ADFORCE INC
10-Q, 1999-08-13
COMPUTER PROCESSING & DATA PREPARATION
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<PAGE>


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                    FORM 10-Q
(Mark One)

[X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934.

                  For the quarterly period ended June 30, 1999

                                       or

[ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934.

                 For the transition period from ______to ______

                         Commission file number: 0-20124


                                  ADFORCE, INC.
             (Exact name of registrant as specified in its charter)


           Delaware                                           33-0694260
(State or other jurisdiction of                            (I.R.S. Employer
incorporation or organization)                            Identification No.)

            10590 North Tantau Avenue, Cupertino, California 95014
             (Address of principal executive offices and zip code)

                  Registrant's telephone number: (408) 873-3680


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

                                   Yes  X  No
                                       ---    ---


The number of shares outstanding of the Registrant's Common Stock, $.001 par
value, was 19,992,162 at July 31, 1999.

<PAGE>

                                  ADFORCE, INC.

                                      INDEX


<TABLE>
<CAPTION>
                               DESCRIPTION                                                           PAGE NUMBER
- -------------------------------------------------------------------------------------                -----------
<S>                                                                                                  <C>
Cover Page                                                                                                1

Index                                                                                                     2

Part I:  Financial Information

      Item 1:  Financial Statements

               Condensed Balance Sheets as of June 30, 1999 and December 31, 1998                         3

               Condensed Statements of Operations for the Three and Six Months
                  Ended June 30, 1999 and 1998                                                            4

               Condensed Statements of Cash Flows for the Six Months
                  Ended June 30, 1999 and 1998                                                            5

               Notes to Condensed Financial Statements                                                    6

      Item 2:  Management's Discussion and Analysis of Financial Condition and
               Results of Operations                                                                      9

      Item 3:  Quantitative and Qualitative Disclosures about Market Risk                                23

Part II: Other Information

      Item 1:  Legal Proceedings                                                                         24

      Item 2:  Changes in Securities and Use of Proceeds                                                 24

      Item 3:  Defaults upon Senior Securities                                                           25

      Item 4:   Submission of Matters to a Vote of Security Holders                                      25

      Item 5:  Other Information                                                                         25

      Item 6:  Exhibits and Reports on Form 8-K                                                          25

Signature                                                                                                26
</TABLE>


                                       2
<PAGE>

PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS


                                      ADFORCE, INC.
                                 CONDENSED BALANCE SHEETS
                                  (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                         JUNE 30,        DECEMBER 31,
                                                                           1999              1998
                                                                       ------------      ------------
                                                                        (unaudited)
<S>                                                                    <C>               <C>
                                          ASSETS

Current assets:
  Cash and cash equivalents                                            $     32,000      $     10,045
  Short-term investments                                                     45,588                 -
  Accounts receivable, net                                                    1,564             1,160
  Prepaid expenses and other current assets                                     773               575
                                                                       ------------      ------------
Total current assets                                                         79,925            11,780
Property and equipment, net                                                   7,945             4,208
Intangible assets, net and other non-current assets                           4,263             4,947
                                                                       ------------      ------------
Total assets                                                           $     92,133      $     20,935
                                                                       ============      ============


                           LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                                     $      2,403      $      1,078
  Accrued compensation and related benefits                                   1,093               458
  Deferred revenue                                                            1,760                10
  Other accrued liabilities                                                   1,366               799
  Current portion of capital lease obligations                                2,605             1,460
                                                                       ------------      ------------
Total current liabilities                                                     9,227             3,805
Long-term portion of capital lease obligations                                5,351             3,089
Stockholders' equity:
  Common stock                                                                   20                 5
  Preferred stock                                                                 -                 5
  Additional paid-in capital                                                120,847            41,609
  Deferred stock compensation                                                (8,254)           (2,802)
  Unrealized loss on available-for-sale securities                              (51)                -
  Retained earnings (accumulated deficit)                                   (35,007)          (24,776)
                                                                       ------------      ------------
Total stockholders' equity                                                   77,555            14,041
                                                                       ------------      ------------
Total liabilities and stockholders' equity                             $     92,133      $     20,935
                                                                       ============      ============
</TABLE>


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

                                       3
<PAGE>

                                  ADFORCE, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED JUNE 30,        SIX MONTHS ENDED JUNE 30,
                                                                 -----------------------------     -----------------------------
                                                                     1999             1998             1999             1998
                                                                 ------------     ------------     ------------     ------------
<S>                                                              <C>              <C>              <C>              <C>
Net revenue                                                      $      4,182     $        784     $      7,402     $      1,198
Cost of revenue:
  Data center operations                                                2,860            1,235            4,775            1,944
  Amortization of intangible assets and deferred
   stock compensation                                                     300              295              669              486
                                                                 ------------     ------------     ------------     ------------
    Total cost of revenue                                               3,160            1,530            5,444            2,430
                                                                 ------------     ------------     ------------     ------------
Gross profit (loss)                                                     1,022             (746)           1,958           (1,232)
Operating expenses:
  Research and development                                              2,239              972            4,483            1,790
  Marketing and selling                                                 1,973            1,221            3,746            1,834
  General and administrative                                              678              453            1,293              843
  Amortization of intangible assets and deferred
   stock compensation                                                   1,692              601            2,926              794
                                                                 ------------     ------------     ------------     ------------
Total operating expenses                                                6,582            3,247           12,448            5,261
                                                                 ------------     ------------     ------------     ------------
Loss from operations                                                   (5,560)          (3,993)         (10,490)          (6,493)
Interest income (expense), net                                            332              (77)             259             (180)
                                                                 ------------     ------------     ------------     ------------
Net loss                                                         $     (5,228)    $     (4,070)    $    (10,231)    $     (6,673)
                                                                 ============     ============     ============     ============

Basic and diluted net loss per share                             $      (0.40)    $      (1.62)    $      (1.20)    $      (2.91)
                                                                 ============     ============     ============     ============

Weighted average shares of common stock outstanding used
 in computing basic and diluted net loss per share                     13,035            2,508            8,500            2,293
                                                                 ============     ============     ============     ============

Pro forma basic and diluted net loss per share                   $      (0.31)    $      (0.41)    $      (0.68)    $      (0.74)
                                                                 ============     ============     ============     ============

Weighted average shares used in computing pro forma basic
 and diluted net loss per share                                        16,884            9,943           15,143            9,077
                                                                 ============     ============     ============     ============
</TABLE>

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

                                       4
<PAGE>

                                        ADFORCE, INC.
                              CONDENSED STATEMENTS OF CASH FLOWS
                                         (UNAUDITED)
                                    (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                         SIX MONTHS ENDED JUNE 30,
                                                                       -----------------------------
                                                                           1999             1998
                                                                       ------------     ------------
<S>                                                                    <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net cash used in operating activities                              $     (1,464)    $     (4,170)

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases (sales) of short-term investments, net                          (45,562)               -
  Purchase of property and equipment                                           (917)            (271)
                                                                       ------------     ------------
    Net cash used in investing activities                                   (46,479)            (271)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments on capital lease obligations                            (1,003)            (371)
  Proceeds from issuance of common stock, net                                70,901               71
  Proceeds from issuance of preferred stock, net                                  -            9,605
  Proceeds from issuance of notes payable                                         -              500
  Repayment of notes payable                                                      -             (113)
                                                                       ------------     ------------
    Net cash provided by financing activities                                69,898            9,692

Net increase in cash and cash equivalents                                    21,955            5,251

Cash and cash equivalents at beginning of period                             10,045            1,680
                                                                       ------------     ------------
Cash and cash equivalents at end of period                             $     32,000     $      6,931
                                                                       ============     ============

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING/FINANCING ACTIVITIES
Property and equipment acquired under capital leases                   $      4,377     $      1,539
                                                                       ============     ============
Conversion of notes payable and accrued interest into Series D
 convertible preferred stock                                           $          -     $        506
                                                                       ============     ============
Conversion of convertible preferred stock to common stock              $     31,486     $          -
                                                                       ============     ============
Increase in deferred stock compensation                                $      8,204     $          -
                                                                       ============     ============
</TABLE>

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

                                       5
<PAGE>

                                  ADFORCE, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS

BASIS OF PRESENTATION

The unaudited condensed financial information of AdForce, Inc. ("AdForce" or
the "Company") furnished herein reflects all adjustments, consisting only of
normal recurring adjustments, which in the opinion of management are
necessary to fairly state the Company's financial position, results of
operations and cash flows for the periods presented. This Quarterly Report on
Form 10-Q should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Registration Statement on Form
S-1, as amended, filed with the Securities and Exchange Commission on May 7,
1999. The results of operations for the three and six month periods ended
June 30, 1999 are not necessarily indicative of the results to be expected
for any subsequent quarter or for the entire year ending December 31, 1999.
The condensed balance sheet at December 31, 1998 has been derived from the
Company's audited financial statements at that date.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations.

NET LOSS, AND PRO FORMA NET LOSS, PER SHARE

Basic and diluted net loss per share are presented in conformity with Statement
of Financial Accounting Standard No. 128, "EARNINGS PER SHARE" ("FAS 128"), for
all periods presented. In accordance with FAS 128, basic and diluted net loss
per share have been computed using the weighted average number of shares of
common stock outstanding during the period, less shares subject to repurchase.
Options to purchase shares of common stock could potentially dilute basic
earnings per share in the future and have not been included in the computation
of diluted net loss per share because to do so would have been antidilutive for
the periods presented.

Pro forma net loss per share has been computed as described above and also gives
effect, under Securities and Exchange Commission guidance, to the conversion of
convertible preferred stock, using the if-converted method, that automatically
converted upon completion of AdForce's initial public offering.

Historical and pro forma basic and diluted net loss per share are as follows (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                   Three months ended June 30,       Six months ended June 30,
                                                                     1999             1998             1999             1998
                                                                   --------         --------         --------         --------
<S>                                                                <C>              <C>              <C>              <C>
Historical:
Net loss ..................................................        $ (5,228)        $ (4,070)        $(10,231)        $ (6,673)

Basic and diluted shares:
Weighted average shares of common stock outstanding .......          13,945            4,372            9,527            4,045
Less weighted average shares subject to repurchase ........             910            1,864            1,027            1,752
                                                                   --------         --------         --------         --------
Weighted average shares of common stock
 outstanding used in computing basic and diluted
   net loss per share .....................................          13,035            2,508            8,500            2,293
                                                                   ========         ========         ========         ========

Basic and diluted net loss per share ......................        $  (0.40)        $  (1.62)        $  (1.20)        $  (2.91)
                                                                   ========         ========         ========         ========
</TABLE>


                                       6
<PAGE>
                                  ADFORCE, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                   Three months ended June 30,       Six months ended June 30,
                                                                     1999             1998             1999             1998
                                                                   --------         --------         --------         --------
<S>                                                                <C>              <C>              <C>              <C>
Pro Forma:
Net loss ..................................................        $ (5,228)        $ (4,070)        $(10,231)        $ (6,673)

Weighted average shares of common stock
   outstanding used in computing basic and diluted
   net loss per share .....................................          13,035            2,508            8,500            2,293

Adjusted to reflect the assumed conversion
   of convertible preferred stock from the date of issuance           3,849            7,435            6,643            6,784
                                                                   --------         --------         --------         --------

Weighted average shares used in computing pro forma
   basic and diluted net loss per share ...................          16,884            9,943           15,143            9,077
                                                                   ========         ========         ========         ========

Pro forma basic and diluted net loss per share ............        $  (0.31)        $  (0.41)        $  (0.68)        $  (0.74)
                                                                   ========         ========         ========         ========
</TABLE>


If Adforce had reported net income, diluted net income per share would have
included the shares used in the computation of pro forma net loss per share,
as well as approximately 3,606,228 and 2,029,951 common equivalent shares
related to outstanding options and warrants to purchase common stock not
included above for the three and six months ended June 30, 1999 and June 30,
1998, respectively. The common equivalent shares from options and warrants
would be determined on a weighted average basis using the treasury stock
method.

MARKETABLE SECURITIES

The Company accounts for investments in marketable securities in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("FAS 115"). AdForce classifies its
short-term investments as available-for-sale. Accordingly, these investments,
primarily commercial paper and corporate bonds, are carried at fair value.
Changes in market values are reflected as unrealized gains or losses, calculated
on the specific identification method, and reported as a net amount in a
separate component of stockholders' equity.

COMPREHENSIVE LOSS

In June 1997, the Financial Accounting Standards Board issued FAS No. 130,
"Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements and is effective for fiscal years
beginning after December 15, 1997. AdForce adopted FAS 130 in the year ended
December 31, 1998. There was no impact on AdForce's financial statements as a
result of the adoption of FAS 130 for 1998 or for the three months ended March
31, 1999. During the three months ended June 30, 1999, unrealized loss on
securities of $51,000 increased total comprehensive loss to $5.3 million.

FINANCIAL INSTRUMENTS RISK

Financial instruments that potentially subject the Company to credit risk
consist of short-term investments and trade receivables. AdForce is subject to
concentrations of credit risk and interest rate risk related to its short-term
investments. AdForce's credit risk is managed by limiting the amount of
investments placed with any one portfolio manager, investing in money market
funds, short-term commercial paper, and A1 rated corporate bonds with a weighted
average months to maturity of approximately 6.5 months as of June 30, 1999.

