At December 31, 1998, the Company had outstanding borrowings in the
amount of $97,000 which are being repaid in equal monthly installments through
June 1999. The agreement restricts the Company's payment of dividends.

In February 1998, the Company entered into an additional line of credit with
the same bank which provided for borrowings of up to $450,000 to finance
equipment purchases during the year ended December 31, 1998. Borrowings are due
in monthly installments through August 2000 plus interest at the bank's prime
rate plus 3% (11.5% at December 31, 1998) and are secured by substantially all
of the Company's assets, excluding intellectual property. At December 31, 1998,
the Company had outstanding borrowings in the amount of $302,000.

In September 1997, the Company obtained a $350,000 irrevocable standby
letter of credit as security for the lease agreement covering its corporate
office facility. A $350,000 certificate of deposit was pledged as collateral for
the standby letter of credit, which was subsequently reduced to $280,000 in
September 1998. The standby letter of credit will continue to be reduced
annually by $70,000 provided that there have been no events of default under the
lease agreement. The amount of the letter of credit can be further reduced if
certain financial covenants, as specified in the lease agreement, are met.

In June 1998, the Company obtained a $3.0 million unsecured line of credit
from another bank. Borrowings under the line of credit bore interest, at the
election of the Company, at the bank's base rate or the adjusted LIBOR plus
1.75%. Borrowings were guaranteed by a significant preferred stockholder of the
Company. In connection with such guarantee, the Company issued to the
stockholder warrants to purchase 66,666 shares of the Company's common stock at
$9.00 per share. Such warrants expire on May 31, 2003. The Company estimated the
fair value of the warrants to be $650,000, which was amortized by charges to
interest expense during the year ended December 31, 1998. Additionally, the
stockholder agreed to purchase up to 333,333 shares of the Company's preferred

F-10
<PAGE>
SCIENTIFIC LEARNING CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)

3. BANK LINE OF CREDIT (CONTINUED)
stock at $9.00 per share if requested by the Company. The Company's right to
require the stockholder to purchase such securities expired upon the closing of
the Series D preferred stock financing in January 1999. Borrowings under the
line of credit were repaid and the line of credit was terminated in December
1998.

In October 1998, the Company obtained a $3.0 million term loan from a
significant preferred stockholder of the Company. Borrowings under this loan
bore interest at 8% per annum. In connection with such loan, the Company issued
to the stockholder warrants to purchase 50,000 shares of the Company's common
stock at $9.00 per share. Such warrants expire on October 23, 2003. The Company
estimated the fair value of the warrants to be $130,000, which was amortized by
charges to interest expense during the year ended December 31, 1998. The loan
was repaid in December 1998.

4. INCOME TAXES

At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $14,000,000. The net operating loss
carryforward will expire in years 2011 through 2018. Utilization of the net
operating losses may be subject to a substantial annual limitation, due to the
ownership change limitations provided by the Internal Revenue Code of 1986. The
annual limitation may result in the expiration of net operating losses before
utilization.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................................... $ 2,668 $ 5,370
Deferred revenue.......................................................... -- 660
Research credit carryforwards............................................. 110 210
Other..................................................................... 254 360
--------- ---------
Total deferred tax assets................................................... 3,032 6,600
Valuation allowance......................................................... (3,032) (6,600)
--------- ---------
Net deferred tax assets..................................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>

Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net deferred
tax assets have been fully offset by a valuation allowance. The valuation
allowance increased by $1,026,000, $2,006,000 and $3,568,000 during the years
ended December 31, 1996, 1997 and 1998, respectively.

F-11
<PAGE>
SCIENTIFIC LEARNING CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)

5. STOCKHOLDERS' EQUITY

PREFERRED STOCK

Preferred stock is as follows by series:

<TABLE>
<CAPTION>
SHARES ISSUED AND OUTSTANDING
---------------------------------
DECEMBER 31,
DESIGNATED -------------------- MARCH 31,
SERIES SHARES 1997 1998 1999
- -------------------------------------------------- --------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
A Convertible 1,000,000 946,435 946,435 946,435
B Redeemable convertible 1,933,333 1,499,999 1,499,999 1,499,999
C Redeemable convertible 1,200,000 952,380 952,380 952,380
D Redeemable convertible 2,231,112 -- 1,277,777 1,833,332
--------- --------- --------- -----------
6,364,445 3,398,814 4,676,591 5,232,146
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>

Each share of preferred stock is convertible into one share of common stock,
subject to antidilution provisions. Automatic conversion will occur (i) upon
completion of an initial public offering of the Company's common stock with
proceeds of a minimum of $22.5 million at a minimum price of $14.25 per common
share or (ii) upon the consent of the holders of a majority of outstanding
preferred stock. The voting rights of preferred stock are equivalent to the
voting rights of common stock into which it is convertible. Dividends on
preferred stock are non-cumulative but fully participating with any cash
dividends declared on common stock. Dividends on Series A, Series B, Series C,
and Series D preferred stock are payable in cash in the amount of $0.18, $0.019,
$0.294 and $0.63 per share per annum as adjusted for any stock dividends,
combinations or splits with respect to such shares, respectively, when and if
declared by the Board of Directors. No such dividends have been declared as of
December 31, 1998. The Series B, C and D preferred stock have stated redemption
values of $2.70, $4.20 and $9.00 per share, respectively. Series B, C and D
preferred stock are mandatorily redeemable at their stated redemption values in
September 2006, June 2007, and December 2005, respectively.

COMMON STOCK

At December 31, 1998, the Company had reserved shares of common stock for
future issuance as follows:

<TABLE>
<S> <C>
Stock Option Plan:
Options outstanding............................................................ 1,187,956
Options available for future grants............................................ 173,032
Common stock warrants............................................................ 116,666
Convertible preferred stock...................................................... 4,676,591
---------
6,154,245
---------
---------
</TABLE>

F-12
<PAGE>
SCIENTIFIC LEARNING CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)

5. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS

Under the Company's Stock Option Plan, 1,500,000 shares of common stock are
reserved for the issuance of incentive stock options (ISO) or non-statutory
stock options (NSO) to eligible participants. The ISOs may be granted at a price
per share not less than the fair market value at the date of grant. The NSOs may
be granted at a price per share not less than 85% of the fair market value at
the date of grant. Options granted to date can be exercised immediately but, if
so exercised, these unvested shares are subject to repurchase by the Company.
Options and unvested shares granted generally vest over a period of up to five
years. Options under the plan have a maximum term of 10 years. In the event
optionholders cease to be employed by the Company, all unvested options are
forfeited and all vested options may be exercised within a 90-day period after
termination; the Company also has the right to repurchase at the original
purchase price any unvested (but issued) shares if the holder is no longer
employed by the Company. At December 31, 1998, no outstanding common shares are
subject to such repurchase rights. Common shares purchased under the plan are
subject to certain restrictions, including the right of first refusal by the
Company for sale or transfer of these shares to outside parties. The Company's
right of first refusal terminates upon completion of an initial public offering
of common stock.

A summary of the Company's stock option activity under the plan is as
follows:

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------
WEIGHTED-
AVERAGE
EXERCISE
NUMBER OF PRICE
SHARES PER SHARE
--------- -------------
<S> <C> <C>
Granted............................................................ 976,490 $ 0.27
Exercised.......................................................... (149) 0.26
Canceled........................................................... (4,414) 0.26
---------
Outstanding at December 31, 1996..................................... 971,927 0.27
Granted............................................................ 232,632 0.55
Exercised.......................................................... (870) 0.26
Canceled........................................................... (162,305) 0.28
---------
Outstanding at December 31, 1997..................................... 1,041,384 0.33
Granted............................................................ 346,488 4.59
Exercised.......................................................... (137,993) 0.32
Canceled........................................................... (61,923) 0.89
---------
Outstanding at December 31, 1998..................................... 1,187,956 1.54
Granted (unaudited)................................................ 113,533 6.00
Exercised (unaudited).............................................. (13,646) 0.47
Canceled (unaudited)............................................... (11,425) 4.27
---------
Outstanding at March 31, 1999 (unaudited)............................ 1,276,418 $ 1.93
---------
---------
Vested and exercisable at December 31, 1998.......................... 499,613 $ 0.33
--------- -----
--------- -----
Vested and exercisable at March 31, 1999 (unaudited)................. 548,917 $ 0.36
--------- -----
--------- -----
</TABLE>

F-13
<PAGE>
SCIENTIFIC LEARNING CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)

5. STOCKHOLDERS' EQUITY (CONTINUED)

STOCK OPTIONS (CONTINUED)

The following table summarizes information concerning outstanding and
exercisable stock options at December 31, 1998:

<TABLE>
<CAPTION>
OUTSTANDING VESTED AND EXERCISABLE
------------------------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE
NUMBER OF PRICE CONTRACTUAL NUMBER OF PRICE
PRICE RANGE SHARES PER SHARE LIFE (YEARS) SHARES PER SHARE
- ------------------------------- --------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.26-$0.30.................... 749,241 $ 0.28 7.52 443,865 $ 0.27
0.60- 0.66.................... 136,637 0.61 8.68 49,328 0.62
0.75.......................... 19,006 0.75 9.04 3,466 0.75
2.25.......................... 45,000 2.25 9.33 2,313 2.25
6.00.......................... 238,072 6.00 9.96 641 6.00
--------- -----------
1,187,956 499,613
--------- -----------
--------- -----------
</TABLE>

The Company recorded deferred compensation of $508,000, $1,586,000 and
$571,000 during the years ended December 31, 1997 and 1998, and the three months
ended March 31, 1999, respectively, representing the difference between the
exercise price and the deemed fair value of certain of the Company's stock
options granted to employees. These amounts are being amortized by charges to
operations over the vesting periods of the individual stock options. Such
amortization amounted to $124,000, $906,000 and $223,000 for the years ended
December 31, 1997 and 1998, and the three months ended March 31, 1999,
respectively. The remaining aggregate deferred compensation of $1,412,000 will
be amortized over the remainder of the vesting periods of the options (generally
five years).

PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION

Pro forma information regarding results of operations and net loss per share
is required by FAS 123, which also requires that the information be determined
as if the Company had accounted for its employee stock options under the fair
value method of FAS 123. The fair value for these options was estimated at the
date of grant using the minimum value method with the following weighted-average
assumptions: a risk-free interest rate of 6.5%, 6.3% and 6.0% for the years
ended December 31, 1996, 1997 and 1998, respectively, no dividend yield or
volatility factors of the expected market price of the Company's common stock,
and a weighted-average expected life of the option of five years.

The option valuation models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value

F-14
<PAGE>
SCIENTIFIC LEARNING CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)

5. STOCKHOLDERS' EQUITY (CONTINUED)
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.

Had compensation cost for the Company's stock-based compensation plans been
determined using the fair value at the grant dates for awards under those plans
calculated using the minimum value method of FAS 123, the Company's net loss and
pro forma basic and diluted net loss per share would have been increased to the
pro forma amounts indicated below:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Pro forma net loss (in thousands)................ $ (2,506) $ (5,092) $ (10,822)
--------- --------- ---------
--------- --------- ---------
Pro forma basic and diluted net loss per share... $ (1.02) $ (1.92) $ (3.90)
--------- --------- ---------
--------- --------- ---------
</TABLE>

The weighted-average fair value of options granted, which is the value
assigned to the options under FAS 123, was $0.03, $1.25 and $6.44 for options
granted during the years ended December 31, 1996, 1997 and 1998, respectively.

The pro forma impact of options on the net loss for the years ended December
31, 1996, 1997 and 1998 is not representative of the effects on net income
(loss) for future years, as future years will include the effects of additional
years of stock option grants.

6. COMMITMENTS

LEASES

The Company leases equipment and its corporate office facility under
non-cancelable capital and operating leases, with initial terms in excess of one
year. The cost of equipment under capital leases is approximately $57,000 and
$63,000 and the related amortization included is $16,000 and $34,000 at December
31, 1997 and 1998, respectively. Future minimum payments under these leases as
of December 31, 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
1999..................................................................... $ 20 $ 949
2000..................................................................... -- 982
2001..................................................................... -- 1,012
2002..................................................................... -- 671
--- -----------
Total minimum lease payments............................................. 20 $ 3,614
-----------
-----------
Less amount representing interest........................................ (2)
---
Present value of minimum lease payments.................................. $ 18
---
---
</TABLE>

Rent expense under all operating leases was $67,000, $418,000 and $974,000
for the years ended December 31, 1996, 1997 and 1998, respectively.

F-15
<PAGE>
SCIENTIFIC LEARNING CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)

6. COMMITMENTS (CONTINUED)
The Company has the option to extend the operating lease covering its
corporate office facility for an additional five years at the end of the lease
term, provided that certain conditions of the lease agreement are met.

LICENSE AGREEMENT

In September 1996, the Company entered into a license agreement with a
university for the use of the intellectual property underlying its training
methods. In exchange for the license, the Company issued 131,192 shares of
Series A preferred stock and paid the university a license-issue fee of
$200,000. In March 1997, the number of shares of Series A preferred stock issued
under the agreement was reduced to 114,526.

Under the agreement, additional royalties and milestone payments are payable
to the university based upon revenues from products using the licensed
technology. Royalty and milestone expenses were $202,000 and $415,000 for the
years ended December 31, 1997 and 1998 (none in 1996) and are included in cost
of revenues.

7. EMPLOYEE RETIREMENT AND BENEFIT PLAN

The Company has a defined contribution retirement plan under Section 401(k)
of the Internal Revenue Code which covers substantially all employees. Eligible
employees may contribute amounts to the plan, via payroll withholding, subject
to certain limitations. The Company does not match contributions by plan
participants.

8. SUBSEQUENT EVENTS (UNAUDITED)

PROPOSED PUBLIC OFFERING OF COMMON STOCK

On April 22, 1999, the Board of Directors authorized the Company to proceed
with an initial public offering of its common stock. If the offering is
consummated as presently anticipated, all of the outstanding preferred stock
will automatically convert into common stock. The unaudited pro forma
stockholders' equity (deficit) at March 31, 1999 gives effect to the conversion
of all outstanding shares of convertible preferred stock at that date into
5,232,146 shares of common stock upon the completion of the offering.

STOCK SPLIT

On April 22, 1999, the Board of Directors approved, and on May 28, 1999 the
stockholders approved, a two-for-three reverse stock split of issued and
outstanding common and preferred stock. All common and preferred share prices,
and amounts associated with rights, preferences, dividends and privileges in the
accompanying financial statements have been retroactively adjusted to reflect
the stock split. In connection with the reverse stock split, the Board of
Directors authorized a decrease in the number of authorized shares of common
stock to 35,500,000 and a decrease in the number of authorized shares of
preferred stock to 5,500,000 shares, subject to stockholder approval. Effective
immediately prior to the closing of the initial public offering of its common
stock, the Board of Directors authorized, and the stockholders approved, an
increase in the number of authorized shares of

F-16
<PAGE>
SCIENTIFIC LEARNING CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)

8. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
common stock to 40,000,000 and a decrease in the number of authorized shares of
preferred stock to 1,000,000 shares.

1999 EQUITY INCENTIVE PLAN

On April 22, 1999, the Company's Board of Directors adopted, and on May 28,
1999 the stockholders approved, the 1999 Equity Incentive Plan which amends and
restates the Company's existing stock option plan. There are 2,192,666 shares of
common stock authorized for issuance under the plan. The plan will become
effective upon completion of the Company's initial public offering of its common
stock.

1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN

On April 22, 1999, the Company's Board of Directors adopted, and on May 28,
1999 the stockholders approved, the 1999 Non-Employee Directors' Stock Option
Plan and reserved an aggregate of 75,000 shares of common stock for grants of
stock options under the plan.

