ZAPME CORP, S-1/A, 1999-09-28

ZAPME CORP
S-1/A, 1999-09-28
COMPUTER PROGRAMMING, DATA PROCESSING, ETC.

Previous: INTERACTIVE INTELLIGENCE INC, S-8, 1999-09-28

Next: ALPHACOM CORP, 10SB12G/A, 1999-09-28

<PAGE>

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

REGISTRATION NO. 333-84557
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

ZAPME! CORPORATION
(Exact name of Registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 7370 91-1836242
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification Number)
incorporation or
organization)
</TABLE>

ZAPME! CORPORATION
3000 EXECUTIVE PARKWAY, SUITE 150
SAN RAMON, CA 94583
(925) 543-0300
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)

LANCE MORTENSEN
CHAIRMAN
ZAPME! CORPORATION
3000 EXECUTIVE PARKWAY
SAN RAMON, CA 94583
(925) 543-0300

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

MARK A. BERTELSEN, ESQ. NORA L. GIBSON, ESQ.
DON S. WILLIAMS, ESQ. PETER S. BUCKLAND, ESQ.
MICHAEL S. ELLIS, ESQ. TAYLOR L. STEVENS, ESQ.
WILSON SONSINI GOODRICH & ROSATI BRIAN E. COVOTTA, ESQ.
Professional Corporation BROBECK, PHLEGER & HARRISON LLP
650 Page Mill Road Spear Street Tower
Palo Alto, CA 94304 One Market
(650) 493-9300 San Francisco, CA 94105
(415) 442-0900

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /

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

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

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

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

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

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM MAXIMUM
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) SHARE(2) OFFERING PRICE(1)(3) REGISTRATION FEE(4)
<S> <C> <C> <C> <C>
Common Stock, ($.001 par value)...... 10,804,545 $12.00 $129,272,722 $35,938
</TABLE>

(1) Includes shares that the Underwriters will have the option to purchase
solely to cover over-allotments, if any.

(2) With respect to the 454,545 shares to be sold in the non-underwritten
offering, the maximum offering price per share is $11.16.

(3) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(c) promulgated under the Securities Act.

(4) $34,528 has been previously paid.

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

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

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

EXPLANATORY NOTE

This registration statement contains two forms of prospectus: (1) one
prospectus to be used in connection with our underwritten offering and (2) one
prospectus to be used in connection with our non-underwritten offering of common
stock to various employees and affiliates of Gilat Satellite Networks. The
non-underwritten prospectus is identical to the underwritten prospectus in all
respects except for the front cover page, the back cover page and the pages
including the Plan of Distribution, each of which is included herein after the
last page of the underwritten prospectus and is labeled "Alternate Page for the
Concurrent Offering Prospectus". Final forms of each prospectus will be filed
with the Commission pursuant to Rule 424(b) under the Securities Act of 1933.

<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
<PAGE>

Subject to Completion
Preliminary Prospectus dated September 28, 1999

P_R_O_S_P_E_C_T_U_S

9,000,000 SHARES

[LOGO]

COMMON STOCK

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

This is ZapMe! Corporation's initial public offering of common stock and
consequently no public market currently exists for our stock.

We expect the public offering price to be between $10.00 and $12.00 per
share. After pricing the offering, we expect that the common stock will trade on
the Nasdaq National Market under the symbol "IZAP."

INVESTING IN OUR COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS.

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

<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- --------------
<S> <C> <C>
Public offering price........................................ $ $
Underwriting discount........................................ $ $
Proceeds, before expenses, to ZapMe! Corporation............. $ $
</TABLE>

The underwriters may also purchase up to an additional 1,350,000 shares from
us at the public offering price, less the underwriting discount, within 30 days
from the date of this prospectus to cover over-allotments.

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

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

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

MERRILL LYNCH & CO.
DEUTSCHE BANC ALEX. BROWN
THOMAS WEISEL PARTNERS LLC
WIT CAPITAL CORPORATION

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

The date of this prospectus is , 1999.
<PAGE>
INSIDE FRONT COVER PAGE
DIAGRAMS, DESCRIPTIONS AND CAPTIONS

1. Top caption: ZapMe! Network.

2. Center: The front inside cover contains a map of the United States that
shows the range of ZapMe!'s broadband interactive network. A satellite is
pictured sending communications to ZapMe!'s network operation centers, as
well as to states where ZapMe! has either already installed computer labs or
has contracted to do so.

Caption: Our broadband interactive network provides: Free high-end PC's,
software, installation and support to schools; the latest technology tools
and educational resources, including over 10,000 indexed third-party
educational sites and Microsoft software; free "always on" satellite
connection to the Internet; engaging, media-rich experience designed
primarily for students aged 13-19; advanced communications tools to network
students, teachers and parents.

INSIDE BACK COVER PAGE
PHOTOGRAPHS AND CAPTIONS

1. Top caption: ZapMe! Network.

2. Center: Color photo of students using the ZapMe! network in school.

3. Bottom: Color photo of six students.
<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary......................................................................................... 1
Risk Factors............................................................................................... 5
Special Note Regarding Forward-Looking Statements.......................................................... 20
Use of Proceeds............................................................................................ 21
Dividend Policy............................................................................................ 21
Capitalization............................................................................................. 22
Dilution................................................................................................... 25
Selected Financial Data.................................................................................... 27
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 28
Business................................................................................................... 37
Management................................................................................................. 53
Certain Transactions....................................................................................... 64
Principal Stockholders..................................................................................... 67
Description of Capital Stock............................................................................... 69
Shares Eligible for Future Sale............................................................................ 74
Underwriting............................................................................................... 76
Legal Matters.............................................................................................. 78
Experts.................................................................................................... 78
Available Information...................................................................................... 79
Index to Financial Statements.............................................................................. F-1
</TABLE>

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

You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you different information. If anyone provides you different or inconsistent
information, you should not rely on it. We are not, and the underwriters are
not, making an offer to sell these securities in any jurisdiction where the
offer or sale is not permitted. You should assume that the information appearing
in this prospectus is accurate as of the date on the front cover of this
prospectus only. Our business, financial condition, results of operations and
prospects may have changed since that date.

<PAGE>
PROSPECTUS SUMMARY

THIS SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO
YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL DATA AND
RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. YOU SHOULD CAREFULLY
CONSIDER, AMONG OTHER THINGS, THE MATTERS SET FORTH IN "RISK FACTORS."

OUR COMPANY

ZapMe! is building a broadband interactive network that brings the latest
technology tools and educational resources to schools for free. For each school
participating in the ZapMe! network, we provide free PCs, software, installation
and support, as well as a free, "always on" connection to the Internet using a
satellite system. The ZapMe! network, which is designed primarily for students
aged 13-19, makes education more engaging and entertaining by providing a rich
media computer experience that is free and easy to use. We plan to extend the
ZapMe! network into the home in order to enhance a student's educational
experience and promote better communication among students, teachers and
parents.

Each school participating in the ZapMe! network typically receives 15
high-end, multimedia PCs with 17-inch monitors, a computer server that is
equipped to receive satellite transmissions, and a laser printer, as well as
broadband access to the ZapMe! Netspace and the Internet. The ZapMe! Netspace is
our proprietary, easy-to-use interface that provides access to over 10,000
Internet sites that we identify, review and index for easy reference and other
aggregated content, applications, and services, including Microsoft Word, Excel
and PowerPoint. In addition, we provide a range of educational and communication
tools, including ZapMail, our network email program, and ZapPoints, a membership
program that rewards students for using the ZapMe! network. Because ZapMe!'s
network employs a satellite system, a ZapMe! lab does not require extensive
rewiring to connect to the Internet.

We believe that by providing schools with free PCs and broadband
connectivity to the Internet, we will help to alleviate the significant
technology funding gap in schools, and provide greater educational and economic
opportunity to students of all demographic backgrounds by giving them access to
the digital tools and electronic information that are critical in today's
knowledge-based economy. Moreover, the ZapMe! network will provide a platform
for the school community to engage in many important activities, including
providing teachers and administrators with access to Internet-based educational
content, cost-effective school e-commerce solutions, and school fundraising
opportunities. In connection with many of these core activities, the ZapMe!
network has established strategic alliances with a wide range of companies to
further enhance the educational experience. In addition, we plan to enter into
additional strategic alliances to enhance our technology, gain access to
compelling educational content, add new features and functionality, or generate
sponsorship and e-commerce revenues.

In particular, in the Fall of the 1999-2000 school year, the ZapMe! network
will:

- Enable schools and students to obtain equipment from leading technology
and document management companies, including Dell, the primary provider of
PC's and servers for our network, and Xerox, the primary provider of
printers for our network;

- Offer access to educational testing and training programs, through an
exclusive strategic relationship with Sylvan, a leading provider of
educational services to students in grades K-12;

- Create convenient, low-cost purchasing options for teachers and
administrators interested in purchasing school supplies, software and
supplementary materials from School Specialty, Inc., the largest supplier
of non-textbook education products to educators in the U.S.; and

- Facilitate safe and effective implementation of school fundraising
activities, such as online magazine drives with New Sub Services, the
world's largest provider of magazine subscriptions.

1
<PAGE>

committed to sharing a percentage of its profits resulting from joint activities
on the ZapMe! network. Participating sponsors have the opportunity to underwrite
public service messages, as well as corporate sponsorships appropriate for
ZapMe! network users, including students aged 13-19, teachers and
administrators. The U.S. Army, for example, plans to use the ZapMe! network to
communicate recruiting opportunities to graduating high school seniors.

We intend to aggressively grow our installed base of schools and increase
our number of users by installing ZapMe! labs in schools throughout the country.
As our installed base of schools and number of users grow, we intend to
stimulate demand for, and use of, our educational network at home. Students and
parents will be able to log on to the ZapMe! network from home in order to
communicate with other ZapMe! users, as well as access ZapMe! applications and
features unique to the home version. We believe that ZapMe! will increase
parental involvement in schools by facilitating communication with teachers.

As of July 31, 1999, there were more than 250 school districts, representing
over 6,000 K-12 schools, including more than 2,000 middle and high schools, that
have approved and signed a three-year contract with us that permits us to
install a ZapMe! lab at those districts' schools. As of July 31, 1999, we had
installed ZapMe! labs in over 220 schools, which had an average of more than
1,000 students, representing over 220,000 students, each of whom has access to a
free ZapMe! account upon request. While the home version of the ZapMe! Network
is free and is designed to work with a home user's existing Internet access
account, ZapMe! plans on directly offering home users a modestly priced ZapMe!
branded Internet access account in the event the home user does not have an
existing account or wishes to purchase Internet access through ZapMe!. In the
Fall of the 1999-2000 school year, ZapMe! will expand current programs and
incentives to encourage network usage.

CORPORATE INFORMATION

We incorporated in California in June 1997 under the name Satellite Online
Solutions, Inc. In October 1998 we changed our name to ZapMe! Corporation. Our
principal executive offices are located at 3000 Executive Parkway, San Ramon,
CA, 94583, and our telephone number at that location is (925) 543-0300. Our main
web site address is WWW.ZAPME.COM. The reference to our Internet address does
not constitute incorporation by reference of the information contained at this
web site.

ZapMe! and the ZapMe! logo, ZapMail, ZapPoints, ZapSearch, ZapMe! Home, and
I Need To Know are unregistered trademarks of ZapMe!. All other brand names or
trademarks appearing in this prospectus are the property of their respective
holders.

ASSUMPTIONS

Except as otherwise noted, all information in this prospectus assumes:

- our reincorporation from California to Delaware, which will be completed
prior to the effective date of this offering, has already taken place;

- the conversion of all outstanding shares of our preferred stock into
common stock upon the completion of this offering;

- no exercise of the underwriters' over-allotment option; and

- the sale of a total of 454,545 shares to various employees and affiliates
of Gilat Satellite Networks in a concurrent public offering at the initial
public offering price minus the underwriting discount and commissions.

CONCURRENT OFFERING

Concurrently with our underwritten public offering, we are offering directly
to various Series D shareholders associated with Gilat Satellite Networks, at
the initial public offering price minus the underwriting discount and
commissions, an aggregate of 454,545 shares or our common stock. Although these
Gilat individuals have indicated an intention to purchase the shares in the
concurrent offering, they are not obligated to do so. The sale of shares to any
Gilat individual in the concurrent offering is not

2
<PAGE>

dependent on the sale of shares to the others, and we might not sell any shares
in the concurrent offering. If the Gilat individuals do not purchase their full
allotment of shares in the concurrent offering, we will not sell any of the
remainder of those allotted shares. In this prospectus, we refer to the offering
of the 9,000,000 shares hereby as the "underwritten offering," to the offering
of 454,545 shares of common stock as the "concurrent offering" and to the
underwritten offering and the concurrent offering together as the "offerings."

THE OFFERINGS

<TABLE>
<S> <C>
Common stock offered in the underwritten
offering................................... 9,000,000 shares

Common stock offered in the concurrent
offering................................... 454,545

Common stock to be outstanding after the
offerings.................................. 42,360,834 shares

Use of proceeds.............................. For general corporate purposes, including
expansion of operations, working capital,
product development and other corporate
expenses.

Nasdaq National Market symbol................ IZAP
</TABLE>

The above table is based on shares outstanding as of June 30, 1999. This
table excludes, as of June 30, 1999:

- 2,512,857 shares of common stock issuable upon exercise of options
outstanding under our 1997 Stock Option Plan and 1998 Stock Option Plan at
a weighted average exercise price of $1.87 per share and 386,493 shares
reserved for future issuance under the plans; and

- 895,890 shares of common stock issuable upon exercise of outstanding
warrants, of which 755,890 shares at a weighted average exercise price of
$3.84 per share were outstanding at June 30, 1999.

"Common stock to be outstanding after the offering" in the above table
includes:

- 2,030,000 shares of Series E Preferred Stock sold in August 1999;

- 303,125 additional shares issuable to holders of the Series C preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999;

- 437,216 additional shares issuable to holders of the Series D preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999; and

- 24,787 additional shares issuable to holders of the Series E preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999.

The number of additional shares issuable to holders of the Series C
preferred stock, Series D preferred stock and Series E preferred stock would be
higher if the actual offering price is lower or the closing of the offering is
later, and lower if the actual offering price is higher or the closing of the
offering is earlier. See "Management--Incentive Stock Plans," beginning on page
59, for a detailed description of our incentive stock plans; "Description of
Capital Stock," beginning on page 69, for a detailed description of our capital
stock; and note 3 of "Notes to Financial Statements," beginning on page F-11,
for a detailed description of our stockholders' equity.

3
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
JUNE 25,
1997
(INCEPTION) SIX MONTHS ENDED
THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------------
1997 1998 1998 1999
------------ ------------ --------- ----------
<S> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ -- $ -- $ -- $ 147
Loss from operations........................................ (570) (4,995) (1,028) (9,096)
Net loss.................................................... (581) (5,031) (1,063) (9,067)
Net loss applicable to common stockholders.................. (581) (5,637) (1,063) (12,838)
Net loss per share, basic and diluted....................... $ (0.05) $ (0.48) $ (0.09) $ (0.95)
Shares used in calculation of net loss per share, basic and
diluted................................................... 11,183 11,685 11,859 13,517
Pro forma net loss per share, basic and diluted
(unaudited)............................................... $ (0.32) $ (0.36)
Shares used in computing pro forma net loss per share, basic
and diluted (unaudited)................................... 15,993 25,462
</TABLE>

See note 1 of notes to financial statements, beginning on page F-9, for an
explanation of the determination of the number of shares used in computing per
share data.

<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------------------------------------
PRO FORMA PRO FORMA AS
ACTUAL PRO FORMA AS ADJUSTED FURTHER ADJUSTED
--------- ----------- ----------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 19,855 $ 29,355 $ 120,425 $ 125,075
Working capital.......................................... 15,597 25,097 116,167 120,817
Total assets............................................. 32,146 41,646 132,716 137,366
Capital lease obligations................................ 6,705 6,705 6,705 6,705
Redeemable convertible preferred stock................... 6,080 6,080 -- --
Stockholders' equity..................................... 14,960 24,460 121,610 126,260
</TABLE>

The balance sheet data table set forth above summarizes:

- actual balance sheet data;

- pro forma balance sheet data giving effect to the sale of 2,030,000 shares
of Series E preferred stock in August 1999, with net proceeds of
approximately $9.5 million; and

- pro forma as adjusted balance sheet data, adjusted to give effect to the
sale by ZapMe! in the underwritten offering of 9,000,000 shares of common
stock offered through this prospectus, at an assumed initial public
offering price of $11.00 per share, and after deducting the estimated
underwriting discount and estimated offering expenses payable by us and
the conversion of all outstanding shares of preferred stock, including the
shares of Series E preferred stock, into shares of common stock, which was
computed using an assumed initial public offering price of $11.00 per
share and an assumed closing date of September 30, 1999.

- pro forma as further adjusted balance sheet data, adjusted to give effect
to the underwritten offering and the sale of an additional 454,545 shares
in the concurrent offering using an assumed initial public offering price
of $11.00 per share, less the underwriting discount and commissions.

4
<PAGE>
RISK FACTORS

THIS OFFERING AND AN INVESTMENT IN OUR COMMON STOCK INVOLVE A HIGH DEGREE OF
RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND THE OTHER
INFORMATION IN THIS PROSPECTUS BEFORE INVESTING IN OUR COMMON STOCK. OUR
BUSINESS AND RESULTS OF OPERATIONS COULD BE SERIOUSLY HARMED BY ANY OF THE
FOLLOWING RISKS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY
OF THESE RISKS, AND YOU MAY LOSE PART OR ALL OF YOUR INVESTMENT.

WE HAVE AN UNPROVEN BUSINESS MODEL AND A LIMITED OPERATING HISTORY WHICH MAKES
AN EVALUATION OF OUR BUSINESS DIFFICULT

Because we were incorporated in June 1997 and only launched our network in
June 1998, we have a limited operating history on which investors can base an
evaluation of our business and prospects. Our revenue and income potential are
unproven and our business model is unique, constantly evolves and will continue
to evolve. We only recently began generating revenue from sponsorships and to
date we have not generated any revenue from e-commerce or network services. We
have limited insight into trends that may emerge and affect our business.

An investor in our common stock must carefully consider the risks and
difficulties frequently encountered by companies in an early stage of
development, as well as the risks we face due to our participation in a new and
rapidly evolving market. Our business strategy may not be successful and we may
not successfully overcome these risks. Please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations," beginning on page
28, for more detailed information on our limited operating history.

WE HAVE A HISTORY OF LOSSES, AND WE EXPECT LOSSES AND SIGNIFICANT INCREASES IN
OUR OPERATING EXPENSES FOR THE FORESEEABLE FUTURE

We incurred net losses of approximately $14.7 million for the period of
inception through June 30, 1999. These losses resulted primarily from costs
related to developing the ZapMe! network, deploying the ZapMe! network to
schools and developing content and features for the ZapMe! network. We have not
achieved profitability. We expect to have increasing net losses and negative
cash flows for the foreseeable future. The size of these net losses will depend,
in part, on the rate of growth in our revenues from our sponsors, e-commerce
offerings and network services and on the level of our expenses. We intend to
increase our operating expenses substantially as we:

- increase the number of users of our network through the deployment of our
network to additional schools;

- increase our network usage through marketing activities and the addition
of new features; and

- increase our general and administrative functions to support our growing
operations.

As a result, we expect that our operating expenses will increase
significantly for the foreseeable future. With increased expenses, we will need
to generate significant additional revenues to achieve profitability.
Consequently, it is possible that we will never achieve profitability, and even
if we do achieve profitability, we may not sustain or increase profitability on
a quarterly or annual basis in the future. If we do not achieve or sustain
profitability in the future, then we may be unable to continue our operations.

WE EXPECT OUR QUARTERLY FINANCIAL RESULTS TO FLUCTUATE AND OUR EARLY STAGE OF
DEVELOPMENT LIMITS OUR ABILITY TO PREDICT REVENUES AND EXPENSES PRECISELY

Our quarterly and annual operating results have varied in the past and are
likely to fluctuate significantly in the future due to a variety of factors,
many of which are outside of our control. Factors

5
<PAGE>

that might cause quarterly fluctuations in our operating results include the
factors described in the subheadings below. To respond to these and other
factors, we may need to make business decisions that could impact our quarterly
operating results. Most of our expenses, such as lease payment obligations,
employee compensation and rent, are relatively fixed in the short term.
Moreover, our expense levels are based, in part, on our expectations regarding
future revenue levels. As a result, if total revenues for a particular quarter
are below our expectations we could not proportionately reduce our operating
expenses for that quarter. Therefore, this revenue shortfall would have a
disproportionate effect on our expected operating results for that quarter.
Consequently, we believe that period-to-period comparisons of our operating
results are not necessarily meaningful, and should not be viewed as indicators
of our future performance. In addition, during future periods our quarterly or
annual operating results may fail to meet the expectations of securities
analysts or investors. In this case the trading price of our common stock would
likely decrease.

OUR METHODS OF GENERATING REVENUES ARE NEW AND LARGELY UNTESTED AND IF WE ARE
UNABLE TO ESTABLISH AND CONTINUE TO GENERATE MULTIPLE REVENUE STREAMS OUR FUTURE
REVENUE GROWTH WILL SUFFER

The success of our business will depend on our ability to generate revenue.
We have only recently begun to generate revenue, and because our methods of
generating revenue are new and largely untested we may generate lower revenues
than we expect. Further, if we are unable to generate multiple new sources of
revenue, our future revenue growth will suffer. We initially expect to receive
the majority of our revenue from:

- sponsorships;

- e-commerce; and

- network services, including marketing and profit sharing fees.

From inception through June 30, 1999, we generated approximately 90% of our
revenue from sponsorships. Although we expect to generate a portion of our
future revenue through e-commerce, we have not generated any e-commerce revenue
through June 30, 1999. As a result, our expected primary methods of generating
revenue are relatively new to us and largely untested.

We expect that revenue from sponsorships will make up a significant amount
of our revenue for the foreseeable future, although we may never achieve
significant sponsorship revenue. If Internet and online advertising do not
continue to grow, or if sponsorship on the ZapMe! network does not achieve
market acceptance, our revenues generated from sponsorships will be lower than
expected, and may be insufficient to support our business model. See
"Business--Our Strategy," beginning on page 41, for more detailed information
regarding sponsorship revenue.

The success of our e-commerce initiative depends on our users being willing
to engage in commerce over our network and more generally upon the adoption of
the Internet as a medium for commerce by a broad base of customers and our
users. If this market fails to develop or develops more slowly than expected, or
if our e-commerce services do not achieve market acceptance, our revenue
generated from e-commerce will be lower than expected.

In the future, we expect to generate revenue through network services. For
example, we have entered into an agreement with a strategic partner who will use
the ZapMe! labs after school hours and, in return, will pay us a portion of its
revenue or profits. We anticipate entering into other arrangements like this
one; however, if we are unable to structure such arrangements, if they develop
more slowly then expected, or if our partners are unable or unwilling to make
full and effective use of our ZapMe! labs and network, our revenue generated
from network services will be lower then expected.

6
<PAGE>
OUR BUSINESS AND FUTURE REVENUE GROWTH WILL SUFFER IF WE FAIL TO RETAIN AND GROW
OUR USER BASE, GENERATE FREQUENT AND RECURRING USAGE BY OUR USERS, OR
DEMONSTRATE THAT OUR USERS ARE ACTUALLY USING OUR SERVICE

The success of our business will depend on our ability to add users and
demonstrate to sponsors that our users are using the ZapMe! network on a regular
basis. Our ability to grow our user base depends largely on our ability to
deploy our network to additional schools and extend our network to home users.
If we are unable to rapidly deploy our network to a large number of additional
schools, we will not be able to grow our core school user base, and our ability
to generate revenue and implement our strategy will be severely limited. Our
ability to grow our user base also depends on our success with the development
and implementation of programs designed to help schools encourage their students
to register.

We must also encourage our users to use our service regularly and for long
periods of time. We have developed programs and features to encourage this type
of use of our network; however, these programs could fail, in whole or in part.
There are also a variety of reasons why our users might not continue to
regularly use our service. Some users may dislike our dynamic billboard, which
is always present. Users may find that our features and content are not
sufficiently compelling to continue regular use, or may turn to other Internet
providers for such services, such as email. A number of our users may not
actively use our service for periods of time. If we are not able to demonstrate
to our sponsors that we have an active and growing user base, sponsors may
choose not to enter into sponsorship agreements with us and our revenue
generated from sponsorships would suffer.

WE RELY HEAVILY ON OUR KEY PARTNERS AND IF THEY TERMINATE THEIR STRATEGIC
ALLIANCES WITH US OR IF THE ARRANGEMENT FAILS TO MEET OUR OBJECTIVES WE MAY
EXPERIENCE DIFFICULTY OR DELAYS IN INSTALLING AND MAINTAINING OUR NETWORK AND
OUR REVENUE GROWTH MAY SUFFER

Our current strategic alliance relationships include: Dell, Gilat and
Spacenet, Microsoft, New Sub Services, School Specialty, Sylvan, Toshiba and
Xerox. We rely heavily on our strategic alliance relationships. These agreements
involve many aspects of our business and in some cases include the sale of
equity securities to these companies. These types of arrangements are complex
and will require a great deal of effort to operate successfully. As a result,
there are many risks related to these arrangements, including some that we may
not have foreseen. It is difficult to assess the likelihood of occurrence of
these risks, including the lack of success of the overall arrangement to meet
the parties' objectives. If we fail to maintain these relationships, or if our
partners do not perform to our expectations, our ability to deploy our network
to additional schools, the performance of our network, and our ability to
generate revenues may all be harmed. Specific examples of these strategic
alliance relationships include: (1) our agreements with Sylvan relating to the
use of our network and labs outside of school hours, (2) our agreement with Dell
relating to the acquisition and integration of our computer lab equipment, and
(3) our agreements with Spacenet relating to the installation of our network and
labs as well as the operation of our network.