CONCENTRATION OF CREDIT RISK

AdForce sells and grants credit for its services to its customers without
requiring collateral or third-party guarantees. To date, we have derived a
substantial portion of our net revenue from a small number of Web sites and
ad rep firms. Many of our leading customers, including such major customers
as Adsmart Network and 24/7 Media, Inc., have limited operating histories and
have not achieved profitability. If one or more of our customers are unable
to pay for our services, our quarterly and annual results of operations could
be materially and adversely affected.

During the three months ended June 30, 1999, the Company's four major
customers, each representing more than 10% of net revenues, collectively
accounted for 72% of net revenue compared to two major customers accounting
for 77%

                                       7
<PAGE>
                                  ADFORCE, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the comparable period in the previous year. For the six months ended June
30, 1999, the Company's four major customers accounted for 74% of net revenue
compared to one major customer accounting for 70% of net revenue for the
comparable period in the previous year. Three of these four major customers
collectively accounted for 71% of our accounts receivable at June 30, 1999.
GeoCities, one of the Company's top four customers for the three months ended
June 30, 1999, was acquired by Yahoo!, Inc., effective May 28, 1999 and
discontinued the use of AdForce's ad-serving services during June 1999.
GeoCities, which had been a customer since June 1998, accounted for 20% and
12% of AdForce's net revenues during the quarters ended March 31, 1999 and
June 30, 1999, respectively.

DEFERRED STOCK COMPENSATION

In connection with the grant of certain options to employees during the three
months ended June 30, 1999, AdForce recorded deferred compensation of
approximately $4.1 million for the aggregate difference between the exercise
prices of those options at their respective dates of grant and the deemed fair
values for accounting purposes of the shares of common stock subject to such
options. This amount is included as a reduction of stockholders' equity and is
being amortized on a graded vesting method to all operating expense categories
including data center operations. This amount has been appropriately split
between cost of revenues and operating expenses but has not been separately
allocated between operating expense categories.

STOCKHOLDERS' EQUITY

In May 1999, AdForce completed an initial public offering of 5,175,000 shares of
its common stock. Proceeds to AdForce from this initial public offering totaled
approximately $70.7 million, net of offering costs of $1.5 million and
underwriter fees of $5.4 million. Upon the closing of the initial public
offering, AdForce's convertible preferred stock converted into 9,467,118 shares
of common stock.

LEGAL MATTERS

In April 1999, Dirk Wray, a Company director, filed an action against Chad
Steelberg, a Company founder, in the Orange County, California Superior Court
alleging that Mr. Steelberg failed to perform certain obligations pursuant to a
1996 agreement between Messrs. Wray and Steelberg.

In June 1999, Mr. Steelberg filed a cross-complaint (the "Cross-Complaint")
against Mr. Wray, certain investors in the Company, the Company, and the
Company's President, Chief Executive Officer and Chairman, Charles W. Berger,
claiming the Company is obligated to defend and indemnify Mr. Steelberg against
Mr. Wray's allegations, and seeking additional damages.

The Company believes the causes of action in the Cross-Complaint claimed against
the Company and Mr. Berger are without merit. The Company intends to indemnify
Mr. Berger pursuant to the Company's certificate of incorporation, bylaws and a
written indemnification agreement, and to defend itself and Mr. Berger
vigorously.

Except as provided above, the Company is not subject to any material legal
proceedings. The Company may from time to time become a party to various legal
proceedings arising in the ordinary course of business.


                                       8
<PAGE>
                                  ADFORCE, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

FORWARD-LOOKING STATEMENTS

     Some of the statements contained in this Quarterly Report on Form 10-Q
are forward-looking and include statements about our plans, objectives,
expectations and intentions that are not historical facts. When used in this
document, the words expects, anticipates, intends, plans, believes, seeks and
estimates and similar expressions are generally intended to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this document.
These forward-looking statements involve risks and uncertainties, and there
are important factors that could cause actual results to differ materially
from those expressed or implied by these forward-looking statements,
including those discussed under "OTHER FACTORS AFFECTING OPERATING RESULTS,
LIQUIDITY AND CAPITAL RESOURCES" below.

THE FOLLOWING DISCUSSION SHOULD BE READ ONLY IN CONJUNCTION WITH OUR UNAUDITED
CONDENSED INTERIM FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN PART I --
ITEM 1 OF THIS QUARTERLY REPORT ON FORM 10-Q, OUR AUDITED FINANCIAL STATEMENTS
AND NOTES THERETO INCLUDED IN OUR FORM S-1 FILED, AS AMENDED, WITH THE
SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1999, AND THE RISK FACTORS
DESCRIBED BELOW.

OVERVIEW

AdForce is a leading provider of centralized, outsourced ad management and
delivery services on the Internet. We began operations on January 16, 1996 as
Imgis, Inc. and spent the first 15 months of our operations developing
technology that could be used to manage and deliver Internet ads for
advertisers, ad agencies, Web sites and ad rep firms. Initially, we did not have
an internal sales force to sell our services. To generate business, we relied
primarily on the sales forces of ad rep firms that used our services to manage
and deliver ads to the Web site customers they represented. In December 1997, we
began building a direct sales force to allow us to penetrate the market for our
services more effectively.

We began delivering ads and recognizing revenue during the second quarter of
1997, and increased our revenue as the ad volumes delivered by our ad rep
firm customers grew. 24/7 Media and its predecessor firms were responsible
for 92% of our net revenue in 1997. In November 1997, we also contracted to
deliver ads for Netcom and FortuneCity, and began to demonstrate the
applicability of our services to Web sites. In 1998, we continued to add
customers with material amounts of ad volume. Adsmart and Netscape began
using our services in early 1998, and GeoCities began using our services in
June 1998. Though we continue to derive the majority of our net revenue from
a limited number of customers, we broadened our customer base in 1998 and
have continued to do this through June 30, 1999. For the first six months of
1998, 24/7 Media and its predecessors accounted for 70% of our net revenue.
For the first six months of 1999, our top four customers, 24/7 Media,
Adsmart, GeoCities and Netscape accounted for 26%, 21%, 16% and 11% of our
net revenue. GeoCities was acquired by Yahoo!, Inc. on May 28, 1999 and
discontinued the use of AdForce's ad-serving services during June 1999.
GeoCities accounted for 20% and 12% of our net revenues during the quarters
ended March 31, 1999 and June 30, 1999, respectively.

In 1997, 1998 and for the first half of 1999, we earned the vast majority of our
revenue by managing and delivering ads for ad agencies, Web sites and ad rep
firms. We also charged customers for other services, such as developing custom
reports, although revenue to date from these services has not been significant.
We plan to continue to develop and offer new services, such as advanced consumer
tracking and targeting capabilities, and expect that an increasing proportion of
our revenue will be generated by these services.

We charge our customers based on each 1,000 ads delivered, and generally offer
lower rates as customers' ad volumes increase. During 1998 and the six months
ended June 30, 1999, our monthly volume of ads delivered increased significantly
as our exisiting customers' internet traffic increased and we added new
customers. However, our average rate per 1,000 ads delivered generally declined
during these periods due principally to pricing competition and lower rates
charged to higher-volume customers. We expect these factors to cause future
declines in average rates charged.


                                       9
<PAGE>
                                  ADFORCE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT'D)

We believe our centralized ad management system is substantially less
expensive than on-site ad delivery alternatives available to most individual
Web sites. Generally, we expect favorable economies of scale for centralized
ad management and delivery to lead to reductions in our average cost per
1,000 ads delivered as we increase the ad volumes moving through our systems.
In addition, a portion of our research and development efforts is devoted to
continuously improving the performance and efficiency of our systems. As a
result, from the first quarter of 1998 through the first quarter of 1999, our
average cost to deliver each ad declined. This decline was at a higher rate
than the decrease in the average rate charged, resulting in improving gross
margins during those periods. However, in the second quarter of 1999 we
opened a second data center and substantially increased available capacity.
Accordingly, our average cost per 1,000 ads delivered during the June 1999
quarter increased, and our gross margin for the quarter declined. As we
continue to aggregate Web sites and their ad volumes on our system, and to
add additional advertisers, ad agencies and rep firms as customers, we
believe these volume increases will again lower our average cost to deliver
ads.

In the operating areas of research and development, sales and marketing, and
general and administrative costs, the single most significant cost is
personnel, including the related payroll, facilities and other overhead
costs. To date however, our personnel requirements in these operating areas
have increased at lower rates than revenue.

We have recorded deferred stock compensation for options granted after
January 1998. As of June 30, 1999, we had recorded aggregate deferred stock
compensation of $12.1 million. This deferred stock compensation is being
amortized over the vesting periods of the stock options. We recognized a
total of $1.2 million and $2.7 million in stock compensation expense during
1998 and the six months ended June 30, 1999, respectively. Since a portion of
this expense was related to persons involved in running our data center
operations, we allocated that portion to cost of revenue and thus reduced our
gross margin. In addition, we recorded stock compensation expense of $1.4
million during 1998 related to unvested founders' stock that was not
repurchased. The total charges to be recognized in future periods from
amortization of deferred stock compensation as of June 30, 1999 are
anticipated to be approximately $2.8 million, $3.2 million, $1.6 million,
$600,000 and $60,000 for the remaining six months of 1999 and for 2000, 2001,
2002 and 2003, respectively.

In February 1998, we acquired StarPoint Software, Inc., principally by
exchanging AdForce shares for StarPoint shares. We accounted for this
transaction as a purchase with a total purchase price of $4.1 million. The
purchase price was primarily allocated to intangible assets, including
purchased technology of $2.6 million, personnel-related assets of $740,000,
and goodwill of $609,000, which are being amortized over the respective lives
of those assets, and in-process technology of $100,000 that was expensed at
the time of the acquisition. Amortization charges related to this purchase of
$1,330,000 were recognized during 1998, $720,000 were recognized for the six
months ended June 30, 1999 and further amortization charges of $0.7 million,
$1.1 million, and $0.1 million are expected to be recognized in 1999, 2000
and 2001, respectively.

We incurred net losses of $3.5 million for the period from January 16, 1996
(inception) to December 31, 1996, $5.7 million for 1997, $15.6 million for
1998 and $10.2 million for the six months ended June 30, 1999. As of June 30,
1999, our accumulated deficit was $35 million. We expect to continue to incur
significant operating expenditures, and capital expenditures of at least $8
million for the remainder of 1999. As a result, we will need to generate
significantly greater revenue than we have generated to date to achieve and
maintain profitability. In addition, our operating costs are relatively
fixed, and cannot be quickly lowered even if we fail to generate significant
revenue. Although we have experienced significant growth in revenue in recent
periods, we expect the growth rate to decline substantially. We expect to
continue to incur net losses on a quarterly and annual basis for at least the
next two years.

On May 7, 1999, we completed our initial public offering, issuing 5,175,000
shares of our Common Stock at $15 per share. Proceeds to us from this initial
public offering totaled approximately $70.7 million, net of offering costs of
$1.5 million and underwriter fees of $5.4 million.

Our engineering personnel are currently located in two separate locations, Costa
Mesa, California and Cupertino, California. In August 1999, we commenced efforts
to consolidate many of our engineering personnel into our


                                      10
<PAGE>
                                  ADFORCE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT'D)

Cupertino, California location. We expect this consolidation to be
substantially complete by December 31, 1999, and expect to record charges
related to the consolidation of the personnel as the related actions are
taken during the second half of 1999.

RESULTS OF OPERATIONS

NET REVENUE

Our net revenue for the three and six months ended June 30, 1999 was $4.2
million and $7.4 million, compared to $0.8 million and $1.2 million for the
comparable periods in 1998, representing respective increases of 433% and
518%. Net revenue of $4.2 million for the second quarter of 1999 increased by
30% over net revenue of $3.2 million for the first quarter of 1999. These
increases in net revenue were primarily due to increases in the volume of ads
we delivered on behalf of our customers. Our ad volumes were 18.4 billion and
31.7 billion for the three and six months ended June 30, 1999, compared to
1.6 billion and 2.6 billion ads for the same periods in 1998. The increases
in net revenue resulting from these volume increases were partially offset by
declines in the average rates charged for delivering those ads. Our volume
increases resulted from both the growth in ad volumes experienced by many of
our existing customers and to a lesser extent, the addition of new customers.
In the second quarter of 1999, our volume increase was also partially offset
by the fact that one of our major customers, GeoCities, was acquired by
Yahoo!, Inc., effective May 28, 1999 and discontinued the use of our
ad-serving services during June 1999. GeoCities, a customer since June 1998,
accounted for 20% and 12% of our revenues for the first and second quarters
of 1999. The declines in average rates charged in the 1999 periods as
compared to the 1998 periods were primarily the result of competitive pricing
pressure and lower rates charged to higher-volume customers. We expect
pricing pressures from competitors and discounts related to large-contract
pricing to continue for at least the next several quarters. We expect that
future revenue growth, if any, will not be as dramatic as in recent periods.

GROSS PROFIT (LOSS)

Cost of revenues primarily consists of capital asset costs, telecommunications
costs, personnel-related costs and facilities costs incurred to operate our data
center operations. It also includes non-cash charges for amortization of
deferred stock compensation to data center personnel, as well as charges for the
amortization of an intangible asset acquired in the purchase of Starpoint
Software, Inc. in 1998.