1999 EMPLOYEE STOCK PURCHASE PLAN

On April 22, 1999, the Company's Board of Directors adopted, and on May 28,
1999 the stockholders approved, the 1999 Employee Stock Purchase Plan to be
effective upon the completion of the Company's initial public offering of its
common stock. The Company has reserved a total of 350,000 shares of common stock
for issuance under the plan. Eligible employees may purchase common stock at 85%
of the lesser of the fair market value of the Company's common stock on the
first day of the applicable one year offering period or the date of purchase.

F-17
<PAGE>

[INSIDE BACK COVER]

<TABLE>
<S> <C>
[Picture of a man and a girl sitting [Scientific Learning
together looking at a book] A Neuroscience Company]

[Picture of a woman leaning over a boy
who is sitting at a desk [Language and Reading]
reading a book]

[Background picture of a woman and a girl
reading]

[Reaching Potential]

[Picture of three children sitting
together looking at a book.]
</TABLE>

<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT, AND THE UNDERWRITERS HAVE NOT, AUTHORIZED ANY OTHER PERSON TO PROVIDE
YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. WE ARE NOT, AND THE
UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT
THE INFORMATION APPEARING IN THIS IS ACCURATE AS OF THE DATE ON THE FRONT OF
THIS PROSPECTUS ONLY. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS
AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
How We Intend to Use the Proceeds from this
Offering..................................... 17
Dividend Policy................................ 17
Capitalization................................. 18
Dilution....................................... 19
Selected Financial Data........................ 20
Management's Discussion and Analysis of
Financial Condition and Results of Operations
............................................. 22
Business....................................... 30
Management..................................... 47
Transactions and Relationships with Related
Parties...................................... 59
Principal Stockholders......................... 61
Description of Capital Stock................... 63
Shares Eligible for Future Sale................ 65
Underwriting................................... 67
Legal Matters.................................. 70
Experts........................................ 70
Additional Information......................... 70
Index to Financial Statements.................. F-1
</TABLE>

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

THROUGH AND INCLUDING , 1999 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

2,300,000 SHARES

[LOGO]

COMMON STOCK

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

PROSPECTUS

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

MERRILL LYNCH & CO.
THOMAS WEISEL PARTNERS LLC
PACIFIC GROWTH EQUITIES, INC.

, 1999

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by us in connection with the sale of the
common stock being registered. All the amounts shown are estimates except for
the registration fee and the NASD filing fee.

<TABLE>
<S> <C>
Registration fee.................................................. $ 12,788
NASD filing fee................................................... 1,000
Nasdaq application fee............................................ 78,875
Blue sky qualification fee and expenses........................... 3,000
Printing and engraving expenses................................... 150,000
Legal fees and expenses........................................... 400,000
Accounting fees and expenses...................................... 200,000
Transfer agent and registrar fees................................. 25,000
Miscellaneous..................................................... 29,337
Total........................................................... $ 900,000
---------
---------
</TABLE>

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

Under Section 145 of the Delaware General Corporation Law, we have broad
powers to indemnify our directors and officers against liabilities they may
incur in such capacities, including liabilities under the Securities Act of
1933. Our bylaws also provide that we will indemnify our directors and executive
officers and may indemnify our other officers, employees and other agents to the
fullest extent not prohibited by Delaware law.

Our certificate of incorporation provides for the elimination of liability
for monetary damages for breach of the directors' fiduciary duty of care to the
Company and its stockholders. These provisions do not eliminate the directors'
duty of care and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of non-monetary relief will remain available under
Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to us, for acts or
omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for any transaction from which the director derived an
improper personal benefit and for payment of dividends or approval of stock
repurchases or redemptions that are unlawful under Delaware law. These
provisions do not affect a director's responsibilities under any other laws,
such as the federal securities laws or state or federal environmental laws.

We have entered into agreements with our directors and executive officers
that require us to indemnify such persons against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred (including
expenses of a derivative action) in connection with any proceeding, whether
actual or threatened, to which any such person may be made a party by reason of
the fact that such person is or was a director or officer of our or any of our
affiliated enterprises, provided such person acted in good faith and in a manner
such person reasonably believed to be in or not opposed to our best interests
and, with respect to any criminal proceeding, had no reasonable cause to believe
his or her conduct was unlawful. The indemnification agreements also set forth
certain procedures that will apply in the event of a claim for indemnification
thereunder.

The underwriting agreement filed as Exhibit 1.1 to this registration
statement provides that the underwriters will indemnify the company and its
officers and directors for specified liabilities arising under the Securities
Act of 1933 or otherwise.

II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since our incorporation on November 30, 1995, we have sold and issued the
following unregistered securities:

1. From January 1996 to June 1996, we issued and sold an aggregate of
2,656,769 shares of common stock at prices ranging from $0.0012 to $0.255
per share to seven executive officers and directors, 123,450 of which are
currently held by one individual who is no longer associated with us.

2. In April 1996, we issued and sold an aggregate of 69,958 shares of
Series A preferred stock at $2.43 per share to four executive officers and
directors under our Series A preferred stock Employee Purchase Plan, 8,230
of which are currently held by one individual who is no longer associated
with us.

3. From April 1996 to May 1996, we issued and sold and aggregate of
761,951 shares of Series A preferred stock at $2.55 per share to 68
investors, 16,274 of which were sold to Dr. Schleifer, a member of our
Board.

4. On September 27, 1996, we issued 131,192 shares of Series A
preferred stock to Rutgers University in partial payment of a license fee.
On March 28, 1997, Rutgers University returned 16,666 shares to us.

5. From October 1996 to November 1996, we issued and sold an aggregate
of 1,499,999 shares of Series B preferred stock at $2.70 per share to two
investors, 1,481,481 of which were sold to Ventures, an affiliate ours.

6. On October 1, 1996 we issued a warrant to purchase 952,380 shares of
Series C preferred stock at an exercise price of $4.20 per share to Warburg,
Pincus Ventures, an affiliate of ours. This warrant was subsequently
exercised on June 16, 1997 and the 952,380 shares were issued to the
affiliate.

7. Since inception, we have granted stock options under our stock
option plan covering an aggregate of 1,474,742 shares of our common stock
(net of expirations and cancellations) at exercise prices ranging from
$0.260 to $11.25 per share.

8. Since inception, options to purchase an aggregate of 281,268 shares
of our common stock were exercised for an aggregate purchase price of
$93,703.00 at exercise prices ranging from $0.26 to $6.00 per share.

9. In June and October 1998, we issued to Warburg, Pincus Ventures, an
affiliate of ours, warrants to purchase 116,666 shares of our common stock.
These warrants were issued in connection with Warburg, Pincus Ventures'
guarantee of a $3 million unsecured line of credit obtained by us in June
1998.

10. In December 1998 and January 1999, we issued and sold an aggregate
of 1,833,332 shares of Series D preferred stock at $9.00 per share,
1,111,111 of which were sold to Warburg, Pincus Ventures, an affiliate of
ours.

The sales and issuances of securities in the transactions described in
paragraphs 1 through 6, 9 and 10 above were deemed to be exempt from
registration under the Securities Act of 1933 by virtue of Section 4(2) of the
Securities Act of 1933. The purchasers in each case represented their intention
to acquire the securities for investment only and not with a view to the
distribution thereof. Appropriate legends are affixed to the stock certificates
issued in these transactions. Similar legends were imposed in connection with
any subsequent sales of any such securities. All recipients either received
adequate information about us or had access, through employment or other
relationships, to such information.

II-2
<PAGE>
The sales and issuances of securities in the transactions described in
paragraphs 1, 2, 7 and 8 above were deemed to be exempt from registration under
the Securities Act of 1933 by virtue of Rule 701 promulgated thereunder in that
they were offered and sold either under written compensatory benefit plans or
under a written contract relating to compensation, as provided by Rule 701.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation.
3.2 Bylaws.
3.3 Form of Restated Certificate of Incorporation to be filed upon completion of this offering.
3.4* Form of Amended and Restated Bylaws to be effective upon the closing of this offering.
4.1 Reference is made to Exhibits 3.1 through 3.4.
4.2 Registration Rights Agreement, dated as of October 1, 1996, as amended on November 14, 1996.
4.3 Specimen stock certificate.
5.1** Opinion of Cooley Godward LLP as to the legality of the securities being registered.
10.1 Form of Indemnity Agreement with each of our directors and executive officers, with related schedules.
10.2* 1999 Equity Incentive Plan.
10.3 Form of Stock Option Agreement under the Incentive Plan.
10.4 Form of Stock Option Grant Notice under the Incentive Plan.
10.5* 1999 Non-Employee Directors' Stock Option Plan.
10.6* Form of Nonstatutory Stock Option Agreement under the Non-Employee Directors' Stock Option Plan
(Initial Grant).
10.7* Form of Nonstatutory Stock Option Agreement under the Non-Employee Directors' Stock Option Plan (Annual
Grant).
10.8 1999 Employee Stock Purchase Plan.
10.9 Form of Employee Stock Purchase Plan Offering under the Employee Stock Purchase Plan.
10.10 Consulting Agreement, dated as of September 20, 1996, with Dr. Michael M. Merzenich, as modified on
January 19, 1998.
10.11 Consulting Agreement, dated as of September 19, 1996, with Dr. Paula A. Tallal, as modified on January
22, 1998.
10.12 Loan and Security Agreement, dated as of February 13, 1998, with Silicon Valley Bank.
10.13+ Exclusive License Agreement, dated September 27, 1996, with the Regents of the University of
California.
10.14 Lease Agreement, dated as of July 31, 1997, with GBC-University Associates, L.P.
10.15 Securities Purchase Agreement, dated September 24, 1996, with Warburg, Pincus Ventures, L.P.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
23.2** Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1 Power of Attorney. Reference is made to page II-5.
27.1 Financial Data Schedule.
</TABLE>

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

* Filed herewith. All exhibits without asterisks have been previously filed.

** To be filed by amendment.

+ Certain portions of this exhibit have been omitted based upon our request
for confidential treatment pursuant to Rule 406 for portions of the
referenced exhibit.

II-3
<PAGE>
FINANCIAL STATEMENT SCHEDULES.

All financial statement schedules are omitted because the information called
for is not required, is not applicable, or is shown either in the financial
statements or notes thereto.

ITEM 17. UNDERTAKINGS.

We hereby undertake to provide at the closing, to the underwriters specified
in the underwriting agreement, certificates in such denominations and registered
in such names as required by the underwriters permitting prompt delivery to each
purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers, and controlling persons
pursuant to the provisions described in Item 14 or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefor, unenforceable. In the event that a claim for
indemnification against these liabilities (other than the payment by us of
expenses incurred or paid by a director, officer, or controlling person in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

We undertake that: (1) for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus as
filed as part of the registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by us pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of the
registration statement as of the time it was declared effective, and (2) for the
purpose of determining any liability under the Securities Act of 1933, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.

II-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company has caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Berkeley,
County of Alameda, State of California, on the 28th day of May, 1999.

<TABLE>
<S> <C> <C>
SCIENTIFIC LEARNING CORPORATION

By: /s/ SHERYLE J. BOLTON
-----------------------------------------
Sheryle J. Bolton
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
</TABLE>

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------

<C> <S> <C>
/s/ SHERYLE J. BOLTON President, Chief Executive May 28, 1999
- ------------------------------ Officer and Director
Sheryle J. Bolton (Principal Executive
Officer)

/s/ DR. MICHAEL M. Chief Scientific Officer May 28, 1999
MERZENICH* and Director
- ------------------------------
Dr. Michael M. Merzenich

/s/ DR. PAULA A. TALLAL* Executive Vice President May 28, 1999
- ------------------------------ and Chairman of the
Dr. Paula A. Tallal Board

/s/ FRANK M. MATTSON Chief Financial Officer, May 28, 1999
- ------------------------------ Vice President, Finance
Frank M. Mattson and Secretary (Principal
Financial and Accounting
Officer)

/s/ CARLETON A. HOLSTROM* Director May 28, 1999
- ------------------------------
Carleton A. Holstrom

/s/ RODMAN W. MOORHEAD, III* Director May 28, 1999
- ------------------------------
Rodman W. Moorhead, III
</TABLE>

II-5
<PAGE>

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------

<C> <S> <C>
/s/ JAMES E. THOMAS* Director May 28, 1999
- ------------------------------
James E. Thomas

/s/ DAVID A. TANNER* Director May 28, 1999
- ------------------------------
David A. Tanner
</TABLE>

<TABLE>
<S> <C> <C> <C>
By: /s/ FRANK M. MATTSON
-------------------------
Frank M. Mattson
ATTORNEY-IN-FACT

*(Signing under the Authority
of a Power of Attorney
previously filed with the
Securities and Exchange
Commission)
</TABLE>

II-6
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation.
3.2 Bylaws.
3.3 Form of Restated Certificate of Incorporation to be filed upon completion of this offering.
3.4* Form of Amended and Restated Bylaws to be effective upon the closing of this offering.
4.1 Reference is made to Exhibits 3.1 through 3.4.
4.2 Registration Rights Agreement, dated as of October 1, 1996, as amended on
November 14, 1996.
4.3 Specimen stock certificate.
5.1** Opinion of Cooley Godward LLP as to the legality of the securities being registered.
10.1 Form of Indemnity Agreement with each of our directors and executive officers, with related schedules.
10.2* 1999 Equity Incentive Plan.
10.3 Form of Stock Option Agreement under the Incentive Plan.
10.4 Form of Stock Option Grant Notice under the Incentive Plan.
10.5* 1999 Non-Employee Directors' Stock Option Plan.
10.6* Form of Nonstatutory Stock Option Agreement under the Non-Employee Directors' Stock Option Plan
(Initial Grant).
10.7* Form of Nonstatutory Stock Option Agreement under the Non-Employee Directors' Stock Option Plan (Annual
Grant).
10.8 1999 Employee Stock Purchase Plan.
10.9 Form of Employee Stock Purchase Plan Offering under the Employee Stock Purchase Plan.
10.10 Consulting Agreement, dated as of September 20, 1996, with Dr. Michael M. Merzenich, as modified on
January 19, 1998.
10.11 Consulting Agreement, dated as of September 19, 1996, with Dr. Paula A. Tallal, as modified on January
22, 1998.
10.12 Loan and Security Agreement, dated as of February 13, 1998, with Silicon Valley Bank.
10.13+ Exclusive License Agreement, dated September 27, 1996, with the Regents of the University of
California.
10.14 Lease Agreement, dated as of July 31, 1997, with GBC-University Associates, L.P.
10.15 Securities Purchase Agreement, dated September 24, 1996, with Warburg,
Pincus Ventures, L.P.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
23.2** Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1 Power of Attorney. Reference is made to page II-5.
27.1 Financial Data Schedule.
</TABLE>

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

* Filed herewith. All exhibits without asterisks have been previously filed.

** To be filed by amendment.

+ Certain portions of this exhibit have been omitted based upon our request
for confidential treatment pursuant to Rule 406 for portions of the
referenced exhibit.

<PAGE>

AMENDED AND RESTATED BYLAWS

SCIENTIFIC LEARNING CORPORATION

(A DELAWARE CORPORATION)

<PAGE>

AMENDED AND RESTATED BYLAWS

SCIENTIFIC LEARNING CORPORATION

(A DELAWARE CORPORATION)

ARTICLE I

OFFICES

SECTION 1. REGISTERED OFFICE. The registered office of the corporation
in the State of Delaware shall be in the City of Dover, County of Kent.

SECTION 2. OTHER OFFICES. The corporation shall also have and maintain
an office or principal place of business at such place as may be fixed by the
Board of Directors, and may also have offices at such other places, both within
and without the State of Delaware as the Board of Directors may from time to
time determine or the business of the corporation may require.

ARTICLE II

CORPORATE SEAL

SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate
Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to
be impressed or affixed or reproduced or otherwise.