WE ARE DEPENDENT ON THIRD PARTIES TO DEPLOY OUR NETWORK TO SCHOOLS AND SUPPORT
IT ONCE INSTALLED

We plan to rapidly deploy our network to additional schools across the
country. We have used, and plan to continue to use, third parties such as Gilat
and Spacenet, and Inacom, to install and support the ZapMe! network in each
school. In the past we have experienced difficulties resulting from the failure
of former third party integrators to manage successfully a wide-scale deployment
into a school environment. Such failures resulted in delays in the scheduled
deployment of our network to additional schools. We have recently entered into
relationships with nationally recognized parties to install software on the
computers, to install the ZapMe! lab in each school site and to serve as the
general contractor to oversee the installation process. However, these parties
may not be able to install schools on a wide scale according to our schedule.
While we do not currently anticipate additional changes of

7
<PAGE>
our third party installers, any further changes would cause delays in the
deployment of the ZapMe! network and any inability to install schools according
to our plan could limit or eliminate revenue generated from sponsorships,
e-commerce and network services. Further, if we do need to hire substitute or
additional third party installers of our network we cannot assure you that we
will be able to do so on terms as favorable as our current arrangements, or at
all, which could result in higher installation costs to us as well as potential
delays in our deployment.

We also rely on third parties to provide the majority of support necessary
to maintain the ZapMe! network and labs once installed. Any inability to
maintain or delays to the maintenance of this equipment would lead to lower
revenue generated from sponsorship and network services.

OUR DEPENDENCE ON SHORT-TERM SPONSORSHIP CONTRACTS EXPOSES US TO GREATER
PRESSURE ON OUR SPONSORSHIP PRICES AND ALLOWS SPONSORS TO QUICKLY CEASE THEIR
SPONSORSHIPS

A substantial portion of our sponsorship revenue is and will continue to be
derived from short-term contracts. Consequently, we may not be able to command
higher prices typically associated with more comprehensive arrangements.
Further, many of our sponsors will be able to cease advertising on our network
quickly and without penalty, thereby increasing our exposure to competitive
pressures. Our current sponsors may not continue to purchase advertisements and
we may not be able to secure new contracts from existing or future sponsors at
attractive rates or at all.

WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUE FROM A SMALL NUMBER OF SPONSORS
AND OUR REVENUE MAY DECLINE SIGNIFICANTLY IF ANY MAJOR SPONSOR CANCELS OR DELAYS
A PURCHASE

A small number of sponsors account for a significant portion of our revenue,
and we anticipate that this trend will continue. For example, in the near-term
we expect to derive a substantial portion of our revenue from an agreement with
Sylvan, and anticipate that this agreement will continue to account for a
meaningful percentage of our revenue through December 31, 2003, when it expires.
GE Americom accounted for approximately 87% of our revenue during the six-month
period ended June 30, 1999. Our revenue from sponsorships will not increase if
we are unable to renew our material agreements, replace such agreements with
similar agreements with new sponsors, or sufficiently diversify our sponsor base
so that we do not rely on a small number of sponsors for a significant portion
of our revenue.

OUR VARIED SALES CYCLES COULD HARM OUR RESULTS OF OPERATIONS IF FORECASTED SALES
ARE DELAYED OR DO NOT OCCUR

The length of time between the date of initial contact with a potential
sponsor and the execution of a contract with the potential sponsor varies
significantly and depends on the nature of the arrangement. Furthermore,
contracting with potential sponsors is subject to delays over which we have
little or no control, including:

- potential sponsors' adoption of the ZapMe! network, which is an entirely
new advertising medium, as an acceptable use of advertising budgets;

- potential sponsors' budgetary constraints;

- potential sponsors' internal acceptance reviews; and

- the possibility of cancellation or delay of projects by sponsors.

During any given sales cycle, we may expend substantial funds and management
resources and yet not obtain sponsorship revenue. Our results of operations for
a particular period may suffer if sales to sponsors forecasted in a particular
period are delayed or do not otherwise occur.

8
<PAGE>
OPPOSITION TO OUR NETWORK, ADVERTISING IN SCHOOLS AND UNRESTRICTED INTERNET
ACCESS MAY LEAD TO NEGATIVE PUBLICITY, REGULATORY CONTROL, LEGAL ACTION,
BOYCOTTS OR OTHER ACTIONS THAT COULD HARM OUR BUSINESS

We expect to generate a significant portion of our revenue from sponsorships
purchased by marketers interested in addressing our student population across
the ZapMe! network in schools. This business model may prove controversial and
lead to negative publicity as well as action by the government or private
interests to restrict or stop our network. To date, some third parties that
oppose corporate advertising in schools, as well as sponsorships on the ZapMe!
network, have engaged in publicity campaigns to deter sponsors from dealing with
the companies engaging in advertising or sponsorship activities and have sought
legislation to curb this practice. In particular, California recently enacted a
law that imposes additional procedural requirements before local school boards
can enter into contracts involving advertising in schools. Similar or more
restrictive legislation is possible in other states and at the local and federal
levels. Anti-school-advertising groups have had some successes in the past
seeking regulation and boycotts of companies that advertise in schools, such as
Channel One, a wholly owned subsidiary of Primedia, Inc. Moreover, any new
restriction, law or regulation pertaining to online media, sponsorships or
e-commerce in schools, or the application or interpretation of existing laws,
could decrease the demand for our service, increase our cost of doing business
or otherwise have a negative impact on our business.

The Internet is the subject of an increasing number of laws and regulations.
These laws or regulations may relate to liability for information retrieved from
or transmitted over the Internet, online content regulation, user privacy,
taxation and the quality of products and services. In addition, these new laws
have not yet been interpreted by the courts, and consequently their
applicability and reach are not defined. Moreover, the applicability to the
Internet of existing laws governing issues such as intellectual property
ownership, copyright, defamation, obscenity and personal privacy is uncertain
and developing. We may be subject to claims that our services violate such laws.
Any new legislation or regulation in the United States or abroad or the
application of existing laws and regulations to the Internet could impose
significant restrictions, requirements or additional costs on our business,
require us to change our operating methods, or subject us to additional
liabilities and cause the price of our common stock to decline. Please see
"Business--Government Regulation," beginning on page 50, for more detailed
information on regulations that might affect our business.

WE ARE DEPENDENT ON OUR NETWORK INFRASTRUCTURE, AND IN PARTICULAR ON SATELLITES
AND SATELLITE TRANSMISSION TECHNOLOGY, AND ANY FAILURE OF OUR NETWORK WOULD HARM
OUR OPERATIONS

Our business plan calls for rapidly deploying our network to many additional
schools. Our network infrastructure may not be able to support the demands this
growth places on it and its performance and reliability may decline. We have
experienced and may in the future experience interruptions in service as a
result of outages and other delays occurring throughout our network
infrastructure. If these outages or delays occur frequently in the future, use
of our network could grow more slowly or decline.

Our network operations center and our communications and other computer
hardware are also subject to disruptions which are beyond our control and for
which we may not have adequate insurance. Fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events could damage our
communications hardware and other network operations.

Each school installed with the ZapMe! network is connected to our network
through a satellite link. The complete or partial loss of the satellite used to
transmit data to schools could affect the performance of our network. Our
network currently uses a single satellite. Orbiting satellites are subject to
the risk of failing prematurely due to mechanical failure, a collision with
objects in space or an inability to maintain proper orbit. Any such loss of the
use of the satellite could prevent us from delivering our services. This
interruption in services would continue until either a new substitute

9
<PAGE>
satellite is placed into orbit, or until our services were moved to a different
satellite. Moving to an alternate satellite would require us to redirect all of
the satellite dishes in our network which is a very time consuming and expensive
process. The loss of a satellite could also result in increased costs of using
satellites. We are dependent on transmissions from the satellite to our customer
sites, and these transmissions may be interrupted or experience other
difficulty, which could result in service interruptions and delays in our
network. In addition, the use of the satellite to provide transmissions to our
customers requires a direct line of sight between the satellite and the receiver
at the school and is subject to distance and rain attenuation. In markets which
experience heavy rainfall we may need to use greater power to maintain
transmission quality. Such changes may require Federal Communications
Commission, or FCC, approval which may not be granted.

WE MAY BE SUBJECT TO THIRD PARTY ABUSES OF OUR NETWORK, SUCH AS "SPAM" OR
"HACKING," WHICH COULD LEAD TO INTERRUPTIONS IN OUR SERVICE AND OTHER ADVERSE
CONSEQUENCES WHICH COULD BE EXPENSIVE TO FIX, SUBJECT US TO LIABILITY OR RESULT
IN LOWER USE OF OUR NETWORK THAN WE EXPECT

The future success of our business depends on the security of our network.
Computer viruses or problems caused by our users or other third parties, such as
the sending of excessive volumes of unsolicited bulk email or "spam," could lead
to interruptions, delays, or cessation in service to our users. In addition, the
sending of "spam" through our network could result in third parties asserting
claims against us. We may not prevail in such claims and our failure to do so
could result in large judgments which would harm our business. Users or other
third parties could also potentially jeopardize the security of confidential
information stored in our computer systems by their inappropriate use of the
Internet, including "hacking," which could cause losses to us or our users or
deter persons from using our services. Users or third parties may also
potentially expose us to liability by "identity theft," or posing as another
ZapMe! user. Unauthorized access by current and former employees or others could
also potentially jeopardize the security of confidential information stored in
our computer systems and those of our users.

We expect that our users will increasingly use the Internet for commercial
transactions in the future. Any network malfunction or security breach could
cause these transactions to be delayed, not completed at all, or completed with
compromised security. Users or others may assert claims of liability against us
as a result of any failure by us to prevent these network malfunctions and
security breaches, and may deter others from using our services, which could
cause our business prospects to suffer. Although we intend to continue using
industry-standard security measures, such measures have been circumvented in the
past, and we cannot assure you that these measures will not be circumvented in
the future. In addition, to alleviate problems caused by computer viruses or
other inappropriate uses or security breaches, we may have to interrupt, delay,
or cease service to our users, which could severely harm our business.

WE ARE DEPENDENT ON OUR LEASED SATELLITE BANDWIDTH AND IF SUCH LEASES WERE
TERMINATED OR OTHERWISE UNAVAILABLE TO US WE COULD BE SUBJECTED TO SIGNIFICANT
ADDITIONAL COSTS OR RESTRICTIONS ON OUR BUSINESS

We currently lease satellite bandwidth from GE Americom and in the future
expect to sublease satellite bandwidth from Spacenet. If, for any reason, the
leases were to be terminated, we might not be able to renegotiate new leases
with GE Americom or Spacenet or another satellite provider on favorable terms,
if at all.

10
<PAGE>
licenses and authorizations necessary to operate effectively, they may not
continue to be successful in doing so. Our failure to indirectly obtain some or
all necessary licenses or approvals could impose significant additional costs
and restrictions on our business, require us to change our operating methods, or
result in our no longer being able to provide our service to affected users.

IF WE ARE UNABLE TO COMPETE EFFECTIVELY AGAINST OUR CURRENT AND POTENTIAL
COMPETITORS THEN WE MAY LOSE USERS TO OTHER SERVICES WHICH COULD RESULT IN LOWER
USAGE OF OUR NETWORK AS WELL AS LOWER THAN EXPECTED REVENUES

The market for the ZapMe! network is new and rapidly evolving, and we expect
competition in and around this market to intensify in the future. While we do
not believe any of our competitors currently offer the functionality offered by
the ZapMe! network, we face competition from a number of companies who provide
services and functionality similar to portions of our network, who market
products and services to a similar base of users, or both, and who could in the
future seek to compete more directly with us. In this light, we believe our
current and potential competitors (and potential partners) include America
Online and Channel One, as well as Disney and Hughes Electronics. For more
information on our competitive position and our competitors, please see
"Business-- Competition," which begins on page 48.

Many of our existing competitors, as well as potential new competitors, have
longer operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
This may allow them to devote greater resources than we can to the development
and promotion of their products and services. Many of these competitors offer a
wider range of products and services than we do. These products and services may
attract users to our competitors' sites and, consequently, result in lower usage
of our network.

SCHOOLS MAY USE ALTERNATIVE MEANS TO ACQUIRE COMPUTERS AND INTERNET ACCESS,
WHICH COULD REDUCE OUR POTENTIAL USER BASE AND MAY LEAD TO LOWER THAN EXPECTED
REVENUES

An immediate attraction of deploying our network is free access to computers
and the Internet. However, for a variety of reasons, schools may decide to use
other methods to acquire computers and Internet access. If schools decide to use
means other than deployment of our network, it will limit our user base, and
consequently we will have lower than expected revenues from sponsorships,
e-commerce and network services. Aside from purchasing the computers and
Internet access from already existing budgets or from donations from parents or
other members of the community, some other methods of acquiring computer
equipment and Internet access that schools may turn to include the government
subsidized E-Rate and various free computer equipment and Internet access
companies and offerings. See "Business--Alternative Sources of Computer
Equipment and Internet Access," beginning on page 49, for additional information
on the other alternatives.

WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND OUR OPERATIONS WHEN
NEEDED

We expect to use the net proceeds of this offering primarily for general
corporate purposes, including expanding our sales and marketing activities,
continuing investments in technology and product development and other capital
expenditures, as well as working capital and other corporate expenses, including
the funding of net losses from operations. We believe that such proceeds,
together with our existing capital resources, will be sufficient to meet our
cash requirements for at least the next twelve months. However, our cash
requirements are large, and depend on several factors, including cash outflows
due to lease obligations, the rate of expansion of our installed school base,
the availability of equipment leases on competitive terms, our success in
generating revenues, the growth of sales and marketing, and other factors. If
capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated.

11
<PAGE>
If additional funds are raised through the issuance of equity securities,
the percentage ownership of our stockholders will be reduced, stockholders may
experience additional dilution, or these equity securities may have rights,
preferences or privileges senior to those of the holders of our common stock. If
additional funds are raised through the issuance of debt securities, such
securities would have rights, preferences and privileges senior to holders of
common stock and the term of such debt could impose restrictions on our
operations. Additional financing may not be available when needed on terms
favorable to us or at all. If adequate funds are not available or are not
available on acceptable terms, we may be unable to deploy our network, develop
or enhance our services, take advantage of future opportunities or respond to
competitive pressures.

WE ARE DEPENDENT ON THE CONTINUED GROWTH IN USE AND POPULARITY OF OUR NETWORK
AND THE INTERNET BY OUR USERS AND OUR ABILITY TO SUCCESSFULLY ANTICIPATE THE
FREQUENTLY CHANGING TASTES OF OUR USERS

Our business is unlikely to be successful if the popularity of the Internet
and related media in school as an educational tool and among students in general
does not continue to increase. Even if the popularity of the Internet and
related media does increase, the success of our network in particular depends on
our ability to anticipate and keep current with the frequently changing tastes
of our users, primarily students age 13-19. Any failure on our part to
successfully anticipate, identify or react to changes in styles, trends or
preferences of our users would lead to reduced interest in and use of the ZapMe!
network and therefore limit opportunities for sponsorship sales as well as
e-commerce. Moreover, the ZapMe! brand could be eroded by misjudgments in
service offerings or a failure to keep our content current with the evolving
preferences of our audience.

SEASONAL AND CYCLICAL PATTERNS MAY AFFECT OUR REVENUE AND RESULTS OF OPERATIONS

We believe that in-school advertising and e-commerce sales will be lower
during the Summer, in late December and early January and during other school
holiday periods when most users of the ZapMe! network will be on vacation and
away from school. In addition, advertising sales in traditional media, such as
television and radio, generally are lower in the first and third calendar
quarters of each year. If our market makes the transition from an emerging to a
more developed market, these traditional seasonal and cyclical patterns may
develop in the future. These patterns would exacerbate seasonality to which we
are subject by further reducing advertising revenues in the first and third
calendar quarter of each year. Seasonal and cyclical patterns in online
advertising and e-commerce in general may also affect our revenue. Because our
operating history is so limited, it is difficult for us to accurately predict
these trends and plan accordingly. Since our operating expenses are based on
future revenue performance, it is possible that seasonal fluctuations could
materially and adversely affect our revenue and results of operations.

OUR NETWORK IS NEW AND WE MAY NEED TO DEVELOP TOOLS TO ATTRACT SPONSORS AND
PARTNERS

It is important to our sponsors that we accurately measure the user base
demographics and sponsorship delivery on our network. We are currently
implementing systems designed to leverage known non-identifying demographic data
about our users, including age, gender, and location identified by zip code, in
such a way as to permit sponsors to address their intended market segment. This
effort may be complicated by the remote nature of the ZapMe! labs in which this
information is generated and recorded before being transmitted back to our
network operations center. If we fail to implement these systems successfully,
we may not be able to accurately evaluate the demographic characteristics of our
users. Sponsors may choose not to advertise on our network or may pay less for
sponsorships if they perceive our measurements to be unreliable.

No standard measurement currently exists to determine the effectiveness or
market reach of the advertising that is available on our network. We may need to
develop standard measurements in order

12
<PAGE>
to support and promote our network as a significant advertising medium. If such
standards do not develop, it could be difficult to attract sponsors and
sponsorship revenue.

OUR EFFORTS TO DEVELOP WIDESPREAD BRAND RECOGNITION ARE LIKELY TO BE EXPENSIVE
AND MAY FAIL

The development of our brand is important to our future success. If we fail
to develop sufficient brand recognition, our ability to attract advertising and
sponsorship revenue may be impaired, and our revenue will suffer. In order to
build our brand awareness we must succeed in our brand marketing efforts,
deliver features and services that are engaging to our users, provide
high-quality content and increase user traffic to the ZapMe! network. These
efforts have required, and will continue to require, significant expenses. We
cannot assure you that we will be successful in developing our brand.

WE MAY BE LIABLE OR INCUR ADDITIONAL COSTS FOR OUR USE OR DISTRIBUTION OF OUR
USERS' INFORMATION

We could be subject to liability claims for misuses of information collected
from our users, such as for unauthorized marketing purposes, and will face
additional expenses to analyze and comply with increasing regulation in this
area. In addition, the Federal Trade Commission, or FTC, is in the process of
issuing final regulations governing collection of personal information from
children under 13, has submitted proposals to the Internet industry regarding
the rights and safety of children using the Internet, and is expected to issue
additional regulations in this area. We are sensitive to the impetus for these
regulations, and accordingly, we currently collect only non-personally
identifying information
during user registration, including age, gender, and location by zip code. We
use this non-personal information internally to determine how to improve our
service, applications and features and to focus our advertisements and
communications. We also use this information externally on an aggregated,
non-individually identifiable basis to provide our sponsors with the
demographics of our user base and response rate to their media. We may in the
future collect names and other personal information for users over 13 in
connection with contests and other promotions, but will not distribute this
information externally, and may sell our user information on an aggregated,
non-individual basis. We could incur additional expenses, or be required to
alter, or eliminate, various current practices if new regulations regarding the
use or distribution of personal and other information collected online are
introduced or if our privacy practices are investigated.

WE MAY BE SUBJECT TO LIABILITY FOR PRODUCTS SOLD THROUGH OUR NETWORK

To date, we have had very limited experience in the sale of products online
and the development of relationships with manufacturers or suppliers of such
products. However, we plan to develop a range of e-commerce opportunities.
Consumers may sue us if any of the products that we sell online are defective,
fail to perform properly or injure the user. Liability claims resulting from our
sale of products could require us to spend significant time and money in
litigation or to pay significant damages.

13
<PAGE>
WE MAY BE SUBJECT TO LIABILITY FOR PUBLISHING OR DISTRIBUTING CONTENT OVER OUR
NETWORK

We may be subject to claims relating to content that is published on or
downloaded from the ZapMe! network. We also could be subject to liability for
content that is accessible from our network through links to other web sites or
that is posted by members in chat rooms or bulletin boards. Although we carry
general liability insurance, our insurance may not cover potential claims of
this type, such as defamation or trademark infringement, or may not be adequate
to cover all costs incurred in defense of potential claims or to indemnify us
for all liability that may be imposed. In addition, any claims like this, with
or without merit, could require us to change our network in a manner that could
be less attractive to our customers and would result in the diversion of our
financial resources and management personnel.

WE MAY NOT BE ABLE TO DELIVER VARIOUS SERVICES IF THIRD PARTIES FAIL TO PROVIDE
RELIABLE SOFTWARE, SYSTEMS AND RELATED SERVICES TO US

All of our advertisements are served using software licensed from
NetGravity. While there is other software available, it would substantially
disrupt our business in the near term to switch to another provider. As such, we
are reliant on NetGravity and its software. If NetGravity's software fails to
perform as expected, or if we are not able to renew such agreement or license or
internally develop similar software in the future, we may not be able to
effectively display advertisements to our users. In such event, our revenue from
sponsorships would likely suffer. On July 13, 1999, DoubleClick, an Internet
advertising provider, and NetGravity announced that they had entered into a
merger agreement pursuant to which DoubleClick will acquire NetGravity in a
stock-for-stock transaction. We cannot predict how this acquisition will affect
our relationship with NetGravity.

In addition we are dependent on various third parties for other software,
systems and related services. Several of the third parties that provide software
and services to us have a limited operating history, have relatively immature
technology and are themselves dependent on reliable delivery of services from
others. As a result, our ability to deliver various services to our users may
suffer due to the failure of these third parties to provide reliable software,
systems and related services to us.

THE INABILITY TO OBTAIN KEY SOFTWARE FROM THIRD PARTIES MAY HARM OUR BUSINESS

We rely on software licensed from third parties, including applications that
are integrated with internally developed software and used in our products. Most
notably, we license remote management software and Windows NT. These third-party
technology licenses may not continue to be available to us on commercially
reasonable terms, or at all, and we may not be able to obtain licenses for other
existing or future technologies that we desire to integrate into our products.
Our business could be seriously harmed if we cannot maintain existing
third-party technology licenses or enter into licenses for other existing or
future technologies needed for our products.

OUR SUCCESS DEPENDS UPON THE SUCCESSFUL DEVELOPMENT OF NEW SERVICES AND FEATURES
IN THE FACE OF RAPIDLY EVOLVING TECHNOLOGY

Our market is characterized by rapidly changing technologies, frequent new
service introductions and evolving industry standards. The recent growth of the
Internet and intense competition in our industry exacerbate these market
characteristics. Our future success will depend on our ability to adapt to
rapidly changing technologies by continually improving the performance, features
and reliability of our network. We may experience difficulties that could delay
or prevent the successful development, introduction or marketing of new
features, content or network services. In addition, our new enhancements must
meet the requirements of our current and prospective users and must achieve
significant market acceptance. We could also incur substantial costs if we need
to modify our service or infrastructures to adapt to these changes.

14
<PAGE>
FAILURE TO MANAGE THE GROWTH OF OUR OPERATIONS COULD HARM OUR BUSINESS AND
STRAIN OUR MANAGERIAL, OPERATIONAL AND FINANCIAL RESOURCES

We have rapidly and significantly expanded our operations. We anticipate
that further significant expansion will be required to grow our user base if we
are to be successful in implementing our business strategy. We may not be able
to implement management information and control systems in an efficient and
timely manner, and our current or planned personnel, systems, procedures and
controls may not be adequate to support our future operations. If we are unable
to manage growth effectively, our business would suffer. During 1998, we
increased the number of employees from 12 to 45, and during the first six months
of 1999, we added 43 additional employees. This expansion is placing a
significant strain on our managerial, operational and financial resources. Most
of our existing senior management personnel, including Rick Inatome, our Chief
Executive Officer, Don Kingsborough, our Senior Vice President, Sales and
Marketing, William S. Burwell, our Chief Information Officer and Bob Rudy, our
Vice President of Operations, joined us within the last six months. Some other
key managerial, technical and operations personnel have not yet been fully
integrated. To manage the expected growth of our operations and personnel, we
will be required to:

- improve existing and implement new operational, financial and management
controls, reporting systems and procedures;

- install new management information systems; and

- train, motivate and manage our sales and marketing, engineering, technical
and customer support employees.

THE LOSS OF KEY PERSONNEL MAY HURT OUR ABILITY TO OPERATE OUR BUSINESS
EFFECTIVELY

Our success depends to a significant degree upon the continued contributions
of the principal members of our sales, engineering and management departments,
many of whom perform important management functions and would be difficult to
replace. Specifically, we believe that our future success is highly dependent on
our senior management, and in particular on Lance Mortensen, our Chairman, and
Rick Inatome, our Chief Executive Officer. We do not have employment contracts
with our key personnel. The loss of the services of any key personnel,
particularly senior management, could seriously harm our business.

IF WE ARE UNABLE TO RETAIN AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS NECESSARY,
WE MAY NOT BE ABLE TO SUCCESSFULLY ACHIEVE OUR OBJECTIVES

We have recently hired and anticipate continuing to hire additional
engineering, sales, marketing, e-commerce, customer support and accounting
personnel. We may not be able to attract and retain the necessary personnel to
accomplish our business objectives, and we may experience constraints that will
adversely affect our ability to deploy the ZapMe! network in a timely fashion or
to support our users and operations. We have at times experienced, and continue
to experience, difficulty in recruiting qualified personnel. Recruiting
qualified personnel is an intensely competitive and time-consuming process.

WE ARE CURRENTLY IN ARBITRATION WITH ONE OF OUR FORMER OFFICERS, WHICH IF
RESOLVED AGAINST US COULD RESULT IN OUR OBLIGATION TO PAY LARGE DAMAGES OR
ACCELERATED VESTING OF THE OFFICER'S ZAPME! STOCK

We filed a demand for arbitration with our former President and Director,
Frank J. Vigil, related to his employment at and departure from ZapMe!. Mr.
Vigil filed a response to our demand and a counterclaim. We cannot assure you
that we will prevail in this arbitration, and any decision against us could
result in an obligation to pay some or all of the damages Mr. Vigil has sought
in his counterclaim. These damages could be substantial. Notably, under the
terms of his employment agreement and related agreements, Mr. Vigil was
permitted to purchase 1.35 million shares of common stock of ZapMe!. Some of
those shares were subject to a right of repurchase by ZapMe! at the time of

15
<PAGE>

Mr. Vigil's separation from ZapMe!. Mr. Vigil may claim that, under the terms of
his employment agreement, the closing of this offering could result in the
cancellation of the right of repurchase and the full vesting of his stock. A
decision against us with regard to the validity of the employment contract and
related agreements could therefore result in the complete vesting of Mr. Vigil's
stock. See "Business--Legal Proceedings" on page 51 for more detailed
information on this arbitration.

THE PURCHASERS IN THE OFFERING WILL EXPERIENCE DILUTION DUE TO OUR OBLIGATION TO
ISSUE ADDITIONAL SHARES TO VARIOUS PREFERRED STOCKHOLDERS IN CONNECTION WITH THE
OFFERING

On August 27, 1998 we sold 600,000 shares of Series C preferred stock. On
December 3, 1998, February 1, 1999, March 31, 1999 and May 28, 1999, we sold an
aggregate of 5,894,110 shares of Series D preferred stock. On August 4, 1999, we
sold 2,030,000 shares of Series E preferred stock. Generally, the shares of
Series C, Series D and Series E preferred stock will convert to common stock on
a one-to-one basis. However, rights granted to the holders of the Series C,
Series D and Series E preferred stock under our Certificate of Incorporation
will require us to issue additional shares of common stock.