Gross margin improved to 24% and 26% from a negative 95% and 103% for the
three and six months ended June 30, 1999 and 1998, respectively, primarily
due to economies of higher ad delivery volumes spread over relatively fixed
costs. These increases were offset in part by declines in the average rates
charged to our customers.  The gross margin of 24% for the second quarter of
1999 decreased from a gross margin of 29% for the first quarter of 1999. The
decrease was due to the opening of our second data center in Cupertino,
California in May 1999, the loss of a major customer, GeoCities, during the
second quarter, and to a lesser extent, the decline in average rates charged
as a result of competitive pricing pressures and volume discounts.

RESEARCH AND DEVELOPMENT

Research and development expenses were $2.2 million and $4.5 million for the
three and six months ended June 30, 1999, compared to $1.0 million and $1.8
million for the comparable periods in 1998. The increase in absolute dollars
in the current periods was due primarily to increases in product development
personnel and consulting expenses. Product development expenses incurred were
primarily related to enhancements to the AdForce service technology. Research
and development expenses were 54% and 61% of net revenues for the three and
six months ended June 30, 1999, compared to 124% and 149% of net revenues for
the comparable periods in 1998. The decline in research and development
expenses as a percentage of net revenue in the current periods was primarily
the result of higher revenues. We believe that continued investment in
product development is critical to achieving our technical objectives of
improved system reliability, scalability, performance and cost; as well as
developing new products and services. As a result, we expect research and
development expenses to increase on an absolute dollar basis over the next
several quarters.

MARKETING AND SELLING

Marketing and selling expenses were $2.0 million and $3.7 million for the three
and six months ended June 30, 1999, compared to $1.2 million and $1.8 million
for the comparable periods in 1998. The increase in absolute


                                      11
<PAGE>
                                  ADFORCE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT'D)

dollars in the current periods was primarily attributable to increase in
marketing and sales personnel and their related expenses, including
commissions associated with increased revenues and costs related to the
continuing development and implementation of our marketing and branding
campaigns. Marketing and selling expenses were 47% and 51% of net revenues
for the three and six months ended June 30, 1999, compared to 156% and 153%
of net revenues for the comparable periods in 1998. Marketing and selling
expenses declined as a percentage of net revenues in the current periods
primarily due to higher revenues. We expect marketing and selling expenses to
increase on an absolute dollar basis over the next several quarters as we
continue our marketing and branding campaigns, and continue to expand our
sales efforts.

GENERAL AND ADMINISTRATIVE

General and administrative expenses were $0.7 million and $1.3 million for the
three and six months ended June 30, 1999, compared to $0.5 million and $0.8
million for the comparable periods in 1998. The increase in absolute dollars in
the current periods was primarily attributable to increases in general and
administrative personnel. General and administrative expenses were 16% and 17%
of net revenues for the three and six months ended June 30, 1999, compared to
58% and 70% of net revenues for the comparable periods in 1998. The decline in
general and administrative expenses as a percentage of net revenue in the
current periods was primarily due to higher revenues. We expect general and
administrative expenses to increase on an absolute dollar basis over the next
several quarters as we hire additional personnel and incur additional costs
related to the growth of our business and our operations as a public company.

AMORTIZATION OF INTANGIBLE ASSETS AND DEFERRED STOCK COMPENSATION

We recognize expense for the amortization of deferred stock compensation to
personnel who have been granted options with an exercise price deemed for
financial reporting purposes to be below the fair market value of the
underlying common stock on the date of grant. We also record stock
compensation expense for unvested shares issued under employee incentive
stock options and founders' stock that were not repurchased pursuant to our
contractual right to purchase the shares. In connection with our acquisition
of StarPoint in February 1998, we recorded intangible assets which are being
amortized to operations over the lives of those assets. These non-cash
charges are included on our Condensed Statement of Operations as
"Amortization of Intangible Assets and Deferred Stock Compensation." We
recognized a total of $2.0 million and $3.6 million in amortization of
intangible assets and deferred stock compensation expense for the three and
six months ended June 30, 1999, compared to $0.9 million and $1.3 million for
the comparable periods in 1998. Since a portion of these expenses was related
to data center operations, we allocated that portion to cost of revenue and
thus reduced our gross margin. Such amortization costs do not result in cash
flows out of the Company.

INTEREST INCOME (EXPENSE), NET

Net interest income was $332,000 and $259,000 for the three and six months
ended June 30, 1999, compared to net interest expense of $77,000 and $180,000
for the comparable periods in 1998. The increase in interest income for the
six months ended June 30, 1999 is attributable to a higher cash, cash
equivalents and short-term investments balance from public offering proceeds
received in May 1999. Interest income, net of expense, in future periods is
expected to decline as a result of declining cash balances and increased
interest on capital leases.

LIQUIDITY AND CAPITAL RESOURCES

Prior to May 1999, we financed our operations primarily from sales of preferred
stock and capital lease financing, and to a lesser extent, net proceeds from the
issuance of notes payable and proceeds from the sale of common stock. In May
1999, the Company sold 5,175,000 shares of the Company's Common Stock at a price
of $15.00 per share in its initial public offering. Net proceeds to the Company
from this offering were approximately $70.7 million.


                                       12
<PAGE>
                                  ADFORCE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT'D)

Net cash used in operating activities was $1.5 million and $4.2 million for the
six months ended June 30, 1999 and 1998, respectively. Cash used in operating
activities for the six months ended June 30, 1999 resulted primarily from net
operating losses and an increase in accounts receivable and prepaid expenses,
partially offset by increases in accounts payable, accrued expenses and deferred
revenues. The increase in deferred revenues was due to cash prepayments by
customers for ad management and delivery services to be provided.

Net cash used in investing activities was $46.5 million and $0.3 million for
the six months ended June 30, 1999 and 1998, respectively. Cash used in
investing activities for the six months ended June 30, 1999 was primarily for
the purchase, net of maturities, of short-term investments, and to a lesser
extent, for the purchase of property and equipment.

Net cash provided by financing activities was $69.9 million and $9.7 million for
the six months ended June 30, 1999 and 1998, respectively. Cash provided by
financing activities for the six months ended June 30, 1999 consisted primarily
of $70.7 million in net proceeds from our initial public offering, partially
offset by principal repayments on capital lease obligations.

As of June 30, 1999, we had $77.6 million of cash, cash equivalents and
short-term investments. Our principal commitments consisted of obligations
under operating and capital leases. These leases were used primarily to equip
our data centers and to expand our existing facilities. Pursuant to an
agreement with America Online we may be obligated to pay them quarterly fees
totaling at least $10 million during the three years following their
delivery of certain, specified demographic data to us. However, we are
uncertain as to when, if ever, the demographic data may be made available to
us.

We anticipate that we will experience a substantial increase in our capital
expenditures and lease commitments consistent with our anticipated growth in
operations, infrastructure and personnel. We currently anticipate that we
will continue to experience significant growth in our operating expenses for
the foreseeable future and that our operating expenses will be a material use
of our cash resources. The Company believes that the existing cash, cash
equivalents and short-term investments will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures for at
least the next twelve months. Thereafter, cash generated from operations, if
any, may not be sufficient to satisfy our liquidity requirements. We may
therefore need to sell additional equity or raise funds by other means. Any
additional financing, if needed, might not be available on reasonable terms
or at all. Failure to raise capital when needed could seriously harm our
business and operating results. If we raise additional funds through the
issuance of equity securities, the percentage of ownership of our current
stockholders would be reduced. Furthermore, these equity securities might
have rights, preferences or privileges senior to our common stock.

POTENTIAL YEAR 2000 RISKS MAY ADVERSELY AFFECT OUR BUSINESS

Many computer systems and software products are coded to accept only two digit
entries in the date code field. These date code fields will need to accept
four-digit entries to distinguish between 21(st) century and 20(th) century
dates. As a result, many companies' software and computer systems may need to be
upgraded or replaced to comply with these Year 2000 requirements.

In the ordinary course of our business, we have evaluated the internally
developed software included in our ad management and delivery system, and
believe this software is generally Year 2000 compliant, meaning that the use or
occurrence of dates on or after January 1, 2000 will not materially affect the
performance of this software or the ability of this software to correctly
create, store, process and output data involving dates. In the third quarter of
1999, we intend to implement internal Year 2000 testing procedures for our
software, and we may learn that our software does not contain all of the
necessary software routines and codes necessary for the accurate calculation,
display, storage and manipulation of data involving dates. We expect the costs
associated with these testing procedures will be approximately $250,000. We have
warranted to some of our customers that Year 2000 compliance issues will not
adversely affect the performance of our ad management and ad delivery services.
If our customers experience Year 2000 problems with our services, they could
assert claims against us for damages. Our standard service agreements provide
performance warranties, and we may need to incur costs to address Year 2000
problems that our customers encounter through the use of our services. To date
we have not received any Year 2000 related claims regarding our services.


                                      13
<PAGE>
                                  ADFORCE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT'D)

We are also working with our external suppliers and service providers with
respect to both third-party applications in our ad management and delivery
system and third-party applications in our information technology
infrastructure to ensure that these third-party systems and applications will
be able to interoperate with our hardware and software infrastructure where
necessary and support our needs into the year 2000. We typically use
industry-standard third-party hardware and software. Where possible, we are
seeking assurances from our suppliers that we believe are critical to our
business that their products are Year 2000 compliant. While we have received
assurances as to the Year 2000 compliance of some of these third-party
products, we generally do not have any contractual rights with these
providers if their software or hardware fails to function due to Year 2000
issues. If these failures do occur, we may incur unexpected expenses to
remedy any problems, including purchasing replacement hardware and software.

Though we will continue these efforts, we do not believe we have significant
Year 2000 issues within our systems or services. Because we believe we are Year
2000 compliant, we have not engaged any third parties to independently verify
our Year 2000 readiness, nor have we assessed potential costs associated with
Year 2000 risks or made any contingency plans to address these risks. Further,
we have not deferred any of our ongoing development efforts to address Year 2000
issues. However, unanticipated costs associated with any Year 2000 compliance
may exceed our present expectations, which could materially and adversely affect
our quarterly and annual results of operations.

We depend on the uninterrupted availability of the Internet infrastructure to
conduct our business as a centralized ad delivery and management service. We
also rely on the continued operations of our customers, in particular Web sites
hosting advertisements, for our revenue. We are heavily dependent upon the
success of Year 2000 compliance efforts of the many service providers that
support the Internet, and the Year 2000 compliance efforts of our customers.
Interruptions in the Internet infrastructure affecting us or our customers, or
failure of the Year 2000 compliance efforts of one or more of our customers,
could materially and adversely affect our ability to generate revenue. The
purchasing patterns of advertisers and agencies could be affected by Year 2000
issues as companies expend significant resources to correct their current
systems for the year 2000; these expenditures may result in reduced funds
available for Internet advertising, which could in turn materially and adversely
affect our ability to generate revenue.

OTHER FACTORS AFFECTING OPERATING RESULTS, LIQUIDITY AND CAPITAL RESOURCES.

OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO PREDICT FUTURE RESULTS OF
OPERATIONS AND TO ADDRESS RISKS AND UNCERTAINTIES

We incorporated in January 1996 and have a limited operating history. You should
consider the risks and difficulties frequently encountered by early stage
companies in new and rapidly evolving markets, particularly those companies
whose businesses depend on the Internet. These risks and difficulties include
our inability to predict future results of operations accurately due to our lack
of operating history and the unavailability of comparable business models. We
cannot assure you that our business strategy will be successful or that we will
address these risks and difficulties successfully.

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE, WHICH COULD AFFECT THE MARKET
PRICE OF YOUR SHARES

Our quarterly results of operations have varied in the past. You should not rely
on quarter-to-quarter comparisons of our results of operations as an indication
of our future performance. It is likely that in future periods our results of
operations will be below the expectations of securities analysts and investors.
If so, the market price of your shares would likely decline. Our revenue and
quarterly results of operations depend on a variety of factors, many of which
are beyond our control. These factors include:

- -    the timing and costs of improvements in our ad management and delivery
     infrastructure, including the addition of more capacity;


                                      14
<PAGE>
                                  ADFORCE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT'D)

- -    our ability to satisfy and retain our existing customers;

- -    any loss of existing customers due to consolidation in the industry;

- -    the ability of our existing customers to maintain or increase their
     Internet traffic or market share;

- -    our ability to expand our customer base and the timing of new customers
     commencing service with us;

- -    changes in our pricing policies or those of our competitors resulting from
     competitive pressures;

- -    our ability to provide reliable and scalable service, including our ability
     to avoid potential system failure;

- -    the announcement or introduction of new technology or services by us or our
     competitors, including database marketing capabilities;

- -    seasonal trends in our business; and

- -    general economic and market conditions.

We expect to continue to make significant capital expenditures as we increase
the capacity and reliability of our existing technology infrastructure and data
centers. We also intend to open additional ad management and delivery centers.
We intend to continue to allocate a large portion of our budget for research and
development. Due to our operating costs being relatively fixed, we would likely
be unable to adjust spending quickly enough to offset any unexpected revenue
shortfall. If we have a shortfall in revenue relative to our expenses, our
quarterly and annual results of operations would be materially and adversely
affected, which in turn could affect the market price of your shares.

WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES

We expect to continue to incur net losses on a quarterly and annual basis for at
least the next two years. If our revenue does not grow or grows more slowly than
we anticipate, or if our operating or capital expenditures exceed our
expectations and cannot be reduced, our quarterly and annual results of
operations will be materially and adversely affected. We incurred net losses of
$3.5 million for the period from January 16, 1996 (inception) to December 31,
1996, $5.7 million for 1997, $15.6 million for 1998, $5.0 million for the three
months ended March 31, 1999 and $5.2 million for the three months ended June 30,
1999. We expect to continue to incur significant operating expenditures, and
capital expenditures of at least $8.0 million, for the remainder of 1999. As a
result, we will need to generate significantly greater revenue than we have
generated to date to achieve and maintain profitability. We expect that future
revenue growth, if any, will not be as rapid as in recent periods. We may never
achieve profitability on a quarterly or an annual basis.

WE DEPEND ON A SMALL NUMBER OF CUSTOMERS FOR OUR REVENUE, THE LOSS OF ANY OF
WHICH WOULD ADVERSELY AFFECT OUR ABILITY TO GENERATE REVENUE

We continue to derive a substantial portion of our net revenue from a small
number of Web sites and ad rep firms. Our quarterly and annual results of
operations would be materially and adversely affected by the loss of any of
these customers or any significant reduction in net revenue generated from these
customers. Our customer agreements can generally be terminated at any time with
little or no penalty.

Our three largest customers for each quarter of 1998 represented 94%, 81%, 60%
and 63% of our net revenue. In the first and second quarter of 1999, four of our
customers, 24/7 Media, Adsmart, GeoCities and Netscape, accounted for
approximately 77% and 72% of our net revenue. In the second quarter of 1999,
Yahoo!, Inc. acquired GeoCities and transitioned ad delivery from AdForce to
Yahoo!'s in-house operations, substantially and negatively


                                      15
<PAGE>
                                  ADFORCE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT'D)

affecting our net revenues. GeoCities accounted for 20% and 12% of net
revenue for the first and second quarters of 1999.

CONSOLIDATION IN THE INTERNET INDUSTRY MAY ADVERSELY AFFECT OUR ABILITY TO
RETAIN OUR PRINCIPAL CUSTOMERS, THE LOSS OF ANY OF WHICH WOULD ADVERSELY AFFECT
OUR ABILITY TO GENERATE REVENUE

Many of our principal customers are now and may in the future be affected by
rapid consolidation in the Internet industry. Our quarterly and annual results
of operations would be materially and adversely affected if we lose any of these
customers as a result of consolidation or if our customers are required to use
the proprietary ad delivery technologies of the companies that acquire them or
other ad delivery technologies. For example, in May 1999, one of our major
customers, GeoCities, was acquired by Yahoo!. Yahoo!'s decision to transition
GeoCities' ad-serving requirements to its internal system in June 1999
materially and adversely affected our business and results of operations. In
addition, in the second quarter of 1999, one of our principal stockholders,
America Online, completed the acquisition of one of our major customers,
Netscape Communications. Though we have remained the primary ad management and
delivery service for Netscape following this acquisition, and have since added
Netscape's international sites to our service, we cannot assure you that America
Online will not elect to transition Netcape's ad serving requirements to America
Online's own internal ad management and delivery service. If America Online
decides to transition Netscape's ad serving requirements to its own system, that
transition would materially and adversely affect our business, results of
operations and financial condition.

WE MAY NOT BE ABLE TO SCALE OUR TECHNOLOGY INFRASTRUCTURE, WHICH WOULD ADVERSELY
AFFECT OUR ABILITY TO RETAIN OUR EXISTING CUSTOMERS AND TO ATTRACT NEW CUSTOMERS

Our technology infrastructure may not be able to support higher volumes of ads,
additional customers or new types of advertising or direct marketing. If we are
not able to continue scaling our technology infrastructure, we may have
difficulty retaining existing customers and attracting new customers. If our
traffic increases because of heightened demand from existing or new customers,
we will need to accommodate large increases in the number of ads that we manage
and deliver and the amount of data that we store. We will also need to support
the introduction of new and evolving types of advertising and direct marketing
that require greater system resources than current methods of Internet
advertising. We may not be able to continue to scale our data centers on time or
within budget. The uninterrupted performance of our data centers is critical to
our success. We expect to add more data centers to improve redundancy and to
increase capacity. Adding capacity will be expensive, and we may not be able to
do so successfully. In addition, we cannot assure you that we will be able to
protect our new or existing data centers from unexpected events as we scale our
systems.

WE MAY NOT BE ABLE TO RESPOND TO RAPID TECHNOLOGICAL CHANGE, WHICH COULD
ADVERSELY AFFECT OUR ABILITY TO RETAIN OUR EXISTING CUSTOMERS AND TO ATTRACT NEW
CUSTOMERS

We may not be able to improve our technology infrastructure to respond to
technological change, changes in customer requirements or preferences, or new
industry standards. We must be able to continue to steadily increase our system
capacity, improve our existing services, and introduce new service offerings
without interrupting or interfering with our operations, and we must be able to
do so in a timely and cost-effective manner. We must ensure that our technology
infrastructure is flexible enough to accommodate technology advancements,
including our ability to deliver ads to a customer base that uses multiple
browsers and multiple versions of those browsers. We must also ensure that our
technology infrastructure is flexible enough to accommodate new customer
requirements and preferences.

WE MAY NOT BE ABLE TO ATTRACT AD AGENCIES AND ADVERTISERS AS CUSTOMERS, WHICH
COULD CAUSE US TO MISS OUR FINANCIAL PROJECTIONS OR THOSE OF SECURITIES ANALYSTS


                                      16
<PAGE>
                                  ADFORCE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT'D)

If we fail to continue to attract advertisers and ad agencies as customers or do
so more slowly than we anticipate, we may not meet our financial projections or
those of securities analysts. Individual advertisers and ad agencies accounted
for less than 7% of our net revenue for the six months ended June 30, 1999. The
service and support requirements of advertisers and ad agencies are
significantly different from those of Web sites and ad rep firms, and
advertisers and ad agencies may not accept third-party Internet ad management
and delivery services or may not choose our services over those offered by
others. Moreover, advertisers and ad agencies may find Internet advertising
services to be too complex, ineffective or otherwise unsatisfactory for managing
and delivering their ad campaigns.

WE MAY NOT COMPETE SUCCESSFULLY IN THE MARKET FOR INTERNET AD MANAGEMENT AND
DELIVERY SERVICES, WHICH WOULD ADVERSELY AFFECT OUR ABILITY TO RETAIN OUR
EXISTING CUSTOMERS AND TO ATTRACT NEW CUSTOMERS

The market for Internet ad management and delivery services is extremely
competitive, and we expect this competition to increase. Our ability to compete
successfully in this market depends on many factors, including:

- -    the performance, reliability, ease of use and price of services that we or
     our competitors offer;

- -    market acceptance of centralized, outsourced ad management and delivery
     systems as compared to internally-developed or site-specific software and
     hardware solutions;

- -    our ability, relative to our competitors, to scale our technology
     infrastructure as our customer needs grow;

- -    timeliness and market acceptance of new services and enhancements to
     existing services introduced by us or our competitors; and

- -    customer service and support efforts by us or our competitors.

The market for Internet ad management and delivery services is subject to
intense competition as companies attempt to establish a market presence. We
expect that competition will increase as industry consolidation causes
certain early entrants in the marketplace to merge or be acquired. For
example, in July 1999 DoubleClick, Inc. announced that it had agreed to
acquire NetGravity, Inc. We have in the past and may in the future be forced
to reduce the prices for our services in order to compete, which could
materially and adversely affect our net revenue and gross margins.

We currently compete with providers of outsourced ad services, including
DoubleClick, MatchLogic and Real Media, as well as providers of ad server
software and hardware solutions such as NetGravity. Many of our current
competitors have substantially greater resources and more developed sales and
marketing strategies than we do. We cannot assure you that we will be able to
compete effectively against such competitors now or in the future.

Another principal source of competition is Web sites that use
internally-developed Internet advertising and direct marketing services.
These Web sites include America Online, one of our principal stockholders,
and Yahoo!. As indicated above, Yahoo! has acquired GeoCities, and America
Online has acquired Netscape, another of our major customers. In addition,
24/7 Media, another of our principal customers, acquired its own ad
management and delivery technology in 1998, and currently uses this
technology to serve a portion of its advertising needs. 24/7 Media has stated
that it is currently developing a next generation ad delivery technology that
is intended to serve as its sole ad delivery solution. It has also stated
that, unless and until the development of and transition to its own ad
delivery technology is complete, it will be primarily dependent on us to
deliver ads to its networks and Web sites. If 24/7 Media ceases doing
business with us or enters into competition with us, it would materially and
adversely affect our business, results of operations and financial condition.
Finally, a fourth major customer, 2CAN Media, was acquired by Adsmart, a
subsidiary of CMG Investments, earlier this year. CMG Investments also owns
Engage Technologies, which in turn owns Accipiter, a supplier of ad server
software and equipment services. If Adsmart transitions its business from us
to Engage/Accipiter, it would materially and adversely affect our business,
results of operations and financial condition.

We may also encounter a number of potential new competitors that have longer
operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.


                                      17
<PAGE>
                                  ADFORCE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT'D)

These qualities may allow them to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. It may also allow
them to devote greater resources than we can to the development, promotion and
sale of their products and services. These competitors might also engage in more
extensive research and development, undertake more far-reaching marketing
campaigns, adopt more aggressive pricing policies and make more attractive
offers to existing and potential employees, strategic partners, advertisers and
Web sites. If such companies decided to enter the market, we cannot assure you
that we would be able to compete against them effectively.

MANY OF OUR CUSTOMERS HAVE LIMITED OPERATING HISTORIES, ARE UNPROFITABLE AND MAY
NOT BE ABLE TO PAY FOR OUR SERVICES, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO
RECOGNIZE REVENUE FROM THESE CUSTOMERS

Many of our leading customers, including 24/7 Media and Adsmart, have limited
operating histories and have not achieved profitability. If one or more of our
customers is unable to pay for our services, or pays more slowly than we
anticipate, our quarterly and annual results of operations could be materially
and adversely affected. You should evaluate the ability of our customers to meet
their payment obligations to us in light of the risks, expenses and difficulties
encountered by companies with limited operating histories, particularly in the
evolving Internet market. In the past, some of our customers have failed to pay
for our services on a timely basis.

WE MAY EXPERIENCE SYSTEM FAILURES OR DELAYS THAT WOULD ADVERSELY AFFECT OUR
OPERATIONS, WHICH COULD LEAD TO CUSTOMER DISSATISFACTION

Our operations depend on our ability to protect our computer systems against
damage from fire, water, power loss, telecommunications failures, computer
viruses, vandalism and other malicious acts, and similar unexpected adverse
events. In the past, interruptions or slowdowns in our services have resulted
from the failure of our telecommunications providers to supply the necessary
data communications capacity in the time frame we require, as well as from
deliberate acts. Unanticipated problems affecting our systems could in the
future cause interruptions or delays in our services. Slow response times or
system failures could also result from straining the capacity of our software or
hardware due to an increase in the volume of advertising delivered through our
servers. Our customers may become dissatisfied by any system failure or delay
that interrupts our ability to provide service to them or slows our response
time.

WE MAY NOT BE ABLE TO TARGET ADVERTISEMENTS, WHICH COULD ADVERSELY AFFECT OUR
ABILITY TO RETAIN OUR EXISTING CUSTOMERS AND TO ATTRACT NEW CUSTOMERS

We may not be able to continue to meet the needs of our customers or the
marketplace for more sophisticated targeting solutions. As more advertisers
demand targeting solutions, we will need to develop increasingly effective tools
and larger databases that can provide greater demographic precision in ad
management and delivery. The development of these tools and databases is
technologically challenging and expensive. We cannot assure you that we can
develop any of these tools or databases in a cost-effective and timely manner,
if at all. Moreover, privacy concerns may cause a reduction or limitation in the
use of user information, which could limit the effectiveness of our technology
and adversely affect our ability to retain our existing customers and to attract
new customers.

THE INTERNET ADVERTISING MARKET MAY FAIL TO DEVELOP OR DEVELOP MORE SLOWLY THAN
EXPECTED, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO RETAIN OUR EXISTING
CUSTOMERS AND TO ATTRACT NEW CUSTOMERS

The Internet advertising market may fail to develop or develop more slowly than
expected. Our future growth largely depends on the continued growth in Internet
advertising generally, and on the willingness of our potential customers to
outsource their Internet advertising and direct marketing needs. Companies doing
business on the Internet must compete with traditional media, including
television, radio, cable and print, for a share of advertisers' total
advertising budgets. Advertisers may be reluctant to devote a significant
portion of their advertising budgets to Internet advertising if they perceive
the Internet to be a limited or ineffective advertising medium. Substantially
all


                                      18
<PAGE>
                                  ADFORCE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT'D)

of our revenue is derived from the delivery of advertisements placed on Web
sites. If advertisers determine that those ads are ineffective or
unattractive as an advertising medium, we may be unable to make the
transition to any other form of Internet advertising. Also, there are filter
software programs that limit or prevent advertising from being delivered to a
user's computer. The commercial viability of Internet advertising would be
materially and adversely affected by Internet users' widespread adoption of
these software programs.