ARTICLE III

STOCKHOLDERS' MEETINGS

SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the principal office of the corporation required
to be maintained pursuant to Section 2 hereof.

SECTION 5. ANNUAL MEETING.

(a) The annual meeting of the stockholders of the corporation,
for the purpose of election of directors and for such other business as may
lawfully come before it, shall be held on such date and at such time as may be
designated from time to time by the Board of Directors. Nominations of persons
for election to the Board of Directors of the corporation and the proposal of
business to be considered by the stockholders may be made at an annual meeting
of stockholders: (i) pursuant to the corporation's notice of meeting of
stockholders; (ii) by or at the direction of the Board of Directors; or (iii) by
any stockholder of the corporation who was a

1
<PAGE>

stockholder of record at the time of giving of notice provided for in the
following paragraph, who is entitled to vote at the meeting and who complied
with the notice procedures set forth in Section 5. (Del. Code Ann., tit. 8,
Section 211(b)).

(b) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. For
nominations or other business to be properly brought before an annual meeting by
a stockholder pursuant to clause (c) of Section 5(a) of these Bylaws, (i) the
stockholder must have given timely notice thereof in writing to the Secretary of
the corporation, (ii) such other business must be a proper matter for
stockholder action under the Delaware General Corporation Law ("DGCL"), (iii) if
the stockholder, or the beneficial owner on whose behalf any such proposal or
nomination is made, has provided the corporation with a Solicitation Notice (as
defined in this Section 5(b)), such stockholder or beneficial owner must, in the
case of a proposal, have delivered a proxy statement and form of proxy to
holders of at least the percentage of the corporation's voting shares required
under applicable law to carry any such proposal, or, in the case of a nomination
or nominations, have delivered a proxy statement and form of proxy to holders of
a percentage of the corporation's voting shares reasonably believed by such
stockholder or beneficial owner to be sufficient to elect the nominee or
nominees proposed to be nominated by such stockholder, and must, in either case,
have included in such materials the Solicitation Notice, and (iv) if no
Solicitation Notice relating thereto has been timely provided pursuant to this
section, the stockholder or beneficial owner proposing such business or
nomination must not have solicited a number of proxies sufficient to have
required the delivery of such a Solicitation Notice under this Section 5. To be
timely, a stockholder's notice shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the ninetieth (90th) day nor earlier than the close of business on
the one hundred twentieth (120th) day prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is advanced more than thirty (30) days prior to or
delayed by more than thirty (30) days after the anniversary of the preceding
year's annual meeting, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the one hundred twentieth
(120th) day prior to such annual meeting and not later than the close of
business on the later of the ninetieth (90th) day prior to such annual meeting
or the tenth (10th) day following the day on which public announcement of the
date of such meeting is first made. In no event shall the public announcement
of an adjournment of an annual meeting commence a new time period for the giving
of a stockholder's notice as described above. Such stockholder's notice shall
set forth: (A) as to each person whom the stockholder proposed to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "1934 Act") and Rule 14a-11 thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (B) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (C) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the corporation's books, and of such beneficial
owner, (ii) the class and number of shares of the corporation which are

2.
<PAGE>

owned beneficially and of record by such stockholder and such beneficial owner,
and (iii) whether either such stockholder or beneficial owner intends to deliver
a proxy statement and form of proxy to holders of, in the case of the proposal,
at least the percentage of the corporation's voting shares required under
applicable law to carry the proposal or, in the case of a nomination or
nominations, a sufficient number of holders of the corporation's voting shares
to elect such nominee or nominees (an affirmative statement of such intent, a
"Solicitation Notice").

(c) Notwithstanding anything in the second sentence of
Section 5(b) of these Bylaws to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the Corporation is
increased and there is no public announcement naming all of the nominees for
director or specifying the size of the increased Board of Directors made by the
corporation at least one hundred (100) days prior to the first anniversary of
the preceding year's annual meeting, a stockholder's notice required by this
Section 5 shall also be considered timely, but only with respect to nominees for
any new positions created by such increase, if it shall be delivered to the
Secretary at the principal executive offices of the corporation not later than
the close of business on the tenth (10th) day following the day on which such
public announcement is first made by the corporation.

(d) Only such persons who are nominated in accordance with the
procedures set forth in this Section 5 shall be eligible to serve as directors
and only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Section 5. Except as otherwise provided by law, the Chairman of the
meeting shall have the power and duty to determine whether a nomination or any
business proposed to be brought before the meeting was made, or proposed, as the
case may be, in accordance with the procedures set forth in these Bylaws and, if
any proposed nomination or business is not in compliance with these Bylaws, to
declare that such defective proposal or nomination shall not be presented for
stockholder action at the meeting and shall be disregarded.

(e) Notwithstanding the foregoing provisions of this Section 5,
in order to include information with respect to a stockholder proposal in the
proxy statement and form of proxy for a stockholder's meeting, stockholders must
provide notice as required by the regulations promulgated under the 1934 Act.
Nothing in these Bylaws shall be deemed to affect any rights of stockholders to
request inclusion of proposals in the corporation proxy statement pursuant to
Rule 14a-8 under the 1934 Act.

(f) For purposes of this Section 5, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the 1934 Act.

SECTION 6. SPECIAL MEETINGS.

(a) Special meetings of the stockholders of the corporation may
be called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer or (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exists any vacancies in previously

3.
<PAGE>

authorized directorships at the time any such resolution is presented to the
Board of Directors for adoption), and shall be held at such place, on such date,
and at such time as the Board of Directors, shall fix.

(b) If a special meeting is properly called by any person or
persons other than the Board of Directors, the request shall be in writing,
specifying the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the Chairman of the Board of Directors, the
Chief Executive Officer, or the Secretary of the corporation. No business may
be transacted at such special meeting otherwise than specified in such notice.
The Board of Directors shall determine the time and place of such special
meeting, which shall be held not less than thirty-five (35) nor more than one
hundred twenty (120) days after the date of the receipt of the request. Upon
determination of the time and place of the meeting, the officer receiving the
request shall cause notice to be given to the stockholders entitled to vote, in
accordance with the provisions of Section 7 of these Bylaws. If the notice is
not given within one hundred (100) days after the receipt of the request, the
person or persons properly requesting the meeting may set the time and place of
the meeting and give the notice. Nothing contained in this paragraph (b) shall
be construed as limiting, fixing, or affecting the time when a meeting of
stockholders called by action of the Board of Directors may be held.

SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or
the Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder entitled to vote at such meeting, such
notice to specify the place, date and hour and purpose or purposes of the
meeting. Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, signed by the person entitled to notice thereof,
either before or after such meeting, and will be waived by any stockholder by
his attendance thereat in person or by proxy, except when the stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Any stockholder so waiving notice of such meeting shall be
bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.

SECTION 8. QUORUM. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation, or by
these Bylaws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. In the absence of a
quorum, any meeting of stockholders may be adjourned, from time to time, either
by the chairman of the meeting or by vote of the holders of a majority of the
shares represented thereat, but no other business shall be transacted at such
meeting. The stockholders present at a duly called or convened meeting, at
which a quorum is present, may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum. Except as otherwise provided by law, the Certificate of Incorporation
or these Bylaws, all action taken by the holders of a majority of the vote cast,
excluding abstentions, at any meeting at which a quorum is present shall be
valid and binding upon the corporation; provided, however, that directors shall
be elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors. Where a

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separate vote by a class or classes or series is required, except where
otherwise provided by the statute or by the Certificate of Incorporation or
these Bylaws, a majority of the outstanding shares of such class or classes or
series, present in person or represented by proxy, shall constitute a quorum
entitled to take action with respect to that vote on that matter and, except
where otherwise provided by statute or by the Certificate of Incorporation or
these Bylaws, the affirmative vote of the majority (plurality, in the case of
the election of directors) of the votes cast, including abstentions, by the
holders of shares of such class or classes or series shall be the act of such
class or classes or series.

SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting
of stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes, excluding abstentions. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken.
At the adjourned meeting, the corporation may transact any business which might
have been transacted at the original meeting. If the adjournment is for more
than thirty (30) days or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.

SECTION 10. VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote shall have the right to do so either in person or by an
agent or agents authorized by a proxy granted in accordance with Delaware law.
An agent so appointed need not be a stockholder. No proxy shall be voted after
three (3) years from its date of creation unless the proxy provides for a longer
period.

SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; (c) if more than one (1) votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the General Corporation Law of Delaware, Section 217(b).
If the instrument filed with the Secretary shows that any such tenancy is held
in unequal interests, a majority or even-split for the purpose of subsection (c)
shall be a majority or even-split in interest.

SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make,
at least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at said meeting, arranged in alphabetical
order, showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the

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examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the time and place of meeting during the whole time thereof
and may be inspected by any stockholder who is present.

SECTION 13. ACTION WITHOUT MEETING. No action shall be taken by the
stockholders except at an annual or special meeting of stockholders called in
accordance with these Bylaws, and no action shall be taken by the stockholders
by written consent.

SECTION 14. ORGANIZATION.

(a) At every meeting of stockholders, the Chairman of the Board
of Directors, or, if a Chairman has not been appointed or is absent, the
President, or, if the President is absent, a chairman of the meeting chosen by a
majority in interest of the stockholders entitled to vote, present in person or
by proxy, shall act as chairman. The Secretary, or, in his absence, an
Assistant Secretary directed to do so by the President, shall act as secretary
of the meeting.

(b) The Board of Directors of the corporation shall be entitled
to make such rules or regulations for the conduct of meetings of stockholders as
it shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. Unless and to the extent determined by the Board of Directors or
the chairman of the meeting, meetings of stockholders shall not be required to
be held in accordance with rules of parliamentary procedure.

ARTICLE IV

DIRECTORS

SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of
directors of the corporation shall be fixed in accordance with the Certificate
of Incorporation. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any cause, the directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.

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SECTION 16. POWERS. The powers of the corporation shall be exercised,
its business conducted and its property controlled by the Board of Directors,
except as may be otherwise provided by statute or by the Certificate of
Incorporation.

SECTION 17. CLASSES OF DIRECTORS. Subject to the rights of the holders
of any series of Preferred Stock to elect additional directors under specified
circumstances, following the closing of the Initial Public Offering, the
directors shall be divided into three classes designated as Class I, Class II
and Class III, respectively. Directors shall be assigned to each class in
accordance with a resolution or resolutions adopted by the Board of Directors.
At the first annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the Class I directors shall expire and
Class I directors shall be elected for a full term of three years. At the
second annual meeting of stockholders following the Closing of the Initial
Public Offering, the term of office of the Class II directors shall expire and
Class II directors shall be elected for a full term of three years. At the
third annual meeting of stockholders following the Closing of the Initial Public
Offering, the term of office of the Class III directors shall expire and
Class III directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.

Notwithstanding the foregoing provisions of this Article, each director
shall serve until his successor is duly elected and qualified or until his
death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.

SECTION 18. VACANCIES. Unless otherwise provided in the Certificate of
Incorporation, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by stockholders, be filled only
by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified. A
vacancy in the Board of Directors shall be deemed to exist under this Bylaw in
the case of the death, removal or resignation of any director.

SECTION 19. RESIGNATION. Any director may resign at any time by
delivering his written resignation to the Secretary, such resignation to specify
whether it will be effective at a particular time, upon receipt by the Secretary
or at the pleasure of the Board of Directors. If no such specification is made,
it shall be deemed effective at the pleasure of the Board of Directors. When
one or more directors shall resign from the Board of Directors, effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each Director so chosen shall hold office for the unexpired
portion of the term of the Director whose place shall be vacated and until his
successor shall have been duly elected and qualified.

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SECTION 20. REMOVAL. Subject to the rights of the holders of any series
of Preferred Stock, the Board of Directors or any individual director may be
removed from office at any time (i) with cause by the affirmative vote of the
holders of a majority of the voting power of all the then-outstanding shares of
voting stock of the corporation, entitled to vote at an election of directors
(the "Voting Stock") or (ii) without cause by the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all the then-outstanding shares of the Voting Stock.

SECTION 21. MEETINGS.

(a) ANNUAL MEETINGS. The annual meeting of the Board of
Directors shall be held immediately before or after the annual meeting of
stockholders and at the place where such meeting is held. No notice of an
annual meeting of the Board of Directors shall be necessary and such meeting
shall be held for the purpose of electing officers and transacting such other
business as may lawfully come before it.

(b) REGULAR MEETINGS. Except as hereinafter otherwise provided,
regular meetings of the Board of Directors shall be held in the office of the
corporation required to be maintained pursuant to Section 2 hereof. Unless
otherwise restricted by the Certificate of Incorporation, regular meetings of
the Board of Directors may also be held at any place within or without the State
of Delaware which has been designated by resolution of the Board of Directors or
the written consent of all directors.

(c) SPECIAL MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation, special meetings of the Board of Directors may be
held at any time and place within or without the State of Delaware whenever
called by the Chairman of the Board, the President or any two of the directors.

(d) TELEPHONE MEETINGS. Any member of the Board of Directors,
or of any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by such means shall constitute presence in person at such meeting.

(e) NOTICE OF MEETINGS. Notice of the time and place of all
special meetings of the Board of Directors shall be orally or in writing, by
telephone, including a voice messaging system or other system or technology
designed to record and communicate messages, facsimile, telegraph or telex, or
by electronic mail or other electronic means, during normal business hours, at
least twenty-four (24) hours before the date and time of the meeting, or sent in
writing to each director by first class mail, postage prepaid, at least three
(3) days before the date of the meeting. Notice of any meeting may be waived in
writing at any time before or after the meeting and will be waived by any
director by attendance thereat, except when the director attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.

(f) WAIVER OF NOTICE. The transaction of all business at any
meeting of the Board of Directors, or any committee thereof, however called or
noticed, or wherever held, shall

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be as valid as though had at a meeting duly held after regular call and notice,
if a quorum be present and if, either before or after the meeting, each of the
directors not present shall sign a written waiver of notice. All such waivers
shall be filed with the corporate records or made a part of the minutes of the
meeting.

SECTION 22. QUORUM AND VOTING.

(a) Unless the Certificate of Incorporation requires a greater
number and except with respect to indemnification questions arising under
Section 43 hereof, for which a quorum shall be one-third of the exact number of
directors fixed from time to time in accordance with the Certificate of
Incorporation, a quorum of the Board of Directors shall consist of a majority of
the exact number of directors fixed from time to time by the Board of Directors
in accordance with the Certificate of Incorporation; provided, however, at any
meeting whether a quorum be present or otherwise, a majority of the directors
present may adjourn from time to time until the time fixed for the next regular
meeting of the Board of Directors, without notice other than by announcement at
the meeting.

(b) At each meeting of the Board of Directors at which a quorum
is present, all questions and business shall be determined by the affirmative
vote of a majority of the directors present, unless a different vote be required
by law, the Certificate of Incorporation or these Bylaws.

SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.

SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.

SECTION 25. COMMITTEES.

(a) EXECUTIVE COMMITTEE. The Board of Directors may by
resolution passed by a majority of the whole Board of Directors appoint an
Executive Committee to consist of one (1) or more members of the Board of
Directors. The Executive Committee, to the extent permitted by law and provided
in the resolution of the Board of Directors shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it; but no such committee shall have
the power or authority in reference to (i) approving or adopting, or
recommending to the stockholders, any

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action or matter expressly required by Delaware the General Corporation Law to
be submitted to stockholders for approval, or (ii) adopting, amending or
repealing any bylaw of the corporation.

(b) OTHER COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole Board of Directors, from time to time appoint
such other committees as may be permitted by law. Such other committees
appointed by the Board of Directors shall consist of one (1) or more members of
the Board of Directors and shall have such powers and perform such duties as may
be prescribed by the resolution or resolutions creating such committees, but in
no event shall such committee have the powers denied to the Executive Committee
in these Bylaws.