The holders of our Series C preferred stock, Series D preferred stock and
Series E preferred stock are entitled to per annum dividends equal to ten
percent, fifteen percent and seven and one half percent, respectively, of the
liquidation value of their stock, initially set at $5 per share. The dividend
will be payable upon the closing of this offering in shares of additional common
stock in the amount equal to the dividend amount.

The holders of our Series C preferred stock and Series D preferred stock
will also be entitled to receive additional newly issued shares of common stock
upon the closing of this offering if the offering price does not exceed $15 per
share in the case of the Series C preferred stock and $10 per share in the case
of the Series D preferred stock.

By way of example, if the offering price is $11.00 per share and the
offering closes on September 30, 1999, the Series C stockholders, Series D
stockholders and Series E stockholders would be entitled to receive
approximately 303,125 shares, 437,216 shares and 24,787 shares, respectively.
When such issuance of additional shares of common stock occurs, current and
prospective stockholders will suffer additional dilution with a resulting
increase in net loss applicable to common stockholders of $8,416,000 which will
also result in an increase in net loss per share applicable to common
stockholders. Depending on the timing of our offering, and in particular, on the
offering price, this dilution could be substantial. Please see "Description of
Capital Stock--Preferred Stock," beginning on page 69, for more information
about our preferred stock.

WE COULD BE REQUIRED TO RECORD A SIGNIFICANT ACCOUNTING EXPENSE UPON THE VESTING
OF A WARRANT

As part of our agreement with Sylvan, we issued a warrant to purchase
150,000 shares of our common stock at $5.00 per share. This warrant becomes
exercisable if Sylvan meets specified milestones by December 31, 2003. If the
warrant becomes exercisable, we could be required to record a significant
non-cash accounting expense based on the value of the warrant in the period in
which the warrant becomes exercisable. The value of the warrant at that time
will depend on the value of our common stock at the time.

WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS AND RESULT IN
INCREASED DEBT AND ASSUMPTION OF CONTINGENT LIABILITIES

As part of our business strategy, we expect to review acquisition prospects
that would complement our current product offerings, augment our market
coverage, enhance our technical capabilities, or otherwise offer growth
opportunities. While we have no current agreements or negotiations underway

16
<PAGE>
with respect to any such acquisitions, we may acquire businesses, products or
technologies in the future. In the event of such future acquisitions, we could:

- issue equity securities which would dilute current stockholders'
percentage ownership;

- incur substantial debt; or

- assume contingent liabilities.

Such actions by us could have a detrimental effect on our results of
operations and/or the price of our common stock. Acquisitions also entail
numerous risks, including:

- difficulties in assimilating acquired operations, technologies, products
or personnel;

- unanticipated costs associated with the acquisition that could materially
adversely affect our results of operations;

- negative effects on our reported results of operations from acquisition
related charges and of amortization of acquired technology and other
intangibles;

- diversion of management's attention from other business concerns;

- adverse effects on existing business relationships with suppliers and
customers;

- risks of entering markets in which we have no or limited prior experience;
and

- potential loss of key employees of acquired organizations.

CONTROL BY EXISTING STOCKHOLDERS MAY LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME
OF DIRECTOR ELECTIONS AND OTHER MATTERS REQUIRING STOCKHOLDER APPROVAL

Upon completion of the offerings, our executive officers, directors and
principal stockholders and their affiliates will own 24,549,614 shares or
approximately 59.8% of the outstanding shares of common stock (59.0% if the
underwriters' over-allotment option is exercised in full), assuming that the
preferred stock converts to common stock at a ratio of one-to-one. These
stockholders, if acting together, would be able to significantly influence all
matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combination
transactions. This concentration of ownership could have the effect of delaying
or preventing a change in our control or otherwise discouraging a potential
acquirer from attempting to obtain control of us. These results could in turn
have a negative effect on the market price of the common stock or prevent our
stockholders from realizing a premium over the market prices for their shares of
common stock. For information about the ownership of common stock by our
executive officers, directors and principal stockholders please refer to
"Principal Stockholders," which begins on page 67.

OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL SHARES AT OR
ABOVE THE OFFERING PRICE

A public market for our common stock has not previously existed. We cannot
predict the extent to which investor interest in ZapMe! will lead to the
development of a trading market or how liquid that market might become. The
initial public offering price for the shares will be determined by negotiations
between us and the representatives of the Underwriters and may not be indicative
of prices that will prevail in the trading market. The trading price of our
common stock could be subject to wide fluctuations in response to factors
unrelated to our operating results such as:

- announcements of technological innovations, significant acquisitions,
strategic alliance relationships, joint ventures or capital commitments by
us or our competitors;

- new products or services offered by us or our competitors;

- changes in financial estimates by securities analysts;

- additions or departures of key personnel; and

- sales of common stock.

17
<PAGE>
In addition, the stock market in general and the Nasdaq National Market and
technology companies in particular have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of such companies. Some of these fluctuations may be due to
speculative trading by individual investors, including investors commonly
referred to as "day traders." The trading prices of many technology companies'
stocks are at or near historical highs and these trading prices and multiples
are substantially above historical levels. These trading prices and multiples
may not be sustained. These broad market and industry factors may materially
adversely affect the market price of our common stock, regardless of our actual
operating performance. In the past, following periods of volatility in the
market price of a company's securities, securities class-action litigation has
often been instituted against such companies. Such litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources.

POSSIBLE INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR BUSINESS

We seek to protect our intellectual property and to respect the intellectual
property rights of others. To protect our own intellectual property, we rely on
U.S. and international law regarding copyright, patents, trademarks and trade
secrets as well as confidentiality agreements with employees, consultants,
contractors and business partners. We cannot guarantee that we will succeed in
obtaining, registering, policing or defeating challenges to our intellectual
property rights, or that we will avoid claims that we are infringing the rights
of others. Please refer to "Business--Intellectual Property," beginning on page
49, for information on steps we have taken to protect our intellectual property.

Despite our efforts to protect our intellectual property, we may be
unsuccessful in doing so. We may be unable to obtain patents or register
trademarks for a variety of reasons, including a mistaken belief that these
items are eligible for intellectual property protection or that we are the
entity entitled to this protection, if any. Our copyrights and trade secrets may
similarly turn out to be ineligible for legal protection. In addition, parties
may attempt to disclose, obtain or use its proprietary information despite, or
in the absence of, a confidentiality agreement. Some foreign countries do not
protect intellectual property rights to the same extent as the United States,
and intellectual property law in the United States is still uncertain and
evolving as applied to Internet-related industries. The status of domain names
and the regulatory bodies in charge of them is also unsettled. Any inability to
register or otherwise protect our intellectual property rights could seriously
harm our business since it could enable competitors to copy important features
on our network.

Furthermore, third parties may assert intellectual property infringement
claims against ZapMe!. These claims, possibly including those from companies
from which we license key technology for its operations, could result in
significant liability, the inability to use key rights and technologies, and the
invalidation of our own proprietary rights. In addition, regardless of the
outcome, any litigation could be time-consuming, expensive, and distracting of
management's time and attention.

FAILURE OF COMPUTER SYSTEMS AND SOFTWARE PRODUCTS TO BE YEAR 2000 COMPLIANT
COULD NEGATIVELY IMPACT OUR BUSINESS

Many currently installed computer systems and software products only accept
two digits to identify the year in any date. Thus, the year 2000 will appear as
"00," which the system might consider to be the year 1900 rather than the year
2000. This could result in system failures, delays or miscalculations causing
disruptions to our operations. The failure of systems maintained by third
parties to be Year 2000 compliant could cause us to incur significant expense to
remedy any problems, reduce our revenues from such third parties or otherwise
seriously damage our business. A significant Year 2000-related disruption of the
network services or equipment that third-party vendors provide to us could also
cause our members or visitors to consider seeking alternate providers or cause
an unmanageable burden on our technical support.

Our failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, some of our normal business activities or
operations. Please see "Management's Discussion and

18
<PAGE>
Analysis of Financial Condition and Results of Operations--Year 2000 Readiness
Disclosure," beginning on page 34, for a detailed description of our state of
year 2000 readiness.

SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE
OUR STOCK PRICE TO FALL

Sales of a large number of shares of our common stock in the public market
after this offering or the perception that such sales could occur could cause
the market price of our common stock to drop. Upon completion of this offering a
significant number of shares will be freely transferable without restriction or
registration under the Securities Act of 1933.

In addition, as soon as practicable after the date of this prospectus, we
intend to file a registration statement on Form S-8 with the Securities and
Exchange Commission covering the shares of common stock reserved for issuance
under our 1997 Stock Option Plan, 1998 Stock Plan and 1999 Employee Stock
Purchase Plan and for options issued outside such plans. Sales of a large number
of shares could have an adverse effect on the market price for our common stock.

After this offering, the holders of a significant number of shares will have
rights with respect to registration of such shares for sale to the public. If
such holders, by exercising their registration rights, cause a large number of
securities to be registered and sold in the public market, such sales could have
an adverse effect on the market price for our common stock. If we were to
include in a company-initiated registration shares held by such holders pursuant
to the exercise of their registration rights, such sales may have an adverse
effect on our ability to raise needed capital. Please see "Shares Eligible for
Future Sale," beginning on page 74, for additional details on the number of
shares which may be sold in the public market.

OUR CHARTER DOCUMENTS WILL MAKE IT MORE DIFFICULT TO ACQUIRE US AND MAY
DISCOURAGE TAKE-OVER ATTEMPTS AND THUS DEPRESS THE MARKET PRICE OF OUR STOCK

Provisions of our Certificate of Incorporation and Bylaws could make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders. For example, stockholder meetings may be called only by our
board of directors, the chairman of the board and the president, advanced notice
is required prior to stockholder proposals, and stockholders may not act by
written consent. Further, we have authorized preferred stock that is
undesignated, making it possible for the board of directors to issue preferred
stock with voting or other rights or preferences that could impede the success
of any attempt to change control of ZapMe!.

Delaware law also could make it more difficult for a third party to acquire
us. Specifically, Section 203 of the Delaware General Corporation Law may have
an anti-takeover effect with respect to transactions not approved in advance by
the board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by our
stockholders.

THE PURCHASERS IN THE OFFERING WILL IMMEDIATELY EXPERIENCE SUBSTANTIAL DILUTION
IN NET TANGIBLE BOOK VALUE

Because our common stock has been sold previously at prices substantially
less than the initial public offering price that you will pay, you will suffer
immediate and substantial dilution in pro forma net tangible book value. The
exercise of outstanding options and warrants, or the issuance of additional
shares of preferred stock, may result in further dilution. See "Dilution,"
beginning on page 25, for further information regarding the dilution in the net
tangible book value of the shares purchased in this offering, and "Description
of Capital Stock," beginning on page 69, for information regarding potential
additional dilution to the value of our common stock.

19
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements in "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks outlined
under "Risk Factors," that may cause our or our industry's actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels or activity, performance or achievements expressed or
implied by such forward-looking statements.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform such statements to actual results.

20
<PAGE>
USE OF PROCEEDS

The net proceeds to ZapMe! from the sale of the common stock in the
offerings are estimated to be approximately $95.7 million (approximately $109.5
million if the underwriters' over-allotment option is exercised in full)
assuming an initial public offering price of $11.00 per share and after
deducting the estimated underwriting discount and estimated offering expenses.

We currently expect to use the net proceeds of the offerings for various
purposes, including expanding our sales and marketing activities (approximately
$8.0 million), continuing investments in technology and product development
(approximately $1.0 million), as well as working capital and other corporate
expenses (approximately $73.0 million), including principal payments on debt and
the funding of net losses from operations. These amounts are preliminary
estimates based on management's current plans, which are based on currently
available information and market conditions, and may change as a result of
future developments. The amounts we actually expend for such working capital and
other purposes may also vary significantly based on the amount of our future
revenues and the other factors described under "Risk Factors." In addition,
while we intend to finance the cost of deploying our network into schools
through third party or OEM lease finance programs, it is likely that not all the
costs of network equipment will be covered by such finance programs. To this
extent, we currently intend to utilize approximately $8.0 million of the
proceeds from the offering for such purpose. Our management will retain broad
discretion in the allocation of the net proceeds of this offering. A portion of
the net proceeds may also be used to acquire or invest in complementary
businesses, technologies, product lines or products. However, we have no current
plans, agreements or commitments with respect to any such acquisition, and we
are not currently engaged in any negotiations with respect to any such
transaction. Pending such uses, the net proceeds of this offering will be
invested in short term, interest-bearing, investment grade securities.

DIVIDEND POLICY

We have never declared nor paid cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of the board of directors and will be
dependent upon our financial condition, results of operations, capital
requirements, general business condition and such other factors as the board of
directors may deem relevant.

21
<PAGE>
CAPITALIZATION

The table below sets forth the following information:

- our actual capitalization as of June 30, 1999;

- our pro forma capitalization after giving effect to our sale of 2,030,000
shares of Series E preferred stock in August 1999, with net proceeds of
approximately $9.5 million;

- our pro forma as adjusted capitalization to give effect to the sale by
ZapMe! of 9,000,000 shares of common stock offered through this
prospectus, assuming an initial public offering price of $11.00 per share,
and after deducting the estimated underwriting discount and estimated
offering expenses payable by us and the conversion of all outstanding
shares of preferred stock into shares of common stock which was computed
using an assumed initial public offering price of $11.00 per share and an
assumed closing date of September 30, 1999; and

- our pro forma as further adjusted capitalization, adjusted to give effect
to the underwritten offering and the sale of an additional 454,545 shares
in the concurrent offering using an assumed initial public price of $11.00
per share, less the underwriting discount and commissions.

22
<PAGE>
This information should be read in conjunction with our financial statements
and related notes thereto included elsewhere in this prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------------------------------
PRO FORMA PRO FORMA AS
ACTUAL PRO FORMA AS ADJUSTED FURTHER ADJUSTED
---------- ----------- ----------- ----------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Capital lease obligations, net of current portion......... $ 4,613 $ 4,613 $ 4,613 $ 4,613
Redeemable convertible preferred stock, $0.01 par value,
issuable in series; 600,000 shares authorized, issued
and outstanding, actual; no shares authorized, issued or
outstanding pro forma, pro forma as adjusted and pro
forma as further adjusted............................... 6,080 6,080 -- --
Stockholders' equity:
Convertible preferred stock, $0.01 par value; 16,357,671
shares authorized (including 600,000 shares designated
as redeemable convertible preferred stock), 15,151,781
shares issued and outstanding, actual; 5,000,000
shares authorized, 17,181,781 shares issued and
outstanding pro forma and no shares issued and
outstanding, pro forma as adjusted and pro forma as
further adjusted...................................... 30,155 39,655 -- --
Common stock, $0.01 par value; 50,000,000 shares
authorized, 14,359,380 shares issued and outstanding,
actual; 200,000,000 shares authorized, 14,359,380
shares outstanding, pro forma; 200,000,000 shares
authorized, 41,906,289 shares issued and outstanding,
pro forma as adjusted and 42,360,834 shares issued and
outstanding, pro forma as further adjusted............ 9,504 9,504 154,725 159,375
Deferred stock compensation............................... (5,643) (5,643) (5,643) (5,643)
Accumulated deficit during the development stage.......... (19,056) (19,056) (27,472) (27,472)
---------- ----------- ----------- ----------------
Total stockholders' equity................................ 14,960 24,460 121,610 126,260
---------- ----------- ----------- ----------------
Total capitalization...................................... $ 25,653 $ 35,153 $ 126,223 $ 130,873
---------- ----------- ----------- ----------------
---------- ----------- ----------- ----------------
</TABLE>

The above table is based on shares outstanding as of June 30, 1999. This
table excludes, as of June 30, 1999:

- 895,890 shares of common stock issuable upon exercise of outstanding
warrants, of which 755,890 shares at a weighted average exercise price of
$3.84 per share were outstanding at June 30, 1999.

The pro forma as adjusted column in the above table also includes:

23
<PAGE>
- 303,125 additional shares issuable to holders of the Series C preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999;

- A dividend of $8,416,000 attributable to the issuance of additional
preferred stock noted above assuming an initial public offering price of
$11.00 per share and that the closing of the offering occurs on September
30, 1999.

See "Management--Incentive Stock Plans," beginning on page 59, for a
detailed description of our incentive stock plans; "Description of Capital
Stock," beginning on page 69, for a detailed description of our capital stock;
and note 3 of "Notes to Financial Statements," beginning on page F-11, for a
detailed description of our stockholders' equity.

24
<PAGE>
DILUTION

The pro forma net tangible book value of our common stock after giving
effect to our sale of 2,030,000 shares of Series E preferred stock in August
1999 with net proceeds of approximately $9.5 million, on June 30, 1999 was
approximately $30.5 million or $0.95 per share. Pro forma net tangible book
value per share represents the amount of our total tangible assets less our
total liabilities, divided by the number of outstanding shares of our common
stock on a pro forma basis after giving effect to the conversion of all
outstanding shares of our preferred stock into 17,781,781 shares of common stock
upon the closing of the offerings. Assuming our sale of 9,000,000 shares of
common stock in the underwritten offering and the sale of 454,545 shares in the
concurrent offering at an assumed initial public offering price of $11.00 per
share and our receipt of the estimated net proceeds from the offerings, after
deducting the estimated underwriting discount and our estimated offering
expenses, our pro forma net tangible book value at June 30, 1999 would have been
$126.3 million or $2.98 per share of common stock. This represents an immediate
increase of pro forma net tangible book value of $2.03 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$8.02 per share to new investors. In other words, we currently expect that new
investors will pay $11.00 per share for our common stock in the offering, which
is substantially greater than the $2.98 per share value, after the offering, of
our tangible assets after subtracting our liabilities. The following table
illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............................. $ 11.00
Pro forma net tangible book value per share as of June 30, 1999............ $ 0.95
Increase in pro forma net tangible book value per share attributable to new
investors................................................................ 2.03
---------
Pro forma net tangible book value per share after offering................... 2.98
---------
Dilution per share to new investors (including the investors in the
concurrent offering)....................................................... $ 8.02
---------
---------
</TABLE>

The following table sets forth, as of June 30, 1999, on the pro forma basis
described above, the differences between the number of shares of common stock
purchased from us, the total price paid and the average price per share paid by
existing stockholders and by the new investors in this offering at an assumed
initial public offering price of $11.00 per share (before deducting the
estimated underwriting discounts and commissions and estimated offering expenses
payable). The table below indicates that while investors in the offering will
contribute 68.1% of the total amount provided by investors to fund ZapMe! to
date, they will own 22.3% of ZapMe!.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................. 32,906,289 77.7% $ 44,186,000 29.9% $ 1.34
New investors (including the investors in the
concurrent offering)............................ 9,454,545 22.3% 103,650,000 70.1% 10.96
------------ ----- -------------- ----- ------
Total......................................... 42,360,834 100.0% $ 147,836,000 100.0%
------------ ----- -------------- -----
------------ ----- -------------- -----
</TABLE>

If the underwriters exercise their over-allotment in full, the following
will occur:

- the percentage of shares of common stock held by existing stockholders
will decrease to approximately 75.3% of the total number of shares of our
common stock outstanding; and

- the number of shares held by new public investors will increase to
10,804,505, or approximately 24.7% of the total number of shares of our
common stock outstanding after this offering.

25
<PAGE>
The above computations are based on shares outstanding as of June 30, 1999.
They exclude, as of June 30, 1999:

- 895,890 shares of common stock issuable upon exercise of outstanding
warrants, of which 755,890 shares at a weighted average exercise price of
$3.84 per share were outstanding at June 30, 1999.

The above computations include:

26
<PAGE>
SELECTED FINANCIAL DATA

The statements of operations data for the period from June 25, 1997
(inception) through December 31, 1997 and for the year ended December 31, 1998,
and the balance sheet data at December 31, 1997 and December 31, 1998, are
derived from our financial statements which have been audited by Ernst & Young
LLP, independent auditors, and are included elsewhere in this prospectus. The
statement of operations data for the six month periods ended June 30, 1998 and
1999 and the balance sheet data at June 30, 1999, are derived from unaudited
financial statements included elsewhere in this prospectus. We have prepared
this unaudited information on the same basis as the audited financial statements
and have included all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of our financial
position and operating results for such periods. Historical results are not
necessarily indicative of future results and the results for interim periods are
not necessarily indicative of results to be expected for the entire year or for
any future period. When you read this selected financial data, it is important
that you also read the financial statements and related notes included in this
prospectus, as well as the section of this prospectus related to "Management's
Discussion and Analysis of Financial Condition and Results of Operations,
beginning on page 28."

<TABLE>
<CAPTION>
PERIOD FROM
JUNE 25,
1997
(INCEPTION)
THROUGH YEAR ENDED SIX MONTHS ENDED
DECEMBER DECEMBER JUNE 30,
31, 31, --------------------
1997 1998 1998 1999
----------- ----------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.......................................... $ -- $ -- $ -- $ 147
Costs and expenses:
Cost of services............................... -- 135 8 1,247
Research and development....................... 231 1,140 429 1,034
Sales and marketing............................ 40 1,197 176 2,456
General and administrative..................... 299 1,458 415 1,975
Amortization of deferred stock compensation.... -- 1,065 -- 2,531
----------- ----------- --------- ---------
Total costs and expenses..................... 570 4,995 1,028 9,243
----------- ----------- --------- ---------
Loss from operations............................. (570) (4,995) (1,028) (9,096)
Interest income (expense), net................... (11) (36) (35) 29
----------- ----------- --------- ---------
Net loss......................................... (581) (5,081) (1,063) (9,067)
Accretion and dividend on redeemable convertible
preferred stock................................ -- (606) -- (3,771)
----------- ----------- --------- ---------
Net loss applicable to common stockholders....... $ (581) $ (5,637) $ (1,063) $ (12,838)
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Net loss per share:
Basic and diluted.............................. $ (0.05) $ (0.48) $ (0.09) $ (0.95)
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Pro forma basic and diluted (unaudited)........ $ (0.32) $ (0.36)
----------- ---------
----------- ---------
Shares used in calculation of net loss per share:
Basic and diluted.............................. 11,183 11,685 11,859 13,517
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Pro forma basic and diluted (unaudited)........ 15,993 25,462
----------- ---------
----------- ---------
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
JUNE 30,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ 275 $ 815 $ 19,855
Working capital (deficit)....................................... (111) (1,013) 15,597
Total assets.................................................... 349 3,603 32,146
Capital lease obligations....................................... -- 387 6,705
Redeemable convertible preferred stock.......................... -- 3,352 6,080
Stockholders' equity (deficit).................................. (512) (2,123) 14,960
</TABLE>

27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND RELATED NOTES AS WELL AS THE OTHER FINANCIAL INFORMATION IN THIS
PROSPECTUS. IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS OR OUR FUTURE
FINANCIAL PERFORMANCE, WHICH INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD LOOKING
STATEMENTS AS A RESULT OF FACTORS SET FORTH UNDER "RISK FACTORS," "BUSINESS" AND
ELSEWHERE IN THIS PROSPECTUS.

OVERVIEW

We commenced operations in June 1997 and began offering sponsorships through
our proprietary network in December 1998. From inception through June 30, 1999,
we were in the development stage, and our activities primarily consisted of:

- marketing the ZapMe! network to school districts;

- entering into agreements with school districts for the placement of the
ZapMe! network in schools;

- developing our proprietary user interface and satellite multicasting
capabilities;

- raising capital;

- recruiting personnel;

- conducting research and development activities; and

- purchasing assets to support our operations.

Since December 1998, we have been:

- deploying our network in schools;

- developing our operations, technology and support capabilities;

- forming strategic alliance relationships; and

- continuing to invest in research and development.

In order to achieve our strategic plan, we intend to continue to invest
heavily in deploying our network, marketing and promotion, technology and
operations. We purchase the computer equipment we install in schools--including
PCs, monitors, servers and printers--on customary terms for sales made for
educational purposes from our partners, some of which are also sponsors.

28
<PAGE>
July 31, 1999, we had installed ZapMe! labs in over 220 schools, which had an
average of more than 1,000 students, representing over 220,000 students, each of
whom has access to a free ZapMe! account upon request. In the Fall of the
1999-2000 school year, ZapMe! will expand current programs and incentives to
encourage network usage.

We have incurred net losses of approximately $14.7 million for the period of
inception through June 30, 1999. We expect to incur additional losses for the
foreseeable future due to the increased cost of sales and marketing, advertising
and promotion, expanded network features and research and development. We expect
that the size of these losses will fluctuate from quarter to quarter and that
these fluctuations may be substantial. In view of the rapidly evolving nature of
our business and our limited operating history, we believe that period-to-period
comparisons of our operating results are not necessarily meaningful and should
not be relied upon as an indication of future performance.

REVENUE. To date, ZapMe! has generated revenue primarily from content
sponsorship fees paid by strategic partners. Two sponsors, Toshiba and General
Electric, accounted for approximately 90% of our revenue in the six months ended
June 30, 1999. We intend to derive revenue from three primary activities:
sponsorship, e-commerce and network services and other. Sponsorship revenue,
which is expected to account for between 90-95% of revenues when we are fully
operational, includes content and public service announcement sponsorships,
banner advertising and full screen interactive ads, consists of fees charged for
messages delivered over our network. Revenue related to sponsorship of content
on our network is generally recognized ratably over the time periods that the
sponsorship is acknowledged unless such sponsorship is based on delivery of a
minimum number of impressions, in which case revenue is recognized as the
impressions are delivered. We expect to generate sponsorship revenue both at
school and at home. Advertising revenue is recognized in the period in which the
advertisement message is displayed on the network, provided that no material
obligations remain and collection of the related account receivable is
reasonably certain. E-commerce revenue, which is expected to account for between
3-6% of revenues when we are fully operational, consists of referral fees and
commissions on transactions facilitated through our network as well as referred
transactions. Revenue from e-commerce is recognized upon notification from the
contracting partner of the fact of the referral or sale upon which referral fees
or commissions is due. Network services and other revenue consist of revenue
from the distribution of content and products which is delivered through our
network, and from educational services delivered in the ZapMe! labs such as
teacher training, tutoring and other educational programs offered through a
strategic alliance with Sylvan Learning Systems. Network services and other
revenue is expected to account for between 2-4% of revenues when we are fully
operational and is recognized in the time period in which the underlying service
is delivered. Network services and other revenue also include revenue from our
five-year agreement with Sylvan which provides for a sharing of revenue derived
from the delivery of Sylvan programs in ZapMe! computer labs. This agreement
allows Sylvan to offer student tutoring, teacher training, and other programs in
the ZapMe! computer labs. For the calendar year 1999, Sylvan is committed to pay
ZapMe! minimum fees. Thereafter, fees will be based on a rate for installed
schools available for use by Sylvan. To date, no programs have been offered
under this arrangement, and additionally no material e-commerce or network
services have been delivered and no significant revenue has been recognized by
ZapMe!.

