ZIFF DAVIS INC, 8-K, 1999-04-02

ZIFF DAVIS INC
8-K, 1999-04-02
PERIODICALS: PUBLISHING OR PUBLISHING & PRINTING

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<PAGE>

As filed with the Securities and Exchange Commission on April 2, 1999

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 8-K

Current Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934

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March 30, 1999
Date of report (Date of earliest event reported)

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ZIFF-DAVIS INC.
(Exact Name of Registrant as Specified in Its Charter)

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Delaware 1-9676 13-3987754
(Commission File Number) (I.R.S. Employer
(State or Other Identification Number)
Jurisdictionof
Incorporation)

One Park Avenue New York, New York 10016
(212) 503-3500
(Address and Telephone Number of Registrant's Principal Executive Offices)

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<PAGE>

Item 5. Other Events

The following (1) Description of Business, (2) Selected Historical Financial
and Other Data, (3) Management's Discussion and Analysis of Financial Condition
and Results of Operations and (4) Financial Statements for each of Ziff-Davis
Inc., ZD and ZDNet, respectively were included as part of Ziff-Davis Inc.'s
Registration Statement on Form S-1, File No. 333-69447 which was filed with the
Commission on March 30, 1999.

ZIFF-DAVIS INC.

DESCRIPTION OF BUSINESS

General

Ziff-Davis Inc. is a leading media and marketing company that provides
information on computing technology, including the Internet. We provide
technology companies worldwide with marketing strategies for reaching key
decision-makers. From an accounting standpoint, we have separated our online
business division from the rest of our businesses, and we have allocated all of
our consolidated assets, liabilities, revenue, expenses and cash flow between
ZD and ZDNet. For additional information regarding the amounts allocated, see
the Selected Combined Financial and Other Data, Management's Discussion and
Analysis of Financial Condition and Results of Operations, Description of
Business and Combined Financial Statements for each of ZD and ZDNet,
respectively.

Relationship with Softbank

For information concerning the formation of Ziff-Davis Inc. and its
relationship with Softbank see Note 1 to the Consolidated Financial Statements
of Ziff-Davis Inc. included in this prospectus and "Risk Factors--Other Ziff-
Davis Inc. Risks--Ziff-Davis Inc. Is Controlled By Its Principal Stockholders.
This Creates Potential Conflicts Of Interest".

2
<PAGE>

ZIFF-DAVIS INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following table presents Selected Historical Consolidated Financial and
Other Data for Ziff-Davis Inc. as of and for the years ended December 31, 1995,
1996, 1997 and 1998. This data was derived from the Consolidated Financial
Statements of Ziff-Davis Inc. included elsewhere in this prospectus. An
affiliate of Ziff-Davis Inc. acquired a print publishing business, "ZDI", on
February 29, 1996; the data does not include results from the acquired business
for periods before the date of acquisition. However, because ZDI represents
Ziff-Davis Inc.'s principal operations, the following table also presents
Selected Historical Combined Financial and Other Data for ZDI as of and for the
years ended December 31, 1994 and 1995 and as of and for the two month period
ended February 28, 1996. The data as of and for the year ended December 31,
1995 and as of and for the two months ended February 28, 1996 was derived from
the audited Consolidated Financial Statements of ZDI. ZDI data as of for the
year ended December 31, 1994, was derived from ZDI's unaudited financial
statements. On May 4, 1998, Ziff-Davis Inc. completed a reorganization
described in Note 2 to the Consolidated Financial Statements of Ziff-Davis
Inc.; results for periods before the reorganization are not directly comparable
to results for periods after the reorganization. This table should be read in
conjunction with the Selected Historical Financial and Other Data, Management's
Discussion and Analysis of Financial Condition and Results of Operations for
each of ZDNet, ZD and Ziff-Davis Inc. and Financial Statements for each of
ZDNet, ZD and Ziff-Davis Inc. beginning on pages F-168, F-94 and F-20 of this
prospectus, respectively.

<TABLE>
<CAPTION>
ZDI(1) Ziff-Davis Inc.
----------------------------------- ---------------------------------------------
Year ended December Two month
31, period ended Year ended December 31,
--------------------- February 28, ---------------------------------------------
1994 1995 1996 1995(2) 1996(2) 1997 1998
---------- ---------- ------------ ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue, net............ $ 711,379 $ 768,995 $ 125,465 $ 202,729 $ 955,139 $1,153,761 $1,108,892
Depreciation and
amortization........... 34,208 91,546 15,137 24,305 139,736 154,940 152,544
Income from operations.. 80,723 55,750 7,270 62,675 87,181 109,232 31,080
Interest expense, net... 17,887 92,609 14,030 44,005 120,646 190,445 143,547
Income (loss) before
income taxes........... 77,650 (40,250) (6,995) 22,869 (27,124) (72,491) (104,236)
Net income
(loss)(3)(4)........... 77,650 (26,002) (4,547) 10,945 (52,081) (71,179) (77,809)
Balance Sheet Data (at
period end):
Cash and cash
equivalents............ $1,066,606 $ 10,083 $ 13,669 $ 27,908 $ 29,915 $ 30,301 $32,566
Total assets............ 2,751,525 1,623,906 1,619,905 1,090,981 3,584,173 3,546,646 3,433,803
Total long-term debt.... 1,034,000 964,153 964,153 575,450 2,522,252 2,408,240 1,539,322
Stockholders' equity.... 391,275 365,150 360,717 397,881 447,756 126,130 1,352,598
Other Data:
Capital expenditures.... $ 15,119 $ 14,163 $ 552 $ 3,367 $ 22,365 $ 30,196 $ 36,599
Investments and
acquisitions, net of
cash acquired.......... -- -- -- 814,520 2,124,823 14,000 27,772
</TABLE>
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(1) A third party acquired ZDI as of January 1, 1995. An affiliate of Ziff-
Davis Inc. acquired ZDI on February 29, 1996. Because ZDI represents Ziff-
Davis Inc.'s principal operations, ZDI data has been presented for periods
before these dates.
(2) An affiliate of Ziff-Davis Inc. acquired ZDI on February 29, 1996; Ziff-
Davis Inc. data does not include results from the acquired business for
periods before the date of acquisition.
(3) During 1994, ZDI conducted its operations through various partnerships.
Accordingly, there was no income tax provision for 1994.
(4) No historical earnings per share or share data are presented as Ziff-Davis
Inc. does not consider such data meaningful. See Note 2 to the Consolidated
Financial Statements of Ziff-Davis Inc. for certain pro forma earnings per
share information concerning Ziff-Davis Inc. After issuance of ZDNet stock,
Ziff-Davis Inc. will report earnings per share data for ZD and ZDNet but
not for Ziff-Davis Inc.

3
<PAGE>

ZIFF-DAVIS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Revenue

Ziff-Davis Inc. had net revenue of $1.109 billion for 1998. A substantial
portion of Ziff-Davis Inc.'s revenue is derived from the sale of advertising,
which in 1998 accounted for 51.6% of total revenue. No single advertiser has
comprised more than 3.0% of Ziff-Davis Inc.'s advertising revenue during any of
the last three years. However, Ziff-Davis Inc.'s top 20 advertisers accounted
for 37.1% of total advertising revenue for 1998.

In the publishing segment, Ziff-Davis Inc.'s principal sources of revenue are
advertising (64.4% of 1998 total publishing revenue), circulation (18.7%) and
other (16.9%). Circulation comprises both paid subscriptions (10.9%) and
newsstand sales (7.8%) while other includes educational and training materials
(7.4%) and market research studies (7.1%) with the balance primarily consisting
of royalties, reprints and other miscellaneous sales. In the events segment,
revenue is derived from two principal sources: sale of exhibit space (66.8% of
1998 total segment revenue) and attendee conference and seminar fees (14.1%).
Unlike many trade show producers, Ziff-Davis Inc. derives a significant portion
of its trade show revenue from other sources (19.1%), including advertising in
show-related publications, billboards, banners, fees from managing customer-
sponsored events and other show-related activities. Ziff-Davis Inc. believes
these other sources will continue to be an important growth area, particularly
for its content-focused events. In the Internet segment, Ziff-Davis Inc.'s
principal source of revenue is from advertising (86.0% of total Internet
revenue for 1998). The Internet segment also derives revenue from subscription-
based fees and services (14.0% of total Internet revenue in 1998).

Cost of operations

In the publishing business, the principal components of Ziff-Davis Inc.'s
production costs are raw materials, printing and distribution, which
represented 34.5%, 38.0% and 27.2%, respectively, of total 1998 publishing
production expenses. Ziff-Davis Inc.'s principal raw material is paper. Paper
supply and prices are subject to volatility and may be significantly affected
by many factors, including market and economic conditions. See also "Risk
Factors--Other Ziff-Davis Inc. Risks--Ziff-Davis Inc. May Be Adversely Affected
By Fluctuations in Paper and Postage Costs" and "--Inflation and Fluctuations
in Paper Prices and Postage Costs". The principal components of production
costs within the events business are the costs of renting and preparing the
facilities to hold the events (46.8% in 1998), direct mail and the related
costs for promotion of the events (37.0% in 1998) and program development and
presentation costs (13.4% in 1998). Production costs in the Internet segment
consist primarily of third party web hosting costs.

The other principal operating costs for Ziff-Davis Inc. are selling, general
and administrative expenses, including editorial costs. Included in these costs
are salaries, sales commissions and benefits (55.4% in 1998) along with
marketing and promotion expenses related to advertising and circulation (19.7%
in 1998).

4
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Factors affecting future periods

Ziff-Davis Inc.'s revenue and profitability are influenced by a number of
external factors, including the volume of new technology product introductions,
the amount and allocation of marketing expenditures by Ziff-Davis Inc.'s
clients, the extent to which sellers elect to advertise using print and online
media or participate in trade shows and conferences, changes in paper prices,
availability of appropriate venues for its largest trade shows and conferences
and competition among computer technology marketers, including print
publishers, producers of trade shows and conferences and providers of other
technology information services. Accordingly, Ziff-Davis Inc. may experience
fluctuations in revenue from period to period. Many of Ziff-Davis Inc.'s large
customers concentrate their advertising expenditures around major new product
launches. Marketing expenditures by technology companies can also be affected
by factors affecting the computer industry generally, including pricing
pressures and temporary surpluses of inventory. Revenue and profitability are
also influenced by product mix and the timing and frequency of Ziff-Davis
Inc.'s new product launches and launches in new markets, as well as by
acquisitions. New publications generally require several years to achieve
profitability and upon achieving initial profitability, often have lower
margins than more established publications. The launch of new publications,
trade shows and services are funded with cash flow from operations and are
expensed as incurred. Accordingly, Ziff-Davis Inc.'s revenue from year to year
may be affected by the number and timing of new product launches. If Ziff-Davis
Inc. concludes that a new publication, trade show or service will not achieve
certain milestones with regard to revenue, profitability and cash flow within a
reasonable period of time, management may discontinue such publication, trade
show or service or merge it into another existing publication, trade show or
service. See "Risk Factors--Other Ziff-Davis Inc. Risks--To Remain Competitive
Ziff-Davis Inc. Must Constantly Expand And Develop New Products And Services.
This Is Inherently Risky And Expensive".

On February 4, 1999, Ziff-Davis purchased ZDTV. This purchase will affect
Ziff-Davis Inc.'s results in future periods. See "--ZDTV" below for certain
summary pro forma and other information about this purchase.

Ziff-Davis Inc. expects to recognize compensation expense of approximately
$21.3 million as a result of certain options granted on December 21, 1998 and
January 29, 1999. Such compensation expense will be recognized over the vesting
period of the options. The 1999 compensation expense related to these options
is expected to be approximately $5.5 million. See Note 13 to Ziff-Davis Inc.'s
Consolidated Financial Statements in this prospectus.

Ziff-Davis Inc. expects to acquire the remaining 30% interest in GameSpot in
exchange for ZDNet stock valued at $9 million, based on the initial public
offering price; provided that, the stockholders of GameSpot will not receive
less than 600,000 shares of ZDNet stock. Assuming a price of $19.00 per share
(the maximum of the range of initial public offering prices set forth on the
cover of this prospectus), this acquisition will result in additional annual
amortization of approximately $1.3 million per year. The effect of this
acquisition and the shares expected to be issued in connection therewith are
not reflected elsewhere in this prospectus.

Presentation of Financial Information

Ziff-Davis Inc. is comprised of certain operations which were acquired at
various times and completed a reorganization in May 1998. See Notes 1 and 2 to
the Consolidated Financial Statements in this prospectus.

5
<PAGE>

Results of Operations

The table below presents the results of Ziff-Davis Inc. as if the assets and
operations acquired by affiliates of Ziff-Davis Inc. on February 29, 1996 (as
described in Note 1 to the Consolidated Financial Statement in this prospectus)
had been acquired on January 1, 1995. Purchase accounting adjustments relating
to that acquisition have been reflected through pro forma amortization,
interest and income tax adjustments, as described in note (1) to the table.
Although the 1996 presentation is not in accordance with generally accepted
accounting principles, management believes it presents the most meaningful
basis of comparison. The financial information presented below may not
necessarily reflect the results of operations which would have occurred had the
February 29, 1996 acquisition been completed on January 1, 1995.

<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
Pro Forma(1) Actual
------------ ----------------------
1996 1997 1998
------------ ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Revenue, net:
Publishing............................. $ 796,602 $ 834,015 $ 782,882
Events................................. 264,884 287,528 269,867
Internet............................... 19,118 32,218 56,143
---------- ---------- ----------
1,080,604 1,153,761 1,108,892
---------- ---------- ----------
Cost of production....................... 302,644 325,245 305,346
Selling, general and administrative
expenses................................ 528,636 564,344 567,683
Depreciation and amortization............ 161,259 154,940 152,544
Restructuring charge .................... -- -- 52,239
---------- ---------- ----------
Income from operations................... 88,065 109,232 31,080
Interest expense, net.................... (135,500) (190,445) (143,547)
Other non-operating income, net.......... 6,106 8,722 8,231
---------- ---------- ----------
Loss before income taxes................. (41,329) (72,491) (104,236)
Provision (benefit) for income taxes..... 25,682 (1,312) (26,427)
---------- ---------- ----------
Net loss................................. $ (67,011) $ (71,179) $ (77,809)
========== ========== ==========
Other Data:
Cash and cash equivalents, end of
period.................................. $ 29,915 $ 30,301 $ 32,566
Net cash provided (used) by operating
activities.............................. 65,681 (3,364) 95,776
Net cash used by investing activities.... (66,856) (44,196) (64,371)
Net cash provided (used) by financing
activities.............................. 6,768 47,946 (29,140)
EBITDA(2)................................ 255,430 272,894 244,094
</TABLE>
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(1) The February 29, 1996 acquisition gave rise to different bases of
accounting for the period after the acquisition as compared to the period
prior to the acquisition. This is primarily due to a purchase price which
exceeded the book value of the assets acquired, financed by a higher level
of both debt and equity as compared to the pre-acquisition capital
structure. The above numbers assume that the acquisition took place on
January 1, 1995; therefore, depreciation and amortization, interest expense
and net loss have been increased by approximately $6,386,000, $824,000 and
$10,383,000, respectively for 1996.
(2) "EBITDA" is defined as income before provision for income taxes, interest
expense, depreciation and amortization. EBITDA for the year ended December
31, 1998 does not include a one-time restructuring charge of $52,239,000.
EBITDA is not intended to represent cash flows from operations and should
not be considered as an alternative to net income as an indicator of Ziff-
Davis Inc.'s operating performance or to cash flows as a measure of
liquidity. Although Ziff-Davis Inc. believes that EBITDA is a standard
measure commonly reported and widely used by analysts, investors and other
interested parties in the publishing and media industries, the EBITDA
presented for Ziff-Davis Inc. may not be comparable to similarly titled
measures reported by other companies.

6
<PAGE>

Year ended December 31, 1998 compared with year ended December 31, 1997

Revenue, net

Revenue decreased by $44.9 million or 3.9% from $1,153.8 million in 1997 to
$1,108.9 million in 1998.

Publishing--Revenue from publishing decreased by $51.1 million or 6.1% from
$834.0 million in 1997 to $782.9 million in 1998. This decline was primarily
due to the transfer of certain publications to a joint venture and the closure
of three publications due to the restructuring discussed below. The remainder
of the decrease was primarily due to lower advertising in business publications
partly offset by growth in advertising in consumer publications. Advertising
revenue was lower in business publications principally due to factors affecting
the computer technology industry during the year. Margin pressure on computer
equipment manufacturers, industry and product delays, lower demand in Asia and
a focus on the Year 2000 transition are contributing to a reduced demand for
advertising in Ziff-Davis Inc.'s magazines. Revenue from international
operations, which generated 10.2% of the segment's revenue, increased by $2.1
million primarily due to the launch of IT Week in the UK, partially offset by
lower advertising in business publications.

Net revenue from MacUser and MacWeek magazines contributed to Mac Publishing
LLC were $32.5 million for 1997 but are no longer consolidated into Ziff-Davis
Inc.'s results for 1998. On May 1, 1998, Ziff-Davis Inc. acquired its joint
venture partner's 50% interest in FamilyPC magazine. Ziff-Davis Inc. now owns
100% of the magazine and its results are included in the consolidated results
from the acquisition date. Revenue from FamilyPC included in the 1998 results
was $11.1 million. Revenue related to the three publications closed as part of
the restructuring was $12.5 million lower in the fourth quarter of 1998 as
compared to the fourth quarter of 1997.

Events--Revenue from events decreased by $17.6 million or 6.1% from $287.5
million in 1997 to $269.9 million in 1998. The decrease was primarily due to a
decline in revenue due to the discontinuation of certain "one-time" shows that
were held in 1997, lower ancillary revenue at COMDEX/Fall and lower square
footage sold at COMDEX/Spring. This decrease was partially offset by increased
revenue from increased square footage sold at Networld+Interop Las Vegas and
Java One due to an increased number of attendees.

Internet--Net revenue increased 74.2% to $56.1 million for the year ended
December 31, 1998 from $32.2 million for the year ended December 31, 1997.
Revenue from advertising was 86% of net revenue for the year ended December 31,
1998 compared to 73% for the year ended December 31, 1997. Revenue from
advertising increased 104.2% to $48.2 million for the year ended December 31,
1998 from $23.6 million for the prior year. The increase in advertising revenue
was attributed to an increase in volume as both the number of advertisers and
the average monthly revenue per advertiser increased. Subscription-based fees
and services decreased by 6.9% to $8.0 million for the year ended December 31,
1998 from $8.6 million for the year ended December 31, 1997.

Cost of production

Production costs decreased by 6.1% or $19.9 million from $325.2 million in
1997 to $305.3 million in 1998.

7
<PAGE>

Publishing production costs decreased by $6.0 million or 2.7% from $221.4
million in 1997 to $215.3 million in 1998. The decrease was related to a
decline in the number of advertising pages produced.

The cost of producing events decreased by $17.4 million or 17.4% from $99.5
million in 1997 to $82.1 million in 1998. The decrease was a result of lower
operational costs and re-negotiated contracts as well as the discontinuation of
certain "one-time" shows that were held in 1997.

Internet production costs increased by $3.6 million or 83.7% from $4.3
million in 1997 to $7.9 million in 1998. The increase in production costs was
due to higher user traffic levels and increased editorial costs associated with
the launch of new content areas.

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $3.3 million or
0.6% from $564.3 million in 1997 to $567.7 million in 1998. The increase was
due to expenditures to launch new products and increased advertising expenses.
The increase was partially offset by headcount reductions and efficiencies
attained through the integration of operations resulting from the
reorganization completed in May 1998, as well as costs eliminated by the
closure of three magazines in the fourth quarter of 1998.

Depreciation and amortization

Total depreciation and amortization decreased $2.4 million from $154.9
million in 1997 to $152.5 million in 1998. The decrease was a result of certain
assets being fully depreciated in 1997 and early 1998.

Restructuring

Margin pressure on computer equipment manufacturers, industry and product
delays, lower demand in Asia and a focus on the Year 2000 transition are
contributing to a reduced demand for advertising in Ziff-Davis Inc.'s
magazines, principally PC Magazine, PC/Computing, Computer Shopper and PC Week.
Ziff-Davis Inc. believes these factors are continuing.

As a result of this reduced demand, in October 1998, Ziff-Davis Inc.
announced a restructuring program with the intent of significantly reducing its
cost base. Ziff-Davis Inc. incurred a pre-tax charge of $52.2 million for this
restructuring program. The charge was reported as a component of income from
operations for the fourth quarter of 1998. The charge included asset impairment
costs ($37.9 million), employee termination costs ($8.6 million) and costs to
exit activities ($5.7 million) principally resulting from the closing of three
publications, Windows Pro, Internet Business and Equip, and the reduction of
Ziff-Davis Inc.'s work force by 310 employees. The charge also included costs
resulting from the discontinuation of certain educational journals and trade
shows. The following sets forth additional detail concerning the principal
components of the charge:

. Asset impairment costs totaled $37.9 million. These costs included the
write-off of intangible assets associated with the discontinued
publications ($34.3 million) and trade shows ($2.9 million) as well as
deferred expenses associated with the discontinued educational journals
($0.7 million).

8
<PAGE>

. Employee termination costs related to severed personnel at the closed
publications as well as a rationalization and resulting workforce
reduction of the remainder of Ziff-Davis Inc.'s operations. Employee
termination costs included payments for severance and earned vacation as
well as the costs of outplacement services and the provision of
continued benefits to personnel. As of December 31, 1998, $5.2 million
of the $8.6 million related to these employee terminations had been
paid.

. Costs to exit activities reflected the costs associated with the final
closure of the discontinued publications ($1.8 million) and the costs to
reduce office space under lease as a result of the reduced level of
employees ($3.8 million).

Interest expense, net

Interest expense decreased by $46.9 million or 24.6% from $190.4 million in
1997 to $143.5 million in 1998. The reduction was due primarily to lower levels
of debt outstanding throughout the year, as well as the capitalization of
$908.7 million of intercompany debt as part of the reorganization.

Other non-operating income, net

Other non-operating income, net primarily reflects Ziff-Davis Inc.'s equity
share in earnings and losses from joint ventures and fees earned from
management of events not produced by Ziff-Davis Inc. This income decreased $0.5
million or 5.6% from $8.7 million in 1997 to $8.2 million in 1998 reflecting
reduced fees from managed events. The decline was partially offset by Ziff-
Davis Inc.'s equity share in earnings of MAC Publishing, LLC, an entity that
was formed in August 1997.

Income taxes

The 1998 income tax benefit of $26.4 million increased from $1.3 million
reported in 1997. The increase was due primarily to income tax benefits
generated from the losses with respect to the MAC Assets, which were not
deductible until Ziff-Davis Inc. purchased the MAC Assets from an affiliate on
May 4, 1998. The income tax benefit was also increased by a higher net loss for
the year ended December 31, 1998 compared to the net loss for the year ended
December 31, 1997.

Net loss

As a result of the changes described above, the net loss for the period
increased $6.6 million or 9.3% from $71.2 million in 1997 to $77.8 million in
1998.

EBITDA

EBITDA for the year ended December 31, 1998 was $244.1 million compared to
$272.9 million for the year ended December 31, 1997. EBITDA for the year ended
December 31, 1998 does not include the $52.2 million restructuring charge.
Results were unfavorable as compared to 1997 due to a lower level of earnings
from advertising in the higher margin business publications partly offset by
improved results in the events segment and reduced losses in the Internet
segment. The improvement in the events segment was attributed to the absence of
losses from the discontinuance of certain

9
<PAGE>

"one-time" shows held in 1997 as well as continued costs savings. Reduced
losses from the Internet segment were the result of revenue growth exceeding
increases in expenses. The ratio of EBITDA to revenue was 22.0% for 1998
compared to 23.7% in 1997.

Year ended December 31, 1997 compared with Pro Forma Year ended December 31,
1996

Revenue, net

Net revenue increased by $73.2 million or 6.8% from $1,080.6 million in 1996
to $1,153.8 million in 1997.

Publishing--Net revenue from publishing grew by $37.4 million or 4.7% from
$796.6 million to $834.0 million. Approximately $22 million was due to
inclusion of a full year of results for the electronic gaming publications
acquired in mid-1996 and two publications launched in late 1996. Increases in
advertising rates, generally ranging between 3.0% and 10.0%, and a 5.1%
increase in advertising pages contributed $11.5 million. Revenue from
international operations, which generated 10.2% of the segment's revenue,
decreased by $6.6 million due to the strengthening of the U.S. dollar relative
to the major European currencies. Continued growth from new educational product
launches and sales of market research studies accounted for the balance of the
revenue growth.

Events--Net revenue from events increased $22.6 million or 8.5% from $264.9
million to $287.5 million. Approximately $15 million of the increase was due to
11 new trade show launches, including revenue from ancillary show-related
sources. The balance of revenue growth was due to higher exhibitor rates
charged at the major events, partly offset by a decline in revenue from
COMDEX/Spring and certain U.K. events.

Internet--Net revenue increased by $13.1 million or 68.6% from $19.1 million
for the pro forma year ended December 31, 1996 to $32.2 million in 1997. An
increasing percentage of ZDNet's net revenue was derived from advertising for
the year ended December 31, 1997, accounting for 73.3% of net revenue, compared
to 37.7% for the same period in 1996. The increased percentage of net revenue
derived from advertising in the later period reflects a continuation of ZDNet's
strategic shift from a business model based on subscription-based fees and
services to one based on advertising.

Revenue from advertising increased $16.4 million or 227.8% to $23.6 million
in 1997 from $7.2 million for the pro forma year ended December 31, 1996. The
increase in advertising revenue was attributable to increases in the number of
advertisers, the average expenditures per advertiser and increasing advertising
rates. The increase was evenly attributable to rate and volume increases.
Subscription-based fees and services decreased $3.3 million or 27.7% from $11.9
million in 1996 to $8.6 million in 1997.

Cost of production

Production costs increased $22.6 million or 7.5% from $302.6 million to
$325.2 million.

Publishing production costs increased $10.4 million or 4.8% from $215.3
million in 1996 to $225.7 million in 1997. Costs related to new launches and
volume-related growth increased approximately $20 million but were partly
offset by approximately $10 million of lower paper costs.

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<PAGE>

The costs of producing events increased $12.2 million or 14.0% from $87.3
million in 1996 to $99.5 million in 1997 primarily as a result of costs related
to new events launched in 1997.

Internet production costs increased $1.3 million or 43.3% from $3.0 million
in 1996 to $4.3 million in 1997. The increase in production costs was due to
higher user traffic levels and increased editorial costs associated with the
launch of new content areas.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $35.7 million or 6.8%
from $528.6 million to $564.3 million. The increase was due to the addition of
employees to support base business volume growth and launches of new products
and services. Results included a one-time $6.0 million charge for the
consolidation and restructuring of the events business which was announced in
the fourth quarter of 1997. Costs for the publishing segment rose 1.2% while
those for the events segment rose 22.1% due to the number of new launches and
the one-time restructuring charge.

Depreciation and amortization

Total depreciation and amortization decreased $6.3 million to $154.9 million
in 1997. The reduction in depreciation and amortization expense was a result of
certain assets being fully depreciated in 1996.

Interest expense, net

Net interest expense increased $54.9 million or 40.5% to $190.4 million in
1997 due to interest on an additional $900 million of intercompany indebtedness
to Softbank incurred to finance a return of capital.

Other non-operating income, net

Other non-operating income, net primarily reflects Ziff-Davis Inc.'s equity
share of earnings and losses from joint ventures and fees earned from
management of events not produced by Ziff-Davis Inc. This income increased $2.6
million from $6.1 million in 1996 to $8.7 million or 42.6% reflecting growth in
fees from managed events and reduced losses from joint ventures.

Income Taxes

The 1997 combined income tax benefit of $1.3 million compares to a pro forma
income tax provision of $25.7 million in 1996. The improvement in the tax
provision is due to a higher pre-tax loss giving rise to a tax benefit. The
difference between the 1997 and 1996 effective tax rates and the federal
statutory tax rate of 35.0% is primarily due to non-recognition of tax losses
generated by the MAC Assets ($56.9 million in 1997 and $77.2 million in 1996),
non-deductible goodwill amortization ($10.2 million in 1997 and $8.6 million in
1996) and state and local income taxes. In addition, the 1996 tax provision
increased approximately $3.2 million as a result of pro forma adjustments
related to the ZDI acquisition.

11
<PAGE>

Net loss

As a result of the changes described above, net loss for the period increased
$4.2 million or 6.2% from $67.0 million to $71.2 million.

EBITDA

EBITDA for 1997 was $272.9 million, an increase of $17.5 million or 6.8% from
the $255.4 million generated in 1996. The increase was due to higher revenue
and management fee income, net of higher production costs and selling, general
and administrative expenses. The ratio of EBITDA to revenue remained relatively
constant at 23.7% for 1997 compared to the 1996 margin of 23.6%.

Liquidity and Capital Resources

As a result of the May 4, 1998 reorganization, Ziff-Davis Inc.'s intercompany
debt owed to Softbank was reduced to $83.1 million. Such indebtedness bears
interest at 9.9% and matures in February 2010. Concurrently with Ziff-Davis
Inc.'s initial public offering, Ziff-Davis Inc. issued and sold $250 million
aggregate principal amount of notes. In addition, Ziff-Davis Inc. entered into
a $1.35 billion credit facility, and borrowed $1.25 billion under such
facility, to provide additional funds for the repayment of intercompany debt to
Softbank and to provide for Ziff-Davis Inc.'s working capital requirements. The
balance of intercompany obligations owed to Softbank was converted to equity.
See Note 2 to the Consolidated Financial Statements in this prospectus.

At December 31, 1998, Ziff-Davis Inc.'s outstanding total debt was $1,547.9
million, excluding unamortized discount, which consisted of $77.9 million due
to Softbank, $250 million in notes and $1,220.0 million under the credit
facility. Under its most restrictive covenant, Ziff-Davis Inc. could have
borrowed an additional $28,800,000 under the credit facility at December 31,
1998. For information concerning the terms of this debt, see "Ziff-Davis Inc.'s
Debt".

Cash and equivalents were $32.6 million at December 31, 1998, an increase of
$2.3 million from $30.3 million at December 31, 1997. The increase was due to
factors described below:

Cash provided by operations was $95.8 million for the year ended December 31,
1998 compared to a use of $3.4 million for the year ended December 31, 1997.
The increase from 1997 to 1998 was attributed to Ziff-Davis Inc.'s lower losses
before the restructuring charge and a decrease in funding to affiliates for the
1998 period.

Cash used for investing activities for the year ended December 31, 1998
totaled $64.4 million compared to $44.2 million for the year ended December 31,
1997. The majority of these expenditures were for computer equipment and
leasehold improvements. Acquisitions and investments in the 1998 period relate
to Ziff-Davis Inc.'s acquisition of Sky TV, a tradeshow in Canada, an
additional 50% interest in Family PC magazine, a European marketing database
company as well as investments in Red Herring and Deja News. Acquisitions for
the year ended December 31, 1997 reflect the purchase of a 70% interest in
GameSpot.

Cash used in financing activities totaled $29.1 million for the year ended
December 31, 1998, representing proceeds from the reorganization and initial
public offering of $1,863.3 million, net of

12
<PAGE>

transaction costs, and funding from Softbank of $20.4 million offset by the
repayment of debt and amounts due to affiliates of $1,916.1 million. Cash
provided by financing activities in 1997 amounted to $47.9 million representing
capital contributions partly offset by repayments of intercompany debt.

Ziff-Davis Inc. had a working capital surplus of approximately $35.5 million
at December 31, 1998, compared to a working capital deficit of approximately
$371.1 million at December 31, 1997. Ziff-Davis Inc.'s balance sheet has
historically had a working capital deficit due to significant amounts due to
affiliates. Ziff-Davis Inc. also maintains a significant level of deferred
revenue generated from publication subscriptions paid in advance and
prepayments from trade show exhibitors. At December 31, 1998, Ziff-Davis Inc.
had deferred revenue of $152.1 million compared to $154.7 million at December
31, 1997. Deferred revenue does not represent a cash liability owed by Ziff-
Davis Inc., unless Ziff-Davis Inc. fails to deliver a magazine or cancels a
trade show, and generally does not affect Ziff-Davis Inc.'s ability to fund
day-to-day operations. Working capital increased as a result of the
reorganization and the initial public offering of Ziff-Davis Inc.'s common
stock which resulted in the repayment and conversion to equity of related party
obligations in connection therewith.

On December 11, 1998, Standard & Poor's lowered its corporate credit and bank
loan ratings for Ziff-Davis Inc. to BB- from BB and its subordinated debt
rating for Ziff-Davis Inc. to B from B+. This downgrade had no impact on our
current borrowings. Although this downgrade may make future borrowings more
expensive, we do not believe this will have a material impact on our liquidity
or our access to credit markets.

Ziff-Davis Inc. believes, based on its current level of operations and
anticipated growth, that Ziff-Davis Inc.'s ability to generate cash, together
with cash on hand and available lines of credit, will be sufficient to make
required payments of principal and interest on Ziff-Davis Inc.'s indebtedness
and to fund anticipated capital expenditures and working capital requirements.
However, actual capital expenditures may change, particularly as a result of
any acquisitions Ziff-Davis Inc. may pursue. The ability of Ziff-Davis Inc. to
meet its debt service obligations and reduce its total debt will depend upon
the future performance of Ziff-Davis Inc.

Credit Facility

Ziff-Davis Inc.'s credit facility, as amended, consists of a seven-year $400
million reducing revolving credit facility, a seven-year $450 million term loan
and an eight-year $500 million term loan. There are no scheduled reductions in
the revolving credit commitment or amortization under the term loan until
September 2000.

For the reasons described under "--Restructuring" above, Ziff-Davis Inc's.
debt to EBITDA ratios at December 31, 1998 would have been above the levels
that had originally been required by its credit facility. On December 16, 1998,
the lenders of the $1.35 billion credit facility agreed to amend certain
provisions of that facility. The amended provisions include an increase in the
allowed leverage ratios. In return, Ziff-Davis Inc. agreed to pay a one-time
fee of $3.375 million and increase the interest rates on amounts borrowed under
the facility to rates currently ranging from LIBOR plus 2.875% to LIBOR plus
3.375% depending on the type of loan. Had the increased interest rates been in
effect for the period from Ziff-Davis Inc.'s initial public offering on April
28, 1998 to December

13
<PAGE>

31, 1998, interest expense would have increased by approximately $11.9 million.
Based on the $1,220.0 million outstanding on December 31, 1998, the annualized
incremental interest is $18.0 million. This increase in interest expense would
reduce the amounts otherwise available to fund ZD or ZDNet operations.

Ziff-Davis Inc.'s credit facility exposes it to market risk with respect to
changes in interest rates. Ziff-Davis Inc. manages this risk through the use of
interest rate swap agreements, as described below. Through the use of these
swap agreements, Ziff-Davis Inc. has effectively established a fixed interest
rate for $550 million of the outstanding credit facility. Based on the $1,220.0
million outstanding under the credit facility at December 31, 1998, if the
LIBOR rate were to increase by 1%, Ziff-Davis Inc. would incur, after giving
effect to the swap agreements, an additional $6.7 million of annual interest
expense.

For a description of the terms of the amended credit facility, see "Ziff-
Davis Inc.'s Debt".

Interest Rate Swaps

On June 10, 1998, Ziff-Davis Inc. entered into interest rate swap agreements,
with an aggregate notional amount of $550 million. Under these swap agreements,
which commenced on August 10, 1998, Ziff-Davis Inc. receives a floating rate of
interest based on three-month LIBOR, which resets quarterly, and pays a fixed
rate of interest each quarter for the terms of the respective agreements. The
weighted average fixed rate Ziff-Davis Inc. pays under these agreements is
5.85%. Ziff-Davis Inc. has entered into these agreements solely to hedge its
interest rate risk. At December 31, 1998, the three-month LIBOR rate was 5.06%.

These swap agreements are viewed by Ziff-Davis Inc. as risk management tools
and are not used for trading or speculative purposes. The notional amount of
$550 million does not represent a real amount exchanged by the parties, and
therefore, is not a measure of Ziff-Davis Inc.'s exposure through its use of
swap agreements. The fair values of these swap agreements were estimated by
obtaining quotes from brokers which represented the amounts that Ziff-Davis
Inc. would pay if the agreements were terminated at the balance sheet date.
While it is not Ziff-Davis Inc.'s intention to terminate these swap agreements,
these fair values indicated that the termination of the swap agreements would
have resulted in a loss of $15,627,000.

By nature, swap agreements involve credit risk, due to the possible
nonperformance by counterparties. To mitigate this risk, Ziff-Davis Inc. enters
into swap agreements with major financial institutions and diversifies the
counterparties used as a means to limit counterparty exposure and concentration
of risk.

ZDTV

In July 1997, Ziff-Davis Inc. entered into a license and services agreement
to develop ZDTV for MAC Holdings, a company that is wholly owned by Mr.
Masayoshi Son, who is a director of Ziff-Davis Inc. and principal stockholder
of SOFTBANK Corp. Under this agreement, Ziff-Davis Inc. agreed to fund ZDTV's
operations through unsecured advances and was granted an option to purchase
ZDTV for a price equal to MAC Holdings' investment plus 10% per annum for the
period

14
<PAGE>

of investment. On January 15, 1999, Ziff-Davis Inc. exercised this option and
on February 4, 1999, purchased ZDTV at a purchase price of $81.4 million. Ziff-
Davis Inc. paid approximately $32.8 million of the purchase price in cash,
funded on February 5, 1999, and paid the remainder by applying approximately
$48.6 million in advances owed to it by MAC Holdings through December 31, 1998.
Ziff-Davis Inc. also agreed to be responsible for the funding of ZDTV during
the period in 1999 prior to the purchase which will be accounted for as
additional purchase price. The cash portion of the purchase price was funded by
an advance from ZDTV to Ziff-Davis Inc., pursuant to the ZDTV cash management
system, of the funds invested in ZDTV by Vulcan Programming described below. In
connection with its acquisition of ZDTV, Ziff Davis Inc. assumed MAC Holdings'
obligations under an option granted to DirectTV to purchase 5% of ZDTV for $15
million, subject to adjustment.

Ziff-Davis Inc. currently has certain long-term agreements to distribute ZDTV
via satellite. Historically, start-up cable television channels have required
substantial investment and there can be no assurance that ZDTV will ultimately
obtain sufficient cable carriage and commercial acceptance to be profitable.
The following unaudited summary pro forma information assumes that the
acquisition of ZDTV and the sale of a one-third interest in ZDTV to Vulcan
Programming referred to below had been consummated on January 1, 1998.
Adjustments for ZDTV transactions include the operating results of ZDTV,
amortization of the purchase price of ZDTV, Vulcan Programming's one-third
interest in the losses of ZDTV and the tax effect of these items.

<TABLE>
<CAPTION>
Adjustments
Ziff-Davis for ZDTV
Inc. Transactions Pro forma
---------- ------------ ----------
(dollars in thousands except per
share data)
<S> <C> <C> <C>
Revenue................................ $1,108,892 $ 5,585 $1,114,477
Income (loss) from operations.......... 31,080 (55,049) (23,969)
Net loss............................... (77,809) (22,443) (100,252)
Pro forma basic loss per share......... $ (1.00)
</TABLE>

ZDTV's cash requirements are currently expected to be approximately $50
million for 1999. The $54 million invested in ZDTV by Vulcan Programming will
be used to fund ZDTV and thereafter cash requirements will be funded by the
partners or by third parties.

Ziff-Davis Inc. intends to file appropriate financial statements and pro
forma information regarding ZDTV on or before April 20, 1999 as set forth in
its Form 8-K filed with the SEC on February 19, 1999.

Vulcan Transactions

On February 5, 1999, Vulcan Programming, an entity owned by Paul G. Allen,
purchased a one-third interest in ZDTV for $54 million. On March 4, 1999,
Vulcan Ventures, the investment vehicle of Paul G. Allen, purchased
approximately three million shares of Ziff-Davis Inc. common stock for $50
million.

15
<PAGE>

Seasonality

Historically, Ziff-Davis Inc.'s business has been seasonal as a significant
portion of annual revenue has occurred in the second and fourth quarters. The
following table sets forth certain unaudited quarterly combined statements of
operations data for each of the eight quarters in the period ended December 31,
1998. In the opinion of Ziff-Davis Inc.'s management, this unaudited
information has been prepared on a basis consistent with the audited
Consolidated Financial Statements appearing elsewhere in this prospectus and
includes all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the information set forth therein when read in
conjunction with the Consolidated Financial Statements and related notes
thereto. The operating results for any quarter are not necessarily indicative
of results for any future period.

<TABLE>
<CAPTION>
Quarters Ended
-----------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- ------------- ------------ --------- -------- ------------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue, net:
Publishing............. $204,281 $211,333 $191,613 $226,788 $191,245 $198,419 $181,726 $211,492
Events................. 15,321 82,135 24,227 165,845 27,121 65,782 29,787 147,177
Internet............... 5,283 7,862 8,132 10,941 9,688 12,274 14,505 19,676
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue........... $224,885 $301,330 $223,972 $403,574 $228,054 $276,475 $226,018 $378,345
Percentage of total
year.................. 19.5% 26.1% 19.4% 35.0% 20.6% 24.9% 20.4% 34.1%
Cost of production...... 61,526 92,986 62,716 108,017 70,310 75,749 63,471 95,816
Selling, general and
administrative
expenses............... 139,980 143,243 143,131 137,990 144,239 140,063 139,516 143,865
Depreciation and
amortization........... 38,966 39,032 39,699 37,243 37,475 39,276 37,843 37,950
Restructuring charge.... -- -- -- -- -- -- -- 52,239
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations............. (15,587) 26,069 (21,574) 120,324 (23,970) 21,387 (14,812) 48,475
Income (loss) before
taxes.................. (60,145) (17,715) (66,937) 72,306 (68,287) (12,032) (39,449) 15,532
Net income (loss)....... $(59,817) $(17,387) $(66,609) $ 72,634 $ (5,121) $(76,560) $ (4,498) $ 8,370
EBITDA(1)............... $ 25,534 $ 68,216 $ 20,486 $158,658 $ 15,127 $ 63,397 $ 27,487 $138,083
Percentage of total
year.................. 9.4% 25.0% 7.5% 58.1% 6.2% 26.0% 11.3% 56.5%
</TABLE>
- --------
(1) "EBITDA" is defined as income before provision for income taxes, interest
expense, depreciation and amortization. EBITDA for the quarter ended
December 31, 1998 does not include a one-time restructuring charge of
$52,239,000. EBITDA is not intended to represent cash flows from operations
and should not be considered as an alternative to net income as an
indicator of Ziff-Davis Inc.'s operating performance or to cash flows as a
measure of liquidity. Although Ziff-Davis Inc. believes that EBITDA is a
standard measure commonly reported and widely used by analysts, investors
and other interested parties in the publishing and media industries, the
EBITDA presented for Ziff-Davis Inc. may not be comparable to similarly
titled measures reported by other companies.

16
<PAGE>

Inflation and Fluctuations in Paper Prices and Postage Costs

Ziff-Davis Inc. continually assesses the impact of inflation and changes in
paper prices. Ziff-Davis Inc. generally enters into contracts for the purchase
of paper which adjust the price on a quarterly basis. Paper prices began to
rise in 1994, rose significantly in 1995 and 1996 and then decreased in 1997.
During 1998, paper prices were relatively flat. Management anticipates that
paper prices will remain relatively stable in 1999. Ziff-Davis Inc. will
continue to monitor the impact of inflation and paper prices and will consider
these matters in setting its pricing policies. Ziff-Davis Inc. frequently
reviews its purchasing and manufacturing processes for opportunities to reduce
costs and mitigate the impact of paper price and postage rate increases such as
purchasing lighter-grade paper stock or, when paper prices are at cyclical
lows, increasing paper inventory or entering into longer term contracts with
suppliers. However, Ziff-Davis Inc. had not entered, and does not currently
plan to enter, into long-term forward price or option contracts for paper.
Management estimates postage costs will increase approximately 3.5% in 1999.
See "Risk Factors--Other Ziff-Davis Inc. Risks--Ziff-Davis Inc. May Be
Adversely Affected By Fluctuations in Paper and Postage Costs" and "ZD
Description of Business--Paper and Printing".

Year 2000 Readiness Disclosure

During 1997, Ziff-Davis Inc. began a review of its computer systems and
software to identify systems and software which might malfunction due to
misidentification of the Year 2000. Ziff-Davis Inc. is using both internal and
external resources to identify, test, correct and reprogram systems and
software for Year 2000 readiness.

At December 31, 1998, Ziff-Davis Inc. was in the research and validation
phase of its Year 2000 project for information technology, or IT, systems and
non-IT systems. This phase consists of research and validation of all
infrastructure, hardware and software, including platform, wide-area network
and local-area network components. Research for non-IT systems includes
identifying systems that include embedded technology, such as micro-
controllers, which are not Year 2000 compliant.

Ziff-Davis Inc. has identified critical systems and applications that will
either be validated for compliance through formal documentation, through
vendors or through testing. Ziff-Davis Inc. will enter the testing phase of its
infrastructure, hardware, software and databases in the first quarter of 1999
and plans to complete such phase by September 1, 1999. Contingency plans will
be developed for any systems or platforms that are known to be non-compliant as
of September 1, 1999.

Some of Ziff-Davis Inc.'s computer systems and databases, including its
subscription fulfillment and payroll systems, are managed by third parties
under contractual arrangements. Ziff-Davis Inc. currently has no Year 2000
compliance problems known to it relating to third parties. Ziff-Davis Inc. has
requested those third parties with which Ziff-Davis Inc. has material
relationships in the first quarter of 1999 to advise it as to whether such
third parties anticipate difficulties in addressing Year 2000 compliance
problems, and if so, the nature of such difficulties. Ziff-Davis Inc.
anticipates that such inquiries will be completed by April 30, 1999.

In addition, Ziff-Davis Inc. will develop contingency plans during the second
half of 1999 in order to compensate for any disruption or downtime that could
result from a Year 2000 compliance problem. Ziff-Davis Inc. plans to replace IT
and non-IT systems that it determines are not Year 2000 compliant prior to
October 1, 1999 in order to minimize any risk of a Year 2000 compliance
problem.

17
<PAGE>

Ziff-Davis Inc. has incurred remediation costs associated with its Year 2000
readiness efforts. These remediation costs have been incurred in connection
with replacement of systems and hardware, modification of software and
consulting costs related to Year 2000 solution providers. The costs to address
Year 2000 issues which have been included in the general and administrative
expenses of Ziff-Davis Inc. have not been tracked separately and are therefore
not determinable. However, management believes these expenses have been
substitutive rather than incremental to the recurring level of general and
administrative expenses. Total capitalized costs incurred in the replacement of
systems in connection with Ziff-Davis Inc.'s Year 2000 readiness efforts as of
December 31, 1997 and 1998 were $1,692,000 and $3,837,000, respectively. Ziff-
Davis Inc. estimates that it will incur an additional $3,815,000 during 1999
related to its Year 2000 readiness efforts.

Ziff-Davis Inc. expects to complete testing and replacement of critical
systems by the beginning of the fourth quarter of 1999. Ziff-Davis Inc.'s
estimate of its most reasonably likely "worst case scenario" would be the
failure of its internal applications and systems that process and store certain
information and data. Ziff-Davis Inc. would resolve the failure of such
applications and systems one by one and management of Ziff-Davis Inc. does not
believe that the impact on its critical systems would be material. However, if
Ziff-Davis Inc. or any subscribers, advertisers, licensors, vendors or other
third parties on whom it relies experiences a Year 2000 compliance problem,
this could have a material adverse effect on Ziff-Davis Inc.'s profit and
liquidity.

Recently Issued Accounting Pronouncements

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
issued in June 1998, establishes accounting and reporting standards for
derivative instruments and for hedging activities and is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Ziff-Davis Inc.
does not expect the adoption of SFAS No. 133 to have a material impact on Ziff-
Davis Inc.'s results of operations.

Ziff-Davis Inc. expects to adopt this statement beginning with its 2000
financial statements.

18
<PAGE>

ZIFF-DAVIS INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Ziff-Davis Inc.
Report of independent accountants....................................... 20
Consolidated balance sheets as of December 31, 1997 and 1998 ........... 21
Consolidated statements of operations for the years ended December 31,
1996, 1997 and 1998.................................................... 22
Consolidated statements of cash flows for the years ended December 31,
1996, 1997, 1998....................................................... 23
Consolidated statements of changes in stockholders' equity for the years
ended December 31, 1996, 1997 and 1998................................. 24
Notes to consolidated financial statements.............................. 25
</TABLE>

19
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Ziff-Davis Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity, present fairly, in all material respects, the financial position of
Ziff-Davis Inc. and its subsidiaries (the "Company") at December 31, 1997 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
New York, NY
February 22, 1999

20
<PAGE>

ZIFF-DAVIS INC.

CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
---------- ---------- ---
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 30,301 $ 32,566
Accounts receivable, net.......................... 221,310 227,325
Inventories....................................... 17,853 15,551
Prepaid expenses and other current assets......... 37,900 34,543
Due from affiliates............................... 131,290 53,984
Deferred taxes.................................... 8,794 22,262
---------- ----------
Total current assets................................ 447,448 386,231
Property and equipment, net......................... 53,536 91,189
Intangible assets, net.............................. 3,030,333 2,907,043
Other assets........................................ 15,329 49,340
---------- ----------
Total assets........................................ $3,546,646 $3,433,803
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 55,468 $ 74,397
Accrued expenses.................................. 80,094 97,319
Unearned income, net.............................. 154,682 152,081
Due to affiliates and management.................. 398,332 4,618
Current portion of notes payable to affiliates.... 125,790 7,692
Other current liabilities......................... 4,222 14,591
---------- ----------
Total current liabilities........................... 818,588 350,698
Notes payable to affiliates......................... 2,408,240 70,192
Notes payable, net of unamortized discount.......... -- 1,469,130
Deferred taxes...................................... 180,117 165,082
Due to management................................... -- 5,400
Other liabilities................................... 13,571 20,703
---------- ----------
Total liabilities................................... 3,420,516 2,081,205
---------- ----------
Commitments and contingencies (Notes 17 and 18)
Stockholders' equity:
Preferred stock(1)................................ -- --
Common stock(2)................................... -- 1,000
Additional paid-in capital........................ 248,330 1,571,681
Accumulated deficit............................... (119,429) (197,238)
Deferred compensation............................. (996) (22,024)
Cumulative translation adjustment................. (1,775) (821)
---------- ----------
Total stockholders' equity.......................... 126,130 1,352,598
---------- ----------
Total liabilities and stockholders' equity.......... $3,546,646 $3,433,803
========== ==========
</TABLE>
- --------
(1) December 31, 1998: par value $.01 per share, 10,000,000 shares authorized,
no shares issued and outstanding; December 31, 1997: no shares authorized,
issued and outstanding.
(2) December 31, 1998: par value $.01 per share, 120,000,000 shares authorized,
100,000,000 shares issued and outstanding; December 31, 1997: par value
$.01 per share, 2,000 shares authorized, 200 shares issued and outstanding.

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

21
<PAGE>

ZIFF-DAVIS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Revenue, net:
Publishing............................... $ 674,040 $ 834,015 $ 782,882
Events................................... 264,884 287,528 269,867
Internet................................. 16,215 32,218 56,143
--------- --------- -----------
955,139 1,153,761 1,108,892
--------- --------- -----------
Cost of production......................... 271,532 325,245 305,346
Selling, general and administrative
expenses.................................. 456,690 564,344 567,683
Depreciation and amortization of property
and equipment............................. 32,303 30,379 29,885
Amortization of intangible assets.......... 107,433 124,561 122,659
Restructuring charge....................... -- -- 52,239
--------- --------- -----------
Income from operations..................... 87,181 109,232 31,080
Interest expense, net--related party....... (120,646) (190,445) (65,935)
Interest expense, net...................... -- -- (77,612)
Other non-operating income, net............ 6,341 8,722 8,231
--------- --------- -----------
Loss before income taxes................... (27,124) (72,491) (104,236)
Provision (benefit) for income taxes....... 24,957 (1,312) (26,427)
--------- --------- -----------
Net loss................................... $ (52,081) $ (71,179) $ (77,809)
========= ========= ===========
Pro forma basic loss per common share...... $ (0.78)
===========
Pro forma weighted average common shares
outstanding............................... 100,000,000
===========
</TABLE>

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

22
<PAGE>

ZIFF-DAVIS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1996 1997 1998
----------- -------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................. $ (52,081) $(71,179) $ (77,809)
Adjustments to reconcile net loss to net
cash provided (used) by operating activi-
ties:
Depreciation and amortization............ 139,736 154,940 152,544
Amortization of debt issuance costs and
discount................................ -- -- 2,430
Restructuring charge..................... -- -- 52,239
Income from equity investments........... (115) (2,030) (7,483)
Deferred tax provision (benefit)......... 24,957 (1,312) (28,974)
Changes in operating assets and liabili-
ties:
Accounts receivable..................... (38,086) (18,899) (4,899)
Inventories............................. 7,788 (853) 2,923
Accounts payable and accrued expenses... 12,850 (7,376) (1,121)
Unearned income......................... 1,392 (20,194) (5,326)
Due to affiliates and management........ (29,303) (38,543) (3,348)
Other, net.............................. (5,595) 2,082 14,600
----------- -------- -----------
Net cash provided (used) by operating
activities............................... 61,543 (3,364) 95,776
----------- -------- -----------
Cash flows from investing activities:
Capital expenditures.................... (22,365) (30,196) (36,599)
Investments and acquisitions, net of
cash acquired.......................... (2,124,823) (14,000) (27,772)
----------- -------- -----------
Net cash used by investing activities..... (2,147,188) (44,196) (64,371)
----------- -------- -----------
Cash flows from financing activities:
Proceeds from equity offering........... -- -- 380,337
Proceeds from issuance of notes pay-
able................................... -- -- 242,723
Proceeds from issuance of bank debt..... -- -- 1,240,200
Proceeds from notes payable to affili-
ates................................... 1,080,000 10,000 --
Payments of amounts due to affiliates... -- -- (314,798)
Repayments of credit facility........... -- -- (95,504)
Borrowings under credit facility........ -- -- 65,504
Principal payments on notes payable to
affiliates............................. -- (31,420) (1,571,264)
Payment of deferred financing fee....... -- -- (3,375)
Purchase of treasury shares............. -- -- (29,500)
Sale of treasury shares................. -- -- 29,500
Advance from majority shareholder....... -- -- 20,377
Contributed capital..................... 1,015,652 69,366 6,660
Payment of dividends.................... (8,000) -- --
----------- -------- -----------
Net cash provided (used) by financing
activities............................... 2,087,652 47,946 (29,140)
Net increase in cash and cash
equivalents.............................. 2,007 386 2,265
Cash and cash equivalents at beginning of
period................................... 27,908 29,915 30,301
----------- -------- -----------
Cash and cash equivalents at end of peri-
od....................................... $ 29,915 $ 30,301 $ 32,566
=========== ======== ===========
</TABLE>

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

23
<PAGE>

ZIFF-DAVIS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)

<TABLE>
<CAPTION>
Ziff-Davis Inc. ZDI ZDCF Additional Retained Cumulative
------------------- Treasury ------------- ------------- paid-in earnings Deferred translation
Shares Amount Stock Shares Amount Shares Amount capital (deficit) compensation adjustment
----------- ------ -------- ------ ------ ------ ------ ---------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1995........... -- $ -- $ -- -- $ -- 100 $ -- $ 379,586 $ 11,831 $ -- $ 111
Acquisition of
Ziff-Davis
Holdings Corp... 100 -- 1,014,178
Return of
capital........ (899,948)
Capital
contribution... 1,474
Dividend paid... (8,000)
Shares
contributed to
restricted
stock plan..... 3,528 (3,528)
Compensation
earned on
restricted
stock.......... 1,080
Net loss........ (52,081)
Foreign currency
translation
adjustment..... (475)
----------- ------ ------- ---- ----- ---- ----- ---------- --------- -------- ------
Balance at
December 31,
1996........... -- -- -- 100 -- 100 -- 498,818 (48,250) (2,448) (364)
Return of
capital........ (381,434)
Capital
contribution... 128,482
Shares
contributed to
restricted
stock plan..... 2,464 (2,464)
Compensation
earned on
restricted
stock.......... 3,916
Net loss........ (71,179)
Foreign currency
translation
adjustment..... (1,411)
----------- ------ ------- ---- ----- ---- ----- ---------- --------- -------- ------
Balance at
December 31,
1997........... -- -- -- 100 -- 100 -- 248,330 (119,429) (996) (1,775)
Capital
contribution... 9,007
Capitalization
of amounts due
to affiliates.. 908,673
Contribution of
subsidiaries
from SBH to
Ziff-Davis
Inc............ 73,619,355 736 (100) -- (100) --
Initial public
offering....... 25,800,000 258 375,235
Acquisition of
fixed assets
from an
affiliate...... 580,645 6 8,994
Purchase of
treasury shares
from SBH....... (2,000,000) (20) (29,480)
Sale of treasury
shares to the
public......... 2,000,000 20 29,480
Stock option
vested as
severance...... 162
Conversion of
Softbank stock
options........ -- 3,018 (3,018)
Issuance of
ZDNet Options.. 18,262 (18,262)
Net loss........ (77,809)
Compensation
earned on
restricted
stock.......... 252
Foreign currency
translation
adjustment..... 954
----------- ------ ------- ---- ----- ---- ----- ---------- --------- -------- ------
Balance at
December 31,
1998........... 100,000,000 $1,000 $ -- -- $ -- -- $ -- $1,571,681 $(197,238) $(22,024) $ (821)
=========== ====== ======= ==== ===== ==== ===== ========== ========= ======== ======
<CAPTION>
Total
stockholders'
equity
-------------
<S> <C>
Balance at
December 31,
1995........... $ 391,528
Acquisition of
Ziff-Davis
Holdings Corp... 1,014,178
Return of
capital........ (899,948)
Capital
contribution... 1,474
Dividend paid... (8,000)
Shares
contributed to
restricted
stock plan..... --
Compensation
earned on
restricted
stock.......... 1,080
Net loss........ (52,081)
Foreign currency
translation
adjustment..... (475)
-------------
Balance at
December 31,
1996........... 447,756
Return of
capital........ (381,434)
Capital
contribution... 128,482
Shares
contributed to
restricted
stock plan..... --
Compensation
earned on
restricted
stock.......... 3,916
Net loss........ (71,179)
Foreign currency
translation
adjustment..... (1,411)
-------------
Balance at
December 31,
1997........... 126,130
Capital
contribution... 9,007
Capitalization
of amounts due
to affiliates.. 908,673
Contribution of
subsidiaries
from SBH to
Ziff-Davis
Inc............ 736
Initial public
offering....... 375,493
Acquisition of
fixed assets
from an
affiliate...... 9,000
Purchase of
treasury shares
from SBH....... (29,500)
Sale of treasury
shares to the
public......... 29,500
Stock option
vested as
severance...... 162
Conversion of
Softbank stock
options........ --
Issuance of
ZDNet Options.. --
Net loss........ (77,809)
Compensation
earned on
restricted
stock.......... 252
Foreign currency
translation
adjustment..... 954
-------------
Balance at
December 31,
1998........... $1,352,598
=============
</TABLE>

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

24
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(numbers rounded to the nearest thousand, except share and per share amounts)

1. The Company and Basis of Presentation

Formation of Ziff-Davis Inc.

Ziff-Davis Inc. was formed through an initial public offering and a
reorganization that were completed on May 4, 1998. (See Note 2.) Prior to that
date, the predecessors of Ziff-Davis Inc. (currently named ZD Inc. ("ZDI") and
ZD Events Inc.) were wholly owned indirect subsidiaries of SOFTBANK Corp
(together with its non-Ziff-Davis Inc. affiliates, "Softbank"). As such,
financial statements for periods prior to May 4, 1998 have been prepared on a
combined basis while the financial statements for the periods after May 4, 1998
have been prepared on a consolidated basis.

As further described below, the consolidated financial statements include the
accounts of ZDI from its date of acquisition (February 29, 1996) and ZD Events
for all periods presented. In addition, the results of the MAC Assets (as
defined below) which were acquired in two tranches on October 31, 1997 and May
4, 1998 have been included in Ziff-Davis Inc.'s financial statements from the
time of their acquisition by MAC Inc. ("MAC") (February 29, 1996). These
results have been included in a manner similar to a pooling of interests, as
the MAC Assets, ZDI and ZD Events Inc. were under common control at the time
the MAC Assets were acquired by Ziff-Davis Inc. (See relationship with Softbank
and MAC below.)

Relationship with Softbank and MAC

SOFTBANK Corp. is the indirect majority stockholder of Ziff-Davis Inc.
SOFTBANK Corp. is a Japanese corporation which at the time of the acquisition
of the MAC Assets was majority owned directly and indirectly by its president,
Mr. Son. As of December 31, 1998, Mr. Son owned approximately 45% of SOFTBANK
Corp. (50.2% as of December 31, 1997). MAC, also a Japanese corporation, was
wholly owned by Mr. Son.

Operations and acquisitions

Ziff-Davis Inc. operates in three business segments: (1) publishing, (2)
events and (3) Internet.

Publishing

The publishing segment is engaged in publishing magazines, journals,
newsletters, electronic information products, training manuals and market
research about the computer industry. The publishing segment's principal
operations are in the U.S. and Europe, although it also licenses or syndicates
its editorial content to over 50 other publications distributed worldwide.

Events

The events segment is engaged in the organization, production and management
of trade shows, conferences and seminars for the computer industry. The events
segment's principal operations are in the U.S. and to a lesser extent in Europe
and Asia.

25
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Internet

The Internet segment is engaged in providing technology related information
to Internet users worldwide. The Internet segment's principal operations are in
the U.S. and to a lesser extent in Europe.

Acquisition of ZDI (formerly Ziff-Davis Publishing Company and Ziff-Davis
Holdings Corp.)

In February 1996, Softbank acquired the stock of Ziff-Davis Holdings Corp.
("Holdings") for an aggregate purchase price of approximately $1,800,000,000,
plus transaction costs. Concurrent with the acquisition, in a separate
agreement, MAC, directly or through wholly owned affiliates, acquired certain
of the assets and assumed certain of the liabilities of ZDI (the "MAC Assets")
for an aggregate purchase price of approximately $302,000,000.

These acquisitions have been accounted for as of February 29, 1996 using the
purchase method of accounting. The excess of the purchase price over the fair
value of the assets acquired and liabilities assumed was $1,922,000,000 and
$285,000,000, respectively.

Subsequent to the acquisition, Holdings and ZDI were merged with ZDI being
the surviving corporation.

Purchase of the MAC Assets

In 1997, ZDI agreed to purchase certain of the MAC Assets for $370,000,000.
The acquisition was effected in two tranches, the first of which closed on
October 31, 1997 and the second of which closed upon completion of the initial
public offering of Ziff-Davis Inc.'s common stock (further described below). At
December 31, 1997, ZDI had accrued the $370,000,000 purchase price which was
recorded as a return of capital.

Acquisition of Sendai

On May 8, 1996, ZDI acquired substantially all of the assets and liabilities
of Sendai Publishing Group, Inc., a publisher and distributor of magazines,
books, products and computer services related to the electronic gaming
industry, for approximately $27,500,000, plus transaction costs. The
acquisition was accounted for as a purchase and accordingly, Sendai's results
are included in the consolidated financial statements since the date of
acquisition. The excess of the purchase price over assets acquired approximated
$33,378,000. The operations of Sendai did not have a material effect on the
consolidated results of operations for the year ended December 31, 1996.

26
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Acquisition of Sky TV

On October 28, 1998, Ziff-Davis Inc. acquired the assets of Sky TV Inc. and
certain affiliates for approximately $12,150,000 in cash plus contingent
payments related to earnings performance payable in 2002. Sky TV is a media
company that produces video content for distribution principally through
airline in-flight, cable and broadcast television. The acquisition was
accounted for as a purchase and accordingly Sky TV's results are included in
the consolidated financial statements since the date of acquisition. The excess
of the purchase price over assets acquired approximated $11,318,000. The
operations of Sky TV did not have a material effect on consolidated results of
operations for the year ended December 31, 1998.

2. Reorganization, Initial Public Offering and ZDNet Stock Proposal

On February 4, 1998, a nonstock corporation, ZD Inc., was formed in
contemplation of a reorganization and initial public offering of Ziff-Davis
Inc. Upon completion of the initial public offering (described below), Ziff-
Davis Inc. was renamed ZD Inc. and ZDCF was renamed ZD Events Inc. and ZD Inc.
was renamed Ziff-Davis Inc.

On May 4, 1998 SOFTBANK Corp., through its wholly owned subsidiary SOFTBANK
Holdings Inc. ("SBH"), completed a reorganization whereby the common stock of
ZD Inc. and ZD Events Inc. were contributed to Ziff-Davis Inc. in exchange for
73,619,335 shares of Ziff-Davis Inc.'s common stock. Concurrent with the
reorganization, Ziff-Davis Inc. (1) completed an initial public offering of
25,800,000 common shares at an initial public offering price of $15.50 per
share, (2) issued $250,000,000 of 8 1/2% subordinated notes due 2008, (3)
entered into a $1,350,000,000 credit facility with a group of banks under which
$1,250,000,000 was borrowed and (4) converted $908,673,000 of intercompany
indebtedness to equity. In addition, Ziff-Davis Inc. received approximately
$9,107,000 of fixed assets from Kingston Technology Company ("Kingston"), a
related party, in exchange for 580,645 shares of Ziff-Davis Inc.'s common stock
and $107,000 in cash. These assets have been subsequently leased back to
Kingston. Total shares of common stock issued to Softbank were 74,200,000. The
transactions described above are hereafter referred to as the "Reorganization".

Proceeds, net of transaction costs, from the initial public offering and
funding transactions in the Reorganization of $1,863,260,000 were used to
complete the purchase of certain assets from MAC for $370,000,000 and repay
intercompany indebtedness.

On May 28, 1998, Ziff-Davis Inc.'s U.S. underwriters exercised their option
to purchase 2.0 million additional shares of common stock to cover over-
allotments. Ziff-Davis Inc. purchased the additional shares from SBH resulting
in no change to the total number of shares outstanding. On December 31, 1998,
SBH contributed 71,619,355 shares of Ziff-Davis Inc.'s common stock to SOFTBANK
America Inc., an affiliate of SOFTBANK Corp.

27
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Unaudited pro forma financial information

The following summary pro forma information has been prepared as if the
Reorganization and initial public offering described above, had been
consummated on January 1, 1998. The pro forma adjustments include a $5,219,000
reduction of interest expense, a $900,000 increase in depreciation expense and
a $900,000 reduction of selling, general and administrative expenses, as well
as the tax effect of these items recorded at an effective tax rate of 40%.

<TABLE>
<CAPTION>
Year ended
December 31, 1998
---------------------
(dollars in thousands
except share and per
share amounts)
<S> <C>
Revenue, net........................................... $ 1,108,892
Depreciation and amortization ......................... 153,444
Income from operations................................. 31,080
Interest expense, net.................................. 138,328
Loss before income taxes............................... (99,017)
Income tax benefit..................................... 24,339
Net loss............................................... $ (74,678)
Net loss per basic common share........................ $ (0.75)
Weighted average common shares outstanding............. 100,000,000
</TABLE>

ZDNet Stock Proposal (unaudited)

The stockholders of Ziff-Davis Inc. are scheduled to vote on a proposal (the
"Tracking Stock Proposal") to authorize the issuance of a new series of common
stock, to be designated as Ziff-Davis Inc.--ZDNet Common Stock ("ZDNet Stock"),
intended to reflect the performance of Ziff-Davis Inc.'s online business
division ("ZDNet"). The majority owner of the common stock of Ziff-Davis Inc.
has committed to vote for the Tracking Stock Proposal. Before the ZDNet Stock
is first issued, Ziff-Davis Inc.'s existing common stock will be re-classified
as Ziff-Davis Inc.--ZD Common Stock ("ZD Stock") and that stock will be
intended to reflect the performance of Ziff-Davis Inc.'s other businesses and a
"Retained Interest" in ZDNet (i.e., Ziff-Davis Inc.'s interest in ZDNet
excluding the interest intended to be represented by outstanding shares of
ZDNet Stock) (collectively, "ZD").

ZD currently has a 100% Retained Interest in ZDNet. Following approval of the
Tracking Stock Proposal, Ziff-Davis Inc. currently plans to offer to the
public, for cash, 10,000,000 shares of ZDNet Stock intended to represent
approximately 14% of the equity value attributed to ZDNet. Ziff-Davis Inc.
expects to offer ZDNet Stock to the public sometime in the first or second
quarter of 1999. However, Ziff-Davis Inc. could choose to conduct the offering
at a later time, or not to make the offering at all, depending on the
circumstances at the time. In addition to or instead of the offering, Ziff-
Davis Inc. reserves the right to distribute ZDNet Stock to stockholders of
Ziff-Davis Inc.

28
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

3. Summary of Significant Accounting Policies

Principles of combination and consolidation

Prior to the Reorganization, the financial statements were prepared on a
combined basis to include the accounts of ZDI and ZD Events including, as
discussed above, the MAC Assets. The financial statements of Ziff-Davis Inc.
prepared subsequent to the Reorganization described above have been prepared on
a consolidated basis. All significant transactions between these entities have
been eliminated in combination and consolidation.

Investments in companies in which Ziff-Davis Inc.'s ownership interests range
from 20% to 50% and in which Ziff-Davis Inc. has the ability to exercise
significant influence over the operating and financial policies of such
companies are accounted for under the equity method.

Cash and cash equivalents

Ziff-Davis Inc. considers all highly liquid investments with an original
maturity of 3 months or less to be cash equivalents.

Concentration of credit risk

Ziff-Davis Inc. places its temporary cash investments with high credit
quality financial institutions. At times, such investments may be in excess of
federally insured limits. Ziff-Davis Inc. has not experienced losses in such
accounts.

Ziff-Davis Inc.'s advertisers and exhibitors include principally customers
who represent a variety of technology companies in the U.S. and other
countries. Ziff-Davis Inc. extends credit to its customers and distributors and
historically has not experienced significant losses relating to receivables
from individual customers or groups of customers.

Property and equipment

Property and equipment have been recorded at cost or estimated fair value at
the date of acquisition. Depreciation is computed using the straight-line
method, half-year convention, over the estimated useful lives of the assets
which range from 3 to 30 years. Leasehold improvements are amortized using the
straight-line method over the service life of the improvement or the life of
the related lease, whichever is shorter. Maintenance and repair costs are
charged to expense as incurred.

Inventories

Inventories, which consist principally of paper, are stated at the lower of
cost or market. Cost is determined on a first-in, first-out basis.

29
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Debt issuance costs and discount on senior subordinated notes

The cost to issue debt is recorded in the balance sheet in other assets and
amortized to interest expense over the life of the debt. The discount on the
senior subordinated notes is recorded in the balance sheet as a reduction of
long-term debt and is amortized to interest expense over the life of the notes.
All amounts are amortized utilizing the effective-interest method.

Intangible assets

Intangible assets consist principally of advertising lists, exhibitor
relationships, trademarks and trade names and goodwill. Amortization of these
assets is computed on a straight-line basis over estimated useful lives.
Identifiable intangible assets are amortized over a period of 2 to 40 years and
goodwill, which represents the excess of the purchase price over the estimated
fair values of net assets acquired, is amortized over a period of 5 to 40
years. (See Note 7.) Ziff-Davis Inc. assesses the recoverability of intangible
assets whenever adverse events or changes in circumstances indicate that
expected future cash flows (undiscounted and without interest charges) may not
be sufficient to support the carrying amount of intangible assets. If
undiscounted cash flows are not sufficient to support the recorded value of
assets, an impairment loss is recognized to reduce the carrying value of the
intangibles to estimated recoverable value.

Revenue recognition

Advertising revenue for Ziff-Davis Inc.'s publications, less agency
commissions, is recognized as income in the month that the related publications
are sent to subscribers or become available for sale at newsstands.

Circulation revenue consists of both subscription revenue and single copy
newsstand sales. Subscription revenue, less estimated cancellations, is
deferred and recognized as income in the month that the related publications
are sent to subscribers. Newsstand sales, less estimated returns, are
recognized in the month that the related publications become available for sale
at newsstands.

Payments received in advance of trade shows, conferences and seminars are
initially reported on the balance sheet as deferred revenue and are recognized
as income when the events take place.

Revenue generated by market research is recognized when the service is
provided.

Online revenue is derived principally from the sale of advertisements on
short-term contracts. Online revenue is recognized ratably in the period in
which the advertisement is displayed, provided that no significant obligations
remain and collection of the resulting receivable is probable. Ziff-Davis
Inc.'s obligations typically include guarantees of minimum number of
"impressions", or times that an advertisement appears in pages viewed by users
of Ziff-Davis Inc.'s online properties. To the extent minimum guaranteed
impressions are not met, Ziff-Davis Inc. defers recognition of the
corresponding revenues until the remaining guaranteed impression levels are
achieved.

30
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Operating costs and expenses

Cost of production includes the direct costs of producing magazines, online
content, newsletters and training materials, primarily paper, printing and
distribution, and the direct costs associated with organizing, producing and
managing trade shows, seminars, conferences and expositions. Selling, general
and administrative costs include subscriber acquisition costs which are
expensed as incurred. Editorial and product development costs are expensed as
incurred. Product development costs include the cost of artwork, graphics,
prepress, plates and photography for new products.

Reportable segments

In 1998, Ziff-Davis Inc. adopted Statement of Financial Accounting Standards
("SFAS") No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 supersedes SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise, replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of Ziff-Davis Inc.'s reportable segments.
SFAS No. 131 also requires disclosures about products and services, geographic
areas and major customers. The adoption of SFAS No. 131 did not affect results
of operations or financial position but did affect the disclosure of segment
information. (See Note 19.)

Foreign currency

The effect of translating foreign currency financial statements into U.S.
dollars is included in the cumulative translation adjustments account in
stockholders' equity. Gains and losses on foreign currency transactions, which
are not significant to operations, have been included in selling, general and
administrative expenses. Ziff-Davis Inc. has not historically entered into
forward currency contracts.

Other non-operating income

Other non-operating income includes management fee income and Ziff-Davis
Inc.'s equity share of income or loss from joint ventures.

Income taxes

Ziff-Davis Inc. uses the asset and liability approach for financial
accounting and reporting of deferred taxes.

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. Actual results
may differ from these estimates.

31
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)

Fair value of financial instruments

Ziff-Davis Inc.'s financial instruments recorded on the balance sheet include
cash and cash equivalents, accounts receivable, accounts payable and debt.
Because of their short maturity, the carrying amount of cash and cash
equivalents, accounts receivable and accounts payable approximate fair value.
Fair value of long-term bank debt is based on rates available to Ziff-Davis
Inc. for debt with similar terms and maturities. Fair value of public debt is
based on market prices.

Ziff-Davis Inc. uses interest rate swap agreements to manage risk on its
floating rate debt portfolio. Fair value of these instruments is based on
estimated current settlement cost.

Interest rate swaps

Ziff-Davis Inc. periodically uses interest rate swaps to manage its exposure
to interest rate fluctuations on its floating rate debt. These interest rate
swaps are entered into for hedging purposes and as such, must be designated and
effective as a hedge against the risk of increased interest rates. Under the
terms of the agreements Ziff-Davis Inc. pays a fixed interest rate on a
notional amount and receives a variable interest rate on the same notional
amount. The differential between the amounts paid and received is recorded as
additional interest expense. Interest rate swaps designated but no longer
effective as a hedge would be reported at market value and the related gains
and losses would be recognized in earnings. Gains or losses on termination of
interest rate swaps would be recognized in earnings in the period of
termination.

Stock-based compensation

Ziff-Davis Inc. has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25"), to account for stock
options. Effective January 1, 1996, Ziff-Davis Inc. adopted the disclosure-only
provisions of Statement of Financial Accounting Standard ("SFAS") No. 123,
Accounting for Stock-Based Compensation.

Earnings per share

Earnings per share data for 1996 and 1997 have been omitted on the basis that
they are not meaningful due to the insignificant number of shares outstanding.
Earnings per share data for 1998 is calculated on a pro forma basis as if the
shares issued in connection with the Reorganization and initial public offering
described in Note 2 were outstanding as of January 1, 1998. Options to purchase
Ziff-Davis Inc. common stock that could potentially dilute basic earnings per
share in the future were not included in the computation of diluted loss per
share because they were anti-dilutive. There were options to purchase 6,691,305
shares of Ziff-Davis Inc. common stock outstanding at December 31, 1998.

32
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Comprehensive income

Ziff-Davis Inc. implemented SFAS No. 130. Reporting Comprehensive Income,
effective January 1, 1998. This standard requires Ziff-Davis Inc. to report the
total changes in stockholders' equity that do not result directly from
transactions with stockholders, including those which do not affect retained
earnings. These changes are not material to Ziff-Davis Inc.'s consolidated
financial statements.

New accounting pronouncement

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Ziff-Davis Inc. does not expect the adoption of
SFAS No. 133 to have a material impact on Ziff-Davis Inc.'s results of
operations. Ziff-Davis Inc. will adopt SFAS No. 133 beginning with its 2000
financial statements.

Reclassifications

Certain amounts have been reclassified, where appropriate, to conform to the
current financial statement presentation.

4. Restructuring

As a result of this reduced demand, in October 1998 Ziff-Davis Inc. announced
a restructuring program with the intent of significantly reducing its cost
base. Ziff-Davis Inc. incurred a pre-tax charge of $52,239,000 for this
restructuring program. The charge included asset impairment costs
($37,890,000), employee termination costs ($8,668,000) and costs to exit
activities ($5,681,000) principally resulting from the closing of three
publications (Windows Pro, Internet Business and Equip) and the reduction of
Ziff-Davis Inc.'s work force by 310 employees. The charge also included costs
resulting from the discontinuation of certain educational journals and trade
shows. The following sets forth additional detail concerning the principal
components of the charge:

. Asset impairment costs totaled $37,890,000. These costs, which are non-
cash, included the write-off of intangible assets, primarily subscriber
lists, advertising lists, tradenames and goodwill, associated with the
discontinued publications ($34,245,000) and trade shows ($2,930,000) as
well as deferred marketing expenses associated with the discontinued
educational journals ($715,000).

33
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

. Employee termination costs related to severed personnel at the closed
publications as well as a rationalization and resulting workforce
reduction of the remainder of Ziff-Davis Inc.'s operations. Employee
termination costs included payments for severance and earned vacation as
well as the costs of outplacement services and the provision of
continued benefits to personnel. As of December 31, 1998, $5,200,000 of
the $8,668,000 related to these employee terminations had been paid.

. Costs to exit activities reflect the costs associated with the final
closure of the discontinued publications ($1,837,000) and the costs to
reduce office space under lease as a result of the reduced level of
employees ($3,844,000).

Included in accrued expenses is $7,260,000 related to this restructuring
which Ziff-Davis Inc. believes will be paid during the first half of 1999.

5. Accounts Receivable, Net

Accounts receivable, net, consist of the following:

<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
(dollars in
thousands)
<S> <C> <C>
Accounts receivable.................................. $309,565 $312,706
Allowance for doubtful accounts, returns and
cancellations....................................... (88,255) (85,381)
-------- --------
$221,310 $227,325
======== ========
</TABLE>

6. Property and Equipment, Net

Property and equipment, net, consist of the following:

<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
----------- -----------
(dollars in thousands)
<S> <C> <C>
Computers and equipment.......................... $ 50,170 $ 78,587
Leasehold improvements........................... 40,033 62,672
Furniture and fixtures........................... 17,619 29,646
----------- -----------
107,822 170,905
Accumulated depreciation and amortization........ (54,286) (79,716)
----------- -----------
$ 53,536 $ 91,189
=========== ===========
</TABLE>

34
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

7. Intangible Assets, Net

Intangible assets, net, consist of the following:

<TABLE>
<CAPTION>
Range of December 31,
Useful Lives ----------------------
(years) 1997 1998
------------ ---------- ----------
(dollars in
thousands)
<S> <C> <C> <C>
Advertising lists..................... 7-34 $ 888,100 $ 872,400
Exhibitor relationships............... 4-27 154,070 154,070
Trademarks/trade names................ 30-40 735,595 709,306
License agreements.................... 6-14 11,212 11,212
Subscriber lists...................... 3-10 51,475 51,375
Other................................. 2-20 57,599 58,837
Goodwill.............................. 5-40 1,387,556 1,419,892
---------- ----------
3,285,607 3,277,092
Accumulated amortization.............. (255,274) (370,049)
---------- ----------
$3,030,333 $2,907,043
========== ==========
</TABLE>

Intangible assets primarily relate to the acquisitions of ZDI, COMDEX and the
MAC Assets. As discussed in Note 1, the acquisitions were accounted for under
the purchase method of accounting. As such, the purchase price of these
acquisitions was allocated to tangible and identifiable intangible assets with
the remaining amount being allocated to goodwill.

Advertising lists, exhibitor relationships and subscriber lists were recorded
at estimated fair value as determined by an income approach. Trademarks/trade
names were recorded at estimated fair value using a relief from royalty
approach.

All intangible assets are being amortized using the straight-line method over
estimated useful lives, up to 40 years. In determining the estimated useful
lives, Ziff-Davis Inc. considered its competitive position in the markets in
which it operates, the historical attrition rates of advertisers, subscribers
and exhibitors, legal and contractual obligations and other factors.

Recoverability of goodwill and intangible assets is assessed at a minimum on
an annual basis. Impairments would be recognized in operating results if a
permanent diminution in value were to occur based upon an undiscounted cash
flow analysis. In connection with the restructuring described in Note 4, Ziff-
Davis Inc. recorded a $37,175,000 write-down of intangible assets associated
with discontinued publications and events.

35
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)

8. Accrued Expenses

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
----------- -----------
(dollars in thousands)
<S> <C> <C>
Payroll and related employee benefits............. $ 29,112 $ 26,351
Accrued interest.................................. 6,226 13,678
Restructuring reserve............................. -- 7,260
Other taxes payable............................... 2,822 2,674
Other............................................. 41,934 47,356
----------- -----------
$ 80,094 $ 97,319
=========== ===========
</TABLE>

9. Unearned Income

Unearned income consists of the following:

<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
(dollars in
thousands)
<S> <C> <C>
Unexpired subscriptions................................ $ 82,167 $ 66,018
Prepaid conference fees................................ 80,706 95,706
Reserve for cancellations.............................. (8,191) (9,643)
-------- --------
$154,682 $152,081
======== ========
</TABLE>

10. Income Taxes

Prior to the Reorganization and initial public offering described in Note 2,
the subsidiaries of Ziff-Davis Inc. had been included in consolidated U.S.
federal income tax returns filed by Softbank, except for operations relating to
the MAC Assets (described in Note 1), which were assets of a separate taxpayer.
The tax expense reflected in the consolidated statements of operations and tax
liabilities reflected in the consolidated balance sheet have been prepared on a
separate return basis as though Ziff-Davis Inc. filed stand-alone income tax
returns. No tax benefit has been recorded for the losses related to the MAC
Assets, as such losses are not available to Ziff-Davis Inc. Following the
Reorganization, Ziff-Davis Inc. will no longer be included in the consolidated
U.S. federal income tax returns filed by Softbank.

Income (loss) before income taxes is attributable to the following
jurisdictions:

<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1997 1998
-------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C>
U.S............................................... $(22,095) $(74,638) $(101,132)
Foreign........................................... (5,029) 2,147 (3,104)
-------- -------- ---------
Total........................................... $(27,124) $(72,491) $(104,236)
======== ======== =========
</TABLE>

36
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Components of the provision (benefit) for income taxes are as follows:

<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1997 1998
------- ------- --------
(dollars in thousands)
<S> <C> <C> <C>
U.S. federal income taxes:
Current................................... $ -- $ -- $ --
Deferred.................................. 19,338 (1,017) (21,595)
State and local income taxes:
Current................................... -- -- --
Deferred.................................. 5,619 (295) (7,377)
Foreign income taxes:
Current................................... -- -- 2,545
Deferred.................................. -- -- --
------- ------- --------
Total provision (benefit) for income
taxes.................................... $24,957 $(1,312) $(26,427)
======= ======= ========

A reconciliation of the U.S. federal statutory tax rate to the Ziff-Davis
Inc.'s effective tax rate on income (loss) before income taxes is as follows:

<CAPTION>
December 31,
---------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Federal statutory tax rate.................. 35.0% 35.0% 35.0%
State and local taxes (net of federal tax
benefit)................................... 6.0 6.0 4.6
Non-recognition of combined losses of MAC
Assets..................................... (116.6) (32.2) (4.4)
Amortization of non-deductible goodwill..... (13.1) (5.8) (3.4)
Other....................................... (3.3) (1.2) (6.4)
------- ------- --------
Effective tax rate.......................... (92.0)% 1.8% 25.4%
======= ======= ========
</TABLE>

The effective tax rate differs from the federal statutory tax rate primarily
as a result of Ziff-Davis Inc.'s inability to deduct losses of the MAC Assets
prior to May 4, 1998. The amortization of non-deductible goodwill resulted
primarily from the acquisition of 100% of the stock of Holdings in 1996.

37
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Following is a summary of the components of the deferred tax accounts at
December 31, 1997 and 1998:

<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
--------- ---------
(dollars in
thousands)
<S> <C> <C>
Current deferred tax assets and (liabilities):
Allowance for doubtful accounts................... $ 8,750 $ 15,769
Unearned income................................... 965 6,309
Other............................................. (921) 184
--------- ---------
Current deferred net tax assets................. 8,794 22,262
--------- ---------
Noncurrent deferred tax assets and (liabilities):
Basis difference in intangible assets............. (288,286) (247,832)
Basis difference in property and equipment........ 7,394 12,274
Net operating loss and other carryforwards........ 133,314 91,637
Other............................................. 6,317 15,149
--------- ---------
Noncurrent deferred tax liabilities............. (141,261) (128,772)
Valuation allowance................................. (38,856) (36,310)
--------- ---------
Net noncurrent deferred tax liabilities......... (180,117) (165,082)
--------- ---------
Net deferred tax liabilities........................ $(171,323) $(142,820)
========= =========
</TABLE>

As of December 31, 1997 and 1998 Ziff-Davis Inc. had total deferred tax
assets of $116,963,000 and $105,012,000, respectively, and total deferred tax
liabilities of $288,286,000 and $247,832,000, respectively. The December 31,
1997 and 1998 net deferred tax assets are reduced by a valuation allowance of
$38,856,000 and $36,310,000, respectively, primarily relating to tax benefits
of foreign net operating loss carryforwards which are not expected to be
realized. The decrease in the valuation allowance in 1998 is primarily related
to the expiration of foreign net operating loss carryforwards. No deferred tax
asset has been established for the losses associated with the MAC Assets,
inasmuch as such losses will not be available to Ziff-Davis Inc.

At December 31, 1998, Ziff-Davis Inc. had U.S. and foreign net operating loss
carryforwards of approximately $195,943,000 which began to expire in 1998.
Ziff-Davis Inc.'s utilization of certain net operating loss carryforwards, of
approximately $122,549,000, is subject to limitations, due to the change of
ownership resulting from the Softbank acquisition of the Holdings stock on
February 29, 1996. Management believes that such limitations will not
significantly affect Ziff-Davis Inc.'s ability to recognize the deferred tax
assets relating to the carryforward. Accordingly, no valuation allowance to
reduce the deferred tax asset relating to the carryforward has been
established. In addition, Ziff-Davis Inc. has alternative minimum tax credit
carryforwards of $385,000 which may be carried forward indefinitely until used.

Undistributed earnings of foreign subsidiaries for which no deferred taxes
have been provided approximate $2,789,000 at December 31, 1998. Any additional
U.S. taxes payable on these foreign earnings, if remitted, would be
substantially offset by credits for foreign taxes already paid.

38
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

11. Notes Payable

A summary of Ziff-Davis Inc.'s notes payable at December 31, 1997 and 1998 is
as follows:

<TABLE>
<CAPTION>
1997 1998
---------- ----------
(dollars in
thousands)
<S> <C> <C>
Notes payable to
affiliates (Note 12)...... $2,534,030 $77,884
---------- ----------
8 1/2% Senior Subordinated
Notes(1).................. -- 249,130
Credit Facility
Revolving credit........ -- 270,000
Term Loan A............. -- 450,000
Term Loan B............. -- 500,000
---------- ----------
Third party notes
payable.................. -- 1,469,130
---------- ----------
Total notes payable....... 2,534,030 1,547,014
Less current portion notes
payable to affiliates.... (125,790) (7,692)
---------- ----------
$2,408,240 $1,539,322
========== ==========
</TABLE>
- --------
(1) Net of unamortized discount of $870.

8 1/2% senior subordinated notes

On May 4, 1998 Ziff-Davis Inc. issued 8 1/2% Senior Subordinated Notes due
2008 (the "Notes") in the aggregate principal amount of $250,000,000. The Notes
were issued at a discount of $915,000 which is being amortized to interest
expense over the term of the Notes. Included in the balance sheet at December
31, 1998 as a reduction of long-term debt is $870,000 representing the
unamortized discount on the Notes. Interest on the Notes is payable semi-
annually on May 1 and November 1 of each year. Redemption of the Notes by Ziff-
Davis Inc. is subject to certain limitations. The Notes are subordinated to all
existing and future senior indebtedness.

Credit facility

Ziff-Davis Inc. is party to a secured guaranteed credit agreement with The
Bank of New York, Morgan Stanley Senior Funding, DLJ Capital Funding and The
Chase Manhattan Bank, as agents, to provide a $1,350,000,000 term credit
facility. The amount outstanding under this facility at December 31, 1998 was
$1,220,000,000. The credit facility consists of (1) a seven-year $400,000,000
reducing revolving credit facility, with $270,000,000 drawn as of December 31,
1998, (2) a seven-year $450,000,000 term loan ("Term Loan A") and (3) an eight-
year $500,000,000 term loan ("Term Loan B"). Under the credit facility, Ziff-
Davis Inc. paid interest at rates ranging from LIBOR plus 1.5% to LIBOR plus
1.75%. See "--Amendment to credit facility" below.

39
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

There are various customary conditions to draw-downs under the revolving
commitments. The revolving credit commitments will be reduced and the $450
million Term Loan A will be amortized, beginning in September 2000, by:

. 10% in 2000, in two equal quarterly installments,

. 20% in each of 2001, 2002, 2003 and 2004 in four equal quarterly
installments and

. 10% at final maturity in March 2005.

The $500 million Term Loan B will be amortized, beginning in September 2000,
by:

. $2 million in 2000, in two equal quarterly installments,

. $4 million in each of 2001, 2002, 2003, 2004 and 2005 in four equal
quarterly installments and

. $478 million at final maturity in March 2006.

The Notes and the credit facility are secured, in part, by a first priority
security interest in capital stock of certain subsidiaries of Ziff-Davis Inc.
and are guaranteed by certain wholly owned domestic subsidiaries of Ziff-Davis
Inc., in each case, including ZD Inc. and ZD Events.

Under its most restrictive covenant, Ziff-Davis Inc. could have borrowed an
additional $28,800,000 under the credit facility at December 31, 1998.

Covenants

The Notes and the credit facility contain certain customary affirmative and
negative covenants, including covenants with respect to limitations on
dispositions of assets, changes of business and ownership, mergers or
acquisitions, restricted payments, indebtedness, loans and investments and
transactions with affiliates. The Notes and the credit facility also contain
certain financial covenants including levels of debt to EBITDA and EBITDA to
interest ratios.

The failure to satisfy any of the covenants would constitute an event of
default under the credit facility. The credit facility also includes other
customary events of default, including, without limitation, nonpayment,
misrepresentation in a material respect, cross-default to other indebtedness,
bankruptcy, ERISA, judgments and change of control. At December 31, 1998,
management believes that Ziff-Davis Inc. was in compliance with all covenants
under its debt agreements.

Amendment to credit facility

40
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

rates on amounts borrowed under the facility to rates currently ranging from
LIBOR plus 2.875% to LIBOR plus 3.375%, depending on the type of loan. The fee
has been capitalized and will be amortized to interest expense over the
remaining term of the facility.

Related-party debt

In March 1995, Ziff-Davis Inc. entered into a $100,000,000 note payable to
Softbank due in quarterly installments, maturing on February 28, 2010 and
bearing interest at 9.9% per annum. (See Note 12.)

Scheduled principal repayments

Scheduled principal payments due on long-term debt at December 31, 1998 are
as follows:

<TABLE>
<CAPTION>
(dollars in
thousands)
-----------
<S> <C>
1999............................................................... $ 7,692
2000............................................................... 53,923
2001............................................................... 100,923
2002............................................................... 100,923
2003............................................................... 100,923
Thereafter......................................................... 1,183,500
----------
Total.............................................................. $1,547,884
Less unamortized discount.......................................... (870)
----------
Notes payable, net................................................. $1,547,014
==========
</TABLE>

Interest rate swaps

On June 10, 1998 Ziff-Davis Inc entered into interest rate swap agreements,
with an aggregate notional amount of $550,000,000. Under these swap agreements,
which took effect on August 10, 1998, Ziff-Davis Inc. receives a floating rate
of interest based on three-month LIBOR, which resets quarterly, and Ziff-Davis
Inc. pays a fixed rate of interest, each quarter, for the terms of the
respective agreements. The terms of these agreements range from 3 to 7 years
and the weighted average fixed rate Ziff-Davis Inc. pays is 5.85%. Ziff-Davis
Inc. has entered into these agreements solely to hedge its interest rate risk
under its floating rate bank debt.

For the year ended December 31, 1998, these interest rate swaps did not have
a material impact on the financial statements.

12. Related Party Transactions

Ziff-Davis Inc. is a member of a group of companies affiliated through common
ownership with Softbank and has various transactions and relationships with
members of the group. Due to these

41
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

relationships, it is possible that the terms of those transactions are not the
same as those that would result from transactions among unrelated parties.

Receivables/payables

Due from affiliates consist of the following:

<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
-------- -------
(dollars in
thousands)
<S> <C> <C>
Due from:
MAC .................................................... $ 42,687 $50,704
Softbank................................................ 84,365 1,557
Other affiliates........................................ 4,238 1,723
-------- -------
$131,290 $53,984
======== =======
</TABLE>

Due to affiliates and management consist of the following:

<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
-------- -------
(dollars in
thousands)
<S> <C> <C>
Due to:
Management (including long-term portion)............... $ -- $ 9,900
MAC ................................................... 270,000 --
Softbank............................................... 126,371 --
Other affiliates....................................... 1,961 118
-------- -------
$398,332 $10,018
======== =======
</TABLE>

As part of the 1996 acquisition of ZDI, Ziff-Davis Inc. agreed to assume
certain obligations to management arising out of prior employment arrangements
with previous owners. In January 1997, Ziff-Davis Inc. paid all amounts due,
including accrued interest, through the payment date.

Prior to the Reorganization and initial public offering, Ziff-Davis Inc. was
a member of Softbank's central cash management system. Under this system, Ziff-
Davis Inc. would periodically transfer excess cash to Softbank for cash
management purposes and in turn receive cash advances from Softbank to fund
Ziff-Davis Inc.'s short-term working capital requirements. Interest was accrued
based on the net balance outstanding at the end of each month. Interest income
was earned at the 30-day LIBOR rate for the applicable month. Interest expense
was incurred at the 30-day LIBOR rate plus 0.5%.

As a result of contingent purchase price adjustments related to its
acquisition of Inter@ctive Enterprises, Ziff-Davis Inc. is obligated to pay the
prior owners of Inter@ctive Week $10,850,000 which was recorded as an increase
to intangible assets. The purchase price payments of $950,000, $4,500,000 and
$5,400,000 are due in 1998, 1999 and 2000, respectively. The 1999 and 2000
payments have been classified as current and long-term due to management.

42
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)

Other affiliated arrangements

During the years ended December 31, 1996, 1997 and 1998, Ziff-Davis Inc.
incurred $2,000,000, $1,631,000 and $270,000, respectively, in advertising
expense with Yahoo!, Inc. ("Yahoo!"), an affiliated company.

Ziff-Davis Inc. sells advertising space and exhibition services to Kingston.
During the years ended December 31, 1996, 1997 and 1998, Ziff-Davis Inc.
recorded revenue of $882,000, $2,667,000 and $3,070,000, respectively, from
sales to Kingston. These services were provided under terms consistent with
those provided to unaffiliated customers.

In addition, on May 4, 1998 Ziff-Davis Inc. purchased $9,107,000 of fixed
assets from Kingston in exchange for cash and common stock of Ziff-Davis Inc.
Such fixed assets were subsequently leased back to Kingston. Rental income
included as a reduction of selling, general and administrative expenses related
to this transaction was $2,400,000 in 1998.

Ziff-Davis Inc. has entered into an agreement to manage certain trade shows
and expositions owned by Softbank, whereby Ziff-Davis Inc. earns management,
royalty and licensing fees. The fees earned for the years ended December 31,
1996, 1997 and 1998 were $3,394,000, $4,057,000 and $1,117,000, respectively.

In 1996 and 1997, Ziff-Davis Inc. had an arrangement with SOFTBANK
Interactive Marketing, an affiliated company, for the provision of interactive
media sales. Ziff-Davis Inc. paid commissions to SOFTBANK Interactive of
$600,000 and $1,800,000 during the years ended December 31, 1996 and 1997,
respectively. The relationship for provision of interactive media sales was
terminated in 1997 and on December 31, 1997, SOFTBANK Interactive was acquired
by an unrelated third party.

Ziff-Davis Inc. has an arrangement with SOFTBANK Services, an affiliated
company, whereby Ziff-Davis Inc. is charged for administrative services
provided plus a management fee. For the years ended December 31, 1996, 1997 and
1998, Ziff-Davis Inc. incurred services fees of $359,000, $1,259,000 and
$810,000, respectively, in relation to this agreement. During 1998, SOFTBANK
Services was sold to an unrelated third party and the arrangement was
terminated.

Ziff-Davis Inc. has entered into certain licensing agreements with Softbank
for the publishing and distribution of Japanese language editions of certain
publications. The fees earned by Ziff-Davis Inc. for the years ended December
31, 1996, 1997 and 1998 were approximately $964,000, $1,818,000 and $709,000,
respectively.

Certain Ziff-Davis Inc. employees have been granted options to purchase
SOFTBANK Corp. common stock (the "Softbank Options"). Further, on January 29,
1999 options to purchase Ziff-Davis Inc. common stock were granted in
connection with the cancellation of certain Softbank Options. (See Note 13.)

43
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

In July 1997, Ziff-Davis Inc. entered into a license and services agreement
to develop ZDTV for MAC Holdings (America) Inc. ("MHA"), a company that is
wholly owned by Mr. Masayoshi Son, who is a director of Ziff-Davis Inc. and
principal stockholder of SOFTBANK Corp. Under this agreement, Ziff-Davis Inc.
agreed to fund ZDTV's operations through unsecured advances and was granted an
option to purchase ZDTV for a price equal to MHA's investment plus 10% per
annum for the period of investment. The cumulative advances, which through
December 31, 1997, totaled $14.4 million net of $10.1 million in repayments,
were repaid concurrently with the Reorganization. Advances in 1998 totaled
$48.6 million and were repaid upon completion of Ziff-Davis Inc.'s acquisition
of ZDTV. (See Notes 2 and 21.)

Ziff-Davis Inc. has entered into operating leases for television production
equipment and has sublet such equipment to ZDTV, an affiliated company. The
terms of the subleases are substantially identical to the terms of the leases
which provide for annual lease payments totaling approximately $1,161,000
through 2003.