(c) TERM. Each member of a committee of the Board of Directors
shall serve a term on the committee coexistent with such member's term on the
Board of Directors. The Board of Directors, subject to the provisions of
subsections (a) or (b) of this Bylaw may at any time increase or decrease the
number of members of a committee or terminate the existence of a committee. The
membership of a committee member shall terminate on the date of his death or
voluntary resignation from the committee or from the Board of Directors. The
Board of Directors may at any time for any reason remove any individual
committee member and the Board of Directors may fill any committee vacancy
created by death, resignation, removal or increase in the number of members of
the committee. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee, and, in addition, in the absence or
disqualification of any member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member.

(d) MEETINGS. Unless the Board of Directors shall otherwise
provide, regular meetings of the Executive Committee or any other committee
appointed pursuant to this Section 25 shall be held at such times and places as
are determined by the Board of Directors, or by any such committee, and when
notice thereof has been given to each member of such committee, no further
notice of such regular meetings need be given thereafter. Special meetings of
any such committee may be held at any place which has been determined from time
to time by such committee, and may be called by any director who is a member of
such committee, upon written notice to the members of such committee of the time
and place of such special meeting given in the manner provided for the giving of
written notice to members of the Board of Directors of the time and place of
special meetings of the Board of Directors. Notice of any special meeting of
any committee may be waived in writing at any time before or after the meeting
and will be waived by any director by attendance thereat, except when the
director attends such special meeting for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. A majority of the authorized number
of members of any such committee shall constitute a quorum for the transaction
of business, and the act of a majority of those present at any meeting at which
a quorum is present shall be the act of such committee.

SECTION 26. ORGANIZATION. At every meeting of the directors, the
Chairman of the Board of Directors, or, if a Chairman has not been appointed or
is absent, the President, or if the

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President is absent, the most senior Vice President, or, in the absence of any
such officer, a chairman of the meeting chosen by a majority of the directors
present, shall preside over the meeting. The Secretary, or in his absence, an
Assistant Secretary directed to do so by the President, shall act as secretary
of the meeting.

ARTICLE V

OFFICERS

SECTION 27. OFFICERS DESIGNATED. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chairman of the
Board of Directors, the Chief Executive Officer, the President, one or more Vice
Presidents, the Secretary, the Chief Financial Officer, the Treasurer, the
Controller, all of whom shall be elected at the annual organizational meeting of
the Board of Directors. The Board of Directors may also appoint one or more
Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such
other officers and agents with such powers and duties as it shall deem
necessary. The Board of Directors may assign such additional titles to one or
more of the officers as it shall deem appropriate. Any one person may hold any
number of offices of the corporation at any one time unless specifically
prohibited therefrom by law. The salaries and other compensation of the
officers of the corporation shall be fixed by or in the manner designated by the
Board of Directors.

SECTION 28. TENURE AND DUTIES OF OFFICERS.

(a) GENERAL. All officers shall hold office at the pleasure of
the Board of Directors and until their successors shall have been duly elected
and qualified, unless sooner removed. Any officer elected or appointed by the
Board of Directors may be removed at any time by the Board of Directors. If the
office of any officer becomes vacant for any reason, the vacancy may be filled
by the Board of Directors.

(b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman
of the Board of Directors, when present, shall preside at all meetings of the
stockholders and the Board of Directors. The Chairman of the Board of Directors
shall perform other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time. If there is no President, then the Chairman
of the Board of Directors shall also serve as the Chief Executive Officer of the
corporation and shall have the powers and duties prescribed in paragraph (c) of
this Section 28.

(c) DUTIES OF PRESIDENT. The President shall preside at all
meetings of the stockholders and at all meetings of the Board of Directors,
unless the Chairman of the Board of Directors has been appointed and is present.
Unless some other officer has been elected Chief Executive Officer of the
corporation, the President shall be the chief executive officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
corporation. The President shall perform other duties commonly incident to his
office and shall also perform such other duties and have such other powers as
the Board of Directors shall designate from time to time.

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(d) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume
and perform the duties of the President in the absence or disability of the
President or whenever the office of President is vacant. The Vice Presidents
shall perform other duties commonly incident to their office and shall also
perform such other duties and have such other powers as the Board of Directors
or the President shall designate from time to time.

(e) DUTIES OF SECRETARY. The Secretary shall attend all
meetings of the stockholders and of the Board of Directors and shall record all
acts and proceedings thereof in the minute book of the corporation. The
Secretary shall give notice in conformity with these Bylaws of all meetings of
the stockholders and of all meetings of the Board of Directors and any committee
thereof requiring notice. The Secretary shall perform all other duties given
him in these Bylaws and other duties commonly incident to his office and shall
also perform such other duties and have such other powers as the Board of
Directors shall designate from time to time. The President may direct any
Assistant Secretary to assume and perform the duties of the Secretary in the
absence or disability of the Secretary, and each Assistant Secretary shall
perform other duties commonly incident to his office and shall also perform such
other duties and have such other powers as the Board of Directors or the
President shall designate from time to time.

(f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial
Officer shall keep or cause to be kept the books of account of the corporation
in a thorough and proper manner and shall render statements of the financial
affairs of the corporation in such form and as often as required by the Board of
Directors or the President. The Chief Financial Officer, subject to the order
of the Board of Directors, shall have the custody of all funds and securities of
the corporation. The Chief Financial Officer shall perform other duties
commonly incident to his office and shall also perform such other duties and
have such other powers as the Board of Directors or the President shall
designate from time to time. The President may direct the Treasurer or any
Assistant Treasurer, or the Controller or any Assistant Controller to assume and
perform the duties of the Chief Financial Officer in the absence or disability
of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and
each Controller and Assistant Controller shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
time to time.

SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officer
or agent, notwithstanding any provision hereof.

SECTION 30. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.

SECTION 31. REMOVAL. Any officer may be removed from office at any
time, either with or without cause, by the affirmative vote of a majority of the
directors in office at the time,

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or by the unanimous written consent of the directors in office at the time, or
by any committee or superior officers upon whom such power of removal may have
been conferred by the Board of Directors.

ARTICLE VI

EXECUTION OF CORPORATE INSTRUMENTS AND
VOTING OF SECURITIES OWNED BY THE CORPORATION

SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.

All checks and drafts drawn on banks or other depositaries on funds to the
credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.

Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.

SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock
and other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman of the Board of Directors, the Chief Executive Officer, the
President, or any Vice President.

ARTICLE VII

SHARES OF STOCK

SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation shall be entitled to have a certificate signed by or in the name
of the corporation by the Chairman of the Board of Directors, or the President
or any Vice President and by the Treasurer or Assistant Treasurer or the
Secretary or Assistant Secretary, certifying the number of shares owned by him
in the corporation. Any or all of the signatures on the certificate may be
facsimiles. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued with the same effect as if he were such officer,
transfer agent, or registrar at the date of issue. Each certificate shall state
upon the face or back thereof, in full or in summary, all of the

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powers, designations, preferences, and rights, and the limitations or
restrictions of the shares authorized to be issued or shall, except as otherwise
required by law, set forth on the face or back a statement that the corporation
will furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional, or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Within a
reasonable time after the issuance or transfer of uncertificated stock, the
corporation shall send to the registered owner thereof a written notice
containing the information required to be set forth or stated on certificates
pursuant to this section or otherwise required by law or with respect to this
section a statement that the corporation will furnish without charge to each
stockholder who so requests the powers, designations, preferences and relative
participating, optional or oher special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights. Except as otherwise expressly provided by law, the rights and
obligations of the holders of certificates representing stock of the same class
and series shall be identical.

SECTION 35. LOST CERTIFICATES. A new certificate or certificates shall
be issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require or to
give the corporation a surety bond in such form and amount as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed.

SECTION 36. TRANSFERS.

(a) Transfers of record of shares of stock of the corporation
shall be made only upon its books by the holders thereof, in person or by
attorney duly authorized, and upon the surrender of a properly endorsed
certificate or certificates for a like number of shares.

(b) The corporation shall have power to enter into and perform
any agreement with any number of stockholders of any one or more classes of
stock of the corporation to restrict the transfer of shares of stock of the
corporation of any one or more classes owned by such stockholders in any manner
not prohibited by the General Corporation Law of Delaware.

SECTION 37. FIXING RECORD DATES.

(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date of
such meeting. If no record date is fixed by the Board of Directors, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held. A

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determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.

(b) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted by the Board of Directors, and which record date shall be
not more than sixty (60) days prior to such action. If no record date has been
fixed by the Board of Directors, the record date for determining stockholders
for any such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.

SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person whether or not it shall have express
or other notice thereof, except as otherwise provided by the laws of Delaware.

ARTICLE VIII

OTHER SECURITIES OF THE CORPORATION

SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and
other corporate securities of the corporation, other than stock certificates
(covered in Section 34), may be signed by the Chairman of the Board of
Directors, the President or any Vice President, or such other person as may be
authorized by the Board of Directors, and the corporate seal impressed thereon
or a facsimile of such seal imprinted thereon and attested by the signature of
the Secretary or an Assistant Secretary, or the Chief Financial Officer or
Treasurer or an Assistant Treasurer; provided, however, that where any such
bond, debenture or other corporate security shall be authenticated by the manual
signature, or where permissible facsimile signature, of a trustee under an
indenture pursuant to which such bond, debenture or other corporate security
shall be issued, the signatures of the persons signing and attesting the
corporate seal on such bond, debenture or other corporate security may be the
imprinted facsimile of the signatures of such persons. Interest coupons
appertaining to any such bond, debenture or other corporate security,
authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an
Assistant Treasurer of the corporation or such other person as may be authorized
by the Board of Directors, or bear imprinted thereon the facsimile signature of
such person. In case any officer who shall have signed or attested any bond,
debenture or other corporate security, or whose facsimile signature shall appear
thereon or on any such interest coupon, shall have ceased to be such officer
before the bond, debenture or other corporate security so signed or attested
shall have been delivered, such bond, debenture or other corporate security
nevertheless may be adopted by the corporation and issued and delivered as
though the person who signed the same or whose facsimile signature shall have
been used thereon had not ceased to be such officer of the corporation.

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ARTICLE IX

DIVIDENDS

SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock
of the corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors pursuant to law
at any regular or special meeting. Dividends may be paid in cash, in property,
or in shares of the capital stock, subject to the provisions of the Certificate
of Incorporation.

SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there may
be set aside out of any funds of the corporation available for dividends such
sum or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.

ARTICLE X

FISCAL YEAR

SECTION 42. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.

ARTICLE XI

INDEMNIFICATION

SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER
OFFICERS, EMPLOYEES AND OTHER AGENTS.

(a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall
indemnify its directors and executive officers (for the purposes of this Article
XI, "executive officers shall have the meaning defined in Rule 3b-7 promulgated
under the 1934 Act) to the fullest extent not prohibited by the Delaware General
Corporation Law; provided, however, that the corporation may modify the extent
of such indemnification by individual contracts with its directors and executive
officers; and, provided, further, that the corporation shall not be required to
indemnify any director or executive officer in connection with any proceeding
(or part thereof) initiated by such person unless (i) such indemnification is
expressly required to be made by law, (ii) the proceeding was authorized by the
Board of Directors of the corporation, (iii) such indemnification is provided by
the corporation, in its sole discretion, pursuant to the powers vested in the
corporation under the Delaware General Corporation Law or (iv) such
indemnification is required to be made under subsection (d).

(b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation
shall have power to indemnify its other officers, employees and other agents as
set forth in the Delaware General Corporation Law.

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(c) EXPENSES. The corporation shall advance to any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he is or was a director or
executive officer of the corporation, or is or was serving at the request of the
corporation as a director or executive officer of another corporation,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefor, all expenses
incurred by any director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under this Bylaw or otherwise.

Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (e) of this Bylaw, no advance shall be made by the corporation to an
executive officer of the corporation (except by reason of the fact that such
executive officer is or was a director of the corporation in which event this
paragraph shall not apply) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, if a determination is reasonably and
promptly made (i) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to the proceeding, or (ii) if such
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, that
the facts known to the decision-making party at the time such determination is
made demonstrate clearly and convincingly that such person acted in bad faith or
in a manner that such person did not believe to be in or not opposed to the best
interests of the corporation.

(d) ENFORCEMENT. Without the necessity of entering into an
express contract, all rights to indemnification and advances to directors and
executive officers under this Bylaw shall be deemed to be contractual rights and
be effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this Bylaw to a director or executive officer shall be
enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. In connection with any claim for indemnification, the
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
Delaware General Corporation Law for the corporation to indemnify the claimant
for the amount claimed. In connection with any claim by an executive officer of
the corporation (except in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
executive officer is or was a director of the corporation) for advances, the
corporation shall be entitled to raise a defense as to any such action clear and
convincing evidence that such person acted in bad faith or in a manner that such
person did not believe to be in or not opposed to the best interests of the
corporation, or with respect to any criminal action or proceeding that such
person acted without reasonable cause to believe that his conduct was lawful.
Neither the failure of the corporation (including its Board of Directors,
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such actionthat indemnification of the claimant is
proper in the circumstances because he has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the corporation

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(including its Board of Directors, independent legal counsel or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that claimant has not
met the applicable standard of conduct. In any suit brought by a director or
executive officer to enforce a right to indemnification or to an advancement of
expenses hereunder, the burden of proving that the director or executive officer
is not entitled to be indemnified, or to such advancement of expenses, under
this Article XI or otherwise shall be on the corporation.

(e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any
person by this Bylaw shall not be exclusive of any other right which such person
may have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is
specifically authorized to enter into individual contracts with any or all of
its directors, officers, employees or agents respecting indemnification and
advances, to the fullest extent not prohibited by the Delaware General
Corporation Law.

(f) SURVIVAL OF RIGHTS. The rights conferred on any person by
this Bylaw shall continue as to a person who has ceased to be a director,
officer, employee or other agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.

(g) INSURANCE. To the fullest extent permitted by the Delaware
General Corporation Law, the corporation, upon approval by the Board of
Directors, may purchase insurance on behalf of any person required or permitted
to be indemnified pursuant to this Bylaw.

(h) AMENDMENTS. Any repeal or modification of this Bylaw shall
only be prospective and shall not affect the rights under this Bylaw in effect
at the time of the alleged occurrence of any action or omission to act that is
the cause of any proceeding against any agent of the corporation.

(i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director and executive officer to
the full extent not prohibited by any applicable portion of this Bylaw that
shall not have been invalidated, or by any other applicable law. If this
Section 43 shall be invalidated due to the application of the indemnification
provisions of another jurisdiction, then the corporation shall indemnify each
director and executive officer to the full extent under any other applicable
law.

(j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the
following definitions shall apply:

(i) The term "proceeding" shall be broadly construed
and shall include, without limitation, the investigation, preparation,
prosecution, defense, settlement, arbitration and appeal of, and the giving of
testimony in, any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative.

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(ii) The term "expenses" shall be broadly construed and
shall include, without limitation, court costs, attorneys' fees, witness fees,
fines, amounts paid in settlement or judgment and any other costs and expenses
of any nature or kind incurred in connection with any proceeding.

(iii) The term the "corporation" shall include, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Bylaw with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.

(iv) References to a "director," "executive officer,"
"officer," "employee," or "agent" of the corporation shall include, without
limitation, situations where such person is serving at the request of the
corporation as, respectively, a director, executive officer, officer, employee,
trustee or agent of another corporation, partnership, joint venture, trust or
other enterprise.

(v) References to "other enterprises" shall include
employee benefit plans; references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and references to
"serving at the request of the corporation" shall include any service as a
director, officer, employee or agent of the corporation which imposes duties on,
or involves services by, such director, officer, employee, or agent with respect
to an employee benefit plan, its participants, or beneficiaries; and a person
who acted in good faith and in a manner he reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan shall
be deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Bylaw.