COST OF SERVICES. Cost of services consist primarily of depreciation on
network equipment, including computers placed in schools, allowances for the
cost of equipment replacement not covered by manufacturers' warranties, and the
cost of operating our satellite communications network. The costs associated
with this form of telecommunication include (1) the cost of land-based
equipment, or "earth segment," such as the satellite dish, hubs, send and
receive cards located inside the network servers and land-based phone service
and (2) the cost of the link to and from the satellite, or "space segment."
ZapMe! provides much of its earth segment to schools by purchasing satellite
dishes, hubs and send/receive cards for its network servers. ZapMe! purchases
space segment from GE Americom, a

29
<PAGE>
unit of General Electric Corporation, and from Spacenet, a wholly-owned
subsidiary of Gilat Satellite Networks, pursuant to fixed price agreements.
Commencing July 1999, Spacenet began to install and lease satellite dishes and
lease receive and transmit cards as well as provide space segment under a
long-term fixed-price per school contract. Cost of services varies directly with
the number of schools.

OPERATING EXPENSES. Our operating expenses consist primarily of sales and
marketing, research and development and general and administrative expenses.
Research and development expenses consist primarily of compensation and
consulting expenses associated with the development and refinement of the ZapMe!
user interface, the satellite network, content and quality assurance. To date,
we have not capitalized any software development costs under Statement of
Financial Accounting Standards ("SFAS") No. 86 because we believe that our
process for developing software is essentially completed concurrent with the
establishment of technological feasibility; as a result, all development costs
have been expensed as incurred. Sales and marketing expenses consist primarily
of salaries, commissions, travel expenses, advertising expenses, costs of
promotional programs such as ZapPoints, trade show expenses, seminars and costs
of marketing materials. General and administrative expenses consist primarily of
salaries and related costs for our executive, administrative, finance, legal and
information technology personnel, support services, facilities costs and
professional services fees.

AMORTIZATION OF DEFERRED STOCK COMPENSATION. We recorded deferred stock
compensation of approximately $5.5 million during the year ended December 31,
1998, and approximately $2.9 million during the six months ended June 30, 1999
as a result of stock options granted during 1998 and 1999 and shares of common
stock granted to an officer of ZapMe! at a price below the deemed fair market
value at the date of grant. Amortization of deferred stock compensation of
approximately $1.1 million was recognized in 1998 and approximately $2.5 million
for the six months ended June 30, 1999. We will recognize approximately $4.1
million of total deferred stock compensation in 1999 and approximately $2.2
million in 2000. Deferred stock compensation is amortized over the vesting
period of the options, generally three to four years, or the performance period
for various warrants we granted using a graded vesting method. As a result,
amortization of deferred stock compensation will adversely impact our operating
results for the next four years.

INCOME TAXES. There was no provision for federal or state income taxes for
any period since inception due to our operating losses. At December 31, 1998, we
had net operating loss carryforwards for federal income tax purposes of
approximately $4.1 million which will expire beginning in fiscal year 2012 if
not utilized. Utilization of our net operating loss carryforwards may be subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code and similar state provisions. Such an
annual limitation could result in the expiration of the net operating loss
carryforwards before utilization. A valuation allowance has been established
and, accordingly, no benefit has been recognized for our net operating losses
and other deferred tax assets. The net valuation allowance increased by
approximately $1.6 million during the year ended December 31, 1998. We believe
that, based on a number of factors, the available objective evidence creates
sufficient uncertainty regarding the realizability of the deferred tax assets
such that a full valuation allowance has been recorded. These factors include
our history of net losses since inception and expected near-term future losses.
We will continue to assess the realizability of the deferred tax assets based on
actual and forecasted operating results. See note 4 of notes to financial
statements, beginning on page F-18.

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS. We recorded accretion and a
dividend on our redeemable convertible preferred stock of approximately $606,000
for the year ended December 31, 1998 and approximately $936,000 for the six
months ended June 30, 1999. For the six months ended June 30, 1999, we have also
recorded approximately $1.0 million for accretion of a liquidation preference
for our convertible preferred stock and approximately $1.8 million for accretion
of a guaranteed initial public offering price for our redeemable convertible
preferred stock based upon an

30
<PAGE>

initial public offering on September 30, 1999 at $11.00 per share. These
preferred stockholders are entitled to these amounts in the event of an initial
public offering.

RESULTS OF OPERATIONS

Because (1) we were a development stage company through June 30, 1999, (2)
first earned revenue in the quarter ended March 31, 1999 and (3) have a short
operating history, we believe that year-over-year comparisons are less
meaningful than an analysis of recent quarterly operating results. Accordingly,
we are providing a discussion and analysis of our results of operations that is
focused on the year ended December 31, 1998 and the quarters ended March 31,
1999 and June 30, 1999.

REVENUE. Total revenue for the quarters ending March 31 and June 30, 1999
were $5,000 and $142,000, respectively. We began earning revenue in the quarter
ending March 31, 1999. Revenue is primarily attributed to content sponsorship of
our network. One sponsor, General Electric, accounted for substantially all of
our revenue in the quarter ended June 30, 1999.

COST OF SERVICES. Cost of services were $135,000, $212,000 and
approximately $1.0 million for the year ending December 31, 1998 and for the
quarters ending March 31 and June 30, 1999, respectively. The increase in the
level of expense was due primarily to depreciation associated with increased
levels of school network equipment which were placed in service. We expect cost
of services to increase in absolute dollars in future periods due to increasing
depreciation on network equipment and to additional costs for space segment
associated with the deployment of the ZapMe! network in additional schools.

RESEARCH AND DEVELOPMENT. Research and development expenses were
approximately $1.1 million, $472,000 and $562,000 for the year ending December
31, 1998 and for the quarters ending March 31 and June 30, 1999, respectively.
Approximately $75,000 of the $90,000 increase in the quarter ending June 30,
1999 over the quarter ending March 31, 1999 is attributable to labor and
temporary help. We believe that continued investment in research and development
will contribute to attaining our strategic objectives and, as a result, expect
research and development expenses to increase in absolute dollars in future
periods.

SALES AND MARKETING. Sales and marketing expenses were approximately $1.2
million, $864,000 and approximately $1.6 million for the year ending December
31, 1998 and for the quarters ending March 31 and June 30, 1999, respectively.
The increase in the level of expense was due primarily to compensation
associated with the increased number of sales and marketing personnel and
related overhead, and increased travel costs associated with our direct selling
efforts. We expect selling and marketing expenses to increase in absolute
dollars in future periods as we hire additional personnel, promote our home
client, and develop incentive programs to increase in-school and at home usage
of the ZapMe! network.

GENERAL AND ADMINISTRATIVE. General and administrative expenses were
approximately $1.5 million, $885,000 and approximately $1.1 million for the year
ending December 31, 1998 and for the quarters ending March 31 and June 30, 1999,
respectively. The increase in the level of expenses is due primarily to
increased personnel and related overhead necessary to support our increased
scale of operations. We expect general and administrative expenses to increase
in absolute dollars in future periods as we expand our management and staff,
incur additional costs related to expansion of our operations and continue to
incur the additional costs associated with being a publicly-traded company.

31
<PAGE>
Our revenue, operating expenses and operating results may vary significantly
from quarter to quarter. The fluctuations may be due to a number of factors,
many of which are beyond our control. These factors include:

- the rate of expansion of our network through deployment into additional
schools;

- the rate of usage of our network in schools and at home;

- our ability to generate and sustain significant levels of sponsorship
revenue;

- fluctuations in the use of our network and in demand for our products and
services related to the school calendar, including vacations and holidays;

- the burden of lease payment obligations;

- government action to regulate or otherwise restrict our access to schools;

- our ability to manage costs, including personnel costs; and

- costs relating to possible acquisitions and integration of technologies or
businesses.

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

INCEPTION TO DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998

Because we were a development stage company during 1997 and the year ended
December 31, 1998, we generated no revenue for these periods. Costs and
operating expenses increased to approximately $4.1 million in 1998 from $570,000
in the period from June 25, 1997 through December 31, 1997 ("inception period").
During our inception period, we incurred primarily general and administrative
and development expenses as our primary focus was on developing the ZapMe!
network. Research and development expenses in 1998 totaled approximately $1.1
million, an increase of $909,000 from $231,000 in fiscal 1997, of which $820,000
was attributable to increased product development, network engineering,
satellite engineering and content department labor costs. In the year ended
December 31, 1998, sales and marketing expenses totaled approximately $1.2
million, compared to $40,000 for fiscal 1997. Approximately $511,000 of this
increase was due primarily to increased labor and temporary help. Additionally,
in 1998 we began to build our infrastructure and added finance, legal, business
development, information technology, executive management and administrative
personnel and related costs, which amounted to approximately $1.5 million for
fiscal 1998 compared to $299,000 for fiscal 1997. Sales and marketing expenses
were not significant in fiscal 1997.

LIQUIDITY AND CAPITAL RESOURCES

Since inception through June 30, 1999, we used approximately $7.9 million of
cash for operating activities, resulting primarily from operating losses of
approximately $14.7 million. During this same period, we used approximately $3.7
million of cash for investing activities, consisting primarily of the purchase
of equipment.

We have financed our cash needs primarily through the private placement of
preferred stock and lease financings. Placements of preferred stock through June
30, 1999 provided net proceeds totaling approximately $30.2 million. At June 30,
1999, we had approximately $20.4 million in cash and cash equivalents and
short-term investments, including restricted cash of $560,000, which represents
an increase of approximately $19.6 million as compared to $815,000 at December
31, 1998. We currently have no significant capital commitments other than
obligations under capital equipment and facilities leases as well as commitments
under cancelable outstanding purchase orders.

32
<PAGE>
Net cash used in operating activities was approximately $2.3 million and
$5.4 million in fiscal 1998 and for the six-month period ending June 30, 1999,
respectively. In each period, cash used by operating activities was primarily a
result of the net losses for such period.

Net cash used in investing activities was approximately $2.4 million and
$1.3 million in fiscal 1998 and for the six-month period ending June 30, 1999,
respectively. In each period, cash used by investing activities was primarily
for the acquisition of property and equipment.

Cash provided by financing activities was approximately $5.2 million and
$25.8 million in fiscal 1998 and for the six-month period ending June 30, 1999,
respectively. The primary source of cash provided by financing activities was
proceeds from the issuance of preferred stock and, to a lesser extent,
borrowings. In addition, in August 1999 we received net proceeds of
approximately $9.5 million from the issuance of preferred stock.

Capital leases incurred were approximately $390,000 and $6.8 million in
fiscal 1998 and for the six-month period ending June 30, 1999, respectively.
Lease financing was used primarily to acquire and install computer equipment in
schools.

In June 1999, the Company entered into an agreement whereby a minimum of 500
school sites would be established and maintained for a fixed monthly fee of $221
per month, for a minimum of three years. In the event the Company fails to
establish 500 sites within three months, an unordered monthly site fee would be
assessed at $150 per site until the site has been installed. As of June 30,
1999, the maximum obligation on installed sites is $3,978,000. In July 1999, the
agreement was amended and the fixed monthly fee on the first 500 sites was
changed to $185 per site. This reduces the maximum obligation on installed sites
to $3,330,000.

In August 1999, we issued 2,030,000 shares of our Series E preferred stock
at $5.00 per share, with gross proceeds of approximately $10,150,000. The $5.00
share price does not necessarily represent fair value of the preferred stock
issued. We will record approximately $12,000,000 as an increase to the Series E
preferred stock to reflect an estimated fair value of $11.00 per share.

Our deferred revenue balance includes deferred revenue attributable to
billings in advance of earnings on content sponsorship activities. We record an
account receivable and deferred revenue upon billing for sponsorships. We
recognize revenue ratably over the period the sponsorship is acknowledged on the
network.

Our agreements with school districts do not require that we incur capital
expenditures. However, we anticipate incurring substantial capital expenditures
in connection with our expansion of our school network. Subject to the
availability of cash or other capital financing arrangements, we expect that
capital expenditures for 1999 for school network equipment will be approximately
$50.0 million. We estimate that this level of expenditure will enable us to
install approximately 1,600 schools during 1999. Under our agreements with
school districts, as of July 31, 1999, we are permitted to install ZapMe! labs
in approximately 6,000 schools. Such expenditures are expected to be made
pursuant to cancelable purchase orders when made. Although we have no other
material commitments other than our capital equipment and facilities leases and
cancelable commitments to purchase school network equipment in the ordinary
course which aggregate approximately $3.8 million, we anticipate that we will
experience an increase in our capital expenditures and lease commitments
consistent with our anticipated growth in operations, infrastructure and
personnel. For more information on these commitments, please see note 5 of notes
to financial statements starting on page F-18. We currently anticipate that we
will continue to experience significant growth in our operating expenses for the
foreseeable future related to expansion of our network, including increasing
research and development spending, increasing our sales and marketing
operations, developing supporting business and technical infrastructures,
improving our operational and financial systems and broadening our user support
capabilities. Such operating expenses will be a material use of our cash
resources.

33
<PAGE>
We believe that our available cash resources and amounts available under
financing facilities will be sufficient to meet our expected working capital and
capital expenditure requirements for at least the next full operating cycle.

We may need to raise additional funds in order to support more rapid
expansion, develop new vertical markets, respond to competitive pressures,
acquire complementary businesses or technologies, or respond to unanticipated
developments. We may seek to raise additional funds through private or public
sales of securities, strategic financial and business relationships, bank debt,
lease financing, or otherwise. If additional funds are raised through the
issuance of equity securities, the percentage of ZapMe! owned by existing
stockholders will be reduced, stockholders may experience additional dilution,
and these equity securities may have rights, preferences, or privileges senior
to those of the holders of ZapMe!'s common stock. Additional financing may not
be available on acceptable terms, if at all. If adequate funds are not available
or are not available on acceptable terms, we may be unable to deploy or enhance
our network and Netspace, take advantage of future opportunities, or respond to
competitive pressures or unanticipated developments, which could severely harm
our business.

YEAR 2000 READINESS DISCLOSURE

Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and
software used by many companies and governmental agencies may need to be
upgraded to comply with such Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.

OUR STATE OF READINESS

We are engaged in an ongoing assessment of the Year 2000 readiness of all
our relevant operating, financial and administrative systems, including the
hardware and software that support our information technology ("IT") and non-IT
systems. Our assessment plan consists of:

- quality assurance testing of our internally developed proprietary
software;

- contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly related to the
delivery of our network services to our users;

- contacting vendors of third-party systems;

- assessing repair and replacement requirements and implementing appropriate
procedures; and

- creating contingency plans in the event of Year 2000 failures.

We are currently reviewing our Year 2000 readiness and developing a plan for
verifying the proper operation of our internally developed software. We expect
to complete and execute our verification plan by October 1999. Although our Year
2000 readiness assessment will not be totally complete until October 1999, we
have by now received readiness assurances from nearly all of our vendors. Most
of the vendors have indicated that they are Year 2000 compliant. In the few
cases where a vendor has indicated that it is not Year 2000 compliant, we have
determined that any possible resulting problems are small and the costs of
remediation, if any, are small. In addition, the transition from year 1999 to
year 2000 was simulated for our material IT and non-IT systems to test our
system readiness. These simulations revealed no notable Year 2000 issues.

All of our third party hardware and software vendors for critical systems
have provided written statements to us or have posted them to their public web
sites, indicating that they are Year 2000 compliant. We read the assurances and
the documentation backing up those assurances that third parties have provided
regarding their Year 2000 compliance. We then evaluated the assurances and

34
<PAGE>
documentation against our experience and knowledge to determine the credibility
of the third party's assurances that it is Year 2000 compliant. If we determined
that the third party assurances were not adequate, which has to date not
occurred, then we would make additional requests for assurances and
documentation and do our own testing of the third party's product. Our review of
the internal systems of third parties with whom we have material relationships
is ongoing.

COSTS TO ADDRESS YEAR 2000 ISSUES

We do not separately account for Year 2000 related expenses but estimate
that our expenses incurred to date to address Year 2000 issues have not been
material and, although we have not completed our assessment of our Year 2000
readiness, we do not expect to incur expenses in excess of $100,000 in
connection with any required future remediation efforts. Such costs, if higher
than anticipated, could adversely impact our operating results.

RISKS ASSOCIATED WITH YEAR 2000 ISSUES

We are not currently aware of any Year 2000 compliance problems relating to
our network applications or our IT or non-IT systems that would have a material
adverse effect on our business, results of operations and financial condition,
notwithstanding efforts to detect and correct such problems. However:

- we may discover Year 2000 compliance problems in our network and other
software that will require substantial revisions or replacements;

- there can be no assurance that third-party hardware or software
incorporated into our material IT and material non-IT systems will not
need to be revised or replaced, which could be time consuming and
expensive; and

- the failure to adequately address Year 2000 compliance issues in our IT
and non-IT systems could result in claims of mismanagement,
misrepresentation or breach of contract and bring about litigation, which
could be costly to defend.

Any such worst-case scenario, if not quickly remedied, could result in lost
revenues, increased expenses and business interruptions, which could have a
material adverse effect on our business, results of operations and financial
condition.

In addition, we cannot guarantee that Internet access companies,
governmental agencies, utility companies, third-party service providers and
others not within our control will be Year 2000 compliant. The failure of such
entities to be Year 2000 compliant could result in a failure beyond our control,
such as a prolonged Internet, telecommunications or electrical failure, which
could prevent us from operating our network.

CONTINGENCY PLAN

Because our needs for hardware and software continually change, we are
engaged in an ongoing Year 2000 compliance assessment. We have not identified
any significant non-compliance issues with our products that have not already
been corrected. However, the results obtained from our ongoing effort will be
considered in determining the need for and the extent of any contingency plan
which, if required, will be implemented by October 31, 1999. The cost of
developing and implementing such a plan could be material.

The information set forth above and elsewhere in this prospectus relating to
Year 2000 issues constitute "Year 2000 Readiness Disclosures," as such term is
defined by the Year 2000 Information and Readiness Disclosure Act of 1998,
enacted October 19, 1998 (Public Law 105-271, 112 Stat. 2386).

35
<PAGE>
INTEREST RATE RISK

Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
The risk associated with fluctuating interest expense is limited, however, to
the expense related to those debt instruments and credit facilities which are
tied to market rates. We do not use derivative financial instruments in our
investment portfolio. We ensure the safety and preservation of our invested
principal funds by limiting default risks, market risk and reinvestment risk. We
mitigate default risk by investing in safe and high-credit quality securities. A
hypothetical increase or decrease in market interest rates by 10% from the
market interest rates at June 30, 1999 would not cause the fair value of our
cash and cash equivalents or the interest expense paid with respect to our
outstanding debt instruments to change by a material amount. Declines in
interest rates over time will, however, reduce our interest income while
increases in interest rates over time will increase our interest expense.

RECENT ACCOUNTING PRONOUNCEMENTS

The FASB issued Statement No. 131 ("SFAS 131"), "Disclosure about Segments
of an Enterprise and Related Information," which establishes standards for the
way public business enterprises report information in annual statements and
interim financial reports regarding operating segments, products and services,
geographic areas, and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997. We adopted SFAS 131 in
the year ended December 31, 1998, and operate in one business segment which is
building a broadband interactive network that brings technology tools and
educational resources to schools at no cost.

36
<PAGE>
BUSINESS

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

OVERVIEW

ZapMe! is creating a broadband interactive network--featuring "always on"
satellite technology-- which brings the latest technology tools and educational
resources to schools for free. We believe that by providing free PCs, software,
installation, support and broadband connectivity to the Internet, we will help
ease the technology funding gap in schools, and provide students of all social
and economic backgrounds access to the technology and information that are
critical in today's knowledge-based economy.

Our turnkey technology solution provides several benefits to each school
that participates in the ZapMe! network. Each school typically receives 15
high-end, multimedia PCs with 17-inch monitors, a satellite-ready computer
server, a laser printer and broadband access to the Internet. In addition, we
offer a proprietary, easy-to-use interface--the ZapMe! Netspace--that provides
access to over 10,000 pre-selected and indexed third-party educational Internet
sites and other aggregated content and services as well as applications such as
Microsoft Word, Excel and Powerpoint. Features of the ZapMe! Netspace include
various educational and communication tools such as discussion boards, free
e-mail and an affinity marketing program that rewards students for using the
ZapMe! network.

The ZapMe! network makes education more engaging and entertaining by
providing a rich media computer experience and facilitating greater parental
involvement in schools by enabling electronic communication among parents and
teachers. In addition, the ZapMe! network provides students, teachers and
administrators access to Internet-based educational content, cost-effective
school e-commerce solutions and school fundraising opportunities. In connection
with many of these core activities, the ZapMe! network has established strategic
alliances with a wide range of companies, including Dell; Gilat Satellite
Networks and its subsidiary, Spacenet; Microsoft; New Sub Services; School
Specialty; Sylvan Learning Systems and Xerox to further enhance the educational
experience. In addition, we plan to enter into additional new strategic
alliances to enhance our technology, gain access to compelling educational
content, add new features and functionality, or generate sponsorship and
e-commerce revenues.

Funding for the development, installation and maintenance of the ZapMe!
network is provided by a combination of corporate sponsorships and e-commerce
relationships. We expect to derive additional revenue from partners and other
sources from after-school use of ZapMe! labs and participation in fundraising
activities. In particular, we will receive additional revenues from Sylvan,
which has committed to sharing a percentage of its profits resulting from joint
activities on the ZapMe! network. Participating sponsors have the opportunity to
underwrite public service messages, as well as corporate sponsorships
appropriate for ZapMe! network users, including students aged 13-19, teachers
and administrators.

As of July 31, 1999, there were more than 250 school districts, representing
over 6,000 K-12 schools, including more than 2,000 middle and high schools, that
have approved and signed a three-year contract with us that permits us to
install a ZapMe! lab at that school. These districts are located in over 40
states. As of July 31, 1999, we had installed ZapMe! labs in over 220 schools,
which had an average of more than 1,000 students, representing over 220,000
students, each of whom has access to a free ZapMe! account upon request. These
schools are located in over 33 states. In the Fall of the 1999-2000 school year,
ZapMe! will expand current programs and incentives to encourage network usage.

37
<PAGE>
MARKET OPPORTUNITY

NEED FOR TECHNOLOGY IN K-12 SCHOOLS

INCREASED IMPORTANCE OF TECHNOLOGY. Throughout the last decade, the U.S.
economy has undergone a fundamental shift, moving from a resource-based economy
to a knowledge-based economy. Although we estimate, based on industry sources,
that over $650 billion is currently spent each year on education and training in
the U.S., we believe that this spending falls short of what is necessary. We
believe that education and training are becoming more important, and that
knowledge is increasingly making the difference in how individuals and companies
perform economically. In addition, an understanding of the uses of technology is
now essential to achieve superior performance in a knowledge-based economy. In
order to respond to these demands, educators, parents and opinion leaders in the
U.S. are increasingly looking to technology, not only as a means of improving
the essential academic skills of students, but also as the basis for a set of
tools students must have to compete effectively. This has created an increased
demand for technology in schools.

TECHNOLOGY FUNDING GAP IN K-12 SCHOOLS. According to the National Center
for Education Statistics, during the 1998-1999 school year, there were over
110,000 K-12 schools in the U.S. These schools face inherent resource
constraints, including limited budgets and annual budget cycles which limit long
term investments. These constraints have, to date, prohibited adequate
investment in technology. We estimate, based on industry sources, that the cost
to achieve the five-to-one ratio of students-to-computers mandated by the
President of the United States and the U.S. Department of Education in their
national technology plan is estimated to be $110 billion over 10 years,
including initial investments and ongoing costs of implementation. We estimate,
based on industry sources, that to wire and equip 88,000 public schools with
computers will cost from $40 billion to $100 billion over the next five years,
assuming $180 to $450 is spent per student, over 44 million public school
students and per student expenditures by schools which have made effective use
of technology. Despite the significant expenditures necessary to improve
technology available in schools, we estimate, based on industry sources, that
only $5.4 billion was spent on technology, defined as hardware, software and
services, in public K-12 schools during the 1998-99 school year. Furthermore, we
believe, based on industry reports, that lack of technology funding is the
number one barrier to increased Internet usage in school. Based on these
statistics, we believe schools in the U.S. suffer a multi-billion dollar funding
gap for technology.

NEED FOR EDUCATION NETWORK. Most schools lack the infrastructure to allow
students, teachers and parents to communicate electronically. According to the
National Center for Education Statistics, there are approximately 53.1 million
students in grades K-12 and 3.2 million teachers who teach grades K-12. We
estimate, based on industry sources, that only 22.5% of schools have a network
capable of connecting the school to the home. We believe that a broadband
educational network focused on students aged 13-19 will facilitate the
integration of computers into the school's curriculum, improve academic
performance, and enhance the student-teacher-parent connection. Stand-alone PCs
are useful for preparing a document or doing individual research, but networked
PCs provide numerous advantages to students, teachers and parents, enabling
timely, effective communication, as well as helping students to collaborate on
group projects. Information and ideas can be shared with anyone connected to the
network.

THE INTERNET

GROWTH OF THE INTERNET. The Internet has emerged as a significant global
communications medium, enabling millions of people to share information and
conduct business electronically and providing advertisers and businesses with an
attractive means of marketing and selling their products and services. The
growth in the number of web users is expected to continue as Internet access
becomes more widely available, bandwidth increases and Internet content improves
and incorporates more multimedia

38
<PAGE>

capabilities. We estimate, based on industry sources, that the number of web
users worldwide will increase from approximately 142.2 million at the end of
1998 to approximately 502.4 million by the end of 2002, representing a compound
annual growth rate of 37%. We estimate, based on industry sources, that
worldwide e-commerce revenue on the Internet will increase from approximately
$50.4 billion at the end of 1998 to more than $1.3 trillion in 2003, based on a
projected 183 million buyers on the web and an average transaction size of
$7,216.