Notes payable to affiliates

See Note 2 for a discussion of Ziff-Davis Inc.'s restructuring of its debt
and equity structures through the Reorganization and initial public offering.

Ziff-Davis Inc.'s long-term debt payable to Softbank consists of the
following:

<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
---------- -------
(dollars in
thousands)
<S> <C> <C>
Notes payable to affiliate(1)......................... $1,080,000 $ --
Notes payable to affiliate(2)......................... 900,000 --
Notes payable to affiliate(3)......................... 375,027 --
Note payable to affiliate(4).......................... 94,231 77,884
Note payable to affiliate(5).......................... 74,772 --
Note payable to affiliate(6).......................... 10,000 --
---------- -------
Total............................................... 2,534,030 77,884
Less Current portion.................................. (125,790) (7,692)
---------- -------
$2,408,240 $70,192
========== =======
</TABLE>
- --------
(1) Principal and interest payments are due in 53 consecutive quarterly
installments on the last business day of each calendar quarter beginning
March 31, 1998 through March 31, 2011. Notes bear interest at a rate of
7.8% per annum.
(2) Notes mature on December 31, 2001 and bear an interest rate of 6.5% per
annum, payable on the last business day of each quarter beginning March 31,
1997.
(3) Notes mature on February 28, 2010 and bear interest at a rate of 8.0% per
annum.
(4) Note matures on February 28, 2010 and bears interest at 9.9% per annum.
(5) Note is payable in 52 equal quarterly installments commencing March 31,
1997 and bears interest at a rate of 8.0% per annum.
(6) Note is payable on January 1, 2007 and bears interest at a rate of 8.0% per
annum.

44
<PAGE>

ZIFF-DAVIS INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)

During 1996, 1997 and 1998, Ziff-Davis Inc. incurred $120,646,000,
$190,445,000 and $65,935,000, respectively, of interest expense due to Softbank
related to the above notes payable.

Guarantee of Softbank's U.S. debt

In April 1996, Softbank signed a line of credit agreement totaling
$50,000,000 with an independent lender for which Ziff-Davis Inc., along with
certain other SOFTBANK Corp. affiliates, is a guarantor. In January 1997,
October 1997 and March 1998, this line of credit was increased to $75,000,000,
$150,000,000 and $450,000,000, respectively. On May 4, 1998, Ziff-Davis Inc.
was released from this guarantee.

Return of capital and dividends

On December 15, 1996, Ziff-Davis Inc. declared a return of capital of
approximately $900,000,000 paid through the issuance of a note payable to a
subsidiary of Softbank and a cash dividend of $8,000,000 to Softbank. In 1997,
Ziff-Davis Inc. recorded a return of capital of $381,434,000 in connection with
the purchase price of companies under common control.

13. Stock Compensation Plans

Softbank Executive Stock Option Plans

The SOFTBANK Executive Stock Option Plans provide for the granting of
nonqualified stock options (the "Softbank Options") to purchase the common
stock of SOFTBANK Corp. to officers, directors and key employees of Ziff-Davis
Inc. SOFTBANK Corp. is a publicly traded company in Japan. Under the plans,
options have been granted at exercise prices equal to the closing market price
in Japan's public equities market (market price denominated in Japanese yen) on
the date of grant. As of December 31, 1998, substantially all options granted
become exercisable in various installments over the first six anniversaries of
the date of grant and expire ten years after the date of grant. On January 19,
1998, the exercise price of all of the shares outstanding under option
agreements was reset to (Yen)4,000, the closing market price on Japan's Tokyo
Stock Exchange First Section at that date. In conjunction with the repricing,
those options previously exercisable on December 31, 1997 could only be
exercised after July 19, 1998. The repricing did not result in compensation
expense to Ziff-Davis Inc.

1998 Incentive Compensation Plan and the 1998 Non-Employee Directors' Stock
Option Plan

45
<PAGE>

ZIFF-DAVIS INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)

to non-employee directors. Ziff-Davis Inc. has reserved 8,500,000 shares of
common stock for issuance under the Incentive Plan and 200,000 shares of common
stock for issuance under the Non-Employee Directors' Plan. During 1998, Ziff-
Davis Inc. granted options to purchase 6,757,495 shares with exercise prices
ranging from $6.00 to $16.00 per share representing the fair value of such
options at that date. Such options vest ratably over five years.

On September 23, 1998, the Board approved the reduction of the exercise price
of all options outstanding under the Incentive Plan from $16.00 to $6.00, the
closing market price of Ziff-Davis Inc.'s common stock on that date. In
addition, the vesting period of the options was extended by three months. The
repricing did not result in compensation expense to Ziff-Davis Inc.

On December 21, 1998 the Board approved an amendment to the Incentive Plan to
permit grants of options and other stock-based awards with respect to any
series of common stock of Ziff-Davis Inc. and to increase the number of shares
available for issuance from 8,500,000 shares to 17,827,500 shares.

In addition, on December 21, 1998, the Board approved the grant of options to
acquire an aggregate of approximately 5,729,000 shares of ZDNet Stock to
certain employees at a price of $7.50 per share. As a result of the grant Ziff-
Davis Inc. has recorded deferred compensation expense of $18,262,000 for the
difference between the exercise price and the deemed fair value of the
underlying shares. This amount has been recorded as a component of
stockholders' equity offset by an addition to paid-in capital. Ziff-Davis Inc.
expects to recognize non-cash compensation for accounting purposes of
$18,262,000 ratably over the vesting period of the options. These options are
currently scheduled to vest and become exercisable on the fifth anniversary of
the date of grant.

The terms of the options described in the preceding paragraph require an
adjustment in the number of shares of ZDNet Stock that holders may purchase and
the per share purchase price thereof if the initial number of shares issuable
with respect to ZD's Retained Interest in ZDNet is different from 40,000,000.
This adjustment is similar to the adjustment that would generally be made to
the terms of employee stock options in the event of a stock split. Ziff-Davis
Inc. currently expects that the initial Number of Shares Issuable with Respect
to ZD's Retained Interest in ZDNet will be 70,000,000. Assuming that this is
so, the total number of shares of ZDNet Stock that holders may purchase upon
exercise of these options will increase to approximately 10,026,000 and the per
share purchase price thereof will decrease to approximately $4.29.

The December 21, 1998 Board actions described above are subject to
stockholder approval. The majority owner of the common stock of Ziff-Davis Inc.
has committed to approve these actions.

46
<PAGE>

ZIFF-DAVIS INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

stock issuable upon such exercise to be supplied to Ziff-Davis Inc. and (2)
Ziff-Davis Inc. will deliver to that affiliate or its designee the exercise
price paid upon such exercise. Thus, the exercise of these options will not
increase the number of shares of Ziff-Davis Inc. common stock outstanding or
Ziff-Davis Inc.'s stockholders' equity. However, Ziff-Davis Inc. expects to
recognize compensation expense for accounting purposes of approximately
$3,018,000 over three years as a result of these grants. As such, this amount
has been recorded in the Financial Statements as additional paid in capital
offset by a reduction to stockholders' equity as deferred compensation.

GameSpot Inc. 1997 Stock Option Plan

Ziff-Davis Inc. adopted the GameSpot Inc. 1997 Stock Option Plan (the
"GameSpot Plan") to provide long-term incentives for key employees of GameSpot
and to enhance stockholder value. The GameSpot Plan provides for the grant of
options to purchase shares of GameSpot Inc.'s common stock. GameSpot has
reserved 800,000 shares of GameSpot Inc.'s common stock for issuance under the
GameSpot Plan. Such options vest ratably over 3 years.

Option grants

Information relating to the Softbank options during 1996, 1997 and 1998 is as
follows:

<TABLE>
<CAPTION>
Weighted Average
Number Option Price
of Shares Per Share(1)
--------- ----------------
<S> <C> <C>
Shares outstanding under options at
December 31, 1995....................... -- --
Granted.................................. 739,493 (2) $87.15
Exercised................................ -- --
Forfeited................................ (12,740)(2) 87.15
--------
Shares outstanding under options at
December 31, 1996....................... 726,753 87.15
Granted.................................. 386,363 61.40
Exercised................................ -- --
Forfeited................................ (146,130) 78.88
--------
Shares outstanding under options at
December 31, 1997....................... 966,986 $78.11
Granted.................................. 258,215 31.03
Exercised................................ (75,982) 31.03
Converted to Ziff-Davis Inc. options..... (83,578) 31.03
Forfeited/cancelled...................... (309,936) 31.03
--------
Shares outstanding under options at
December 31, 1998....................... 755,705 $31.03
========
Shares exercisable as of:
At December 31, 1996..................... -- --
At December 31, 1997 (price range $44.26-
$87.15)................................. 107,630 $82.06
At December 31, 1998 (price of $31.03)... 255,060 $31.03
</TABLE>
- --------
(1) The exercise price of the stock options is set in Japanese yen. The
exercise prices as shown above have been converted to U.S. dollars based
upon the exchange rate as of the date of grant for the respective options.
The 1998 activity reflects the repricing of all options outstanding as of
January 19, 1998 to (Yen)4,000.
(2) Adjusted for a 1.4:1 stock split during 1996 and a 1.3:1 stock split during
1997.

47
<PAGE>

ZIFF-DAVIS INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Information relating to Ziff-Davis Inc. stock options issued during 1998 is
as follows:

<TABLE>
<CAPTION>
Weighted Average
Number of Option Price
Shares Per Share
--------- ----------------
<S> <C> <C>
Shares outstanding under options at
December 31, 1997......................... -- --
Granted.................................... 6,757,495 $6.09
Exercised.................................. --
Converted from Softbank options............ 327,400 8.89
Forfeited.................................. (393,590) 6.00
---------
Shares outstanding under options at
December 31, 1998......................... 6,691,305 $6.22
=========
</TABLE>

Information relating to ZDNet stock options issued during 1998 is as follows:

<TABLE>
<CAPTION>
Weighted Average
Number of Opinion Price
Shares* Per Share*
--------- ----------------
<S> <C> <C>
Shares outstanding under options at December
31, 1997................................... -- --
Granted..................................... 5,729,300 $7.50
Exercised................................... -- --
Forfeited................................... -- --
---------
Shares outstanding under options at December
31, 1998................................... 5,729,300 $7.50
=========
</TABLE>
- --------
* The number of shares and price per share will be adjusted if the Initial
Number of Shares Issuable with Respect to ZD's Retained Interest in ZDNet is
different from 40,000,000.

At December 31 1998, no shares of either the Ziff-Davis Inc. or ZDNet options
were exercisable.

Information relating to GameSpot, Inc. stock options is as follows:

<TABLE>
<CAPTION>
Weighted Average
Number of Option price
Shares Per share
--------- ----------------
<S> <C> <C>
Shares outstanding under options at
December 31, 1996......................... -- --
Granted.................................... 780,000 $0.44
Exercised.................................. -- --
Forfeited.................................. (61,000) 0.44
--------
Shares outstanding under options at
December 31, 1997......................... 719,000 $0.44
Granted.................................... -- --
Exercised.................................. -- --
Forfeited.................................. (167,000) $0.44
--------
Shares outstanding under options at
December 31, 1998......................... 552,000 $0.44
========
Shares exercisable as of:
December 31, 1997 (price range of $0.44)... 400,610 $0.44
========
December 31, 1998 (price range of $0.44)... 497,639 $0.44
========
</TABLE>

48
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

As permitted by SFAS No. 123, Ziff-Davis Inc. has chosen to continue to
account for stock options in accordance with the provisions of APB 25 and,
accordingly, no compensation expense related to stock option grants was
recorded in 1996, 1997 or 1998. Pro forma information regarding net income is
required by SFAS No. 123 and has been determined as if Ziff-Davis Inc. had
accounted for stock options under the fair value method. The fair value of the
option grants was estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions for 1996, 1997 and 1998:

Softbank options
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate......................... 5.89% 6.35% 5.46%
Dividend yield.................................. 0.26% 0.22% 1.50%
Volatility factor............................... 54.03% 51.35% 77.72%
Expected life................................... 6 years 6 years 6 years

Ziff-Davis Inc. options
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate......................... n/a n/a 5.03%
Dividend yield.................................. n/a n/a 0.00%
Volatility factor............................... n/a n/a 54.70%
Expected life................................... n/a n/a 6 years

ZDNet options
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate......................... n/a n/a 4.67%
Dividend yield.................................. n/a n/a 0.00%
Volatility factor............................... n/a n/a 54.70%
Expected life................................... n/a n/a 6 years

GameSpot Inc. options
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate......................... n/a 6.35% 6.44%
Dividend yield.................................. n/a 0.00% 0.00%
Volatility factor............................... n/a 100.27% 100.27%
Expected life................................... n/a 4 years 4 years

The weighted average fair value of options granted in 1996, 1997 and 1998, is
as follows:

<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Softbank options................................ $ 64.30 $ 34.05 $ 19.81
Ziff-Davis Inc. options......................... n/a n/a 5.21
ZDNet options................................... n/a n/a 4.25
GameSpot Inc. options........................... n/a 0.32 0.32
</TABLE>

49
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had
compensation cost for the stock option plans been determined based upon the
fair value at the grant date for awards during 1996, 1997 and 1998 consistent
with the provisions of SFAS No. 123, Ziff-Davis Inc.'s net loss would have been
increased by approximately $3,100,000, $4,200,000 and $15,130,000,
respectively.

Other stock compensation plans

During 1996, 1997 and 1998, Ziff-Davis Inc. granted 45,760, 61,940 and 27,223
shares of common stock of SOFTBANK Corp. respectively (adjusted for a 1.4:1
stock split during 1996 and a 1.3:1 stock split during 1997) to certain key
employees, subject to restrictions as to continuous employment which expire
over a 3 to 5-year period from the date of grant. The granting of the shares to
Ziff-Davis Inc.'s employees has been recorded as additional paid-in capital
offset by a reduction to stockholders' equity as deferred compensation. Such
amounts were recorded at the fair value, as established by market price of the
shares on the date of grant. The unearned compensation is being amortized
ratably over the restricted periods. During 1996, restrictions on 13,790 shares
expired, 2,160 shares were forfeited and $1,080,000 was charged to expense
related to the restricted stock awards. During 1997, restrictions on 75,210
shares expired, 2,150 shares were forfeited and $3,916,000 was charged to
expense related to these restricted stock awards. During 1998, restrictions on
22,361 shares expired, 5,736 shares were forfeited and $252,000 was charged to
expense related to these restricted stock awards.

Employee Stock Purchase Plan

In 1998, Ziff-Davis Inc. adopted the Employee Stock Purchase Plan (the "Stock
Purchase Plan") whereby eligible employees may purchase Ziff-Davis Inc.'s
common stock with after-tax payroll deductions of 1% to 10% of their base pay.
The price at which shares of common stock will be purchased is the lesser of
85% of the fair market value of a share of common stock on (1) the first
business day of a purchase period or (2) the last business day of a purchase
period. Ziff-Davis Inc. has reserved 1,500,000 shares of common stock for
issuance under the Stock Purchase Plan.

On December 21, 1998 the Board approved an amendment to the Employee Stock
Purchase Plan, subject to stockholder approval, to permit grants of options
with respect to any series of common stock of Ziff-Davis Inc. and increase the
number of shares available for sale to participants from 1,500,000 shares to
2,500,000 shares.

14. Employee Benefit Plans

Pension plan

Certain employees of Ziff-Davis Inc. who have met eligibility requirements
were covered by a noncontributory defined benefit pension plan. The benefits
are based on years of service and average

50
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)

compensation at the time of retirement. Ziff-Davis Inc.'s funding policy is to
contribute amounts sufficient to meet the minimum funding requirements as set
forth in the Employee Retirement Income Security Act of 1974 ("ERISA").
Contributions to the plan are determined in accordance with the projected unit
credit cost method. Plan assets consist of U.S. equity securities, high grade
corporate bonds and commercial paper, and U.S. treasury notes.

During 1997, Ziff-Davis Inc. decided to terminate the defined benefit pension
plan and pursuant to this decision, all accrued benefits became fully vested as
of August 31, 1997. The amounts below reflect the effects of such termination.
All accrued obligations were settled during 1998 and a gain of $156,000 was
recognized in 1998 as a result of the plan settlement.

The weighted average assumed discount rate of 7% and rate of increase in
future compensation levels of 6% was used in the determination of the actuarial
present value of the projected benefit obligation at December 31, 1996 and
1997. The weighted average expected long-term rate of return on plan assets at
December 31, 1996 and 1997 was 7%.

Net periodic pension cost includes the following components:

<TABLE>
<CAPTION>
1996 1997 1998
------ ----- -----
(dollars in thousands)
<S> <C> <C> <C>
Service cost......................................... $ 700 $ 391 $ --
Interest cost........................................ 472 456 --
Expected return on plan assets....................... (300) (445) --
Amortization of transition obligation................ 199 75 --
------ ----- -----
Net periodic pension cost............................ $1,071 $ 477 $ --
====== ===== =====
</TABLE>

The following table sets forth the funded status and amounts recognized in
the balance sheet:

<TABLE>
<CAPTION>
1997 1998
------ ----
(dollars in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.................................. $5,721 $--
------ ----
Accumulated benefit obligations............................ 5,721 --
====== ====
Projected benefit obligations................................ 5,721 --
Plan assets at fair value.................................... (6,004) --
------ ----
Projected benefit obligation less than plan assets........... (283) --
Unrecognized net transition asset............................ 1,279 --
------ ----
Pension liability included in balance sheet.................. $ 996 $--
====== ====
</TABLE>

Retirement plans

Ziff-Davis Inc. maintains various defined contribution retirement plans.
Substantially all of Ziff-Davis Inc.'s employees are eligible to participate in
one of the plans under which annual

51
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

contributions may be made by Ziff-Davis Inc. for the benefit of all eligible
employees. In certain cases, employees may also make contributions to the plan
in which they participate which, and subject to certain limitations, may be
matched by Ziff-Davis Inc. up to certain specified percentages. Employees are
generally eligible to participate in a plan upon joining Ziff-Davis Inc. and
receive matching contributions after one year of employment. Ziff-Davis Inc.
made contributions to the plans totaling $10,470,000, $13,725,000 and
$13,004,000 in 1996, 1997 and 1998, respectively.

15. Investments

Ziff-Davis Inc. has investments in the following companies/joint ventures:

<TABLE>
<CAPTION>
Carrying value
at December 31,
Ownership ---------------
Equity investments Percentage 1997 1998
------------------ ---------- ------- -------
(dollars in
thousands)
<S> <C> <C> <C>
MAC Publishing LLC............................. 50% $16,244 $19,268
ExpoComm LLC................................... 50 7,758 8,571
Family PC G.P.................................. 50 9,342 --
<CAPTION>
Cost Investments
----------------
<S> <C> <C> <C>
Red Herring Communications, Inc. .............. -- $ 5,000
Deja News, Inc. ............................... -- 5,000
</TABLE>

The entities listed above are engaged primarily in the publication or
distribution of print media and the organization, production and management of
trade shows and providing interactive information and programming to
technology-oriented Internet users. Other investments and joint ventures are
not material to Ziff-Davis Inc.'s financial statements.

Ziff-Davis Inc.'s equity income (loss) was $(796,000), $335,000 and
$7,483,000 in 1996, 1997 and 1998, respectively.

16. Supplemental Cash Flow Information

<TABLE>
<CAPTION>
1996 1997 1998
---------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Cash paid during the year for:
Interest.................................. $ 99,509 $185,447 $129,976
Income taxes.............................. 360 4 1,000
Noncash investing and financing activities:
Fair value of assets acquired............. $2,508,603 $ 20,749 $ 60,473
Liabilities assumed....................... 370,518 6,749 32,701
---------- -------- --------
Cash paid................................. 2,138,085 14,000 27,772
Less--cash acquired....................... 13,262 -- --
---------- -------- --------
Net cash paid for investments and
acquisitions............................. $2,124,823 $ 14,000 $ 27,772
========== ======== ========
Return of capital dividends............... $ 899,948 $381,434 $ --
========== ======== ========
Capital contributions..................... $ 5,002 $ 61,580 $926,096
========== ======== ========
</TABLE>

52
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

17. Operating Lease Commitments

Ziff-Davis Inc. is obligated under various operating leases which expire at
various dates through 2021. Future minimum rental commitments under
noncancelable operating leases are as follows:

<TABLE>
<CAPTION>
(dollars in
thousands)
<S> <C>
1999.......................................................... $ 32,740
2000.......................................................... 34,094
2001.......................................................... 31,882
2002.......................................................... 29,957
2003.......................................................... 28,655
Thereafter.................................................... 232,974
--------
Total....................................................... $390,302
========
</TABLE>

Netted in the above totals is approximately $5,000,000 for which Ziff-Davis
Inc. has noncancelable subleases in place. Total sublease income approximates
Ziff-Davis Inc.'s required payments under the related leases. Rent expense
amounted to approximately $23,015,000, $29,994,000 and $24,695,000 for the
years ended December 31, 1996, 1997 and 1998, respectively.

18. Contingencies

Ziff-Davis Inc. is subject to various claims and legal proceedings arising in
the normal course of business.

Class action and derivative litigations

Following a decline in the price per share of Ziff-Davis Inc.'s common stock
in October 1998, eight securities class action suits were filed against Ziff-
Davis Inc. and certain of its directors and officers in the United States
District Court for the Southern District of New York.

The complaints allege that defendants violated Sections 11, 12(a) (2) and 15
of the Securities Act of 1933 in connection with the registration statement
filed by Ziff-Davis Inc. with the Securities and Exchange Commission relating
to the initial public offering of Ziff-Davis Inc.'s stock on April 29, 1998
(the "IPO"). More particularly, the complaints allege that the registration
statement contained false and misleading statements and failed to disclose
facts that could have indicated an impending decline in Ziff-Davis Inc.'s
revenue. The complaints seek on behalf of a class of purchasers of Ziff-Davis
Inc.'s common stock from the date of the IPO through October 8, 1998
unspecified damages, interest, fees and costs, rescission, and injunctive
relief such as the imposition of a constructive trust upon the proceeds of the
IPO.

On January 28, 1999, the court entered an order consolidating the actions,
appointing lead plaintiff's counsel and requiring the filing of a consolidated
amended complaint within 45 days. Thereafter, Ziff-Davis Inc. will have 45 days
to respond to the consolidated amended complaint.

53
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

In addition, two derivative suits have been filed by stockholders against
Ziff-Davis Inc. and all of its directors in the Court of Chancery of the State
of Delaware for New Castle County. The complaints allege that the directors
breached their fiduciary duties to Ziff-Davis Inc. by repricing the stock
options awarded to certain directors and demand the nullification of the
repricing and an injunction against exercise by the directors of any repriced
option. Plaintiffs filed an amended complaint on February 17, 1999 (which is
substantially similar to the original complaints, except that the amended
complaint also addresses the granting of "new options" at an allegedly "reduced
exercise price") and have indicated their intent to seek consolidation of the
actions. A response to the amended complaint has not yet been filed.

Other legal proceedings

Ziff-Davis Inc. was named as a defendant in an action, filed on April 17,
1998 in the Supreme Court of the State of New York, by minority stockholders of
SOFTBANK Interactive Marketing Inc. ("SIM"), formerly an indirect subsidiary of
SOFTBANK Corp. The complaint alleges, among other things, that SBH, SIM's
majority stockholder, acting with Ziff-Davis Inc. and two of its senior
officers and directors who were directors of SIM (and who were also named as
defendants), had conflicts of interest between SIM and other Softbank
investments (including investments in Ziff-Davis Inc.) and failed to act in the
best interests of SIM and the minority stockholders by taking actions which
benefited Ziff-Davis Inc. The complaint states claims based on common law
fraud, breach of fiduciary duty and aiding and abetting theories and seeks in
excess of $200,000,000 in damages. Ziff-Davis Inc. and the other defendants
have moved to dismiss all of the claims against them other than a breach of
contract claim which is solely against SBH, and the motion was granted, with
the result that all of the claims against Ziff-Davis Inc. and its officers were
dismissed, and most of the claims against SBH were dismissed, leaving only a
claim against SBH concerning the alleged failure of SBH to give plaintiffs
adequate notice of the sale of its stock to SIM.

Although the outcome of these cases cannot be predicted, Ziff-Davis Inc.
believes that there are substantial defenses to the claims. Ziff-Davis Inc.
currently cannot estimate its ultimate liability, if any, with respect to such
pending litigations. Accordingly, no provision for such matters has been
included in the financial statements.

19. Segment Information

Ziff-Davis Inc. has adopted the provisions of SFAS No. 131 Disclosures about
Segments of an Enterprise and Related Information. As such, prior years data
has been restated in accordance with SFAS No. 131.

Business segment information

Ziff-Davis Inc.'s reportable segments are based on its method of internal
reporting, which segregates its business by product lines. Management measures
operating performance of the

54
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

business segments based on "EBITDA". EBITDA is defined as income before
provision for income taxes, interest expense, depreciation and amortization and
restructuring charges. EBITDA is not intended to represent cash flows from
operations and should not be considered as an alternative to net income as an
indicator of Ziff-Davis Inc.'s operating performance or to cash flows as a
measure of liquidity. Although Ziff-Davis Inc. believes that EBITDA is a
standard measure commonly reported and widely used by analysts, investors and
other interested parties in the publishing business and media industries, the
EBITDA presented for Ziff-Davis Inc. may not be comparable to similarly titled
measures reported by other companies.

Ziff-Davis Inc.'s reportable segments are:

Publishing

The publishing segment is engaged in publishing magazines, journals,
newsletters, online content, training manuals and providing market research
about the computer industry. The publishing segment's principal operations are
in the United States and Europe, although it also licenses or syndicates its
editorial content to over 50 other publications distributed worldwide.

Events

The events segment is engaged in the organization, production and management
of trade shows, conferences and seminars for the computer industry. The events
segment's principal operations are in North America and to a lesser extent in
Europe, Asia and Latin America.

Internet

The Internet segment is engaged in providing technology-related information
to Internet users worldwide. The Internet segment's principal operations are in
the U.S. and to a lesser extent Europe.

55
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

The accounting policies of the segments are the same as those described in
Note 3 under "Summary of Significant Accounting Policies". Ziff-Davis Inc.
evaluates the performance of its segments and allocates resources to them based
on EBITDA. Any inter-segment revenue included in segment data are not material.
The following presents information about the reported segments for the years
ending December 31:

<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Revenue:
Publishing............................ $ 674,040 $ 834,015 $ 782,882
Events................................ 264,884 287,528 269,867
Internet.............................. 16,215 32,218 56,143
---------- ---------- ----------
Total............................... $ 955,139 $1,153,761 $1,108,892
========== ========== ==========
<CAPTION>
1996 1997 1998
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
EBITDA:
Publishing............................ $ 136,395 $ 183,545 $ 125,320*
Events................................ 108,791 103,749 119,698
Internet.............................. (11,928) (14,400) (924)
---------- ---------- ----------
Total............................... $ 233,258 $ 272,894 $ 244,094
========== ========== ==========
- --------
* Before restructuring charge of $52,239,000.

<CAPTION>
1996 1997 1998
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Total Assets:
Publishing............................ $2,358,144 $2,335,034 $2,192,099
Events................................ 1,143,522 1,124,286 1,144,018
Internet.............................. 82,507 87,326 97,686
---------- ---------- ----------
Total............................... $3,584,173 $3,546,646 $3,433,803
========== ========== ==========

A reconciliation of total segment EBITDA to total consolidated loss before
income taxes, for the years ended December 31, 1996, 1997 and 1998 is as
follows:

<CAPTION>
1996 1997 1998
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
EBITDA:
Total segment EBITDA.................. $ 233,258 $ 272,894 $22244,094
Restructuring charge.................. -- -- (52,239)
Depreciation & amortization........... (32,303) (30,379) (29,885)
Amortization of intangible assets..... (107,433) (124,561) (122,659)
Interest expense, net................. (120,646) (190,445) (143,547)
---------- ---------- ----------
Consolidated loss before taxes...... $ (27,124) $ (72,491) $ (104,236)
========== ========== ==========
</TABLE>

56
<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Equity in income of investees included in the publishing segment EBITDA for
the years ended December 31, 1996, 1997 and 1998 was $(796,000), $335,000 and
$2,044,000, respectively. Equity in net income of investees included in the
events segment EBITDA for the years ended December 31, 1996, 1997 and 1998 was
$ -- , $1,695,000 and $5,439,000, respectively.

Publishing's investment in equity method investees for the years ended
December 31, 1996, 1997 and 1998 was $10,138,00, $25,586,000 and $19,268,000,
respectively. Events' investment in equity method investees for the years ended
December 31, 1996, 1997 and 1998 was $7,698,000, $7,758,000 and $8,571,000,
respectively.

During the years ended December 31, 1996, 1997 and 1998, publishing spent
$2,123,651,000, $19,026,000 and $42,324,000, respectively, for additions to
long-lived assets. Events spent $22,527,000, $19,798,000 and $12,565,000 for
additions to long-lived assets during the years ended December 31, 1996, 1997
and 1998, respectively. Internet spent $1,010,000, $5,372,000 and $9,483,000
for additions to long-lived assets during the years ended December 31, 1996,
1997 and 1998, respectively.

The following is sales information by geographic area as of and for the
respective years ended December 31.

<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Revenue:
U.S. ..................................... $ 854,666 $1,040,297 $ 990,096
Foreign................................... 100,473 113,464 118,796
---------- ---------- ----------
Total................................... $ 955,139 $1,153,761 $1,108,892
========== ========== ==========

Foreign revenue is based on the country in which the sales originate. Revenue
from no single foreign country was material to the consolidated revenues of ZD.

The following is long-lived asset information by geographic area as of and
for the years ended December 31, 1996, 1997 and 1998:

<CAPTION>
1996 1997 1998
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Long-lived assets:
U.S. ..................................... $3,202,981 $3,090,643 $3,034,002
Foreign................................... 9,538 8,555 13,570
---------- ---------- ----------
Total................................... $3,212,519 $3,099,198 $3,047,572
========== ========== ==========
</TABLE>

No single customer accounted for more than 10% of total revenue for each of
the years ended December 31, 1996, 1997 and 1998.

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<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)

20. Fair Value of Financial Instruments

Ziff-Davis Inc.'s accounting policies with respect to financial instruments
are discussed in Note 3.

The carrying amounts and fair values of Ziff-Davis Inc.'s significant on
balance sheet financial instruments at December 31, 1997 and 1998 are as
follows:

<TABLE>
<CAPTION>
At December 31,
---------------------------------------
1997 1998
------------------- -------------------
Carrying Fair Carrying Fair
Amount Values Amount Values
--------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents............. 30,301 30,301 32,566 32,566
Accounts receivable................... 221,310 221,310 227,325 227,325
Accounts payable...................... 55,468 55,468 74,397 74,397
Long-term debt (including current
portion)............................. 2,534,030 2,534,030 1,547,014 1,543,839
</TABLE>

Interest rate swaps

Ziff-Davis Inc. utilizes interest rate swaps to reduce the impact on interest
expense of fluctuating interest rates on its variable rate debt. Under Ziff-
Davis Inc.'s interest rate swap agreements, Ziff-Davis Inc. agreed with the
counterparties to exchange, at quarterly intervals, the difference between
Ziff-Davis Inc.'s fixed pay rate and the counterparties' variable pay rate on
three-month LIBOR. At December 31, 1998, Ziff-Davis Inc. was a fixed payor of
5.85% on an aggregate notional amount of $550,000,000.

The fair values of these interest rate swaps were estimated by obtaining
quotes from brokers which represented the amounts that Ziff-Davis Inc. would
pay if the agreements were terminated at the balance sheet date. While it is
not Ziff-Davis Inc.'s intention to terminate these interest rate swaps, these
fair values indicated that the termination of the interest rate swap agreements
would have resulted in a loss of $15,627,000.

21. Subsequent Events

ZDTV

On February 4, 1999, Ziff-Davis Inc. purchased ZDTV at a purchase price of
approximately $81,400,000. (See Note 12.) Ziff-Davis Inc. paid approximately
$32,800,000 of the purchase price in cash (settled on February 5, 1999) and
paid the remainder by applying approximately $48,600,000 in advances owed to it
by MAC Holdings America. Ziff-Davis Inc. also agreed to be responsible for the
funding of ZDTV during the period in 1999 prior to the purchase which will be
accounted for as additional purchase price. Other than advances to ZDTV which
are reported on Ziff-Davis Inc.'s balance sheet, the results of operations of
ZDTV are not included in Ziff-Davis Inc.'s results for any of the periods
presented. This acquisition will be accounted for in 1999 under the purchase
method of accounting.

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<PAGE>

ZIFF-DAVIS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)

Vulcan transactions

On February 5, 1999, Vulcan Programming Inc., an entity owned by Paul G.
Allen, purchased a one-third interest in ZDTV for $54,000,000 in cash. On March
4, 1999, Vulcan Ventures, the investment vehicle of Paul G. Allen, purchased
approximately three million shares of Ziff-Davis Inc. common stock for
$50,000,000 in cash.

Unaudited summary pro forma information

The following unaudited summary pro forma information assumes that the
acquisition of ZDTV and the sale of a one-third interest in ZDTV to Vulcan
Programming had been consummated on January 1, 1998. Adjustments for ZDTV
transactions include the operating results of ZDTV, amortization of the
purchase price of ZDTV, Vulcan Programming's one-third interest in the losses
of ZDTV and the tax effects of these items. The pro forma data is not
necessarily indicative of actual results had the transaction occurred on
January 1, 1998. Further, pro forma results are not meant to represent future
financial results.

<TABLE>
<CAPTION>
Adjustments
for
Ziff-Davis acquisition
Inc. of ZDTV Pro Forma
---------- ----------- ----------
(dollars in thousands except
per share amounts)
<S> <C> <C> <C>
Revenue............................... $1,108,892 $ 5,585 $1,114,477
Income (loss) from operations......... 31,080 (55,049) (23,969)
Net loss.............................. (77,809) (22,443) (100,252)
Pro forma basic loss per share........ $ (1.00)
</TABLE>

Incentive Plan

On March 4, 1999, the Board approved an amendment to the Incentive Plan,
subject to stockholder approval, which increased the number of shares available
for issuance under the Incentive Plan to 23,327,500 shares.

59
<PAGE>

DESCRIPTION OF BUSINESS

Ziff-Davis Inc. is a leading media and marketing company that provides
information on computing and technology, including the Internet. ZD is the
division of Ziff-Davis Inc. focused on the businesses of print publishing,
trade shows and conferences, market research, education, including ZDU, our
Internet-based educational service, and television, including an online
component. ZD provides technology companies worldwide with marketing
strategies for reaching key decision-makers.

ZD's PC Magazine, PC Week and Computer Shopper magazines were the top three
computer magazines in the U.S. and are among the top 25 U.S. magazines, each
as measured by total revenue in 1997. In 1998, ZD was the largest technology
publisher in the U.S. in terms of magazine revenue with at least 50% more
magazine revenue than its closest competitor. In 1997, ZD accounted for 36.8%
of all advertising and circulation dollars spent in computer periodicals. ZD
believes its publications provide readers and advertisers with comprehensive
market and product coverage and quality editorial content.

Through ZD Events, ZD also produces some of the world's most important trade
shows serving vendors, resellers, buyers and users of computer technology and
the Internet. In 1998, ZD produced over 50 trade shows and conferences
worldwide with over two million estimated attendees. ZD's COMDEX/Fall event is
the number one ranked trade show for all industries in the U.S. as measured by
total revenue, total exhibit space and number of attendees.

ZD's other media and marketing platforms include market research, education
and publication of computer-related newsletters and training manuals and
television. ZD also currently has a 100% retained interest in ZDNet, Ziff-
Davis Inc.'s online business division, although that interest will decline to
reflect the initial issuance of ZDNet stock as well as any future issuances.

Industry Background

Technology continues to be one of the largest and fastest growing sectors of
the U.S. economy. The market for technology goods and services is rapidly
expanding due to increased integration of computers into the workplace and
home, shortened product life cycles and increased use of the Internet. The
demand for computer technology to enhance productivity and the increasing
number of applications in the areas of education, entertainment and
communications has dramatically increased the number of computers in use
worldwide, from 150 million in 1993 to over 300 million in 1997. This increase
in computer usage has significantly broadened the consumer and business
markets for computer technology. In addition, rapid technological advances
have shortened product life cycles. Today, the estimated marketable product
life of a PC is less than six months as compared to five years in 1981. The
Internet has also become a widely accepted information tool. Forrester
Research Inc. estimates that the number of adult Web users will reach 51
million in the U.S. by the end of 1998 and will grow to 99 million by the end
of 2001.

These factors have led to increased demand among buyers and users of
computer technology product for objective, up-to-date information and
analysis. To meet this demand, sellers of computer

60
<PAGE>

technology products need to effectively advertise to increase sales, educate
consumers, improve end-user satisfaction and build brand loyalty. Computer
technology-focused media enables sellers to communicate their message
effectively by targeting a focused customer base. As a result of a broadening
consumer base containing favorable demographics, computer technology
publications and other media are becoming increasingly attractive as a platform
for consumer product advertising.

Computer Technology Print Publications Market

Advertising and circulation revenue for computer-oriented print publications
grew on average 10% a year from 1994 to 1997, totaling $1.7 billion in 1997.
However, in 1998 computer advertising pages decreased 8% as compared to 1997,
according to Adscope and CMR. Ziff-Davis Inc. believes the decline in the
technology advertising market is due mainly to continuing margin pressure on
computer equipment manufacturers, industry and product delays, lower demand in
Asia and a focus on the Year 2000 transition.

Computer Technology Trade Shows

Trade show attendees are presented with product advertisements in the form of
exhibits and "editorial" content in the form of conferences and other ancillary
forums. Producers of trade shows and conferences generate revenue from exhibit
space sales, advertising and attendance fees. Trade shows and conferences allow
sellers to conduct a large volume of face-to-face sales presentations to
qualified buyers in a short period of time. Professional attendees include
hardware and software manufacturers and developers, sales and distribution
personnel and large volume end-users. Industry leaders such as Microsoft
Corporation and Cisco Systems, Inc. use these events to promote the launch of
important products in order to reach top-ranking decision-makers in the
computer technology industry.

Trade shows are an increasingly important marketing strategy for information
technology vendors and can be an effective medium for generating and closing
sales. In 1998 estimated exhibit space revenue from North American computer-
product trade shows was approximately $686 million, exhibit square footage rose
17% from 1997, the number of exhibiting firms increased 26% from 1997 and
attendance at such shows rose 20% from 1997.

ZD Strategy

ZD's objective is to be the preferred marketing partner to technology vendors
and service providers seeking to reach primary decision-makers involved in the
specification and purchase of their products and services. The key elements of
ZD's strategy are:

Focus On The Technology Market

ZD believes that its focus on the technology market provides it with
substantial opportunities to attract both audiences and advertisers.

Develop The Most Comprehensive, Objective And Authoritative Content

ZD strives to produce the most differentiated, high quality content to
attract category brand-specifiers and decision-makers. ZD Labs, its computer
testing facility, enables ZD to provide reliable

61
<PAGE>

and authoritative product evaluations to the business and consumer markets. The
ability to provide focused audiences with targeted information attracts leading
advertisers and exhibitors to ZD's products and services.

Build Brand Strength

ZD seeks growth in its core portfolio of leading brands, such as PC Magazine,
PC Week and COMDEX. ZD seeks to expand its market share of audiences and
advertisers while enhancing the quality and accessibility of its content and
marketing services. Ziff-Davis Inc.'s variety of business platforms enables ZD
to offer multiple media presentations of its branded content.

Leverage Multiple Media Marketing Platforms

ZD believes that the scope and depth of Ziff-Davis Inc.'s products and
services across multiple media platforms creates growth opportunities exceeding
those that ZD's businesses could achieve independently. Such opportunities
include the leveraging of strong relationships with advertisers in one media
platform into other platforms, cross-marketing products and services to the
audiences of its different platforms and packaging integrated marketing
products across all platforms for large advertisers. We believe that ZD has a
competitive advantage over single platform providers because of its ability to
offer clients multiple platform marketing solutions.

Launch New Products And Services

ZD believes that rapid advances in technology will create additional growth
opportunities to launch new products and expand its audience and advertiser
base. ZD seeks to identify new audiences and develop products and services that
respond to their informational needs. ZD believes that the scope of its
operations and its experience in launching new products across multiple media
platforms and geographic regions enable it to more readily achieve market
acceptance for new products and services.

Expand Global Reach

ZD intends to leverage its brand recognition and multinational experience to
expand further into overseas markets, focusing on key markets that have size
and growth characteristics to support ZD's strategy of cross-media operations.
ZD seeks to further expand internationally through the launch overseas of
proven U.S. properties, joint ventures and licensing arrangements with local
operating partners and selective acquisitions.

ZD expects to fund its business and operating strategy from internally
generated cash flow from operations, which are estimated to be sufficient to
fund investments as well as repay indebtedness. See "ZD Management's Discussion
and Analysis of Financial Condition and Results of Operations".

Print Publishing

ZD is a leading computer-related magazine publisher, with 26 primary U.S. and
international titles, including its joint ventures, and over 50 licensed
publications, totaling more than 75 publications distributed worldwide. ZD's
publications have a combined circulation of approximately

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<PAGE>

seven million primary readers worldwide. Approximately 61.5% of ZD's total
revenue for the year ended December 31, 1998, was attributable to its print
publishing business. ZD's magazines are designed to appeal to a target audience
of sophisticated customers in the business and consumer markets by providing
high-quality editorial content. ZD produces monthly magazines that provide
comparative, laboratory-based product reviews and news weeklies that provide
product and industry news and analysis. ZD also serves the developing market
for lifestyle and entertainment publications that focus on technology. ZD's
publications also include magazines related to the electronic gaming industry
that ZD acquired from Sendai Publishing Group, Inc. in May 1996.

ZD believes its leading position in the computer publishing market is based
upon:

. Leading Brands in Key Categories. In 1997, ZD's PC Magazine, PC Week and
Computer Shopper magazines were the top three computer magazines in the
U.S. and among the top 25 U.S. magazines, each as measured by total
revenue.

. Strength in Advertising, Circulation and Newsstand Sales. In 1997, ZD
accounted for 36.8% of all advertising and circulation dollars spent in
computer periodicals. ZD's U.S. publications have a total circulation of
approximately six million primary readers, and ZD has a worldwide
circulation of approximately seven million primary readers. In 1998, PC
Magazine's circulation was greater than that of Business Week, Fortune or
Forbes. With respect to newsstand sales, ZD's publications accounted for
50.1% of all computer magazines sold in the first six months of 1998.

. High Quality Editorial Content. ZD's top editors and columnists are
supported by laboratory-testing facilities, producing widely acknowledged
authoritative benchmarks for determining product quality. ZD's
comprehensive content attracts focused audiences, thereby attracting
leading advertisers and exhibitors to its products and services.

. Successful Development of New Publications for Emerging Sectors. ZD has
successfully introduced or acquired publications targeted at the consumer
market (FamilyPC and Computer Gaming World), technology lifestyle (Yahoo!
Internet Life), Internet professionals (Inter@ctive Week) and resellers
(Sm@rt Reseller).

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<PAGE>

The following table sets forth information relating to ZD's primary
publications for 1998.

<TABLE>
<CAPTION>
1998
Circulation Publication 1998
First ----------------- Frequency Advertising
Publication Issue Type(1) Amount(2) (Per Year) Pages(3)
----------- ----- ------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
U.S. Business
PC Magazine................... 1981 P 1,182,181 22x 5,381
PC/Computing.................. 1988 P 1,044,252 12x 2,557
Computer Shopper.............. 1979 P 560,267 12x 6,525
PC Week....................... 1983 C 400,144 51x 5,447
Inter@ctive Week.............. 1994 C 150,150 45x 2,173
Macworld(4)................... 1985 P 532,702 12x 1,296
Sm@rt Reseller................ 1998 C 65,520 22x 890
U.S. Consumer
Electronic Gaming Monthly..... 1988 P 398,219 12x 1,428
Yahoo! Internet Life.......... 1995 P 453,433 12x 722
Computer Gaming World......... 1981 P 286,978 12x 2,416
Expert Gamer(5)............... 1988 P 191,083 12x 688
Official U.S. PlayStation
Magazine..................... 1995 P 179,472 12x 864
FamilyPC(6)................... 1994 P 401,163 12x 1,161
International
PC Professionell (Germany).... 1991 P 209,257 12x 1,570
PC Direkt (Germany)........... 1992 P 170,067 12x 2,285
Internet Professionell
(Germany).................... 1997 P 35,171 12x 176
PC Magazine (UK).............. 1992 P 135,002 12x 3,472
PC Direct (UK)................ 1992 P 121,032 12x 6,606
PC Gaming World (UK).......... 1997 P 40,385 12x 405
IT Week (UK).................. 1998 C 55,000 45x 635
PC Expert (France)............ 1992 P 102,000 12x 1,587
PC Direct (France)............ 1992 P 82,640 12x 2,922
PC Week (China)(7)............ 1996 C 70,000 51x 3,264
PC/Computing (China)(7)....... 1994 P 70,000 12x 215
PC Magazine (China)(7)........ 1994 P 103,000 12x 988
Sm@rt Reseller (China)(7)..... 1998 C 50,000 26x 178
</TABLE>
- --------
(1) P = Paid, C = Controlled.
(2) Based on circulation information provided by ZD to the Audit Bureau of
Circulations for paid publications and BPA International for controlled
publications for the six months ended December 31, 1998 for domestic
publications and based on ZD data for international publications.
(3) As reported by AdScope, Inc., Eugene, OR for the year ended December 31,
1998 for domestic publications and based on ZD data for international
publications.
(4) Joint venture with International Data Group, Inc.
(5) Formerly EGM/2/.
(6) Operated as a joint venture with an affiliate of The Walt Disney Company
through April 30, 1998; 100% owned by ZD thereafter.
(7) Joint venture with Richina Media Holdings and other local agencies in
China.

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<PAGE>

Corporate Sales

ZD's corporate sales team integrates its marketing activities into one
cohesive resource for its largest customers. The corporate sales group,
originally established to provide discounts for advertisers buying across two
or more magazine titles, has been expanded to allow marketers to reach their
target buyers through any combination of Ziff-Davis Inc.'s business platforms.
Currently 27 professionals in U.S. corporate sales coordinate major
advertisers' campaigns across Ziff-Davis Inc.'s multiple platforms.

Editorial, Laboratory Testing And Benchmark Software

ZD seeks to develop and maintain a high level of technical expertise to
provide quality technology content. ZD's editorial personnel includes award-
winning editors and experts. ZD believes its publications are widely regarded
as a reliable source of objective product evaluations and industry news because
of the quality and reputation of its laboratory tests. To maintain impartiality
and objectivity in its product reviews, ZD has policies governing separation of
editorial functions from advertising sales functions and restricts trading in
securities of technology-related companies by its journalists.

ZD is committed to laboratory-based product testing as an integral part of
its editorial mission. For the year ended December 31, 1998, ZD spent over $11
million in laboratory testing. The ZD Labs staff works with testers from many
of ZD's different publications to provide comprehensive, objective test results
to assist buying decisions. In addition to the core ZD Labs staff, the PC
Magazine, PC Week, Computer Shopper and PC/Computing publications maintain
their own staff and/or testing space. The ZD Labs testing facility tests
thousands of products and systems each year and conducts large-scale tests to
simulate corporate installations. ZD believes ZD Labs gives it a competitive
advantage in terms of staffing, equipment and access to the technology
necessary to effectively evaluate products.

ZD Labs produces the core, publicly available and widely distributed
benchmark software that its publications use to measure the performance of PCs,
Macintosh systems and servers. ZD's benchmarks have become industry standards
among major buyers of computer and Internet-related technology.

Sources Of Print Publishing Revenue

ZD's publications are generally either paid-circulation magazines--which
generate revenue from newsstand sales, subscriptions and advertising--or
controlled-circulation publications--which are distributed free of charge to
qualified information technology professionals, generate revenue principally
from advertising sales and provide valuable demographic information to ZD.

Advertising Sales. ZD seeks to assist its advertisers in maximizing the
return on their marketing investment. Advertising sales accounted for 77.6% of
ZD's total print publishing revenue for the year ended December 31, 1998. The
ZD sales force uses market research tools, such as ZD's BrandTrak and ZDNet's
InternetTrak services, to inform clients about overall industry trends.
BrandTrak is a survey that is conducted every six months of subscribers to five
ZD publications and three European publications in order to track purchasing
behavior by brand. InternetTrak is a

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<PAGE>

quarterly marketing survey of Web users in the U.S. that tracks Web users and
their online activities. ZD's sales staff provides customer service, research,
promotional support and value-added programs for advertisers.

Circulation. ZD maintains centralized circulation operations, enabling it to
capitalize on its successful practices on a timely basis across all
publications. ZD strives to increase its readership by building relationships
with distributors, retailers and subscribers. Revenue from circulation of ZD's
paid-circulation magazines accounted for 19.6% of ZD's total print publishing
revenue in 1998. This was comprised of subscription sales (10.2% in 1998) and
newsstand sales (9.4% 1998). ZD's publications have a total circulation of
approximately seven million primary readers worldwide.

ZD's newsstand strategy focuses on developing strong relationships with key
distributors and large retail accounts. For example, ZD is the principal
supplier of computer technology publications to Warner Publisher Services, a
division of Time Warner Inc. In addition, ZD has preferred distribution
arrangements with large retailers including WalMart, Staples and Barnes &
Noble. These arrangements, which are terminable at will without notice, include
prominent magazine displays to strengthen ZD's brand identity.

ZD's subscription strategy is to maintain a highly focused readership and
increase subscriber loyalty and renewal rates. This strategy provides ZD's
advertisers with access to a precisely focused target audience.