ARTICLE XII

NOTICES

SECTION 44. NOTICES.

(a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of
these Bylaws, notice is required to be given to any stockholder, it shall be
given in writing, timely and duly deposited in the United States mail, postage
prepaid, and addressed to his last known post office address as shown by the
stock record of the corporation or its transfer agent.

(b) NOTICE TO DIRECTORS. Any notice required to be given to any
director may be given by the method stated in subsection (a), or by facsimile,
telex or telegram, except that such notice other than one which is delivered
personally shall be sent to such address as such

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director shall have filed in writing with the Secretary, or, in the absence of
such filing, to the last known post office address of such director.

(c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by
a duly authorized and competent employee of the corporation or its transfer
agent appointed with respect to the class of stock affected, specifying the name
and address or the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall in the absence of fraud, be prima
facie evidence of the facts therein contained.

(d) TIME NOTICES DEEMED GIVEN. All notices given by mail, as
above provided, shall be deemed to have been given as at the time of mailing,
and all notices given by facsimile, telex or telegram shall be deemed to have
been given as of the sending time recorded at time of transmission.

(e) METHODS OF NOTICE. It shall not be necessary that the same
method of giving notice be employed in respect of all directors, but one
permissible method may be employed in respect of any one or more, and any other
permissible method or methods may be employed in respect of any other or others.

(f) FAILURE TO RECEIVE NOTICE. The period or limitation of time
within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any director may
exercise any power or right, or enjoy any privilege, pursuant to any notice sent
him in the manner above provided, shall not be affected or extended in any
manner by the failure of such stockholder or such director to receive such
notice.

(g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL.
Whenever notice is required to be given, under any provision of law or of the
Certificate of Incorporation or Bylaws of the corporation, to any person with
whom communication is unlawful, the giving of such notice to such person shall
not be required and there shall be no duty to apply to any governmental
authority or agency for a license or permit to give such notice to such person.
Any action or meeting which shall be taken or held without notice to any such
person with whom communication is unlawful shall have the same force and effect
as if such notice had been duly given. In the event that the action taken by
the corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate shall state,
if such is the fact and if notice is required, that notice was given to all
persons entitled to receive notice except such persons with whom communication
is unlawful.

(h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever
notice is required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings, or (ii) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve month period, have been mailed addressed to such
person at his address as shown on the records of the corporation and have been
returned undeliverable, the giving of such notice to such

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person shall not be required. Any action or meeting which shall be taken or
held without notice to such person shall have the same force and effect as if
such notice had been duly given. If any such person shall deliver to the
corporation a written notice setting forth his then current address, the
requirement that notice be given to such person shall be reinstated. In the
event that the action taken by the corporation is such as to require the filing
of a certificate under any provision of the Delaware General Corporation Law,
the certificate need not state that notice was not given to persons to whom
notice was not required to be given pursuant to this paragraph.

ARTICLE XIII

AMENDMENTS

SECTION 45. AMENDMENTS. Subject to paragraph (h) of Section 43 of the
Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the
affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the
voting power of all of the then-outstanding shares of the Voting Stock. The
Board of Directors shall also have the power to adopt, amend, or repeal Bylaws.

ARTICLE XIV

LOANS TO OFFICERS

SECTION 46. LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance
may be with or without interest and may be unsecured, or secured in such manner
as the Board of Directors shall approve, including, without limitation, a pledge
of shares of stock of the corporation. Nothing in these Bylaws shall be deemed
to deny, limit or restrict the powers of guaranty or warranty of the corporation
at common law or under any statute.

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ARTICLE I OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Section 1. Registered Office. . . . . . . . . . . . . . . . . . . . 1

Section 2. Other Offices. . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE II CORPORATE SEAL. . . . . . . . . . . . . . . . . . . . . . . . 1

Section 3. Corporate Seal . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE III STOCKHOLDERS' MEETINGS. . . . . . . . . . . . . . . . . . . . 1

Section 4. Place of Meetings. . . . . . . . . . . . . . . . . . . . 1

Section 5. Annual Meeting . . . . . . . . . . . . . . . . . . . . . 1

Section 6. Special Meetings . . . . . . . . . . . . . . . . . . . . 3

Section 7. Notice of Meetings . . . . . . . . . . . . . . . . . . . 4

Section 8. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . 4

Section 9. Adjournment and Notice of Adjourned Meetings . . . . . . 4

Section 10. Voting Rights. . . . . . . . . . . . . . . . . . . . . . 5

Section 11. Joint Owners of Stock. . . . . . . . . . . . . . . . . . 5

Section 12. List of Stockholders . . . . . . . . . . . . . . . . . . 5

Section 13. Action Without Meeting . . . . . . . . . . . . . . . . . 5

Section 14. Organization . . . . . . . . . . . . . . . . . . . . . . 5

ARTICLE IV DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Section 15. Number and Term of Office. . . . . . . . . . . . . . . . 6

Section 16. Powers . . . . . . . . . . . . . . . . . . . . . . . . . 6

Section 17. Classes Of Directors.. . . . . . . . . . . . . . . . . . 6

Section 18. Vacancies. . . . . . . . . . . . . . . . . . . . . . . . 7

Section 19. Resignation. . . . . . . . . . . . . . . . . . . . . . . 7

Section 20. Removal. . . . . . . . . . . . . . . . . . . . . . . . . 7

Section 21. Meetings . . . . . . . . . . . . . . . . . . . . . . . . 7

Section 22. Quorum and Voting. . . . . . . . . . . . . . . . . . . . 8

Section 23. Action Without Meeting . . . . . . . . . . . . . . . . . 9

Section 24. Fees and Compensation. . . . . . . . . . . . . . . . . . 9

Section 25. Committees . . . . . . . . . . . . . . . . . . . . . . . 9

Section 26. Organization . . . . . . . . . . . . . . . . . . . . . .10

ARTICLE V OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . .10

Section 27. Officers Designated. . . . . . . . . . . . . . . . . . .10

Section 28. Tenure and Duties of Officers. . . . . . . . . . . . . .11

1
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Section 29. Delegation of Authority. . . . . . . . . . . . . . . . .12

Section 30. Resignations . . . . . . . . . . . . . . . . . . . . . .12

Section 31. Removal. . . . . . . . . . . . . . . . . . . . . . . . .12

ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION. . . . . . . . . . . .12

Section 32. Execution of Corporate Instruments . . . . . . . . . . .12

Section 33. Voting of Securities Owned by the Corporation. . . . . .13

ARTICLE VII SHARES OF STOCK . . . . . . . . . . . . . . . . . . . . . . .13

Section 34. Form and Execution of Certificates . . . . . . . . . . .13

Section 35. Lost Certificates. . . . . . . . . . . . . . . . . . . .14

Section 36. Transfers. . . . . . . . . . . . . . . . . . . . . . . .14

Section 37. Fixing Record Dates. . . . . . . . . . . . . . . . . . .14

Section 38. Registered Stockholders. . . . . . . . . . . . . . . . .15

ARTICLE VIII OTHER SECURITIES OF THE CORPORATION . . . . . . . . . . . . .15

Section 39. Execution of Other Securities. . . . . . . . . . . . . .15

ARTICLE IX DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . .15

Section 40. Declaration of Dividends . . . . . . . . . . . . . . . .15

Section 41. Dividend Reserve . . . . . . . . . . . . . . . . . . . .16

ARTICLE X FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . .16

Section 42. Fiscal Year. . . . . . . . . . . . . . . . . . . . . . .16

ARTICLE XI INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . .16

Section 43. Indemnification of Directors, Executive Officers,
Other Officers, Employees and Other Agents . . . . . . .16

ARTICLE XII NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . .19

Section 44. Notices. . . . . . . . . . . . . . . . . . . . . . . . .19

ARTICLE XIII AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . .20

Section 45. Amendments . . . . . . . . . . . . . . . . . . . . . . .20

ARTICLE XIV LOANS TO OFFICERS . . . . . . . . . . . . . . . . . . . . . .21

Section 46. Loans to Officers. . . . . . . . . . . . . . . . . . . .21

<PAGE>

SCIENTIFIC LEARNING CORPORATION

1999 EQUITY INCENTIVE PLAN

ADOPTED FEBRUARY 19, 1996
APPROVED BY STOCKHOLDERS MARCH 30, 1996
AMENDED AND RESTATED SEPTEMBER 27, 1996
APPROVED BY STOCKHOLDERS JUNE 11, 1997
AMENDED MARCH 11, 1999
AMENDED MAY 17, 1999
AMENDED AND RESTATED ____________, 1999
APPROVED BY STOCKHOLDERS ____________, 1999
TERMINATION DATE: JUNE ___, 2009

1. PURPOSES.

(a) The Plan initially was established effective as of February 19,
1996 (the "Prior Plan"). The Prior Plan hereby is amended and restated in its
entirety as the Plan, effective as of the date of the closing of the initial
public offering ("IPO") of the common stock of the Company ("Common Stock").
The terms of the Prior Plan shall remain in effect and apply to all options
granted pursuant to the Prior Plan.

(b) The purpose of the Plan is to provide a means by which selected
Employees, Directors and Consultants may be given an opportunity to benefit from
increases in value of the Common Stock through the granting of (i) Incentive
Stock Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses, (iv) rights
to purchase restricted stock and (v) Stock Appreciation Rights.

(c) The Company, by means of the Plan, seeks to retain the services
of persons who are now Employees, Directors or Consultants, to secure and retain
the services of new Employees, Directors and Consultants and to provide
incentives for such persons to exert maximum efforts for the success of the
Company and its Affiliates.

(d) The Company intends that the Stock Awards issued under the Plan
shall, in the discretion of the Board or any Committee to which responsibility
for administration of the Plan has been delegated pursuant to subsection 3(c),
be either (i) Options granted pursuant to Section 6 hereof, including Incentive
Stock Options and Nonstatutory Stock Options, (ii) stock bonuses or rights to
purchase restricted stock granted pursuant to Section 7 hereof or (iii) Stock
Appreciation Rights granted pursuant to Section 8 hereof. All Options shall be
separately designated Incentive Stock Options or Nonstatutory Stock Options at
the time of grant, and in such form as issued pursuant to Section 6, and a
separate certificate or certificates will be issued for shares purchased on
exercise of each type of Option.

2. DEFINITIONS.

(a) "AFFILIATE" means any parent corporation or subsidiary
corporation, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f) respectively, of the Code.

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(b) "BOARD" means the Board of Directors of the Company.

(d) "COMMITTEE" means a Committee appointed by the Board in
accordance with subsection 3(c) of the Plan.

(e) "COMPANY" means Scientific Learning Corporation, a Delaware
corporation.

(f) "CONSULTANT" means any person, including an advisor, engaged by
the Company or an Affiliate to render consulting services and who is compensated
for such services, provided that the term "Consultant" shall not include
Directors who are paid only a director's fee by the Company or who are not
compensated by the Company for their services as Directors.

(g) "CONTINUOUS SERVICE" means that the Optionee's employment or
service with the Company or an Affiliate of the Company, whether in the capacity
of an Employee, a Director or a Consultant, is not interrupted or terminated.
The Optionee's Continuous Service shall not be deemed to have terminated merely
because of a change in the capacity in which the Optionee renders employment or
service to the Company or an Affiliate or the Company or a change in the entity
for which the Optionee renders such employment or service, provided that there
is no interruption or termination of the Optionee's Continuous Service. The
Board or the Chief Executive Officer of the Company, in that party's sole
discretion, may determine whether Continuous Service shall be considered
interrupted in the case of any leave of absence approved by the Board or the
Chief Executive Officer of the Company, including sick leave, military leave, or
any other personal leave.

(h) "COVERED EMPLOYEE" means the Chief Executive Officer and the four
(4) other highest compensated officers of the Company for whom total
compensation is required to be reported to stockholders under the Exchange Act,
as determined for purposes of Section 162(m) of the Code.

(i) "DIRECTOR" means a member of the Board.

(j) "DISABILITY" means the permanent and total disability of a person
within the meaning of Section 22(e)(3) of the Code.

(k) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.

(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.

(m) "FAIR MARKET VALUE" means, as of any date, the value of the
Common Stock of the Company determined as follows:

(1) If the Common Stock is listed on any established
stock exchange, or traded on the Nasdaq National Market or the Nasdaq SmallCap
Market, the Fair Market Value of a share of Common Stock shall be the closing
sales price for such stock (or the closing bid, if no sales were reported) as
quoted on such exchange or market (or the exchange or market with

2.
<PAGE>

the greatest volume of trading in Common Stock) on the trading day prior to the
day of determination, as reported in the Wall Street Journal or such other
source as the Board deems reliable;

(2) In the absence of such markets for the Common
Stock, the Fair Market Value shall be determined in good faith by the Board.

(n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.

(o) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act),
does not possess an interest in any other transaction as to which disclosure
would be required under Item 404(a) of Regulation S-K, and is not engaged in a
business relationship as to which disclosure would be required under Item 404(b)
of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for
purposes of Rule 16b-3.

(p) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.

(q) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.

(r) "OPTION" means a stock option granted pursuant to the Plan.

(s) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of
the Plan.

(t) "OPTIONEE" means a person to whom an Option is granted pursuant
to the Plan.

(u) "OUTSIDE DIRECTOR" means a Director who either (i) is not a
current employee of the Company or an "affiliated corporation" (within the
meaning of Treasury regulations promulgated under Section 162(m) of the Code),
is not a former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time, and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director, or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.

(v) "PLAN" means this Scientific Learning Corporation 1999 Equity
Incentive Plan.

(w) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.

3.
<PAGE>

(x) "SECURITIES ACT" means the Securities Act of 1933, as amended.

(y) "STOCK APPRECIATION RIGHT" means any of the various types of
rights which may be granted under Section 8 of the Plan.

(z) "STOCK AWARD" means any right granted under the Plan, including
any Option, any stock bonus, any right to purchase restricted stock and any
Stock Appreciation Right.

(aa) "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to
the terms and conditions of the Plan.

3. ADMINISTRATION.

(a) The Board shall administer the Plan unless and until the Board
delegates administration to a Committee, as provided in subsection 3(c).

(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:

(1) To determine from time to time which of the
persons eligible under the Plan shall be granted Stock Awards; when and how each
Stock Award shall be granted; whether a Stock Award will be an Incentive Stock
Option or a Nonstatutory Stock Option, a stock bonus, a right to purchase
restricted stock, a Stock Appreciation Right or a combination of the foregoing;
the provisions of each Stock Award granted (which need not be identical),
including the time or times when a person shall be permitted to receive stock
pursuant to a Stock Award; whether a person shall be permitted to receive stock
upon exercise of an Independent Stock Appreciation Right; and the number of
shares with respect to which a Stock Award shall be granted to each such person.

(2) To construe and interpret the Plan and Stock
Awards granted under it, and to establish, amend and revoke rules and
regulations for its administration. The Board, in the exercise of this power,
may correct any defect, omission or inconsistency in the Plan or in any Stock
Award Agreement, in a manner and to the extent it shall deem necessary or
expedient to make the Plan fully effective.

(3) To amend the Plan or a Stock Award as provided in
Section 13.

(4) Generally, to exercise such powers and to perform
such acts as the Board deems necessary or expedient to promote the best
interests of the Company which are not in conflict with the provisions of the
Plan.

(c) The Board may delegate administration of the Plan to a Committee
or Committees of one or more members of the Board. In the discretion of the
Board, a Committee may consist solely of two or more Outside Directors, in
accordance with Code Section 162(m), or solely of two or more Non-Employee
Directors, in accordance with Rule 16b-3. If administration is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board (and references in this
Plan to the Board shall thereafter be to the

4.
<PAGE>

Committee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan. Notwithstanding anything in this Section 3 to the
contrary, the Board or the Committee may delegate to a committee of one or more
members of the Board the authority to grant Options to eligible persons who (1)
are not then subject to Section 16 of the Exchange Act and/or (2) are either (i)
not then Covered Employees and are not expected to be Covered Employees at the
time of recognition of income resulting from such Option, or (ii) not persons
with respect to whom the Company wishes to comply with Section 162(m) of the
Code.

