Nature of Operations - Hungry Minds, Inc. (the "Company") commenced operations on September 1, 1998, and was incorporated in California, on February 4, 1999. The Company was initially incorporated as The Knowledge Project, Inc. and changed its name to Hungry Minds, Inc. in October 1999.

The Company is a provider of e-learning sites for internet communities and businesses interested in providing learning solutions to their users and employees. The e-learning sites are customized internet-based environments with content and hosting provided by the Company. Online users have access to original content and content produced by various vendors. The Company launched its website in September 1999.

As of June 30, 2000, the Company was a development stage company. Successful completion of the Company's development program and, ultimately, the attainment of profitable operations is dependent upon future events, including obtaining adequate financing to fulfill its development activities, increasing its customer base and implementing and successfully executing its business and marketing strategy.

Revenue Recognition - The Company's revenues are derived from setup and maintenance fees earned from the creation and development of customized e-learning sites, in addition to commissions generated through e- commerce sales and advertising arrangements. Setup fees are deferred and amortized over the stated contract period of twelve months. Maintenance fees are recognized as the underlying services are provided. E-commerce commission is recognized upon delivery of the product sold by the vendor. Advertising revenue is recognized ratably on a straight line basis, over the period in which the advertisement is displayed, which is generally one year. Amounts collected in advance of advertising revenue being recognized are recorded as deferred revenue in the accompanying financial statements.

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 3 years.

Capitalized Leases - Equipment subject to noncancelable leases, which meet the criteria of capital leases, is capitalized at the present value of the minimum lease payments due over the term of the lease and amortized over the estimated useful life of the equipment or the lease term, whichever is shorter.

Income Taxes - The Company accounts for income taxes using an asset and liability approach. Deferred income tax assets and liabilities result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.

Stock Based Compensation - The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.

The Company accounts for equity instruments issued to nonemployees in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, and Emerging Issues Task Force ("EITF") Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, which requires that the fair value of such instruments be recognized as an expense over the period in which the related services are received.

Concentration of Credit Risk - Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. Risks associated with cash are mitigated by placing such amounts with high credit quality financial institutions.

Credit risk with respect to trade receivables is spread over diverse customers who make up the Company's customer base. At December 31, 1998 and 1999, no one customer accounted for more than 10% of total accounts receivable. The allowance for doubtful accounts was $0, $1,006 and $5,000 (unaudited) as of December 31, 1998 and 1999 and June 30, 2000, respectively.

Comprehensive Income - For the periods presented, the Company's comprehensive loss, as defined by SFAS No. 130, Reporting Comprehensive Income, is equal to its net loss.

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

Unaudited Interim Financial Information - Interim financial statements as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements. In the opinion of management, all adjustments (consisting only or normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year.

Recently Issued Accounting Standards - In June 1998 and June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards SFAS No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities, and Statement of Financial Accounting Standards No. 137 ("SFAS 137"), Deferral of the Effective Date of SFAS 133, respectively. SFAS 133 and SFAS 137 require the recognition of all derivatives as either assets or liabilities in the statement of financial position, and to measure those instruments at its fair value, and are effective for all fiscal years beginning after June 15, 2000. As of December 31, 1999, the Company was studying the application of SFAS 133 and the potential effect on its financial statements.

On August 10, 2000, IDG Books Worldwide, Inc. ("IDG"), through its wholly owned subsidiary Greenfields Acquisitions, Inc., acquired certain net assets of the Company, including property and equipment, unbilled accounts receivables, intellectual property and rights under certain existing agreements. The purchase price of approximately $5 million paid by IDG consisted of $3.3 million in cash, a $900,000 payment by IDG to a Company creditor, a $400,000 advance to the Company and the issuance of a warrant to acquire 62,992 shares of IDG common stock. The warrant is fully vested, expires in 2005 and becomes exercisable only if IDG's stock price reaches $24.9375. Accounts receivable existing at the acquisition date and certain prepaid and other assets were excluded from the sale to IDG. Most liabilities were also specifically excluded from transfer to IDG, including existing accounts payable and accrued liabilities, obligations arising under or in connection with taxes of the Company, employee benefit plans and those incurred with the lease of real property.