Licensing and Joint Ventures. In its international publications, ZD seeks to
maximize global reach, maintain content quality and reduce the cost of entering
new markets. Through subsidiaries, ZD currently has publishing operations in
France, the United Kingdom and Germany. ZD also has over 50 licensed
publications worldwide. ZD's licenses are generally three to five year
agreements that provide for a minimum annual royalty against a percentage of
revenue. ZD also operates with a number of joint venture partners, including
IDG in the U.S., Richina Media Holdings and other local agencies in China and
APN Computing Group in Australia.

U.S. Publications

Business Magazines. In the U.S. market, ZD publishes seven computer
publications directed to business buyers, including four paid-circulation
magazines and three controlled-circulation weeklies or bi-weeklies. Each
publication produces authoritative, independent guidance that ZD believes is
generally considered to be the primary product resource in its market segment.
Macworld is published by Mac Publishing L.L.C., a ZD joint venture with IDG.

PC Magazine provides corporate buyers of computer technology with
comprehensive laboratory-based comparative reviews of PC hardware, software and
networking products, with a focus on technical specifications. With a paid
circulation of more than 1.18 million, PC Magazine is the largest circulation
computer magazine in the world, accounting for 37.8% of all computer
advertising revenue in directly competitive U.S. publications in 1998. PC
Magazine also produces two newsstand-only specials: Your New PC (buying advice
for less sophisticated computer buyers) and InternetUser (reviews of Internet
products).

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<PAGE>

PC/Computing offers reviews of computer products, focusing on productivity
and usability. A monthly publication, it is one of only three computer
magazines to have reached a circulation of over one million readers.

Computer Shopper provides buying advice, product evaluations and technology
coverage, including availability, pricing, specifications and configurations of
thousands of computer products. Computer Shopper has a newsstand circulation of
approximately 260,000 (the largest newsstand sales of any computer
publication).

PC Week provides enterprise product buyers and information technology
professionals at large corporate computing sites with timely information on
products, companies and general industry news. PC Week has a controlled
circulation of over 400,000.

Inter@ctive Week provides Internet and telecommunications professionals with
information on products, events, services, strategies, alliances and key
players. With a controlled circulation of over 150,000, Inter@ctive Week became
one of the leading publications for the digital communications technology
industry in less than three years.

Sm@rt Reseller, a bi-weekly publication, provides value-added resellers,
system integrators, distributors, Web developers and Internet service providers
with in-depth news and analysis on business and technology. Sm@rt Reseller
currently has a controlled circulation of over 65,000.

Macworld provides Macintosh buyers with comparative, laboratory-based product
evaluations, reviews and information about Macintosh products, supported by a
product testing facility which ZD believes is the most advanced in the
Macintosh industry. Macworld has a qualified circulation of over 500,000.

Consumer Magazines. ZD publishes six magazines that serve the rapidly growing
consumer market in order to meet the varying needs of computer enthusiasts, net
surfers, family buyers and gamers.

Electronic Gaming Monthly targets video game enthusiasts and offers news,
information and product reviews about the latest games on ten different game
systems. This monthly publication has a paid circulation of more than 390,000.
Expert Gamer (formerly known as EGM/2/), a companion publication to Electronic
Gaming Monthly with a paid circulation of more than 190,000, offers in-depth
strategies, exclusive tips and tricks and comprehensive maps and walk-throughs
of the latest games.

Yahoo! Internet Life is a leading Internet consumer magazine. Yahoo! Internet
Life has a paid circulation of more than 450,000 readers. It is designed to be
an entertaining and authoritative guide to the Internet, targeting an
influential, affluent and early-adopting group of readers. ZD has an exclusive
license from Yahoo! Inc. to use Yahoo! in the title of a print magazine.

Computer Gaming World provides computer game enthusiasts with results-
oriented gaming information. Computer Gaming World serves more than 280,000
game enthusiasts and is the oldest and one of the largest computer game
publications.

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<PAGE>

Official U.S. PlayStation Magazine assists Sony PlayStation users in getting
the most out of their game consoles by providing up-to-date news, interviews
and insights. This publication has a paid circulation of over 175,000
PlayStation game fans.

FamilyPC is specifically targeted to households with children and has a paid
circulation of over 400,000. Written by parents for parents in easy to
understand language, its purpose is to assist families in selecting computers
and software and thereafter ensure that they get a rewarding, productive and
educational experience from them.

International Publications

ZD publishes in the United Kingdom PC Magazine, PC Direct, PC Gaming World
and IT Week; in Germany PC Professionell, PC Direkt and Internet Professionell;
in France PC Expert and PC Direct; and in the People's Republic of China PC
Week, PC Computing, PC Magazine and Sm@rt Reseller through a venture with
Richina Media Holdings and local agencies in China.

PC Magazine (U.K.), PC Expert, PC Professionell, and PC Magazine (China) are
equivalents of PC Magazine (U.S.) adapted to their individual markets.
Similarly, PC Direct (U.K.), PC Direct (France) and PC Direkt are intended to
be equivalents of ZD's U.S. publication, Computer Shopper. IT Week includes
material from Inter@ctive Week and ZDNet News in addition to local content.

Paper And Printing

ZD maintains strong relationships with its paper suppliers and printing
companies. ZD's main paper suppliers for its U.S. publications are Bowater,
Blandin, Champion, Consolidated and Fraser, which provided 8%, 13%, 38%, 15%
and 12%, respectively, of ZD's paper supply in 1998 as measured by tonnage. Its
paper supply contracts are generally two-to-three year agreements, with
quarterly pricing adjustments, and are renewable on a staggered basis. Most
agreements contain pricing clauses that seek to ensure the most competitive
pricing on a quarter to quarter basis. ZD has relationships with a number of
printing companies, including R.R. Donnelley, Brown, Quadgraphics and Quebecor.
Approximately 46% of ZD's total printing expenditures for its U.S. publications
are with R.R. Donnelley, which has a number of alternative printing sites.
Printing contracts are generally two-to-three year agreements.

Trade Shows and Conferences

ZD is a leading producer of trade shows, conferences and customized marketing
and educational programs for the computer industry in the U.S. Approximately
25.6% of ZD's total revenue in 1998 was attributable to its trade show and
conference business. ZD produces the industry-wide COMDEX events, which ZD's
predecessor acquired in April 1995, other segment-focused trade shows and
conferences and customized events for specific clients. ZD produced over 50
trade shows and conferences in 1998.

The COMDEX/Fall event, held in the fourth quarter of each year, has been held
for 19 years and is the number one ranked trade show for all industries in the
U.S. as measured by total revenue, total exhibit space and number of attendees.
In 1998, ZD estimates that over two million people

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<PAGE>

attended its trade shows and conferences worldwide. In addition to COMDEX/Fall,
held annually in Las Vegas, ZD produces 18 other COMDEX events in 13 countries.

In 1998, ZD produced 11 segment-focused "NetWorld+Interop" and "Seybold
Seminars" trade shows in 9 countries. The NetWorld+Interop trade shows focus on
the networking/interconnectivity segment of the computer industry and the
Seybold Seminars focus on technologies for publishing and graphic
communications. ZD also produces the following segment-focused trade shows:

. WINDOWS WORLD, in conjunction with Microsoft Corporation,

. EXPO COMM, servicing the worldwide telecommunications industry,

. CommUnity, for the emerging corporate integrated data, voice and video
segments,

. COMDEX/Enterprise, focusing on solutions for the large corporate
information technology infrastructures,

. Java SM Business Expo SM, sponsored by Sun Microsystems, Inc. and
focusing on the full range of Java(TM) technology for information
technology professionals and

. Support Services Conference & Expo, focusing on technology for help desk
and information technology support services.

ZD also produces customized conferences that are designed to meet the
marketing needs of specific clients. For example, ZD produced the JavaOne
series of conferences for Sun Microsystems, Inc., which were designed to
introduce Java technology software to the developer community.

Attendees at ZD's trade shows and conferences cover a wide range of
participants from the computer industry, including manufacturers, distributors,
dealers, retailers, as well as value-added and other resellers and large
corporate end-users. Each event includes an extensive conference program,
providing a forum to exchange information germane to the particular event's
focus. In addition, each event has one or more "keynote" sessions with speakers
drawn from computer industry leaders. ZD estimates that in 1998 over 8,000
companies participated as exhibitors in its trade shows and conferences.

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<PAGE>

The following table sets forth information relating to ZD's principal trade
shows and conferences, including joint ventures, for 1998. Substantially all of
ZD's international COMDEX events are joint ventures and substantially all
NetWorld+Interop events are owned by ZD.

<TABLE>
<CAPTION>
1998 Actual
-------------------------------------
Total Net Estimated
Launch Square Total Total
Year Footage Exhibitors Attendees
------ --------- ---------- ---------
<S> <C> <C> <C> <C>
EVENT
North America
COMDEX/Fall............................. 1979 1,229,062 1,556 202,000
COMDEX/Spring, WINDOWS WORLD & EXPO COMM
USA.................................... 1981 180,259 563 85,750
COMDEX/Canada incl. WINDOWS WORLD and
Connected Computing.................... 1992 140,648 334 57,110
COMDEX/PacRim........................... 1995 65,762 211 30,500
COMDEX/Quebec........................... 1996 34,770 129 17,825
COMDEX/Miami & EXPO COMM Miami.......... 1996 65,600 261 20,000
NetWorld+Interop & CommUnity Las Vegas.. 1986 475,484 705 55,000
NetWorld+Interop & CommUnity Atlanta.... 1992 383,048 576 44,000
Seybold San Francisco Publishing........ 1986 153,324 356 38,570
Seybold Seminars New York............... 1982 122,920 293 23,970
International
COMDEX/SUCESU-SP Brazil................. 1992 306,134 393 130,000
COMDEX & WINDOWS WORLD Mexico(1)........ 1993 68,874 199 39,000
COMDEX/INFOCOM & WINDOWS WORLD
Argentina.............................. 1997 89,252 250 32,000
COMDEX IT France........................ 1997 118,116 560 60,000
COMDEX/Japan & Object World Tokyo(2).... 1996 96,706 139 80,970
COMDEX/China............................ 1996 164,689 175 91,265
COMDEX/Korea............................ 1997 40,689 127 81,685
COMDEX/Asia at Singapore Informatics.... 1995 32,830 205 19,075
COMDEX/IT INDIA......................... 1996 43,057 125 70,000
NetWorld+Interop Paris.................. 1992 194,015 400 48,770
NetWorld+Interop Tokyo(2)............... 1993 169,800 258 99,320
Seybold Seminars Tokyo(2)............... 1996 3,400 23 24,135
Windows NT Intranet Solutions Japan(2).. 1994 36,500 59 38,020
</TABLE>
- --------
(1) These international COMDEX events are wholly owned by ZD.
(2) Trade shows in Japan are owned by Softbank and managed by ZD.

Sources Of Trade Show And Conference Revenue

Exhibitor space fees accounted for 66.8% of ZD's total trade show and
conference revenue for 1998. ZD believes most trade show producers receive
virtually all of their revenue from the sale of exhibitor space fees. ZD has
actively sought to increase its revenue from other sources, including attendee
fees, which accounted for 33.2% of all trade show and conference revenue in
1998.

All exhibitors pay the same price per square foot of booth space, regardless
of the exhibit hall selected or the location or size of the booth. Typically, a
majority of exhibitors at each trade show commit to booth space for the next
year's show. ZD encourages this commitment through a prioritized booth
selection procedure based upon seniority. Annual renewal is required for
exhibitors

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<PAGE>

to maintain their seniority. Exhibitors pay for space in two or three
installments, the last of which is usually due six months prior to the upcoming
event.

Attendee fees accounted for 14.1% of ZD's trade show and conference revenue
for 1998, primarily from NetWorld+Interop and Seybold Seminars events. Most
COMDEX attendees are invited guests of exhibitors who receive complimentary
admission tickets from ZD for their customers and key prospects. This helps
exhibitors ensure that their best customers and prospects will attend.

Advertising revenue from ZD's trade shows and conferences is derived
principally from five products:

. a daily newspaper distributed during the show,

. the Program Exhibits Guide,

. the Preview, a newspaper distributed to pre-registrants and certain prior
year attendees before the show,

. advertising billboards and banners and

. exhibitor logo products that are sold to exhibitors to increase booth
traffic and name recognition.

ZD also maintains a continuously updated database containing the names and
certain demographic information on its attendees. This database is rented to
direct mail users on a fee-per-use basis.

COMDEX

COMDEX trade shows cover a broad range of new technologies at every stage
from their development and introduction to commercial maturity. Many of the
most significant computer product launches over the past 19 years occurred at
COMDEX, including the launch of the IBM PC, Lotus 1-2-3, Windows 3.1 and DVD.

COMDEX/Fall is a five-day trade show held annually in November in Las Vegas.
In 1998, COMDEX/Fall had approximately 1,500 exhibiting companies occupying 1.2
million net square feet of exhibit space and 200,000 attendees. COMDEX/Spring,
which was launched in 1981, is a smaller version of the fall event. In 1998, it
was held in Chicago and had approximately 560 exhibiting companies and over
85,000 attendees. For the last eight years, ZD, in cooperation with Microsoft
Corporation, has produced a WINDOWS WORLD trade show concurrently with
COMDEX/Spring.

In 1993, ZD began launching additional COMDEX events in order to capitalize
on the international recognition of the COMDEX brand name. In 1998, other
COMDEX events were held in Miami, Toronto, Vancouver, Montreal, Mexico City,
Monterrey (Mexico), Buenos Aires, Sao Paulo, Rio de Janeiro, London, Paris,
Tokyo, Seoul, New Delhi, Beijing, Singapore and Cairo.

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<PAGE>

NetWorld+Interop

NetWorld+Interop is the largest of ZD's segment-focused trade shows and is
the leading show for professionals in the rapidly growing field of computer
networking. NetWorld+Interop places strong emphasis on the quality of its
conference programs and has become a leading educational forum for the Internet
and enterprise computing communities. The largest NetWorld+Interop event is
held annually in May in Las Vegas. Each NetWorld+Interop trade show features
InteropNet, a live, multi-platform network that interconnects exhibitors to one
another and to the Internet. In 1998, the NetWorld+Interop Las Vegas event had
approximately 700 exhibiting companies occupying 475,000 net square feet of
exhibit space and 55,000 attendees. The NetWorld+Interop Atlanta event, held in
October each year, is only slightly smaller in all categories. In 1998,
NetWorld+Interop events were held in Las Vegas, Atlanta, Singapore, Tokyo,
London, Sao Paulo, Paris and Sydney.

Seybold Seminars

ZD's Seybold Seminars are also segment-focused trade shows, providing
information and education for traditional and new media publishing industries.
These shows focus on the latest technologies and products, design tools and
desktop applications. The largest of the Seybold Seminars series is held
annually each Fall in San Francisco. In 1998, this Seybold Seminars show had
approximately 350 exhibiting companies occupying 150,000 net square feet of
exhibit space and 38,000 attendees. Other Seybold Seminars events are held in
New York and Tokyo.

Television

In order to expand its media platforms, Ziff-Davis Inc. entered into a
license and services agreement to manage ZDTV for MAC Holdings, a company that
is wholly owned by Mr. Masayoshi Son, who is a director of Ziff-Davis Inc. and
principal stockholder of SOFTBANK Corp. In February 1999, Ziff-Davis Inc.
acquired ZDTV and sold a one-third interest in ZDTV to Vulcan Programming,
Inc., an entity owned by Paul G. Allen, for $54 million.

ZDTV, which was launched in May 1998, is the first 24-hour cable television
channel and integrated Web site focused exclusively on computers, technology
and the Internet. ZDTV targets a wide range of viewers, including computer and
technology enthusiasts, computer gaming enthusiasts, business people, teens,
families and other viewers with a sustained interest in computers, technology
and the Internet. ZDTV's programming includes educational features, product
evaluations, gaming tips and strategies, current events and other
entertainment. ZDTV also features live interactive programming, allowing
viewers to participate through simultaneous Web programming on ZDTV.com. ZDTV
reached approximately 9.6 million homes at December 31, 1998 according to ZDTV
estimates. In addition, ZDTV creates customized programming for third parties,
including the regional Emmy award-winning "The Site" with MSNBC and "21st
Century Home" with Home & Garden Television.

For more information about Ziff-Davis Inc.'s acquisition of ZDTV, see "ZD
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and ZD's Combined Financial Statements.

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<PAGE>

Education

ZD publishes computer training products and services for end-users and
advanced technology professionals. Its products and services include Internet-
based training, computer-based training, instructor-led courseware and
customization tools. ZD believes its education offerings extend ZD's reach and
brand reputation while permitting it to attract and retain customers.

ZD produces software-specific newsletters and technology information, with
approximately 40 titles. Generally published monthly, the titles include time-
saving tips and techniques on products such as Windows 95, Novel NetWare,
Visual Basic, Word, Excel, Microsoft Office, PhotoShop and Windows NT, in
addition to several programming and operating systems journals.

ZDU is an Internet-based technology educational service through which ZD
provides interactive instructor-led training to subscribers. The ZDU service is
part of ZD but is closely integrated with ZDNet.

Market Research

ZD's market research division develops, analyzes and compiles a wide variety
of information on computer technology issues ranging from current technical
aspects to decision making trends. The ZD Market Intelligence, or ZDMI, unit
focuses on installed and planned technology hardware and software purchases. It
is a leading source in North America and Europe of fact-based information for
the computer and communications industries. ZDMI is an important part of ZD's
effort to be a single source marketing solution, as it provides marketing
customers with important targeting information. ZDMI's databases are built from
more than 45,000 telephone interviews per month and contain data on installed
and planned computer and communications products and services at over 350,000
business sites in the U.S., Canada and eight European countries, according to
ZD estimates. ZDMI identifies and targets customers by tracking current
activity and market share in the business, home and reseller channels.
Customers use ZDMI's services to make important marketing decisions.

ZD also identifies and analyzes trends in the decision making process for
computer technology consumers. This information indicates the criteria people
focus on to select products beyond technical product specifications. ZD's
market research division also consolidates information obtained in each of the
databases maintained by other operating divisions within ZD and ZDNet, so that
each division can offer Ziff-Davis Inc.'s clients a wide range of information
to meet their marketing needs across multiple platforms.

Competition

ZD competes with a wide range of companies for each of its products and
services. The magazine publishing business is highly competitive. ZD faces
broad competition from other technology publishers and from other media
companies such as business, news and general interest magazines. Computer and
technology publishers that directly compete with ZD in the U.S. include IDG,
CMP and Imagine Media. ZD also competes with various computer and technology
publishers in the international markets where it conducts business. A
publishing company's success depends upon a number of factors, such as
editorial quality, product positioning and price. Competitive

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<PAGE>

factors for advertising sales include quality of readership, circulation,
reader response and advertising rates.

ZD also faces competition in its trade show and conference business,
primarily from several significant trade show management companies. These
include Miller Freeman, Mecklermedia and IDG. Competitive factors in this
business include quality of conference content, organizational efficiency and
quality and number of exhibitors and attendees.

ZD's market research division faces competition from numerous market research
companies, including International Data Corporation, Gartner Group's Dataquest
and IntelliQuest. Database providers such as Information Resource Group and Dun
& Bradstreet provide additional competition.

ZD's education division competes with a variety of education providers,
including vendor-supplied training materials and traditional classroom-based
computer training.

ZDTV is the first 24-hour cable television channel and integrated Web site
focused exclusively on computers, technology and the Internet, and as such, it
is not expected to face direct competition in the near future. However, ZDTV
does compete with a variety of general and special interest television
programs. In addition, the market for television programming in general is
highly competitive, with many programming producers competing for channel
carriage, advertisers and audiences.

Trademarks

ZD has developed strong brand awareness for its principal publications, trade
shows and other products and services. Accordingly, ZD considers its
trademarks, copyrights, trade secrets and similar intellectual property as
critical to its success and relies on trademark, copyright and trade secrets
laws, as well as licensing and confidentiality agreements, to protect its
intellectual property rights. ZD generally registers its material trademarks in
the U.S. and in certain other key countries in which these trademarks are used.
Effective trademark, copyright and trade secret protection may not be available
in every country where ZD's publications and services are available.

ZD may be subject to claims of alleged infringement by it or its licensees of
trademarks and other intellectual property rights of third parties from time to
time in the ordinary course of business. ZD does not believe there are any such
legal proceedings or claims that are likely to have, individually or in the
aggregate, a material adverse effect on its business, financial condition or
results of operations.

Employees

As of December 31, 1998, ZD had a total of 2,889 employees. Of these
employees, 621 were engaged in U.S. magazine publishing activities, 397 in
international publishing activities, 505 in trade shows and conferences, 407 in
education activities, 436 in market research and 523 in central services. None
of ZD's U.S. employees is represented by a labor union. ZD considers its
relationships with its employees to be satisfactory.

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<PAGE>

Facilities

ZD's world headquarters are located in New York and ZD has over 50 editorial,
production and sales offices and computer labs in many other cities in the U.S.
and around the world. ZD's other principal offices are located in the Boston
and San Francisco metropolitan areas. ZD and Ziff-Davis Inc. do not own real
property that is material to its business and Ziff-Davis Inc. leases all but
one of its offices from third parties. ZD believes that its properties, taken
as a whole, are in good operating condition and are suitable and adequate for
its current operations, and that suitable additional or alternative space,
including space available under lease options, will be available at
commercially reasonable terms for future expansion.

Legal Proceedings

For information concerning certain legal proceedings to which Ziff-Davis Inc.
is a party, see "ZDNet Description of Business".

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<PAGE>

ZD
SELECTED HISTORICAL COMBINED FINANCIAL AND OTHER DATA

The following table presents Selected Historical Combined Financial and Other
Data for ZD as of and for the years ended December 31, 1995, 1996, 1997, and
1998. This data was derived from the Combined Financial Statements of ZD
included elsewhere in this prospectus. An affiliate of Ziff-Davis Inc. acquired
a print publishing business, ZD Publishing, on February 29, 1996; the data does
not include results from the acquired business for periods before the date of
acquisition. However, because ZD Publishing represents ZD's principal
operations, the following table also presents Selected Historical Combined
Financial and Other Data for ZD Publishing as of and for the years ended
December 31, 1994 and 1995 and as of and for the two month period ended
February 28, 1996. The data as of and for the year ended December 31, 1995 and
as of and for the two months ended February 28, 1996 was derived from the
Combined Financial Statements of ZD Publishing. ZD Publishing data as of for
the year ended December 31, 1994, was derived from ZD Publishing unaudited
financial statements. On May 4, 1998, Ziff-Davis Inc. completed a
reorganization described in Note 2 to the Combined Financial Statements of ZD;
results for periods before the reorganization are not directly comparable to
results for periods after the reorganization. This table should be read in
conjunction with the Selected Historical Financial and Other Data and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for each of ZDNet, ZD and Ziff-Davis Inc. and Financial Statements
for each of ZDNet, ZD and Ziff-Davis Inc. beginning on pages F-168 , F-94 and
F-20 of this prospectus, respectively.

<TABLE>
<CAPTION>
ZD Publishing(1) ZD
------------------------------------- ------------------------------------------------------
Two month
Year ended December 31, period ended Year ended December 31,
----------------------- February 28, ---------------------------------------------
1994 1995 1996 1995(2) 1996(2) 1997 1998
----------- ----------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations (dollars in thousands)
Data:
Revenue, net............ $ 698,030 $ 755,419 $ 122,562 $ 202,729 $ 938,924 $1,121,543 $1,052,749
Depreciation and
amortization........... 33,045 87,506 14,540 24,305 134,251 147,259 146,096
Income from operations.. 85,134 65,283 8,540 62,675 104,594 131,713 38,586
Interest expense, net... 17,887 92,609 14,030 44,005 120,646 190,445 143,547
Income (loss) before
income taxes........... 82,176 (36,472) (6,539) 22,869 (26,636) (71,648) (104,748)
Net income
(loss)(3)(4)........... 82,176 (26,002) (4,547) 10,945 (52,081) (71,179) (77,809)
Balance Sheet Data
(at period end):
Cash and cash
equivalents............ $ 1,064,174 $ 10,083 $ 13,669 $ 27,908 $ 29,915 $ 30,273 $ 32,274
Total assets............ 2,747,968 1,625,426 1,622,438 1,090,981 3,584,963 3,548,108 3,429,938
Total long-term debt.... 1,034,000 964,153 964,153 575,450 2,522,252 2,408,240 1,539,322
Division equity......... 387,718 365,150 360,717 397,881 447,756 126,130 1,352,598
Other Data:
Capital expenditures.... $ 14,606 $ 12,573 $ 384 $ 3,367 $ 21,355 $ 27,822 $ 32,117
Capital contributions to
ZDNet.................. -- 7,106 2,350 -- 13,630 20,664 14,269
Investments and
acquisitions, net of
cash acquired.......... -- -- -- 814,520 2,124,823 11,002 22,772
</TABLE>
- -------
(1) A third party acquired ZD Publishing as of January 1, 1995. An affiliate of
Ziff-Davis Inc. acquired ZD Publishing on February 29, 1996. Because ZD
Publishing represents ZD's principal operations, ZD Publishing data has
been presented for periods before these dates.
(2) An affiliate of Ziff-Davis Inc. acquired ZD Publishing on February 29,
1996; ZD data does not include results from the acquired business for
periods before the date of acquisition.
(3) During 1994, ZD Publishing conducted its operations through various
partnerships. Accordingly, there was no income tax provision for 1994.
(4) No historical earnings per share or share data are presented as ZD does not
consider such data meaningful. After issuance of ZDNet stock, Ziff-Davis
Inc. will report earnings per share data for ZD and ZDNet but not for Ziff-
Davis Inc.

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<PAGE>

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

Revenue

ZD had net revenue of $1.053 billion for 1998. A substantial portion of ZD's
revenue is derived from the sale of advertising, which in 1998 accounted for
49.8% of total revenue. No single advertiser has comprised more than 4.0% of
ZD's advertising revenue during any of the last three years. However, ZD's top
20 advertisers accounted for 37.5% of total advertising revenue for 1998.

In the publishing segment, ZD's principal sources of revenue are advertising
(64.4% of 1998 total publishing revenue), circulation (18.7%) and other (16.9%)
for the year ended December 31, 1998. Circulation comprises both paid
subscriptions (10.9%) and newsstand sales (7.8%) while other includes
educational and training materials (7.4%) and market research studies (7.1%)
with the balance primarily consisting of royalties, reprints and other
miscellaneous sales. In the events segment, revenue is derived from two
principal sources: sale of exhibit space (66.8% of 1998 total segment revenue)
and attendee conference and seminar fees (14.1%). Unlike many trade show
producers, ZD derives a significant portion of its trade show revenue from
other sources (19.1%), including advertising in show-related publications,
billboards, banners, fees from managing customer-sponsored events and other
show-related activities. ZD believes these other sources will continue to be an
important growth area, particularly for its content-focused events.

ZD provides certain editorial content and brands for ZDNet for which ZDNet
pays a royalty to ZD based on ZDNet's revenue. See Note 5 to ZD's Combined
Financial Statements in this prospectus.

Cost of Operations

In the publishing business, the principal components of ZD's production costs
are raw materials, printing and distribution, which represented 34.5%, 38.0%
and 27.2%, respectively, of total 1998 publishing production expenses. ZD's
principal raw material is paper. Paper supply and prices are subject to
volatility and may be significantly affected by many factors, including market
and economic conditions. See "Risk Factors--Other Ziff-Davis Inc. Risks--Ziff-
Davis Inc. May Be Adversely Affected By Fluctuations In Paper And Postage
Costs" and "--Inflation and Fluctuations in Paper and Postage Costs". The
principal components of production costs within the events business are the
costs of renting and preparing the facilities to hold the events (46.8% in
1998), direct mail and the related costs for promotion of the events (37.0% in
1998) and program development and presentation costs (13.4% in 1998).

The other principal operating costs for ZD are selling, general and
administrative expenses, including editorial costs. Included in these costs are
salaries, sales commissions and benefits (56.6% in 1998) along with marketing
and promotion expenses related to advertising and circulation (20.2% in 1998).

Ziff-Davis Inc. provides certain selling, general and administrative services
and shared services on a centralized basis and the costs of these central
services are allocated between ZD and ZDNet. See Note 5 to ZD's Combined
Financial Statements in this prospectus.

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Factors affecting future periods

ZD's revenue and profitability are influenced by a number of external
factors, including the volume of new technology product introductions, the
amount and allocation of marketing expenditures by ZD's clients, the extent to
which sellers elect to advertise using print and online media or participate in
trade shows and conferences, changes in paper prices, availability of
appropriate venues for its largest trade shows and conferences and competition
among computer technology marketers, including print publishers, producers of
trade shows and providers of other technology information services.
Accordingly, ZD may experience fluctuations in revenue from period to period.
Many of ZD's large customers concentrate their advertising expenditures around
major new product launches. Marketing expenditures by technology companies can
also be affected by factors affecting the computer industry generally,
including pricing pressures and temporary surpluses of inventory. Revenue and
profitability are also influenced by product mix and the timing and frequency
of ZD's new product launches and launches in new markets, as well as by
acquisitions. New publications generally require several years to achieve
profitability and upon achieving initial profitability, often have lower
margins than more established publications. The launch of new publications,
trade shows and services are funded with cash flow from operations and are
expensed as incurred. Accordingly, ZD's revenue from year to year may be
affected by the number and timing of new product launches. If ZD concludes that
a new publication, trade show or service will not achieve certain milestones
with regard to revenue, profitability and cash flow within a reasonable period
of time, management may discontinue such publication, trade show or service or
merge it into another existing publication, trade show or service. See "Risk
Factors--Other Ziff-Davis Inc. Risks--To Remain Competitive Ziff-Davis Inc.
Must Constantly Expand And Develop New Products And Services. This Is
Inherently Risky And Expensive".

On February 4, 1999, ZD purchased ZDTV. This purchase will affect ZD's
results in future periods. See "--ZDTV" below for certain summary pro forma and
other information about this purchase.

ZD expects to recognize compensation expense of approximately $7.9 million as
a result of certain options granted on December 21, 1998 and January 29, 1999.
Such compensation expense will be recognized over the vesting period of the
options. The 1999 compensation expense related to these options is expected to
be approximately $2.2 million. See Note 15 to ZD's Combined Financial
Statements in this prospectus.

Presentation of Financial Information

ZD is comprised of certain operations which were acquired at various times
and completed a reorganization in May 1998. See Notes 1 and 2 to ZD's Combined
Financial Statements in this prospectus.

In order to create financial statements that separately present ZD's assets,
liabilities, revenue, expenses and cash flow while still reflecting ZD's 100%
retained interest in ZDNet's division equity and net losses, ZD has accounted
for its interest in ZDNet in a manner similar to the manner prescribed by APB
No. 18, The Equity Method of Accounting for Investments in Common Stock. Thus,
ZD's historical balance sheets reflect ZD's 100% retained interest in ZDNet's
division equity

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<PAGE>

as "Retained interest in ZDNet". Similarly, ZD's historical statements of
operations reflect ZD's 100% retained interest in ZDNet's division losses as
"Loss related to retained interest in ZDNet".

Since ZD and ZDNet together constitute all of Ziff-Davis Inc. and since ZD's
financial statements have historically reflected 100% of ZDNet's division
equity and losses, ZD's division equity and net income or loss has historically
been equal to Ziff-Davis Inc.'s total stockholders' equity and net income or
loss.

However, ZD's 100% retained interest will decline in the future to reflect,
among other things, the ZDNet stock sold in the offering. When ZD's retained
interest declines to a percentage below 100%, ZD's net income or loss will,
going forward, reflect only that reduced percentage of ZDNet's division income
or loss.

The book value associated with ZD's retained interest will increase or
decrease, among other things, to reflect ZD's proportionate retained interest
in ZDNet's division income or loss and will be adjusted from time to time as
set forth under Note 3 to ZD's Combined Financial Statements in this
prospectus.

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Results of Operations

The table below presents the results of ZD as if the assets and operations
acquired by affiliates of Ziff-Davis Inc. on February 29, 1996 (as described in
Note 1 to the Combined Financial Statements in this prospectus) had been
acquired on January 1, 1995. Purchase accounting adjustments relating to that
acquisition have been reflected through pro forma amortization, interest and
income tax adjustments, as described in note (1) to the table. Although the
1996 presentation is not in accordance with generally accepted accounting
principles, management believes it presents the most meaningful basis of
comparison. The financial information presented below may not necessarily
reflect the results of operations which would have occurred had the February
29, 1996 acquisition been completed on January 1, 1995.

<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
Pro
Forma(1) Actual
--------- --------------------
1996 1997 1998
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenue, net:
Publishing......................... $ 796,602 $ 834,015 $ 782,882
Events............................. 264,884 287,528 269,867
--------- --------- ---------
1,061,486 1,121,543 1,052,749
--------- --------- ---------
Cost of production:
Publishing......................... 212,287 221,367 215,336
Events............................. 87,373 99,533 82,143
--------- --------- ---------
299,660 320,900 297,479
Selling, general and administrative
expenses............................ 499,901 521,671 518,349
Depreciation and amortization........ 154,854 147,259 146,096
Restructuring charge................. -- -- 52,239
--------- --------- ---------
Income (loss) from operations........ 107,071 131,713 38,586
Interest expense, net................ (135,500) (190,445) (143,547)
Loss related to Retained Interest in
ZDNet............................... (17,933) (21,238) (7,884)
Other non-operating income, net...... 6,106 8,322 8,097
--------- --------- ---------
Loss before income taxes............. (40,256) (71,648) (104,748)
Provision (benefit) for income
taxes............................... 26,755 (469) (26,939)
--------- --------- ---------
Net loss............................. $ (67,011) $ (71,179) $ (77,809)
========= ========= =========
Other Data:
Cash and cash equivalents, end of
period.............................. $ 29,915 $ 30,273 $ 32,274
Net cash provided by operating
activities.......................... 80,483 11,900 100,299
Net cash used by investing
activities.......................... (65,678) (59,488) (69,158)
Net cash provided (used) by financing
activities.......................... (9,212) 47,946 (29,140)
EBITDA(2)............................ 255,430 272,894 244,094
</TABLE>
- --------

(1) The February 29, 1996 acquisition gave rise to different bases of
accounting for the period after the acquisition as compared to the period
prior to the acquisition. This is primarily due to a purchase price which
exceeded the book value of the assets acquired, financed by a higher level
of both debt and equity as compared to the pre-acquisition capital
structure. The above numbers assume that the acquisition took place on
January 1, 1995; therefore, depreciation and amortization, interest expense
and net loss have been increased by approximately $6,064,000, $824,000 and
$10,383,000 for 1996.
(2) "EBITDA" is defined as income before provision for income taxes, interest
expense, depreciation and amortization. ZD's EBITDA is calculated by adding
(a) ZD's EBITDA before losses related to its retained

80
<PAGE>

interest in ZDNet and (b) ZD's proportionate interest (currently 100%) in
ZDNet's EBITDA. EBITDA for the year ended December 31, 1998 is before a one-
time restructuring charge of $52,239,000. EBITDA is not intended to
represent cash flows from operations and should not be considered as an
alternative to net income as an indicator of ZD's operating performance or
to cash flows as a measure of liquidity. Although ZD believes that EBITDA is
a standard measure commonly reported and widely used by analysts, investors
and other interested parties in the publishing and media industries, the
EBITDA presented for ZD may not be comparable to similarly titled measures
reported by other companies.

Year ended December 31, 1998 compared with year ended December 31, 1997

Revenue, net

Revenue decreased by $68.8 million or 6.1% from $1,121.5 million in 1997 to
$1,052.7 million in 1998.

Publishing--Revenue from publishing decreased by $51.1 million or 6.1% from
$834.0 million in 1997 to $782.9 million in 1998. This decline was primarily
due to the transfer of certain publications to a joint venture and the closure
of three publications due to the restructuring discussed below. The remainder
of the decrease was primarily due to lower advertising in business publications
partly offset by growth in advertising in consumer publications. Advertising
revenue was lower in business publications principally due to factors affecting
the computer technology industry during the year. Margin pressure on computer
equipment manufacturers, industry and product delays, lower demand in Asia and
a focus on the Year 2000 transition are contributing to a reduced demand for
advertising in Ziff-Davis Inc.'s magazines. Revenue from international
operations, which generated 10.2% of the segment's revenue, increased by $2.1
million due to the launch of IT Week in the UK, partially offset by lower
advertising in business publications.

Events--Revenue from events decreased by $17.7 million or 6.1% from $287.5
million in 1997 to $269.9 million in 1998. The decrease was primarily due to a
decline in revenue due to the discontinuation of certain "one-time" shows that
were held in 1997, lower ancillary revenue at COMDEX/Fall and lower square
footage sold at COMDEX/Spring. This decrease was partially offset by increased
revenue from increased square footage sold at Networld+Interop Las Vegas and
Java One due to an increased number of attendees.

Cost of production

Production costs decreased by 7.3% or $23.5 million from $320.9 million in
1997 to $297.4 million in 1998.

81
<PAGE>

Publishing production costs decreased by $6.1 million or 2.7% from $221.4
million in 1997 to $215.3 million in 1998. The decrease was related to a
decline in the number of advertising pages produced.

The cost of producing events decreased by $17.4 million or 17.4% from $99.5
million in 1997 to $82.1 million in 1998. The decrease is a result of lower
operational costs and re-negotiated contracts as well as the discontinuance of
certain "one-time" shows that were held in 1997.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased by $3.4 million or
0.7% from $521.7 million in 1997 to $518.3 million in 1998. The decrease was
due primarily to the headcount reduction and efficiencies attained through the
integration of operations resulting from the reorganization completed in May
1998, as well as costs eliminated by the closure of three magazines in the
fourth quarter of 1998. This decrease was partially offset by increased costs
relating to the launch of new products and services and increased advertising
expenses.

Depreciation and amortization

Total depreciation and amortization decreased $1.2 million from $147.3
million in 1997 to $146.1 million in 1998. The decrease was a result of certain
assets being fully depreciated in 1997 and early 1998.

Restructuring

Margin pressure on computer equipment manufacturers, industry and product
delays, lower demand in Asia and a focus on the Year 2000 transition are
contributing to a reduced demand for advertising in ZD's magazines, principally
PC Magazine, PC/Computing, Computer Shopper and PC Week. ZD believes these
factors are continuing.

As a result of this reduced demand, in October 1998, Ziff-Davis Inc.
announced a restructuring program with the intent of significantly reducing its
cost base. Ziff-Davis Inc. incurred a pre-tax charge of $52.2 million for this
restructuring program. The charge was reported as a component of income from
operations for the fourth quarter of 1998. The charge included asset impairment
costs ($37.9 million), employee termination costs ($8.6 million), and costs to
exit activities ($5.7 million) principally resulting from the closing of three
publications, Windows Pro, Internet Business and Equip, and the reduction of
Ziff-Davis Inc.'s work force by 310 employees. The charge also included costs
resulting from the discontinuation of certain educational journals and trade
shows. The following sets forth additional detail concerning the principal
components of the charge:

82
<PAGE>

vacation as well as the costs of outplacement services and the provision
of continued benefits to personnel. As of December 31, 1998, $5.2
million of the $8.6 million related to these employee terminations had
been paid.

. Costs to exit activities reflect the costs associated with the final
closure of the discontinued publications ($1.8 million) and the costs to
reduce office space under lease as a result of the reduced level of
employees ($3.8 million).

Interest expense, net

Loss related to retained interest in ZDNet

The loss related to the retained interest in ZDNet decreased by $13.4 million
from $21.2 million in 1997 to $7.9 million in 1998. This decrease is due to
improved performance of that business. See "ZDNet Management's Discussion and
Analysis of Financial Condition and Results of Operations" elsewhere in this
prospectus.

Other non-operating income, net

Other non-operating income, net primarily reflects ZD's equity share in
earnings and losses from joint ventures and fees earned from management of
events not produced by ZD. This income decreased $0.2 million or 2.4% from $8.3
million in 1997 to $8.1 million in 1998 reflecting reduced fees from managed
events. The decline was partially offset by ZD's equity share in earnings of
MAC Publishing, LLC, an entity that was formed in August 1997.

Income taxes

The 1998 income tax benefit of $26.9 million increased from $0.5 million
reported in 1997. The increase was due primarily to income tax benefits
generated from the losses with respect to the MAC Assets, which were not
deductible until ZD purchased the MAC Assets from an affiliate on May 4, 1998.
The income tax benefit was also increased by a higher net loss for the year
ended December 31, 1998 compared to the net loss for the year ended December
31, 1997.

Net loss

As a result of the changes described above, the net loss for the period
increased $6.6 million or 9.3% from $71.2 million in 1997 to $77.8 million in
1998.

EBITDA

83
<PAGE>

to a lower level of earnings from advertising in the higher margin business
publications partly offset by improved results in the events segment and
reduced losses from ZD's retained interest in ZDNet. The improvement in the
events segment was attributed to the absence of losses from the discontinuance
of certain "one-time" shows held in 1997 as well as continued costs savings.
Reduced losses from ZDNet were the result of revenue growth exceeding increases
in expenses. The ratio of EBITDA to revenue was 23.2% for 1998 compared to
24.3% in 1997.

Year ended December 31, 1997 compared with Pro Forma Year ended December 31,
1996

Revenue, net

Net revenue increased by $60.0 million or 5.7% from $1,061.5 million in 1996
to $1,121.5 million in 1997.

Publishing--Net revenue from publishing grew by $37.4 million or 4.7% from
$796.6 million to $834.0 million. Approximately $22 million was due to
inclusion of a full year of results for the electronic gaming publications
acquired in mid-1996 and two publications launched in late 1996. Increases in
advertising rates, generally ranging between 3.0% and 10.0%, and a 5.1%
increase in advertising pages contributed $11.5 million. Revenue from
international operations, which generated 9.5% of the segment's revenue,
decreased by $1.5 million due to the strengthening of the U.S. dollar relative
to the major European currencies. Continued growth from new educational product
launches and sales of market research studies accounted for the balance of the
revenue growth.

Cost of production

Production costs increased $21.2 million or 7.1% from $299.7 million to
$320.9 million.

Publishing production costs increased $9.1 million or 4.3% from $212.3
million in 1996 to $221.4 million in 1997. Costs related to new launches and
volume-related growth increased approximately $20 million but were partly
offset by approximately $10 million of lower paper costs.

The costs of producing events increased $12.2 million or 14.0% from $87.3
million in 1996 to $99.5 million in 1997 primarily as a result of costs related
to new events launched in 1997.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $21.8 million or 4.4%
from $499.9 million to $521.7 million. The increase was due to the addition of
employees to support base business volume growth and launches of new products
and services. Results included a one-time $6.0 million charge for the
consolidation and restructuring of the events business which was announced in
the fourth quarter of 1997. Costs for the publishing segment rose 1.2% while
those for the events segment rose 22.1% due to the number of new launches and
the one-time restructuring charge.

84
<PAGE>

Depreciation and amortization

Total depreciation and amortization decreased $7.6 million to $147.3 million
in 1997. The reduction in depreciation and amortization expense was a result of
certain assets being fully depreciated in 1996.

Interest expense, net

Loss related to Retained Interest in ZDNet

The loss from ZD's retained interest in ZDNet increased to $21.2 million in
1997 from $17.9 million in 1996 due to the operating performance of that
business. See "ZDNet Management's Discussion and Analysis of Financial
Condition and Results of Operations".

Other non-operating income, net

Other non-operating income, net primarily reflects ZD's equity share in
earnings and losses from joint ventures and fees earned from management of
events not produced by ZD. This income increased $2.2 million from $6.1 million
in 1996 to $8.3 million or 36.1% primarily due to a $2.2 million or 36.3%
increase in ZD's share of Mac Publishing, LLC's earnings.

Income Taxes

The 1997 combined income tax benefit of $0.5 million compares to a pro forma
income tax provision of $26.8 million in 1996. The improvement in the tax
provision is due to a higher pre-tax loss giving rise to a tax benefit. The
difference between the 1997 and 1996 effective tax rates and the federal
statutory tax rate of 35.0% is primarily due to non-recognition of tax losses
generated by the MAC Assets ($42.0 million in 1997 and $63.0 million in 1996),
non-deductible goodwill amortization ($10.2 million in 1997 and $8.6 million in
1996) and state and local income taxes. In addition, the 1996 tax provision
increased approximately $2.1 million as a result of pro forma adjustments
related to the ZDI acquisition.

Net loss

As a result of the changes described above, net loss for the period increased
$4.2 million or 6.2% from $67.0 million to $71.2 million.

EBITDA

EBITDA for 1997 was $272.9 million, an increase of $17.5 million or 6.9% from
the $255.4 million generated in 1996. The increase was due to higher revenue
and management fee income, net of higher production costs and selling, general
and administrative expenses. The ratio of EBITDA to revenue remained relatively
constant at 24.3% for 1997 compared to the 1996 margin of 24.1%.

85
<PAGE>

Liquidity and Capital Resources

Sources and uses of cash

As a result of the May 4, 1998 reorganization, ZD's intercompany debt owed to
Softbank was reduced to $83.1 million. Such indebtedness bears interest at 9.9%
and matures in February 2010. Concurrently with Ziff-Davis Inc.'s initial
public offering, Ziff-Davis Inc., on behalf of ZD, issued and sold $250 million
aggregate principal amount of notes. In addition, Ziff-Davis Inc., on behalf of
ZD, entered into a $1.35 billion credit facility, and borrowed $1.25 billion
under such facility, to provide additional funds for the repayment of
intercompany debt to Softbank and to provide for ZD's working capital
requirements. The balance of intercompany obligations owed to Softbank was
converted to equity. See Note 2 to the Combined Financial Statements in this
prospectus.

At December 31, 1998, ZD's outstanding total debt was $1,547.9 million,
excluding unamortized discount, which consisted of $77.9 million due to
Softbank, $250 million in notes and $1,220.0 million under the credit facility.
Under its most restrictive covenant, ZD could have borrowed an additional
$28,800,000 under the credit facility at December 31,1998. For information
concerning the terms of this debt, see "Ziff-Davis Inc.'s Debt".

Cash and cash equivalents were $32.3 million at December 31, 1998, an
increase of $2.0 million from $30.3 million at December 31, 1997. The increase
was due to the factors discussed below:

Cash provided by operations was $100.3 million for the year ended December
31, 1998 compared to $11.9 million for the year ended December 31, 1997. The
increase from 1997 to 1998 was attributed to ZD's lower losses before the
restructuring charge, lower working capital and a decrease in funding to
affiliates and to ZDNet for the 1998 period.

Cash used in investing activities for the year ended December 31, 1998
totaled $69.2 million compared to $59.5 million for the year ended December 31,
1997. The majority of these expenditures were for computer equipment and
leasehold improvements as well as for funding the operation of ZDNet.
Acquisitions and investments in the 1998 period relate to ZD's acquisition of
Sky TV, a trade show in Canada, an additional 50% interest in Family PC
magazine, a European marketing database company as well as an investment in Red
Herring. Acquisitions for the 1997 period reflected the purchase of a 70%
interest in GameSpot.

Cash used in financing activities totaled $29.1 million for the year ended
December 31, 1998, representing proceeds from the reorganization and initial
public offering of $1,863.3 million, net of transaction costs, and funding from
Softbank of $20.4 million offset by the repayment of debt and amounts due to
affiliates of $1,916.1 million. Cash provided by financing activities in 1997
amounted to $47.9 million representing capital contributions partly offset by
repayments of intercompany debt.

ZD had a working capital surplus of approximately $22.6 million at December
31, 1998, compared to a working capital deficit of approximately $379.8 million
at December 31, 1997. Ziff-Davis Inc.'s balance sheet has historically had a
working capital deficit due to significant amounts due to affiliates. ZD also
maintains a significant level of deferred revenue generated from publication
subscriptions paid in advance and prepayments from trade show exhibitors. At
December 31, 1998, Ziff-Davis Inc. had deferred revenue of $151.0 million
compared to $154.7 million at December 31, 1997. Deferred revenue does not
represent a cash liability owed by Ziff-Davis Inc., unless Ziff-Davis

86
<PAGE>

Inc. fails to deliver a magazine or cancels a trade show, and generally does
not affect Ziff-Davis Inc.'s ability to fund day-to-day operations. Working
capital increased as a result of the reorganization and the initial public
offering of Ziff-Davis Inc.'s common stock which resulted in the repayment and
conversion to equity of related party obligations in connection therewith.

On December 11, 1998, Standard & Poors lowered its corporate credit and bank
loan ratings for Ziff-Davis Inc. to BB- from BB and its subordinated debt
rating for Ziff-Davis Inc. to B from B+. This downgrade had no impact on our
current borrowings. Although this downgrade may make future borrowings more
expensive, we do not believe this will have a material impact on our liquidity
or our access to credit markets.

ZD believes, based on its current level of operations and anticipated growth,
that ZD's ability to generate cash, together with cash on hand and available
lines of credit, will be sufficient to make required payments of principal and
interest on ZD's indebtedness and fund anticipated capital expenditures and
working capital requirements. However, actual capital requirements may change,
particularly as a result of any acquisitions ZD may pursue. The ability of ZD
to meet its debt service obligations and reduce its total debt will depend upon
the future performance of ZD.

Funding for ZDNet

In the financial statements of ZD and ZDNet, whenever ZDNet had a cash need,
other than cash needs of ZDNet's foreign operations or cash needs of ZDNet's
operations that are not wholly owned, that cash need was funded by ZD and
accounted for as a capital contribution (i.e., as an increase in ZDNet's
division equity and ZD's Retained Interest in ZDNet). Accordingly, no interest
income from ZDNet has been reflected in the financial statements of ZD. After
the date on which ZDNet stock is first issued, Ziff-Davis Inc. will account for
all cash transfers from one group to or for the account of the other group,
other than transfers in return for assets or services rendered or transfers in
respect of ZD's retained interest that correspond to dividends paid on ZDNet
stock, as inter-group revolving credit advances. These advances will bear
interest at the rate at which Ziff-Davis Inc. could borrow such funds on a
revolving credit basis as the board of directors determines in its sole
discretion. However the board of directors has the discretion to determine that
a given transfer or type of transfer should be accounted for as a long-term
loan, a capital contribution increasing ZD's retained interest in ZDNet or a
return of capital reducing ZD's retained interest in ZDNet.