4. SHARES SUBJECT TO THE PLAN.

(a) Subject to the provisions of subsection 12(a) relating to
adjustments upon changes in stock, the stock that may be issued pursuant to
Stock Awards shall not exceed in the aggregate Two Million One Hundred Ninety
Two Thousand Six Hundred Sixty Six (2,192,666) shares of Common Stock. If any
Stock Award shall for any reason expire or otherwise terminate, in whole or in
part, without having been exercised in full (or vested in the case of restricted
stock), the stock not acquired under such Stock Award shall revert to and again
become available for issuance under the Plan. Shares subject to Stock
Appreciation Rights exercised in accordance with Section 8 of the Plan shall not
be available for subsequent issuance under the Plan.

(b) The stock subject to the Plan may be unissued shares or
reacquired shares, bought on the market or otherwise.

5. ELIGIBILITY.

(a) Incentive Stock Options and Stock Appreciation Rights appurtenant
thereto may be granted only to Employees. Stock Awards other than Incentive
Stock Options and Stock Appreciation Rights appurtenant thereto may be granted
to Employees, Directors and Consultants.

(b) No person shall be eligible for the grant of an Incentive Stock
Option if, at the time of grant, such person owns (or is deemed to own pursuant
to Section 424(d) of the Code) stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or of any
of its Affiliates unless the exercise price of such Option is at least one
hundred ten percent (110%) of the Fair Market Value of such stock at the date of
grant and the Option is not exercisable after the expiration of five (5) years
from the date of grant.

(c) Subject to the provisions of Section 12 relating to adjustments
upon changes in stock, no employee shall be eligible to be granted Options and
Stock Appreciation Rights covering more than Four Hundred Twenty Thousand
(420,000) shares of the Common Stock in any calendar year.

6. OPTION PROVISIONS.

Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:

5.
<PAGE>

(a) TERM. No Incentive Stock Option shall be exercisable after the
expiration of ten (10) years from the date it was granted.

(b) PRICE. The exercise price of each Incentive Stock Option shall
be not less than one hundred percent (100%) of the Fair Market Value of the
stock subject to the Option on the date the Option is granted, but the exercise
price of each Nonstatutory Stock Option shall be any price determined by the
Board in its sole discretion. Notwithstanding the foregoing, an Incentive Stock
Option may be granted with an exercise price lower than that set forth in the
preceding sentence if such Incentive Stock Option is granted pursuant to an
assumption or substitution for another option in a manner satisfying the
provisions of Section 424(a) of the Code.

(c) CONSIDERATION. The purchase price of stock acquired pursuant to
an Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash or (ii) at the discretion of the Board (A) by
delivery to the Company of other Common Stock of the Company, (B) according to a
deferred payment (however, payment of the common stock's "par value," as defined
in the Delaware General Corporation Law, shall not be made by deferred payment),
or other arrangement (which may include, without limiting the generality of the
foregoing, the use of other Common Stock of the Company) with the person to whom
the Option is granted or to whom the Option is transferred pursuant to
subsection 6(d), or (C) in any other form of legal consideration that may be
acceptable to the Board.

In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.

(d) TRANSFERABILITY. An Incentive Stock Option shall not be
transferable except by will or by the laws of descent and distribution, and
shall be exercisable during the lifetime of the person to whom the Option is
granted only by such person. A Nonstatutory Stock Option may be transferred to
the extent provided in the Option Agreement; provided that if the Option
Agreement does not expressly permit the transfer of a Nonstatutory Stock Option,
the Nonstatutory Stock Option shall not be transferable except by will, by the
laws of descent and distribution or pursuant to a domestic relations order
satisfying the requirements of Rule 16 of the Exchange Act and shall be
exercisable during the lifetime of the person to whom the Option is granted only
by such person or any transferee pursuant to a domestic relations order.
Notwithstanding the foregoing, the person to whom the Option is granted may, by
delivering written notice to the Company, in a form satisfactory to the Company,
designate a third party who, in the event of the death of the Optionee, shall
thereafter be entitled to exercise the Option.

(e) VESTING. The total number of shares of stock subject to an
Option may, but need not, be allotted in periodic installments (which may, but
need not, be equal). The Option Agreement may provide that from time to time
during each of such installment periods, the Option may become exercisable
("vest") with respect to some or all of the shares allotted to that period, and
may be exercised with respect to some or all of the shares allotted to such
period and/or any prior period as to which the Option became vested but was not
fully exercised. The Option may be subject to such other terms and conditions
on the time or times when it may be exercised (which may be based on performance
or other criteria) as the Board may deem appropriate. The vesting provisions of

6.
<PAGE>

individual Options may vary. The provisions of this subsection 6(e) are subject
to any Option provisions governing the minimum number of shares as to which an
Option may be exercised.

(f) TERMINATION OF THE OPTIONEE'S CONTINUOUS SERVICE. In the event
an Optionee's Continuous Service terminates (other than upon the Optionee's
death or Disability), the Optionee may exercise his or her Option (to the extent
that the Optionee was entitled to exercise it at the date of termination) but
only within such period of time ending on the earlier of (i) the date three (3)
months after the termination of the Optionee's Continuous Service (or such
longer or shorter period specified in the Option Agreement), or (ii) the
expiration of the term of the Option as set forth in the Option Agreement. If,
after termination, the Optionee does not exercise his or her Option within the
time specified in the Option Agreement, the Option shall terminate, and the
shares covered by such Option shall revert to and again become available for
issuance under the Plan.

An Optionee's Option Agreement may also provide that, if the exercise of
the Option following the termination of the Optionee's Continuous Service (other
than upon the Optionee's death or Disability) would be prohibited at any time
solely because the issuance of shares would violate the registration
requirements under the Securities Act, then the Option shall terminate on the
earlier of (i) the expiration of the term of the Option as described in
subsection 6(a) or (ii) the expiration of a period of three (3) months after the
termination of the Optionee's Continuous Service during which the exercise of
the Option would not be in violation of such registration requirements (if such
provisions would result in an extension of the time during which the Option may
be exercised beyond the period described in the first paragraph of this
subsection 6(f)).

(g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous
Service terminates as a result of the Optionee's Disability, the Optionee may
exercise his or her Option (to the extent that the Optionee was entitled to
exercise it at the date of termination), but only within such period of time
ending on the earlier of (i) the date twelve (12) months following such
termination (or such longer or shorter period specified in the Option Agreement,
or (ii) the expiration of the term of the Option as set forth in the Option
Agreement. If, at the date of termination, the Optionee is not entitled to
exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to and again become available for issuance
under the Plan. If, after termination, the Optionee does not exercise his or
her Option within the time specified herein, the Option shall terminate, and the
shares covered by such Option shall revert to and again become available for
issuance under the Plan.

(h) DEATH OF OPTIONEE. In the event of the death of an Optionee
during, or within a period specified in the Option after the termination of, the
Optionee's Continuous Service, the Option may be exercised (to the extent the
Optionee was entitled to exercise the Option at the date of death) by the
Optionee's estate, by a person who acquired the right to exercise the Option by
bequest or inheritance or by a person designated to exercise the option upon the
Optionee's death pursuant to subsection 6(d), but only within the period ending
on the earlier of (i) the date eighteen (18) months following the date of death
(or such longer or shorter period specified in the Option Agreement), or (ii)
the expiration of the term of such Option as set forth in the Option Agreement.
If, at the time of death, the Optionee was not entitled to exercise his or her
entire Option, the shares covered by the unexercisable portion of the Option
shall

7.
<PAGE>

revert to and again become available for issuance under the Plan. If, after
death, the Option is not exercised within the time specified herein, the Option
shall terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.

(i) EARLY EXERCISE. The Option may, but need not, include a
provision whereby the Optionee may elect at any time before the Optionee's
Continuous Service terminates to exercise the Option as to any part or all of
the shares subject to the Option prior to the full vesting of the Option. Any
unvested shares so purchased may be subject to a repurchase right in favor of
the Company or to any other restriction the Board determines to be appropriate.

(j) RE-LOAD OPTIONS. Without in any way limiting the authority of
the Board to make or not to make grants of Options hereunder, the Board shall
have the authority (but not an obligation) to include as part of any Option
Agreement a provision entitling the Optionee to a further Option (a "Re-Load
Option") in the event the Optionee exercises the Option evidenced by the Option
Agreement, in whole or in part, by surrendering other shares of Common Stock in
accordance with this Plan and the terms and conditions of the Option Agreement.
Any such Re-Load Option (i) shall be for a number of shares equal to the number
of shares surrendered as part or all of the exercise price of such Option; (ii)
shall have an expiration date which is the same as the expiration date of the
Option the exercise of which gave rise to such Re-Load Option; and (iii) shall
have an exercise price which is equal to one hundred percent (100%) of the Fair
Market Value of the Common Stock subject to the Re-Load Option on the date of
exercise of the original Option. Notwithstanding the foregoing, a Re-Load
Option which is an Incentive Stock Option and which is granted to a 10%
stockholder (as described in subsection 5(b)), shall have an exercise price
which is equal to one hundred ten percent (110%) of the Fair Market Value of the
stock subject to the Re-Load Option on the date of exercise of the original
Option and shall have a term which is no longer than five (5) years.

Any such Re-Load Option may be an Incentive Stock Option or a
Nonstatutory Stock Option, as the Board may designate at the time of the grant
of the original Option; provided, however, that the designation of any Re-Load
Option as an Incentive Stock Option shall be subject to the one hundred thousand
dollars ($100,000) annual limitation on exercisability of Incentive Stock
Options described in subsection 11(e) of the Plan and in Section 422(d) of the
Code. There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load
Option shall be subject to the availability of sufficient shares under
subsection 4(a) and shall be subject to such other terms and conditions as the
Board may determine which are not inconsistent with the express provisions of
the Plan regarding the terms of Options.

7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.

Each stock bonus or restricted stock purchase agreement shall be in such
form and shall contain such terms and conditions as the Board shall deem
appropriate. The terms and conditions of stock bonus or restricted stock
purchase agreements may change from time to time, and the terms and conditions
of separate agreements need not be identical, but each stock bonus or restricted
stock purchase agreement shall include (through incorporation of provisions
hereof by reference in the agreement or otherwise) the substance of each of the
following provisions as appropriate:

(a) PURCHASE PRICE. The purchase price under each restricted stock
purchase agreement shall be such amount as the Board shall determine and
designate in such agreement.

8.
<PAGE>

Notwithstanding the foregoing, the Board may determine that eligible
participants in the Plan may be awarded stock pursuant to a stock bonus
agreement in consideration for past services actually rendered to the Company
for its benefit.

(b) TRANSFERABILITY. Rights under a stock bonus or restricted stock
purchase agreement may be transferred to the extent provided in the agreement;
provided that if the agreement does not expressly permit the transfer of such
rights, no rights under the agreement shall be transferable except by will or
the laws of descent and distribution or, if the agreement so provides, pursuant
to a domestic relations order satisfying the requirements of Rule 16b-3 so long
as stock awarded under such agreement remains subject to the terms of the
agreement.

(c) CONSIDERATION. The purchase price of stock acquired pursuant to
a stock purchase agreement shall be paid either: (i) in cash; (ii) at the
discretion of the Board, according to a deferred payment or other arrangement
with the person to whom the stock is sold; or (iii) in any other form of legal
consideration that may be acceptable to the Board in its discretion.
Notwithstanding the foregoing, the Board to which administration of the Plan has
been delegated may award stock pursuant to a stock bonus agreement in
consideration for past services actually rendered to the Company or for its
benefit.

(d) VESTING. Shares of stock sold or awarded under the Plan may, but
need not, be subject to a repurchase option in favor of the Company in
accordance with a vesting schedule to be determined by the Board.

(e) TERMINATION OF CONTINUOUS SERVICE. In the event the Stock Award
recipient's Continuous Service terminates, the Company may repurchase or
otherwise reacquire any or all of the shares of stock held by that person which
have not vested as of the date of termination under the terms of the stock bonus
or restricted stock purchase agreement between the Company and such person.

8. STOCK APPRECIATION RIGHTS.

(a) To exercise any outstanding Stock Appreciation Right, the holder
must provide written notice of exercise to the Company in compliance with the
provisions of the Stock Award Agreement evidencing such right. Except as
provided in subsection 5(c), no limitation shall exist on the aggregate amount
of cash payments the Company may make under the Plan in connection with the
exercise of a Stock Appreciation Right.

(b) Three types of Stock Appreciation Rights shall be authorized for
issuance under the Plan:

(1) TANDEM STOCK APPRECIATION RIGHTS. Tandem Stock
Appreciation Rights will be granted appurtenant to an Option, and shall, except
as specifically set forth in this Section 8, be subject to the same terms and
conditions applicable to the particular Option grant to which it pertains.
Tandem Stock Appreciation Rights will require the holder to elect between the
exercise of the underlying Option for shares of stock and the surrender, in
whole or in part, of such Option for an appreciation distribution. The
appreciation distribution payable on the exercised Tandem Right shall be in cash
(or, if so provided, in an equivalent number of shares of stock based

9.
<PAGE>

on Fair Market Value on the date of the Option surrender) in an amount up to the
excess of (A) the Fair Market Value (on the date of the Option surrender) of the
number of shares of stock covered by that portion of the surrendered Option in
which the Optionee is vested over (B) the aggregate exercise price payable for
such vested shares.

(2) CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent
Rights will be granted appurtenant to an Option and may apply to all or any
portion of the shares of stock subject to the underlying Option and shall,
except as specifically set forth in this Section 8, be subject to the same terms
and conditions applicable to the particular Option grant to which it pertains.
A Concurrent Right shall be exercised automatically at the same time the
underlying Option is exercised with respect to the particular shares of stock to
which the Concurrent Right pertains. The appreciation distribution payable on
an exercised Concurrent Right shall be in cash (or, if so provided, in an
equivalent number of shares of stock based on Fair Market Value on the date of
the exercise of the Concurrent Right) in an amount equal to such portion as
shall be determined by the Board or the Committee at the time of the grant of
the excess of (A) the aggregate Fair Market Value (on the date of the exercise
of the Concurrent Right) of the vested shares of stock purchased under the
underlying Option which have Concurrent Rights appurtenant to them over (B) the
aggregate exercise price paid for such shares.

(3) INDEPENDENT STOCK APPRECIATION RIGHTS.
Independent Rights will be granted independently of any Option and shall, except
as specifically set forth in this Section 8, be subject to the same terms and
conditions applicable to Nonstatutory Stock Options as set forth in Section 6.
They shall be denominated in share equivalents. The appreciation distribution
payable on the exercised Independent Right shall be not greater than an amount
equal to the excess of (A) the aggregate Fair Market Value (on the date of the
exercise of the Independent Right) of a number of shares of Company stock equal
to the number of share equivalents in which the holder is vested under such
Independent Right, and with respect to which the holder is exercising the
Independent Right on such date, over (B) the aggregate Fair Market Value (on the
date of the grant of the Independent Right) of such number of shares of Company
stock. The appreciation distribution payable on the exercised Independent Right
shall be in cash or, if so provided, in an equivalent number of shares of stock
based on Fair Market Value on the date of the exercise of the Independent Right.

9. COVENANTS OF THE COMPANY.

(a) During the terms of the Stock Awards, the Company shall keep
available at all times the number of shares of stock required to satisfy such
Stock Awards.