THE INTERNET INFRASTRUCTURE MAY NOT BE ABLE TO ACCOMMODATE RAPID GROWTH, WHICH
COULD ADVERSELY AFFECT OUR ABILITY TO RETAIN OUR EXISTING CUSTOMERS AND TO
ATTRACT NEW CUSTOMERS

The Internet infrastructure may fail to support the growth of the Internet. If
the Internet continues to experience an increase in users, an increase in
frequency of use or an increase in the capacity requirements of users, we cannot
assure you that the Internet infrastructure will be able to support the demands
placed on it. Any actual or perceived failure of the Internet could undermine
the benefits of our services. In addition, the Internet could lose its viability
as a commercial medium due to delays in the development or adoption of new
technology required to accommodate increased levels of Internet activity or due
to increased government regulation. Changes in, or insufficient availability of,
telecommunications services to support the Internet could result in slower
response times and could hamper use of the Internet. Even if the Internet
infrastructure is able to accommodate rapid growth, we may be required to spend
heavily to adapt to new technologies.

WE MAY NOT BE ABLE TO RETAIN KEY PERSONNEL, AND OUR MANAGEMENT TEAM MAY NOT WORK
TOGETHER SUCCESSFULLY

Our future success depends on the continued service of our key technical, sales
and senior management personnel and their ability to execute our growth
strategy. Competition is intense for qualified personnel, particularly technical
and engineering personnel, and at times we have experienced difficulties in
retaining current personnel and attracting new personnel.

WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE THE CONSOLIDATION OF OUR ENGINEERING
STAFF, WHICH COULD LEAD TO PRODUCT DEVELOPMENT DELAYS AND DISRUPTIONS IN SERVICE

Our engineering personnel are currently located in two separate locations, Costa
Mesa, California and Cupertino, California. In August 1999, we commenced efforts
to consolidate many of our engineering personnel into our Cupertino, California
location. We expect this consolidation to be substantially complete by December
31, 1999. This consolidation will divert management time and resources. During
the course of this consolidation effort, we may be less efficient in our product
development efforts, and could therefore experience delays in releasing new
products. Further, this transition could increase the risk of service
disruptions. These delays and disruptions, if they occur, could adversely affect
our ability to retain our existing customers and to attract new customers.
Additionally, engineering personnel may choose not to remain in our employment
as a result of this consolidation.

WE MAY NOT BE ABLE TO MANAGE OUR GROWTH, WHICH COULD ADVERSELY AFFECT OUR
ABILITY TO MANAGE OUR BUSINESS

During the second quarter of 1999 we continued to expand our research and
development, data center operations, sales, marketing and customer service
organizations, and increased our total number of employees from 109 as of March
31, 1999 to 146 as of June 30, 1999. We may not be able to continue to manage
our internal growth effectively to keep pace with the expansion of the Internet
advertising market or our competitors' growth. Our rapid growth has placed, and
the anticipated future growth in our operations will continue to place, a
significant strain on our management systems and resources. We expect that we
will need to continue to improve our financial and managerial controls and
reporting systems and procedures, and will need to continue to expand, train and
manage our workforce.


                                      19
<PAGE>
                                  ADFORCE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT'D)

WE MAY NOT BE ABLE TO PROTECT OUR TECHNOLOGY, WHICH COULD DIMINISH THE VALUE OF
OUR TECHNOLOGY AND OUR SERVICES

Our success and ability to compete are dependent on our internally developed
technologies and trademarks. If our proprietary rights are infringed by a third
party, the value of our services to our customers would be diminished and
additional competition might result from the third party's use of those rights.
We cannot assure you that our patent applications or trademark registrations
will be approved. Even if they are approved, our patents or trademarks may be
successfully challenged by others or invalidated. If our trademark or copyright
registrations are not approved because third parties own those trademarks or
copyrights, our use of these trademarks and/or copyrighted materials would be
restricted unless we entered into arrangements with the third-party owners,
which might not be possible on reasonable terms. We cannot assure you that any
of our proprietary rights will be viable or of value since the validity,
enforceability and scope of protection of proprietary rights in Internet-related
industries are uncertain and evolving. We also cannot assure you that the steps
we have taken will prevent misappropriation of our solutions or technologies,
particularly in foreign countries where laws or law enforcement practices may
not protect our proprietary rights as fully as in the United States.

THIRD PARTIES MAY ASSERT INFRINGEMENT CLAIMS AGAINST US OR OUR CUSTOMERS, WHICH
COULD RESULT IN LIABILITY FOR DAMAGES, THE INVALIDATION OF OUR RIGHTS OR THE
DIVERSION OF OUR TIME AND ATTENTION

Third parties may assert infringement claims against us or our customers based
on our technology or our collection of user data. Any claims or litigation, if
they occur, could subject us to significant liability for damages or could
result in invalidation of our rights. Even if we were to prevail, litigation
could be time-consuming and expensive to defend, and could result in diversion
of our time and attention. Any claims or litigation from third parties might
also limit our ability to use the proprietary rights subject to these claims or
litigations.

OUR CONTRACTUAL RELATIONSHIP WITH AMERICA ONLINE COULD LEAD TO A DIVERSION OF
OUR DEVELOPMENT RESOURCES AND THE OBLIGATION TO PAY AMERICA ONLINE A LARGE SUM
OF MONEY

We have granted to America Online and its affiliates a royalty-free, perpetual
license to our ad management and delivery technology, including source and
object code, and any improvements to it that we make generally available to our
customers. Under the terms of this license agreement, America Online could also
require us to customize a version of our technology for the exclusive use of
America Online and its affiliates. We are obliged under the license agreement to
provide these services for an indefinite period of time with little potential
for significant profit, which could significantly strain our development
resources. We have also entered into a demographic data agreement with America
Online. Under the terms of this agreement, America Online may elect to make
demographic information available to us at any time within three years,
triggering substantial payment obligations from us even if we do not use this
information and even if we have contracted to obtain similar information from an
alternative source. If America Online makes the demographic data available to us
and then later limits or denies access to the demographic information or
significantly changes its advertising or privacy policies, our ability to market
our technology and services with enhanced targeting abilities and to generate
additional revenue could be severely limited.

GOVERNMENT REGULATION OF THE INTERNET MAY INHIBIT THE COMMERCIAL ACCEPTANCE
OF THE INTERNET

New legislation regulating the Internet could inhibit the growth of the Internet
and decrease the acceptance of the Internet as a communications and commercial
medium. The applicability to the Internet of existing laws governing issues such
as property ownership, libel and personal privacy is uncertain. Governmental
authorities may seek to further regulate the Internet with respect to issues
such as user privacy (including tracking, targeting and profiling users),
pornography, acceptable content, electronic commerce, taxation, and the pricing,
characteristics and quality of products and services.


                                      20
<PAGE>
                                  ADFORCE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT'D)

POTENTIAL YEAR 2000 RISKS MAY ADVERSELY AFFECT OUR BUSINESS

There is significant uncertainty in the software industry regarding the
potential effects associated with Year 2000 compliance issues. We depend heavily
on the uninterrupted availability of the Internet infrastructure to conduct our
business as a centralized management and delivery service. We also rely heavily
on the continued operations of our customers, in particular Web sites hosting
advertisements, for our revenue. We are thus dependent upon the success of the
Year 2000 compliance efforts of the many service providers that support the
Internet, and the Year 2000 compliance efforts of our customers. Interruptions
in the Internet infrastructure affecting us or our customers, or the failure of
the Year 2000 compliance efforts of one or more of our customers, could have a
material adverse effect on our quarterly and annual results of operations.

We are currently evaluating our internally developed software included in our ad
management and delivery system, and believe that this software is generally Year
2000 compliant, meaning that the use of dates on or after January 1, 2000 will
not materially affect the performance of this software or the ability of this
software to correctly create, store, process and output data involving dates. We
are currently working with our external suppliers and service providers to
ensure that third-party systems and applications will be able to interoperate
with our hardware and software infrastructure where necessary and support our
needs into the year 2000. We are also seeking contractual assurances from our
suppliers that their systems and services are Year 2000 compliant. To date, we
have not made any contingency plans to address risks of non-compliance, and
cannot assure you that there will not be unanticipated costs associated with any
Year 2000 compliance.

WE MAY NOT HAVE ENOUGH CAPITAL TO CONTINUE TO EXECUTE OUR BUSINESS OBJECTIVES,
WHICH COULD ADVERSELY AFFECT OUR ABILITY TO MEET OUR FINANCIAL PROJECTIONS OR
THOSE OF SECURITIES ANALYSTS

We may need to raise additional funds, and we cannot be certain that we would be
able to obtain additional financing on favorable terms, if at all. We are
devoting at least an additional $8 million to our data center facilities in
Costa Mesa and Cupertino, California during the remainder of 1999, and will need
to continue to devote additional resources as we establish new ad management and
delivery centers. We also expect to make significant investments in sales and
marketing and the development of new services. The failure to generate
sufficient cash flows or to raise sufficient funds to finance growth could
require us to delay or abandon some or all of our plans or forego new market
opportunities, making it difficult for us to respond to competitive pressures.
If we issue equity securities to raise funds, our stockholders will be diluted.
The holders of the new equity securities may also have rights, preferences or
privileges senior to those of existing holders of common stock.

THE PRICE OF OUR COMMON STOCK IS LIKELY TO BE VOLATILE AND SUBJECT TO WIDE
FLUCTUATIONS, AND WE COULD BE SUBJECT TO SECURITIES LITIGATION

The market price of our common stock has been and is likely to continue to be
subject to wide fluctuations. If our revenue does not grow or grows more slowly
than we anticipate, or if operating or capital expenditures exceed our
expectations or cannot be adjusted accordingly, the market price of our common
stock could fall. In addition, if the market for Internet-related stocks or the
stock market in general experiences a loss in investor confidence, the market
price of our common stock could fall for reasons unrelated to our business or
results of operations. Investors may be unable to resell their shares of our
common stock at or above the offering price. In the past, companies that have
experienced volatility in the market price of their stock have been the subject
of securities class action litigation. If we were the subject of litigation, it
could result in substantial costs and a diversion of management's attention and
resources.

PROVISIONS IN OUR CHARTER DOCUMENTS MAY DETER ACQUISITION BIDS FOR ADFORCE,
WHICH COULD ADVERSELY AFFECT THE MARKET PRICE OF YOUR SHARES

We have adopted a classified board of directors. In addition, our stockholders
are unable to act by written consent or to fill any vacancy on the board of
directors. Our stockholders cannot call special meetings of stockholders to


                                      21
<PAGE>
                                  ADFORCE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT'D)

remove any director or the entire board of directors without cause. These
provisions and other provisions of Delaware law could make it more difficult for
a third party to acquire us, even if doing so would benefit our stockholders.

OUR OFFICERS AND DIRECTORS EXERT SUBSTANTIAL INFLUENCE OVER ADFORCE, WHICH COULD
LIMIT YOUR ABILITY TO INFLUENCE ADFORCE AND WHICH COULD DELAY OR PREVENT A
CHANGE OF CONTROL OF ADFORCE

As of June 30, 1999, our executive officers, our directors and entities
affiliated with them and our 5% stockholders beneficially owned, in the
aggregate, approximately 62% of our outstanding common stock. These stockholders
may be able to exercise substantial influence over all matters requiring
approval by our stockholders, including the election of directors and approval
of significant corporate transactions. This concentration of ownership may also
have the effect of delaying or preventing a change in control of AdForce.

FUTURE SALES OF SHARES BY EXISTING STOCKHOLDERS COULD ADVERSELY AFFECT THE
MARKET PRICE OF YOUR SHARES

Sales of a substantial number of shares of our common stock in the public market
by our stockholders could depress the market price of our common stock and could
impair our ability to raise capital through the sale of additional equity
securities.


                                      22
<PAGE>
                                  ADFORCE, INC.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We provide our ad management and delivery services to companies in North America
and Europe. As a result, our financial results could be affected by various
factors, including changes in foreign currency exchange rates or weak economic
conditions in foreign markets. As all sales are currently made in U.S. dollars,
a strengthening of the dollar could make our services less competitive in
foreign markets.

Our investment policy requires us to invest funds in excess of current operating
requirements in obligations of the U.S. government and its agencies and
investment grade obligations of state and local governments and U.S.
corporations. Our interest income is sensitive to changes in the general level
of U.S. interest rates, particularly since the majority of our investments are
in short-term instruments. Due to the nature of our short-term investments, we
have concluded that there is no material market risk exposure.


                                      23
<PAGE>
                                  ADFORCE, INC.

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

In April 1999, Dirk Wray, a Company director, filed an action against Chad
Steelberg, a Company founder, in the Orange County, California Superior Court
alleging that Mr. Steelberg failed to perform certain obligations pursuant to a
1996 agreement between Messrs. Wray and Steelberg.

In June 1999, Mr. Steelberg filed a cross-complaint (the "Cross-Complaint")
against Mr. Wray, certain investors in the Company, the Company and the
Company's President, Chief Executive Officer and Chairman, Charles W. Berger,
claiming the Company is obligated to defend and indemnify Mr. Steelberg against
Mr. Wray's allegations, and seeking additional damages.