Credit Facility

ZD's credit facility, as amended, consists of a seven-year $400 million
reducing revolving credit facility, a seven-year $450 million term loan and an
eight-year $500 million term loan. There are no scheduled reductions in the
revolving credit commitment or amortization under the term loan until September
2000.

For the reasons described under "--Restructuring" above, Ziff-Davis Inc.'s
debt to EBITDA ratios at December 31, 1998 would have been above the levels
that originally had been required by its credit facility. On December 16, 1998,
the lenders of the $1.35 billion credit facility agreed to amend certain
provisions of that facility. The amended provisions include an increase in the
allowed leverage ratios. In return, ZD agreed to pay a one-time fee of $3.375
million and increase rates on

87
<PAGE>

amounts borrowed under the facility to rates currently ranging from LIBOR plus
2.875% to LIBOR plus 3.375% depending on the type of loan. Had the increased
interest rates been in effect for the period from Ziff-Davis Inc.'s initial
public offering on April 28, 1998 to December 31, 1998, interest expense would
have increased by approximately $11.9 million. Based on the $1,220.0 million
outstanding on December 31, 1998, the annualized incremental interest is $18.0
million. This increase in interest expense would reduce the amount otherwise
available for funding ZD or ZDNet operations.

ZD's credit facility exposes it to market risk with respect to changes in
interest rates. ZD manages this risk through the use of interest rate swap
agreements, as described below. Through the use of these swap agreements, ZD
has effectively established a fixed interest rate for $550 million of the
outstanding credit facility. Based on the $1,220.0 million outstanding under
the credit facility at December 31, 1998, if the LIBOR rate were to increase by
1%, ZD would incur, after giving effect to the swap agreements, an additional
$6.7 million of annual interest expense.

For a description of the terms of the amended credit facility, see "Ziff-
Davis Inc.'s Debt".

Interest Rate Swaps

On June 10, 1998, ZD entered into interest rate swap agreements, with an
aggregate notional amount of $550 million. Under these swap agreements, which
commenced on August 10, 1998, ZD receives a floating rate of interest based on
three-month LIBOR, which resets quarterly, and pays a fixed rate of interest
each quarter for the terms of the respective agreements. The weighted average
fixed rate ZD pays under these agreements is 5.85%. ZD has entered into these
agreements solely to hedge its interest rate risk. At December 31, 1998, the
three-month LIBOR rate was 5.06%.

These swap agreements are viewed by ZD as risk management tools and are not
used for trading or speculative purposes. The notional amount of $550 million
does not represent a real amount exchanged by the parties, and therefore, is
not a measure of ZD's exposure through its use of swap agreements. The fair
values of these swap agreements were estimated by obtaining quotes from brokers
which represented the amounts that ZD would pay if the agreements were
terminated at the balance sheet date. While it is not ZD's intention to
terminate these swap agreements, these fair values indicated that the
termination of these swap agreements would have resulted in a loss of
$15,627,000.

By nature, swap agreements involve credit risk, due to the possible
nonperformance by counterparties. To mitigate this risk, ZD enters into swap
agreements with major financial institutions and diversifies the counterparties
used as a means to limit counterparty exposure and concentration of risk.

ZDTV

In July 1997, Ziff-Davis Inc. entered into a license and services agreement
to develop ZDTV for MAC Holdings (America) Inc., a company that is wholly owned
by Mr. Masayoshi Son, who is a director of Ziff-Davis Inc. and principal
stockholder of SOFTBANK Corp. Under this agreement, Ziff-Davis Inc. agreed to
fund ZDTV's operations through unsecured advances and was granted an option to
purchase ZDTV for a price equal to MAC Holdings' investment plus 10% per annum
for

88
<PAGE>

the period of investment. On January 15, 1999, Ziff-Davis Inc. exercised this
option and on February 4, 1999 purchased ZDTV at a purchase price of $81.4
million. Ziff-Davis Inc. paid approximately $32.8 million of the purchase price
in cash, funded on February 5, 1999, and paid the remainder by applying
approximately $48.6 million in advances owed to it by MAC Holdings through
December 31, 1998. Ziff-Davis Inc. also agreed to be responsible for the
funding of ZDTV during the period in 1999 prior to the purchase, which will be
accounted for as additional purchase price. The cash portion of the purchase
price was funded by an advance from ZDTV to Ziff-Davis Inc., pursuant to the
ZDTV cash management system, of the funds invested in ZDTV by Vulcan
Programming described below. In connection with its acquisition of ZDTV, Ziff-
Davis Inc. assumed MAC Holdings' obligations under an option granted to
DirectTV to purchase 5% of ZDTV for $15 million, subject to adjustment.

Ziff-Davis Inc. currently has certain long-term agreements to distribute ZDTV
via satellite. Historically, start-up cable television channels have required
substantial investment and there can be no assurance that ZDTV will ultimately
obtain sufficient cable carriage and commercial acceptance to be profitable.
The following unaudited pro forma information assumes that the acquisition of
ZDTV and the sale of a one-third interest in ZDTV to Vulcan Programming had
been consummated on January 1, 1998. Adjustments for ZDTV transactions include
the operating results of ZDTV, amortization of the purchase price of ZDTV,
Vulcan Programming's one-third interest in the losses of ZDTV and the tax
effect of these items. The pro forma data is not necessarily indicative of
actual results had the transaction occurred at January 1, 1998. Further, pro
forma results are not intended to be indicative of future financial results.

<TABLE>
<CAPTION>
Adjustments
Ziff-Davis for ZDTV
Inc. Transactions Pro forma
---------- ------------ ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenue......................... $1,052,749 $ 5,585 $1,058,334
Income (loss) from operations... 38,586 (55,049) (16,463)
Net loss........................ (77,809) (22,443) (100,252)
</TABLE>

Vulcan Transactions

On February 5, 1999, Vulcan Programming, Inc., an entity owned by Paul G.
Allen, purchased a one-third interest in ZDTV for $54 million. On March 4,
1999, Vulcan Ventures, the investment vehicle of Paul G. Allen, purchased
approximately three million shares of Ziff-Davis Inc. common stock for $50
million.

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<PAGE>

Seasonality

Historically, ZD's business has been seasonal as a significant portion of
annual revenue has occurred in the second and fourth quarters. The following
table sets forth certain unaudited quarterly combined statements of operations
data for each of the eight quarters in the period ended December 31, 1998. In
the opinion of the Ziff-Davis Inc.'s management, this unaudited information has
been prepared on a basis consistent with the audited Combined Financial
Statements of ZD appearing elsewhere in this prospectus and includes all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the information set forth therein when read in conjunction with
the Combined Financial Statements and related notes thereto. The operating
results for any quarter are not necessarily indicative of results for any
future period.

<TABLE>
<CAPTION>
Quarters Ended
-----------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- ------------- ------------ --------- -------- ------------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue, net:
Publishing............. $204,281 $211,333 $191,613 $226,788 $191,246 $198,419 $181,726 $211,491
Events................. 15,321 82,135 24,227 165,845 27,121 65,782 29,787 147,177
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue........... $219,602 $293,468 $215,840 $392,633 $218,367 $264,201 $211,513 $358,668
Percentage of total
year.................. 19.6% 26.2% 19.2% 35.0% 20.7% 25.1% 20.1% 34.1%
Cost of production...... 60,842 91,152 61,710 107,196 69,048 74,710 62,898 90,823
Selling, general and
administrative expenses 130,837 132,015 131,633 127,186 131,177 127,114 127,382 132,676
Depreciation and
amortization........... 37,196 37,173 37,804 35,086 35,748 37,859 36,207 36,282
Restructuring charge.... -- -- -- -- -- -- -- 52,239
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations............. (9,273) 33,128 (15,307) 123,165 (17,606) 24,518 (14,974) 46,648
Income (loss) before
taxes.................. (59,901) (17,448) (66,703) 72,404 (68,058) (11,940) (39,458) 14,708
Net income (loss)....... $(59,817) $(17,387) $(66,609) $ 72,634 $ (5,121) $(76,560) $ (4,498) $ 8,370
EBITDA(1)............... $ 25,534 $ 68,216 $ 20,486 $158,658 $ 15,127 $ 63,397 $ 27,487 $138,083
Percentage of total
year.................. 9.4% 25.0% 7.5% 58.1% 6.2% 26.0% 11.3% 56.5%
</TABLE>
- --------
(1) "EBITDA" is defined as income before provision for income taxes, interest
expense, depreciation and amortization. ZD's EBITDA is calculated by adding
(a) ZD's EBITDA before losses related to its retained interest in ZDNet and
(b) ZD's proportionate interest (currently 100%) in ZDNet's EBITDA. EBITDA
for the quarter ended December 31, 1998 does not include one-time
restructuring charge of $52,239,000. EBITDA is not intended to represent
cash flows from operations and should not be considered as an alternative
to net income as an indicator of ZD's operating performance or to cash
flows as a measure of liquidity. Although ZD believes that EBITDA is a
standard measure commonly reported and widely used by analysts, investors
and other interested parties in the publishing and media industries, the
EBITDA presented for ZD may not be comparable to similarly titled measures
reported by other companies.

Inflation and Fluctuations in Paper and Postage Costs

ZD continually assesses the impact of inflation and changes in paper prices.
ZD generally enters into contracts for the purchase of paper which adjust the
price on a quarterly basis. Paper prices began to rise in 1994, rose
significantly in 1995 and 1996 and then decreased in 1997. During 1998, paper
prices were relatively flat. Management anticipates that paper prices will
remain relatively stable in 1999. ZD will continue to monitor the impact of
inflation and paper prices and will consider these matters in setting its
pricing policies. ZD frequently reviews its purchasing and manufacturing
processes for opportunities to reduce costs and mitigate the impact of paper
price and postage rate

90
<PAGE>

increases such as purchasing lighter-grade paper stock or, when paper prices
are at cyclical lows, increasing paper inventory or entering into longer term
contracts with suppliers. However, ZD has not entered, and does not currently
plan to enter, into long-term forward price or option contracts for paper.
Management estimates postage costs will increase approximately 3.5% in 1999.
See "Risk Factors--Other Ziff-Davis Inc. Risks--Ziff-Davis Inc. May Be
Adversely Affected By Fluctuations In Paper And Postage Costs" and "ZD
Description of Business--Print Publishing".

Year 2000 Readiness Disclosure

During 1997, Ziff-Davis Inc., including the businesses comprising ZD, began a
review of its computer systems and software to identify systems and software
which might malfunction due to misidentification of the Year 2000. Ziff-Davis
Inc. is using both internal and external resources to identify, test, correct
and reprogram systems and software for Year 2000 readiness.

At December 31, 1998, Ziff-Davis Inc. was in the research and validation
phase of its Year 2000 project for information technology or IT systems and
non-IT systems. This phase consists of research and validation of all
infrastructure, hardware and software, including platform, wide-area network
and local-area network components. Research for non-IT systems includes
identifying systems that include embedded technology, such as micro-
controllers, which are not Year 2000 compliant.

Ziff-Davis Inc. has identified critical systems and applications that will
either be validated for compliance though formal documentation, through vendors
or through testing. Ziff-Davis Inc. will enter the testing phase of its
infrastructure, hardware, software and databases in the first quarter of 1999
and plans to complete such phase by September 1, 1999. Contingency plans will
be developed for any systems or platforms that are known to be non-compliant as
of September 1, 1999.

91
<PAGE>

management believes these expenses have been substitutive rather than
incremental to the recurring level of general and administrative expenses.
Total capitalized costs incurred in the replacement of systems in connection
with Ziff-Davis Inc.'s Year 2000 readiness efforts as of December 31, 1997 and
1998 were $1,692,000 and $3,837,000, respectively. Ziff-Davis Inc. estimates
that it will capitalize an additional $3,815,000 during 1999 related to its
Year 2000 readiness efforts.

Ziff-Davis Inc. expects to complete testing and replacement of critical
systems by the beginning of the fourth quarter of 1999. Ziff-Davis Inc.'s
estimate of ZD's most reasonably likely "worst case scenario" would be the
failure of its internal applications and systems that process and store certain
information and data. Ziff-Davis Inc. would resolve the failure of such
applications and systems one by one and management of Ziff-Davis Inc. does not
believe that the impact on its critical systems would be material. However, if
Ziff-Davis Inc. or any subscribers, advertisers, licensors, vendors or other
third parties on whom it relies experiences a Year 2000 compliance problem,
this could have a material adverse effect on ZD's profit and liquidity.

Recently Issued Accounting Pronouncements

SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities
issued in June 1998, establishes accounting and reporting standards for
derivative instruments and for hedging activities and is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Ziff-Davis Inc.
does not expect the adoption of SFAS No. 133 to have a material impact on ZD's
results of operations.

ZD expects to adopt this statement beginning with its 2000 financial
statements.

92
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
ZD
Report of independent accountants....................................... 94
Combined balance sheets as of December 31, 1997 and 1998 ............... 95
Combined statements of operations for the years ended December 31, 1996,
1997 and 1998 ......................................................... 96
Combined statements of cash flows for the years ended December 31, 1996,
1997 and 1998 ......................................................... 97
Combined statements of changes in division equity for the years ended
December 31, 1996, 1997 and 1998....................................... 98
Notes to combined financial statements.................................. 99
</TABLE>

93
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Ziff-Davis Inc.

In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, cash flows and changes in division equity,
present fairly, in all material respects, the financial position of ZD (a
division of Ziff-Davis Inc., the "Company") at December 31, 1997 and 1998, and
the results of its operations and cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

As described in Note 1 to the financial statements, ZD is a division of Ziff-
Davis Inc.; accordingly the financial statements of ZD should be read in
conjunction with the audited financial statements of Ziff-Davis Inc.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
New York, NY
February 22, 1999

94
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

COMBINED BALANCE SHEETS
(dollars in thousands)

<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 30,273 $ 32,274
Accounts receivable, net............................... 209,914 208,593
Inventories............................................ 17,853 15,551
Prepaid expenses and other current assets.............. 37,872 34,278
Due from affiliates.................................... 131,290 53,984
Deferred taxes......................................... 8,725 21,483
---------- ----------
Total current assets..................................... 435,927 366,163
Property and equipment, net.............................. 50,391 85,571
Retained interest in ZDNet............................... 83,292 89,547
Intangible assets, net................................... 2,963,169 2,844,317
Other assets............................................. 15,329 44,340
---------- ----------
Total assets............................................. $3,548,108 $3,429,938
========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable....................................... $ 54,823 $ 71,844
Accrued expenses....................................... 77,886 93,824
Unearned income, net................................... 154,682 151,003
Due to affiliates and management....................... 398,332 4,618
Current portion of notes payable to affiliates......... 125,790 7,692
Other current liabilities.............................. 4,222 14,591
---------- ----------
Total current liabilities................................ 815,735 343,572
Notes payable to affiliates.............................. 2,408,240 70,192
Notes payable, net of unamortized discount............... -- 1,469,130
Deferred taxes........................................... 185,613 169,356
Due to management........................................ -- 5,400
Other liabilities........................................ 12,390 19,690
---------- ----------
Total liabilities........................................ 3,421,978 2,077,340
---------- ----------
Commitments and contingencies (Notes 20 and 22)
Division equity.......................................... 126,130 1,352,598
---------- ----------
Total liabilities and division equity.................... $3,548,108 $3,429,938
========== ==========
</TABLE>

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

95
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

COMBINED STATEMENTS OF OPERATIONS
(dollars in thousands)

<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Revenue, net:
Publishing............................... $ 674,040 $ 834,015 $ 782,882
Events................................... 264,884 287,528 269,867
--------- ---------- ----------
938,924 1,121,543 1,052,749
--------- ---------- ----------
Cost of production:
Publishing............................... 181,313 221,367 215,336
Events................................... 87,373 99,533 82,143
--------- ---------- ----------
268,686 320,900 297,479
Selling, general and administrative
expenses.................................. 431,393 521,671 518,349
Depreciation and amortization of property
and equipment............................. 31,647 28,884 27,875
Amortization of intangible assets.......... 102,604 118,375 118,221
Restructuring charge....................... -- -- 52,239
--------- ---------- ----------
Income from operations..................... 104,594 131,713 38,586
Interest expense, net--related party....... (120,646) (190,445) (65,935)
Interest expense, net...................... -- -- (77,612)
Loss related to retained interest in
ZDNet..................................... (16,925) (21,238) (7,884)
Other non-operating income, net............ 6,341 8,322 8,097
--------- ---------- ----------
Loss before income taxes................... (26,636) (71,648) (104,748)
Provision (benefit) for income taxes....... 25,445 (469) (26,939)
--------- ---------- ----------
Net loss................................... $ (52,081) $ (71,179) $ (77,809)
========= ========== ==========
</TABLE>

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

96
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

COMBINED STATEMENTS OF CASH FLOWS
(dollars in thousands)

<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1996 1997 1998
---------- -------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $ (52,081) $(71,179) $ (77,809)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization............. 134,251 147,259 146,096
Amortization of debt discount............. -- -- 2,430
Loss from retained interest in ZDNet...... 16,925 21,238 7,884
Income from equity investments............ (115) (2,030) (7,483)
Deferred tax provision (benefit).......... 25,445 (469) (29,484)
Restructuring charge...................... -- -- 52,239
Changes in operating assets and liabili-
ties:
Accounts receivable..................... (36,194) (14,375) 2,437
Inventories............................. 7,788 (853) 2,923
Accounts payable and accrued expenses... 10,503 (6,065) (4,316)
Unearned income......................... 1,299 (20,101) (6,404)
Due to affiliates and management........ (29,303) (38,543) (3,348)
Other, net.............................. (4,354) (2,982) 15,134
---------- -------- ----------
Net cash provided by operating activities... 74,164 11,900 100,299
---------- -------- ----------
Cash flows from investing activities:
Capital expenditures...................... (21,355) (27,822) (32,117)
Capital contributions to ZDNet............ (13,630) (20,664) (14,269)
Investments and acquisitions, net of cash
acquired................................. (2,124,823) (11,002) (22,772)
---------- -------- ----------
Net cash used by investing activities....... (2,159,808) (59,488) (69,158)
---------- -------- ----------
Cash flows from financing activities:
Proceeds from equity offering............. -- -- 380,337
Proceeds from issuance of notes payable... -- -- 242,723
Proceeds from issuance of bank debt....... -- -- 1,240,200
Proceeds from notes payable to affili-
ates..................................... 1,080,000 10,000 --
Payments of amounts due to affiliates..... -- -- (314,798)
Repayments of credit facility............. -- -- (95,504)
Borrowings under credit facility.......... -- -- 65,504
Payment of deferred financing fees........ -- -- (3,375)
Payments of notes payable to affiliates... -- (31,420) (1,571,264)
Purchase of treasury shares............... -- -- (29,500)
Sale of treasury shares................... -- -- 29,500
Advance from majority shareholder......... -- -- 20,377
Contributed capital....................... 1,015,651 69,366 6,660
Payment of dividends...................... (8,000) -- --
---------- -------- ----------
Net cash provided (used) by financing activ-
ities...................................... 2,087,651 47,946 (29,140)
---------- -------- ----------
Net increase in cash and cash equivalents... 2,007 358 2,001
Cash and cash equivalents at beginning of
period..................................... 27,908 29,915 30,273
---------- -------- ----------
Cash and cash equivalents at end of period.. $ 29,915 $ 30,273 $ 32,274
========== ======== ==========
</TABLE>

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

97
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

COMBINED STATEMENTS OF CHANGES IN DIVISION EQUITY
(dollars in thousands)

<TABLE>
<CAPTION>
Retained Cumulative Total
Paid-in earnings Deferred translation division
capital (deficit) compensation adjustment equity
---------- --------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... $ 379,586 $ 11,831 $ -- $ 111 $ 391,528
Acquisition of Ziff-
Davis Holdings Corp. .. 1,014,178 1,014,178
Return of capital....... (899,948) (899,948)
Capital contribution.... 1,474 1,474
Dividend paid........... (8,000) (8,000)
Shares contributed to
restricted stock plan.. 3,528 (3,528) --
Compensation earned on
restricted stock....... 1,080 1,080
Net loss................ (52,081) (52,081)
Foreign currency
translation
adjustment............. (475) (475)
---------- --------- ------- ------ ----------
Balance at December 31,
1996................... 498,818 (48,250) (2,448) (364) 447,756
Return of capital....... (381,434) (381,434)
Capital contribution.... 128,482 128,482
Shares contributed to
restricted stock plan.. 2,464 (2,464) --
Compensation earned on
restricted stock....... 3,916 3,916
Net loss................ (71,179) (71,179)
Foreign currency
translation
adjustment............. (1,411) (1,411)
---------- --------- ------- ------ ----------
Balance at December 31,
1997................... 248,330 (119,429) (996) (1,775) 126,130
Capital contribution.... 9,007 9,007
Capitalization of
amounts due to
affiliates............. 908,673 908,673
Contribution of
subsidiaries from SBH
to Ziff-Davis Inc...... 736 736
Initial public
offering............... 375,493 375,493
Acquisition of fixed
assets from an
affiliate.............. 9,000 9,000
Purchase of treasury
shares from SBH........ (29,500) (29,500)
Sale of treasury shares
to the public.......... 29,500 29,500
Stock options vested as
severance.............. 162 162
Conversion of Softbank
stock options.......... 2,942 (2,942) --
Issuance of ZDNet
Options................ 4,993 (4,993) --
Net loss................ (77,809) (77,809)
Compensation earned on
restricted stock....... 252 252
Foreign currency
translation
adjustment............. 954 954
---------- --------- ------- ------ ----------
Balance at December 31,
1998................... $1,559,336 $(197,238) $(8,679) $ (821) $1,352,598
========== ========= ======= ====== ==========
</TABLE>

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

98
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS
(numbers rounded to the nearest thousand, except share and per share amounts)

1. Organization and Basis of Presentation

Formation of Ziff-Davis Inc.

Ziff-Davis Inc. was formed through an initial public offering and
reorganization that were completed on May 4, 1998. (See Note 2.) Prior to that
date, the predecessors of Ziff-Davis Inc. (currently named ZD Inc. and ZD
Events Inc.) were wholly owned indirect subsidiaries of SOFTBANK Corp.
(together with its non-Ziff-Davis Inc. affiliates, "Softbank").

As further described below, the combined financial statements include the
accounts of ZDI from its date of acquisition (February 29, 1996) and ZD Events.
Effective December 31, 1997, COMDEX and Forums merged and the surviving company
was renamed ZD COMDEX and Forums Inc. ("ZDCF"). In 1998, ZDCF was renamed ZD
Events Inc.

ZD is the division of Ziff-Davis Inc. (formerly ZD Inc.) focused on the
business of print publishing, trade shows and conferences, market research and
education. ZDNet is the online business division of Ziff-Davis Inc. Each of ZD
and ZDNet is sometimes referred to herein as a "Group".

In order to prepare separate financial statements for ZD and ZDNet, Ziff-
Davis Inc. has allocated all of its consolidated assets, liabilities, revenue,
expenses and cash flow between ZD and ZDNet. Thus, the financial statements of
ZD and ZDNet, taken together, comprise all of the accounts included in the
corresponding consolidated financial statements of Ziff-Davis Inc.

ZD's financial statements reflect the application of certain cash management
and allocation policies adopted by the Board of Directors of Ziff-Davis Inc.
(the "Board"). These policies are summarized in Note 5 under "Certain Cash
Management and Allocation Policies".

Even though Ziff-Davis Inc. has allocated all of its consolidated assets,
liabilities, revenue, expenses and cash flow between ZD and ZDNet, that
allocation and the division of Ziff-Davis Inc. common stock will not change the
legal title to any assets or responsibility for any liabilities and will not
affect the rights of any creditors. Holders of ZD Stock (as defined below) will
continue to be common stockholders of Ziff-Davis Inc. and, as such, will be
subject to all risks associated with an investment in Ziff-Davis Inc. and all
of its businesses, assets and liabilities.

Financial impacts which occur that affect Ziff-Davis Inc.'s consolidated
results of operations or financial position could affect the results of
operations or financial condition of ZD or the market price of ZD Stock. In
addition, net losses of ZDNet, and any dividends or distributions on, or
repurchases of, ZDNet Stock will reduce the assets of Ziff-Davis Inc. legally
available for dividends on ZD Stock. Accordingly, financial information for ZD
should be read in conjunction with financial information for ZDNet and
financial information for Ziff-Davis Inc.

99
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Relationship with Softbank and MAC

Operations and acquisitions

ZD operates in two business segments: (1) publishing and (2)events.

Publishing

The publishing segment is engaged in publishing magazines, journals,
newsletters, electronic information products, training manuals and providing
market research about the computer industry. The publishing segment's principal
operations are in the U.S. and Europe, although it also licenses or syndicates
its editorial content to over 50 other publications distributed worldwide. The
publishing segment includes a 100% retained interest in ZDNet.

Events

Acquisition of ZDI (formerly Ziff-Davis Publishing Company and Ziff-Davis
Holdings Corp.)

Subsequent to the acquisition, Holdings and ZDI were merged with ZDI being
the surviving corporation.

100
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Purchase of the MAC Assets

In 1997, ZD agreed to purchase certain of the MAC Assets for $370,000,000.
The acquisition was effected in two tranches, the first of which closed on
October 31, 1997 and the second of which closed upon completion of the initial
public offering of Ziff-Davis Inc.'s common stock (further described below). At
December 31, 1997, ZD had accrued the $370,000,000 purchase price which was
recorded as a return of capital.

The acquisitions from MAC described above have been accounted for in a manner
similar to a pooling of interests as all entities involved were under common
control at the time of the acquisitions. Accordingly, the accompanying combined
financial statements include the results of operations of the MAC Assets from
February 29, 1996. Throughout these financial statements any reference to ZD
includes ZDI, ZD Events and the MAC Assets (including ZD's 100% retained
interest in ZDNet) from February 29, 1996.

Acquisition of Sendai

On May 8, 1996, ZD acquired substantially all of the assets and liabilities
of Sendai Publishing Group, Inc., a publisher and distributor of magazines,
books, products and computer services related to the electronic gaming
industry, for approximately $27,500,000, plus transaction costs. The
acquisition was accounted for as a purchase and accordingly, Sendai's results
are included in the combined financial statements since the date of
acquisition. The excess of the purchase price over assets acquired approximated
$33,378,000. The operations of Sendai did not have a material effect on the
combined results of operations for the year ended December 31, 1996.

Acquisition of Sky TV

On October 28, 1998, ZD acquired the assets of Sky TV Inc. and certain
affiliates for approximately $12,150,000 in cash plus contingent payments
related to earnings performance payable in 2002. Sky TV is a media company that
provides video content for distribution principally through airline in-flight,
cable and broadcast television. The acquisition was accounted for as a purchase
and accordingly, Sky TV's results are included in the combined financial
statements since the date of acquisition. The excess of the purchase price over
assets acquired approximated $11,318,000. The operations of Sky TV did not have
a material effect on the combined results of operations for the year ended
December 31, 1998.

2. Reorganization and Initial Public Offering

On February 4, 1998, a nonstock corporation, ZD Inc., was formed in
contemplation of a reorganization and initial public offering of Ziff-Davis
Inc. Upon completion of the initial public

101
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

offering (described below), Ziff-Davis Inc. was renamed ZD Inc, ZDCF was
renamed ZD Events Inc. and ZD Inc. was renamed Ziff-Davis Inc.

On May 4, 1998, SOFTBANK Corp., through its wholly owned subsidiary SOFTBANK
Holdings Inc. ("SBH"), completed a reorganization whereby the common stock of
ZD Inc. and ZD Events Inc. were contributed to Ziff-Davis Inc. in exchange for
73,619,355 shares of Ziff-Davis Inc.'s common stock. Concurrent with the
reorganization, Ziff-Davis Inc. (1) completed an initial public offering of
25,800,000 common shares at an initial public offering price of $15.50 per
share, (2) issued $250,000,000 of 8 1/2% subordinated notes due 2008, (3)
entered into a $1,350,000,000 credit facility with a group of banks under which
$1,250,000,000 was borrowed and (4) converted $908,673,000 of intercompany
indebtedness to equity. In addition, Ziff-Davis Inc. received approximately
$9,107,000 of fixed assets from Kingston Technology Company ("Kingston"), a
related party, in exchange for 580,645 shares of Ziff-Davis Inc.'s common stock
and $107,000 in cash. These assets have been subsequently leased back to
Kingston. Total shares of common stock issued to Softbank were 74,200,000. The
transactions described above are herein referred to as the "Reorganization".

On May 28, 1998, Ziff-Davis Inc.'s U.S. underwriters exercised their option
to purchase 2.0 million additional shares of common stock to cover over-
allotments. ZD purchased the additional shares from SBH resulting in no change
to the total number of shares outstanding. On December 31, 1998, SBH
contributed 71,619,355 shares of Ziff-Davis Inc.'s common stock to SOFTBANK
America Inc., an affiliate of SOFTBANK Corp.

102
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Unaudited pro forma financial information

The following summary pro forma information has been prepared as if the
Reorganization and initial public offering, described above, had been
consummated on January 1, 1998. The pro forma adjustments include a $5,219,000
reduction of interest expense, a $900,000 increase in depreciation expense and
a $900,000 reduction of selling, general and administrative expenses, as well
as the tax effect of these items recorded at an effective tax rate of 40%.

<TABLE>
<CAPTION>
Year ended
December 31, 1998
----------------------
(dollars in thousands)
<S> <C>
Revenue, net........................................ $1,052,749
Depreciation and amortization....................... 146,996
Income from operations.............................. 38,586
Interest expense, net............................... 138,328
Loss before income taxes............................ (99,529)
Income tax benefit.................................. (24,851)
Net loss............................................ $ (74,678)
</TABLE>

3. ZDNet Stock Proposal (unaudited)

The book value associated with ZD's Retained Interest in ZDNet will be
increased proportionately for net income (or decreased proportionately for net
loss) of ZDNet. In addition, that book value will be adjusted from time to time
as set forth below.

103
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Currently, Ziff-Davis Inc. provides all funding for ZD and ZDNet as described
in Note 5 under "Certain Cash Management and Allocation Policies". Ziff-Davis
Inc. intends to continue these practices until ZDNet Stock is first issued.
Accordingly, no interest income or expense from or to ZDNet has been reflected
in the financial statements of ZD for any period prior to the date on which
ZDNet Stock is first issued.

After the date on which ZDNet Stock is first issued, for financial statement
purposes, the following policies will apply except to the extent the Board
rescinds, modifies or adds to them:

(a) Ziff-Davis Inc. will attribute each future incurrence or issuance of
external debt or preferred stock (and the proceeds thereof) to ZD, except
in cases where the Board determines otherwise. The Board may determine from
time to time to attribute an incurrence or issuance of debt or preferred
stock (and the proceeds thereof) to ZDNet to the extent that Ziff-Davis
Inc. incurs or issues the debt or preferred stock for the benefit of ZDNet,
but the Board will not be required to do so.

(b) Ziff-Davis Inc. will attribute each future issuance of ZD Stock (and
the proceeds thereof) to ZD. Ziff-Davis Inc. may attribute any future
issuance of ZDNet Stock (and the proceeds thereof) to ZD in respect of its
Retained Interest in ZDNet (in a manner analogous to a secondary offering
of common stock of a subsidiary owned by a corporate parent) or to ZDNet
(in a manner analogous to a primary offering of common stock). Dividends on
and repurchases of ZD Stock will be charged against ZD, and dividends on
and repurchases of ZDNet Stock will be charged against ZDNet. In addition,
at the time of any dividend on ZDNet Stock, Ziff-Davis Inc. will credit to
ZD, and charge against ZDNet, a corresponding amount in respect of ZD's
Retained Interest in ZDNet.

(c) Whenever ZDNet holds cash (other than cash of ZDNet's foreign
operations or cash of ZDNet's operations that are not wholly owned), ZDNet
will normally transfer that cash to ZD. Conversely, whenever ZDNet has a
cash need (other than cash needs of ZDNet's foreign operations or cash
needs of ZDNet's operations that are not wholly owned), ZD will normally
fund that cash need. However, the Board will determine, in its sole
discretion, whether to provide any particular funds to either Group. The
Board is not obligated to cause either Group to provide funds to the other
Group if the Board determines it is not in the best interest of Ziff-Davis
Inc. to do so.

104
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Retained Interest in ZDNet or (3) the Board determines that a given
transfer (or type of transfer) should be accounted for as a return of
capital reducing ZD's Retained Interest in ZDNet. There are no specific
criteria to determine when Ziff-Davis Inc. will account for a cash transfer
as a long-term loan, a capital contribution or a return of capital rather
than an inter-Group revolving credit advance. The Board would make such a
determination in the exercise of its business judgment at the time of such
transfer (or the first of such type of transfer) based upon all relevant
circumstances. Factors the Board would consider include (1) the current and
projected capital structure of each Group, (2) the relative levels of
internally generated funds of each Group, (3) the financing needs and
objectives of the recipient Group, (4) the investment objectives of the
transferring Group, (5) the availability, cost and time associated with
alternative financing sources and (6) prevailing interest rates and general
economic conditions.

(e) Any cash transfer accounted for as an inter-Group revolving credit
advance will bear interest at the rate at which Ziff-Davis Inc. could
borrow such funds on a revolving credit basis (as the Board determines in
its sole discretion). Any cash transfer accounted for as a long-term loan
will have interest rate, amortization, maturity, redemption and other terms
that generally reflect the then prevailing terms on which Ziff-Davis Inc.
could borrow such funds (as the Board determines in its sole discretion).

(f) Any cash transfer from ZD to ZDNet (or for its account) accounted for
as a capital contribution will correspondingly increase ZDNet's division
equity and ZD's Retained Interest in ZDNet. As a result, the number of
shares of ZDNet Stock that could be issued by Ziff-Davis Inc. for the
account of ZD in respect of its Retained Interest in ZDNet (the "Number of
Shares Issuable with Respect to ZD's Retained Interest in ZDNet") will
increase by (1) the amount of such capital contribution divided by (2) the
Market Value of ZDNet Stock on the date of transfer.

(g) Any cash transfer from ZDNet to ZD (or for its account) accounted for
as a return of capital will correspondingly reduce ZDNet's division equity
and ZD's Retained Interest in ZDNet. As a result, the Number of Shares
Issuable with Respect to ZD's Retained Interest in ZDNet will decrease by
(1) the amount of such return of capital divided by (2) the Market Value of
ZDNet Stock on the date of transfer.

4. Summary of Significant Accounting Policies

Principles of combination

The combined financial statements include the accounts of ZD. All significant
transactions within the ZD division have been eliminated in combination.

105
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Investments in companies in which ZD's ownership interests range from 20% to
50% and in which ZD has the ability to exercise significant influence over the
operating and financial policies of such companies are accounted for under the
equity method.

Cash and cash equivalents

ZD considers all highly liquid investments with an original maturity of 3
months or less to be cash equivalents.

Concentration of credit risk

ZD places its temporary cash investments with high credit quality financial
institutions. At times, such investments may be in excess of federally insured
limits. ZD has not experienced losses in such accounts.

ZD's advertisers and exhibitors include principally customers who represent a
variety of technology companies in the U.S. and other countries. ZD extends
credit to its customers and distributors and historically has not experienced
significant losses relating to receivables from individual customers or groups
of customers.

Property and equipment

Inventories

Inventories, which consist principally of paper, are stated at the lower of
cost or market. Cost is determined on a first-in, first-out basis.

Investment in ZDNet

ZD's Retained Interest in 100% of the division equity of ZDNet is reflected
as "Retained Interest in ZDNet" in ZD's balance sheets. Similarly, ZD's
Retained Interest in 100% of the division net losses of ZDNet is reflected as
"Net loss related to retained interest in ZDNet" in ZD's combined statements of
operations.

Ziff-Davis Inc. accounts for ZD's retained interest in ZDNet in a manner
similar to the method prescribed under APB No. 18, The Equity Method of
Accounting for Investments in Common Stock.

106
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Debt issuance costs and discount on senior subordinated notes

Intangible assets

Intangible assets consist principally of advertising lists, exhibitor
relationships, trademarks and trade names and goodwill. Amortization of these
assets is computed on a straight-line basis over estimated useful lives.
Identifiable intangible assets are amortized over a period of 2 to 40 years and
goodwill, which represents the excess of the purchase price over the estimated
fair values of net assets acquired, is amortized over a period of 5 to 40
years. (See Note 9.) ZD assesses the recoverability of intangible assets
whenever adverse events or changes in circumstances indicate that expected
future cash flows (undiscounted and without interest charges) may not be
sufficient to support the carrying amount of intangible assets. If undiscounted
cash flows are not sufficient to support the recorded value of assets, an
impairment loss is recognized to reduce the carrying value of the intangibles
to estimated recoverable value.

Revenue recognition

Advertising revenue for ZD's publications, less agency commissions, is
recognized as income in the month that the related publications are sent to
subscribers or become available for sale at newsstands.

Payments received in advance of trade shows, conferences and seminars are
initially reported on the balance sheet as deferred revenue and are recognized
as income when the events take place.

Revenue generated by market research is recognized when the service is
provided.

Operating costs and expenses

Cost of production includes the direct costs of producing magazines,
newsletters and training materials, primarily paper, printing and distribution,
and the direct costs associated with organizing, producing and managing trade
shows, seminars, conferences and expositions. Selling, general and
administrative costs include subscriber acquisition costs which are expensed as
incurred. Editorial

107
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

and product development costs are expensed as incurred. Product development
costs include the cost of artwork, graphics, prepress, plates and photography
for new products.

Reportable segments

In 1998, ZD adopted Statement of Financial Accounting Standards ("SFAS") No.
131, Disclosures about Segments of an Enterprise and Related Information. SFAS
No. 131 supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of ZD's reportable segments. SFAS No. 131 also requires disclosures
about products and services, geographic areas and major customers. The adoption
of SFAS No. 131 did not affect results of operations or financial position but
did affect the disclosure of segment information. (See Note 21.)

Foreign currency

The effect of translating foreign currency financial statements into U.S.
dollars is included in the cumulative translation adjustments account in
division equity. Gains and losses on foreign currency transactions, which are
not significant to operations, have been included in selling, general and
administrative expenses. Ziff-Davis Inc. has not historically entered into
forward currency contracts.

Other non-operating income

Other non-operating income includes management fee income and ZD's equity
share of income or loss from joint ventures.

Income taxes

ZD uses the asset and liability approach for financial accounting and
reporting of deferred taxes.

Use of estimates

Fair value of financial instruments

ZD's financial instruments recorded on the balance sheet include cash and
cash equivalents, accounts receivable, accounts payable and debt. Because of
their short maturity, the carrying amount of cash and cash equivalents,
accounts receivable and accounts payable approximate fair value. Fair

108
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

value of long-term bank debt is based on rates available to ZD for debt with
similar terms and maturities. Fair value of public debt is based on market
prices.

ZD uses interest rate swap agreements to manage risk on its floating rate
debt portfolio. Fair value of these instruments is based on estimated current
settlement cost.

Interest rate swaps

ZD periodically uses interest rate swaps to manage its exposure to interest
rate fluctuations on its floating rate debt. These interest rate swaps are
entered into for hedging purposes and, as such, must be designated and
effective as a hedge against the risk of increased interest rates. Under the
terms of the agreements ZD pays a fixed interest rate on a notional amount and
receives a variable interest rate on the same notional amount. The differential
between amounts paid and received is recorded as additional interest expense.
Interest rate swaps designated but no longer effective as a hedge would be
reported at market value and the related gains and losses would be recognized
in earnings. Gains or losses on termination of interest rate swaps would be
recognized in earnings in the period of termination.

Stock-based compensation

ZD has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), to account for stock
options. Effective January 1, 1996, ZD adopted the disclosure-only provisions
of Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for
Stock-Based Compensation.

Comprehensive income

ZD implemented SFAS No. 130, Reporting Comprehensive Income, effective
January 1, 1998. This standard requires ZD to report the total changes in
division equity that do not result directly from transactions with
stockholders, including those which do not affect retained earnings. These
changes are not material to ZD's combined financial statements.

New accounting pronouncement

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. ZD does not expect that the adoption of SFAS No.
133 will have a material impact on ZD's results of operations. ZD will adopt
SFAS No.133 beginning with its 2000 financial statements.

109
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Reclassifications

Certain amounts have been reclassified, where appropriate, to conform to the
current financial statement presentation.

5. Certain Cash Management and Allocation Policies

ZD's financial statements reflect the application of certain cash management
and allocation policies summarized below. The Board may rescind, modify or add
to any of these policies.

Treasury activities

Ziff-Davis Inc. manages most treasury activities on a centralized,
consolidated basis. These activities include the investment of surplus cash,
the issuance, repayment and repurchase of short-term and long-term debt, and
the issuance and repurchase of common stock and preferred stock. Each of ZD and
ZDNet generally remits its cash receipts (other than receipts of foreign
operations or operations that are not wholly owned) to Ziff-Davis Inc., and
Ziff-Davis Inc. generally funds ZD's and ZDNet's cash disbursements (other than
disbursements of foreign operations or operations that are not wholly owned),
on a daily basis.

In the financial statements of ZD and ZDNet, (1) all external debt and equity
transactions (and the proceeds thereof) were attributed to ZD, (2) whenever
ZDNet held cash (other than cash of ZDNet's foreign operations or cash of
ZDNet's operations that are not wholly owned), that cash was transferred to ZD
and accounted for as a return of capital (i.e., as a reduction in ZDNet's
division equity and ZD's Retained Interest in ZDNet) and (3) whenever ZDNet had
a cash need (other than cash needs of ZDNet's foreign operations or cash needs
of ZDNet's operations that are not wholly owned), that cash need was funded by
ZD and accounted for as a capital contribution (i.e., as an increase in ZDNet's
division equity and ZD's Retained Interest in ZDNet).

Corporate general and administrative expenses

Ziff-Davis Inc. allocates the cost of certain corporate general and
administrative services and shared services (including certain legal,
accounting (tax and financial), information systems, telecommunications,
purchasing, marketing, intellectual property, public relations, corporate
office and travel expenses) (collectively, "Central Services") to ZD based on
utilization. Where determinations based on utilization alone are impracticable,
Ziff-Davis Inc. uses other methods and criteria that management believes to be
equitable and to provide a reasonable estimate of the cost attributable to ZD.

110
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Taxes

Federal income taxes, which are determined on a consolidated basis, are
allocated to ZD (and reflected in its financial statements) in accordance with
Ziff-Davis Inc.'s tax allocation policy. In general, this policy provides that
the consolidated tax provision (and related tax payments or refunds) are
allocated between the Groups based principally upon the financial income,
taxable income, credits and other amounts directly related to the respective
Groups. Tax benefits that cannot be used by the Group generating such
attributes, but can be utilized on a consolidated basis, are allocated to the
Group that generated such benefits. As a result, the allocated Group amounts of
taxes payable or refundable are not necessarily comparable to those that would
have resulted if the Groups had filed separate tax returns. State income taxes
generally are computed on a separate company basis.

Royalty charges

ZD charges ZDNet an annual fee for the use of various brands and editorial
content. The current annual fee, which is reflected in ZD's financial
statements as a reduction of its selling, general and administrative costs, is
equal to 5% of the first $100,000,000 of ZDNet's revenue for the year, 4% of
the next $50,000,000 of ZDNet's revenue for that year and 3% of any incremental
revenue over $150,000,000 for that year. The Board may at some point in the
future change this fee as it, in its sole discretion, deems appropriate in
light of the circumstances from time to time.

6. Restructuring

Margin pressure on computer equipment manufacturers, industry and product
delays, lower demand in Asia and a focus on the Year 2000 transition are
contributing to a reduced demand for advertising in ZD's magazines, principally
PC Magazine, PC/Computing, Computer Shopper and PC Week. ZD believes these
factors are continuing.

As a result of this reduced demand, in October 1998 Ziff-Davis Inc. announced
a restructuring program with the intent of significantly reducing its cost
base. Ziff-Davis Inc. incurred a pre-tax charge of $52,239,000 for this
restructuring program. The charge included asset impairment costs
($37,890,000), employee termination costs ($8,668,000) and costs to exit
activities ($5,681,000) principally resulting from the closing of three
publications (Windows Pro, Internet Business and Equip), and the reduction of
Ziff-Davis Inc.'s work force by 310 employees. The charge also included costs
resulting from the discontinuation of certain educational journals and trade
shows. The following sets forth additional detail concerning the principal
components of the charge:

111
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

($2,930,000) as well as deferred marketing expenses associated with the
discontinued educational journals ($715,000).

. Employee termination costs related to severed personnel at the closed
publications as well as a rationalization and resulting workforce
reduction of the remainder of
Ziff-Davis Inc.'s operations. Employee termination costs included payments
for severance and earned vacation as well as the costs of outplacement
services and the provision of continued benefits to personnel. As of
December 31, 1998, $5,200,000 of the $8,668,000 related to these employee
terminations had been paid.

Included in accrued expenses is $7,260,000 related to this restructuring
which Ziff-Davis Inc. believes will be paid during the first half of 1999.

7. Accounts Receivable, Net

Accounts receivable, net, consist of the following:

<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
(dollars in
thousands)
<S> <C> <C>
Accounts receivable.................................. $297,647 $292,108
Allowance for doubtful accounts, returns and
cancellations....................................... (87,733) (83,515)
-------- --------
$209,914 $208,593
======== ========
</TABLE>

8. Property and Equipment, Net

Property and equipment, net, consist of the following:

<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
----------- -----------
(dollars in thousands)
<S> <C> <C>
Computers and equipment.......................... $ 45,896 $ 70,584
Leasehold improvements........................... 39,719 61,972
Furniture and fixtures........................... 16,911 28,570
----------- -----------
102,526 161,126
Accumulated depreciation and amortization........ (52,135) (75,555)
----------- -----------
$ 50,391 $ 85,571
=========== ===========
</TABLE>

112
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

9. Intangible Assets, Net

Intangible assets, net, consist of the following:

<TABLE>
<CAPTION>
Range of December 31,
Useful Lives ----------------------
(years) 1997 1998
------------ ---------- ----------
(dollars in
thousands)
<S> <C> <C> <C>
Advertising lists.................... 7-34 $ 885,700 $ 870,000
Exhibitor relationships.............. 4-27 154,070 154,070
Trademarks/trade names............... 30-40 735,595 709,306
License agreements................... 6-14 11,212 11,212
Subscriber lists..................... 3-10 47,175 47,075
Other................................ 2-20 57,599 58,837
Goodwill............................. 5-40 1,316,077 1,348,413
---------- ----------
3,207,428 3,198,913
Accumulated amortization............. (244,259) (354,596)
---------- ----------
$2,963,169 $2,844,317
========== ==========
</TABLE>

All intangible assets are being amortized using the straight-line method over
estimated useful lives, up to 40 years. In determining the estimated useful
lives, ZD considered its competitive position in the markets in which it
operates, the historical attrition rates of advertisers, subscribers and
exhibitors, legal and contractual obligations and other factors.

Recoverability of goodwill and intangible assets is assessed at a minimum on
an annual basis. Impairments would be recognized in operating results if a
permanent diminution in value were to occur based upon an undiscounted cash
flow analysis. In connection with the restructuring described in Note 6, ZD
recorded a $37,175,000 write-down of intangible assets associated with
discontinued publications and events.

113
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

10. Accrued Expenses

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
(dollars in
thousands)
<S> <C> <C>
Payroll and related employee benefits.................. $ 27,672 $ 24,408
Accrued interest....................................... 6,226 13,678
Restructuring reserve.................................. -- 7,260
Other taxes payable.................................... 2,633 2,386
Other.................................................. 41,355 46,092
-------- --------
$ 77,886 $ 93,824
======== ========

11. Unearned Income

Unearned income consists of the following:

<CAPTION>
December 31,
------------------
1997 1998
-------- --------
(dollars in
thousands)
<S> <C> <C>
Unexpired subscriptions................................ $ 82,167 $ 64,940
Prepaid conference fees................................ 80,706 95,706
Reserve for cancellations.............................. (8,191) (9,643)
-------- --------
$154,682 $151,003
======== ========
</TABLE>

12. Income Taxes

Provision (benefit) for income taxes and related assets and liabilities
attributed to ZD are determined in accordance with Ziff-Davis Inc.'s tax
allocation policy. (See Note 5.)

Prior to the Reorganization and initial public offering described in Note 2,
ZD had been included in consolidated U.S. federal income tax returns filed by
Softbank, except for operations relating to the MAC Assets (described in Note
1), which were assets of a separate taxpayer. The tax expense reflected in the
consolidated statements of operations and tax liabilities reflected in the
combined balance sheet have been prepared on a separate return basis as though
ZD filed stand-alone income tax returns. No tax benefit has been recorded for
the losses related to the MAC Assets, as such losses are not available to Ziff-
Davis Inc. Following the Reorganization, Ziff-Davis Inc. will no longer be
included in the consolidated U.S. federal income tax returns filed by Softbank.