(b) The Company shall seek to obtain from each regulatory commission
or agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares under Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Stock Award or any stock issued or issuable pursuant to any such
Stock Award. If, after reasonable efforts, the Company is unable to obtain from
any such regulatory commission or agency the authority which counsel for the
Company deems necessary for the lawful issuance and sale of stock under the
Plan, the Company shall be relieved from any liability for failure to issue and
sell stock upon exercise of such Stock Awards unless and until such authority is
obtained.

10.
<PAGE>

10. USE OF PROCEEDS FROM STOCK.

Proceeds from the sale of stock pursuant to Stock Awards shall
constitute general funds of the Company.

11. MISCELLANEOUS.

(a) The Board shall have the power to accelerate the time at which a
Stock Award may first be exercised or the time during which a Stock Award or any
part thereof will vest, notwithstanding the provisions in the Stock Award
stating the time at which it may first be exercised or the time during which it
will vest.

(b) Neither the recipient of a Stock Award nor any person to whom a
Stock Award is transferred in accordance with the Plan shall be deemed to be the
holder of, or to have any of the rights of a holder with respect to, any shares
subject to such Stock Award unless and until such person has satisfied all
requirements for exercise of the Stock Award pursuant to its terms.

(c) Nothing in the Plan or any instrument executed or Stock Award
granted pursuant thereto shall confer upon any recipient or other holder of
Stock Awards any right to continue in the employ of the Company or any Affiliate
or to continue serving as a Consultant or a Director, or shall affect the right
of the Company or any Affiliate to terminate the employment of any Employee with
or without notice and with or without cause, or the right to terminate the
relationship of any Consultant pursuant to the terms of such Consultant's
agreement with the Company or Affiliate or service as a Director pursuant to the
Company's Bylaws and the provisions of the corporate law of the state in which
the Company is incorporated.

(d) To the extent that the aggregate Fair Market Value (determined at
the time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
all plans of the Company and its Affiliates exceeds one hundred thousand dollars
($100,000), the Options or portions thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory Stock
Options.

(e) The Company may require any person to whom a Stock Award is
granted, or any person to whom a Stock Award is transferred in accordance with
the Plan, as a condition of exercising or acquiring stock under any Stock Award,
(1) to give written assurances satisfactory to the Company as to such person's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters, and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (2) to
give written assurances satisfactory to the Company stating that such person is
acquiring the stock subject to the Stock Award for such person's own account and
not with any present intention of selling or otherwise distributing the stock.
The foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon the
exercise or acquisition of stock under the Stock Award has been registered under
a then currently effective registration statement under the Securities Act, or
(ii) as to any particular requirement, a determination is made by counsel for
the Company that such requirement need not be met in the circumstances under the
then applicable securities laws. The Company may, upon advice of counsel

11.
<PAGE>

to the Company, place legends on stock certificates issued under the Plan as
such counsel deems necessary or appropriate in order to comply with applicable
securities laws, including, but not limited to, legends restricting the transfer
of the stock.

(f) To the extent provided by the terms of a Stock Award Agreement,
the person to whom a Stock Award is granted may satisfy any federal, state or
local tax withholding obligation relating to the exercise or acquisition of
stock under a Stock Award by any of the following means (in addition to the
Company's right to withhold from any compensation paid to such person by the
Company) or by a combination of such means: (1) tendering a cash payment; (2)
authorizing the Company to withhold shares from the shares of the Common Stock
otherwise issuable to the participant as a result of the exercise or acquisition
of stock under the Stock Award; or (3) delivering to the Company owned and
unencumbered shares of the Common Stock of the Company.

12. ADJUSTMENTS UPON CHANGES IN STOCK.

(a) If any change is made in the stock subject to the Plan, or
subject to any Stock Award, without the receipt of consideration by the Company
(through merger, consolidation, reorganization, recapitalization,
reincorporation, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or other transaction not involving the receipt of
consideration by the Company), the Plan will be appropriately adjusted in the
class(es) and maximum number of shares subject to the Plan pursuant to
subsection 4(a) and the maximum number of shares subject to award to any person
during any calendar year pursuant to subsection 5(c), and the outstanding Stock
Awards will be appropriately adjusted in the class(es) and number of shares and
price per share of stock subject to such outstanding Stock Awards. Such
adjustments shall be made by the Board, the determination of which shall be
final, binding and conclusive. (The conversion of any convertible securities of
the Company shall not be treated as a "transaction not involving the receipt of
consideration by the Company".)

(b) In the event of a proposed dissolution or liquidation of the
Company, the Board shall notify the Stock Award holder at least fifteen (15)
days prior to such proposed action. To the extent it has not been previously
exercised, the Stock Award shall terminate immediately prior to the consummation
of such proposed action.

(c) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; or (3) a reverse merger in
which the Company is the surviving corporation but the shares of Common Stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or
otherwise, then (i) any surviving corporation or acquiring corporation shall
assume any Stock Awards outstanding under the Plan or shall substitute similar
stock awards (including an award to acquire the same consideration paid to the
stockholders in the transaction described in this subsection 12(b)) for those
outstanding under the Plan, or (ii) in the event any surviving corporation or
acquiring corporation refuses to assume such Stock Awards or to substitute
similar stock awards for those outstanding under the Plan, (A) with respect to
Stock Awards held by persons whose Continuous Service has not terminated, the
vesting of such Stock Awards (and, if applicable, the time during which such
Stock Awards may be exercised) shall be accelerated prior to such event and the
Stock Awards terminated if not exercised

12.
<PAGE>

(if applicable) after such acceleration and at or prior to such event, and (B)
with respect to any other Stock Awards outstanding under the Plan, such Stock
Awards shall be terminated if not exercised (if applicable) prior to such event.

(d) In the event of the acquisition by any person, entity or group
within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any
comparable successor provisions (excluding any employee benefit plan, or related
trust, sponsored or maintained by the Company or any Affiliate of the Company)
of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act, or comparable successor rule) of securities of the Company
representing at least fifty percent (50%) of the combined voting power entitled
to vote in the election of directors, then, with respect to Stock Awards held by
persons whose Continuous Service has not terminated, the vesting of such Stock
Awards (and, if applicable, the time during which such Stock Awards may be
exercised) shall be accelerated immediately upon the happening of such event.

13. AMENDMENT OF THE PLAN AND STOCK AWARDS.

(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 12 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company to the extent stockholder approval is necessary for the Plan to
satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or
securities exchange listing requirements.

(b) The Board may in its sole discretion submit any other amendment
to the Plan for stockholder approval, including, but not limited to, amendments
to the Plan intended to satisfy the requirements of Section 162(m) of the Code
and the regulations thereunder regarding the exclusion of performance-based
compensation from the limit on corporate deductibility of compensation paid to
certain executive officers.

(c) It is expressly contemplated that the Board may amend the Plan in
any respect the Board deems necessary or advisable to provide eligible Optionees
with the maximum benefits provided or to be provided under the provisions of the
Code and the regulations promulgated thereunder relating to Incentive Stock
Options and/or to bring the Plan and/or Incentive Stock Options granted under it
into compliance therewith.

(d) Rights under any Stock Award granted before amendment of the Plan
shall not be impaired by any amendment of the Plan unless (i) the Company
requests the consent of the person to whom the Stock Award was granted and (ii)
such person consents in writing.

(e) The Board at any time, and from time to time, may amend the terms
of any one or more Stock Awards; provided, however, that the rights under any
Stock Award shall not be impaired by any such amendment unless (i) the Company
requests the consent of the person to whom the Stock Award was granted and (ii)
such person consents in writing.

14. TERMINATION OR SUSPENSION OF THE PLAN.

(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate ten (10) years from the date the
Plan is adopted by the Board or approved by

13.
<PAGE>

the stockholders of the Company, whichever is earlier. No Stock Awards may be
granted under the Plan while the Plan is suspended or after it is terminated.
Notwithstanding the foregoing, all Incentive Stock Options shall be granted, if
at all, no later than the last day preceding the tenth (10th) anniversary of the
earlier of (i) the date on which the latest increase in the maximum number of
shares issuable under the Plan was approved by the stockholders of the Company
or (ii) the date such amendment was adopted by the Board.

(b) Rights and obligations under any Stock Award granted while the
Plan is in effect shall not be impaired by suspension or termination of the
Plan, except with the consent of the person to whom the Stock Award was granted.

15. EFFECTIVE DATE OF PLAN.

The Plan shall become effective as of the date of the closing of the
IPO, but no Options or rights to purchase restricted stock granted under the
Plan shall be exercised, and no stock bonuses shall be granted under the Plan,
unless and until the Plan has been approved by the stockholders of the Company,
which approval shall be within twelve (12) months before or after the date the
Plan was adopted by the Board.

14.

<PAGE>

SCIENTIFIC LEARNING CORPORATION
1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN

ADOPTED MAY 17, 1999
APPROVED BY STOCKHOLDERS _________________, 1999
TERMINATION DATE: JUNE ___, 2009

1. PURPOSE.

(a) The purpose of the 1999 Non-Employee Directors' Stock Option Plan
(the "Plan") is to provide a means by which each member of the Board of
Directors of Scientific Learning Corporation (the "Company") who is not
otherwise at the time of grant an employee of or consultant to the Company or of
any Affiliate of the Company, or a holder or representative of the holder of 3%
or more of the Company's capital stock (each such person being hereafter
referred to as a "Non-Employee Director") will be given an opportunity to
purchase stock of the Company.

(b) The word "Affiliate" as used in the Plan means any parent
corporation or subsidiary corporation of the Company as those terms are defined
in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986,
as amended from time to time (the "Code").

(c) The Company, by means of the Plan, seeks to retain the services
of persons now serving as Non-Employee Directors of the Company, to secure and
retain the services of persons capable of serving in such capacity, and to
provide incentives for such persons to exert maximum efforts for the success of
the Company.

2. ADMINISTRATION.

(a) The Board of Directors of the Company (the "Board") shall
administer the Plan unless and until the Board delegates administration to a
committee, as provided in subparagraph 2(b).

(b) The Board may delegate administration of the Plan to a committee
composed of two (2) or more members of the Board (the "Committee"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board, subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.

3. SHARES SUBJECT TO THE PLAN.

(a) Subject to the provisions of paragraph 10 relating to adjustments
upon changes in stock, the stock that may be sold pursuant to options granted
under the Plan shall not exceed in the aggregate Seventy-Five Thousand (75,000)
shares of the Company's common stock. If any

1.
<PAGE>

option granted under the Plan shall for any reason expire or otherwise terminate
without having been exercised in full, the stock not purchased under such option
shall again become available for the Plan.

(b) The stock subject to the Plan may be unissued shares or
reacquired shares, bought on the market or otherwise.

4. ELIGIBILITY.

Options shall be granted only to Non-Employee Directors of the Company.

5. NON-DISCRETIONARY GRANTS AND COMPENSATION.

(i) Upon the effectiveness of the registration statement for
the initial public offering (the "IPO") of the Company, each person who is then
a Non-Employee Director, and after the IPO, upon the election to the Board of
Directors of a new member who is a Non-Employee Directors, automatically shall
be granted options to purchase Five Thousand (5,000) shares of common stock of
the Company (an "Initial Grant") on the terms and conditions set forth herein;
provided, however, that (unless otherwise determined by a majority of
disinterested Directors) such Initial Grant shall only be granted to
Non-Employee Directors who have not previously been granted stock options or had
the opportunity to purchase restricted stock in the Company in connection with
their service as a Director of the Company.

(b) Each person who is a Non-Employee Director on the first
anniversary of the IPO automatically shall, on such day and each anniversary
thereafter, be granted an option to purchase Five Thousand (5,000) shares of
common stock of the Company on the terms and conditions set forth herein (an
"Annual Grant").

(c) Each person who is elected for the first time to be a
Non-Employee Director after the first anniversary of the IPO automatically also
shall be granted an Annual Grant on each anniversary of the date such
Non-Employee Director was elected to be a Non-Employee Director by the Board or
stockholders.

6. OPTION PROVISIONS.

Each option shall be subject to the following terms and conditions:

(a) The term of each option commences on the date it is granted and,
unless sooner terminated as set forth herein, expires on the date five (5) years
from the date of grant ("Expiration Date"). If the optionee's service as a
Non-Employee Director of the Company or an employee, member of the Board of
Directors or consultant to the Company or any Affiliate terminates for any
reason or for no reason, the option shall terminate on the earlier of the
Expiration Date or the date twelve (12) months following the date of
termination of all such service; PROVIDED, HOWEVER, that if such termination of
service is due to the optionee's death, the option shall terminate on the
earlier of the Expiration Date or eighteen (18) months following the date of
the optionee's death.

2.
<PAGE>

(b) The exercise price of each option shall be equal to one hundred
percent (100%) of the Fair Market Value of the stock (as such term is defined in
subsection 9(d)) subject to such option on the date such option is granted.

(i) Payment of the exercise price per share in cash at the
time of exercise;

(ii) Provided that at the time of the exercise the Company's
common stock is publicly traded and quoted regularly in THE WALL STREET JOURNAL,
payment by delivery of shares of common stock of the Company already owned by
the optionee, held for the period required to avoid a charge to the Company's
reported earnings, and owned free and clear of any liens, claims, encumbrances
or security interest, which common stock shall be valued at its Fair Market
Value on the date preceding the date of exercise; or

(iii) Payment pursuant to a program developed under Regulation
T as promulgated by the Federal Reserve Board which results in the receipt of
cash (or check) by the Company either prior to the issuance of shares of the
Company's common stock or pursuant to the terms of irrevocable instructions
issued by the optionee prior to the issuance of shares of the Company's common
stock.

(iv) Payment by a combination of the methods of payment
specified in subparagraph 6(c)(i) through 6(c)(iii) above.

(d) An option shall be transferable only to the extent specifically
provided in the option agreement; PROVIDED, HOWEVER, that if the option
agreement does not specifically provide for the transferability of an option,
then the option shall not be transferable except by will or by the laws of
descent and distribution, and shall be exercisable during the lifetime of the
person to whom the option is granted only by such person (or by his guardian or
legal representative) or transferee pursuant to such an order. Notwithstanding
the foregoing, the optionee may, by delivering written notice to the Company in
a form satisfactory to the Company, designate a third party who, in the event of
the death of the optionee, shall thereafter be entitled to exercise the option.

(e) The Initial Grant shall be fully vested at the time of grant.

(f) The Annual Grant shall be fully vested at the time of grant.

(g) The Company may require any optionee, or any person to whom an
option is transferred under subparagraph 6(d), as a condition of exercising any
such option: (i) to give written assurances satisfactory to the Company as to
the optionee's knowledge and experience in financial and business matters; and
(ii) to give written assurances satisfactory to the Company stating that such
person is acquiring the stock subject to the option for such person's own
account and not with any present intention of selling or otherwise distributing
the stock. These requirements, and any assurances given pursuant to such
requirements, shall be inoperative if

3.
<PAGE>

(i) the issuance of the shares upon the exercise of the option has been
registered under a then currently-effective registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), or (ii) as to any
particular requirement, a determination is made by counsel for the Company that
such requirement need not be met in the circumstances under the then applicable
securities laws. The Company may require any optionee to provide such other
representations, written assurances or information that the Company shall
determine is necessary, desirable or appropriate to comply with applicable
securities laws as a condition of granting an option to the optionee or
permitting the optionee to exercise the option. The Company may, upon advice of
counsel to the Company, place legends on stock certificates issued under the
Plan as such counsel deems necessary or appropriate in order to comply with
applicable securities laws, including, but not limited to, legends restricting
the transfer of the stock.

(h) Notwithstanding anything to the contrary contained herein, an
option may not be exercised unless the shares issuable upon exercise of such
option are then registered under the Securities Act or, if such shares are not
then so registered, the Company has determined that such exercise and issuance
would be exempt from the registration requirements of the Securities Act.