The Company believes the causes of action in the Cross-Complaint claimed against
the Company and Mr. Berger are without merit. The Company intends to indemnify
Mr. Berger pursuant to the Company's certificate of incorporation, bylaws and a
written indemnification agreement, and to defend itself and Mr. Berger
vigorously.

Except as provided above, the Company is not subject to any material legal
proceedings. The Company may from time to time become a party to various legal
proceedings arising in the ordinary course of business.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

(a)  SALES OF REGISTERED SECURITIES AND USE OF PROCEEDS

On May 7, 1999, the Company sold 5,175,000 shares of Common Stock in its
initial public offering at a price of $15.00 per share pursuant to a Form S-1
Registration Statement, No. 333-73231, as amended, which became effective May
7, 1999. The principal underwriters for the offering were Hambrecht and
Quist, LLC, Lehman Brothers, Volpe Brown Whelan & Company and Charles Schwab
& Co., Inc. The Company received gross proceeds from the offering of $77.6
million, $5.4 million of which was deducted for underwriting discounts and
commissions, and the Company paid $1.5 million for other offering expenses,
none of which were paid directly or indirectly to any directors, officers,
persons owning ten percent or more of any class of equity securities of the
Company or any affiliates of the Company. From the effective date of the
Registration Statement through June 30, 1999, the Company invested all of the
proceeds in cash, cash equivalents, and short-term investments.

(b)  SALES OF UNREGISTERED SECURITIES

Option Exercises

From April 1, 1999 to June 30, 1999, the Company sold 155,485 shares of
Common Stock to 27 employees and/or optionees pursuant to exercises of
options granted under the Company's 1997 Stock Plan (the "1997 Plan") at a
weighted average exercise price of $0.86 per share. Options granted under the
1997 Plan are immediately exercisable and subject to repurchase by the
Company at the exercise price until they vest. Generally, options vest as to
1/4 of the shares on the first anniversary of the date of grant, with the
balance vesting as to 1/36 of the remaining shares each month until fully
vested. The Company received an aggregate of $134,000 in cash for the stock
issued. All sales of stock pursuant to these option exercises were made in
reliance on Rule 701 under the Securities Act of 1933.

Warrant Exercises

In June 1999, the Company issued Common Stock pursuant to warrant exercises as
follows: (1) 85,234 shares of Common Stock to Venture Lending & Leasing, Inc.
pursuant to the net exercise of its warrants (as a result of which no cash was
paid to the Company) to purchase 90,158 shares of the Company's


                                      24
<PAGE>
                                  ADFORCE, INC.

Common Stock issued in connection with lease financing previously obtained by
the Company; (2) 22 shares of Common Stock to Hummer Winblad Technology Fund
II-A, L.P. for $151.03 in cash; (3) 3,538 shares of Common Stock to Hummer
Winblad Venture Fund II, L.P. for $24,288.37 in cash; (4) 124 shares of
Common Stock to Hummer Winblad Technology Fund II, L.P. for $851.26 in cash;
and  (5) 6,142 shares of Common Stock to BridgeGate, L.L.C. for $10,085.83 in
cash issued in connection with employee placement services performed by
BridgeGate. All sales of stock pursuant to warrant exercises were made in
reliance on section 4(2) of the Securites Act of 1933.

CONVERSION OF SERIES A, B, C, D AND E CONVERTIBLE PREFERRED STOCK

On May 7, 1999 all of the Company's outstanding shares of Series A, B, C, D and
E Convertible Preferred Stock were automatically converted into 9,467,118 shares
of Common Stock.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5.  OTHER INFORMATION

None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      The following exhibits are filed as part of this report:

         Exhibit 27        Financial Data Schedule

         Exhibit 10.32     Services Agreement dated as of June 11, 1999 between
                           Adsmart Networks, Inc. and AdForce, Inc.
                           (Confidential treatment has been requested.)

(b)      We filed no reports on Form 8-K during the three-month period ended
         June 30, 1999.


                                       25
<PAGE>
                                  ADFORCE, INC.


                                    SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.


                                        AdForce, Inc.
                                        (Registrant)

Date:  August 13, 1999

                                        By:  /s/ John A. Tanner
                                             ----------------------------
                                             John A. Tanner
                                             Executive Vice President, Chief
                                             Financial Officer (Duly Authorized
                                             and Principal Financial and
                                             Accounting Officer)


                                      26

<PAGE>

ADFORCE-TM- SERVICES AGREEMENT                                   ADSMART NETWORK
- --------------------------------------------------------------------------------

                                                                   Exhibit 10.32

                                            Agreement with Adsmart Network, Inc.

[*]  CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
     WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
     TO THE OMITTED PORTIONS.

                               SERVICES AGREEMENT

     This Services Agreement ("Agreement") is entered into as of June 11, 1999
(the "Effective Date") between Adsmart Network, Inc., a Delaware corporation
with offices at 100 Brickstone Square, 5th Floor, Andover, MA 01810, and
AdForce, Inc., a Delaware corporation with offices at 10590 North Tantau Avenue,
Cupertino, CA 95014 ("AdForce").

                                  INTRODUCTION

     A.   AdForce provides an Internet advertising management and delivery
service (the "AdForce Service") which enables each user of the AdForce Service
to manage advertising on its Web site, a network of Web sites, and other on-line
environments. AdForce provides each user of the AdForce Service a "client-side"
software application (the "Client") to enable the user to place ad tags, to
schedule, monitor and modify advertising, and to generate reports on such
advertising. AdForce maintains server complexes from which it will
electronically deliver Adsmart scheduled advertising to online environments
containing AdForce ad tags.

     B.   Adsmart wishes to use, and AdForce has agreed to provide, the AdForce
Service pursuant to the terms and conditions of this Agreement.

     The parties hereby agree as follows:

1.   ADFORCE SERVICE. The AdForce Service includes: (a) the delivery of
     "Impressions" (defined as the receipt of a request for an advertisement
     made via an AdForce ad tag) by AdForce, verified monthly by the Audit
     Bureau of Verification Services, Inc. or another third party auditor chosen
     by AdForce; (b) AdForce customer support services described in Section 2
     below, (c) the targeting features described in EXHIBIT B; and (d) the suite
     of standard reports listed in EXHIBIT B. Fees for the AdForce Service are
     set forth on EXHIBIT A.

     AdForce intends to add additional features, upgrades, modifications or
     enhancements ("Features") to the AdForce Service from time to time, such
     as, but not limited to, demographic targeting and reporting, certain
     tracking technologies, registration verification/data enhancement,
     additional reports and other services. AdForce will give Adsmart access to
     any such new Features that are made generally available in the AdForce
     Service as soon as they become available. These new Features will, in
     AdForce's sole discretion, either be included in the AdForce Service
     without charge or be subject to additional fees. Adsmart may, however,
     accept or decline any new Features that are subject to additional fees.

2.   ADFORCE CUSTOMER SUPPORT. AdForce Service will provide Adsmart telephone
     customer support from the hours of 6 a.m. to 6 p.m. PST, Monday through
     Friday, excluding major holidays. Adsmart will also have accesss to AdForce
     Customer Support services twenty-four (24) hours per day, seven (7) days
     per week via cell phone or pager. Finally, AdForce will dedicate an
     Customer Support representative to Adsmart. Adsmart will be responsible for
     scheduling campaigns and providing other support to its customers and
     advertisers, but may elect at any time to convert to AdForce's Platinum
     service, subject to additional fees, in which case AdForce will assume such
     support.

3.   ADSMART OBLIGATIONS. Adsmart agrees to use the AdForce Service to serve not
     less than ninety percent (90%) of Adsmart's total monthly ad volume;
     provided, however, that Adsmart shall not be required to use the AdForce
     Service

                                    Page 1

[*]  CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
     WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
     TO THE OMITTED PORTIONS.

<PAGE>
ADFORCE-TM- SERVICES AGREEMENT                                   ADSMART NETWORK
- --------------------------------------------------------------------------------

     for any Adsmart ad-serving performed, as of the Effective Date, by Engage
     Technologies, Inc. ("Engage"), until AdForce can demonstrate to the
     reasonable satisfaction of Adsmart that "Clickstream Data" (as defined in
     Section 6 below) associated with such ads will be collected and provided to
     Engage. For such volumes, Adsmart further agrees to implement the AdForce
     ad tags as described in the AdForce 2.6 User Guide and help documentation
     AdForce has provided to Adsmart, and to schedule advertising for Adsmart's
     network of Web sites or other on-line properties using the AdForce Client.
     AdForce agrees to provide Adsmart not less than thirty (30) days prior
     written notice of any material changes in the procedures described in the
     AdForce 2.6 User Guide or other process documentation provided to Adsmart;
     certain imminent releases are referenced on EXHIBIT A. Adsmart agrees to
     provide AdForce rolling 90-day volume forecasts of Impressions to be
     delivered using the AdForce Service, updated at the beginning of each
     calendar month.

4.   LICENSE/LIMITATIONS ON USE. Subject to the terms and conditions of this
     Agreement, AdForce hereby grants to Adsmart, contingent on timely payment
     of fees due AdForce, a non-exclusive, non-transferable license for the term
     of this Agreement to use the Client internally and solely in connection
     with the AdForce Service. AdForce shall have the sole and exclusive
     ownership of all right, title and interest in and to the Client, any
     enhancements thereto and in any materials and data provided to Adsmart by
     AdForce. Adsmart shall not copy, modify, alter, sell, distribute or
     sublicense the Client or reverse assemble, reverse compile or otherwise
     attempt by any other method to create or derive the source programs of the
     Client, nor authorize or contract with third parties to do the same.
     Adsmart shall not use the Client or the AdForce Service for any purpose
     other than managing Adsmart's advertising on its own Web sites and on sites
     for which Adsmart is providing ad sales services.

5.   CONFIDENTIALITY; DATA. The terms of the Confidentiality Addendum attached
     hereto as EXHIBIT C are incorporated herein by reference. Any passwords to
     the AdForce Service provided to Adsmart, , AdForce source code, , are
     confidential and proprietary to All data collected or stored by AdForce in
     managing and delivering ads for Adsmart which specifically pertain to
     Adsmart or ads delivered for Adsmart, including, but not limited to,
     information about sites in the media plan, impression limits, ad costs,
     campaign results, and click-through or transaction rates (collectively
     "Campaign Data"), shall be owned by, and be proprietary and confidential
     to, Adsmart. Accordingly, AdForce may not use said Campaign Data for any
     purpose other than the delivery of the AdForce Service under this Agreement
     on behalf of Adsmart; provided, however, that AdForce may use such Campaign
     Data for reporting or other purposes where such information is aggregated
     with campaign data from other AdForce customers and/or not specifically
     identifiable as Adsmart information. Adsmart and AdForce shall jointly own
     all data collected or stored as a side effect of serving or tracking ads on
     behalf of Adsmart that is not Campaign Data, having all association with
     Adsmart and its customers, if any, removed ("Clickstream Data"). AdForce
     can use Clickstream Data for any purposes that do not expose Campaign Data
     to any third party, and is specifically authorized to provide a copy of
     such Clickstream Data to Engage for the duration of this Agreement for
     purposes of building user profiles in the "Engage Knowledge" profiling
     application, to use such Clickstream Data locally to build a local copy of
     such profiles using AdForce's licensed copy of Engage Knowledge and any
     upgrades or extensions thereof, and to use profiles obtained from Engage
     and/or generated locally to serve targeted advertising to any and all
     AdForce customers, subject only to AdForce's separate fee obligations to
     Engage. Adsmart may request at any time during the term hereof, or any
     renewal term, to receive copies of Clickstream Data from AdForce as
     described below. AdForce will use commercially reasonable efforts to
     implement the necessary mechanisms with Adsmart to supply such data, and
     shall supply the data at the following rates: [*] per month for files
     delivered weekly for the preceding week, and [*] per month for files
     delivered monthly for the preceding month. AdForce will not be required to
     store information in excess of two (2) months, but will use commercially
     reasonable efforts to support Adsmart's requests for longer storage,
     subject to additional fees. Notwithstanding any other provision of this
     Agreement, AdForce will not use Clickstream Data to create or sell profiles
     except through Engage or as permitted with Adsmart's prior written consent.

6.   WARRANTY. Each party warrants that its is free to enter into this Agreement
     and that this Agreement constitutes the valid and binding obligation of
     such party, enforceable in accordance with its terms. AdForce further
     warrants that except for events beyond AdForce's control, including but not
     limited to Internet access outages or other disruptions and other

                                    Page 2

[*]  CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
     WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
     TO THE OMITTED PORTIONS.

<PAGE>
ADFORCE-TM- SERVICES AGREEMENT                                   ADSMART NETWORK
- --------------------------------------------------------------------------------

     events of force majeure, (a) the AdForce Service will materially conform
     to the functionality described in the AdForce User Guide and shall meet
     the performance requirements set forth in EXHIBIT D, (b) AdForce either
     owns or has the right to use all hardware and software components of the
     AdForce Service and the provision of the AdForce Service will not
     infringe on any U.S. intellectual property right of any third party, and
     (c) all software, hardware and information technology used or employed
     in the AdForce Service, including the Client, provided pursuant to this
     Agreement will be "Year 2000 Compliant." Year 2000 Compliant is defined
     herein as information technology that will: (i) consistently and
     accurately handle data information before, during and after January 1,
     2000, including but not limited to accepting date input, providing date
     output, and performed calculations or comparisons on dates or portions
     of dates; (ii) respond to two-digit date input in a way that resolves
     any ambiguity as to century in a disclosed, defined and predetermined
     manner, and (iii) store and provide output of data information in ways
     that are unambiguous as to century. EXCEPT AS SPECIFIED IN THIS SECTION,
     ADFORCE HEREBY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING
     WITHOUT LIMITATION ANY AND ALL WARRANTIES OF MERCHANTABILITY, FITNESS
     FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT, IN CONNECTION WITH THIS
     AGREEMENT.