114
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Income (loss) before income taxes is attributable to the following
jurisdictions:

<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1997 1998
-------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C>
U.S. ..................................... $(21,607) $(73,795) $(101,644)
Foreign................................... (5,029) 2,147 (3,104)
-------- -------- ---------
Total..................................... $(26,636) $(71,648) $(104,748)
======== ======== =========

Components of the provision (benefit) for income taxes are as follows:

<CAPTION>
December 31,
------------------------------
1996 1997 1998
-------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C>
U.S. federal income taxes:
Current................................. $ -- $ -- $ --
Deferred................................ 19,716 (364) (22,008)
State and local income taxes:
Current................................. -- -- --
Deferred................................ 5,729 (105) (7,476)
Foreign income taxes:
Current................................. -- -- 2,545
Deferred................................ -- -- --
-------- -------- ---------
Total provision (benefit) for income
taxes................................ $ 25,445 $ (469) $ (26,939)
======== ======== =========

A reconciliation of the U.S. federal statutory tax rate to ZD's effective tax
rate on income (loss) before income taxes is as follows:

<CAPTION>
December 31,
------------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Federal statutory tax rate................ 35.0% 35.0% 35.0%
State and local taxes (net of federal tax
benefit)................................. 6.0 6.0 4.6
Loss related to retained interest in
ZDNet.................................... (26.1) (12.2) (2.5)
Non-recognition of combined losses of MAC
Assets................................... (96.9) (22.2) (2.6)
Amortization of non-deductible goodwill... (13.3) (5.8) (3.2)
Other..................................... (0.2) (0.1) (5.6)
-------- -------- ---------
Effective tax rate........................ (95.5)% 0.7% 25.7%
======== ======== =========
</TABLE>

The effective tax rate differs from the federal statutory tax rate primarily
as a result of ZD's inability to deduct losses of the MAC Assets prior to May
4, 1998, and ZD's policy of recording the losses related to its 100% retained
interest in ZDNet on a net of tax basis. The amortization of non-deductible
goodwill resulted primarily from the acquisition of 100% of the stock of
Holdings in 1996.

115
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Following is a summary of the components of the deferred tax accounts at
December 31, 1997 and 1998:

<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
--------- ---------
(dollars in
thousands)
<S> <C> <C>
Current deferred tax assets and (liabilities):
Allowance for doubtful accounts................... $ 8,713 $ 15,068
Unearned Income................................... 965 6,309
Other............................................. (953) 106
--------- ---------
Current deferred net tax assets................. 8,725 21,483
--------- ---------
Noncurrent deferred tax assets and (liabilities):
Basis difference in intangible assets............. (288,286) (247,832)
Basis difference in property and equipment........ 7,394 12,274
Net operating loss and other carryforwards........ 124,233 81,909
Other............................................. 6,307 15,034
--------- ---------
Noncurrent deferred tax liabilities............. (150,352) (138,615)
Valuation allowance................................. (35,261) (30,741)
--------- ---------
Net noncurrent deferred tax liabilities......... (185,613) (169,356)
--------- ---------
Total net deferred tax liabilities.................. $(176,888) $(147,873)
========= =========
</TABLE>

As of December 31, 1997 and 1998 ZD had total deferred tax assets of
$112,351,000 and $99,959,000 respectively, and total deferred tax liabilities
of $289,239,000 and $247,832,000 respectively. The December 31, 1997 and 1998
net deferred tax assets are reduced by a valuation allowance of $35,261,000 and
$30,741,000 respectively, primarily relating to tax benefits of foreign net
operating loss carryforwards which are not expected to be realized. The
decrease in the valuation allowance in 1998 is primarily related to the
expiration of foreign net operating loss carryforwards. No deferred tax asset
has been established for the losses associated with the MAC Assets, inasmuch as
such losses will not be available to ZD.

At December 31, 1998, ZD has U.S. and foreign net operating loss
carryforwards of approximately $172,943,000, which will begin to expire in
1999. ZD's utilization of certain net operating loss carryforwards, of
approximately $112,549,000, is subject to limitations, due to the change of
ownership resulting from the Softbank acquisition of the Holdings stock on
February 29, 1996. Management believes that such limitations will not
significantly affect ZD's ability to recognize the deferred tax assets relating
to the carryforward. Accordingly, no valuation allowance to reduce the deferred
tax asset relating to the carryforward has been established. In addition, ZD
has alternative minimum tax credit carryforwards of $385,000 which may be
carried forward indefinitely until used.

116
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Undistributed earnings of foreign subsidiaries for which no deferred taxes
have been provided approximated $2,789,000 at December 31, 1998. Any additional
U.S. taxes payable on these foreign earnings, if remitted, would be
substantially offset by credits for foreign taxes already paid.

13. Notes Payable

All of Ziff-Davis Inc.'s external debt has been attributed to ZD.

A summary of ZD's notes payable at December 31, 1997 and 1998 is as follows:

<TABLE>
<CAPTION>
1997 1998
---------- ----------
(dollars in
thousands)
<S> <C> <C>
Notes payable to
affiliates (Note 14)..... $2,534,030 $ 77,884
---------- ----------
8 1/2% Senior Subordinated
Notes(1)................. -- 249,130
Credit Facility
Revolving credit........ -- 270,000
Term Loan A............. -- 450,000
Term Loan B............. -- 500,000
---------- ----------
Third party notes
payable.................. -- 1,469,130
---------- ----------
Total notes payable....... 2,534,030 1,547,014
Less current portion notes
payable to affiliates.... (125,790) (7,692)
---------- ----------
$2,408,240 $1,539,322
========== ==========
</TABLE>
- --------
(1)Net of unamortized discount of $870.

8 1/2% senior subordinated notes

On May 4, 1998 ZD issued 8 1/2% Senior Subordinated Notes due 2008 (the
"Notes") in the aggregate principal amount of $250,000,000. The Notes were
issued at a discount of $915,000 which is being amortized to interest expense
over the term of the Notes. Included in the balance sheet as a reduction of
long-term debt at December 31, 1998 is $870,000 representing the unamortized
discount on the Notes. Interest on the Notes is payable semi-annually on May 1
and November 1 of each year. Redemption of the Notes by ZD is subject to
certain limitations. The Notes are subordinated to all existing and future
senior indebtedness.

Credit facility

117
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

$400,000,000 reducing revolving credit facility, with $270,000,000 drawn as of
December 31, 1998; (2) a seven-year $450,000,000 term loan ("Term Loan A");
and (3) an eight-year $500,000,000 term loan ("Term Loan B"). Under the credit
facility, Ziff-Davis Inc. paid interest at rates ranging from LIBOR plus 1.5%
to LIBOR plus 1.75%. See "--Amendment to credit facility" below.

. 10% in 2000, in two equal quarterly installments,

. 20% in each of 2001, 2002, 2003 and 2004 in four equal quarterly
installments and

. 10% at final maturity in March 2005.

The $500 million term loan will be amortized, beginning in September 2000, by:

. $2 million in 2000, in two equal quarterly installments,

. $4 million in each of 2001, 2002, 2003, 2004 and 2005 in four equal
quarterly installments and

. $478 million at final maturity in March 2006.

Under its most restrictive covenant, ZD could have borrowed an additional
$28,800,000 under the credit facility at December 31, 1998.

Covenants

118
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

bankruptcy, ERISA, judgments and change of control. At December 31, 1998,
management believes that ZD was in compliance with all covenants under its debt
agreements.

Amendment to credit facility

On December 16, 1998, the lenders on Ziff-Davis Inc.'s $1,350,000,000 credit
facility agreed to amend certain provisions of that facility. The amended
provisions include an increase in allowed leverage ratios. In return, Ziff-
Davis Inc. agreed to pay a one-time fee of $3,375,000 and increase rates on
amounts borrowed under the facility to rates ranging from LIBOR plus 2.875% to
LIBOR plus 3.375%, depending on the type of loan. The fee has been capitalized
and will be amortized to interest expense over the remaining term of the
facility.

Related-party debt

In March 1995, Ziff-Davis Inc. entered into a $100,000,000 note payable to
Softbank due in quarterly installments, maturing on February 28, 2010 and
bearing interest at 9.9% per annum. (See Note 14.)

Scheduled principal repayments:

Scheduled principal payments due on long-term debt at December 31, 1998 are
as follows:

<TABLE>
<CAPTION>
(dollars in thousands)

<S> <C>
1999..................................................... $ 7,692
2000..................................................... 53,923
2001..................................................... 100,923
2002..................................................... 100,923
2003..................................................... 100,923
Thereafter............................................... 1,183,500
----------
Total.................................................... $1,547,884
Less unamoritized discount............................... (870)
----------
Notes payable, net....................................... $1,547,014
==========
</TABLE>

Interest rate swaps

On June 10, 1998 ZD entered into interest rate swap agreements, with an
aggregate notional amount of $550,000,000. Under these swap agreements, which
took effect on August 10, 1998, ZD receives a floating rate of interest based
on three-month LIBOR, which resets quarterly, and ZD pays a fixed rate of
interest, each quarter, for the terms of the respective agreements. The terms
of these agreements range from 3 to 7 years and the weighted average fixed rate
ZD pays is 5.85%. ZD has entered into these agreements solely to hedge its
interest rate risk under its floating rate bank debt.

119
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

For the year ended December 31, 1998, these interest rate swaps did not have
a material impact on the financial statements.

14. Related Party Transactions

ZD transacts business with a group of companies affiliated through common
ownership with Softbank, and has various transactions and relationships with
members of the group. Due to these relationships, it is possible that the terms
of those transactions are not the same as those that would result from
transactions among unrelated parties.

Receivables/payables

Due from affiliates consist of the following:

<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
-------- -------
(dollars in
thousands)
<S> <C> <C>
Due from:
MAC.................................................... $ 42,687 $50,704
Softbank............................................... 84,365 1,557
Other affiliates....................................... 4,238 1,723
-------- -------
$131,290 $53,984
======== =======

Due to affiliates and management consist of the following:

<CAPTION>
December 31,
----------------
1997 1998
-------- -------
(dollars in
thousands)
<S> <C> <C>
Due to:
Management (including long-term portion)............... $ -- $ 9,900
MAC.................................................... 270,000 --
Softbank............................................... 126,371 --
Other affiliates....................................... 1,961 118
-------- -------
$398,332 $10,018
======== =======
</TABLE>

As part of the 1996 acquisition of ZDI, ZD agreed to assume certain
obligations to management arising out of prior employment arrangements with
previous owners. In January 1997, ZD paid all amounts due, including accrued
interest, through the payment date.

Prior to the Reorganization and initial public offering, ZD was a member of
Softbank's central cash management system. Under this system, ZD would
periodically transfer excess cash to Softbank for cash management purposes and
in turn receive cash advances from Softbank to fund ZD's short-term working
capital requirements. Interest was accrued based on the net balance outstanding
at the

120
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

end of each month. Interest income was earned at the 30-day LIBOR rate for the
applicable month. Interest expense was incurred at the 30-day LIBOR rate plus
0.5%.

As a result of contingent purchase price adjustments related to its
acquisition of Inter@ctive Enterprises, ZD is obligated to pay the prior owners
of Inter@ctive Week $10,850,000 which was recorded as an increase to intangible
assets. The purchase price payments of $950,000, $4,500,000 and $5,400,000 are
due in 1998, 1999 and 2000, respectively. The 1999 and 2000 payments have been
classified as current and long-term due to management.

Other affiliated arrangements

During the years ended December 31, 1996, 1997 and 1998, ZD incurred
$2,000,000, $1,631,000 and $169,000, respectively, in advertising expense with
Yahoo!, Inc. (Yahoo!), an affiliated company.

ZD sells advertising space and exhibition services to Kingston. During the
years ended December 31, 1996, 1997 and 1998, ZD recorded revenue of $882,000,
$2,667,000 and $2,472,000, respectively, from sales to Kingston. These services
were provided under terms consistent with those provided to unaffiliated
customers.

In addition, on May 4, 1998 Ziff-Davis Inc. purchased $9,107,000 of fixed
assets from Kingston in exchange for cash and common stock of Ziff-Davis Inc.
Such fixed assets were subsequently leased back to Kingston. Rental income
included as a reduction of selling, general and administrative expenses
relating to this transaction was $2,400,000 in 1998.

ZD has entered into an agreement to manage certain trade shows and
expositions owned by Softbank, whereby ZD earns management, royalty and
licensing fees. The fees earned by ZD for the years ended December 31, 1996,
1997 and 1998 were $3,394,000, $4,057,000 and $1,117,000, respectively.

ZD has an arrangement with SOFTBANK Services, an affiliated company, whereby
ZD is charged for administrative services provided plus a management fee. For
the years ended December 31, 1996, 1997 and 1998 ZD incurred services fees of
$359,000, $1,259,000 and $810,000, respectively, in relation to this agreement.
During 1998, SOFTBANK Services was sold to an unrelated third party and the
arrangement was terminated.

ZD has entered into certain licensing agreements with Softbank for the
publishing and distribution of Japanese language editions of certain
publications. The fees earned by ZD for the years ended December 31, 1996, 1997
and 1998 were approximately $964,000, $1,818,000 and $709,000, respectively.

121
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Certain ZD employees have been granted options to purchase SOFTBANK Corp.
common stock (the "Softbank Options"). Further, on January 29, 1999, options to
purchase Ziff-Davis Inc. common stock were granted in connection with the
cancellation of certain Softbank Options. (See Note 15.)

Included in selling, general and administrative expenses is an allocation for
Ziff-Davis Inc.'s Central Services amounting to $61,359,000, $85,739,000 and
$92,032,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
Also included as a reduction in selling, general and administrative expenses is
a royalty charge from ZDNet amounting to $811,000, $1,611,000 and $2,807,000
for the years ended December 31, 1996, 1997 and 1998, respectively. (See Note
5.)

ZD's publications sell advertising to ZDNet at discounts to market rates. Had
ZD charged market rates for such advertising, ZD's revenue would have increased
by $2,235,000, $2,671,000 and $1,429,000 for the years ended December 31, 1996,
1997 and 1998, respectively.

In July 1997, Ziff-Davis Inc. entered into a license and services agreement
to develop ZDTV for MAC Holdings (America) Inc. ("MHA"), a company that is
wholly owned by Mr. Masayoshi Son, who is a director of Ziff-Davis Inc. and
principal stockholder of SOFTBANK Corp. Under this agreement, Ziff-Davis Inc.
agreed to fund ZDTV's operations through unsecured advances and was granted an
option to purchase ZDTV for a price equal to MHA's investment plus 10% per
annum for the period of investment. The cumulative advances, which through
December 31, 1997, totaled $14.4 million net of $10.1 million in repayments
were repaid concurrently with the Reorganization. Advances in 1998 totaled
$48.6 million and were repaid upon completion of Ziff-Davis Inc.'s acquisition
of ZDTV. (See Notes 2 and 23.)

Notes payable to affiliates

See Note 2 for a discussion of ZD's restructuring of its debt and equity
structures through the Reorganization and initial public offering.

122
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

ZD's long-term debt payable to Softbank consists of the following:

(2) Notes mature on December 31, 2001 and bear an interest rate of 6.5% per
annum, payable on the last business day of each quarter beginning March 31,
1997.

(3) Notes mature on February 28, 2010 and bear interest at a rate of 8.0% per
annum.

(4) Note matures on February 28, 2010 and bears interest at 9.9% per annum.

(5) Note is payable in 52 equal quarterly installments commencing March 31,
1997 and bears interest at a rate of 8.0% per annum.

(6) Note is payable on January 1, 2007 and bears interest at a rate of 8.0% per
annum.

During 1996, 1997 and 1998 ZD incurred $120,646,000, $190,445,000 and
$65,935,000, respectively, of interest expense due to Softbank related to the
above notes payable.

Guarantee of Softbank's U.S. debt

In April 1996, Softbank signed a line of credit agreement totaling
$50,000,000 with an independent lender for which ZD, along with certain other
SOFTBANK Corp. affiliates, is a guarantor. In January 1997, October 1997 and
March 1998, this line of credit was increased to $75,000,000, $150,000,000 and
$450,000,000, respectively. On May 4, 1998, ZD was released from this
guarantee.

Return of capital and dividends

On December 15, 1996, ZD declared a return of capital of approximately
$900,000,000 paid through the issuance of a note payable to a subsidiary of
Softbank and a cash dividend of $8,000,000

123
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

to Softbank. In 1997, ZD recorded a return of capital of $381,434,000 in
connection with the purchase of companies under common control.

15. Stock Compensation Plans

SOFTBANK Executive Stock Option Plans

The Softbank Executive Stock Option Plans provide for the granting of
nonqualified stock options (the "Softbank Options") to purchase the common
stock of SOFTBANK Corp. to officers, directors and key employees of ZD.
SOFTBANK Corp. is a publicly traded company in Japan. Under the plans, options
have been granted at exercise prices equal to the closing market price in
Japan's public equities market (market price denominated in Japanese yen) on
the date of grant. As of December 31, 1998, substantially all options granted
become exercisable in various installments over the first six anniversaries of
the date of grant and expire ten years after the date of grant. On January 19,
1998, the exercise price of all of the shares outstanding under option
agreements was reset to (Yen)4,000, the closing market price on Japan's Tokyo
Stock Exchange First Section at that date. In conjunction with the repricing,
those options previously exercisable on December 31, 1997 could only be
exercised after July 19, 1998. The repricing of the stock options did not
result in compensation expense to ZD.

1998 Incentive Compensation Plan and the 1998 Non-Employee Directors' Stock
Option Plan

In 1998, Ziff-Davis Inc. adopted the 1998 Incentive Compensation Plan (the
"Incentive Plan") and the 1998 Non-Employee Directors' Stock Option Plan (the
"Non-Employee Directors' Plan"). The Incentive Plan provides for the grant of
options, stock appreciation rights, stock awards and other interests in Ziff-
Davis Inc.'s common stock to key employees of Ziff-Davis Inc. and its
affiliates and consultants. The Non-Employee Directors' Plan provides for the
grant of stock options to non-employee directors. Ziff-Davis Inc. has reserved
8,500,000 shares of common stock for issuance under the Incentive Plan and
200,000 shares of common stock for issuance under the Non-Employee Directors'
Plan. During 1998, Ziff-Davis Inc. granted options to purchase 6,418,495 shares
with exercise prices ranging from $6.00 to $16.00 per share representing the
fair value of such options on the date of grant. Such options vest ratably over
five years.

On December 21, 1998 the Board approved an amendment to the Incentive Plan to
permit grants of options and other stock-based awards with respect to any
series of common stock of Ziff-Davis

124
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Inc. and to increase the number of shares available for issuance from 8,500,000
shares to 17,827,500 shares.

In addition, on December 21, 1998, the Board approved the grant of options to
acquire an aggregate of approximately 1,566,000 shares of ZDNet Stock to
certain employees at a price of $7.50 per share. As a result of the grant ZD
has recorded deferred compensation expense of $4,993,000 for the difference
between the exercise price and the deemed fair value of the underlying shares.
This amount has been recorded as a component of division equity offset by an
addition to paid-in capital. ZD expects to recognize non-cash compensation for
accounting purposes of $4,993,000 ratably over the vesting period of the
options. These options are currently scheduled to vest and become exercisable
on the fifth anniversary of the date of grant.

The terms of the options described in the preceding paragraph require an
adjustment in the number of shares of ZDNet Stock that holders may purchase and
the per share purchase price thereof if the initial Number of Shares Issuable
with Respect to ZD's Retained Interest in ZDNet is different from 40,000,000.
This adjustment is similar to the adjustment that would generally be made to
the terms of employee stock options in the event of a stock split. Ziff-Davis
Inc. currently expects that the initial Number of Shares Issuable with Respect
to ZD's Retained Interest in ZDNet will be 70,000,000. Assuming that this is
so, the total number of shares of ZDNet Stock that holders may purchase upon
exercise of these options will increase to approximately 10,200,000 and the per
share purchase price thereof will decrease to approximately $4.29.

The December 21, 1998 Board actions described above are subject to
stockholder approval. The majority owner of the common stock of Ziff-Davis Inc.
has committed to approve these actions.

On January 29, 1999, Ziff-Davis Inc. granted options to a number of employees
in connection with the cancellation of corresponding options to purchase stock
of SOFTBANK Corp. In connection with these grants, an affiliate of SOFTBANK
Corp. has agreed with Ziff-Davis Inc. that, if and when any of these options
are exercised, (1) that affiliate will cause the shares of Ziff-Davis Inc.
common stock issuable upon such exercise to be supplied to Ziff-Davis Inc. and
(2) Ziff-Davis Inc. will deliver to that affiliate or its designee the exercise
price paid upon such exercise. Thus, the exercise of these options will not
increase the number of shares of Ziff-Davis Inc. common stock outstanding or
Ziff-Davis Inc.'s stockholders' equity. However, ZD expects to recognize
compensation expense for accounting purposes of approximately $2,942,000 over
three years as a result of these grants. As such, this amount has been recorded
in the Financial Statements as additional paid-in capital offset by a reduction
to division equity as deferred compensation.

125
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Option grants

Information relating to the Softbank options during 1996, 1997 and 1998 is as
follows:

<TABLE>
<CAPTION>
Weighted Average
Number Option Price
of Shares Per Share(1)
--------- ----------------
<S> <C> <C>
Shares outstanding under options at
December 31, 1995....................... -- --
Granted.................................. 714,777(2) $87.15
Exercised................................ -- --
Forfeited................................ (12,740)(2) 87.15
--------
Shares outstanding under options at
December 31, 1996....................... 702,037 $87.15
Granted.................................. 368,563 61.25
Exercised................................ -- --
Forfeited................................ (138,034) 78.89
--------
Shares outstanding under options at
December 31, 1997....................... 932,566 $78.14
Granted.................................. 258,215 31.03
Exercised................................ (75,982) 31.03
Forfeited/cancelled...................... (309,936) 31.03
Converted to Ziff-Davis Inc. options..... (81,478) 31.03
-------- ------
Shares outstanding under options at
December 31, 1998....................... 723,385 $31.03
========
Shares exercisable as of:
At December 31, 1996................... -- --
At December 31, 1997 (price range
$44.26-$87.15)........................ 102,510 $82.21
At December 31, 1998 (price $31.03).... 243,686 $31.03
</TABLE>
--------
(1) The exercise price of the stock options is set in Japanese yen. The
exercise prices as shown above have been converted to U.S. dollars
based upon the exchange rate as of the date of grant for the
respective options. The 1998 activity reflects the repricing of all
options outstanding as of January 19, 1998 to (Yen)4,000.

(2) Adjusted for a 1.4:1 stock split during 1996 and a 1.3:1 stock
split during 1997.

Information relating to the Ziff-Davis Inc. stock options during 1998 is as
follows:

<TABLE>
<CAPTION>
Weighted Average
Number Option Price
of Shares Per Share
--------- ----------------
<S> <C> <C>
Shares outstanding under options at December
31, 1997................................... -- --
Granted..................................... 6,418,495 $6.09
Exercised................................... -- --
Converted from Softbank options............. 319,174 8.89
Forfeited................................... (385,590) 6.00
---------
Shares outstanding under options at December
31, 1998................................... 6,352,079 $6.22
=========
</TABLE>

126
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Information relating to the ZDNet stock options during 1998 is as follows:

<TABLE>
<CAPTION>
Weighted Average
Number Option Price
of Shares* Per Share*
---------- ----------------
<S> <C> <C>
Shares outstanding under options at December
31, 1997................................... -- --
Granted..................................... 1,566,357 $7.50
Exercised................................... -- --
Forfeited................................... -- --
---------
Shares outstanding under options at December
31, 1998................................... 1,566,357 $7.50
=========
</TABLE>
--------
* The number of shares and price per share will be adjusted if
the Initial Number of Shares Issuable with Respect to ZD's
Retained Interest in ZDNet is different from 40,000,000.

At December 31, 1998, no shares of either Ziff-Davis Inc. or ZDNet options
were exercisable.

As permitted by SFAS No. 123, ZD has chosen to continue to account for stock
options in accordance with the provisions of APB 25 and, accordingly, no
compensation expense related to stock option grants was recorded in 1996, 1997
or 1998. Pro forma information regarding net income is required by SFAS No. 123
and has been determined as if ZD had accounted for stock options under the fair
value method. The fair value of the option grants was estimated at the date of
grant using the Black-Scholes option-pricing model with the following
assumptions for 1996, 1997 and 1998:

Softbank options
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate........................... 5.89% 6.35% 5.46%
Dividend yield.................................... 0.26% 0.22% 1.50%
Volatility factor................................. 54.03% 51.35% 77.72%
Expected life..................................... 6 years 6 years 6 years

Ziff-Davis Inc. options

<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate........................... n/a n/a 5.03%
Dividend yield.................................... n/a n/a 0.00%
Volatility factor................................. n/a n/a 54.70%
Expected life..................................... n/a n/a 6 years

ZDNet options

<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate........................... n/a n/a 4.67%
Dividend yield.................................... n/a n/a 0.00%
Volatility factor................................. n/a n/a 54.70%
Expected life..................................... n/a n/a 6 years
</TABLE>

127
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

The weighted average fair value of options granted in 1996, 1997 and 1998 is
as follows:

<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Softbank options..................................... $64.30 $34.05 $19.81
Ziff-Davis Inc. options.............................. n/a n/a 5.21
ZDNet options........................................ n/a n/a 4.25
</TABLE>

For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had
compensation cost for the stock option plans been determined based upon the
fair value at the grant date for awards during 1996, 1997 and 1998, consistent
with the provisions of SFAS No. 123, ZD's net loss would have been increased by
approximately $3,000,000, $4,000,000 and $14,084,000, respectively.

Other stock compensation plans

During 1996, 1997 and 1998 employees of ZD were granted 45,760, 61,940 and
27,223 shares of common stock of SOFTBANK Corp., respectively (adjusted for a
1.4:1 stock split during 1996 and a 1.3:1 stock split during 1997) to certain
key employees, subject to restrictions as to continuous employment which expire
over a 3 to 5-year period from the date of grant. The granting of the shares to
ZD's employees has been recorded as additional paid-in capital offset by a
reduction to division equity as deferred compensation. Such amounts were
recorded at the fair value, as established by market price of the shares on the
date of grant. The unearned compensation is being amortized ratably over the
restricted periods. During 1996, restrictions on 13,790 shares expired, 2,160
shares were forfeited and $1,080,000 was charged to expense related to the
restricted stock awards. During 1997, restrictions on 75,210 shares expired,
2,150 shares were forfeited and $3,916,000 was charged to expense related to
these restricted stock awards. During 1998, restrictions on 22,361 shares
expired, 5,736 shares were forfeited and $252,000 was charged to expense
related to these restricted stock awards.

Employee Stock Purchase Plan

On December 21, 1998 the Board approved an amendment to the Employee Stock
Purchase Plan, subject to stockholder approval, to permit grants of options
with respect to any series of

128
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

common stock of Ziff-Davis Inc. and increase the number of shares available for
sale to participants from 1,500,000 shares to 2,500,000 shares.

16. Employee Benefit Plans

Pension plan

Certain employees of ZD who have met eligibility requirements were covered by
a noncontributory defined benefit pension plan. The benefits are based on years
of service and average compensation at the time of retirement. ZD's funding
policy is to contribute amounts sufficient to meet the minimum funding
requirements as set forth in the Employee Retirement Income Security Act of
1974 ("ERISA"). Contributions to the plan are determined in accordance with the
projected unit credit cost method. Plan assets consist of U.S. equity
securities, high grade corporate bonds and commercial paper, and U.S. treasury
notes.

During 1997, ZD decided to terminate the defined benefit pension plan and
pursuant to this decision, all accrued benefits became fully vested as of
August 31, 1997. The amounts below reflect the effects of such termination. All
accrued plan obligations were settled during 1998 and a gain of $156,000 was
recognized in 1998 as a result of the plan settlement.

Net periodic pension cost includes the following components:

<TABLE>
<CAPTION>
1996 1997 1998
------ ----- ----
(dollars in
thousands)
<S> <C> <C> <C>
Service cost.......................................... $ 700 $ 391 $--
Interest cost......................................... 472 456 --
Expected return on plan assets........................ (300) (445) --
Amortization of transition obligation................. 199 75 --
------ ----- ----
Net periodic pension cost............................. $1,071 $ 477 $--
====== ===== ====
</TABLE>

129
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

The following table sets forth the funded status and amounts recognized in
the balance sheet:

<TABLE>
<CAPTION>
1997 1998
------- -----
(dollars in
thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................ $ 5,721 $ --
------- -----
Accumulated benefit obligations.......................... 5,721 --
======= =====
Projected benefit obligations.............................. 5,721 --
Plan assets at fair value.................................. (6,004) --
======= =====
Projected benefit obligation less than of plan assets...... (283) --
Unrecognized net transition asset ......................... 1,279 --
------- -----
Pension liability included in balance sheet................ $ 996 $ --
======= =====
</TABLE>

Retirement plans

Ziff-Davis Inc. maintains various defined contribution retirement plans.
Substantially all of ZD's employees are eligible to participate in one of the
plans under which annual contributions may be made by Ziff-Davis Inc. for the
benefit of all eligible employees. In certain cases, employees may also make
contributions to the plan in which they participate which, and subject to
certain limitations, may be matched by Ziff-Davis Inc. up to certain specified
percentages. Employees are generally eligible to participate in a plan upon
joining Ziff-Davis Inc. and receive matching contributions after one year of
employment. ZD made contributions to the plans totaling $10,023,000,
$12,974,000 and $11,893,000 in 1996, 1997 and 1998, respectively.

17. Investments

ZD has investments in the following companies/joint ventures/divisions:

<TABLE>
<CAPTION>
Carrying value at
December 31,
Ownership -----------------
Equity Investments Percentage 1997 1998
------------------ ---------- -------- --------
(dollars in
thousands)
<S> <C> <C> <C>
MAC Publishing LLC........................... 50% $ 16,244 $ 19,268
ExpoComm LLC................................. 50% 7,758 8,571
Family PC G.P................................ 50% 9,342 --
Cost Investments
----------------
Red Herring Communications, Inc. ............ -- $ 5,000
</TABLE>

The entities listed above are engaged primarily in the publication or
distribution of print media, the organization, production and management of
trade shows and providing interactive information and programming to
technology-oriented Internet users. Other investments and joint ventures are
not material to ZD's financial statements.

130
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

ZD had equity income (loss) from joint ventures of $(796,000), $335,000 and
$7,483,000 in 1996, 1997 and 1998, respectively. In addition, ZD had equity
losses of $16,925,000, $21,238,000 and $7,884,000 in 1996, 1997 and 1998,
respectively, from its 100% Retained Interest in ZDNet.

18. Supplemental Cash Flow Information

<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1997 1998
---------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Cash paid during the year for:
Interest................................... $ 99,509 $185,447 $129,976
Income taxes............................... 360 4 1,000
Noncash investing and financing activities:
Fair value of assets acquired.............. $2,508,603 $ 14,000 $ 55,473
Liabilities assumed........................ 370,518 -- 32,701
---------- -------- --------
Cash paid.................................. 2,138,085 14,000 22,772
Less--cash acquired........................ 13,262 -- --
---------- -------- --------
Net cash paid for acquisitions............. $2,124,823 $ 14,000 $ 22,772
========== ======== ========
Return of capital dividends................ $ 899,948 $381,434 $ --
========== ======== ========
Capital contributions...................... $ 5,002 $ 61,580 $926,096
========== ======== ========
</TABLE>

19. Fair Value of Financial Instruments

ZD's accounting policies with respect to financial instruments are discussed
in Note 4.

The carrying amounts and fair values of ZD's significant on balance sheet
financial instruments at December 31, 1997 and 1998 are as follows:

<TABLE>
<CAPTION>
At December 31,
-------------------------------------------
1997 1998
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Values Amount Values
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents......... $ 30,273 $ 30,273 $ 32,274 $ 32,274
Accounts receivable............... 209,914 209,914 208,593 208,593
Accounts payable.................. 54,823 54,823 71,844 71,844
Long-term debt (including current
portion)......................... 2,534,030 2,534,030 1,547,014 1,543,839
</TABLE>

Interest rate swaps

ZD utilizes interest rate swaps to reduce the impact on interest expense of
fluctuating interest rates on its variable rate debt. Under ZD's interest rate
swap agreements, ZD agreed with the counterparties to exchange, at quarterly
intervals, the difference between ZD's fixed pay rate and the

131
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

counterparties' variable pay rate on three-month LIBOR. At December 31, 1998,
ZD was a fixed payor of 5.85% on an aggregate notional amount of $550,000,000.

The fair values of these interest rate swaps were estimated by obtaining
quotes from brokers which represented the amounts that ZD would pay if the
agreements were terminated at the balance sheet date. While it is not ZD's
intention to terminate these interest rate swaps, these fair values indicated
that the termination of the interest rate swap agreements would have resulted
in a loss of $15,627,000.

20. Operating Lease Commitments

ZD utilizes equipment and space under lease to Ziff-Davis Inc. ZD's portion
of the minimum lease payments based on square feet utilized are as follows:

<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
1999..................................................... $ 31,408
2000..................................................... 32,601
2001..................................................... 30,371
2002..................................................... 28,893
2003..................................................... 27,579
Thereafter............................................... 225,952
--------
Total.................................................. $376,804
========
</TABLE>

Netted in the above totals is approximately $5,000,000 for which ZD has
noncancelable subleases in place. Total sublease income approximates ZD's
required payments under the related leases. Rent expense amounted to
approximately $22,347,000, $28,646,000 and $23,087,000 for the years ended
December 31, 1996, 1997and 1998, respectively.

21. Segment Information

ZD has adopted the provisions of SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information. As such, prior years data has been
restated in accordance with SFAS No. 131.

Business segment information

Reportable segments are based on ZD's method of internal reporting which
segregates its business by product lines. Management measures operating
performance of the business segments based on "EBITDA". EBITDA is defined as
income before provision for income taxes, interest expense, depreciation and
amortization and restructuring charge. ZD's EBITDA is calculated by adding (a)
ZD's EBITDA before losses related to its retained interest in ZDNet and (b)
ZD's proportionate interest in ZDNet's EBITDA. EBITDA is not intended to
represent cash flows from

132
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

operations and should not be considered as an alternative to net income as an
indicator of ZD's operating performance or to cash flows as a measure of
liquidity. Although ZD believes that EBITDA is a standard measure commonly
reported and widely used by analysts, investors and other interested parties,
in the publishing business and media industries, the EBITDA presented for ZD
may not be comparable to similarly titled measures reported by other companies.

ZD's reportable segments are:

Publishing

Events

The events segment is engaged in the organization, production and management
of trade shows, conferences and seminars for the computer industry. The events
segment's principal operations are in North America and to a lesser extent in
Europe, Asia and Latin America.

The accounting policies of the segments are the same as those described in
Note 3 under "Summary of Significant Accounting Policies". ZD evaluates the
performance of its segments and allocates resources to them based on EBITDA.
Any inter-segment revenue included in segment data are not material. The
following presents information about the reported segments for the years ending
December 31:

<TABLE>
<CAPTION>
1996 1997 1998
-------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Revenue:
Publishing................................. $674,040 $ 834,015 $ 782,882
Events..................................... 264,884 287,528 269,867
-------- ---------- ----------
Total.................................... $938,924 $1,121,543 $1,052,749
======== ========== ==========

<CAPTION>
1996 1997 1998
-------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
EBITDA:
Publishing................................. $124,467 $ 169,145 $ 124,396*
Events..................................... 108,791 103,749 119,698
-------- ---------- ----------
Total.................................... $233,258 $ 272,894 $ 244,094
======== ========== ==========
</TABLE>
- --------
* Before restructuring charge of $52,239,000.

133
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Total Assets:
Publishing................................ $2,441,441 $2,423,822 $2,285,920
Events.................................... 1,143,522 1,124,286 1,144,018
---------- ---------- ----------
Total................................... $3,584,963 $3,548,108 $3,429,938
========== ========== ==========
</TABLE>

A reconciliation of total segment EBITDA to total combined loss before income
taxes, for the years ended December 31, 1996, 1997 and 1998 is as follows:

<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C>
EBITDA:
Total segment EBITDA...................... $233,258 $272,894 $ 244,094
Restructuring charge...................... -- -- (52,239)
Depreciation & amortization............... (31,647) (28,884) (27,875)
Amortization of intangible assets......... (102,604) (118,375) (118,221)
Interest expense, net..................... (120,646) (190,445) (143,547)
Non-EBITDA loss related to retained
interest in ZDNet........................ (4,997) (6,838) (6,960)
-------- -------- ---------
Combined loss before income taxes....... $(26,636) $(71,648) $(104,748)
======== ======== =========
</TABLE>

Equity in income of investees included in the publishing segment EBITDA for
the years ended December 31, 1996, 1997 and 1998 was $(796,000), $335,000 and
$2,044,000, respectively. Equity in income of investees included in the events
segment EBITDA for the years ended December 31, 1996, 1997 and 1998 was $--,
$1,695,000 and $5,439,000 respectively.

Publishing's investment in equity method investees for the years ended
December 31, 1996, 1997 and 1998 was $10,138,000, $25,586,000 and $19,268,000,
respectively. Events' investment in equity method investees for the year ended
December 31, 1996, 1997 and 1998 was $7,698,000, $7,758,000 and $8,571,000,
respectively.

134
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

The following is sales information by geographic area as of and for the
respective years ended December 31.

<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Revenue:
U.S....................................... $ 838,749 $1,008,681 $ 936,075
Foreign................................... 100,175 112,862 116,674
---------- ---------- ----------
Total................................... $ 938,924 $1,121,543 $1,052,749
========== ========== ==========

Foreign revenue is based on the country in which the sales originate. Revenue
from no single foreign country was material to the combined revenues of ZD.

The following is long-lived asset information by geographic area as of and
for the years ended December 31, 1996, 1997 and 1998:

<CAPTION>
1996 1997 1998
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Long-lived assets:
U.S. ..................................... $3,211,881 $3,103,611 $3,049,645
Foreign................................... 9,580 8,570 14,130
---------- ---------- ----------
Total................................... $3,221,461 $3,112,181 $3,063,775
========== ========== ==========
</TABLE>

No single customer accounted for more than 10% of total revenue for each of
the years ended December 31, 1996, 1997 and 1998.

22. Contingencies

ZD is subject to various claims and legal proceedings arising in the normal
course of business.

Class action and derivative litigations

135
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

class of purchasers of Ziff-Davis Inc.'s common stock from the date of the IPO
through October 8, 1998 unspecified damages, interest, fees and costs,
rescission, and injunctive relief such as the imposition of a constructive
trust upon the proceeds of the IPO.

In addition, two derivative suits have been filed by stockholders against
Ziff-Davis Inc. and all of its directors in the Court of Chancery of the State
of Delaware for New Castle County. The complaints allege that the directors
breached their fiduciary duties to Ziff-Davis Inc. by repricing the stock
options awarded to certain directors and demand the nullification of the
repricing and an injunction against exercise by the directors of any repriced
option. The Plaintiffs filed an amended complaint on February 17, 1999 (which
is substantially similar to the original complaints, except that the amended
complaint also addresses the granting of "new options" at an allegedly "reduced
exercise price") and have indicated their intent to seek consolidation of the
actions. A response to the amended complaint has not yet been filed.

Other legal proceedings

Although the outcome of this case cannot be predicted, Ziff-Davis Inc.
believes that there are substantial defenses to the claims. Ziff-Davis Inc.
currently cannot estimate its ultimate liability, if any, with respect to such
pending litigations. Accordingly, no provision for such matters has been
included in the financial statements.

136
<PAGE>

ZD
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

23. Subsequent Events

ZDTV

On February 4, 1999, ZD purchased ZDTV at a purchase price of approximately
$81,400,000. (See Note 14.) ZD paid approximately $32,800,000 of the purchase
price in cash (settled on February 5, 1999) and paid the remainder by applying
approximately $48,600,000 in advances owed to it by MAC Holdings America. ZD
also agreed to be responsible for the funding of ZDTV during the period in 1999
prior to the purchase which will be accounted for as additional purchase price.
Other than advances to ZDTV which are reported on ZD's balance sheet, the
results of operations of ZDTV are not included in ZD's results for any of the
periods presented. This acquisition will be accounted for in 1999 under the
purchase method of accounting.

Vulcan transactions

On February 5, 1999, Vulcan Programming, an entity owned by Paul G. Allen,
purchased a one-third interest in ZDTV for $54,000,000 in cash. On March 4,
1999, Vulcan Ventures, the investment vehicle of Paul G. Allen, purchased
approximately three million shares of Ziff-Davis Inc. common stock for
$50,000,000 in cash.

Unaudited summary pro forma information

The following unaudited summary pro forma information assumes that the
acquisition of ZDTV and the sale of a one-third interest in ZDTV to Vulcan
Programming had been consummated on January 1, 1998. Adjustments for ZDTV
transactions include the operating results of ZDTV, amortization of the
purchase price of ZDTV, Vulcan Programming's one-third interest in the losses
of ZDTV and the tax effect of these items. The pro forma data is not
necessarily indicative of actual results had the transaction occurred on
January 1, 1998. Further, pro forma results are not meant to represent future
financial results.

<TABLE>
<CAPTION>
Adjustments
for ZDTV
ZD Transactions Proforma
---------- ------------ ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenue............................. $1,052,749 $ 5,585 $1,058,334
Income (loss) from operations....... 38,586 (55,049) (16,463)
Net loss............................ (77,809) (22,443) (100,252)
</TABLE>

Incentive Plan

On March 4, 1999, the Board approved an amendment to the Incentive Plan,
subject to stockholder approval which increased the number of shares available
for issuance under the Incentive Plan, to 23,327,500 shares.

137
<PAGE>

ZDNET
DESCRIPTION OF BUSINESS

Industry Background

Growth Of The Internet And Demand For Technology-Related Content

The Internet has emerged as a global mass medium, enabling millions of people
to access and share information and conduct business electronically. Forrester
Research, Inc. estimates that the number of adult Web users will reach 51
million in the U.S. by the end of 1998 and will grow to 99 million by the end
of 2001. Major factors driving this growth include the increasing familiarity
and acceptance of the Internet by businesses and consumers, the increasing
number of personal computers in homes and offices, the ease, speed and lower
cost of Internet access and improvements in network infrastructure.

As the Internet gains acceptance as an advertising and commerce medium and
Internet use continues to grow, technology will play an increasing role in
everyday life. According to Dataquest, worldwide end user spending for
information technology products and related services is expected to be
approximately $2 trillion in 1999 and grow 10% to 15% annually over the next
three years. With the growth of the Internet and the widespread use of personal
computers, cellular phones, pagers and personal digital assistants, technology
has become an area of broad general interest. Users of technology products and
services confront an increasingly complex marketplace due to the rapid pace of
technological change and the frequent introduction of new products and
services. The prevalence of technology and the growing number of technological
choices heighten the demand for up-to-date, comprehensive information about
technology-related products and services.

Advertising And Commerce On The Internet

As the Internet and the technology industry continue to grow, the value of
the Internet to advertisers and merchants can be expected to increase as a
result of:

. the growth in the number of Web users,

. the Internet's global reach,

. the attractive demographic profile of Web users,

. the interactive nature of the medium,

. the increased willingness of users to conduct transactions online and

. the ability to effectively target user groups, customize promotions and
measure Web usage and viewer demographics.

ZDNet believes these characteristics allow Internet advertisers to build
valuable customer relationships through targeted advertising and sales
campaigns. The overall market for advertising on the Internet was approximately
$900 million in 1997 and $1.3 billion in the first nine months of 1998, as
measured by the Internet Advertising Bureau. According to Forrester Research,
Inc., advertising spending on the Internet will exceed $4 billion in the year
2000 and double to more than $8 billion by 2002.

138
<PAGE>

The Internet also provides an efficient means for merchants to sell their
products and services directly to consumers. Forrester Research, Inc. forecasts
that worldwide commerce revenue on the Internet will increase from
approximately $35 billion in 1998 to $1.4 trillion in 2003. Internet
transactions are expected to increase as merchants improve Web-based
transaction-processing technology and as consumers become more accustomed to
purchasing online.

ZDNet believes Internet sites focused on technology are particularly well-
suited to promote advertising and commerce because they offer a large user base
with attractive demographics for technology and general consumer product
companies. Historically, technology-focused sites have attracted primarily
technology advertisers, which, according to InterMedia Advertising Solutions,
accounted for approximately 47% of all U.S. online advertising dollars during
the first nine months of 1998. Recently, many of the largest advertisers on
traditional media, including consumer product companies, automobile
manufacturers and travel-related companies, have expanded their use of Internet
advertising. Such consumer-related advertising accounted for 27% of all U.S.
online advertising in the third quarter of 1998 according to the Internet
Advertising Bureau, and ZDNet believes Internet advertising will become an
increasing percentage of consumer product companies' overall advertising
budgets in the future. Internet sites with well-recognized brand names that
focus on technology should be well-positioned to capitalize on emerging
Internet advertising and commerce opportunities.

The ZDNet Solution

ZDNet's Web sites are designed to capitalize on the market opportunities
created by the increasing importance of technology, the emergence of the
Internet as a mass medium and the appealing demographics of technology-oriented
Web users. ZDNet focuses on content, community and commerce, enabling users to
research topics of interest, interact with other users, download software and
evaluate and purchase a wide range of products and services at a single
destination. Ziff-Davis Inc. was among the first content providers to focus its
efforts on the Internet, launching its zdnet.com service in the fall of 1994.
The ZDNet solution is based on the following distinguishing attributes:

Broad-Based Comprehensive Technology And Internet-Related Content

ZDNet's interconnected and easily navigable sites offer depth and breadth of
coverage on the technology industry as well as topics of general interest,
including financial information and general news. ZDNet divides its content
broadly into "channels" that focus on specific topics or audience groups. Over
60 sites can be reached through the zdnet.com home page or through their own
distinct domains, and sites are generally organized with similar navigation and
layout to ensure consistency throughout the network. ZDNet's online editorial
and technical staff of industry experts develops high-quality original content
specifically for online interactive use. ZDNet offers over 1,200 news stories
per month, 50,000 product listings, 30,000 product reviews and 34,000
downloadable programs. In addition, through ZDNet's relationship with ZD, ZDNet
has use of the content of all of ZD's computer and technology publications,
including PC Magazine, PC/Computing, PC Week and Yahoo! Internet Life.

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<PAGE>

Strong Community Affinity

ZDNet has developed an extensive user community and encourages active
participation by enabling users to personalize their content and join user
groups based on common interests. ZDNet provides forums, chat groups and other
interactive online environments that allow users to express views and share
information. In addition, its industry personalities host interactive forums
that encourage user comments and feedback. To promote its community, ZDNet has
instituted a common registration system for chat, discussion and e-mail
capabilities. Registered users are able to access member-only software
downloads and are eligible for special offers such as discounted trial
enrollment in ZDU's online courses, which is part of ZD's education business.
ZDNet makes a variety of e-mail newsletters and alerts available to its users,
allowing subscribers to select those of interest. As of December 1998, ZDNet
had an e-mail newsletter subscription base of over 2.3 million and distributed
over 52 million e-mail newsletters and alerts to its users in that month.

Attractive Environment For Advertising And Commerce

ZDNet facilitates commerce on its sites by providing users with the ability
to evaluate, compare and purchase products and services and by providing
advertisers and merchants with access to a highly targeted user group with
attractive demographics. According to the Winter 1999 @Plan study, among users
of ZDNet's Internet sites:

. 59% have college degrees,

. 85% have an annual household income of at least $35,000, and 21% in
excess of $100,000,

. 49% use the Internet every day and

. 56% purchased a product in the prior six months after gathering
information on the Internet.

In addition, ZDNet has developed an array of sales and marketing options,
such as banners, sponsorship wraps, buttons, text and graphical links, e-mail
sponsorships and custom microsites, that are designed to assist advertisers in
crafting unique and distinctive programs to target and reach their audiences.
ZDNet is also the first non-ad agency to win a prestigious "Creative Excellence
in Business Advertising" award, presented by the American Business Press.

Relationship With ZD

ZDNet derives many benefits from its relationship with ZD, including the
ability to leverage the ZD brand, use content from ZD publications and cross-
market across all of ZD's platforms. ZD publishes leading technology print
publications, such as PC Magazine, PC/Computing, PC Week and Yahoo! Internet
Life, produces leading trade shows and conferences, such as COMDEX,
NetWorld+Interop and Seybold Seminars, operates ZDTV, a 24-hour cable
television network, and maintains well-recognized market research and education
platforms, such as ZDU. For over a decade, the "Ziff-Davis" name has been a
leading brand associated with technology content.

The ZDNet Strategy

ZDNet's objective is to be the leading online content site focused on
technology products and services for users and the preferred online platform
for advertisers and merchants. The key elements of ZDNet's strategy are:

140
<PAGE>

Continue To Offer Differentiated Technology And Internet-Related Content

ZDNet will continue to provide comprehensive and authoritative coverage of
the technology field in order to attract users and increase the value of its
sites to advertisers and merchants. Based on market research and user traffic
and feedback, ZDNet will continue to identify technology trends and develop
innovative sites that appeal to specific market segments and user interests. In
the past 12 months, ZDNet has introduced 16 new sites, or new areas within
existing sites, including special areas addressing Year 2000 issues, small
businesses, electronic commerce and technology-related careers.

Grow The ZDNet Community

ZDNet seeks to further grow its membership base by continuing to provide
interesting forums, chat groups and user groups, developing additional
interactive capabilities, promoting new online personalities and offering
insights from a broad range of experts. In response to these efforts, ZDNet's
registered user community has increased from 956,490 on December 31, 1997 to
1,844,571 on December 31, 1998, an increase of 93%. ZDNet also recently
launched ZDRewards, an online membership service which entitles subscribers to
receive a bundle of Ziff-Davis Inc. products and services, such as a
subscription to a ZD magazine or a semester of ZDU online classes, all for one
discounted price.

Build ZDNet Brand Strength

ZDNet seeks to reinforce its brand recognition and extend its reputation as a
leading site among users of technology information by continuing to leverage
the Ziff-Davis and ZDNet names. ZDNet's brand-building initiatives include
displaying the ZDNet brand on all ZDNet site pages, including those accessed
through the portals of its strategic partners, providing consistent formats for
easy navigation on all its sites and promoting a common registration program
for users. ZDNet plans to continue to promote the ZDNet brand in ZD
publications and events and to otherwise coordinate marketing efforts with ZD.