Property and equipment consists of the following:

                                           December 31,
                                     ------------------------   June 30,
                                        1998         1999         2000
                                     -----------  -----------  -----------
                                                               (Unaudited)
Computer hardware                   $     9,689  $ 2,003,699  $ 2,243,032
Purchased computer software                 --     1,147,359    1,193,018
Furniture, fixtures and office
  equipment                               4,600       71,423       26,779
Leasehold improvements                      --       197,998          --
                                     -----------  -----------  -----------
           Total                         14,289    3,420,479    3,462,829

Accumulated depreciation                    --       517,725    1,063,237
                                     -----------  -----------  -----------
Property and equipment - net        $    14,289  $ 2,902,754  $ 2,399,592
                                     ===========  ===========  ===========

The above amounts include assets under capital lease with a cost basis of $279,507 and $1,148,974 and net book value of $279,507 and $957,478 at December 31, 1999 and June 30, 2000 (unaudited), respectively. There were no assets under capital lease at December 31, 1998.

In October 1999, the Company entered into a twelve-month agreement to purchase advertising space on the website of an unaffiliated company. Obligations associated with this contract and incurred as of December 31, 1999 totaled approximately $826,000 and were included in Other Accrued Liabilities and charged to Selling and Marketing expense. Subsequent to December 31, 1999, this advertising contract was cancelled. A final payment of approximately $878,000 as full satisfaction of the Company's outstanding obligations has been accrued at June 30, 2000.

The Company was an S corporation for tax purposes from inception through August 4, 1999.

The primary components of the net deferred tax asset as of December 31, 1999 are:

Net operating loss carryforwards    $   960,446
Tax credits                             104,116
Other, net                              958,438
                                     -----------
           Total                      2,023,000

Valuation allowance                  (2,023,000)
                                     -----------
Net deferred tax asset              $       --
                                     ===========

No tax benefit from net operating losses and other deferred tax assets has been recorded through December 31, 1999. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The Company established a 100% valuation allowance at December 31, 1999 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets.

At December 31, 1999, the Company had net operating loss carryforwards of approximately $2,408,000, for federal tax purposes, which begin to expire during fiscal year 2019. Additionally, the Company has net operating loss carryforwards of approximately $2,429,000 for California franchise tax purposes, which begin to expire during fiscal year 2007. At December 31, 1999, the Company also had tax credit carryforwards of approximately $71,000 for federal tax purposes, which begin to expire during fiscal year 2014. Additionally, the Company has tax credit carryforwards of approximately $50,000 for California franchise tax purposes, which do not expire.

Internal Revenue Code Section 382 places a limitation (the "Section 382 Limitation") on the amount of taxable income which can be offset by net operating loss ("NOL") carryforwards after a change in control (generally greater than 50% change in ownership) of a loss corporation. California has similar rules. Generally, after a control change, a loss corporation cannot deduct NOL carryforwards in excess of the Section 382 Limitation. Due to these "change in ownership" provisions, utilization of the NOL and tax credit carryforwards may be subject to an annual limitation regarding their utilization against taxable income in future periods.

The Company leases office space and equipment under noncancelable operating and capital leases with various expiration dates through June 2004. At December 31, 1999, future minimum lease payments under noncancelable operating and capital leases are as follows:

                                                    Capital    Operating
                                                    Leases       Leases
                                                  -----------  -----------
Year ending December 31:
  2000                                               117,600      380,380
  2001                                               117,600      382,284
  2002                                               117,600      363,493
  2003                                                   --       334,510
  2004                                                   --       127,050
                                                  -----------  -----------
Total minimum lease payments                         352,800  $ 1,587,717
                                                               ===========
Less amount representing interest                     73,293
                                                  -----------
Present value of capital lease obligations           279,507

Less current portion                                  78,979
                                                  -----------
Long term portion of capital lease obligations   $   200,528
                                                  ===========

At December 31, 2000, future minimum rentals to be received through October 2003 under noncancelable operating subleases totaled $234,172.