GROWTH OF ONLINE SPONSORSHIP. The Internet has become an attractive medium
for corporate sponsors, offering a level of flexibility, interactivity and
measurability not available in traditional media. The Internet enables corporate
sponsors to use demographics in delivering their messages to specific groups, as
well as to change their messages frequently in response to market factors,
current events and consumer feedback. Moreover, the Internet allows corporate
sponsors to specify an offering to each user in real-time and receive valuable
data on customer tastes, preferences and shopping and buying patterns. We
estimate, based on industry sources, that the amount of Internet advertising in
the U.S. will grow from approximately $2.1 billion in 1998 to $9.0 billion by
2002, a compound annual growth rate of 45%.

INCREASING VALUE OF DEFINED DEMOGRAPHIC AUDIENCE. Early Internet
sponsorship efforts were directed primarily at a broad audience by placing
corporate messages on the most frequently visited web sites. As the Internet has
matured, businesses have sought to improve the effectiveness of their corporate
sponsorship by directing their messages toward the Internet users they most want
to reach. By offering corporate sponsorship efforts to the most relevant users,
Internet-based corporate sponsors seek to improve their brand awareness and
response rates and reduce costs by eliminating spending that is not directed at
their intended audience.

STUDENTS' IMPORTANCE TO THE INTERNET AND IN THE ECONOMY. Extrapolating from
United States Census Bureau data, we estimate that there are more than 25
million individuals aged 13-19. Individuals in this age group are becoming
increasingly involved in the Internet. We estimate, based on industry sources,
that the number of people aged 13-19 who regularly access the Internet will rise
from 8.4 million in 1998 to 16.6 million by 2002. Their increased Internet
activity creates a significant opportunity for underwriting corporate
sponsorships and offering products and services online to students aged 13-19.
We estimate, based on industry sources, that this audience spent in excess of
$100 billion in 1998, based on over 25 million teens spending, on average, $84
per week. We estimate, based on industry sources, that teens will spend $1.2
billion on e-commerce alone by 2002.

THE ZAPME! SOLUTION

ZapMe! has designed a broadband interactive network, using "always on,"
bi-directional satellite technology, which brings the latest technology tools
and educational resources to schools. We believe that by providing free PCs and
broadband connectivity to the Internet, we will help to ease the technology
funding gap in schools, and provide students of all social and economic
backgrounds access to the technology and information that are critical in
today's knowledge-based economy. In addition, the ZapMe! network facilitates
greater parental involvement in schools by enabling electronic communication
among parents and teachers. Moreover, the ZapMe! network provides students,
teachers and administrators access to Internet-based educational content,
cost-effective school e-commerce solutions and school fundraising opportunities.
The ZapMe! network also provides corporate sponsors the opportunity to
underwrite public service messages and education content areas and services
appropriate for ZapMe! network users. Key elements of our approach are:

FREE BROADBAND INTERACTIVE NETWORK FOR SCHOOLS. We offer a turnkey
technology solution for schools by providing each participating school with
access to the ZapMe! network, including PCs and broadband connectivity to the
Internet, all at no cost to the school. A participating school typically
receives 15 high-end, multimedia PCs with 17-inch monitors, satellite
communications hardware, and a

39
<PAGE>
laser printer, as well as broadband access to the Internet and the ZapMe!
Netspace, our proprietary, easy-to-use interface that provides access to over
10,000 pre-selected, indexed educational sites and other aggregated content and
services. We also offer schools a single point of contact for free service,
including network implementation, maintenance, training and system upgrading.

HIGH-SPEED, "ALWAYS ON" SATELLITE DELIVERY. Our "always on" network
provides schools with a free broadband connection to the Internet using a
satellite system. In addition to providing high-speed Internet access, our
design enables us to download and store full motion video, other rich media
files, system upgrades and other data directly, quickly and efficiently onto
local school servers, where they can be accessed immediately and without the
delays typically associated with downloading large media and application files.
The "multicasting" capabilities inherent in satellite technology enable us to
simultaneously deliver these types of files to many different locations. As a
result, our costs of delivery are extremely low even while the speed at which we
can transmit these files is extremely high (more than 10 times the rates of the
fastest current forms of Internet access such as DSL and T-1 and T-3 access).
Because these files are accessed locally, and not over the Internet, we also
avoid delays associated with delivering media files using streaming network
architectures. We therefore can provide our users with high-speed access to
Internet content and new multimedia applications (such as video and high-quality
audio) and e-commerce applications.

ALTERNATIVE SOURCES OF SCHOOL FUNDING. The ZapMe! network provides schools
with a wide range of alternative sources for funding the acquisition of
technology and related equipment and services. In addition to providing schools
with free computing equipment and broadband Internet access, we offer or plan to
offer schools the following funding opportunities:

- Programs which enable safe, effective deployment of school fundraising
activities, such as magazine drives. For example, we are currently
planning to launch a network-based, Internet-delivered program for
fundraising activities with New Sub Services, the world's largest provider
of magazine subscriptions.

- Our ZapPoints program, which provides opportunities for schools to upgrade
technology, including PCs and document processing equipment, through the
accumulation of ZapPoints. Schools have the opportunity to purchase
products and equipment based upon ZapPoints, which measure a school's
cumulative usage and participation in ZapMe! programs. Xerox intends to
participate in the ZapPoints program.

We believe there are a wide variety of technology providers and educational
organizations which are interested in participating in these programs.

OPPORTUNITY FOR ONLINE SPONSORSHIP. We believe that ZapMe! appeals to
potential sponsors because it combines the following attributes:

- access to students aged 13-19 who, prior to the ZapMe! network, have been
difficult to reach during school hours or who may not otherwise have had
access to the Internet;

- "always on," rich-media, full-screen, full-motion, interactive display
that can be used to create more entertaining and engaging messages;

- delivery of messages that meet the individual preferences of users;

- ability to engage users, conduct online surveys, test product trials,
provide product feedback, and support product launches;

- access to a quarterly take-home CD-ROM that sponsors can use to explain
their programs or services; and

40
<PAGE>
- the opportunity to underwrite public service messages and education
content areas and services that serve the local community.

ATTRACTIVE FEATURES DRIVE NETWORK USAGE. We have designed the ZapMe!
Netspace to have attractive features, content and functionality, in order to
maintain and increase usage of the ZapMe! network. Features incorporated on the
ZapMe! Netspace include ZapMail, ZapPoints affinity marketing programs,
discussion boards, and a full suite of Microsoft software, including Word, Excel
and PowerPoint.

ZapMe! believes that this combination will lead to above industry average
sponsorship rates and more effective and engaging sponsorship models.

OUR STRATEGY

Our goal is to create the premier broadband educational network for students
aged 13-19, as well as for teachers, administrators and parents. We plan to
continue installing our network in schools, building brand recognition among
students, teachers and parents, and promoting increased use of our network both
in school and at home. Key elements of our strategy are as follows:

ACTIVELY DEPLOY OUR NETWORK AND GROW OUR INSTALLED BASE OF SCHOOLS AND
NUMBER OF USERS. We intend to capitalize on our early market entrance to deploy
our network, grow our installed base of schools and increase our number of
users. As of July 31, 1999, we had installed ZapMe! labs in over 220 schools.
Installation on this scale requires significant time and resources; therefore,
we believe our progress to date provides us a time-to-market advantage over
potential competitors. We have gained experience as we have deployed our
network, which we believe will streamline our further expansion. In addition, as
of July 31, 1999, there are more than 250 school districts, representing over
6,000 K-12 schools, including more than 2,000 middle and high schools, that have
approved and signed a three-year contract with us. We intend to capitalize on
our early mover advantage to gain significant market share.

PROMOTE REPEAT USAGE AND LOYALTY OF USERS. We believe that
broadband-delivered rich media networks, such as the ZapMe! network, have an
inherent potential for creating loyal users, particularly when combined with
free service offerings such as those we provide. As users invest time and energy
in ZapMe!'s services, they may become less inclined to switch to alternative
services. In particular, we believe that our ZapPoints affinity marketing
program will promote user loyalty by providing students incentives to
participate, as well as incentives for schools to encourage their students to
participate. We intend to promote repeat usage and user loyalty by maintaining
and improving our range of no cost services, expanding the breadth and depth of
our product offerings and remaining responsive to user trends and suggestions.

INCREASE FUNDING FROM SPONSORS. We believe that the ZapMe! network will
provide sponsors with an attractive means of offering their products and
services to schools, students, teachers, administrators and parents. We intend
to develop innovative sponsorship relationships with leading brand marketers
which support broad marketing objectives, including brand promotion, awareness,
product introductions and online research. We expect many of these sponsorship
arrangements will involve longer-term contracts and higher dollar values than
typical banner deals. We also intend to offer traditional banner advertising
options for sponsors. However, since the broadband interactive ZapMe! network is
a new and unproven advertising medium, advertisers that have traditionally
relied on other advertising media may be reluctant to purchase sponsorships on
the ZapMe! network or may face creative challenges in developing media for
sponsorships on the ZapMe! network. Potential sponsors may believe that online
advertising in general, and sponsorship on our network in particular, is less
effective than traditional advertising media for promoting their products and
services. Consequently, they may allocate little or none of their advertising
budget to sponsorships on the ZapMe! network. In addition, competition for

41
<PAGE>

Internet-based advertising revenue is intense and the amount of available
standard banner advertising space on the Internet is increasing at a significant
rate. These factors are causing Internet advertising rates to decline and we
expect that these rates may continue to decline in the future. While we have the
ability to deliver online advertising in a richer format than standard banner
advertising, we may still be subjected to this trend.

BUILD STRONG BRAND RECOGNITION. We believe that establishing and leveraging
the ZapMe! brand is important to our success. We have already benefited from
positive news stories and from word-of-mouth marketing. We intend to increase
our brand equity through the rapid introduction of the ZapMe! network into
schools throughout the country. We believe that the attractive features, content
and functionality of the ZapMe! Netspace will strengthen our brand and attract
new students, teachers and parents to become users.

LEVERAGE INSTALLED BASE OF SCHOOLS AND NUMBER OF USERS TO DRIVE USE AT
HOME. As our installed base of schools and number of users grow, we intend to
stimulate demand for, and use of, ZapMe! at home. As part of its agreement with
participating schools, ZapMe! intends to send home to each student a quarterly
CD-ROM that includes a home version of the ZapMe! Netspace. In order to
stimulate home use of ZapMe!, we also intend to offer communication and
entertainment features unique to the home version of the ZapMe! Netspace, as
well as our ZapPoints program. ZapMe! has no immediate plans to extend the
network into the home environment by satellite. ZapMe! instead is relying on
existing home Internet connectivity options, principally dial up, but also
through DSL, cable modems, and other connectivity options as they become
available.

PURSUE STRATEGIC ALLIANCES. We plan to increase usage of the network and
grow our revenues through strategic alliances that offer opportunities to
improve our technology, gain access to compelling content, add new features and
functionality or generate sponsorship or e-commerce revenues. ZapMe! also
intends to form alliances with other companies to leverage their brands, while
incorporating content that is consistent with our educational mission. We may
also expand our revenue opportunities through alliances with technology
providers, providers of educational goods and services, online service and
content providers, commerce providers and advertisers.

LEVERAGE OUR NETWORK TO CREATE ADDITIONAL REVENUE STREAMS. Our ZapMe!
network will enable us to create additional revenue streams through appropriate
after-school use of the labs and e-commerce. For example, our agreement with
Sylvan provides for Sylvan to use the ZapMe! labs outside of school hours for
educational programs and services and we share in the revenue generated from
those programs and services. Other opportunities to leverage our network include
an alliance to establish computer summer camps utilizing ZapMe! labs and
corporations using the labs after hours for training purposes. In addition, we
believe that by building a large base of users, we will be able to enter into
revenue sharing or other agreements with appropriate e-commerce partners
interested in serving students, teachers and parents in both the school market
and the home market.

THE ZAPME! NETWORK

The ZapMe! network offers significant benefits not only to schools, but also
to students, teachers, administrators, parents and sponsors.

WHAT ZAPME! OFFERS TO SCHOOLS. We offer a free turnkey technology solution
for schools by providing each school with a complete broadband interactive
network with the following components. We will offer the following in the Fall
of the 1999-2000 school year:

- Hardware. An eligible school typically receives 15 high-end, multimedia
PCs with 17-inch monitors, satellite communications hardware, and a laser
printer, as well as access to broadband Internet connectivity through the
ZapMe! Netspace, our proprietary, easy-to-use interface that

42
<PAGE>

provides access to over 10,000 Internet sites of third-party independent
content providers that we identify, review and index for easy reference
and other aggregated content and services;

- Broadband Connectivity. Our network incorporates broadband Internet
connectivity over a bi-directional satellite delivery system. This design
permits us to simultaneously multicast data, including full motion video
files, to schools. The speed afforded by broadband satellite-delivered
multicast data allows ZapMe! to provide our users fast access to
graphic-oriented Internet content and new bandwidth-intensive multimedia
applications;

- Software. The ZapMe! school network incorporates two categories of
software: the ZapMe! Netspace and third-party software that is accessed
directly through the ZapMe! Netspace. The ZapMe! Netspace is a
proprietary, easy-to-use interface that uses standard Web browser commands
and runs on top of Internet Explorer 4.0 and Windows NT. Microsoft Office
applications such as Word, Excel and PowerPoint are also accessed directly
through the ZapMe! Netspace; and

- Services. An eligible school typically also receives installation,
customer service and technical support, as well as teacher training.

- Installation. To enable rapid and reliable deployment, we have
agreements with third-parties to provide complete network installation
services. These agreements provide for site inspection, installation
and testing of both the satellite dish, which is typically installed on
the roof of the school, and the balance of the computer lab, which is
typically installed in a library or dedicated computer room. We believe
that these relationships with third-parties enable us to provide
high-quality, nationwide service, and to reach and sustain a much
higher deployment scale than if we were to undertake all installation
services ourselves. We currently rely on Gilat and Spacenet, and
Inacom, for the majority of our installation needs.

- Customer Service and Technical Support. We have developed a
comprehensive approach for managing all customer service and technical
support issues, intended to ensure that every interaction a user has
with ZapMe! is a positive experience. Participating schools, therefore,
are not required to have a dedicated network administrator.
Specifically, we have established a four-level escalation process,
which is balanced between a national call center partner and internal
ZapMe! technical support representatives. Level 1 and 2 are handled
through our national call center partner, while more complex problems
are routed to our own technical personnel. We believe that we have
developed customer support metrics which are directly correlated to the
customer satisfaction experience. We intend to manage both our national
call center partner and ourselves to achieve high standards for
customer support.

- Teacher Training. We intend to provide enabling training designed for
both teachers and administrators, including systems administration,
Internet fundamentals, and applications. This training will be
delivered through a variety of media, including broadcast, computer-
based, online and face-to-face channels.

WHAT ZAPME! RECEIVES FROM K-12 SCHOOLS. According to the National Center
for Education Statistics, during the 1998-1999 school year, there were over
110,000 K-12 schools in the U.S. Our initial focus is on middle and high
schools. In order to have a ZapMe! lab installed at a school, a school board
must approve and sign a standard three-year contract with us. This contract
commits each school that receives a ZapMe! lab to use each PC an average of four
hours per school day. Each school must also provide related items such as power,
a dedicated phone line, lab space and insurance for the equipment. The standard
contract also stipulates that each participating school provides us and our
partners with access to the ZapMe! lab during non-school hours. As part of its
agreement with participating schools, ZapMe! intends to send home to each
student a quarterly CD-ROM that includes a home version of the ZapMe! Netspace.

43
<PAGE>
WHAT ZAPME! OFFERS TO USERS. The ZapMe! network provides our users a rich
media computer experience that is easy to use and makes education more engaging
and entertaining. We believe that we have designed the ZapMe! Netspace with
attractive features, content and functionality, and that students and teachers
will use the ZapMe! network in school and at home. We expect the following
software features to be available by Fall of the 1999-2000 school year:

- ZapMail. All ZapMe! users can email students, friends, teachers, and
others with this standard feature. ZapMail is accessible through the
Internet, so students can also use ZapMail to take their schoolwork home
with them. Students can create documents at school and have access to them
at home, on vacation or wherever they can connect to the Internet.

- Message Boards. These message centers, which can be customized by class
or topic, allow students to collaborate with peers and teachers,
regardless of geographic location. Message boards are valuable tools for
asynchronous discussions and collaboration between students. Message
boards also enable teachers to build a stronger community, and are
vehicles for students to become more involved in extracurricular
activities.

- ZapSearch. This feature allows students to find what they want on the
ZapMe! network or the full Internet.

- Microsoft Office. Microsoft Office applications such as Word, Excel and
PowerPoint may be accessed directly through the ZapMe! Netspace.

- ZapPoints. ZapPoints is an incentive-based program much like a frequent
flyer program that rewards students for using the ZapMe! network. Students
that log in and use the ZapMe! network will earn ZapPoints that can be
redeemed for merchandise with our e-commerce partners. This "earn while
you learn" program of rewards can also be extended to academic and
athletic achievement, extracurricular activities, community fund raising
efforts, ZapMe! network administration, and for purchasing sponsor's
products and services. Schools receive matching ZapPoints for each of
their students, which are redeemable through ZapMe!'s e-commerce programs.
Dependent upon the underlying arrangement, we will record a charge to
revenue or to cost of services expense for ZapPoints awards based upon the
full dollar equivalent of points which have been awarded and which are
expected to be redeemed.

- My Bookmarks. Bookmarks are an option supplied with most browsers, but
the ZapMe! network allows the students' bookmarks to travel with them to
any computer on which the ZapMe! Netspace can be accessed. For example,
students may work at a different computer each time they enter the lab.
The bookmarks are delivered upon log in, and are stored on the ZapMe!
network, so no matter where the students log in, their favorite web sites
are easily accessible.

- My Tools. The ZapMe! network allows students to launch their favorite
software applications directly through the browser, not separately.
Students can toggle back and forth between a web site, a Word document and
their email. This allows for easier, quicker work and again provides them
the security of knowing that all of their stuff, including homework, is
just one click away.

WHAT ZAPME! OFFERS TO SPONSORS. We believe that ZapMe! offers an appealing
opportunity for sponsors because it provides the following:

- access to students aged 13-19 who, prior to the ZapMe! network, have been
difficult to reach during school hours or who may not otherwise have had
access to the Internet;

- our dynamic billboard is a fixed space on the PC screen that displays
sponsorship messages. The dynamic billboard is larger than typical banner
ads and is always on the left-hand side of the PC screen, regardless of
which applications are used or where a user navigates. The dynamic
billboard displays new sponsorship messages periodically, for example,
every 15 seconds. The

44
<PAGE>
ZapMe! network is designed to allow users to click on the dynamic
billboard and view the sponsor's message on a full-screen, rich media
interactive display, with full motion video and high quality audio.

- ability to deliver messages that meet the individual preferences of users;

- ability to interact with users, conduct online surveys, product trials,
online recruiting, provide product feedback and support product launches;

- access to a quarterly take-home CD-ROM that sponsors can use to explain
their programs or services; and

- opportunity to underwrite public service messages that serve the local
community.

STRATEGIC ALLIANCES

We plan to enter into strategic alliances in order to capitalize on our
infrastructure, improve our technology, gain access to compelling content, add
new features and functionality, and generate sponsorship and e-commerce
revenues. We may also expand our revenue opportunities through alliances with
technology providers, providers of educational goods and services, online
service and content providers, commerce providers and advertisers. ZapMe!'s
current strategic alliances include:

DELL COMPUTER CORPORATION. Dell has agreed to be a principal supplier of
hardware for our labs. ZapMe! is installing Dell equipment, including PCs,
monitors, and high-end servers in schools across the country. Dell has indicated
that it plans to participate in our e-commerce and ZapPoints programs. Dell has
also made an equity investment in ZapMe!.

GILAT SATELLITE NETWORKS. Gilat supplies our satellite uplink equipment and
satellite receiver cards for each school installation. Gilat's wholly-owned
subsidiary, Spacenet, provides us with our satellite space segment. Spacenet is
also our primary contractor for the network installation process. Gilat has also
made an equity investment in ZapMe!.

MICROSOFT. Through an agreement with Microsoft, ZapMe! will provide
Microsoft's Word, Excel and PowerPoint programs to the in-school users of our
network. Microsoft's operating system products are the backbone of our network.

NEW SUB SERVICES. We are currently planning to launch a network-based,
Internet-delivered program for safe, effective deployment of school fundraising
activities with New Sub Services, the world's largest provider of magazine
subscriptions.

SCHOOL SPECIALTY. ZapMe! and School Specialty, the largest supplier of
non-textbook education products to educators in the U.S., have teamed up to
offer e-commerce opportunities to schools, teachers and administrators. School
Specialty intends to offer a range of school supplies over the ZapMe! Netspace
for convenient ordering through the network.

SYLVAN LEARNING SYSTEMS. We have entered into an agreement with Sylvan
which permits Sylvan to offer educational programs and services in ZapMe! labs
when not in use. In exchange, Sylvan pays us a percentage of the net profit it
generates from those programs and services. Sylvan has also made an equity
investment in ZapMe!.

TOSHIBA. Toshiba is a sponsor of the ZapMe! network and a supplier of
hardware for our labs.

XEROX. Xerox has agreed to be a sponsor of our network and a principal
supplier of state-of-the-art printers for our labs. Xerox participates in our
ZapPoints program.

45
<PAGE>
SPONSORSHIP

We intend to fund the ZapMe! network through a combination of corporate
sponsorships and e-commerce relationships. Participating sponsors have the
opportunity to underwrite public service messages, as well as corporate
sponsorship appropriate for ZapMe! network users, including students aged 13-19,
teachers and administrators. The U.S. Army, for example, plans to use the ZapMe!
network to communicate recruiting opportunities to graduating high school
seniors. Other corporate sponsors scheduled for the Fall of the 1999-2000 school
year include: Dell, General Electric, Johnson & Johnson, Labtech, Mercury
Records, New Sub Services, Proctor & Gamble, Sylvan, Toshiba, the U.S. Navy and
Xerox. This list of scheduled sponsors reflects the variety of different
industries which might sponsor the ZapMe! network. We believe that we will
receive proceeds of at least $10,000 from each of the listed sponsors in the
1999-2000 school year; however, we cannot determine in advance the exact amount
of the sponsorship, and furthermore our contracts with these sponsors may allow
them to quickly terminate their sponsorship on our network. Please see "Risk
Factors--Our dependence on short-term sponsorship contracts exposes us to
greater pressure on our sponsorship prices and allows sponsors to quickly cease
their sponsorships," on page 8 for more information on risks posed by our
dependence on short term sponsorship contracts.

Our sponsorship arrangements often differ from traditional banner
advertising in that they are designed to achieve broad marketing objectives such
as brand promotion. We believe the dynamic nature of our network will allow us
to design sponsorships programs that cater to the specific goals of sponsors.
These goals include delivery of a rich, interactive media experience (including
full motion video with audio), impression frequency, ability to conduct online
market research, supporting new product launches, product feedback information,
online recruiting, new account openings, and fulfilling e-commerce transactions.
In addition, we intend to develop educationally-appropriate content to support
the marketing and e-commerce initiatives of sponsors. We believe that we will,
in a limited number of cases, enter into exclusive sponsorship arrangements in
key sponsor categories that may extend for a period of time. As a result of our
sponsorship strategy, we believe that ZapMe! will be able to command effective
sponsorship rates significantly above the industry average.

SALES AND MARKETING

As of July 31, 1999, ZapMe! had a direct sales organization consisting of
six sales professionals with an average of 11 years of experience, all of whom
were hired since February 28, 1999. We intend to hire additional qualified sales
professionals in the future. Our sales organization consults regularly with
sponsors on design and placement of advertising, provides customers with
advertising management analysis and focuses on providing a high level of
customer satisfaction. We generally seek to hire individuals who possess
significant experience in obtaining sponsorships and preexisting relationships
with potential sponsors in a variety of media. In addition to our sponsorship
sales organization, we have six internal and four dedicated external sales
professionals (including four at a telemarketing firm) focused on marketing to
school districts who are candidates for joining the ZapMe! network.

We employ a variety of methods to promote the ZapMe! brand and to increase
network usage by users, including the ZapPoints user rewards program, in-school
promotions such as technology incentive programs co-branded with partners, and
home CD-ROM co-marketing campaigns integrating student recreational interests
such as video games, music videos, movie trailers and fashion. In the Fall of
the 1999-2000 school year, ZapMe! will expand current programs and incentives to
encourage network usage. In addition, ZapMe! engages in an ongoing public
relations campaign which includes speaking engagements, conference participation
and press tour activities. Our marketing department, which consists of seven
professionals, works in conjunction with our creative services department.

46
<PAGE>
INSTALLED SCHOOL BASE AND USERS

ZapMe! believes a large and active user base is critical to its success.
ZapMe! has launched an aggressive user-acquisition campaign, which includes
rapidly growing our installed base of schools and creating free services and
support for our users. Registration is available to all students, teachers and
administrators in participating schools at no cost to the students or school.

Recognizing the importance of student privacy, ZapMe! has designed its
registration process and created a policy to ensure the privacy of its users.
Under our privacy policy, we collect only non-personally identifying
information--including age, gender and location by zip code--from our student
users. We use collected information internally in order to make appropriate
materials available to our student users. Schools are solely responsible for
maintaining any personally identifying information about their student users. We
may in the future collect names and other personal information from users over
13 in conjunction with contests and other promotions, but will not distribute
this information externally. We provide only aggregated versions of
non-personally identifying information--such as what percentage of our users are
a particular age--to third parties.

ZapMe! also promotes the protection of students in their use of the network.
Students sign on and are known to ZapMe! only by the anonymous user names that
they choose. In addition, they pick a password to protect their accounts from
use by others. We also provide schools the ability, at their discretion, to
provide more or less access to the Internet. Schools can choose to allow access
only to our selected 10,000 educational sites, or to sites one or two clicks
from these sites. We plan to offer filtering software as well to help schools
gain even more flexibility and control over the Internet. Finally, ZapMe!
encourages schools to comply with all applicable requirements, including, for
example, the collection of acceptable use policies signed by the students and
their parents.

INFRASTRUCTURE AND TECHNOLOGY

The ZapMe! network incorporates "always on" broadband Internet connectivity
over a satellite delivery system, application servers located in our network
operations center, and a desktop interface and related applications. Our
satellite delivery system permits us to simultaneously multicast data, including
full motion video files, from our network operations center to each school
server in the ZapMe! network. We believe that this is an efficient way of
distributing files over a remote network in a school environment.