Increase Advertising And Commerce Revenue

ZDNet seeks to increase revenue generated from advertising and commerce by
continuing to develop innovative content, growing its user community, expanding
its base of technology advertisers, attracting consumer and other advertisers
and facilitating commerce opportunities. ZDNet continually refines its online
tracking reports to better enable advertisers and merchants to demonstrate
their advertising effectiveness, evaluate their marketing initiatives and
increase the rate of return on their advertising investments. ZDNet plans to
increase the number of its revenue-sharing commerce relationships with leading
technology and consumer product providers. ZDNet also plans to increase the
number of product listings on its ComputerShopper.com channel and expand its
ability to facilitate electronic commerce.

Strengthen And Expand Strategic Alliances

ZDNet seeks to increase brand awareness, traffic and revenue by entering into
strategic alliances with key Internet companies. ZDNet currently has alliances
with many of the Web's leading sites,

141
<PAGE>

including Yahoo!, Excite, MSNBC and Deja News, and plans to establish new
alliances as opportunities arise. As part of these alliances, ZDNet typically
provides selected branded content for its partners' sites in return for a
variety of benefits including revenue and links back to ZDNet sites from the
partner's site, providing ZDNet with access to a broader base of consumers.

Extend International Presence

ZDNet had localized foreign language editions in more than 16 countries as of
December 31, 1998 and plans to continue to expand into selected overseas
markets through international launches as well as joint ventures and licensing
arrangements with local operating partners, as opportunities arise.

ZDNet Sites and Services

ZDNet offers more than 60 interconnected and easily navigable sites focused
on providing comprehensive, authoritative and timely online technology content,
creating an active community environment for its users and providing
opportunities for commerce.

ZDNet considers its content to be the most thorough and interesting content
on technology that is available online. ZDNet estimates that it currently
offers more than 300,000 pages of content on its interconnected sites where
users can research, evaluate, learn, interact, download and shop. ZDNet creates
original content using its own skilled and dedicated team of 149 editors,
online producers, developers and operations staff and also uses content from ZD
publications and various strategic alliance partners. ZDNet's content is
divided broadly into "channels" that aggregate information from a variety of
sources around a specific topic area or audience focus, thereby facilitating
accessibility. All channels can be reached through the main zdnet.com home page
or through their own distinct domains, making browsing and searching easy.

ZDNet seeks to foster a sense of community and engage its users in an
interactive online experience where they can express opinions and share
information about technology-related products and issues. ZDNet offers a
variety of features and activities designed to facilitate its community growth
and build user loyalty and affinity. Users can personalize the content they
seek and join user groups with others who have similar interests. In addition,
users can activate the "talk-back" feature, which allows them to state their
views, and the "e-mail to a friend" feature, which allows them to easily send
articles of interest to others. During January 1999, ZDNet estimates that
275,000 e-mails were sent using the e-mail to a friend feature. Many of ZDNet's
channels provide moderated forums and chat events on a variety of current news
and segment topics and certain hosts of these forums have become popular
Internet personalities.

ZDNet seeks to facilitate commerce on the Internet by combining information
about hardware and software products and services with direct access to
merchants. ZDNet's primary computer commerce site, ComputerShopper.com, was one
of the first Web shopping services to integrate comparative pricing, how-to
guides, buying tips, specifications, product reviews and multiple direct
purchasing sources. ComputerShopper.com currently displays products from more
than 113 merchants in over 88 product categories and enables shoppers to both
evaluate products and directly make purchases online.

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<PAGE>

The following table highlights a number of ZDNet sites:

<TABLE>
<CAPTION>
Selected Sites Description
- -------------- -----------
<S> <C>
Anchor Desk..... Inside analysis of technology news and products
At Home......... Resources for home computing
Careers......... Employment center for computer industry professionals
Classifieds..... Ads and person-to-person auctions for computing products
Community
Central......... Worldwide computing community
ComputerShopper.com.. Marketplace to shop, compare and buy
DevHead......... Tools, tips, and advice for Web developers
E-Business...... Business advice on e-commerce opportunities
Enterprise...... News, reviews and analytical editorial for IT professionals
Equip........... Guide to electronic gadgets for home and office
</TABLE>

143
<PAGE>

<TABLE>
<CAPTION>
Selected Sites Description
- -------------- -----------
GameSpot........ Popular destination for PC and video game users
Help Channel.... Advice on optimizing the use of a PC or Mac
Inter@ctive
Investor........ Latest financial data and news for technology investors
Inter@ctive News and resources for IT professionals in interactive
Week........... communications
PC/Computing.... Advice on getting the most out of technology
PC Magazine..... Comparative reviews, buying advice and commentary
PC Week...................Breaking.news.and.analysis.on.the technology industry
<S> <C>
Products Channel..........Reviews.to.help.evaluate.and.select products
Sm@rt Reseller............News.and.resources.for.computer.resellers, integrators and
consultants
Small Business Advisor....Technology.solutions.for.small.business.professionals
</TABLE>

144
<PAGE>

<TABLE>
<CAPTION>
Selected Sites Description
- -------------- -----------
<S> <C>
Software Library........Source.for.tested.and.reviewed.software..
Yahoo! Internet Life....Reviews.and.links.to.interesting.Internet.sites.
ZDNetwork News..........Timely.and.comprehensive.news.on.the.technology.
industry
ZDRewards...............Offering.members.discounted.Ziff-Davis.products.and..
services
ZDY2K...................News.and.resources.about.Year.2000.issues.
</TABLE>

Select ZDNet Sites

ZDNet.com (www.zdnet.com) is the home page and gateway for all of ZDNet's
sites and was ranked first among all Web sites in the category of news,
information and entertainment (as measured by net reach) in December 1998
according to Media Metrix.

ComputerShopper.com (www.computershopper.com) (formerly called NetBuyer)
supplies users with a comprehensive display of computer and technology products
in one central location with direct links to merchants to facilitate commerce
transactions. ZDNet shoppers can easily browse and search pricing and product
information, access expert recommendations and buying tips and complete their
purchases online for a unified shopping experience. Users of
ComputerShopper.com can purchase products directly on the site using a secured
server or can place orders through individual merchants (by clicking through to
the merchants' Web sites, dialing the merchants' 1-800 numbers or faxing the
orders to the merchants). Over $37 million in commerce orders were initiated
through ComputerShopper.com and forwarded to merchants in December 1998.

ZDNet Products (www.zdproducts.com) is a comprehensive and authoritative
source for information on purchasing computer products and technology. This
site is organized with user-friendly search and compare capabilities and offers
readily available expert advice and reviews for a full range of users and
systems.

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ZDNet Anchordesk (www.anchordesk.com) was one of the first Web sites to
provide a combination of opinionated analysis and news in an interactive e-mail
environment featuring a talk-back capability for its subscribers. This site
offers a companion e-mail newsletter which is distributed every business day to
a subscription base of over 2 million.

ZDNetwork News (www.zdnn.com) provides 24 hours a day/7 days a week coverage
for computing and technology news and information. ZDNetwork News aggregates
news through its investigative and reporting staff, its relationship with ZDTV
and ZD publications such as PC Week, Inter@ctive Week and Sm@rt Reseller and
strategic partnerships with MSNBC, Excite and others. This site also provides
audio and video clip capabilities, e-mail and customized news with MSNBC's
NewsAlert, Backweb and Pointcast.

GameSpot and Videogames.com (www.gamespot.com, www.videogames.com) offer
comprehensive news, reviews, previews and tips for all game categories.
GameSpot had the largest share of game advertising revenue among all game Web
sites for the first six months of 1998. GameSpot is 70% owned by ZDNet with the
remaining interest owned by the founders of the site and certain other
employees. ZDNet expects to acquire the remaining 30% interest in GameSpot.

ZDNet Help (www.zdhelp.com) offers comprehensive tips, advice and trouble-
shooting aids for a full range of hardware and software. Users can search,
browse or access experts in chat rooms and on bulletin boards.

ZDNet Software Library (www.hotfiles.com) offers over 34,000 files of
shareware, freeware and other downloadable software programs, nearly all of
which are tested for viruses and compatibility and approximately 25,000 of
these files are professionally reviewed and rated.

ZDNet Inter@ctive Investor (www.zdii.com) provides investors with extensive,
up-to-date financial company profiles and news on technology and Internet
stocks. It provides access to multiple third-party information services such as
The Red Herring magazine, institutional equity research commentary and research
reports through Multex Systems Inc. This site ranked eighth in Barron's 1998
annual survey of the top ten Internet investment sites.

Other ZDNet Channels

Ziff-Davis Print Publication Sites. Each of the Ziff-Davis print publications
has a branded Web site within ZDNet's interconnected sites. Each of the sites
contains content adapted from Ziff-Davis print media and original content
developed specifically for these sites. Among the print publication sites
operated by ZDNet are the companion sites of ZD's most successful print
magazines, such as PC Magazine, PC/Computing, PC Week and Yahoo! Internet Life.

Topical Sites. ZDNet also has eight sites, four of which were launched in
1998, that are targeted at particular audiences or topics, providing an
efficient means for advertisers and marketers to reach highly focused consumer
groups. Examples of ZDNet's targeted sites are At Home (www.zdnet.com/athome),
Enterprise (www.zdnet.com/enterprise), Small Business Advisor
(www.zdnet.com/smallbusiness), Windows (www.zdwindows.com) and Year 2000
Challenge (www.zdy2k.com). ZDNet identifies and monitors technology trends
seeking to effectively launch and introduce new sites that address the needs of
its users.

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Relationship with ZD

ZDNet believes that its relationship with ZD provides it with substantial
advantages over other online technology content providers. ZDNet has rights to
use ZD's technology content online on a preferred basis. In addition, ZDNet has
access to ZD's experience in delivering technology content through print
publishing, trade shows and television and can leverage ZD's experience to the
online medium.

With more than 75 publications distributed worldwide, the Ziff-Davis name is
seen by a combined circulation of approximately seven million primary readers
worldwide. ZD also produced over 50 trade shows and conferences worldwide on
technology and the Internet in 1998 with over two million estimated attendees.
Through ZDU, ZD provides online interactive instructor-led training to paid
subscribers. Through ZDTV, ZD offers the first 24-hour cable television channel
and integrated Web site focused exclusively on computers, technology and the
Internet. ZDNet believes that its relationship with ZD offers users the
advantages of an integrated media and marketing company with multiple
platforms.

ZDNet's relationship with ZD allows it to integrate Ziff-Davis Inc.'s
marketing activities into one cohesive resource for print, trade show and
conference, television and online advertising. In addition, ZDNet and ZD are
able to realize benefits from cross-promotion of their products and services.

Strategic Alliances

ZDNet's strategic alliances are important sources of content exchange,
revenue, brand visibility and increased user traffic. ZDNet has strategic
alliances with many of the Web's leading sites, including Yahoo!, Excite, MSNBC
and Deja News, pursuant to which selected ZDNet-branded content is displayed on
their sites in exchange for traffic, brand recognition, content or a percentage
of the revenue generated from those sites. These alliances are generally under
short-term contracts that expire in 1999, subject to renewal upon the agreement
of both parties.

ZDNet is the exclusive high-technology content partner of MSNBC, one of the
Web's largest sites for general news and sports content. Under this arrangement
ZDNet licenses content and brands to MSNBC in exchange for the exclusive right
among online computer and technology content providers to use MSNBC's general
news content. ZDNet also recently started using Deja News' technology which
allows ZDNet's users to search Usenet and participate in online discussion
groups, including Usenet newsgroups. In addition, ZDNet content is distributed
by various Internet service providers such as AT&T WorldNet, MindSpring and
BellSouth to individual and corporate customers.

International

Through wholly owned sites and joint ventures, ZDNet currently operates
localized versions of certain of its Web sites in the United Kingdom, Germany,
France and Australia. In addition, through licensing arrangements with non-U.S.
operators, localized foreign language versions of ZDNet's Web sites were
available as of December 31, 1998 in more than 12 additional countries,
including Japan, Italy, Latin America, Russia, South Africa, Spain and
Switzerland. In order to deliver high-quality

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content worldwide, each of ZDNet's international Web sites offers content
tailored specifically to its local market in addition to content translated
from ZDNet's U.S. Web sites. See "Risk Factors--Risk Factors Relating to
ZDNet--ZDNet Intends to Expand Its International Operations And May Encounter A
Number Of Problems Doing So. There Are Also A Number of Risks Associated With
International Operations That Could Adversely Affect ZDNet's Business.

Advertising Sales And Marketing

ZDNet derives the principal portion of its revenue from the sale of
advertisements. For 1998 advertising revenue represented 86% of ZDNet's net
revenue. Advertising revenue is generally derived from short-term contracts on
a per impression basis and by the number of product listings in the
ComputerShopper.com site.

ZDNet believes that its user demographics are attractive to technology and
general consumer product advertisers and merchants. ZDNet has developed
extensive sales and marketing programs designed to assist advertisers in
reaching their audiences through distinctive and customizable programs. ZDNet
sells display advertising in multiple formats, such as banners, sponsorship
wraps, buttons, text and graphical links and e-mail sponsorships, that allow
users to link directly to the advertisers' own Web sites or to special
promotional microsites created by ZDNet on behalf of its advertisers. In
addition, advertising can be purchased in selected areas or across ZDNet's
entire network of sites.

ZDNet believes that its focused and well-trained sales and marketing
organization is important to attaining and maintaining premium advertising
pricing and maximizing revenue. ZDNet's sales and marketing organization uses
market research tools, such as ZDNet's InternetTrak services, to inform clients
about overall industry trends. InternetTrak is a quarterly marketing survey of
Web users in the U.S. that tracks Web users and their online activities.
ZDNet's direct sales and marketing organization consisted of 86 professionals
as of December 31, 1998. Sales and marketing are generally organized by
geographic region.

During the fourth quarter of 1998, 377 companies advertised with ZDNet, as
compared to 280 in the fourth quarter of 1997. The following is a list of
ZDNet's top fifteen advertising customers based on advertising revenue in 1998:

<TABLE>
<S> <C> <C>
Active Home/X-10 E-Trade Micron Computer
Buy Direct First USA Microsoft
Chumbo Gateway Onsale
Compaq Hewlett Packard Symantec
Computer Sales Professional IBM 3Com/US Robotics
</TABLE>

No advertiser accounted for more than 5% of ZDNet's revenue during 1998.
ZDNet's 20 largest advertising customers accounted for approximately 46.5% of
net advertising revenue during 1998.

Technology Infrastructure and Operations

ZDNet has developed an expandable operations infrastructure using open
standard hardware and software systems. ZDNet's network of sites is primarily
hosted on ZDNet servers maintained at

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multiple locations to facilitate load balancing and reduce potential downtimes.
Additionally, ZDNet outsources certain hosting and related functions to:

. NewsCorp/News Internet Services,

. Real Networks and

. InterStep, Inc.

The primary data center is designed to minimize failures by utilizing
redundant equipment and connectivity paths.

ZDNet has developed systems allowing it to efficiently create new content
channels and build in personalization capabilities. With respect to
advertising, publishing and systems management tools, ZDNet has licensed
technology from:

. Vignette for its StoryServer publishing system,

. Thunderstone for its Texis search software and

. Proxicom for software relating to "threaded messages", which are user
originated messages that are organized under specific topics and
subtopics and then are presented to users for further discussion.

ZDNet also has developed complementary proprietary systems and solutions to
enhance traffic and advertising measurement functions.

Competition

Competition among Internet content sites is intense and is expected to
increase significantly in the future. The market for Internet content providers
is rapidly evolving and barriers to entry are low, enabling newcomers to launch
competitive sites at relatively low cost.

ZDNet competes for advertisers, merchants, users and strategic partners with:

. Web sites specializing in technology information, such as sites provided
by c|net, CMP, IDG and Internet.com,

. Internet portals, search sites and content aggregators, such as Excite,
Infoseek, Lycos and Yahoo!,

. general purpose online service providers, such as America Online and
MSN,

. general news sites, such as those provided by CNN and ABC,

. browser/software companies offering information services, such as
Microsoft and Netscape and

. large general-interest sites, such as Time Warner's pathfinder.com.

In addition, ZDNet competes with traditional media content businesses such as
newspapers, magazines, radio and television. Additionally, certain ZDNet
channels compete with Web sites focused on a particular corresponding content
niche. For example, GameSpot competes with Web

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sites such as those provided by Imagine Media and HappyPuppy, and the ZDNet
Software Library competes with several software download sites.

Primary competitive factors in attracting users are:

. quality,

. reliability,

. brand recognition and

. depth, breadth and presentation of content.

Primary competitive factors in attracting advertisers are:

. user demographics and volume,

. ability to deliver interactive and focused advertising and

. cost-effectiveness.

ZDNet's success will depend on its ability to continue to provide
comprehensive, engaging content to attract and maintain both users and
advertisers.

Employees

As of December 31, 1998, ZDNet had 316 employees, including 149 in Web design
and content development, 86 in sales, marketing, customer support and audience
development, 69 in technical development and operations and 12 in
administration, planning and finance. ZDNet also uses independent contractors
and temporary employees. None of ZDNet's employees is represented by a labor
union. ZDNet considers its relationship with its employees to be satisfactory.

Facilities

ZDNet's headquarters are located in San Francisco and its other principal
offices are located in the Boston metropolitan area, New York, Chicago, Los
Angeles and Seattle. Ziff-Davis Inc. leases all of the property and offices
occupied by ZDNet and as a result ZDNet pays an allocated portion of Ziff-Davis
Inc.'s lease payments. ZDNet believes that the properties it occupies are
adequate for its current operations, and that suitable additional or
alternative space, including space available under lease options, will be
available on reasonable commercial terms for future expansion.

Legal Proceedings

Ziff-Davis Inc. was named a defendant in an action, filed on April 17, 1998
in the Supreme Court of the State of New York, by minority stockholders of
SOFTBANK Interactive, formerly an indirect subsidiary of SOFTBANK Corp. The
complaint alleges, among other things, that SOFTBANK Holdings Inc., SOFTBANK
Interactive's majority stockholder, acting with Ziff-Davis Inc. and two of its
senior officers and directors who were directors of SOFTBANK Interactive (and
who were also named as defendants), had conflicts of interest between SOFTBANK
Interactive and

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other investments of SOFTBANK Corp. and its non-Ziff-Davis Inc. affiliates
(collectively, "Softbank") (including investments in Ziff-Davis Inc.) and
failed to act in the best interests of SOFTBANK Interactive and the minority
stockholders by taking actions which benefited Ziff-Davis Inc. The complaint
states claims based on common law fraud, breach of fiduciary duty and aiding
and abetting theories and seeks in excess of $200 million in damages. Ziff-
Davis Inc. and the other defendants have moved to dismiss all of the claims
against them other than a breach of contract claim which is solely against
SOFTBANK Holdings, and the motion was granted, with the result that all of the
claims against Ziff-Davis Inc. and its officers were dismissed, and most of the
claims against SOFTBANK Holdings were dismissed, leaving only a claim against
SOFTBANK Holdings concerning the alleged failure of SOFTBANK Holdings to give
plaintiffs adequate notice of the sale of its stock to SOFTBANK Interactive.

In addition, eight securities class action suits have been filed against
Ziff-Davis Inc. and certain of its directors and officers in the United States
District Court for the Southern District of New York. The complaints allege
that defendants violated Sections 11, 12(a)(2) and 15 of the Securities Act in
connection with the registration statement filed by Ziff-Davis Inc. with the
Securities and Exchange Commission relating to the initial public offering of
Ziff-Davis Inc.'s common stock. More particularly, the complaints allege that
the registration statement contained false and misleading statements and failed
to disclose facts that could have indicated an impending decline in Ziff-Davis
Inc.'s revenue. The complaints seek, on behalf of a class of purchasers of
Ziff-Davis Inc.'s common stock from the date of the initial public offering
through October 8, 1998, unspecified damages, interest, fees and costs,
rescission, and injunctive relief such as the imposition of a constructive
trust upon the proceeds of the initial public offering.

The complaints are as follows: Napoli v. Ziff-Davis Inc., et al., No. 98 Civ.
7158 (filed Oct. 9, 1998); Steinberg, et al. v. Ziff-Davis Inc., et al., No. 98
Civ. 7205 (filed Oct. 13, 1998); Flinker v. Ziff-Davis Inc., et al., No. 98
Civ. 7231 (filed Oct. 14, 1998); Koenig v. Ziff-Davis Inc., et al., No. 98 Civ.
7260 (filed Oct. 15, 1998); Schindler v. Ziff-Davis Inc., et al., No. 98 Civ.
7418 (filed Oct. 19, 1998); Miller v. Ziff-Davis Inc., et al., No. 98 Civ. 7541
(filed Oct. 23, 1998); Felgoise v. Ziff-Davis Inc., et al., No. 98 Civ. 8045
(filed Nov. 9, 1998) and Javier v. Ziff-Davis Inc., et al., No. 98 Civ. 8201
(filed Nov. 17, 1998). On January 28, 1999, the court entered an order
consolidating the actions, appointing lead plaintiff's counsel and requiring
the filing of a consolidated amended complaint within 45 days. The plaintiffs
filed a consolidated complaint on March 15, 1999. The responsive pleading of
Ziff-Davis Inc. and certain of its directors and officers named in the suits is
due April 29, 1999.

In addition, two derivative suits have been filed by stockholders against
Ziff-Davis Inc. and all of its directors in the Court of Chancery of the State
of Delaware for New Castle County. The complaints allege that the directors
breached their fiduciary duties to Ziff-Davis Inc. by repricing the stock
options awarded to certain directors and demand the nullification of the
repricing and an injunction against exercise by the directors of any repriced
option. The complaints are as follows: Jacobs v. Ziff-Davis Inc., et al., No.
16813NC (filed Nov. 30, 1998) and Bernd Bildstein v. Ziff-Davis Inc., et al.,
No. 16835NC (filed Dec. 10, 1998). Plaintiffs filed an amended complaint on
February 17, 1999, which is substantially similar to the original complaints,
except that the amended complaint also addresses the granting of "new options"
at an allegedly "reduced exercise price".

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The plaintiffs have also indicated their intent to seek consolidation of the
actions. A response to the amended complaint is due April 12, 1999.

Although the outcome of the foregoing cases cannot be predicted, Ziff-Davis
Inc. believes that there are substantial defenses to all of the claims.

There are no other legal proceedings to which Ziff-Davis Inc. is a party,
other than ordinary routine litigation incidental to its business that is not
otherwise material to the business or financial condition of Ziff-Davis Inc.

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ZDNET
SELECTED HISTORICAL COMBINED FINANCIAL AND OTHER DATA

The following table presents Selected Historical Combined Financial and Other
Data for ZDNet and its predecessor as of and for the years ended December 31,
1994 and 1995, as of and for the two month period ended February 28, 1996, as
of and for the ten month period ended December 31, 1996 and as of and for the
years ended December 31, 1997 and 1998. This data was derived from the Combined
Financial Statements of ZDNet included elsewhere in this prospectus. Data as of
and for the year ended December 31, 1994 was derived from ZDNet's unaudited
financial statements. This table should be read in conjunction with the
Selected Historical Financial and Other Data and Management's Discussion and
Analysis of Financial Condition and Results of Operations for each of ZDNet, ZD
and Ziff-Davis Inc. and Financial Statements for each of ZDNet, ZD and Ziff-
Davis Inc. beginning on pages F-168, F-94 and F-20 of this prospectus,
respectively.

<TABLE>
<CAPTION>
Predecessor(1) ZDNet
------------------------------ ---------------------------------
Year ended Two month Ten month
December 31, period ended period ended Year ended
---------------- February 28, December 31, December 31,
1994 1995 1996 1996 1997 1998
------- ------- ------------ ------------ ------------ -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue, net............ $13,349 $13,576 $ 2,903 $16,215 $ 32,218 $56,143
Cost of operations:
Production and
content............... 9,321 10,709 1,802 14,863 23,543 26,208
Selling, general and
administrative
expenses.............. 7,276 8,360 1,774 13,280 23,475 30,993
Depreciation and
amortization.......... 1,163 4,040 597 5,485 7,681 6,448
Loss from operations.... (4,411) (9,533) (1,270) (17,413) (22,481) (7,506)
Minority interest....... -- -- -- -- 400 134
Loss before income
taxes.................. (4,411) (9,533) (1,270) (17,413) (22,081) (7,372)
Net loss (2)............ (4,526) (5,755) (814) (16,925) (21,238) (7,884)
Balance Sheet Data (at period
end):
Total current assets.... $ 2,432 $ 3,992 $ 4,951 $ 7,852 $ 11,521 20,068
Total assets............ 3,557 91,772 92,717 82,507 87,326 97,686
Total liabilities....... 8,083 2,090 1,492 3,932 4,034 8,139
Division equity
(deficit).............. (4,526) 89,682 91,225 78,575 83,292 89,547
Other Data:
Capital expenditures.... $ 513 $ 1,590 $ 168 $ 1,010 $ 2,374 4,483
Investments and
acquisitions, net of
cash acquired.......... -- -- -- -- 2,998 5,000
</TABLE>
- --------
(1) A third party acquired ZDNet's predecessor as of January 1, 1995. An
affiliate of Ziff-Davis Inc. acquired ZDNet's predecessor on February 29,
1996. Data for ZDNet's predecessor has been presented for periods before
these dates.

(2) No historical earnings per share or share data are presented as ZDNet does
not consider such data meaningful. After issuance of ZDNet stock, Ziff-
Davis Inc. will report earnings per share data for ZD and ZDNet but not for
Ziff-Davis Inc.

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

Revenue

ZDNet's revenue consists of advertising revenue and revenue from
subscription-based fees and services. Advertising revenue consists primarily of
revenue derived from the sale of advertisements on pages delivered to users of
ZDNet's Internet sites. ZDNet recognizes the delivery of a single view of an
advertisement as an "impression". Advertising revenue is derived principally
from arrangements with ZDNet's advertising customers that provide for a
guaranteed number of impressions. Advertising rates vary depending primarily on
the total number of guaranteed impressions purchased, the length of the
advertiser's commitment, the location in which the advertisements are displayed
and the type of advertising. Advertising revenue is recognized in the period in
which the advertisements are delivered. For contracts/campaigns that are longer
than one accounting period, the revenue from the contract/campaign is
recognized ratably over the term of the contract/campaign.

Revenue from barter transactions is recognized during the period in which
advertisements are displayed. Barter transactions are recorded at the lower of
estimated fair value of goods or services received or the estimated fair value
of advertising given. To date, barter transactions have been immaterial to
revenue.

During 1995 and part of 1996, ZDNet was focused on generating revenue from
subscription-based fees and services. This revenue is generated primarily by
charging monthly membership fees to provide access to product reviews, software
reviews and shareware. During 1996, ZDNet shifted the focus of the business
model from the generation of subscription-based fees and services to the
generation of advertising revenue.

As a result of this shift, ZDNet's advertising revenue increased from 6.0% of
total revenue for the year ended December 31, 1995 to 86.0% of total revenue
for the year ended December 31, 1998. Over this period subscription-based fees
and services decreased correspondingly as a percentage of revenue.

No single advertiser accounted for more than 5.0% of ZDNet's total revenue
for the year ended December 31, 1997 or 1998. ZDNet's top 20 advertisers
accounted for 29.3% and 39.9% of total revenue for the years ended December 31,
1997 and 1998, respectively.

Cost of Operations

Costs of production and content include costs to produce and edit content on
ZDNet's Internet sites as well as technical costs incurred to maintain ZDNet's
Internet sites. ZD provides certain editorial content and brand-marketing
services to ZDNet for which ZDNet pays a royalty to ZD based on revenue. This
charge is also included in costs of production and content. See Note 4 to
ZDNet's Combined Financial Statements in this prospectus.

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<PAGE>

The principal selling, general and administrative expenses of ZDNet are
payroll, sales commissions and related expenses, marketing and promotion. Ziff-
Davis Inc. provides certain selling, general and administrative services and
shared services on a centralized basis and the costs of these central services
are allocated between ZD and ZDNet. See Note 4 to ZDNet's Combined Financial
Statements in this prospectus.

ZDNet also incurs a substantial amount of amortization expense related to
intangible assets created as a result of the December 21, 1994 and February 29,
1996 acquisitions of Ziff-Davis Inc.'s predecessors by Forstmann Little and Co.
and SOFTBANK Corp., respectively. The February 1996 acquisition created
$72.7 million of intangible assets for ZDNet. In addition, $5.5 million of
intangible assets were created by ZDNet's January 1997 acquisition of a 70%
equity interest in GameSpot, Inc., formerly SpotMedia Communications, Inc.

Factors Affecting Future Periods

ZDNet's revenue and profitability are influenced by a number of external
factors, including the volume of new technology product introductions, the
amount and allocation of marketing expenditures by ZDNet's advertisers, the
extent to which merchants elect to advertise using online media and competition
among other technology marketers.

Accordingly, ZDNet may experience fluctuations in revenue from period to
period. Marketing expenditures by technology companies can also be affected by
factors affecting the technology industry generally, including pricing
pressures and temporary surpluses of inventory. Revenue and profitability are
also influenced by product mix, the timing and frequency of ZDNet's new product
launches in new markets and acquisitions.

ZDNet has an extremely limited operating history upon which to base an
evaluation of ZDNet's prospects. ZDNet's prospects must be considered in light
of the risks, expenses and difficulties frequently encountered by start-up
companies in the new and rapidly evolving market for Internet products, content
and services. ZDNet's revenue and cost of operations have grown substantially
and ZDNet has incurred cumulative net losses since inception. These losses
reflect substantial expenditures to develop, launch and acquire ZDNet's
Internet sites and services. ZDNet believes that newly launched sites and
services require a certain period of growth before they begin to achieve
adequate revenue to support their operation.

ZDNet must, among other things, effectively develop new relationships and
maintain existing relationships with its advertisers, their advertising
agencies and other third parties, provide original and compelling content to
Internet users, develop and upgrade its technology, respond to competitive
developments and attract, retain and motivate qualified personnel. There can be
no assurance that ZDNet will succeed in addressing such risks and the failure
to do so could have a material adverse effect on ZDNet's business, financial
condition or results of operations. Additionally, ZDNet's limited operating
history makes the prediction of future operating results difficult or
impossible, and there can be no assurance that ZDNet's revenue will increase or
even continue at its current level, or that ZDNet will achieve or maintain
profitability or generate cash from operations in future periods. Since
inception, ZDNet has incurred significant losses and, for the period from
February 29, 1996 to

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December 31, 1998, had accumulated a deficit of $46.0 million. ZDNet may
continue to incur losses in the future.

ZDNet expects to recognize compensation expense of approximately $13.4
million as a result of certain options granted on December 21, 1998 and January
29, 1999. Such compensation expense will be recognized over the vesting period
of the options. The 1999 compensation expense related to these options is
expected to be approximately $3.3 million. See Note 11 to ZDNet's Combined
Financial Statements in this prospectus.

ZDNet expects to acquire the remaining 30% interest in GameSpot in exchange
for ZDNet stock valued at $9 million, based on the initial public offering
price; provided that, the stockholders of GameSpot will not receive less than
600,000 shares of ZDNet stock. Assuming a price of $19.00 per share (the
maximum of the range of initial public offering prices set forth on the cover
of this prospectus), this acquisition will result in additional annual
amortization of approximately $1.3 million per year. The effect of this
acquisition and the shares expected to be issued in connection therewith are
not reflected elsewhere in this prospectus.

For a discussion of other factors that may affect results, see "Risk
Factors--Risk Factors Relating to ZDNet".

Presentation of Financial Information

ZDNet is comprised of certain operations which were acquired at various times
and completed a reorganization in May 1998. See Note 1 to ZDNet's Combined
Financial Statements in this prospectus.

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<PAGE>

Results of Operations

The table below presents the results of ZDNet as if the assets and operations
acquired by affiliates of Ziff-Davis Inc. on February 29, 1996 (as described in
Note 1 to the ZDNet Combined Financial Statements in this prospectus) had been
acquired on January 1, 1995. Purchase accounting adjustments relating to that
acquisition have been reflected through pro forma amortization and interest and
income tax adjustments, as described in note (1) to the table. Although the
1996 presentation is not in accordance with generally accepted accounting
principles, management believes it presents the most meaningful basis of
comparison. The financial information presented below may not necessarily
reflect the results of operations which would have occurred had the February
29, 1996 acquisition been completed on January 1, 1995.

<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
Pro
forma Actual
-------- -----------------
1996(1) 1997 1998
-------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenue, net............................. $ 19,118 $ 32,218 $56,143
Cost of operations:
Production and content................. 16,665 23,543 26,208
Selling, general and administrative
expenses.............................. 15,054 23,475 30,993
Depreciation and amortization.......... 693 1,495 2,010
Amortization of intangible assets...... 5,712 6,186 4,438
-------- -------- -------
Total operating expenses............. 38,124 54,699 63,649
-------- -------- -------
Loss from operations..................... (19,006) (22,481) (7,506)
Minority interest........................ -- 400 134
-------- -------- -------
Loss before income taxes................. (19,006) (22,081) (7,372)
Provision (benefit) for income taxes..... (1,073) (843) 512
-------- -------- -------
Net loss................................. $(17,933) $(21,238) $(7,884)
======== ======== =======
Other data:
Capital expenditures..................... $ 1,178 $ 2,374 $ 4,483
Investments and acquisitions, net of cash
acquired................................ -- 2,998 5,000
EBITDA(2)................................ (12,601) (14,400) (924)
</TABLE>
- --------
(1) The February 29, 1996 acquisition gave rise to different bases of
accounting for the period after the acquisition as compared to the period
prior to the acquisition. The above numbers assume that the acquisition
took place on January 1, 1995; therefore amortization of intangible assets
and net loss have been increased by $323,000 and $194,000, respectively,
for the year ended December 31, 1996.

(2) "EBITDA" is defined as income before provision for income taxes, interest
expense, depreciation and amortization. EBITDA is not intended to represent
cash flows from operations and should not be considered as an alternative
to net income as an indicator of ZDNet's operating performance or to cash
flows as a measure of liquidity. Although ZDNet believes that EBITDA is a
standard measure commonly reported and widely used by analysts, investors
and other interested parties in the media industry, the EBITDA presented
for ZDNet may not be comparable to similarly titled measures reported by
other companies.

157
<PAGE>

The following table presents the foregoing amounts as a percentage of
revenue:

<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
Pro Forma Actual
----------- -----------------
1996 1997 1998
----------- ------- -------
<S> <C> <C> <C>
Revenue, net................ 100.0% 100.0% 100.0%
Cost of operations:
Production and content.... 87.2 73.1 46.7
Selling, general and
administrative expenses.. 78.7 72.9 55.2
Depreciation and
amortization............. 3.6 4.6 3.6
Amortization of intangible
assets................... 29.9 19.2 7.9
------- ------- -------
Total operating
expenses............... 199.4 169.8 113.4
------- ------- -------
Loss from operations........ (99.4) (69.8) (13.4)
Minority interest........... -- 1.2 0.3
------- ------- -------
Loss before income taxes.... (99.4) (68.6) (13.1)
Provision (benefit) for
income taxes............... (5.6) (2.7) 0.9
------- ------- -------
Net loss.................... (93.8)% (65.9)% (14.0)%
======= ======= =======
</TABLE>

Year ended December 31, 1998 compared with the year ended December 31, 1997

Revenue, net

Net revenue increased 74% to $56.1 million for the year ended December 31,
1998 from $32.2 million for the year ended December 31, 1997. Revenue from
advertising was 86% of net revenue for the year ended December 31, 1998
compared to 73% for the year ended December 31, 1997.

Revenue from advertising increased 104% to $48.1 million for the year ended
December 31, 1998 from $23.6 million for the year ended December 31, 1997. The
increase in advertising revenue was attributed to an increase in volume as both
the number of advertisers and the average monthly revenue per advertiser
increased. Subscription-based fees and services decreased by 7% to $8.0 million
for the year ended December 31, 1998 from $8.6 million for the year ended
December 31, 1997.

Cost of operations

Production and content. Production and content expenses were $26.2 million or
46% of net revenue for the year ended December 31, 1998, compared to $23.5
million or 73% of net revenue for the prior year. The absolute dollar increase
in production and content charges was due to an increase in ZD's revenue-based
royalty charge to ZDNet, as well as an increase in production costs to support
higher user traffic levels and increased editorial costs associated with the
launch of new content areas. The cost of production and content decreased as a
percentage of revenue primarily due to economies of scale. ZDNet expects this
trend to continue. Royalty payments to ZD were $2.8 million and $1.6 million
for the years ended December 31, 1998 and 1997, respectively.

Selling, general and administrative expenses. Selling, general and
administrative expenses were $31.0 million or 55% of net revenue for the year
ended December 31, 1998, compared to $23.5 million or 73% of net revenue for
the year ended December 31, 1997. The absolute dollar increase

158
<PAGE>

was primarily due to increased personnel and services required to support the
growth of ZDNet, offset to some extent by the cessation of commission payments
to SOFTBANK Interactive Marketing Inc., as ZDNet sales and marketing teams
replaced SOFTBANK Interactive in these functions. Sales and marketing costs
were $21.2 million or 38% of net revenue for the year ended December 31, 1998
compared to $15.9 million or 49% of net revenue for the year ended December 31,
1997. ZDNet intends to continue to increase spending in absolute dollars on
sales and marketing and intends to launch a print ad campaign in the future.
Sales and marketing expenses are incurred both to drive traffic to ZDNet's Web
site and to increase the number of advertisers and advertising sales. Included
in the sales and marketing costs was an allocation from Ziff-Davis Inc.
relating to certain selling, general and administrative services and shared
services provided on a centralized basis amounting to $0.9 million and $0.5
million for the years ended December 31, 1998 and 1997, respectively.

Administrative and overhead costs were $9.7 million or 17% of net revenue for
the year ended December 31, 1998 compared to $7.6 million or 23% of net revenue
for the year ended December 31, 1997. Included in administrative and overhead
costs was an allocation of the cost of certain Ziff-Davis Inc. services
provided on a centralized basis amounting to $5.1 million and $3.4 million for
the years ended December 31, 1998 and 1997, respectively. The selling, general
and administrative costs decreased as a percentage of revenue primarily due to
economies of scale. ZDNet expects this trend to continue.

Depreciation. Depreciation expense was $2.0 million for the year ended
December 31, 1998 compared to $1.5 million for the year ended December 31,
1997. The increase related primarily to the increased capital expenditures made
by ZDNet for equipment necessary to expand its network and infrastructure in
order to support its continued growth.

Amortization of intangible assets. Amortization of intangible assets was $4.4
million for the year ended December 31, 1998 compared to $6.2 million for the
year ended December 31, 1997. The decrease in amortization related to the
intangible assets of advertising and subscription lists becoming fully
amortized as of March 1, 1998. This resulted in only two months of the related
amortization being included in the year ended December 31, 1998 versus twelve
months amortization included in the year ended December 31, 1997. Annual
amortization expense related to the remaining goodwill balance will be
approximately $4.1 million before giving effect to any future increase in
goodwill.

Minority interest

The minority interest of $0.1 million in 1998 and $0.4 million in 1997
represented losses attributed to the holders of the minority interest in
GameSpot.

Income taxes

Losses which were incurred prior to the completion of Ziff-Davis Inc.'s
reorganization on May 4, 1998, are non-deductible for Ziff-Davis Inc. as ZDNet
was under the ownership of MAC Inc. As such, ZDNet recorded income tax expense
of $0.5 million for the year ended December 31, 1998, primarily resulting from
taxable income being generated during the third and fourth quarters of 1998,
representing an effective tax rate of (6.9%). The effective rate in 1997 was
significantly lower than the statutory rate of 35.0% due to the substantial
level of non-deductible expenses which were incurred while ZDNet was owned by
MAC Inc.

159
<PAGE>

Net loss

As a result of the items described above, ZDNet's net loss decreased to $7.9
million from $21.2 million for the years ended December 31, 1998 and 1997,
respectively.

EBITDA

EBITDA for the year ended December 31, 1998 was a loss of $0.9 million
compared to a loss of $14.4 million for the same period in 1997. The
improvement was due to substantially increased revenue, offset to some extent
by higher production and content costs and selling, general and administrative
expenses.

Year ended December 31, 1997 compared with Pro Forma Year ended December 31,
1996

Revenue, net

Net revenue increased 69% to $32.2 million for the year ended December 31,
1997 from $19.1 million for the pro forma year ended December 31, 1996. An
increasing percentage of ZDNet's net revenue was derived from advertising for
the year ended December 31, 1997, accounting for 73% of net revenue, compared
to 37% for the same period in 1996. The increased percentage of net revenue
derived from advertising in the later period reflects a continuation of ZDNet's
strategic shift from a business model based on subscription-based fees and
services to one based on advertising.

Revenue from advertising increased 228% to $23.6 million for year ended
December 31, 1997 from $7.2 million for the pro forma year ended December 31,
1996. The increase in advertising revenue was attributable to increases in the
number of advertisers, the average expenditures per advertiser and increasing
advertising rates. The increase was evenly attributable to rate and volume
increases. Subscription-based fees and services decreased by 28% to $8.6
million from $11.9 million from the same period in 1996.

Cost of Operations

Production and content. Production and content expenses were $23.5 million or
73% of net revenue for year ended December 31, 1997, compared to $16.7 million
or 87% of net revenue for the pro forma year ended December 31, 1996. The
absolute dollar increase in production and content charges was due to an
increase in Ziff-Davis Inc.'s revenue based royalty charge to ZDNet, as well as
an increase in production costs to support higher user traffic levels, and
increased editorial costs associated with the launch of new content areas. The
cost of production and content decreased as a percentage of revenue primarily
due to economies of scale. Royalty charges from ZD were $1.6 million and
$1.0 million for the year ended December 31, 1997 and the pro forma year ended
December 31, 1996, respectively.

Selling, general and administrative expenses. Selling, general and
administrative expenses were $23.5 million or 73% of net revenue for the year
ended December 31, 1997, compared to $15.1 million or 79% of net revenue for
the pro forma year ended December 31, 1996. The absolute dollar increase in
selling, general and administrative expenses was due to higher sales commission
costs

160
<PAGE>

paid to SOFTBANK Interactive and to the initial hiring of the existing ZDNet
sales and marketing teams. SOFTBANK Interactive was the exclusive sales team
for ZDNet prior to 1997. Sales and marketing costs were $15.9 million or 49% of
net revenue for the year ended December 31, 1997 compared to $11.0 million or
57% of net revenue for the pro forma year ended December 31, 1996. Included in
sales and marketing costs was an allocation from Ziff-Davis Inc. relating to
certain selling, general and administrative services and shared services
provided on a centralized basis amounting to $0.5 million for the year ended
December 31, 1997. There was no such charge for the pro forma year ended
December 31, 1996.

Administrative and overhead costs were $7.6 million or 23% of net revenue for
the year ended December 31, 1997 from $4.1 million or 21% of net revenue for
the pro forma year ended December 31, 1996. Included in administrative and
overhead costs was an allocation of the cost of certain Ziff-Davis Inc.
services provided on a centralized basis amounting to $3.4 million and $2.7
million for the year ended December 31, 1997 and the pro forma year ended
December 31, 1996, respectively. Selling, general and administrative expenses
decreased as a percentage of revenue primarily due to economies of scale.

Depreciation and amortization. Depreciation and amortization expense was $1.5
million for the year ended December 31, 1997, compared to $0.7 million for the
pro forma year ended December 31, 1996. The increase in depreciation expense
primarily related to the increased capital expenditures made by ZDNet for
equipment necessary to expand its network and infrastructure in order to
support its continued growth.

Amortization of intangible assets. Amortization of intangible assets was $6.2
million for the year ended December 31, 1997 compared to $5.7 million for the
pro forma year ended December 31, 1996. In February 1997, ZDNet purchased a 70%
interest in GameSpot, which created intangible assets of approximately $5.5
million. The 1997 period included approximately $0.5 million of amortization
related to this acquisition.

Minority interest

The minority interest of $0.4 million for the year ended December 31, 1997,
represents losses attributed to the holders of the minority interest in
GameSpot, which was acquired in January 1997.

Income taxes

The 1997 income tax benefit of $0.8 million compares to a pro forma income
tax provision of $1.1 million in 1996. The benefit represents an effective tax
rate of approximately 3.8% and 5.6%, respectively, which is significantly less
than the federal statutory rate of 35.0% because ZDNet has a substantial level
of non-deductible expenses, as losses which were incurred while ZDNet was under
MAC ownership are non-deductible to Ziff-Davis Inc. As such, ZDNet does not
reflect any tax benefits associated with those losses.

Net loss

As a result of the items described above, ZDNet's net loss increased to $21.2
million for the year ended December 31, 1997 from $17.9 million for the pro
forma year ended December 31, 1996.

161
<PAGE>

EBITDA

EBITDA for 1997 was a loss of $14,400,000 compared to a loss of $12,601,000
for the pro forma year ended December 31, 1996. The decrease was primarily due
to higher production and content costs and selling, general and administrative
expenses partially offset by increased revenue.

Liquidity and Capital Resources

Funding from ZD

In the financial statements of ZD and ZDNet, whenever ZDNet had a cash need,
other than cash needs of ZDNet's foreign operations or cash needs of ZDNet's
operations that are not wholly owned, that cash need was funded by ZD and
accounted for as a capital contribution (i.e., as an increase in ZDNet's
division equity and ZD's retained interest in ZDNet). Accordingly, no interest
expense has been reflected in the financial statements of ZDNet. Each of ZD and
ZDNet is sometimes referred to herein as a "group". After the date on which
ZDNet stock is first issued, Ziff-Davis Inc. will account for all cash
transfers from ZD or ZDNet to or for the account of the other, other than
transfers in return for assets or services rendered or transfers in respect of
ZD's retained interest that correspond to dividends paid on ZDNet stock, as
inter-group revolving credit advances. These advances will bear interest at the
rate at which Ziff-Davis Inc. could borrow such funds on a revolving credit
basis as the board of directors determines in its sole discretion. However, the
board of directors has the discretion to determine that a given transfer or
type of transfer should be accounted for as a long-term loan, a capital
contribution increasing ZD's retained interest in ZDNet or a return of capital
reducing ZD's retained interest in ZDNet.

For a discussion about the terms on which Ziff-Davis Inc. can now borrow on a
short-term basis, see "Ziff-Davis Inc. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Credit Facility". There is no assurance, however, that ZDNet will
continue to be able to obtain sufficient funding from ZD. For a discussion of
the discretion of the board of directors regarding transfers of cash between ZD
and ZDNet, see "Risk Factors--Risk Factors Relating to ZDNet Stock--Under Its
Current Policies The Board of Directors Has Sole Discretion Concerning Various
Cash Management Matters".

Sources and uses of cash

Cash and cash equivalents were $0.3 million at December 31, 1998, an increase
of $0.3 million from $0.0 million at December 31, 1997. The increase was due to
the factors discussed below:

Cash used by operations was $4.5 million for the year ended December 31, 1998
compared to $15.3 million for the year ended December 31, 1997. The improvement
from 1998 to 1997 was due primarily to a reduction in net loss. The loss for
the year ended December 31, 1998 was $7.9 million compared to $21.2 million for
the same period in 1997.

Cash used by investing activities for the year ended December 31, 1998
totaled $9.5 million and $5.4 million for the year ended December 31, 1997.
Cash used for capital expenditures for the year ended December 31, 1998
increased by $2.1 million to $4.5 million from $2.4 million for the year ended
December 31, 1997. ZDNet intends to continue to invest in equipment as
necessary to support

162
<PAGE>

the increasing user traffic. Capital expenditures on equipment is expected to
be approximately $4.0 million in 1999. In addition, in July 1998, ZDNet
invested $5.0 million in preferred stock of Deja News, Inc., an Internet
discussion group. During the year ended December 31, 1997, ZDNet spent
approximately $3.0 million to acquire a 70% interest in GameSpot.

Cash provided by financing activities decreased to $14.3 million for the year
ended December 31, 1998 from $20.7 million for the year ended December 31,
1997, reflecting the improved operating performance of ZDNet. As discussed
under "--Funding from ZD" above, all funding from ZD was accounted for as a
capital contribution.

163
<PAGE>

Seasonality

Historically, ZDNet's business has been seasonal as a significant portion of
annual revenue has occurred in the fourth quarter. This fluctuation is a result
of seasonal changes common to the media industry. The following table sets
forth certain unaudited quarterly combined statement of operations data for
each of the eight quarters in the period ended December 31, 1998. In the
opinion of Ziff-Davis Inc.'s management, this unaudited information has been
prepared on a basis consistent with the audited Combined Financial Statements
of ZDNet in this prospectus and includes all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the information set
forth therein when read in conjunction with the Combined Financial Statements
and related notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
Quarter Ended
(in thousands)
---------------------------------------------------------------------------------------
1997 1998
------------------------------------------- -------------------------------------------
March 31 June 30 September 30 December 31 March 31 June 30 September 30 December 31
-------- ------- ------------ ----------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 5,283 $ 7,862 $ 8,132 $10,941 $ 9,688 $12,274 $14,504 $19,677
Cost of operations...... 11,597 14,921 14,401 13,780 16,050 15,405 14,344 17,850
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (6,314) (7,059) (6,269) (2,839) (6,362) (3,131) 160 1,827
Minority interest....... (46) (201) (189) 36 (125) (145) (60) 196
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
taxes.................. (6,268) (6,858) (6,080) (2,875) (6,237) (2,986) 220 1,631
Provision (benefit) for
taxes.................. (244) (267) (232) (100) (228) (92) 8 824
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $(6,024) $(6,591) $(5,848) $(2,775) $(6,009) $(2,894) $ 212 $ 807
======= ======= ======= ======= ======= ======= ======= =======
EBITDA(1)............... $(4,498) $(4,999) $(4,185) $ (718) $(4,511) $(1,569) $ 1,857 $ 3,299
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------------
1997 1998
------------------------------------------- -------------------------------------------
March 31 June 30 September 30 December 31 March 31 June 30 September 30 December 31
-------- ------- ------------ ----------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of operations...... 219.5 189.8 177.1 125.9 165.7 125.5 98.9 90.7
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (119.5) (89.8) (77.1) (25.9) (65.7) (25.5) 1.1 9.3
Minority interest....... (0.9) (2.6) (2.3) 0.3 (1.3) (1.2) (0.4) 1.0
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
taxes.................. (118.6) (87.2) (74.8) (26.2) (64.4) (24.3) 1.5 8.3
Provision (benefit) for
taxes.................. (4.6) (3.4) (2.9) (0.9) (2.4) (0.7) 0.1 4.2
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... (114.0)% (83.8)% (71.9)% (25.3)% (62.0)% (23.6)% 1.4% 4.1%
======= ======= ======= ======= ======= ======= ======= =======
EBITDA(1)............... (85.1)% (63.6)% (51.5)% (6.6)% (46.6)% (12.8)% 12.8% 16.8%
</TABLE>
- --------
(1) "EBITDA" is defined as income before provision for income taxes, interest
expense, depreciation and amortization. EBITDA is not intended to represent
cash flows from operations and should not be considered as an alternative
to net income as an indicator of ZDNet's operating performance or to cash
flows as a measure of liquidity. Although Ziff-Davis Inc. believes that
EBITDA is a standard measure commonly reported and widely used by analysts,
investors and other interested parties in the media industry, the EBITDA
presented for ZDNet may not be comparable to similarly titled measures
reported by other companies.