Rent expense on operating leases was $10,184 and $255,393 for the periods ended December 31, 1998 and 1999, respectively, and $65,202 and $190,348 for the six months ended June 30, 1999 and 2000, respectively (unaudited). Rental income from operating subleases was $0 and $35,640 for the periods ended December 31, 1998 and 1999, respectively, and $2,742 and $32,898 for the six months ended June 30, 1999 and 2000, respectively (unaudited).

In January 2000, the Company entered into another capital lease agreement for computer equipment which provides for annual lease payments of $372,000 for a period of three years.

During 1998 and 1999, the Company received borrowings of $55,000 and $4,450,000, respectively, from its major shareholder and chief executive officer (including $3,245,000 received during the six months ended June 30, 1999). Interest recorded at a rate of 10% per annum on these borrowings was $884 and $76,260 for the periods ended December 31, 1998 and 1999, respectively.

During 1999 this principal and interest, totaling $4,582,144, was converted into 2,000,000 shares of common stock and 10,500,000 shares of Series A preferred stock.

During the six months ended June 30, 2000, the Company issued promissory notes totalling $2,549,000 to its major shareholder and chief executive officer. The borrowings are repayable on demand and are secured by the assets of the Company. The notes accrue interest at a rate of 10% per annum which is payable upon repayment of the principal. Interest recorded on the notes for the six months ended June 30, 2000 totalled $54,159 (unaudited).

During the six months ended June 30, 2000, the Company received non interest-bearing advances totaling $400,000 (unaudited) from IDG Books Worldwide, Inc. These advances are to be repaid from the proceeds from the sale to IDG Books Worldwide, Inc. subsequent to period end (see Note 8).

Convertible Preferred Shares - In July 1999, the Company's Articles of Incorporation were amended to authorize the Company to issue 17,045,000 shares of no par value convertible preferred stock, of which 10,500,000 were designated Series A and 6,545,000 Series B.

At December 31, 1999, the amounts, terms and liquidation values of the Company's convertible preferred stock were as follows:

                                        Proceeds Net  Aggregate
                Shares                  of Issuance  Liquidation
              Authorized   Outstanding     Costs     Preference
              -----------  -----------  -----------  -----------
A             10,500,000   10,500,000  $ 4,305,000  $ 4,305,000
B              6,545,000    6,500,000    6,485,380    6,500,000
              -----------  -----------  -----------  -----------
Total         17,045,000   17,000,000  $10,790,380  $10,805,000
              ===========  ===========  ===========  ===========

In January 2000, the Company's Articles of Incorporation were amended to increase the authorized capital of Series B convertible preferred stock to 11,500,000 shares. In February 2000, the Company issued 5,000,000 shares of Series B convertible preferred stock at $1.00 per share, and received proceeds net of issuance costs of $4,995,796.

Significant terms of the outstanding convertible preferred stock are as follows:

• Holders of convertible preferred stock are entitled to receive dividends when and as declared by the Board of Directors. No dividends on convertible preferred stock or common stock have been declared by the Board from inception through June 30, 2000.
• Each share of preferred stock is convertible at the option of the shareholder into a number of shares of common stock determined by dividing $0.41 for Series A preferred stock and $1.00 for Series B preferred stock by the applicable conversion price. The initial conversion price, subject to adjustment in certain instances, is $0.41 and $1.00 per share for Series A and Series B preferred stock, respectively. Shares of preferred stock will be converted automatically, on the same terms, upon the first to occur of:

• Each share of preferred stock has voting rights equivalent to the number of shares of common stock into which it is convertible.
• In the event of liquidation, dissolution or winding up of the Company, holders of preferred stock are entitled to receive, after payment of debt and other liabilities of the Company but prior to any distributions to common stockholders, an amount per share of $0.41 plus any declared but unpaid dividend for each share of Series A preferred stock held and an amount per share of $1.00 plus any declared but unpaid dividend for each share of Series B preferred stock held. If the assets and funds to be distributed are insufficient to permit full payment, the funds are to be first distributed to holders of Series B preferred stock on a pro rata basis. If funds remain available after payment of the full preferential amount to holders of Series B preferred stock, they are to be distributed to holders of Series A preferred stock on a pro rata basis. Upon completion of the distribution, the holders of common stock will receive any remaining assets of the Company.

Stock Option Plan - In July 1999, the Company's Board of Directors approved the 1999 Equity Incentive Plan (the "Incentive Plan"). Under the Incentive Plan, the Board of Directors may issue options to purchase up to 6,000,000 shares of common stock. Options issued under the Incentive Plan may be either incentive stock options, granted to employees of the Company, or nonqualified stock options, granted to directors and consultants of the Company. Options granted to directors and consultants generally vest immediately on the date of the grant. Options granted to employees generally vest in installments over four years, commencing on the date of hire. Options generally expire ten years from the grant date.

A summary of activity under the Incentive Plan is set forth below:

                                                                   Weighted
                                                                    Average
                                                       Options     Exercise
                                                     Outstanding     Price
                                                     -----------  -----------
Outstanding, December 31, 1998                              --   $       --
Options granted (weighted average fair value
  of $0 per share)                                    3,396,267         0.09
Options exercised                                      (644,957)        0.07
Options cancelled                                      (148,625)        0.12
                                                     -----------  -----------
Outstanding, December 31, 1999 (537,735
  exercisable at a weighted average price
  of $0.07 per share)                                 2,602,685  $      0.10
                                                     ===========  ===========

At December 31, 1999, options to purchase 2,752,358 shares of common stock were available for grant. During the six months ended June 30, 2000, the Company issued options to purchase 1,693,125 shares of common stock at a weighted average exercise price of $0.20 per share.

Additional information regarding options outstanding as of December 31, 1999 is as follows:

                                                             Options Vested
                       Options Outstanding                  and Exercisable
                        December 31, 1999                  December 31, 1999
               -------------------------------------  -----------------------
                              Weighted
                              Average      Weighted                 Weighted
  Range of                   Remaining     Average      Number      Average
  Exercise       Number     Contractual    Exercise   Vested and    Exercise
   Prices      Outstanding  Life (yrs.)     Price     Outstanding    Price
-------------  -----------  ------------  ----------  -----------  ----------
$0.07-$0.20     2,602,685          9.16       $0.10      537,735       $0.07

Options Granted to Nonemployees - In August 1999, the Company granted 659,817 common stock options to consultants in conjunction with services performed. The Company recorded compensation expense of $122,814 for the fair value of the options on the date of grant which is included in operating expenses for the period ended December 31, 1999. No common stock options were granted to nonemployees during 1998 or during the six month periods ended June 30, 1999 and 2000.

Additional Stock Plan Information - As discussed in Note 1, the Company accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretations.

Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, requires the disclosure of pro forma net loss had the Company adopted the fair value method. For purposes of the pro forma disclosure, the fair value of stock-based awards to employees has been calculated using the minimum value method with the following additional weighted average assumptions: expected life, 3.5 years; risk-free interest 5.81%; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach, and cancellations are recognized as they occur. If the computed fair values of the Company's awards had been amortized to expense over their related vesting periods, the impact on net loss for the periods presented would not be material.

The Company has a 401(k) plan (the "Plan") covering all employees who have met certain eligibility requirements. Under the Plan, employees may elect to contribute up to 15% of their eligible compensation to the Plan, subject to certain limitations. The Company does not make matching contributions to the Plan.