Our infrastructure is scalable, allowing us to quickly adjust to our rapidly
expanding user base. Currently, we license commercially available technology
whenever possible in lieu of dedicating our financial and human resources to
developing technology solutions. In particular, we purchase PCs, monitors and
servers primarily from Dell and Toshiba and printers primarily through Xerox. We
lease satellite equipment and transmission services from Gilat and Spacenet, its
wholly-owned subsidiary, under an agreement that runs until 2005. We license the
operating system for our web browser, as well as Word, Excel and PowerPoint,
from Microsoft under an agreement with no expiration date. We license the
technology that allows us to multicast content over our network via satellite
from Starburst under a perpetual license agreement. Finally, in order to serve
sponsor messages, we have purchased a perpetual license for AdServer technology
from NetGravity. We are in the process of implementing fail safe or redundant
systems to promote high system availability and ease of maintenance.

ZapMe! users access the Internet and ZapMe!-provided desktop applications
(which typically has been previously multi-casted to the school server) using
the ZapMe! Netspace. Users have access to the Internet, third-party applications
such as Microsoft Office, and ZapMe! features, including email, search and
bulletin boards. The ZapMe! Netspace also presents rich media sponsor messages
which are generated at the local school server, within the dynamic billboard
portion of the Netspace.

47
<PAGE>
Our public web site, user registration database, email server, and system
backup functions are hosted at Frontier Global Center in California using a set
of NT and Unix software systems. Frontier Global Center is manned 24 hours per
day, seven days per week by systems administrators and network managers to
ensure the highest level of support. Critical data from the servers are
regularly archived off site by a third party service.

COMPETITION

The market for the ZapMe! network is new and rapidly evolving, and we expect
competition in and around our market to intensify in the future. We are not
aware of any competitor that currently offers or is planning to offer a
broadband interactive network for schools at minimal or no cost. However, we
face competition from a number of companies which provide services and
functionality similar to portions of the ZapMe! network, market products and
services to a similar base of users, or both. For example:

- America Online provides both Internet access as well as their own content.
They also market to a user base similar to ours with their Kids Only
section that derives most of its revenue from advertising. America Online
has a large amount of high quality content, and a popular user interface.
In addition, America Online can leverage its log-in based network to
address the demographics of its user base.

- Channel One owns and operates an advertising-supported educational
television service for secondary school students in the U.S. It airs 12
minutes of news and current events each school day via satellite,
generating revenues from 2 minutes of advertising included in the program.
We may compete with Channel One for sponsors seeking to reach the same
audience.

- Hughes Electronics currently offers satellite-based broadband Internet
access to consumers, but does not provide their own content, nor do they
market to a user base similar to ours. However, they have recently entered
into a strategic alliance with America Online to promote America Online's
broadband services and content.

- Disney offers a wide variety of Internet content that markets to a user
base similar to ours. They own or have access to high quality content, and
have experience in marketing to a user base similar to ours.

We believe that our greatest potential competitive threat is posed not by a
single company, but a combination of one or more companies which each addresses
different parts of our business model. Many of our competitors have
significantly greater financial, technical, marketing and distribution resources
than we do. Our competitors may engage in more extensive research and
development, adopt more aggressive pricing policies and make more attractive
offers to existing and potential employees, partners, sponsors and e-commerce
merchants. Our competitors may develop services that are equal or superior to
ours or that achieve greater market acceptance. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to better address the needs
of sponsors and businesses engaged in e-commerce. As a result, it is possible
that new competitors may emerge and rapidly acquire significant market share.
Competition could reduce our revenues and otherwise harm our business. We
therefore believe that we must rapidly deploy our network in order to achieve a
leadership position relative to potential competitors or imitators. In addition,
we believe that our success in competing with other potential competitors or
imitators will depend on various factors, many of which are outside of our
control. These factors include:

- The quality of our network content;

- The ease of use of our user interface;

48
<PAGE>
- The timing and market acceptance of new and enhanced services and
features; and

- The sales and marketing efforts by us and our competitors.

We believe that with respect to each of these factors, it competes favorably
to other companies addressing the educational market.

ALTERNATIVE SOURCES OF COMPUTER EQUIPMENT AND INTERNET ACCESS

An immediate attraction of deploying our network is free access to computers
and the Internet. However, for a variety of reasons, schools may decide to use
other methods to acquire computers and Internet access. Aside from purchasing
the computers and Internet access from already existing budgets or from
donations from parents or other members of the community, some other methods of
acquiring computer equipment and Internet access include:

E-rate. The Education-rate initiative, commonly referred to as "E-rate," is
a government sponsored program under which schools can qualify for discounts on
a wide variety of networking products, telecommunications services and Internet
access. The discount ranges from 20%-90% depending upon whether the school is in
an urban or rural area and the economic status of the students. Passed as part
of the 1996 Telecommunications Act, the E-rate is an extension of the Universal
Service Fund, originally designed to make telephone service ubiquitous in the
United States. The FCC recently moved to fund the E-rate program at $2.25
billion for the period from July 1, 1999 to June 30, 2000, the maximum level
under its regulations. Schools may choose to utilize the E-rate and purchase
their computer and network equipment and Internet access themselves, rather than
using the ZapMe! network.

Free Computer Equipment and Internet Access Companies and Offerings. Various
companies have recently begun to offer a variety of low cost computer equipment
and Internet access, as well as packages of both. The free equipment and
Internet access has to date largely been tied to the user accepting additional
advertising or network services from the company providing the equipment or
Internet access. In addition, several companies have recently announced that
they will subsidize the cost of computer equipment for purchasers who agree to a
full price multi-year Internet access commitment. We believe that to date none
of these offerings has targeted the school or multiple PC lab markets. New
product offerings occur rapidly in our industry, however, and in the future
schools may choose to receive their computer equipment and Internet access from
these sources rather than use the ZapMe! network.

INTELLECTUAL PROPERTY

We seek to protect our intellectual property through a combination of U.S.
and international law regarding copyright, patents, trademarks and trade secrets
as well as confidentiality agreements with employees, consultants, contractors
and business partners. We currently have five patent applications on file with
the United States Patent and Trademark Office and are in the process of
preparing four additional patent applications and two continuations of our
existing applications. The proprietary technologies for which ZapMe! is pursuing
patents include those allowing ZapMe! to:

- correlate user's preferences and access privileges with a user name so
that the user's experience is consistent regardless of what computer he or
she uses;

- allow a user to keep track of and move between the windows he or she has
open more effectively by providing a window management system designed
specifically for Internet use;

- dynamically assign and change the ZapPoints applicable to particular
actions on the ZapMe! Netspace in order to encourage use of particular
features at different times;

49
<PAGE>

- transmit sponsor messages and other content via satellite to local school
computers for distribution to the appropriate ZapMe! users;

- simultaneously monitor system usage across multiple ZapMe! computers for
diagnostic purposes;

- manage e-mail and other communications remotely; and

- multicast information efficiently over ZapMe!'s satellite network.

In addition, we have applied to register ZapMe! and other trademarks in the
United States and in a number of foreign countries. We have given copyright
notice on our Netspace and many other copyrightable materials by affixing a
standard copyright notice in the appropriate places. ZapMe! controls access to
our trade secrets and proprietary information by entering into confidentiality
agreements with its employees, consultants, contractors and actual and potential
business partners. We currently own the Internet domain name "zapme.com," from
which we run our corporate web site.

GOVERNMENT REGULATION

We expect to generate a significant portion of our revenue from advertising
and e-commerce directed primarily at teens using ZapMe! labs in schools. This
business model may prove controversial and lead to action by the government or
private interests to restrict or stop our network. To date, some third parties
that oppose corporate advertising in schools, including sponsorships on the
ZapMe! network, have sought legislation to curb this practice. In particular,
California recently enacted a law that imposes additional procedural
requirements before ZapMe! or other entities may sign contracts with local
school boards. Similar or more restrictive legislation is possible in other
states and at the local and federal levels. Anti-school-advertising groups have
had some successes in the past seeking regulation and boycotts of other
companies that advertise in schools, such as Channel One. Restrictions on our
advertising or e-commerce would seriously harm our business. Moreover, any new
law or regulation pertaining to online media or advertising in schools, or the
application or interpretation of existing laws, could decrease the demand for
our service, increase our cost of doing business or otherwise have a negative
effect on our business.

The Internet is also the subject of an increasing number of laws and
regulations. These laws and regulations may relate to liability for information
retrieved from or transmitted over the Internet, online content regulation, user
privacy, taxation and the quality of products and services. In particular,
Congress has recently passed (and the President has signed into law):

- Child Online Protection Act of 1998. The Act makes it unlawful for anyone
to knowingly distribute material for commercial purposes over the Internet
to minors that is harmful to minors. It imposes additional restrictions
and obligations and establishes the Commission on Online Protection to
study and report to Congress on methods to help reduce access to harmful
information by minors.

- Children's Online Privacy Protection Act of 1998. The Act makes it
unlawful for an operator of a web site or online service directed to
children under 13 to collect, use or distribute personal information from
a child under 13 in a manner which violates regulations to be proscribed
by the FTC. The FTC is in the process of issuing final regulations, which
concern the scope of the Act's parental consent requirements.

- Protection of Children from Sexual Predators Act of 1998. This Act
mandates that electronic communication service providers report facts or
circumstances from which a violation of child pornography laws is
apparent.

- Digital Millennium Copyright Act of 1998. This Act establishes limited
liability for online copyright infringement by online service providers
for listing or linking to third-party web sites that include
copyright-infringing materials.

50
<PAGE>
The courts have not yet interpreted these laws so their applicability and
reach, therefore, are not defined. One federal court has, however, upheld a
challenge to the constitutional validity of the Child Online Protection Act and
ordered a preliminary injunction against enforcement or prosecution under the
Act as of February 1, 1999. Nonetheless, these laws may impose significant
additional costs on our business, require us to change our operating methods, or
subject ZapMe! to additional liabilities. Moreover, the applicability to the
Internet of existing laws governing issues such as intellectual property
ownership, copyright, defamation, obscenity and personal privacy is uncertain
and developing. ZapMe! may be subject to claims that our services violate such
laws. Any new legislation or regulation in the United States or abroad or the
application of existing laws and regulations to the Internet could damage our
business and cause the price of our common stock to decline.

The satellite industry is a highly regulated industry. In the United States,
operation and use of satellites requires licenses from the FCC. As a lessee of
satellite space, we could in the future be indirectly subject to new laws,
policies or regulations or changes in the interpretation or application of
existing laws, policies or regulations, any of which may modify the present
regulatory environment in the United States. While we believe that our satellite
access providers will be able to obtain all U.S. licenses and authorizations
necessary to operate effectively, they may not continue to be successful in
doing so. Our failure to indirectly obtain some or all necessary licenses or
approvals could seriously harm our business.

LEGAL PROCEEDINGS

On July 7, 1999, we filed a demand for arbitration with our former President
and Director, Frank J. Vigil, related to his employment at and departure from
ZapMe!. We assert that ZapMe! was induced by Mr. Vigil's fraudulent
representations to enter into an employment agreement with him. We seek the
rescission of the employment agreement, as well as the return of all benefits
received by Mr. Vigil under the agreement, and costs and fees associated with
the arbitration.

On July 26, 1999, Mr. Vigil filed a response to our demand and a
counterclaim. Mr. Vigil denied the allegations contained in our demand. Mr.
Vigil's counterclaim alleges breach of contract, breach of implied covenant of
good faith and fair dealing, fraud in the inducement of contract, intentional
misrepresentation, defamation, and violations of the California Labor Code, all
related to the circumstances of his employment at and departure from ZapMe!. Mr.
Vigil seeks various damages which are set forth in "Risk Factors--We are
currently in arbitration with one of our former officers," beginning on page 15.

Each party to the arbitration has asserted various defenses to the claims
and counterclaims. We cannot assure you that we will prevail in this
arbitration, and any decision against us could result in an obligation to pay
some or all of the damages Mr. Vigil has sought in his counterclaim. These
damages could be substantial. Notably, under the terms of his employment
agreement and related agreements, Mr. Vigil was permitted to purchase 1.35
million shares of common stock of ZapMe!. Some of those shares were subject to a
right of repurchase by ZapMe! at the time of Mr. Vigil's separation from ZapMe!.
Mr. Vigil may claim that, under the terms of his employment agreement, the
closing of this offering could result in the cancellation of the right of
repurchase and the full vesting of his stock. A decision against us with regard
to the validity of the employment contract and related agreements could
therefore result in the complete vesting of Mr. Vigil's stock.

EMPLOYEES

As of June 30, 1999, we had 88 employees. None of our employees is
represented by a labor union or is the subject of a collective bargaining
agreement. We have never experienced a work stoppage and believe that employee
relations are good.

51
<PAGE>
ZapMe! believes that its future success will depend in part on its continued
ability to attract, hire and retain qualified personnel. Competition for such
personnel is intense, and we cannot guarantee that we will be able to identify,
attract and retain such personnel in the future.

FACILITIES

Our primary offices are located in approximately 12,000 square feet of
office space in San Ramon, California, under a lease expiring in August 2002. We
believe that our current facilities will not be adequate to sustain the
anticipated increase in headcount during the 1999 fiscal year, and we are
currently negotiating for additional office space in San Ramon.

52
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS

The executive officers, key employees and directors of the Company, and
their ages as of June 30, 1999, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------------------- --------- -------------------------------------------------
<S> <C> <C>
Lance Mortensen......................................... 46 Chairman of the Board
Rick Inatome............................................ 46 Chief Executive Officer and Director
Robert A. Stoffregen.................................... 50 Chief Financial Officer
Don Kingsborough........................................ 52 Senior Vice President, Sales and Marketing
Bruce Bower............................................. 37 General Counsel, Vice President of Business
Development and Secretary
William S. Burwell...................................... 52 Chief Information Officer
Dave Lundberg........................................... 40 Chief Technical Officer
Robert Rudy............................................. 44 Vice President of Operations
Royce Johnson........................................... 50 Vice President of Vertical Markets
Darryl Deaton........................................... 51 Vice President and Director
Michael Arnouse(1)(2)................................... 43 Director
Douglas Becker(1)(2).................................... 33 Director
Yoel Gat(1)............................................. 47 Director
Tom Hitchner(2)......................................... 47 Director
Jack Kemp............................................... 64 Director
</TABLE>

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

(1) Member of Compensation Committee.

(2) Member of Audit Committee.

MR. MORTENSEN is a founder of ZapMe! Corporation and has been our Chairman
since our inception. Mr. Mortensen began the planning and preliminary
organization of ZapMe! in 1996, and incorporated us in June 1997. Prior to
founding ZapMe!, Mr. Mortensen was Chief Executive Officer of Monterey Pasta
Company, a food service company, from January 1993 to October 1995. From 1981 to
1992 he was President of Morweg Construction Company, a California residential
construction company.

MR. INATOME, our Chief Executive Officer and one of our directors, joined us
in September 1999. From July 1993 to September 1999, Mr. Inatome was Chairman of
the Board of Inacom, a technology services firm he founded. Mr. Inatome
currently serves on the Board of Directors of Sylvan Learning Systems, Inc., RL
Polk, and Atlantic Premium Brands.

MR. STOFFREGEN has been our Chief Financial Officer since January 1999.
Prior to joining us as an employee, Mr. Stoffregen was a consultant to the
company. From January 1998 to October 1998, he served as Vice President and
Chief Financial Officer of Radical Entertainment, a video game development
company. Prior to that, from June 1996 to January 1998, he was Executive Vice
President, Chief Financial Officer and Director of Corporate Development for the
California Culinary Academy, a culinary arts school. From May 1995 to May 1996,
he was providing financial consulting services. Mr. Stoffregen was Executive
Vice President and Chief Financial Officer of YES! Entertainment Corporation, a
children's product and entertainment company, from September 1994 to March 1995.
From August 1991 to September 1994, he was Senior Vice President and Chief
Financial Officer of The Sharper Image, a retailer of upscale gifts. Mr.
Stoffregen was a partner with Deloitte & Touche from 1985 through August 1991.

MR. KINGSBOROUGH joined us in April 1999 as Senior Vice President, Sales and
Marketing. From July 1998 to April 1999, Mr. Kingsborough provided consulting
services. Mr. Kingsborough served as the Chief Executive Officer of YES!
Entertainment Corporation, a children's product and

53
<PAGE>
entertainment company, from December 1992 to July 1998. YES! Entertainment
Corporation filed a petition pursuant to Chapter 11 of the Bankruptcy Code in
February 1999. Mr. Kingsborough serves on the Board of Directors of Game Trader,
Inc., a wholesaler of new and used video games and a publicly traded company.

MR. BOWER has been our General Counsel, Vice President of Business
Development and Secretary since November 1998. Prior to joining us, Mr. Bower
was a founder and principal of i-80 Ventures, an investment and consulting firm,
from November 1997 to November 1998. Mr. Bower was the principal of Bower
Consulting Group from April 1997 to November 1998. From March 1995 to March
1997, he served as Executive Vice President, Business Development and General
Counsel of YES! Entertainment Corporation, a children's product and
entertainment company. From November 1989 to March 1995, Mr. Bower was an
associate with Wilson Sonsini Goodrich & Rosati, a law firm.

MR. BURWELL has been our Chief Information Officer since September 1999.
Prior to joining us, Mr. Burwell worked for EDS, a computer services firm, from
1974 to September 1999 in numerous capacities, most recently as President of
Consumer Technology Services.

MR. LUNDBERG, our Chief Technical Officer, joined us in January 1999. Before
that, he was with Computer Curriculum Corporation, an educational software
development company, from June 1995 to January 1999, initially as Vice President
of Engineering, and then as Vice President of Internet Technology. From December
1992 to June 1995, Mr. Lundberg was Vice President of Engineering for Kalieda
Labs, a software development company.

MR. RUDY has been Vice President of Operations since March 1999. From March
1998 to March 1999, he was Vice President of Corporate Quality and Development
at Credence Systems Corporation, a semiconductor supplier. Mr. Rudy was Director
of Account Management and Technology Transfer at SEMATECH, a nonprofit research
and development consortium of U.S. semiconductor manufacturers, from November
1994 to March 1998.

MR. JOHNSON, our Vice President of Vertical Markets, has been with us since
September 1998. From April 1996 to September 1998, Mr. Johnson was Vice
President, Marketing and a Director of Millennia Software, a software company.
He was the owner and principal of Pioneer Business Consulting, a business and
financial consulting firm from October 1994 to April 1996. Mr. Johnson worked
from June 1976 to October 1994 for Intel Corporation, serving in a number of
positions, including Controller and Assistant General Manager, Microprocessor
Division.

MR. DEATON is a Vice President and has been one of our directors since
November 1997. One of our co-founders, he has been with us since our inception
in June 1997, and has headed various departments, including Content Development,
School Sales and Marketing and School Network Installation. From July 1994 until
June 1997, Mr. Deaton was the owner and principal of Darryl Deaton Real
Estate/Consulting.

MR. ARNOUSE has been one of our directors since October 1998. Mr. Arnouse
has spent the past 10 years as a business consultant and financier for private
and publicly traded companies. During that period, he had financed more than
fifty transactions totaling in excess of five hundred million dollars. Mr.
Arnouse co-founded Sky Trek International Airlines and served as Chairman of the
Board of Directors from January 1996 until June 1998 and continues to serve on
its board. Mr. Arnouse is currently employed as Chairman and President of
Wharton Capital Partners Ltd., a New York based investment banking and financial
consulting firm. Mr. Arnouse also serves as president of State Capital Market
Group Ltd., a privately owned investment and business consulting company.

MR. BECKER has been one of our directors since April 1999. Mr. Becker has
been President and Co-Chief Executive Officer of Sylvan Learning Systems, Inc.,
one of our shareholders, since April 1993. From February 1991 until April 1993,
Mr. Becker was the Chief Executive Officer of the Sylvan Learning Center
Division of Sylvan. He has been a Director of Sylvan since December 1986. Mr.
Becker also serves as a director of Caliber Learning Network, Inc. and
Constellation Energy

54
<PAGE>
Group. Mr. Becker was elected to our board pursuant to the terms of the Series D
Preferred Stock Purchase Agreement.

MR. GAT has been one of our directors since June 1999. Mr. Gat is a
co-founder of Gilat Satellite Networks Ltd., a leading supplier of VSAT
satellite earth stations, and one of our shareholders, and has served as Chief
Executive Officer and a director of Gilat since 1987. Mr. Gat is a member of the
Stock Option and Compensation Committees of Gilat Satellite Networks, and has
also been Chairman
of the Board since July 1995. Mr. Gat also serves as Chairman of the Board of
Directors of KSAT, a joint venture with Keppel Communications, which provides
satellite-based telecommunication services in China, as well as serving as a
Director of Gilat Communications Ltd., a provider of satellite-based
communications services. Mr. Gat is also the Chairman of the MOST consortium, an
initiative for research relating to next-generation real-time, multimedia
content delivery tools for the Internet, and a director of ILAN-GAT Engineering
Ltd., a construction engineering company.

MR. HITCHNER has been one of our directors since May 1999. Mr. Hitchner is a
General Partner of QuestMark Partners, L.P., where he has been since January
1999. From 1988 to November 1998, he was with BT Alex. Brown, serving in a
number of positions, including Managing Director and a founder and senior member
of the Private Equity Group. Mr. Hitchner served as the senior private equity
professional on 49 transactions while he was with the Private Equity Group of BT
Alex. Brown, in which $973 million was invested. Mr. Hitchner was elected to the
board pursuant to a voting agreement between QuestMark Partners, L.P., Lance
Mortensen, and ZapMe!, entered into in connection with the Series D preferred
stock financing.

MR. KEMP has been one of our directors since July 1999. Mr. Kemp has been
Co-Director of Empower America, a political policy organization, since 1993. Mr.
Kemp served as the Secretary of Housing and Urban Development from February 1989
until January 1992 and, before that, for 18 years as a member of the United
States House of Representatives. Mr. Kemp is also a director of Oracle
Corporation, American Bankers Insurance Group, Inc., Carson Products, Inc., a
manufacturer and marketer of personal care products, Everen Securities, Inc., a
securities firm, Proxicom, Inc., an internet services provider, Speedway
Motorsports, Inc., a promotor and sponsor of motorsports and The Sports
Authority, Inc., a sporting goods retailer. Mr. Kemp also sits on the
compensation committee of Everen Securities, Inc., and on the advisory board of
Thomas Weisel Partners, LLC, one of the underwriters of this offering.

BOARD COMMITTEES

The board of directors recently reconstituted the compensation and audit
committees. The compensation committee evaluates and approves the compensation
policies for the executive officers and administers our employee benefit plans.
The members of the compensation committee are Michael Arnouse, Douglas Becker
and Yoel Gat. The audit committee reviews the accounting practices and
procedures, the results and scope of the audit and recommends the appointment of
the independent auditors. The members of the audit committee are Michael
Arnouse, Douglas Becker and Tom Hitchner.

DIRECTOR COMPENSATION

We reimburse each member of our board of directors for out-of-pocket
expenses incurred in connection with attending board meetings. No member of our
board of directors currently receives any additional cash compensation.

In June 1999, Mr. Arnouse, Mr. Hitchner, Mr. Becker and Mr. Gat, as outside
directors of ZapMe!, were each granted options to purchase 20,000 shares of
stock at an exercise price of $4.00. These options were immediately
exerciseable. In August 1999, Mr. Kemp, as an outside director of ZapMe!, was
granted an option to purchase 20,000 shares of stock at an exercise price of
$5.00 per share. This option was immediately exerciseable.

55
<PAGE>

Our 1998 Plan provides that options will be granted to non-employee
directors pursuant to an automatic nondiscretionary grant formula. Each
non-employee director will be granted an option to purchase 7,500 shares of
common stock on the date of each annual meeting of the shareholders of ZapMe!.
Each option will be granted at the fair market value of the common stock on the
date of grant. Options granted to non-employee directors under the Director Plan
will be fully vested and exercisable on the date of grant. The options to be
granted under the 1998 Plan will be nonqualified stock options. Nonqualified
stock options are stock options which do not constitute "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code.
Currently, all directors other than Mr. Mortensen and Mr. Deaton are eligible to
participate in the 1998 Plan as non-employee directors. Mr. Mortensen and Mr.
Deaton are eligible to participate in the 1998 Plan as employees. See "Incentive
Stock Plans--1998 Stock Plan," beginning on page 59, for more information about
director compensation.

DIRECTOR CONFLICTS OF INTEREST

There are no known potential conflicts of interest arising from certain of
our directors being affiliated with significant stockholders. Under the Delaware
General Corporation Law, each of our directors will owe a duty of loyalty to
ZapMe!. Furthermore, the interests of these Directors, who are stockholders'
themselves, are aligned with the interests of other stockholders of ZapMe!. If
nonetheless a conflict of interest were to arise (for example, in connection
with a transaction between ZapMe! and a party affiliated with one of our
directors), then such director would as appropriate recuse himself or herself
from any discussion and vote upon the approval of the transaction.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Prior to June 1999, the compensation committee was composed of Messrs.
Arnouse and Mortensen, our Chairman of the Board. The committee is currently
composed of Messrs. Arnouse, Becker and Gat. No interlocking relationship exists
between the board of directors or compensation committee and the board of
directors or compensation committee of any other company, nor has any
interlocking relationship existed in the past.

Messrs. Arnouse and Mortensen, the members of the compensation committee
during the previous fiscal year, were involved in the following transactions
with ZapMe!:

On June 25, 1997, we issued and sold 10,000,000 shares of common stock to
Lance Mortensen, our Chief Executive Officer and Chairman of the Board, for an
aggregate purchase price of $50,000.

In August 1998, Mr. Mortensen exercised options to purchase 600,000 shares
of our common stock at an aggregate purchase price of approximately $10,000.

On August 1, 1997, October 17, 1997, December 22, 1997, January 22, 1998,
March 23, 1998, and June 9, 1998, we issued convertible promissory notes for an
aggregate amount of $900,000. All of the notes contained the same rights and
privileges. On August 5, 1998, the principal of the notes and interest which had
accrued converted into 9,097,671 shares of our Series A preferred stock. Michael
Arnouse, one of our directors, and his affiliates were holders of $800,000 of
these promissory notes, which, at a rate of 6.50% per annum, had accrued
approximately $23,000 in interest. This principal and accrued interest was
converted into 7,986,560 shares of Series A preferred stock. All of the Series A
preferred stock will convert into 9,097,671 shares of common stock upon the
consummation of this offering.