7. COVENANTS OF THE COMPANY.

(a) During the terms of the options granted under the Plan, the
Company shall keep available at all times the number of shares of stock required
to satisfy such options.

(b) The Company shall seek to obtain from each regulatory commission
or agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the options granted under the
Plan; PROVIDED HOWEVER, that this undertaking shall not require the Company to
register under the Securities Act either the Plan, any option granted under the
Plan, or any stock issued or issuable pursuant to any such option. If, after
reasonable efforts, the Company is unable to obtain from any such regulatory
commission or agency the authority which counsel for the Company deems necessary
for the lawful issuance and sale of stock under the Plan, the Company shall be
relieved from any liability for failure to issue and sell stock upon exercise of
such options.

8. USE OF PROCEEDS FROM STOCK.

Proceeds from the sale of stock pursuant to options granted under the
Plan shall constitute general funds of the Company.

9. MISCELLANEOUS.

(a) Neither an optionee nor any person to whom an option is
transferred under subparagraph 6(d) shall be deemed to be the holder of, or to
have any of the rights of a holder with respect to, any shares subject to such
option unless and until such person has satisfied all requirements for exercise
of the option pursuant to its terms.

4.
<PAGE>

(b) Nothing in the Plan or in any instrument executed pursuant
thereto shall confer upon any Non-Employee Director any right to continue in the
service of the Company or any Affiliate in any capacity or shall affect any
right of the Company, its Board or shareholders or any Affiliate, to remove any
Non-Employee Director pursuant to the Company's Bylaws and the provisions of
Delaware general corporation law.

(c) In connection with each option made pursuant to the Plan, it
shall be a condition precedent to the Company's obligation to issue or transfer
shares to a Non-Employee Director, or to evidence the removal of any
restrictions on transfer, that such Non-Employee Director make arrangements
satisfactory to the Company to insure that the amount of any federal, state or
local withholding tax required to be withheld with respect to such sale or
transfer, or such removal or lapse, is made available to the Company for timely
payment of such tax.

(d) As used in this Plan, "Fair Market Value" means, as of any date,
the value of the common stock of the Company determined as follows:

(i) If the common stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap, the Fair Market Value of a share of
common stock shall be the closing sales price for such stock (or the closing
bid, if no sales were reported) as quoted on such system or exchange (or the
exchange with the greatest volume of trading in common stock) on the last market
trading day prior to the day of determination, as reported in THE WALL STREET
JOURNAL or such other source as the Board deems reliable; or

(ii) In the absence of an established market for the common
stock, the Fair Market Value shall be determined in good faith by the Board.

10. ADJUSTMENTS UPON CHANGES IN STOCK.

(a) If any change is made in the stock subject to the Plan, or
subject to any option granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan and outstanding options will
be appropriately adjusted in the class(es) and maximum number of shares subject
to the Plan and the class(es) and number of shares and price per share of stock
subject to outstanding options. The Board shall make such adjustments, and the
determination of the Board shall be final, binding and conclusive. (The
conversion of any convertible securities of the Company shall not be treated as
a "transaction not involving the receipt of consideration by the Company.")

(b) In the event of: (1) a dissolution, liquidation, or sale of all
or substantially all of the assets of the Company; (2) a merger or consolidation
in which the Company is not the surviving corporation; or (3) a reverse merger
in which the Company is the surviving corporation but the shares of the
Company's common stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise, then (i) any surviving or acquiring corporation
shall assume any options

5.
<PAGE>

outstanding under the Plan or shall substitute similar options (including an
option to acquire the same consideration paid to the shareholders in the
transaction described in this subparagraph 10(b)) for those outstanding under
the Plan, or (ii) in the event any surviving corporation or acquiring
corporation refuses to assume such options or to substitute similar options for
those outstanding under the Plan, then such options shall be terminated if not
exercised prior to such event.

(c) In the event of the acquisition by any person, entity or group
within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any
comparable successor provisions (excluding any employee benefit plan, or related
trust, sponsored or maintained by the Company or any Affiliate of the Company)
of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act, or comparable successor rule) of securities of the Company
representing at least fifty percent (50%) of the combined voting power entitled
to vote in the election of directors, then, with respect to options held by
persons whose continuous service has not terminated, the vesting of such options
(and, if applicable, the time during which such options may be exercised) shall
be accelerated immediately upon the happening of such event.

11. AMENDMENT OF THE PLAN.

(a) The Board at any time, and from time to time, may amend the Plan
and/or some or all outstanding options granted under the Plan. However, except
as provided in paragraph 10 relating to adjustments upon changes in stock, no
amendment shall be effective unless approved by the shareholders of the Company
to the extent shareholder approval is necessary for the Plan to satisfy the
requirements of Rule 16b-3 under the Exchange Act or any Nasdaq or securities
exchange listing requirements.

(b) Rights and obligations under any option granted before any
amendment of the Plan shall not be impaired by such amendment unless (i) the
Company requests the consent of the person to whom the option was granted and
(ii) such person consents in writing.

12. TERMINATION OR SUSPENSION OF THE PLAN.

(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate ten (10) years after the date
adopted by the Board. No options may be granted under the Plan while the Plan
is suspended or after it is terminated.

(b) Suspension or termination of the Plan shall not impair rights and
obligations under any option granted while the Plan is in effect, except with
the consent of the person to whom the option was granted.

6.
<PAGE>

13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE.

(a) The Plan shall become effective on the same day that the
Company's initial public offering of shares of common stock becomes effective,
subject to the condition subsequent that the shareholders of the Company approve
the Plan.

(b) No option granted under the Plan shall be exercised or
exercisable unless and until the condition of subparagraph 13(a) above has been
met.

<PAGE>

SCIENTIFIC LEARNING CORPORATION
1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN

NONSTATUTORY STOCK OPTION
(INITIAL GRANT)

________________, Optionee:

On __________________, 199__, an option was automatically granted to you
(the "optionee") pursuant to the Scientific Learning Corporation (the "Company")
1999 Non-Employee Directors' Stock Option Plan (the "Plan") to purchase shares
of the Company's common stock ("Common Stock"). This option is NOT intended to
qualify and will NOT be treated as an "incentive stock option" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").

The grant hereunder is in connection with and in furtherance of the
Company's compensatory benefit plan for Non-Employee Directors (as defined in
the Plan).

The details of your option are as follows:

1. The total number of shares of Common Stock subject to this option
is five thousand (5,000) shares.

2. The exercise price of this option is _________________________
($________) per share, such amount being equal to the Fair Market Value (as
defined in the Plan) of the Common Stock on the date of grant of this option.

3. These options are fully vested at the time of grant.

4. (a) You may exercise this option, to the extent specified
above, by delivering a notice of exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require pursuant
to Section 6 of the Plan. You may exercise this option only for whole shares.

(b) You may elect to pay the exercise price under one of the
following alternatives:

(i) Payment in cash or check at the time of exercise;

(ii) Provided that at the time of the exercise the
Common Stock is publicly traded and quoted regularly in THE WALL STREET JOURNAL,
payment by delivery of shares of Common Stock already owned by you, held for the
period required to avoid a charge to the Company's reported earnings, and owned
free and clear of any liens, claims, encumbrances or security interest, which
Common Stock shall be valued at its Fair Market Value on the date preceding the
date of exercise;

1.
<PAGE>

(iii) Payment pursuant to a program developed under
Regulation T as promulgated by the Federal Reserve Board which results in the
receipt of cash (or check) by the Company either prior to the issuance of shares
of the Common Stock or pursuant to the terms of irrevocable instructions issued
by you prior to the issuance of shares of the Common Stock; or

(iv) Payment by a combination of the methods of payment
specified in subparagraphs (i) through (iii) above.

(c) By exercising this option you agree that the Company may
require you to enter an arrangement providing for the cash payment by you to the
Company of any tax-withholding obligation of the Company arising by reason of
the exercise of this option. Notwithstanding anything to the contrary contained
herein, you may not exercise this option unless the shares issuable upon
exercise of this option are then registered under the Securities Act of 1933, as
amended (the "Securities Act"), or, if such shares are not then so registered,
the Company has determined that such exercise and issuance would be exempt from
the registration requirements of the Securities Act.

5. This option is not transferable except (i) by will or by the laws
of descent and distribution, (ii) by written designation which takes effect upon
your death, (iii) by written instruction, in a form accepted by the Company, to
your spouse, children, stepchildren, or grandchildren (whether adopted or
natural), to a trust, family limited liability company or family partnership
created solely for the benefit of you and the foregoing persons, or (iv) to your
former spouse (if transfer is pursuant to a judicial decree dissolving your
marriage). During your life this Option is exercisable only by you or a
transferee satisfying the above conditions. The terms of this Option shall be
binding upon the transferees, executors, administrators, heirs, successors, and
assigns of the Optionee. Notwithstanding the foregoing, by delivering written
notice to the Company, in a form satisfactory to the Company, you may designate
a third party who, in the event of your death, shall thereafter be entitled to
exercise this option.

6. The term of this option ("Expiration Date") is ten (10) years
measured from the grant date, subject, however, to earlier termination upon your
termination of service, as set forth in Section 6 of the Plan.

7. Any notices provided for in this option or the Plan shall be
given in writing and shall be deemed effectively given upon receipt or, in the
case of notices delivered by the Company to you, five (5) days after deposit in
the United States mail, postage prepaid, addressed to you at the address
specified below or at such other address as you hereafter designate by written
notice to the Company.

8. This option is subject to all the provisions of the Plan, a copy
of which is attached hereto, and its provisions are hereby made a part of this
option, including without limitation the provisions of Section 6 of the Plan
relating to option provisions, and is further subject to all interpretations,
amendments, rules and regulations which may from time to time be promulgated and
adopted pursuant to the Plan. In the event of any conflict between the
provisions of this option and those of the Plan, the provisions of the Plan
shall control.

2.
<PAGE>

9. Notwithstanding anything to the foregoing, this option shall NOT
be exercisable in whole or in part unless and until the Company's shareholders
have approved the Plan.

Dated the ____ day of _____________, 19___.

Very truly yours,

SCIENTIFIC LEARNING CORPORATION

By:
-------------------------------------------
Duly authorized on behalf of the Board of
Directors

ATTACHMENT:

1999 Non-Employee Directors' Stock Option Plan

3.
<PAGE>

The Undersigned:

(a) Acknowledges receipt of the foregoing option and the
attachment referenced therein and understands that all rights and liabilities
with respect to this option are set forth in the option and the Plan; and

(b) Acknowledges that as of the date of grant of this option,
it sets forth the entire understanding between the undersigned optionee and the
Company and its Affiliates regarding the acquisition of Common Stock in the
Company and supersedes all prior oral and written agreements on that subject
with the exception of (i) the options and any other stock awards previously
granted and delivered to the undersigned under stock award plans of the Company
and (ii) the following agreements only:

NONE:
------------------------------

OTHER:
------------------------------

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

------------------------------
Optionee

<PAGE>

NOTICE OF EXERCISE

Scientific Learning Corporation
1995 University Avenue, Suite 400
Berkeley, CA 94704 Date of Exercise:____________

Ladies and Gentlemen:

This constitutes notice under my stock option that I elect to purchase
the number of shares for the price set forth below.

Stock option dated: _______________

Number of shares as to which
option is exercised: _______________

Certificates to be
issued in name of: _______________

Total exercise price: $______________

Cash payment delivered
herewith: $______________

Value of __________ shares
of common stock delivered
herewith(1): _______________

By this exercise, I agree (i) to provide such additional documents as
you may require pursuant to the terms of the Company's 1999 Non-Employee
Directors' Stock Option Plan and (ii) to provide for the payment by me to you
(in the manner designated by you) of your withholding obligation, if any,
relating to the exercise of this option.

Very truly yours,

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

- ---------------------
(1) Shares must meet the public trading requirements set forth in the
option. Shares must be valued in accordance with the terms of the option being
exercised, must have been owned for the minimum period required in the option,
and must be owned free and clear of any liens, claims, encumbrances or security
interests. Certificates must be endorsed or accompanied by an executed
assignment separate from certificate.

<PAGE>

SCIENTIFIC LEARNING CORPORATION
1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN

NONSTATUTORY STOCK OPTION
(ANNUAL GRANT)

___________________________, Optionee:

On __________________, 199___, an option was automatically granted to
you (the "Optionee") pursuant to the Scientific Learning Corporation (the
"Company") 1999 Non-Employee Directors' Stock Option Plan (the "Plan") to
purchase shares of the Company's common stock ("Common Stock"). This option is
not intended to qualify and will not be treated as an "incentive stock option"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").

The grant hereunder is in connection with and in furtherance of the
Company's compensatory benefit plan for Non-Employee Directors (as defined in
the Plan).

The details of your option are as follows:

1. The total number of shares of Common Stock subject to this option
is five thousand (5,000) shares.

3. These options are fully vested at the time of grant.

4. (a) You may exercise this option, to the extent specified above,
by delivering a notice of exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require
pursuant to Section 6 of the Plan. You may exercise this option only for whole
shares.

(b) You may elect to pay the exercise price under one of the
following alternatives:

(i) Payment in cash or check at the time of exercise;

(ii) Provided that at the time of the exercise the
Common Stock is publicly traded and quoted regularly in THE WALL STREET JOURNAL,
payment by delivery of shares of Common Stock already owned by you, held for
the period required to avoid a charge to the Company's reported earnings, and
owned free and clear of any liens, claims, encumbrances or

1.
<PAGE>

security interest, which Common Stock shall be valued at its Fair Market
Value on the date preceding the date of exercise;

(iii) Payment pursuant to a program developed under
Regulation T as promulgated by the Federal Reserve Board which results in the
receipt of cash (or check) by the Company either prior to the issuance of shares
of the Common Stock or pursuant to the terms of irrevocable instructions issued
by you prior to the issuance of shares of the Common Stock; or

(iv) Payment by a combination of the methods of payment
specified in subparagraphs (i) through (iii) above.

<PAGE>

and adopted pursuant to the Plan. In the event of any conflict between the
provisions of this option and those of the Plan, the provisions of the Plan
shall control.

Notwithstanding anything to the foregoing, this option shall not be
exercisable in whole or in part unless and until the Company's shareholders have
approved the Plan.

Dated the ____ day of ____________ , 19___.

Very truly yours,

SCIENTIFIC LEARNING CORPORATION

By:
--------------------------------------------
Duly authorized on behalf of the Board of
Directors

ATTACHMENT:

1999 Non-Employee Directors' Stock Option Plan

3.
<PAGE>

The Undersigned:

NONE: ____________________________________________________

_____________________________________________________

OTHER: ____________________________________________________

____________________________________________________

___________________________________
Optionee

<PAGE>

NOTICE OF EXERCISE

Scientific Learning Corporation
1995 University Avenue, Suite 400
Berkeley, CA 94704 Date of Exercise: ____________________

Ladies and Gentlemen:

This constitutes notice under my stock option that I elect to purchase
the number of shares for the price set forth below.

Stock option dated: _______________

Number of shares as to which
option is exercised: _______________

Certificates to be
issued in name of: _______________

Total exercise price: $______________

Cash payment delivered
herewith: $______________

Value of __________ shares
of common stock delivered
herewith(1): _______________

Very truly yours,

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

- ----------------------
(1) Shares must meet the public trading requirements set forth in the option.
Shares must be valued in accordance with the terms of the option being
exercised, must have been owned for the minimum period required in the option,
and must be owned free and clear of any liens, claims, encumbrances or security
interests. Certificates must be endorsed or accompanied by an executed
assignment separate from certificate.

<PAGE>
Exhibit 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated January 15,
1999 in the Registration Statement (Amendment No. 1 to Form S-1, No. 333-77133)
and related Prospectus of Scientific Learning Corporation for the registration
of shares of its Common Stock.

Walnut Creek, California /s/ ERNST & YOUNG LLP

May 28, 1999