7.   INDEMNIFICATION. (a) Subject to subsection (b), Adsmart shall defend,
     indemnify and hold harmless AdForce from any claims, liability, damages and
     costs (including reasonable costs and attorneys' fees, "CLAIMS") arising
     out of or relating to advertising placed by Adsmart using the AdForce
     Service, including, without limitation, Claims based on allegations of
     libel, false or misleading advertising, invasion of privacy or rights of
     publicity; provided that: (i) AdForce promptly notifies Adsmart of such
     Claims; (ii) Adsmart has sole control of the defense and settlement of such
     Claims and is not responsible for any settlement that it does not approve
     in writing; and (iii) AdForce renders all assistance required, at Adsmart's
     expense. (b) AdForce shall defend, indemnify and hold harmless Adsmart from
     any Claims for infringement arising out of or relating to Adsmart's use of
     the Client or the AdForce Service pursuant to this Agreement; provided
     that: (i) Adsmart promptly notifies AdForce of such Claims; (ii) AdForce
     has sole control of the defense and settlement of such Claims and is not
     responsible for any settlement that it does not approve in writing; and
     (iii) Adsmart renders all assistance required, at AdForce's expense. If
     AdForce believes that an injunction may be entered against Adsmart's use of
     the Client, AdForce may, at its option, (A) obtain a license permitting
     such use, (B) modify the Client to avoid the alleged infringement, or (C)
     if it cannot reasonably do either of the foregoing, terminate Adsmart's
     license to the Client and this Agreement. NOTWITHSTANDING ANY PROVISION OF
     THIS AGREEMENT TO THE CONTRARY, ADFORCE'S INDEMNIFICATION OBLIGATIONS UNDER
     THIS SECTION CONSTITUTE ADSMART'S SOLE AND EXCLUSIVE REMEDY WITH RESPECT TO
     INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS OF ANY KIND.

8.   LIABILITY. NEITHER PARTY WILL BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL,
     SPECIAL, EXEMPLARY OR OTHER INDIRECT DAMAGES, WHETHER BASED ON BREACH OF
     CONTRACT, TORT, PRODUCT LIABILITY OR OTHERWISE, EVEN IF SUCH PARTY HAS BEEN
     WARNED OF THE POSSIBILITY OF SUCH DAMAGES. IN NO EVENT WILL EITHER PARTY'S
     LIABILITY TO THE OTHER PARTY UNDER THIS AGREEMENT EXCEED $2.5 MILLION.

9.   TERMINATION. Either party may terminate the Agreement if the other party
     fails to perform any of its obligations in any material respect, and such
     failure continues for a period of thirty (30) days after receipt by the
     breaching party of written notice from the non-breaching party specifying
     such default. Either party may also terminate this Agreement in its
     discretion upon ninety (90) days prior written notice to the other.
     Finally, either party may terminate this Agreement in the event that the
     other party ceases to do business, undergoes a bankruptcy or insolvency
     proceeding, or an assignment for the benefit of creditors. Upon the
     expiration or termination of the Agreement for any reason, the parties will
     return all confidential information of the other party in their possession.
     All accrued payment obligations of Adsmart shall survive expiration or
     termination of the Agreement, as shall the parties' rights and obligations
     under Sections 4 through 9, Sections 11 through 13 and EXHIBIT C.

10.  ASSIGNMENT. This Agreement is not assignable or transferable by either
     party without the prior written consent of the other party, except that a
     party may assign this Agreement to any entity: (a) controlling that party;
     (b) controlled by, or under common control with, that party (provided such
     assignee assumes the assignor's obligations under this Agreement and
     provided further that assignor remains liable to the other party following
     such assignment, or (c) acquiring

                                    Page 3

[*]  CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
     WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
     TO THE OMITTED PORTIONS.

<PAGE>
ADFORCE-TM- SERVICES AGREEMENT                                   ADSMART NETWORK
- --------------------------------------------------------------------------------

     substantially all of assignor's assets (provided such assignee assumes
     assignor's obligations under this Agreement), or (d) by operation of
     law. "Control" in the foregoing shall mean ownership of fifty percent
     (50%) or more of the voting stock of the entity.

11.  PAYMENT TERMS. Adsmart shall pay to AdForce the dollar amounts determined
     from the pricing schedule set forth in EXHIBIT A within thirty (30) days
     from the date of invoice. Adsmart shall pay AdForce for use of the AdForce
     Service by Adsmart and its ad sales customers regardless of whether Adsmart
     has been compensated by its customers for such services. All payments to
     AdForce shall be remitted in U.S. Dollars. Fees for the AdForce Service are
     subject to change upon any renewal of this Agreement.

12.  TERM AND LEVEL OF SERVICE. The term shall commence on the Effective Date
     indicated below and shall continue for three (3) years. This Agreement
     shall automatically renew for additional one (1) year periods thereafter
     unless, within thirty (30) days prior to the end of any term, either party
     notifies the other of its decision to terminate this Agreement.

13.  GENERAL. This Agreement is the complete and exclusive statement of the
     mutual understanding of the parties and supersedes and cancels all previous
     written and oral agreements and communications relating to the subject
     matter of this Agreement, including, but not limited to, that certain
     AdForce Services Agreement dated August 25, 1998 between AdForce and 2CAN
     Media, Inc., as amended and subsequently assumed by Adsmart. No failure or
     delay in exercising any right hereunder will operate as a waiver thereof,
     nor will any partial exercise of any right or power hereunder preclude
     further exercise. Any waivers or amendments shall be effective only if made
     in writing. If any provision of this Agreement shall be adjudged by any
     court of competent jurisdiction to be unenforceable or invalid, that
     provision shall be limited or eliminated to the minimum extent necessary so
     that this Agreement shall otherwise remain in full force and effect and
     enforceable. This Agreement shall be governed by the law of the State of
     California without regard to or application of choice of law rules or
     principles. Any disputes under this Agreement initiated by Adsmart shall be
     subject to the exclusive jurisdiction and venue of the California state
     courts and the Federal courts located in Santa Clara County, California.
     Any disputes under this Agreement initiated by AdForce shall be subject to
     the exclusive jurisdiction and venue of the Massachusetts state courts and
     the Federal courts located in Boston, Massachusetts. The prevailing party
     in any action to enforce this Agreement will be entitled to recover its
     attorneys' fees and costs in connection with such action. Each party agrees
     to comply with all applicable laws, rules and regulations in connection
     with its activities under this Agreement. Nothing contained herein shall be
     construed as establishing a partnership, joint venture, employment or other
     business relationship between the parties hereto other than that of
     independent contractors. This Agreement may be executed in counterparts,
     each of which shall be deemed an original and all of which together shall
     constitute one instrument.

14.  CERTAIN ADDITIONAL AGREEMENTS. Adsmart and AdForce wish to expand their
     relationship beyond ad management and delivery, and thus agree to the
     following additional provisions.

     (a)  MODIFICATIONS AND ENHANCEMENTS. Adsmart may request that AdForce make
          modifications or enhancements to the Client or to the AdForce Service,
          including custom reports. AdForce will consider such requests in good
          faith, but will not be obligated to make any requested modification.
          If AdForce agrees to make a requested modification, AdForce will
          submit a quote for the cost to complete the modification to Adsmart on
          a time and materials basis, with personnel costs charged at [*] per
          hour, together with a time schedule and acceptance criteria, all
          subject to Adsmart's review and approval. Unless agreed otherwise in
          advance, any modifications made with Adsmart funds will be the sole
          property of Adsmart, and thus may not be included by AdForce in the
          AdForce Service provided to other AdForce customers. However, if
          AdForce agrees to bear the cost of such modifications, these
          modifications will be the sole property of AdForce and may be included
          by AdForce in the AdForce Service provided to other AdForce customers.

     (b)  COOPERATIVE SALES AND MARKETING AGREEMENT. Adsmart and AdForce will
          use their respective best efforts to execute a mutually acceptable
          agreement within thirty (30) days from the Effective Date under which
          they will (i) agree upon a rate card for ad management and delivery by
          AdForce for parties other than Adsmart, (ii) coordinate their business
          development efforts generally and through regular business development
          and sales meetings so that

                                    Page 4

[*]  CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
     WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
     TO THE OMITTED PORTIONS.

<PAGE>
ADFORCE-TM- SERVICES AGREEMENT                                   ADSMART NETWORK
- --------------------------------------------------------------------------------

          Adsmart and AdForce work closely together on market opportunities
          that can benefit both companies, (iii) agree upon incentive
          compensation programs for their respective employees to reward
          mutually beneficial business development efforts, or for one
          company to reward successful business development efforts of
          employees of the other on its behalf, (iv) prepare a mutually
          agreeable statement regarding the Adsmart/AdForce relationship for
          use by each party in its promotional and other activities
          (including a press release to be issued not later than five (5) day
          following execution of this Agreement), which statement shall
          designate Adsmart as a "preferred ad sales partner" for AdForce,
          and shall designate AdForce as Adsmart's "preferred ad serving
          partner," and (v) prepare a statement acceptable to Adsmart
          regarding the Adsmart/Engage Technologies ("Engage") relationship
          for use by AdForce in its promotional and other activities.

     (c)  ENGAGE TECHNOLOGIES. Subject to agreement on final terms with Engage
          and to receiving necessary support from Engage, AdForce will use
          commercially reasonable efforts to integrate Engage's Engage Knowledge
          application software with the AdForce system (including in the Client,
          AdForce's backend operations and reporting systems) on the timeline
          and specification to be agreed upon between AdForce and Engage.
          Adsmart acknowledges that with respect to targeted advertising
          delivered by AdForce on Adsmart's behalf using Engage Knowledge
          profiles, AdForce will be entitled to a minimum margin of [*] in
          addition to fees payable by AdForce to Engage for such use and fees
          payable by Adsmart to AdForce for ad management and delivery services
          hereunder.

     (d)  I/PRO. AdForce will discuss in good faith with Engage moving all, or
          substantially all, of AdForce's requirements for third party auditing
          of AdForce Impressions to I/PRO, a division of Engage, subject to
          meeting or beating the current pricing and service being provided to
          AdForce by the Audit Bureau of Verification Services, Inc.

     (e)  NAVISITE. If AdForce determines that its customer and business
          requirements in the future require outsourcing of image delivery to a
          third party hosting service, AdForce will submit its requirements to
          NaviSite prior to or at the same time it submits such requirements to
          any other hosting service. AdForce further commits to use NaviSite for
          such hosting services if NaviSite "meets or beats" the pricing and
          performance of other third party hosting facilities available to
          AdForce.

15.  TECHNICAL AUDITS. In addition to the monthly Impression audits included in
     the AdForce Service, Adsmart may request that AdForce obtain further
     technical certification of the AdForce system's functionality, including
     accuracy of impression counts, security and accuracy of data storage and
     accuracy of reporting. Adsmart may request such a technical audit up to two
     (2) times in any rolling twelve-month period, and shall bear all costs and
     expenses, including any direct expenses incurred by AdForce, of such
     audits. AdForce will be able to use freely any certifications so obtained
     in its marketing materials or other public statements.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective
Date written above.

<TABLE>
<S>                                               <C>
Adsmart Network, Inc.                              AdForce, Inc.

     Address:   100 Brickstone Square, 5th Floor   Address:    10590 North Tantau Avenue
                Andover, MA 01810                              Cupertino, CA 95014
     Telephone: 978.684.3780 or 888.559.8222       Telephone:  408.873.3680
     Facsimile: 978.684.3618                       Facsimile:  408.873.3695

By:                                                By:
    --------------------------------------------        ----------------------------------
Print Name:                                             Rex S. Jackson
            ------------------------------------        Vice President and General Counsel
Title:
       -----------------------------------------
</TABLE>

                                    Page 5

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     WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
     TO THE OMITTED PORTIONS.

<PAGE>
ADFORCE-TM- SERVICES AGREEMENT                                   ADSMART NETWORK
- --------------------------------------------------------------------------------


                                    EXHIBIT A

                                 ADFORCE SERVICE

<TABLE>
<CAPTION>
- ---------------------------------------------------------------
                                        ADFORCE SERVICE
- ---------------------------------------------------------------
<S>                              <C>
Campaign Management features     Scheduling
                                 Delivery
                                 Reporting
                                 Inventory Forecast
                                 Targeting
- ---------------------------------------------------------------
Auditing                         [*]
                                 Campaign audits are [*] each.
- ---------------------------------------------------------------
Customer Support                 24 hour support by phone or
                                 pager
- ---------------------------------------------------------------
Same Day Change Orders           [*] each
- ---------------------------------------------------------------
Campaign Service                 Adsmart's traffic department
                                 schedules campaigns
- ---------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
RATES PER THOUSAND IMPRESSIONS
- ---------------------------------------------------------------
       IMPRESSIONS/MONTH                      CPM
- ---------------------------------------------------------------
<S>                                <C>
Up to [*]                                  [*]
- ---------------------------------------------------------------
Over [*] to [*]                            [*]
- ---------------------------------------------------------------
Over [*] to [*]                            [*]
- ---------------------------------------------------------------
Over [*]                                   [*]
- ---------------------------------------------------------------
</TABLE>

- -    [*]

- -    House ads served to unsold inventory will be charged at full rate on any
     day that total impressions are equal to or less than [*]. If total daily
     impressions exceed [*], then house ads will be charged at [*]; provided,
     however, that if such house ad exceed [*], the excess will be charged at
     the full applicable daily rate.