On May 7, 1998, we issued a convertible promissory note to Wharton Capital
Partners, L.P., an entity with which Mr. Arnouse, one of our directors, is
affiliated. The note's original amount of principal was $400,000, and the note
carried an 8.5% interest rate. In August 1998, the promissory note was converted
into 160,000 shares of Series B preferred stock and we paid approximately $8,000
in accrued interest. In February 1999, the shares were transferred to another
private investor.

56
<PAGE>
In October 1997 and September 1998, Mr. Mortensen was granted options to
purchase 600,000 and 300,000 shares, respectively, at an exercise price of
$0.0165 per share and $1.10 per share, respectively, of our common stock. The
options vest at a rate of one-twelfth each month and one-third per year,
respectively; however, on June 2, 1998, the vesting of Mr. Mortensen's option to
purchase 600,000 shares was accelerated, and these shares are now fully vested.

On August 2, 1999, a majority of ZapMe!'s directors, excluding Lance
Mortensen, approved the issuance of an immediately exercisable non-statutory
option to purchase 300,000 shares of our common stock to Mr. Mortensen at an
exercise price of $5.00 per share. The shares are subject to a right of
repurchase in favor of ZapMe!, which will expire at a rate of one third on each
anniversary of the date of grant. ZapMe! has agreed to loan Mr. Mortensen, at
his request, the amount necessary to pay for the aggregate exercise price of the
option, which loan will be secured by the shares purchased on exercise of the
option. The interest rate of the loan will be 5.43%. This loan has not yet been
issued to Mr. Mortensen.

Between June 1997 and October 1997, we issued promissory notes to Mr.
Mortensen aggregating approximately $156,000 bearing an interest rate of 12.0%
per annum. In September 1998, the principal and approximately $11,000 in accrued
interest was paid.

We have paid Aquatic Innovations, Inc. approximately $10,000 and $130,000
for office equipment rental and other expenses incurred on behalf of ZapMe! in
1997 and 1998, respectively. Mr. Mortensen is the owner of Aquatic Innovations,
Inc.

In September 1998, we paid Wharton Capital Partners, L.P. $180,000 in
consulting fees in connection with the issuance of ZapMe!'s Series C preferred
stock. Mr. Arnouse is an affiliate of Wharton.

In January 1999, we issued a promissory note in the amount of $500,000 to
Mr. Arnouse bearing an interest rate of 12.0% per annum. The note and
approximately $12,000 of interest was paid in April 1999.

EXECUTIVE COMPENSATION

The following table sets forth summary information concerning the
compensation we paid for services rendered to us during 1998 by our chief
executive officer and our two most highly compensated executive officers who
were serving as executive officers at the end of 1998 and whose salaries were
more than $100,000 in 1998 and one individual who was not serving as an
executive officer at the end of 1998, but who was otherwise qualified to be
named in this table (the "named executive officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS (#)
- --------------------------------------------------------------------------- ---------- ----------- -------------
<S> <C> <C> <C>
Lance Mortensen, Chairman.................................................. 273,052 -- 300,000
Darryl Deaton, Vice President and Director................................. 145,013 -- 50,000
John Evleth, former Chief Financial Officer and Director(1)................ 137,607 -- 50,000
Joshua Marks, former Chief Operating Officer/Executive Producer(2)......... 120,000 -- 158,730
</TABLE>

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

(1) Mr. Evleth resigned as Chief Financial Officer and Director in November
1998.

(2) Mr. Marks resigned as Chief Operating Officer/Executive Producer in January
1999.

57
<PAGE>
OPTION GRANTS IN FISCAL YEAR 1998

The following table provides information relating to stock options awarded
to each of the executive officers named in the summary compensation table during
the fiscal year ended December 31, 1998, including the potential realizable
value over the 10 year term of the options based on assumed rates of stock
appreciation of 5% and 10%, beginning with a base value equal to the fair market
value at the time of grant, which is equal to the exercise price, compounded
annually. These assumed rates of appreciation comply with the rules of the SEC
and do not represent our estimate of future stock prices. Actual gains, if any,
on stock option exercises will be dependent on the future performance of our
common stock. In 1998, we granted options and rights to acquire up to an
aggregate of 3,070,230 shares to employees, consultants, directors and other
persons having a business relationship with us under the 1997 and 1998 Stock
Option Plans and all at an exercise price equal to not less than the fair market
value of our common stock on the date of grant as determined in good faith by
the board of directors. Optionees may pay the exercise price by check, note,
delivery of already-owned shares of our common stock or any other instrument the
board will accept. Options granted under the 1997 and 1998 Stock Option Plans
generally vest at a rate of one-third per year. No stock appreciation rights
were granted to these individuals during such year.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------
PERCENT OF POTENTIAL REALIZED
TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK VALUE OF
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR OPTIONS BASED
UNDERLYING EMPLOYEES PRICE PER OPTIONS TERM ON MID-POINT
OPTIONS IN FISCAL SHARE EXPIRATION ---------------------- OF OFFERING
NAME GRANTED YEAR (%) ($) DATE 5% 10% PRICE ($)(3)
- ----------------------------------- ----------- ------------- ----------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lance Mortensen.................... 300,000 9.8 1.10 9/8/08 $ 207,535 $ 525,935 $ 2,970,000
Darryl Deaton...................... 50,000 1.6 1.00 9/8/08 31,445 79,687 500,000
John Evleth........................ 50,000(1) 1.6 1.00 9/8/08 31,445 79,687 500,000
Joshua Marks....................... 158,730(2) 5.2 0.09 1/6/08 8,984 22,768 1,731,744
</TABLE>

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

(1) 50,000 shares returned to 1998 Stock Plan on November 23, 1998.

(2) 97,002 shares returned to 1997 Stock Plan on January 8, 1999.

(3) Based of the mid-point of the assumed initial public offering price range of
$11.00 per share.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

The following table sets forth information about the number and year-end
value of exercisable and unexercisable options held by the executive officers
named in the summary compensation table for the year ended December 31, 1998.
The "Value Realized" on shares acquired on exercise in the year ended December
31, 1998 is based on the difference between the deemed fair market value of the
common stock at December 31, 1998 ($2.00 per share) and the exercise price,
while the "Value of Unexercised In-the-Money Options at December 31, 1998" is
based on the difference between the initial public offering price and the
exercise price.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998
SHARES ACQUIRED VALUE -------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- --------------- ------------ ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Lance Mortensen.......... 600,000 $ 1,190,100 -- 300,000 -- $ 2,970,000
Darryl Deaton............ 200,000 396,700 -- 50,000 -- 550,000
John Evleth.............. 200,000 396,000 -- -- -- --
Joshua Marks............. -- 57,319 101,411 $ 630,509 1,115,521
</TABLE>

58
<PAGE>
INCENTIVE STOCK PLANS

1997 EMPLOYEE STOCK OPTION PLAN.

Our 1997 Employee Stock Option Plan was adopted by our board of directors
and approved by our stockholders in October 1997. The 1997 Employee Stock Option
Plan provides for the granting to our employees of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, and for the granting to employees, directors and independent
contractors of nonstatutory stock options. Our board of directors and our
stockholders have authorized a total of 1,363,730 shares of common stock for
issuance pursuant to the 1997 Employee Stock Option Plan. As of June 30, 1999,
there were options to purchase 129,410 shares outstanding. No grants were made
under this plan after the adoption of the 1998 Stock Plan.

1998 STOCK PLAN.

The board of directors adopted the 1998 Plan and the stockholders initially
approved the 1998 Plan in June 1998. In connection with this offering, the board
of directors approved the amendment and restatement of the 1998 Plan in August
1999 and the stockholders approved the amendment and restatement in September
1999. The 1998 Plan provides for the grant of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code to employees, and for the
grant of nonstatutory stock options and stock purchase rights to employees,
directors and consultants.

NUMBER OF SHARES OF COMMON STOCK AVAILABLE UNDER THE 1998 PLAN

As of June 30, 1999, a total of 4,036,270 shares of common stock were
reserved for issuance pursuant to the 1998 Plan, of which options to acquire
2,383,447 shares were issued and outstanding as of that date. As part of the
1999 amendment and restatement of the 1998 Plan, the board of directors approved
an increase of 1,500,000 shares reserved for issuance under the 1998 Plan. The
1998 Plan provides for annual increases in the number of shares available for
issuance thereunder, on the first day of each new fiscal year of the Company,
effective beginning with the Company's fiscal year 2000, equal to the lowest of
5% of the outstanding shares of common stock on the first day of the fiscal
year, 2 million shares or such amount as the board may determine.

ADMINISTRATION OF THE 1998 PLAN

The board of directors or a committee of the board (as applicable, the
administrator) administers the 1998 Plan. In the case of options intended to
qualify as "performance-based compensation" within the meaning of Section 162(m)
of the Code, the committee will consist of two or more "outside directors"
within the meaning of Section 162(m) of the Code. The administrator has the
power to determine the terms of the options or SPRs granted, including the
exercise price, the number of shares subject to each option or SPR, the
exercisability of the options and the form of consideration payable upon
exercise.

OPTIONS

The administrator determines the exercise price of nonstatutory stock
options granted under the 1998 Plan, but with respect to nonstatutory stock
options intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Code, the exercise price must at least be equal
to the fair market value of the common stock on the date of grant. The exercise
price of all incentive stock options granted under the 1998 Plan must be at
least equal to the fair market value of the common stock on the date of grant.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of ZapMe!'s outstanding capital stock, the exercise
price of any incentive stock option granted must equal at least 110% of the fair
market value on the

59
<PAGE>
grant date and the term of such incentive stock option must not exceed five
years. The term of all other options is determined by the administrator.

An optionee generally must exercise an option granted under the 1998 Plan at
the time set forth in the optionee's option agreement after termination of the
optionee's status as an employee, director or consultant of ZapMe!, or within 12
months after the optionee's termination by death or disability, but in no event
later than the expiration of the option's ten year term.

STOCK PURCHASE RIGHTS

The administrator determines the exercise price of SPRs granted under the
1998 Plan. In the case of SPRs, unless the administrator determines otherwise,
the restricted stock purchase agreement entered into in connection with the
exercise of the SPR shall grant ZapMe! a repurchase option that ZapMe! may
exercise upon the voluntary or involuntary termination of the purchaser's
service with ZapMe! for any reason (including death or disability). The purchase
price for shares ZapMe! repurchases pursuant to restricted stock purchase
agreements shall generally be the original price paid by the purchaser and may
be paid by cancellation of any indebtedness of the purchaser to ZapMe!. The
repurchase option shall lapse at a rate that the administrator determines.

OUTSIDE DIRECTOR OPTIONS

The 1998 Plan also provides for the automatic grant to each nonemployee
director of a nonstatutory stock option for 7,500 shares of common stock on the
date of each annual stockholder's meeting of ZapMe!. Each option shall have a
term of 10 years and the shares subject to these options shall be fully vested
and exercisable on the date of grant. The exercise price of each option shall be
100% of the fair market value per share of common stock on the date of grant.

TRANSFERABILITY OF OPTIONS AND SPRS

An optionee generally may not transfer options and SPRs granted under the
1998 Plan and only the optionee may exercise an option and SPR during his or her
lifetime.

ADJUSTMENTS UPON MERGER OR ASSET SALE

The 1998 Plan provides that in the event of a merger of ZapMe! with or into
another corporation or a sale of substantially all of ZapMe!'s assets, the
successor corporation shall assume or substitute each option or SPR. If the
outstanding options or SPRs are not assumed or substituted, the administrator
shall provide notice to the optionee that he or she has the right to exercise
the option or SPR as to all of the shares subject to the option or SPR,
including shares which would not otherwise be exercisable, for a period of
fifteen days from the date of the notice. The option or SPR will terminate upon
the expiration of the fifteen-day period.

AMENDMENT AND TERMINATION OF THE 1998 PLAN

Unless terminated sooner, the 1998 Plan will terminate automatically in
2008. In addition, the administrator has the authority to amend, suspend or
terminate the 1998 Plan, provided that no such action may affect any share of
common stock previously issued and sold or any option previously granted under
the 1998 Plan.

1999 EMPLOYEE STOCK PURCHASE PLAN

The board of directors adopted ZapMe!'s Purchase Plan in August 1999.
ZapMe!'s stockholders approved the Purchase Plan in September 1999.

60
<PAGE>
NUMBER OF SHARES OF COMMON STOCK AVAILABLE UNDER THE PURCHASE PLAN

A total of 500,000 shares of common stock has been reserved for issuance
under the Purchase Plan. In addition, the Purchase Plan provides for automatic
annual increases in the number of shares available for issuance under the
Purchase Plan on the first day of each fiscal year, beginning with the Company's
fiscal year 2000, equal to the lowest of 2% of the outstanding shares of common
stock on the first day of the fiscal year, one million shares or such other
amount as may be determined by the board.

ADMINISTRATION OF THE PURCHASE PLAN

The board of directors or a committee appointed by the board administers the
Purchase Plan. The board of directors or its committee has full and exclusive
authority to interpret the terms of the Purchase Plan and determine eligibility.

ELIGIBILITY TO PARTICIPATE

Employees are eligible to participate if they are customarily employed by
ZapMe! or any participating subsidiary for at least 20 hours per week and more
than five months in any calendar year. However, an employee may not be granted
an option to purchase stock under the Purchase Plan if such employee:

- immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of the capital stock of
ZapMe!; or

- whose rights to purchase stock under all employee stock purchase plans of
ZapMe! accrues at a rate that exceeds $25,000 worth of stock for each
calendar year.

OFFERING PERIODS AND CONTRIBUTIONS

The Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, contains consecutive, 6-month offering periods. The
offering periods generally start on the first trading day on or after May 1 and
November 1 of each year, except for the first such offering period which will
commence on the first trading day on or after the effective date of this
offering and will end on the last trading day on or before November 1, 1999.

The Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 10% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings
and commissions but excludes payments for overtime, shift premium payments,
incentive compensation, incentive payments, bonuses and other compensation. The
maximum number of shares a participant may purchase during a single offering
period is 5,000 shares.

PURCHASE OF SHARES

Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the Purchase Plan is 85% of the lower of the fair market value
of the common stock at the beginning or end of the offering period. Participants
may end their participation at any time during an offering period, and they will
be paid their payroll deductions to date. Participation ends automatically upon
termination of employment with ZapMe!.

TRANSFERABILITY OF RIGHTS

A participant may not transfer rights granted under the Purchase Plan other
than by will, the laws of descent and distribution or as otherwise provided
under the Purchase Plan.

61
<PAGE>
ADJUSTMENTS UPON MERGER OR ASSET SALE

The Purchase Plan provides that, in the event of a merger of ZapMe! with or
into another corporation or a sale of substantially all of ZapMe!'s assets, a
successor corporation may assume or substitute for each outstanding option. If
the successor corporation refuses to assume or substitute for the outstanding
options, the offering period then in progress will be shortened, and a new
exercise date will be set.

AMENDMENT AND TERMINATION OF THE PURCHASE PLAN

The 1999 Purchase Plan will terminate in 2009. However, the board of
directors has the authority to amend or terminate the Purchase Plan, except
that, other than in connection with a dissolution, liquidation, merger or sale
of substantially all ZapMe!'s assets, no such action may adversely affect any
outstanding rights to purchase stock under the Purchase Plan.

401(k) PLAN

ZapMe! recently adopted a 401(k) plan which is scheduled to go into effect
in September 1999. ZapMe!'s 401(k) plan covers its eligible employees located in
the United States. The 401(k) plan is intended to qualify under Sections 401(a)
and 401(k) of the Internal Revenue Code. Consequently, contributions to the
401(k) plan by employees or by ZapMe!, and the investment earnings thereon, will
not be taxable to employees until withdrawn from the 401(k) plan. Further,
contributions by ZapMe!, if any, will be deductible by ZapMe! when made.
Employees may elect to contribute up to 15% of their current compensation to the
401(k) plan up to the statutorily prescribed annual limit, which was $10,000 in
1999.

ZapMe! does not currently intend to make any contributions to the 401(k)
plan. However, since this is a new plan participation in the plan by non-highly
compensated employees may be insufficient to meet statutory minimums. In such a
case, ZapMe! may be required to make contributions, and the ability of highly
compensated employees to participate may be limited.

EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS

We have entered into agreements with some of our officers providing for
payments upon termination of their employment. Our agreement with Mr. Deaton
provides that he will receive a minimum compensation level of $10,000 per month,
paid through December 31, 1999 regardless of whether either he or ZapMe!
terminates his employment voluntarily or with cause. Our agreement with Mr.
Kingsborough provides that in the event that he terminates his employment for
good reason, or if ZapMe! terminates his employment without cause, he will
receive nine months of base salary, if the termination occurs prior to the first
anniversary of his employment at ZapMe!, or six months of base salary, if the
termination occurs prior to the third anniversary of his employment. Mr.
Kingsborough is also entitled to a pro rata portion of the cash bonus otherwise
payable to him under these circumstances. Our agreement with Mr. Rudy provides
that, in the event he terminates his employment for good reason, or if ZapMe!
terminates his employment without cause, he will receive six months of base
salary, six months of non-cash benefits, a pro rata share of the cash bonus
otherwise payable to him, and accelerated vesting of his options, to the lesser
of 30,000 shares or the balance of the unvested shares under Mr. Rudy's initial
grant of options. Our agreement with Mr. Inatome provides that, in the event
that ZapMe! terminates his employment without his consent and for a reason other
than cause, death, or disability, he will receive his then current base salary
for a period of one year, provided that he does not compete with ZapMe! during
that term.

LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS

62
<PAGE>
enter into indemnification agreements with our directors and officers and to
purchase insurance on behalf of any person whom we are required or permitted to
indemnify. We have entered into indemnification agreements with each of our
directors and executive officers and intend to obtain a policy of directors' and
officers' liability insurance that insures such persons against the cost of
defense, settlement or payment of a judgment in the absence of an intent to
deceive or defraud.

We have entered into agreements with our directors and executive officers
regarding indemnification. Under these agreements we are required to indemnify
them against expenses, judgments, fines, settlements and other amounts actually
and reasonably incurred (including expenses of a derivative action) in
connection with an actual, or a threatened, proceeding if any of them may be
made a party because he or she is or was one of our directors or officers. We
are obligated to pay these amounts only if the officer or director acted in good
faith and in a manner that he or she reasonably believed to be in (or not
opposed to) our best interests. With respect to any criminal proceeding, we are
obligated to pay these amounts only if the officer or director had no reasonable
cause to believe his or her conduct was unlawful. The indemnification agreements
also set forth procedures that will apply in the event of a claim for
indemnification thereunder.

In addition, our amended and restated certificate of incorporation filed in
connection with this offering provides that the liability of our directors for
monetary damages shall be eliminated to the fullest extent permissible under the
General Corporation Law of the State of Delaware, as amended. This provision in
our amended and restated certificate of incorporation does not eliminate a
director's duty of care, and, in appropriate circumstances, equitable remedies
such as an injunction or other forms of non-monetary relief would remain
available. Each director will continue to be subject to liability for breach of
the director's duty of loyalty to us, for acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law, for acts or
omissions that the director believes to be contrary to our best interests or our
stockholders, for any transaction from which the director derived an improper
personal benefit, for improper transactions between the director and us and for
improper distributions to stockholders and loans to directors and officers. This
provision also does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.

There is no pending litigation or proceeding involving any of our directors
or officers as to which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.

63
<PAGE>
CERTAIN TRANSACTIONS

EQUITY TRANSACTIONS

On September 3, 1997, we issued 1,486,984 shares of common stock to Darryl
Deaton, one of our directors and officers, and 371,746 shares of common stock to
John Evleth, a former officer and director, in lieu of wages owed.

In August 1998, Mr. Deaton and Mr. Evleth exercised options to purchase
200,000 and 200,000 shares of our common stock, respectively, at an aggregate
purchase price of approximately $3,000 and $3,000, respectively.

In January 1999, Joshua Marks, a former officer, exercised options to
purchase 57,319 shares of our common stock, for an aggregate purchase price of
approximately $5,000.

On December 3, 1998, March 31, 1999 and May 28, 1999, we issued and sold an
aggregate of 5,894,110 shares of our Series D preferred stock at a purchase
price of $5.00 per share, including:

- 2,026,070 shares to QuestMark Partners, L.P., a major shareholder and an
entity with which Thomas Hitchner, one of our directors, is affiliated;

- 600,000 shares to Sylvan Learning Systems, Inc., an entity with which
Douglas Becker, one of our directors, is affiliated;

- 600,000 shares to Gilat Satellite Networks, Ltd. and Phoenix Worldwide
Limited, a related party, entities with which Yoel Gat, one of our
directors, is affiliated; and

- other private investors.

On August 4, 1999, we issued and sold an aggregate of 2,030,000 shares of
our Series E preferred stock at a purchase price of $5.00 per share, including:

- 2,000,000 shares to Dell Computer Corporation, a major shareholder; and

- 30,000 shares to another private investor.

Since inception, as part of the Company's normal review and determination of
compensation, we have granted the following options to officers:

- In October 1997 and September 1998, Mr. Evleth was granted options to
purchase 200,000 and 50,000 shares, respectively, at an exercise price of
$0.015 and $1.00 per share, respectively, of our common stock. Mr. Evleth
has exercised the option to purchase 200,000 shares, and the option to
purchase 50,000 shares has expired;

- In October 1997 and September 1998, Mr. Deaton was granted options to
purchase 200,000 and 50,000 shares, respectively, at an exercise price of
$0.0165 and $1.00 per share, respectively, of our common stock. Mr. Deaton
has exercised the option to purchase 200,000 shares, and the option to
purchase 50,000 shares vests at the rate of one-third per year;

- In January 1998, Mr. Marks was granted options to purchase 158,730 shares
of ZapMe!'s common stock at an exercise price of $0.09 per share. These
shares vested over 3 years, with one third vesting after one year and the
balance vesting monthly thereafter;

- In December 1998 and June 1999, Robert A. Stoffregen, one of our officers,
was granted options to purchase 110,000 and 40,000 shares, respectively,
at an exercise price of $1.50 and $4.00 per share, respectively, of our
common stock. These options vest at a rate of one-third per year;

- In January 1999, April 1999 and April 1999, Don Kingsborough, one of our
officers, was granted options to purchase 30,000, 120,000 and 180,000
shares, respectively, at an exercise price of

64
<PAGE>

$2.00, $2.50 and $2.50 per share, respectively, of our common stock. These
options vest at a rate of one-third per year. The options to purchase
30,000 shares have expired;

- In September 1999, Rick Inatome, one of our officers, was granted options
to purchase 1,000,000 shares of common stock at an exercise price of $5.00
per share. These options vest at a rate of one-fourth after one year and
1/48 per month thereafter;

- In November 1998 and June 1999, Bruce Bower, one of our officers, was
granted options to purchase 150,000 and 30,000 shares, respectively, at an
exercise price of $1.00 and $4.00 per share, respectively, of our common
stock. These options vest at a rate of one-third per year;

- In December 1998, April 1999 and June 1999, Dave Lundberg, one of our
officers, was granted options to purchase 40,000, 25,000 and 85,000
shares, respectively, at an exercise price of $1.50, $2.50 and $4.00 per
share, respectively, of our common stock. These options vest at a rate of
one-third per year;

- In April 1999, Robert Rudy, one of our officers, was granted options to
purchase 180,000 shares of our common stock at an exercise price of $2.50
per share. These options vest at a rate of one-third per year;

- In October 1998 and December 1998, Royce Johnson, one of our officers, was
granted options to purchase 60,000 and 20,000 shares, respectively, at an
exercise price of $1.00 and $1.50 per share, respectively, of our common
stock. The option for 60,000 shares vests one year after grant. The option
for 20,000 shares vests only if certain performance criteria are met; and

- In September 1999, William S. Burwell, one of our officers, was granted
options to purchase 175,000 shares of common stock at an exercise price of
$10.00 per share. These options vest at a rate of one-third per year.

We believe that the shares issued in the above described transactions were
sold at the then fair market value and that the terms of all the above described
transactions were no less favorable than we could have obtained from
unaffiliated third parties.

OTHER TRANSACTIONS

In March 1999, ZapMe! entered into a "Products and Services Agreement" with
Sylvan Learning Systems, Inc. The Agreement grants Sylvan an exclusive right to
deliver products and services on the ZapMe! systems in schools. The products and
services include student tutoring, information training services, test
preparation programs and other computer based tests. We will earn fees based
upon the number of eligible schools and the length of time eligible schools have
been operational. The initial term of the agreement will expire on December 31,
2003 with a five year renewal option subject to our earning minimum fees from
the agreement. Mr. Becker is an affiliate of Sylvan.

As consideration to enter into the agreement, Sylvan was issued a warrant
for 150,000 shares of ZapMe!'s common stock at $5.00 per share. The warrant is
exercisable in whole after Sylvan issues its release of audited financial
statements for the year ended December 31, 2003 and subject to ZapMe! earning a
minimum fee per eligible school during the year ended December 31, 2003.

We purchase VSAT data communications equipment from Gilat Satellite
Networks, Ltd. Through June 1999, ZapMe! has paid approximately $1.8 million to
Gilat and its subsidiary, Spacenet, for equipment, consulting services and
software license fees. In June 1999, ZapMe! and Spacenet, entered into an
agreement whereby Spacenet will provide us with equipment, installation and
space segment for a fixed fee per school installation. Mr. Gat is an affiliate
of Gilat.

65
<PAGE>

For additional information, please see the sections entitled
"Management--Directors Compensation," beginning on page 55, and
"Management--Compensation Committee Interlocks and Insider Participation,"
beginning on page 56.

ZapMe! believes that all of the transactions set forth above were made on
terms no less favorable to ZapMe! than could have been otherwise obtained from
unaffiliated third parties. ZapMe! did not employ special procedures in
connection with all of the transactions set forth above, but rather relied upon
the business judgment and experience of its senior management to ensure that
these transactions were completed on terms equivalent to those which could have
been obtained in an arm's length transaction. All future transactions, including
loans, if any, between ZapMe! and its officers, directors and principal
stockholders and their affiliates and any transactions between ZapMe! and any
entity with which its officers, directors or 5% shareholders are affiliated will
be approved by a majority of the board of directors, including a majority of the
independent and disinterested outside directors of the board of directors and
will be on terms no less favorable to ZapMe! than could be obtained from
unaffiliated third parties.