164
<PAGE>

Year 2000 Readiness Disclosure

During 1997, Ziff-Davis Inc., including the businesses comprising ZDNet,
began a review of its computer systems and software to identify systems and
software which might malfunction due to misidentification of the Year 2000.
Ziff-Davis Inc. is using both internal and external resources to identify,
test, correct and reprogram systems and software for Year 2000 readiness.

At December 31, 1998, Ziff-Davis Inc. was in the research and validation
phase of its Year 2000 project for information technology or IT, systems and
non-IT systems. This phase consists of research and validation of all
infrastructure, hardware and software, including platform, wide-area network
and local-area network components. Research for non-IT systems includes
identifying systems that include embedded technology, such as micro-
controllers, which are not Year 2000 compliant.

Ziff-Davis Inc. has incurred remediation costs associated with its Year 2000
readiness efforts. These remediation costs have been incurred in connection
with replacement of systems and hardware, modification of software and
consulting costs related to Year 2000 solution providers. The costs to address
Year 2000 issues which have been included in the general and administrative
expenses of Ziff-Davis Inc. have not been tracked separately and are therefore
not determinable. However, management believes these expenses have been
substitutive rather than incremental to the recurring level of general and
administrative expenses. Total capitalized costs incurred in the replacement of
systems in connection with Ziff-Davis Inc.'s Year 2000 readiness efforts as of
December 31, 1997 and 1998 were $1.7 million and $3.8 million, respectively.
Ziff-Davis Inc. estimates that it will incur an additional $3.8 million during
1999 related to its Year 2000 readiness efforts.

Ziff-Davis Inc. expects to complete testing and replacement of critical
systems by the beginning of the fourth quarter of 1999. Ziff-Davis Inc.'s
estimate of ZDNet's most reasonably likely "worst

165
<PAGE>

case scenario" would be the failure of its internal applications and systems
that process and store certain information and data. Ziff-Davis Inc. would
resolve the failure of such applications and systems one by one and management
of Ziff-Davis Inc. does not believe that the impact on its critical systems
would be material. However, if Ziff-Davis Inc. or any subscribers,
advertisers, licensors, vendors or other third parties on whom it relies
experiences a Year 2000 compliance problem, this could have a material adverse
effect on ZDNet's profit and liquidity.

Recently Issued Accounting Pronouncement

SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities
issued in June 1998 establishes accounting and reporting standards for
derivative instruments and for hedging activities and is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Ziff-Davis Inc.
does not expect the adoption of SFAS No. 133 to have a material impact on the
ZDNet's results of operations.

ZDNet expects to adopt the above statement beginning with its 2000 financial
statements.

166
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
ZDNet
Report of independent accountants....................................... 168
Combined balance sheets as of December 31, 1997 and 1998 ............... 169
Combined statements of operations for the period from February 29, 1996
to December 31, 1996, for the years ended December 31, 1997 and 1998 .. 170
Combined statements of cash flows for the period from February 29, 1996
to December 31, 1996, for the years ended December 31, 1997 and 1998 .. 171
Combined statements of changes in division equity for the period from
February 29, 1996 to December 31, 1996, for the years ended December
31, 1997 and 1998 ..................................................... 172
Notes to combined financial statements.................................. 173
</TABLE>

167
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Ziff-Davis Inc.

In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, cash flows and changes in division equity,
present fairly, in all material respects, the financial position of ZDNet (a
division of Ziff-Davis Inc., the "Company") at December 31, 1997 and 1998, and
the results of its operations and its cash flows for the period from February
29, 1996 to December 31, 1996 and for the years ended December 31, 1997 and
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.

As described in Note 1 to the financial statements, ZDNet is a division of
Ziff-Davis Inc.; accordingly, the financial statements of ZDNet should be read
in conjunction with the audited financial statements of Ziff-Davis Inc.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
New York, NY
February 22, 1999

168
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

COMBINED BALANCE SHEETS
(dollars in thousands)

<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 28 $ 292
Accounts receivable, net of allowance for doubtful accounts
of $522 and $1,866, for 1997 and 1998, respectively.......... 11,396 18,732
Deferred taxes................................................ 69 779
Other current assets.......................................... 28 265
------- -------
Total current assets........................................ 11,521 20,068
Property and equipment, net..................................... 3,145 5,618
Investment, at cost............................................. -- 5,000
Deferred taxes.................................................. 5,496 4,274
Intangible assets, net.......................................... 67,164 62,726
------- -------
Total assets................................................ $87,326 $97,686
======= =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.............................................. $ 645 $ 2,553
Accrued expenses.............................................. 2,208 3,495
Unearned income............................................... -- 1,078
------- -------
Total current liabilities................................... 2,853 7,126
Non-current liabilities......................................... 1,181 1,013
------- -------
Total liabilities........................................... 4,034 8,139
------- -------
Commitments and contingencies (Notes 12 and 13)
Division equity................................................. 83,292 89,547
------- -------
Total liabilities and division equity....................... $87,326 $97,686
======= =======
</TABLE>

The accompanying notes are an integral part of the combined financial
statements.

169
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

COMBINED STATEMENTS OF OPERATIONS
(dollars in thousands)

<TABLE>
<CAPTION>
Period from Year ended
February 29, 1996 December 31,
to December 31, -----------------
1996 1997 1998
----------------- -------- -------
<S> <C> <C> <C>
Revenue, net.............................. $ 16,215 $ 32,218 $56,143
Cost of operations:
Production and content.................. 14,863 23,543 26,208
Selling, general and administrative
expenses............................... 13,280 23,475 30,993
Depreciation and amortization of
property and equipment................. 656 1,495 2,010
Amortization of intangible assets....... 4,829 6,186 4,438
-------- -------- -------
Total operating expenses.............. 33,628 54,699 63,649
-------- -------- -------
Loss from operations...................... (17,413) (22,481) (7,506)
Minority interest......................... -- 400 134
-------- -------- -------
Loss before income taxes.................. (17,413) (22,081) (7,372)
Provision (benefit) for income taxes...... (488) (843) 512
-------- -------- -------
Net loss.................................. $(16,925) $(21,238) $(7,884)
======== ======== =======
</TABLE>

The accompanying notes are an integral part of the combined financial
statements.

170
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

COMBINED STATEMENTS OF CASH FLOWS
(dollars in thousands)

<TABLE>
<CAPTION>
Period from Year ended
February 29, 1996 December 31,
to December 31, -----------------
1996 1997 1998
----------------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................. $(16,925) $(21,238) $(7,884)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 656 1,495 2,010
Amortization of intangible assets...... 4,829 6,186 4,438
Minority interest...................... -- (400) (134)
Deferred tax benefit................... (488) (843) 512
Changes in operating assets and
liabilities:
Accounts receivable.................. (1,892) (4,524) (7,336)
Other current assets................. (1,217) 4,093 (237)
Accounts payable and accrued
expenses............................ 2,347 (1,311) 3,195
Unearned income...................... 93 (93) 1,078
Other, net........................... (23) 1,371 (164)
-------- -------- -------
Net cash used in operating activities.... (12,620) (15,264) (4,522)
-------- -------- -------
Cash flows from investing activities:
Capital expenditures................... (1,010) (2,374) (4,483)
Investments and acquisitions, net of
cash acquired......................... -- (2,998) (5,000)
-------- -------- -------
Net cash used in investing activities.... (1,010) (5,372) (9,483)
-------- -------- -------
Cash flows from financing activities:
Capital contributions from ZD.......... 13,630 20,664 14,269
-------- -------- -------
Net cash provided by financing
activities.............................. 13,630 20,664 14,269
-------- -------- -------
Net increase in cash and cash
equivalents............................. -- 28 264
Cash and cash equivalents at beginning of
period.................................. -- -- 28
-------- -------- -------
Cash and cash equivalents at end of
period.................................. $ -- $ 28 $ 292
======== ======== =======
Supplemental Cash Flow Information:
Non-cash capital contribution.......... $ -- $ 5,167 $ --
</TABLE>

The accompanying notes are an integral part of the combined financial
statements.

171
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

COMBINED STATEMENTS OF CHANGES IN DIVISION EQUITY
(dollars in thousands)

<TABLE>
<CAPTION>
Cumulative Total
Paid-in Deferred Accumulated translation division
capital compensation deficit adjustment equity
-------- ------------ ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at February 29,
1996................... $ 81,900 $ -- $ -- $ -- $ 81,900
Capital contribution
from ZD................ 13,630 -- -- -- 13,630
Net loss................ -- -- (16,925) -- (16,925)
Foreign currency
translation
adjustment............. -- -- -- (30) (30)
-------- -------- -------- ----- --------
Balance at December 31,
1996................... 95,530 -- (16,925) (30) 78,575
Capital contribution
from ZD................ 25,831 -- -- -- 25,831
Net loss................ -- -- (21,238) -- (21,238)
Foreign currency
translation
adjustment............. -- -- -- 124 124
-------- -------- -------- ----- --------
Balance at December 31,
1997................... 121,361 -- (38,163) 94 83,292
Capital contribution
from ZD................ 14,269 -- -- -- 14,269
Conversion of Softbank
stock options.......... 76 (76) -- -- --
Issuance of ZDNet
Options................ 13,269 (13,269) -- -- --
Net loss................ -- -- (7,884) -- (7,884)
Foreign currency
translation
adjustment............. -- -- -- (130) (130)
-------- -------- -------- ----- --------
Balance at December 31,
1998................... $148,975 $(13,345) $(46,047) $ (36) $ 89,547
======== ======== ======== ===== ========
</TABLE>

The accompanying notes are an integral part of the combined financial
statements.

172
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS
(numbers rounded to the nearest thousand, except share and per share amounts)

1. Organization and Basis of Presentation

Formation of Ziff-Davis Inc.

Ziff-Davis Inc. was formed through an initial public offering and
reorganization that were completed on May 4, 1998 (described below). Prior to
that date, the predecessors of Ziff-Davis Inc. (currently named ZD Inc. and ZD
Events Inc.) were wholly owned indirect subsidiaries of SOFTBANK Corp.
(together with its non-Ziff-Davis Inc. affiliates, "Softbank").

ZDNet is the online business division of Ziff-Davis Inc. ZD is the division
of Ziff-Davis Inc. (formerly ZD Inc.) focused on the business of print
publishing, trade shows and conferences, market research and education. Each of
ZD and ZDNet is sometimes referred to herein as a "Group".

ZDNet's financial statements reflect the application of certain cash
management and allocation policies adopted by the Board of Directors of Ziff-
Davis Inc. (the "Board"). These policies are summarized in Note 4 under
"Certain Cash Management and Allocation Policies".

Even though Ziff-Davis Inc. has allocated all of its consolidated assets,
liabilities, revenue, expenses and cash flow between ZD and ZDNet, that
allocation and the division of Ziff-Davis Inc.'s common stock will not change
the legal title to any assets or responsibility for any liabilities and will
not affect the rights of any creditors. Holders of ZDNet Stock (as described
below) will continue to be common stockholders of Ziff-Davis Inc. and, as such,
will be subject to all risks associated with an investment in Ziff-Davis Inc.
and all of its businesses, assets and liabilities.

Financial impacts that occur at ZD that affect Ziff-Davis Inc.'s consolidated
results of operations or financial position could affect the results of
operations or financial condition of ZDNet or the market price of ZDNet Stock.
In addition, net losses of ZD, and any dividends or distributions on or
repurchases of ZD Stock, will reduce the assets of Ziff-Davis Inc. legally
available for dividends on ZDNet Stock. Accordingly, financial information for
ZDNet should be read in conjunction with financial information for ZD and
financial information for Ziff-Davis Inc.

Relationship with Softbank and MAC

173
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

approximately 45% of SOFTBANK Corp. (50.2% as of December 31, 1997). MAC, also
a Japanese corporation, was wholly owned by Mr. Son.

Acquisition of ZDNet

In February 1996, SOFTBANK Corp. acquired the stock of Ziff-Davis Holdings
Corp. ("Holdings") for an aggregate purchase price of approximately
$1,800,000,000 plus transaction costs. Softbank is a Japanese corporation which
as of December 31, 1997 was 50.2% owned by Mr. Son, its President, including
43.4% directly owned by his wholly owned holding company, MAC Inc. (MAC Inc.
and affiliates hereinafter referred to as "MAC"). Concurrent with the
acquisition, in a separate agreement, MAC, directly or through wholly owned
affiliates, acquired certain assets and assumed certain liabilities of ZD Inc.
(the "MAC Assets"), a wholly owned subsidiary of Holdings (formerly Ziff-Davis
Inc.), for an aggregate purchase price of approximately $302,000,000. ZDNet
comprised a portion of the MAC Assets.

Acquisition of GameSpot, Inc.

In January 1997, SOFTBANK Holdings Inc., an affiliate of Ziff-Davis Inc.
("SBH"), acquired 70% of GameSpot, Inc. ("GameSpot", formerly SpotMedia
Communications, Inc.) for approximately $3,000,000. Funds for this acquisition
were provided by Ziff-Davis Inc. to SBH. As part of the initial public offering
and reorganization that was completed on May 4, 1998 (described below),
GameSpot was contributed to ZDNet. Because GameSpot and Ziff-Davis Inc. were
under common control at the time of the transaction, the GameSpot acquisition
has been accounted for in a manner similar to a pooling of interests and
GameSpot's results have been included in ZDNet's results since the time of
common ownership (January 1997). The "pooling" of GameSpot results in a non-
cash capital contribution of $5,167,000 for the year ended December 31, 1997.

Reorganization and initial public offering

On February 4, 1998, a nonstock corporation, ZD Inc., was formed in
contemplation of a reorganization and initial public offering of Ziff-Davis
Inc. Upon completion of the initial public offering (described below), Ziff-
Davis Inc. was renamed ZD Inc., ZDCF was renamed ZD Events Inc. and ZD Inc. was
renamed Ziff-Davis Inc.

On May 4, 1998, SOFTBANK Corp., through its wholly owned subsidiary, SBH
completed a reorganization whereby the common stock of ZD Inc. and ZD Events
Inc. were contributed to Ziff-Davis Inc. in exchange for 73,619,355 shares of
Ziff-Davis Inc.'s common stock. Concurrent with the

174
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

reorganization, Ziff-Davis Inc. (1) completed an initial public offering of
25,800,000 common shares at an initial public offering purchase price of $15.50
per share, (2) issued $250,000,000 of 8 1/2% subordinated notes due 2008, (3)
entered into a $1,350,000,000 credit facility with a group of banks under which
$1,250,000,000 was borrowed and (4) converted $908,673,000 of intercompany
indebtedness to equity. In addition, Ziff-Davis Inc. received approximately
$9,107,000 of fixed assets from Kingston Technology Company ("Kingston"), a
related party, in exchange for 580,645 shares of Ziff-Davis Inc.'s common stock
and $107,000 in cash. These assets have been subsequently leased back to
Kingston. Total shares of common stock issued to Softbank were 74,200,000. The
transactions described above are herein referred to as the "Reorganization".

On May 28, 1998, Ziff-Davis Inc.'s U.S. underwriters exercised their option
to purchase 2.0 million additional shares of common stock to cover over-
allotments. Ziff-Davis Inc. purchased the additional shares from SBH resulting
in no change to the total number of shares outstanding. On December 31, 1998
SBH contributed 71,619,355 shares of Ziff-Davis Inc.'s common stock to SOFTBANK
America, Inc., an affiliate of SOFTBANK Corp.

Investment in Deja News Inc.

On July 22, 1998, ZDNet purchased $5,000,000 in Series C, convertible, non-
voting preferred shares of Deja News Inc., an Internet discussion network. This
investment is being accounted for at cost.

2. ZDNet Stock Proposal (unaudited)

The stockholders of Ziff-Davis Inc. are scheduled to vote on a proposal (the
"Tracking Stock Proposal") to authorize the issuance of a new series of common
stock, to be designated as Ziff-Davis Inc.--ZDNet Common Stock ("ZDNet Stock"),
intended to reflect the performance of Ziff-Davis Inc.'s online business
division ("ZDNet"). The majority owner of the common stock of Ziff-Davis Inc.
has committed to vote for the Tracking Stock Proposal. Before the ZDNet Stock
is first issued, Ziff-Davis Inc.'s existing common stock will be re-classified
as Ziff-Davis Inc.--ZD Common Stock ("ZD Stock") and that stock will be
intended to reflect the performance of Ziff-Davis Inc.'s other businesses and a
"Retained Interest" in ZDNet (i.e., Ziff-Davis Inc.'s retained interest in
ZDNet excluding the interest intended to be represented by outstanding shares
of ZDNet Stock)(collectively, "ZD").

ZD currently has a 100% Retained Interest in ZDNet. Following approval of the
Tracking Stock Proposal, Ziff-Davis Inc. currently plans to offer to the
public, for cash, 10,000,000 shares of ZDNet

175
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Stock intended to represent approximately 14% of the equity value attributed to
ZDNet. Ziff-Davis Inc. expects to offer ZDNet Stock to the public sometime in
the first or second quarter of 1999. However, Ziff-Davis Inc. could choose to
conduct the offering at a later time, or not to make the offering at all,
depending on the circumstances at the time. In addition to or instead of the
offering, Ziff-Davis Inc. reserves the right to distribute ZDNet Stock to
stockholders of Ziff-Davis Inc.

Currently, Ziff-Davis Inc. provides all funding for ZD and ZDNet as described
in Note 4 under "Certain Cash Management and Allocation Policies". Ziff-Davis
Inc. intends to continue these practices until ZDNet Stock is first issued.
Accordingly, no interest expense or income to or from ZD has been reflected in
the financial statements of ZDNet for any period prior to the date on which
ZDNet Stock is first issued.

After the date on which ZDNet Stock is first issued, for financial statement
purposes, the following policies will apply except to the extent the Board
rescinds, modifies or adds to them:

176
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

(d) Ziff-Davis Inc. will account for all cash transfers from one Group to
or for the account of the other Group (other than transfers in return for
assets or services rendered or transfers in respect of ZD's Retained
Interest that correspond to dividends paid on ZDNet Stock) as inter-Group
revolving credit advances unless (1) the Board determines that a given
transfer (or type of transfer) should be accounted for as a long-term loan,
(2) the Board determines that a given transfer (or type of transfer) should
be accounted for as a capital contribution increasing ZD's Retained
Interest in ZDNet or (3) the Board determines that a given transfer (or
type of transfer) should be accounted for as a return of capital reducing
ZD's Retained Interest in ZDNet. There are no specific criteria to
determine when Ziff-Davis Inc. will account for a cash transfer as a long-
term loan, a capital contribution or a return of capital rather than an
inter-Group revolving credit advance. The Board would make such a
determination in the exercise of its business judgment at the time of such
transfer (or the first of such type of transfer) based upon all relevant
circumstances. Factors the Board would consider include (1) the current and
projected capital structure of each Group, (2) the relative levels of
internally generated funds of each Group, (3) the financing needs and
objectives of the recipient Group, (4) the investment objectives of the
transferring Group, (5) the availability, cost and time associated with
alternative financing sources and (6) prevailing interest rates and general
economic conditions.

177
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

3. Summary of Significant Accounting Policies

Principles of combination

The combined financial statements include the accounts of ZDNet. All
significant transactions within the ZDNet division have been eliminated on
combination.

Cash and cash equivalents

ZDNet considers all highly liquid investments with an original maturity of 3
months or less to be cash equivalents.

Concentration of credit risk

ZDNet places its temporary cash investments with high credit quality
financial institutions. At times, such investments may be in excess of
federally insured limits. ZDNet has not experienced losses in such accounts.

ZDNet's customers represent a variety of technology companies in the U.S. and
other countries. ZDNet extends credit to its customers and historically has not
experienced significant losses relating to receivables from individual
customers or groups of customers.

Property and equipment

Property and equipment have been recorded at cost or estimated fair value at
the date of acquisition. Depreciation is computed using the straight-line
method half-year convention over the estimated useful lives of the assets which
range from 3 to 8 years. Leasehold improvements are amortized using the
straight-line method over the service life of the improvement or the life of
the related lease, whichever is shorter. Maintenance and repair costs are
charged to expense as incurred.

Intangible assets

Intangible assets consist principally of advertising lists, subscriber lists
and goodwill. Amortization of these assets is computed on a straight-line basis
over estimated useful lives. Identifiable intangible assets are amortized over
a period of 2 to 9 years and goodwill, which represents the excess of the
purchase price over the estimated fair values of net assets acquired, is
amortized over a period of 10 to 20 years. (See Note 6.) ZDNet assesses the
recoverability of intangible assets whenever adverse events or changes in
circumstances indicate that expected future cash flows (undiscounted and
without interest charges) may not be sufficient to support the carrying amount
of intangible assets. If undiscounted cash flows are not sufficient to support
the recorded value of assets, an impairment loss is recognized to reduce the
carrying value of the intangibles estimated recoverable value. ZDNet has not
experienced any impairment of its intangible assets.

178
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand)

Revenue recognition

ZDNet's revenue is derived principally from the sale of advertisements on
short-term contracts. Advertising revenue is recognized ratably in the period
in which the advertisement is displayed, provided that no significant
obligations remain and collection of the resulting receivable is probable.
ZDNet's obligations typically include guarantees of a minimum number of
"impressions", or times that an advertisement appears in pages viewed by users
of ZDNet's online properties. To the extent minimum guaranteed impressions are
not met, ZDNet defers recognition of the corresponding revenue until the
remaining guaranteed impression levels are achieved.

Revenue from subscription based fees and services is recognized evenly over
the term of the contract.

Revenue from barter transactions is recognized during the period in which the
advertisements are displayed. Barter transactions are recorded at the lower of
estimated fair value of the goods or services received or the estimated fair
value of the advertisements given. To date, barter transactions have been
insignificant.

Foreign currency

The effect of translating foreign currency financial statements into U.S.
dollars is included in the cumulative translation adjustment account in
division equity. Gains and losses on foreign currency transactions, which are
not significant to operations, have been included in selling, general and
administrative expenses. ZDNet has not historically entered into forward
currency contracts.

Income taxes

ZDNet uses the asset and liability approach for financial accounting and
reporting of deferred taxes.

Use of estimates

Fair value of financial instruments

All current assets and liabilities are carried at cost, which approximates
fair value because of the short-term maturity of those instruments.

179
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Stock-based compensation

ZDNet has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), to account for stock
options. Effective January 1, 1996, ZDNet adopted the disclosure only
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation.

Comprehensive income

ZDNet implemented SFAS No. 130 Reporting Comprehensive Income, effective
January 1, 1998. This standard requires ZDNet to report the total changes in
division equity that do not result directly from transactions with
stockholders, including those which do not affect retained earnings. These
changes are not material to ZDNet's combined financial statements.

New accounting pronouncement

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
Accounting for Derivative Instruments and Hedging Activities, SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. ZDNet does not expect that the adoption of SFAS
No. 133 will have a material impact on ZDNet's results of operations. ZDNet
will adopt SFAS No. 133 beginning with its 2000 financial statements.

4. Certain Cash Management and Allocation Policies

ZDNet's financial statements reflect the application of certain cash
management and allocation policies summarized below. The Board may rescind,
modify or add to any of these policies.

Treasury activities

Ziff-Davis Inc. manages most treasury activities on a centralized,
consolidated basis. These activities include the investment of surplus cash,
the issuance, repayment and repurchase of short-term and long-term debt, and
the issuance and repurchase of common stock and preferred stock. Each of ZDNet
and ZD generally remits its cash receipts (other than receipts of foreign
operations or operations that are not wholly owned) to Ziff-Davis Inc., and
Ziff-Davis Inc. generally funds ZDNet's cash disbursements (other than
disbursements of foreign operations or operations that are not wholly owned),
on a daily basis.

180
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

equity and ZD's Retained Interest in ZDNet) and (3) whenever ZDNet had a cash
need (other than cash needs of ZDNet's foreign operations or cash needs of
ZDNet's operations that are not wholly owned), that cash need was funded by ZD
and accounted for as a capital contribution (i.e., as an increase in ZDNet's
division equity and ZD's Retained Interest in ZDNet). Accordingly, no interest
expense or income to or from ZD has been reflected in the financial statements
of ZDNet.

Corporate general and administrative expenses

Ziff-Davis Inc. allocates the cost of certain corporate general and
administrative services and shared services (including certain legal,
accounting (tax and financial), information systems, telecommunications,
purchasing, marketing, intellectual property, public relations, corporate
office and travel expenses) (collectively, "Central Services") to ZDNet based
on utilization. Where determinations based on utilization alone are
impracticable, Ziff-Davis Inc. uses other methods and criteria that management
believes to be equitable and to provide a reasonable estimate of the cost
attributable to ZDNet.

Taxes

Federal income taxes, which are determined on a consolidated basis, except
for GameSpot, are allocated to ZDNet (and reflected in its financial
statements) in accordance with Ziff-Davis Inc.'s tax allocation policy. In
general, this policy provides that the consolidated tax provision (and related
tax payments or refunds) are allocated between the Groups based principally
upon the financial income, taxable income, credits and other amounts directly
related to the respective Groups. Tax benefits that cannot be used by the Group
generating such attributes, but can be utilized on a consolidated basis, are
allocated to the Group that generated such benefits. As a result, the allocated
Group amounts of taxes payable or refundable are not necessarily comparable to
those that would have resulted if the Groups had filed separate tax returns.

Royalty charges

ZD charges ZDNet an annual fee for the use of various brands and editorial
content. The current annual fee, which is reflected in ZDNet's financial
statements as part of its production and content costs, is equal to 5% of the
first $100,000,000 of ZDNet's revenue for the year, 4% of the next $50,000,000
of ZDNet's revenue for that year and 3% of any incremental revenue over
$150,000,000 for that year. The Board may at some point in the future change
this fee as it, in its sole discretion, deems appropriate in light of the
circumstances from time to time.

181
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

5. Property and equipment, net

Property and equipment, net consists of the following:

<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
(dollars in
thousands)
<S> <C> <C> <C> <C>
Computers and equipment......................... $ 4,274 $ 8,003
Furniture and fixtures.......................... 708 1,076
Leasehold improvements.......................... 314 700
------- -------
5,296 9,779
Accumulated depreciation and amortization....... (2,151) (4,161)
------- -------
$ 3,145 $ 5,618
======= =======
</TABLE>

6. Intangible assets, net

Intangible assets, net consists of the following:

<TABLE>
<CAPTION>
Range of Useful December 31,
Lives ------------------
(years) 1997 1998
--------------- -------- --------
(dollars in
thousands)
<S> <C> <C> <C>
Subscription lists..................... 2 $ 4,300 $ 4,300
Advertising lists...................... 9 2,400 2,400
Goodwill............................... 10-20 71,479 71,479
-------- --------
78,179 78,179
Accumulated amortization............... (11,015) (15,453)
-------- --------
$ 67,164 $ 62,726
======== ========
</TABLE>

Intangible assets primarily relate to the acquisition of the MAC Assets. As
discussed in Note 1, the acquisition was accounted for under the purchase
method of accounting. As such, the purchase price of this acquisition was
allocated to tangible and identifiable intangible assets with the remaining
amount being allocated to goodwill.

Advertising lists and subscriber lists were recorded at estimated fair value
as determined by an income approach.

All intangible assets are being amortized using the straight-line method over
estimated useful lives, up to 20 years. In determining the estimated useful
lives, ZDNet considered its competitive position in the markets in which it
operates, the historical attrition rates of advertisers, subscribes and
exhibitors, legal and contractual obligations and other factors.

182
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

7. Accrued Expenses

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
----------- -----------
(dollars in thousands)
<S> <C> <C>
Payroll and related employee benefits............. $ 1,440 $ 2,221
Licenses.......................................... 108 24
Other taxes....................................... 189 302
Other............................................. 471 948
----------- -----------
$ 2,208 $ 3,495
=========== ===========
</TABLE>

8. Income Taxes

Provision (benefit) for income taxes and related assets and liabilities
attributed to ZDNet are determined in accordance with Ziff-Davis Inc.'s tax
allocation policy. (See Note 4.)

ZDNet (excluding GameSpot) has been included in a consolidated federal income
tax return, except for the periods in which it was owned by MAC Inc. (described
in Note 1). GameSpot is a 70% owned subsidiary and files separate federal and
state income tax returns on a stand-alone basis.

Loss before income taxes is attributable to the following jurisdictions:

<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1997 1998
-------- -------- -------
(dollars in thousands)
<S> <C> <C> <C>
U.S. ......................................... $(15,263) $(18,853) $(5,009)
Foreign....................................... (2,150) (3,228) (2,363)
-------- -------- -------
Total......................................... $(17,413) $(22,081) $(7,372)
======== ======== =======
</TABLE>

183
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Components of the provision (benefit) for income taxes are as follows:

<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997 1998
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
U.S. federal income taxes:
Current......................................... $ -- $ -- $ --
Deferred........................................ (378) (653) 413
State and local income taxes:
Current......................................... -- -- --
Deferred........................................ (110) (190) 99
Foreign income taxes.............................. -- -- --
------- ------- ------
Total provision (benefit) for income taxes.... $ (488) $ (843) $ 512
======= ======= ======
</TABLE>

A reconciliation of the U.S. federal statutory tax rate to ZDNet's effective
tax rate on loss before income taxes is as follows:

<TABLE>
<CAPTION>
December 31,
-------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Federal statutory tax
rate................... 35.0% 35.0% 35.0%
State and local taxes
(net of federal tax
benefit)............... 6.0 6.0 5.0
Non-recognition of
combined losses of MAC
Assets................. (33.3) (26.8) (29.3)
Change in valuation
allowance.............. (4.9) (9.5) (14.2)
Amortization of non-
deductible goodwill ... -- (0.9) (2.8)
Other................... -- -- (0.6)
----- ----- -----
Effective tax rate...... 2.8% 3.8% (6.9)%
===== ===== =====
</TABLE>

The effective tax rate differs from the federal statutory tax rate primarily
as a result of ZDNet's inability to deduct losses incurred by ZDNet while owned
by MAC. In addition, tax benefits attributable to losses in foreign
jurisdictions and certain U.S. losses are subject to the establishment of a
valuation allowance inasmuch as such loss carryforwards are not expected to be
utilized in the future.

184
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Following is a summary of the components of the deferred tax accounts at
December 31, 1997 and 1998:

<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
----------- -----------
(dollars in thousands)
<S> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts................... $ 37 $ 701
Other............................................. 32 78
----------- -----------
Current deferred tax assets....................... 69 779
Non current deferred tax assets
Net operating loss and other carryforwards........ 9,081 9,728
Other............................................. 10 115
----------- -----------
Noncurrent deferred tax assets.................... 9,091 9,843
Valuation allowance................................ (3,595) (5,569)
----------- -----------
Net noncurrent deferred tax assets................ 5,496 4,274
----------- -----------
Net deferred tax assets......................... $ 5,565 $ 5,053
=========== ===========
</TABLE>

The valuation allowance primarily relates to tax benefits of foreign net
operating loss carryforwards acquired in the MAC Asset purchase which are not
expected to be realized. No deferred tax asset has been established for the
U.S. losses generated by ZDNet while owned by MAC since these losses will not
be available for use by Ziff-Davis Inc.

ZDNet has U.S. and foreign net operating loss carryforwards at December 31,
1998 of approximately $23,000,000, which will begin to expire in 2000. The
utilization of certain net operating loss carryforwards of approximately
$10,000,000 is subject to limitations primarily due to the change of ownership
resulting from Softbank's acquisition of Holding's stock. Management believes
that such limitations will not significantly affect Ziff-Davis Inc.'s ability
to recognize the deferred tax asset relating to the carryforwards. Accordingly,
no valuation allowance to reduce the deferred tax asset relating to the
carryforwards has been established.

9. Related Party Transactions

ZDNet transacts business with a group of companies affiliated through common
ownership with Softbank and has various transactions and relationships with
members of the group. Due to these relationships, it is possible that the terms
of those transactions are not the same as those that would result from
transactions among unrelated parties.

ZD provides all necessary funding for the operations and investments of
ZDNet; this funding is accounted for as capital contributions. (See Notes 2 and
4.) For the period from February 29, 1996 to December 31, 1996 and the years
ended December 31, 1997 and 1998, such capital contributions were $13,630,000,
$25,831,000 and $14,269,000, respectively.

185
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

The amounts receivable or payable to affiliated companies are included in
accounts receivable, net or accounts payable in the accompanying balance
sheets. Details of these amounts are:

<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
----------- -----------
(dollars in thousands)
<S> <C> <C>
Accounts receivable:
Softbank Kingston.................................... $ 60 $ 72
E-Trade.............................................. -- 367
US Web............................................... 7 --
Asia Communications Global Limited................... 61 --
Inquiry.com, Inc. ................................... 50 --
Trend Micro, Inc. ................................... 10 --
Sega Entertainment................................... 32 36
----------- -----------
Total.............................................. $ 220 $ 475
=========== ===========
Accounts payable:
SIM.................................................. $ 2 $ --
Yahoo!............................................... -- 60
GeoCities............................................ -- 12
PointCast............................................ 42 16
----------- -----------
Total.............................................. $ 44 $ 88
=========== ===========
</TABLE>

ZDNet purchases advertising in ZD's publications at discounts to market
rates. Had ZD charged market rates for such advertising, ZDNet's operating
expenses would have increased by $2,235,000, $2,671,000 and $1,429,000 for the
period from February 29, 1996 to December 31, 1996 and for the years ended
December 31, 1997 and 1998, respectively.

186
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Related party transactions included in the accompanying combined statements
of operations include the following:
<TABLE>
<CAPTION>
Period from Year ending
February 29, 1996 December 31,
to December 31, --------------
1996 1997 1998
----------------- ------ ------
(dollars in thousands)
<S> <C> <C> <C>
Revenue, net
ZD.......................................... $ -- $ 76 $ 160
ZDTV........................................ -- 11 36
GeoCities................................... -- 30 --
E-Trade..................................... -- -- 1,168
Kingston Technology Company................. 88 353 615
US Web...................................... 93 75 --
Asia Communications Global Limited.......... -- 61 --
Electric Minds, Inc. ....................... -- 15 --
Inquiry.com, Inc. .......................... 29 149 --
Trend Micro, Inc. .......................... 28 77 --
Sega Entertainment.......................... 4 248 94
------ ------ ------
Total..................................... $ 242 $1,095 $2,073
====== ====== ======
Expenses
ZD.......................................... $4,496 $8,330 $9,374
ZDTV........................................ -- (120) (532)
SIM......................................... 585 1,613 --
Yahoo!...................................... 27 -- 101
GeoCities................................... -- -- 108
PointCast................................... -- 42 144
------ ------ ------
Total....................................... $5,108 $9,865 $9,195
====== ====== ======
</TABLE>

Included in selling, general and administrative expenses is an allocation for
Ziff-Davis Inc.'s Central Services amounting to $2,391,000, $3,877,000 and
$5,949,000 for the ten month period ended December 31, 1996 and the years ended
December 31, 1997 and 1998, respectively. Also included in selling, general and
administrative expenses is a royalty charge to ZD amounting to $811,000,
$1,611,000 and $2,807,000 for the ten month period ended December 31, 1996 and
the years ended December 31, 1997 and 1998, respectively. (See Note 4.)

ZDNet is reimbursed by certain affiliates for pre-determined costs incurred
by ZDNet on the affiliates' behalf. These reimbursements are reflected as a
reduction of expenses in the accompanying statements of operations.

10. Employee Benefit Plans

Ziff-Davis Inc. maintains various defined contribution retirement plans.
Substantially, all of ZDNet's employees are eligible to participate in one of
the plans under which annual contributions may be made by Ziff-Davis Inc. for
the benefit of all eligible employees. In certain cases, employees

187
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

may also make contributions to the plan in which they participate which, and
subject to certain limitations, may be matched by ZDNet up to certain specified
percentages. Employees are generally eligible to participate in a plan upon
joining Ziff-Davis Inc. and receive matching contributions after one year of
employment. ZDNet made contributions to the plan totaling $447,000, $751,000
and $1,111,000 for the period from February 29, 1996 to December 31, 1996 and
the years ended December 31, 1997 and 1998, respectively.

11. Stock Compensation Plans

SOFTBANK Executive Stock Option Plans

The Softbank Executive Stock Option Plans provide for the granting of
nonqualified stock options (the "Softbank Options") to purchase the common
stock of SOFTBANK Corp. to officers, directors and key employees of Ziff-Davis
Inc. SOFTBANK Corp. is a publicly traded company in Japan. Under the plans,
options have been granted at exercise prices equal to the closing market price
in Japan's public equities market (market price denominated in Japanese yen) on
the date of grant. As of December 31, 1998, substantially all options granted
become exercisable in various installments over the first six anniversaries of
the date of grant and expire ten years after the date of grant. On January 19,
1998, the exercise price of all of the shares outstanding under option
agreements were reset to (Yen)4,000, the closing market price on Japan's Tokyo
Stock Exchange First Section at that date. In conjunction with the repricing,
those options previously exercisable at December 31, 1997 could only be
exercised after July 19, 1998. The repricing of the stock options did not
result in compensation expense to ZDNet.

1998 Incentive Compensation Plan and the 1998 Non-Employee Directors' Stock
Option Plan

In 1998, Ziff-Davis Inc. adopted the 1998 Incentive Compensation Plan (the
"Incentive Plan") and the 1998 Non-Employee Directors' Stock Option Plan (the
"Non-Employee Directors' Plan"). The Incentive Plan provides for the grant of
options, stock appreciation rights, stock awards and other interests in Ziff-
Davis Inc.'s common stock to key employees of Ziff-Davis Inc. and its
affiliates and consultants. The Non-Employee Directors' Plan provides for the
grant of stock options to non-employee directors. Ziff-Davis Inc. has reserved
8,500,000 shares of common stock for issuance under the Incentive Plan and
200,000 shares of common stock for issuance under the Non-Employee Directors'
Plan. During 1998, Ziff-Davis Inc. granted options to purchase 339,000 shares
to ZDNet employees with an exercise price of $16.00 per share representing the
fair value of such options at that date. Such options vest ratably over five
years.

188
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

In addition, on December 21, 1998, the Board approved the grant of options to
acquire an aggregate of approximately 4,163,000 shares of ZDNet Stock to
certain employees, at a price of $7.50 per share. As a result of the grant
ZDNet has recorded deferred compensation expense of $13,269,000 for the
difference between the exercise price and the deemed fair value of the
underlying shares. This amount has been recorded as a component of division
equity offset by an addition to paid-in capital. ZDNet expects to recognize
non-cash compensation for accounting purposes of $13,269,000 ratably over the
vesting period of the options. These options are currently scheduled to vest
and become exercisable on the fifth anniversary of the date of grant.

The terms of the options described in the preceding paragraph require an
adjustment in the number of shares of ZDNet Stock that holders may purchase and
the per share purchase price thereof if the initial Number of Shares Issuable
with Respect to ZD's Retained Interest in ZDNet is different from 40,000,000.
This adjustment is similar to the adjustment that would generally be made to
the terms of employee stock options in the event of a stock split. Ziff-Davis
Inc. currently expects that the initial Number of Shares Issuable with Respect
to ZD's Retained Interest in ZDNet will be 70,000,000. Assuming that this is
so, the total number of shares of ZDNet Stock that holders may purchase upon
exercise of these options will increase to approximately 10,026,000 and the per
share purchase price thereof will decrease to approximately $4.29.

The December 21, 1998 Board actions described above are subject to
stockholder approval. The majority owner of the common stock of Ziff-Davis Inc.
has committed to approve these actions.

On January 29, 1999, Ziff-Davis Inc. granted options to a number of employees
in connection with the cancellation of corresponding options to purchase stock
of SOFTBANK Corp. In connection with these grants, an affiliate of SOFTBANK
Corp. has agreed with Ziff-Davis Inc. that, if and when any of these options
are exercised, (1) that affiliate will cause the shares of Ziff-Davis Inc.
common stock issuable upon such exercise to be supplied to Ziff-Davis Inc. and
(2) Ziff-Davis Inc. will deliver to that affiliate or its designee the exercise
price paid upon such exercise. Thus, the exercise of these options will not
increase the number of shares of Ziff-Davis Inc. common stock outstanding or
Ziff-Davis Inc.'s stockholders' equity. However, ZDNet expects to recognize
compensation expense for accounting purposes of approximately $76,000 over
three years as a result of these grants. As such, this amount has been recorded
in the Financial Statements as additional paid-in capital offset by a reduction
to division equity as deferred compensation.

189
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

GameSpot Inc. 1997 Stock Option Plan

Option grants

Information relating to the Softbank options during 1996, 1997 and 1998 is as
follows:

<TABLE>
<CAPTION>
Weighted Average
Number of Option Price
Shares Per Share(1)
--------- ----------------
<S> <C> <C> <C>
Shares outstanding under options at December 31,
1995................................................. -- --
Granted............................................. 24,716(2) $87.15
Exercised........................................... -- --
Forfeited........................................... -- --
------
Shares outstanding under options at December 31,
1996................................................. 24,716 $87.15
Granted............................................. 17,800 64.50
Exercised........................................... -- --
Forfeited........................................... (8,096) 78.76
------
Shares outstanding under options at December 31,
1997................................................. 34,420 $77.41
Granted............................................. -- --
Exercised........................................... -- --
Forfeited........................................... -- --
Converted to Ziff-Davis Inc. options................ (2,100) 31.03
------
Shares outstanding under options at December 31,
1998................................................. 32,320 $31.03
======
Shares exercisable as of:.............................
December 31, 1996................................... -- --
December 31, 1997 (price range $64.50 to $87.15).... 5,120 $78.97
December 31, 1998 (price $31.03).................... 11,374 $31.03
</TABLE>
- --------
(1) The exercise price of the stock options is set in Japanese yen. The
exercise prices as shown above have been converted to U.S. dollars based
upon the exchange rate as of the date of grant for the respective options.
The 1998 activity reflects the repricing of all options outstanding as of
January 19, 1998 to (Yen)4,000.
(2) Adjusted for a 1.4:1 stock split during 1996 and a 1.3:1 stock split during
1997.

190
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Information relating to Ziff-Davis Inc. stock options issued during 1998 is
as follows:

<TABLE>
<CAPTION>
Weighted
Average
Number of Option Price
Shares Per Share
--------- ------------
<S> <C> <C>
Shares outstanding under options at December
31, 1997...................................... -- --
Granted...................................... 339,000 $6.00
Exercised.................................... -- --
Converted from Softbank options.............. 8,226 8.89
Forfeited.................................... (8,000) 6.00
---------
Shares outstanding under options at December
31, 1998...................................... 339,226 $6.08
=========

Information relating to ZDNet stock options issued during 1998 is as follows:

<CAPTION>
Weighted
Average
Number of Option Price
Shares* Per Share*
--------- ------------
<S> <C> <C>
Shares outstanding under options at December
31, 1997...................................... -- --
Granted...................................... 4,162,943 $7.50
Exercised.................................... -- --
Forfeited.................................... -- --
---------
Shares outstanding under options at December
31, 1998...................................... 4,162,943 $7.50
=========
</TABLE>
- --------
* The number of shares and price per share will be adjusted if the Initial
Number of Shares Issuable with Respect to ZD's Retained Interest in ZDNet is
different from 40,000,000.

At December 31, 1998, no shares of either Ziff-Davis Inc. or ZDNet options
were exercisable.

Information relating to GameSpot, Inc. stock options is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Option Price
Shares Per Share
--------- ------------
<S> <C> <C>
Shares outstanding under options at December
31, 1996...................................... -- --
Granted...................................... 780,000 $0.44
Exercised.................................... -- --
Forfeited.................................... (61,000) 0.44
--------
Shares outstanding under options at December
31, 1997...................................... 719,000 0.44
Granted...................................... -- --
Exercised.................................... -- --
Forfeited.................................... (167,000) 0.44
--------
Shares outstanding under options at December
31, 1998...................................... 552,000 $0.44
========
Shares exercisable as of:
December 31, 1997.............................. 400,610 $0.44
========
December 31, 1998.............................. 497,639 $0.44
========
</TABLE>

191
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

As permitted by SFAS No. 123, ZDNet has chosen to continue to account for
stock options in accordance with the provisions of APB 25 and accordingly, no
compensation expense related to stock option grants was recorded in 1996, 1997
or 1998. Pro forma information regarding net income is required by SFAS No. 123
and has been determined as if ZDNet had accounted for stock options under the
fair value method. The fair value of the option grants was estimated at the
date of grant using the Black-Scholes option-pricing model with the following
assumptions for 1996, 1997 and 1998 :

Softbank options

<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate......................... 5.89% 6.35% 5.46%
Dividend yield.................................. 0.26% 0.22% 1.50%
Volatility factor............................... 54.03% 51.35% 77.72%
Expected life................................... 6 years 6 years 6 years

Ziff-Davis Inc. options

<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate......................... n/a n/a 5.03%
Dividend yield.................................. n/a n/a 0.00%
Volatility factor............................... n/a n/a 54.70%
Expected life................................... n/a n/a 6 years

ZDNet options

<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate......................... n/a n/a 4.67%
Dividend yield.................................. n/a n/a 0.00%
Volatility factor............................... n/a n/a 54.70%
Expected life................................... n/a n/a 6 years

GameSpot Inc. options

<CAPTION>
1996 1997 1998
------- ------- -------
Risk free interest rate......................... n/a 6.35% 6.44%
Dividend yield.................................. n/a 0.00% 0.00%
Volatility factor............................... n/a 100.27% 100.27%
Expected life................................... n/a 4 years 4 years

The weighted average fair value of options granted in 1996, 1997 and 1998 is
as follows:

1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Softbank options................................ $ 64.30 $ 34.05 $ 19.81
Ziff-Davis Inc. options......................... n/a n/a 5.21
ZDNet options................................... n/a n/a 4.25
GameSpot options................................ n/a 0.32 0.32
</TABLE>

192
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had
compensation cost for the stock option plans been determined based upon the
fair value at the grant date for awards during 1996, 1997 and 1998, consistent
with the provisions of SFAS No. 123, ZDNet's net loss would have increased by
approximately $156,000, $167,000 and $1,046,000, respectively.

Employee Stock Purchase Plan

Ziff-Davis Inc. adopted the Employee Stock Purchase Plan (the "Stock Purchase
Plan") whereby eligible employees may purchase Ziff-Davis Inc.'s common stock
with after-tax payroll deductions of 1% to 10% of their base pay. The price at
which shares of common stock will be purchased is the lesser of 85% of the fair
market value of a share of common stock on (1) the first business day of a
purchase period or (2) the last business day of a purchase period. Ziff-Davis
Inc. has reserved 1,500,000 shares of common stock for issuance under the Stock
Purchase Plan.

12. Operating Lease Commitments

ZDNet utilizes equipment and space under lease to Ziff-Davis Inc. ZDNet's
allocation of the minimum lease payments are as follows:

<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
1999.................. $ 1,332
2000.................. 1,493
2001.................. 1,511
2002.................. 1,064
2003.................. 1,076
Thereafter............ 7,022
-------
Total minimum
payments........... $13,498
=======
</TABLE>

Rental expense from operating leases amounted to $668,000, $1,348,000 and
$1,608,000, for the period February 29, 1996 to December 31, 1996, and the
years ended December 31, 1997 and 1998, respectively.

13. Contingencies

ZDNet and Ziff-Davis Inc. are subject to various legal proceedings arising in
the normal course of business.

193
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

Class action and derivative litigations

The complaints allege that defendants violated Sections 11, 12(a) (2) and 15
of the Securities Act of 1933 in connection with the registration statement
filed by Ziff-Davis Inc. with the Securities and Exchange Commission relating
to the initial public offering of the Ziff-Davis Inc.'s common stock on April
29, 1998 (the "IPO"). More particularly, the complaints allege that the
registration statement contained false and misleading statements and failed to
disclose facts that could have indicated an impending decline in Ziff-Davis
Inc.'s revenue. The complaints seek on behalf of a class of purchasers of Ziff-
Davis Inc.'s common stock from the date of the IPO through October 8, 1998
unspecified damages, interest, fees and costs, recission and injunctive relief
such as the imposition of a constructive trust upon the proceeds of the IPO.

Other legal proceedings

194
<PAGE>

ZDNET
(a division of Ziff-Davis Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)

damages. Ziff-Davis Inc. and the other defendants have moved to dismiss all of
the claims against them other than a breach of contract claim which is solely
against SBH, and the motion was granted, with the result that all of the claims
against Ziff-Davis Inc. and its officers were dismissed, and most of the claims
against SBH were dismissed, leaving only a claim against SBH concerning the
alleged failure of SBH to give plaintiffs adequate notice of the sale of its
stock to SIM.

14. Subsequent Events

Incentive Plan

195
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

Ziff-Davis Inc.

Dated: April 1, 1999
/s/ Timothy C. O'Brien
By: _________________________________
Name: Timothy C. O'Brien
Title: Chief Financial Officer

196