- -    On-site training is available on request for [*], per trainer, plus travel
     expenses.

- -    A surcharge of [*] per thousand Impressions will be applied for each
     kilobyte, or fraction thereof, that the average size of advertisements over
     a 30-day period exceeds [*].

- -    In compliance with its notification requirements set forth in Section 3 of
     the Agreement, AdForce is currently releasing to Adsmart Beta versions of
     the AdForce 3.0 Client and AdForce's Actuate-based reporting system.

                                    Page 6

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     WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
     TO THE OMITTED PORTIONS.

<PAGE>
ADFORCE-TM- SERVICES AGREEMENT                                   ADSMART NETWORK
- --------------------------------------------------------------------------------


                                    EXHIBIT B

ADFORCE TARGETING: The AdForce Service include targeting on the following
parameters, when AdForce databases allow the parameter to be resolved:

- -    BROWSER TYPE - Different campaigns can be delivered to visitors with
     different browsers.
- -    OPERATING SYSTEM - Different campaigns can be delivered to visitors with
     different operating systems
- -    DOMAIN TYPE - Different campaigns can be delivered to visitors from
     different domains (i.e. .com or .edu)
- -    SERVICE PROVIDER - Different campaigns can be delivered to visitors with
     different Internet service providers.
- -    TELEPHONE AREA CODE - Different campaigns can be delivered to visitors in
     different area codes.
- -    SIC CODE - Different campaigns can be delivered to visitors working for
     companies with different SIC codes.
- -    COUNTRY - Different campaigns can be delivered to visitors from different
     countries.
- -    FREQUENCY - An advertisement can be shown no more than a specified number
     of times to each visitor.
- -    SEQUENCE - A series of advertisements can be shown in sequence to a
     visitor.
- -    KEYWORDS - Advertisements can be targeted on the basis of a word or phrase
     typed by a visitor.
- -    SITE DATA - Ads can be targeted on the basis of data in a site's database
     (i.e. with registered users)
- -    DAY / DATE / TIME OF DAY - Ads can be scheduled to run during specific
     times and on specific days.
- -    CONTENT AREA - Ads can be targeted to a specific area of a site.

There may be additional charges for additional targeting parameters added in the
future, as well as for customization of the targeting algorithms for keywords
and site data.

ADFORCE REPORTING: The following reports are currently available in the AdForce
Service:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
NETWORK REPORTS                             WEBSITE REPORTS                           ADVERTISER REPORTS
- -------------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>                                       <C>
Daily Campaign Details                      Activity by Advertiser                    Campaign On-line Summary
- -------------------------------------------------------------------------------------------------------------------------------
Daily Campaign Summary                      Activity by Area Code                     Summary by Area Code
- -------------------------------------------------------------------------------------------------------------------------------
Monthly Billing Report                      Activity by Browser                       Summary by Banner
- -------------------------------------------------------------------------------------------------------------------------------
Summary by Advertiser                       Activity by Content Unit                  Summary by Browser
- -------------------------------------------------------------------------------------------------------------------------------
Summary by Area Code                        Activity by Country                       Summary by Category
- -------------------------------------------------------------------------------------------------------------------------------
Summary by Browser                          Activity by Date                          Summary by Country
- -------------------------------------------------------------------------------------------------------------------------------
Summary by Category                         Activity by Domain                        Summary by Date
- -------------------------------------------------------------------------------------------------------------------------------
Summary by Country                          Activity by Keyword                       Summary by Domain
- -------------------------------------------------------------------------------------------------------------------------------
Summary by Date                             Activity by Hour                          Summary by Hour
- -------------------------------------------------------------------------------------------------------------------------------
Summary by Domain                           Activity by Operating System              Summary by Operating System
- -------------------------------------------------------------------------------------------------------------------------------
Summary by Hour                             Activity by Pay Type                      Summary by Service Provider
- -------------------------------------------------------------------------------------------------------------------------------
Summary by Operating System                 Activity by Service Provider              Summary by SIC Code
- -------------------------------------------------------------------------------------------------------------------------------
Summary by Payment Type                     Activity by SIC Code                      Summary by Website
- -------------------------------------------------------------------------------------------------------------------------------
Summary by Service Provider                 Website Revenue                           Campaign Summary
- -------------------------------------------------------------------------------------------------------------------------------
Summary by SIC Code                                                                   Monthly Billing Report
- -------------------------------------------------------------------------------------------------------------------------------
Summary by Website
- -------------------------------------------------------------------------------------------------------------------------------
Website Revenue
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>

AdForce is currently providing a custom "Network Unique IP" report. The
estimated time to initially set up this report is [*], and to prepare the report
monthly is [*]; AdForce's billing rate for these services is [*]. AdForce has
also agreed to review an Adsmart template for a "network by country by Website"
report and provide a quote for setting up and periodically providing this
report. There will be additional charges for reports customized or designed to
Adsmart's specifications. There may also be additional charges for reports added
in the future.

                                    Page 7

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     WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
     TO THE OMITTED PORTIONS.

<PAGE>
ADFORCE-TM- SERVICES AGREEMENT                                   ADSMART NETWORK
- --------------------------------------------------------------------------------

                                    EXHIBIT C

                            CONFIDENTIALITY ADDENDUM

     This Confidentiality Addendum ("Addendum") is attached to that certain
Services Agreement between Adsmart Network, Inc. and AdForce, Inc. (the
"Services Agreement").

     1. CONFIDENTIAL INFORMATION. For purposes herein, the party disclosing
Confidential Information (as defined below) in any given instance is referred to
as the "Disclosing Party," and the party receiving the information in such
instance is referred to as the "Recipient." "Confidential Information" includes
all information, data and know-how disclosed by Disclosing Party to Recipient
hereunder, whether in written form or embodied in tangible materials (including,
without limitation, software, hardware, drafts, drawings, graphs, charts,
spreadsheets, disks, tapes, prototypes, samples, letters, notes, memoranda or
presentations), which is clearly marked or labeled "CONFIDENTIAL" or with a
similar legend, or which if disclosed orally or not so marked, is of such a type
or nature that a reasonable person would conclude that such information is
confidential.

     2. CONFIDENTIALITY OBLIGATIONS. Recipient agrees that it will preserve in
strict confidence and secure against accidental loss any Confidential
Information disclosed by Disclosing Party to Recipient, and will otherwise
comply with the terms of this Addendum, for a period of three (3) years from
disclosure of such Confidential Information by Disclosing Party. In preserving
Disclosing Party Confidential Information, Recipient will use the same standard
of care it would use to secure and safeguard its own confidential information of
similar importance, but in no event less than reasonable care. Any permitted
reproduction of Disclosing Party's Confidential Information shall contain all
confidential or proprietary legends that appear on the original. Recipient shall
immediately notify Disclosing Party in the event of any loss or unauthorized
disclosure of Confidential Information.

     3. PERMITTED DISCLOSURES. Recipient shall permit access to Disclosing Party
Confidential Information solely to its employees who (i) have a need to know
such information and (ii) have signed confidentiality agreements containing
terms at least as restrictive as those contained herein. Recipient shall not
disclose Confidential Information to any affiliate, parent or subsidiary of
Recipient, or disclose or transfer any Confidential Information to third
parties, without the specific prior written approval of Disclosing Party.
Recipient shall use Disclosing Party Confidential Information disclosed
hereunder solely for the purposes set forth in the Services Agreement and for
such other purposes as Disclosing Party shall specifically approve in writing.

     4. OBLIGATION TO RETURN CONFIDENTIAL INFORMATION. Recipient acknowledges
that Disclosing Party retains ownership of all Confidential Information
disclosed or made available to Recipient. Accordingly, upon any termination,
cancellation or expiration of the Services Agreement, or upon Disclosing Party's
request for any reason, Recipient shall return promptly to Disclosing Party the
originals and all copies (without retention of any copy) of any written
documents, tools, materials or other tangible items containing or embodying
Confidential Information.

     5. NO REPRESENTATIONS OR WARRANTIES. Disclosing Party makes no warranties,
whether express, statutory or implied, relating to the sufficiency or accuracy
of the Confidential Information disclosed for any purpose, nor regarding
infringement of others' intellectual property rights which may arise from the
use of such Confidential Information.

     6. EXCLUSIONS. This Addendum shall not apply to information with respect to
which Recipient can affirmatively establish that (a) Recipient rightfully
possessed such information prior to its first receipt thereof from Disclosing
Party, as shown by files of Recipient in existence at the time of the
disclosure; (b) such information is publicly known or, through no wrongful act
or failure to act by Recipient, becomes publicly known; (c) the information is
hereafter furnished to Recipient by a third party who is not in breach of an
obligation of confidentiality; (d) employees or other agents of Recipient who
have not been exposed to the Confidential Information independently developed
such information without reference to or reliance upon Disclosing Party's
confidential information; or (e) Recipient is required by governmental or court
order to disclose such information, provided that Recipient shall provide
Disclosing Party advance notice thereof to enable Disclosing Party the
opportunity to prevent or control such disclosure.

     7. NO GRANT OF PROPERTY RIGHTS. Recipient recognizes and agrees that
nothing contained in this Addendum shall be construed as granting any property
rights, by license or otherwise, to any Disclosing Party Confidential
Information disclosed pursuant to the Services Agreement or this Addendum, or to
any invention or any patent right that

                                    Page 8

[*]  CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
     WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
     TO THE OMITTED PORTIONS.

<PAGE>
ADFORCE-TM- SERVICES AGREEMENT                                   ADSMART NETWORK
- --------------------------------------------------------------------------------

has issued or that may issue based on such Confidential Information.

     8. REMEDIES; SURVIVAL. Recipient acknowledges that improper disclosure, or
threatened disclosure, of Disclosing Party Confidential Information will cause
irreparable harm to Disclosing Party, and thus that Disclosing Party shall be
entitled to, among other forms of relief, injunctive relief to prevent any such
unauthorized disclosure. Recipient's obligations under this Agreement shall
survive termination of its association with Disclosing Party regardless of the
manner of such termination and shall be binding upon Recipient's heirs,
successors and assigns.


                                    Page 9

[*]  CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
     WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
     TO THE OMITTED PORTIONS.

<PAGE>
ADFORCE-TM- SERVICES AGREEMENT                                   ADSMART NETWORK
- --------------------------------------------------------------------------------


                                    EXHIBIT D

                            PERFORMANCE REQUIREMENTS


[*]  CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
     WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
     TO THE OMITTED PORTIONS.



                                     Page 10

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     WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
     TO THE OMITTED PORTIONS.

<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S>                             <C>                     <C>
<PERIOD-TYPE>                   3-MOS                   6-MOS
<FISCAL-YEAR-END>                          DEC-31-1999             DEC-31-1999
<PERIOD-START>                             APR-01-1999             JAN-01-1999
<PERIOD-END>                               JUN-30-1999             JUN-30-1999
<CASH>                                          32,000                  32,000
<SECURITIES>                                    45,588                  45,588
<RECEIVABLES>                                    3,001                   3,001
<ALLOWANCES>                                   (1,437)                 (1,437)
<INVENTORY>                                          0                       0
<CURRENT-ASSETS>                                79,925                  79,925
<PP&E>                                          12,248                  12,248
<DEPRECIATION>                                 (4,303)                 (4,303)
<TOTAL-ASSETS>                                  92,133                  92,133
<CURRENT-LIABILITIES>                            9,227                   9,227
<BONDS>                                              0                       0
                                0                       0
                                          0                       0
<COMMON>                                            20                      20
<OTHER-SE>                                      77,535                  77,535
<TOTAL-LIABILITY-AND-EQUITY>                    92,133                  92,133
<SALES>                                          4,182                   7,402
<TOTAL-REVENUES>                                 4,182                   7,402
<CGS>                                            3,160                   5,444
<TOTAL-COSTS>                                    3,160                   5,444
<OTHER-EXPENSES>                                 6,582                  12,448
<LOSS-PROVISION>                                     0                       0
<INTEREST-EXPENSE>                                 219                     390
<INCOME-PRETAX>                                (5,228)                (10,231)
<INCOME-TAX>                                         0                       0
<INCOME-CONTINUING>                            (5,228)                (10,231)
<DISCONTINUED>                                       0                       0
<EXTRAORDINARY>                                      0                       0
<CHANGES>                                            0                       0
<NET-INCOME>                                   (5,228)                (10,231)
<EPS-BASIC>                                     (0.40)                  (1.20)
<EPS-DILUTED>                                   (0.31)                  (0.68)


</TABLE>


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