66
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding to the beneficial
ownership of our common stock as of August 31, 1999, and as adjusted to reflect
the sale of the shares of common stock offered in the offerings, by each person
or entity who is known by ZapMe! to own beneficially 5% or more of ZapMe!'s
outstanding common stock, each director of ZapMe!, each of the executive
officers and all directors and executive officers of ZapMe! as a group. The
address of all the beneficial owners, unless otherwise noted, is 3000 Executive
Parkway, San Ramon CA 94583. Except as otherwise indicated, and subject to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock held by
them.

The percentage ownership in the table below is based on 32,155,660 shares of
common stock outstanding as of August 31, 1999 and 41,610,205 shares immediately
following the completion of the offerings (assuming no exercise of the
Underwriters' over-allotment option), together with applicable options and/or
warrants for such shareholder. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities, subject to community
property laws, where applicable. Shares of common stock subject to options or
warrants that are presently exercisable or exercisable within 60 days of the
date of this prospectus are deemed to be beneficially owned by the person
holding such options for the purpose of computing the percentage of ownership of
such person but are not treated as outstanding for the purpose of computing the
percentage of any other person. To the extent that any shares are issued upon
exercise of options, warrants or other rights to acquire our capital stock that
are presently outstanding or granted in the future or reserved for future
issuance under our stock plans, there will be further dilution to new public
investors.

The number of shares includes 17,781,781 shares of common stock issuable
upon conversion of our convertible preferred stock upon consummation of this
offering. For purposes of this table, we have assumed that the preferred stock
converts to common stock at a ratio of one-to-one. The percentage of shares
outstanding after the offerings assumes the underwriter's over-allotment is not
exercised.

67
<PAGE>

<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY
OWNED AS A RESULT OF
OPTIONS PERCENTAGE OF SHARES
AND WARRANTS OUTSTANDING
NUMBER OF EXERCISABLE --------------------
SHARES WITHIN 60 DAYS OF THE BEFORE
BENEFICIALLY DATE OF THE AFTER THE
NAME OF BENEFICIAL OWNER OWNED THIS PROSPECTUS OFFERING OFFERING
- ------------------------------------ --------- ---------------------- --------- ---------
<S> <C> <C> <C> <C>
QuestMark Partners, L.P.(1)......... 2,026,070 20,000 6.4% 4.9%
Dell Computer Corporation(2)........ 2,000,000 -- 6.2 4.8
Mortensen Irrevocable Family
Trust(3).......................... 2,000,000 -- 6.2 4.8
MCA Irrevocable Family Trust(4)..... 2,000,000 -- 6.2 4.8
Marianne Schmitt Hellauer(5)........ 4,000,000 -- 12.4 9.6
Lance Mortensen(6).................. 10,600,000 400,000 33.8 26.2
Rick Inatome........................ 1,110,000 -- 3.5 2.7
Michael Arnouse(7).................. 7,976,560 20,000 24.9 19.2
Robert A. Stoffregen................ -- -- * *
Don Kingsborough.................... -- -- * *
Bruce Bower......................... -- 50,000 * *
William S. Burwell.................. -- -- * *
Dave Lundberg....................... -- -- * *
Bob Rudy............................ -- -- * *
Royce Johnson....................... -- 64,000 * *
Darryl Deaton....................... 1,636,984 16,667 5.1 4.0
Douglas Becker(8)................... 600,000 170,000 2.4 1.8
Yoel Gat(9)......................... 600,000 20,000 1.9 1.5
Thomas Hitchner(10)................. 2,026,070 20,000 6.4 4.9
Jack Kemp........................... -- 20,000 * *
All executive officers and directors
as a group (15 persons)........... 24,549,614 780,667 76.9 59.8
</TABLE>

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

* Less than 1%.

(1) One South Street, Suite 800, Baltimore, MD 21202.

(2) Dell Computer Corporation purchased 2,000,000 shares of Series E preferred
stock on August 4, 1999. Dell Computer Corporation owns these shares through
Dell USA L.P., an indirect wholly-owned subsidiary. One Dell Way, Round
Rock, TX 78682.

(3) Trust established for the benefit of Lance Mortensen, Marianne Schmitt
Hellauer, Trustee, 3712 Valerie Carol Ct., Ellicott City, MD 21042.

(4) Trust established for the benefit of Michael Arnouse, Marianne Schmitt
Hellauer, Trustee, 3712 Valerie Carol Ct., Ellicott City, MD 21042.

(5) Includes 2,000,000 shares held by Ms. Hellauer as trustee of the MCA
Irrevocable Family Trust and 2,000,000 shares held by Ms. Hellauer as
trustee of the Mortensen Family Trust. Ms. Hellauer disclaims beneficial
ownership of these shares.

(6) Includes 2,000,000 shares held by the Mortensen Irrevocable Family Trust, a
trust established for the benefit of Mr. Mortensen.

(7) Includes 2,000,000 shares held by the MCA Irrevocable Family Trust, a trust
established for the benefit of Mr. Arnouse, and 700,000 shares held by the
MC Investment Trust, a trust established for the benefit of Mr. Arnouse.

(8) Includes 600,000 shares and a warrant for 150,000 shares held by Sylvan
Learning Systems, Inc. Mr. Becker is the President and Co-Chief Executive
Officer of Sylvan Learning System, Inc., and disclaims beneficial ownership
of the shares and warrant held by Sylvan, except to the extent of his
pecuniary interest therein.

(9) Includes 500,000 shares held by Gilat Satellite Networks, Ltd., a company of
which Mr. Gat is Chief Executive Officer. Mr. Gat disclaims beneficial
ownership of the shares held by Gilat Satellite Networks, Ltd., except to
the extent of his pecuniary interest therein. Also includes 100,000 shares
held by an entity associated with Gilat Satellite Networks, Ltd. Mr. Gat
disclaims beneficial ownership of the shares held by that entity.

(10) Includes 2,026,070 shares and options for 20,000 shares held by QuestMark
Partners, L.P., an entity with which Mr. Hitchner is affiliated. Mr.
Hitchner disclaims beneficial ownership of the shares held by QuestMark
Partners, L.P., except to the extent of his general partnership interest
therein.

68
<PAGE>
DESCRIPTION OF CAPITAL STOCK

The following description of our capital stock and the provisions of our
articles of incorporation and bylaws are only summaries and are qualified by
reference to our articles of incorporation and bylaws filed as exhibits to the
registration statement of which this prospectus is a part. Our authorized
capital stock consists of 50,000,000 shares of common stock, $.01 par value per
share, and 17,781,781 shares of preferred stock, $.01 par value per share. As of
August 31, 1999, the outstanding shares are set forth in the table below:

<TABLE>
<CAPTION>
NUMBER OF SHAREHOLDERS OF
OUTSTANDING SHARES RECORD
------------------ ---------------------------
<S> <C> <C>
Common Stock..................................... 14,373,879 35
Total Preferred Stock............................ 17,781,781 59
Series A....................................... 9,097,671 4
Series B....................................... 160,000 1
Series C....................................... 600,000 5
Series D....................................... 5,894,110 47
Series E....................................... 2,030,000 2
</TABLE>

Each of the shares of preferred stock outstanding prior to this offering
will automatically convert into common stock upon consummation of this offering.

COMMON STOCK

Holders of the common stock are entitled to receive, when and if declared by
the board of directors, dividends and other distributions in cash, stock or
property from our assets or funds legally available for those purposes subject
to any dividend preferences that may be attributable to preferred stock. Holders
of common stock are entitled to one vote for each share held of record on all
matters on which shareholders may vote. Holders of common stock are not entitled
to cumulative voting for the election of directors.

There are no preemptive, conversion, redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and non-assessable. In the event of our liquidation, dissolution or winding
up, holders of common stock are entitled to share ratably in the assets
available for distribution.

After this offering there will be 41,920,788 shares of common stock
outstanding. This number consists of 14,373,879 shares of common stock currently
outstanding, 9,000,000 shares to be issued in this offering and 18,546,909
shares issuable upon conversion of our preferred stock, assuming an initial
public offering price of $11.00 per share and that the closing of the offering
occurs on September 30, 1999.

PREFERRED STOCK

Before this offering, there were 17,781,781 shares of preferred stock
outstanding. Each of these shares will be converted into common stock upon
consummation of the offering. After this conversion, our board of directors,
without further action by the shareholders, is authorized to issue an aggregate
of 5,000,000 shares of preferred stock. Currently, we have no plans to issue a
new series of preferred stock. Our board of directors may, without shareholder
approval, issue preferred stock with dividend rates, redemption prices,
preferences on liquidation or dissolution, conversion rights, voting rights and
any other preferences, which rights and preferences could adversely affect the
voting power of the holders of common stock. Issuance of preferred stock could
make it harder for a third party to acquire, or could discourage or delay a
third party from acquiring, a majority of our outstanding stock.

The 17,781,781 shares of preferred stock currently outstanding have
preemptive rights.

69
<PAGE>
RIGHTS OF PREFERRED STOCK HOLDERS

On August 27, 1998, we sold 600,000 shares of Series C preferred stock. On
December 3, 1998, February 1, 1999, March 31, 1999 and May 28, 1999 we sold an
aggregate of 5,894,110 shares of Series D preferred stock. On August 4, 1999 we
sold 2,030,000 shares of Series E preferred stock. Generally, the shares of
Series C, Series D and Series E preferred stock will convert to common stock on
a greater than one-to-one basis. In addition, rights granted to the holders of
the Series C and Series D preferred stock under our Certificate of Incorporation
may require us to issue additional shares of common stock.

STOCK DIVIDEND

The holders of our Series C, Series D and Series E preferred stock are
entitled to a per annum dividend equal to ten percent, fifteen percent and seven
and one-half percent, respectively, of the liquidation value of the preferred
stock, which value is initially set at $5 per share, the purchase price of the
stock. The dividend will be paid by increasing the liquidation value of the
preferred stock by the amount equal to the dividend obligation. Upon the closing
of the offering, the number of shares of common stock that the preferred stock
converts into equals the quotient obtained by dividing (1) the liquidation value
of the preferred stock then in effect by (2) the purchase price of the preferred
stock.

Assuming that the closing of the offering occurs on September 30, 1999, the
600,000 shares of Series C preferred stock outstanding will convert into 903,125
shares of our common stock, the 5,894,110 shares of Series D preferred stock
outstanding will convert into 6,331,326 shares of our common stock and the
2,030,000 shares of Series E preferred stock outstanding will convert into
2,054,787 shares of our common stock.

ADDITIONAL SHARES OF COMMON WHICH MUST BE ISSUED UPON CONVERSION

The following table sets forth at several example offering prices, and
because the shares received as a stock dividend also have the right to receive
the additional shares, assuming that the closing of the offering occurs on
September 30, 1999, the approximate number of additional shares of common stock
that we will be obligated to issue to the holders of Series C or Series D
preferred stock:

<TABLE>
<CAPTION>
ADDITIONAL SHARES ADDITIONAL SHARES
TO SERIES C TO SERIES D
ASSUMED OFFERING PRICE PER SHARE HOLDERS HOLDERS
- ------------------------------------------------------ ----------------- ------------------
<S> <C> <C>
$10.00...................................... 393,348 437,216
11.00...................................... 303,125 437,216
12.00...................................... 277,865 437,216
13.00...................................... 164,183 437,216
14.00...................................... 109,578 437,216
15.00...................................... 62,292 437,216
</TABLE>

If such issuance of additional shares were to occur, current and prospective
stockholders would suffer additional dilution with a resulting proportionate
decrease in our earnings per share. This dilution could be substantial.

WARRANTS

As of August 31, 1999, giving effect to the conversion of all preferred
stock into common stock, we had outstanding warrants to purchase an aggregate of
855,890 shares of common stock, 705,890 of

70
<PAGE>

which are immediately exercisable and 150,000 of which are exercisable for 30
days after Sylvan releases its audited financial statements for the year ended
December 31, 2003, if Sylvan achieves specified milestones. Of these, warrants
to purchase 105,890 shares of preferred stock expire immediately prior to the
closing of this offering. The remaining warrants expire at various dates through
June 2004.

The following table sets forth warrants outstanding as of September 30,
1999:

<TABLE>
<CAPTION>
AVERAGE
NUMBER OF EXERCISE
DATE OF ISSUANCE TYPE WARRANTS PRICE EXPIRES
- ---------------------------- --------------------- ----------- ----------- ------------------
<S> <C> <C> <C> <C>
May 1998.................... Series B preferred 500,000 $ 3.25 May 2003
November 1998............... Series D preferred 5,500 $ 5.00 November 2005
February 1999............... Series D preferred 390 $ 5.00 February 2006
March 1999.................. Common 150,000 $ 5.00 April 2004
June 1999................... Series D preferred 100,000 $ 5.00 June 2004
July 1999................... Common 100,000 $ 5.00 September 1999
</TABLE>

We have agreed to issue warrants to a number of lease financing companies.
As of September 30, 1999, we are obligated to issue warrants for 92,500 shares
of common stock.

Some of the warrants have a net exercise provision under which the holder
may, in lieu of payment of the exercise price in cash, surrender the warrant and
receive a net amount of shares, based on the fair market value of our stock at
the time of the exercise of the warrant, after deducting the aggregate exercise
price.

The holders of warrants for Series B and Series D preferred shares have the
right to require us to include their securities in some future registration
statements we file under the Securities Act of 1933.

REGISTRATION RIGHTS

After the consummation of the offering, the holders of 9,449,238 shares of
common stock issuable upon conversion of the preferred stock will have
registration rights with respect to those securities, assuming an initial public
offering price of $11.00 per share and that the closing of the offering occurs
on September 30, 1999 (not including shares issuable upon exercise of warrants).
These rights are described in a shareholders agreement between us and the
holders of those securities. The agreement provides for registration upon the
demand of the holders of not less than 25% of the outstanding shares of Series C
and Series D preferred stock, upon the demand of the holders of not less than
50% of the outstanding Series C preferred stock, and upon the demand of
specified holders of Series D preferred stock. In addition, pursuant to that
agreement, the holders of our preferred stock and warrants for our preferred
stock are entitled to require us to include their securities in some future
registration statements we file under the Securities Act of 1933, referred to as
piggyback registration rights. The holders of those securities also are entitled
to require us to register their securities on a registration statement on Form
S-3 once we are eligible to use a Form S-3 in connection with registrations.
However, holders of these shares will be restricted from exercising these rights
until 180 days after the date of this prospectus. Registration of shares of
common stock by the exercise of these demand registration rights, piggyback
registration rights or S-3 registration rights under the Securities Act of 1933
would result in these shares becoming freely tradable without restriction under
the Securities Act of 1933 immediately upon the effectiveness of such
registration. Please see "Risk Factors--Substantial future sales of our common
stock in the public market could cause our stock price to fall," beginning on
page 19, and "Shares Eligible for Future Sale," beginning on page 74.

71
<PAGE>
SHAREHOLDER ACTION; SPECIAL MEETING OF SHAREHOLDERS

The Delaware Certificate of Incorporation that will become effective
immediately prior to the effectiveness of this offering states that shareholders
may not take action by written consent, but only at duly called annual or
special meetings of shareholders. The Delaware Certificate of Incorporation also
provide that special meetings of shareholders may be called only by the
president, the chairman of the board of directors, by a majority of the board of
directors or by a holder or holders of at least 50% of our outstanding common
stock.

ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS

The bylaws provide that shareholders must provide timely notice in writing
to bring business before an annual meeting of shareholders or to nominate
candidates for election as directors at an annual meeting of shareholders. To be
timely notice for an annual meeting, a shareholder's notice must be delivered to
or mailed and received at our principal executive offices at least 120 days
before the first anniversary of the date our notice of annual meeting was
provided for the previous year's annual meeting of shareholders. If no annual
meeting of shareholders was held in the previous year or the date of the annual
meeting of shareholders has been changed to be more than 30 calendar days
earlier than or 30 calendar days after that anniversary, notice by the
shareholder, to be timely, must be received at least 90 days but no more than
120 days before the annual meeting of shareholders or the close of business on
the 10th day following the date on which notice of the date of the meeting is
given to shareholders or made public, whichever first occurs. To be timely
notice for a special meeting, a shareholder's notice must be delivered to us by
the close of business 10 days after notice of the meeting is given to
shareholders. The bylaws also specify requirements as to the form and content of
a shareholders' notice. These provisions may keep shareholders from bringing
matters before an annual meeting of shareholders or from making nominations for
directors at an annual meeting of shareholders.

AUTHORIZED BUT UNISSUED SHARES

The authorized but unissued shares of common stock and preferred stock are
available for future issuances without shareholder approval. These additional
shares may be used for a variety of corporate purposes, including future public
offerings to raise additional capital, corporate acquisitions and employee
benefit plans. The existence of authorized but unissued shares of common stock
and preferred stock could make it harder or discourage an attempt to obtain
control of us by a proxy contest, tender offer, merger or otherwise.

CHANGE OF CONTROL PROVISIONS IN EMPLOYEE BENEFIT PLANS

DELAWARE ANTI-TAKEOVER LAW AND CHARTER PROVISIONS

After our reincorporation in Delaware, we will be subject to Section 203 of
the Delaware General Corporation Law which generally prohibits a Delaware
corporation from engaging in any business

72
<PAGE>
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder.
Section 203 applies unless:

- prior to the date such stockholder became an interested stockholder, the
board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming
an interested stockholder;

- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or

- on or after such date the stockholder became an interested stockholder,
the business combination is approved by the board of directors and
authorized at a meeting of stockholders by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.

Provisions of our certificate of incorporation and Delaware law may delay,
defer or prevent a change in our control and may adversely affect the voting and
other rights of holders of common stock. In particular, our certificate of
incorporation provides for a classified board of directors and the inability of
stockholders to vote cumulatively for directors.

LIMITATION ON DIRECTORS' LIABILITY AND INDEMNIFICATION MATTERS

Our certificate of incorporation provides that, except to the extent
provided by Delaware law, our directors will not be personally liable to us or
our stockholders for monetary damages for any breach of fiduciary duty while
serving as directors. This provision also does not affect the directors'
responsibilities under Delaware corporate law or any other laws, such as the
Federal securities laws or state or Federal environmental laws. Insofar as the
indemnification for liabilities arising under the Securities Act may be
permitted to our directors or officers, we have been informed that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.

We have entered into indemnity agreements to indemnify our executive
officers and directors in addition to the indemnification provided for in our
certificate of incorporation and bylaws. These agreements indemnify our
directors and executive officers for expenses, judgments and fines and amounts
paid in settlement, actually and reasonably incurred by any such person in any
action, suit or proceeding arising out of such person's services as a director
or executive officer on our behalf. We believe that these provisions and
agreements are necessary to attract and retain qualified directors and officers.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is BankBoston N.A.

73
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of our common stock in the public market after
the offering could adversely affect the market price of our common stock and our
ability to raise equity capital in the future on terms favorable to us.

After the offerings, 42,360,834 shares of our common stock will be
outstanding, assuming an initial public offering price of $11.00 per share and
that the closing of the offering occurs on September 30, 1999 and that the
underwriters do not exercise the over-allotment option. Of these shares, all of
the 9,000,000 shares sold in the underwritten offering and the 454,545 shares
sold in the concurrent offering will be freely tradable without restriction or
further registration under the Securities Act, unless these shares are purchased
by "affiliates" as that term is defined in Rule 144 under the Securities Act.
The remaining shares of common stock held by existing shareholders are
"restricted securities" as that term is defined in Rule 144 under the Securities
Act. Restricted securities may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144 or 701
under the Securities Act, which rules are summarized below.

The following table shows approximately when the 32,906,289 shares of our
common stock that are not being sold in this offering but which will be
outstanding when this offering is complete will be eligible for sale in the
public market:

ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN THE PUBLIC MARKET

<TABLE>
<CAPTION>
<S> <C>
180 days after the effective date............................................... 25,071,764
------------
</TABLE>

Resale of most of the restricted shares that will become available for sale
in the public market starting 180 days after the effective date will be limited
by volume and other resale restrictions under Rule 144 because the holders are
our affiliates.

RULE 144

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year is entitled to sell, within any three-month
period, a number of shares that is not more than the greater of:

- 1% of the number of shares of common stock then outstanding, which will
equal approximately 423,608 shares immediately after this offering; or

- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the sale
on Form 144 is filed.

Sales under Rule 144 must also comply with manner of sale provisions and
notice requirements and to the availability of current public information about
us.

RULE 144(k)

Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days before a sale, and who has beneficially owned the
restricted shares for at least two years, is entitled to sell the shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.

RULE 701

In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchase shares from us under a
stock option plan or other written

74
<PAGE>
agreement can resell those shares 90 days after the effective date of this
offering in reliance on Rule 144, but without complying with some of the
restrictions, including the holding period, contained in Rule 144.

LOCK-UP AGREEMENTS

Executive officers, directors and shareholders who will hold an aggregate of
32,721,088 shares of our common stock after this offering, assuming an initial
public offering price of $11.00 per share and that the closing of the offering
occurs on September 30, 1999, will sign or are subject to existing lock-up
agreements under which they will agree not to transfer or dispose of, directly
or indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for shares of common stock, for a period of 180 days
after the date of this prospectus. Transfers or dispositions can be made sooner
with the prior written consent of Merrill Lynch & Co.

REGISTRATION RIGHTS

Upon completion of this offering, assuming an initial public offering price
of $11.00 per share and that the closing of the offering occurs on September 30,
1999, the holders of 9,449,238 shares of our common stock will be entitled to
rights with respect to the registration of their shares under the Securities
Act. Please see "Description of Capital Stock--Registration Rights," beginning
on page 71, for a more detailed description of these registration rights. After
registration, these shares will become freely tradable without restriction under
the Securities Act. Any sales of securities by these shareholders could have a
material adverse effect on the trading price of our common stock.

STOCK OPTIONS

Immediately after this offering we intend to file a registration statement
under the Securities Act covering 4,899,350 shares of common stock reserved for
issuance under our stock option plans. Each year as the number of shares
reserved for issuance under our 1998 Stock Plan increases, we will file an
amendment to the registration statement covering the additional shares. As of
June 30, 1999, options to purchase 2,512,857 shares of common stock were issued
and outstanding. Of these options to purchase shares of common stock, 670,382
will be vested and exercisable within 60 days of the date of this offering. When
the lock-up agreements described above expire, these vested options will become
freely tradable. This registration statement is expected to be filed and become
effective as soon as practicable after the effective date of this offering.
Accordingly, shares registered under that registration statement will, subject
to vesting provisions and Rule 144 volume limitations applicable to our
affiliates, be available for sale in the open market immediately after the 180
day lock-up agreements expire.

75
<PAGE>
UNDERWRITING

GENERAL

Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Bank Securities
Inc., Thomas Weisel Partners LLC, and Wit Capital Corporation are acting as
representatives of each of the underwriters named below. Subject to the terms
and conditions stated in the Purchase Agreement among us and the underwriters,
we have agreed to sell to each of underwriters, and each of the underwriters,
severally and not jointly, has agreed to purchase from us the number of shares
of common stock stated opposite its name below.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................................
Deutsche Bank Securities Inc.....................................
Thomas Weisel Partners LLC.......................................
Wit Capital Corporation..........................................
---------

Total.................................................. 9,000,000
---------
---------
</TABLE>

Subject to the terms and conditions stated in the Purchase Agreement, the
several underwriters have agreed to purchase all the shares of common stock
being sold pursuant to the Purchase Agreement if any shares of common stock are
purchased. In the event that Dell does not purchase any shares, or purchases
fewer shares than anticipated, the underwriters will purchase those shares not
purchased by Dell. Under the terms of the Purchase Agreement, the commitments of
the non-defaulting Underwriters may in some circumstances be increased or the
Purchase Agreement may be terminated.

ZapMe! will sell the 454,545 shares that may be issued to various Series D
shareholders associated with Gilat Satellite Networks directly pursuant to an
agreement to offer such shares to them. The sale to the Gilat individuals is
expected to be consummated simultaneously with the sale of the shares offered
hereby.

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

The underwriters offer the shares of common stock, subject to prior sale,
when as and if issued to and accepted by them, subject to approval of some legal
matters by counsel for the underwriters and some other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject order in whole or in part.

A prospectus in electronic format is being made available on a web site
maintained by Wit Capital. In addition, all dealers purchasing shares from Wit
Capital in this offering have agreed to make a prospectus in electronic format
available on web sites maintained by each of these dealers.

COMMISSIONS AND DISCOUNTS

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

76
<PAGE>
The following table shows the per share and total underwriting discounts
that we will pay to the underwriters. This information is presented assuming
either no exercise or full exercise by the underwriters of their over-allotment
options.

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

We will pay the expenses of the offering, estimated at $ .

RESERVED SHARES

At our request, the underwriters have reserved for sale, at the initial
public offering price, up to twelve percent of the shares offered hereby to be
sold to people associated with us or our directors, officers or employees, such
as vendors, suppliers, existing stockholders and other persons that have
relationships with or are interested in us. Shares may also be reserved for our
directors, officers or employees. The number of shares of our common stock
available for sale to the general public will be reduced to the extent that
those persons purchase the reserved shares. Any reserved shares which are not
orally confirmed for purchase within one day of the pricing of this offering
will be offered by the underwriters to the general public on the same terms as
the other shares offered by this prospectus.

OVER-ALLOTMENT OPTION

We have granted to the underwriters an option exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate of an additional
1,350,000 shares of common stock at the public offering price stated on the
cover of this prospectus, less the underwriting discount. The underwriters may
exercise this option solely to cover over-allotments, if any, made on the sale
of the common stock offered hereby. To the extent that the underwriters exercise
this option, each underwriter will generally be obligated to purchase a number
of additional shares of common stock proportionate to such underwriter's initial
amount reflected to the table above.

NO SALES OF SIMILAR SECURITIES

We and our executive officers and directors have agreed, for a period of 180
days after the date of this prospectus not to directly or indirectly issue,
sell, or otherwise dispose of or transfer any shares of common stock or
securities convertible into or exchangeable or exercisable for common stock,
without the prior written consent of Merrill Lynch on behalf of the
underwriters, except for purchases and sales of stock in the open market, shares
purchased in our directed share program, or transfers to a family member or a
family trust, transfers of shares as a gift, or transfers to limited partners of
a partnership or shareholders of a corporation if such transferee agrees in
writing to be similarly restricted. See "Shares Eligible for Future Sale,"
beginning on page 74, for detailed information about our shares of common stock
that will be eligible for future sale.

PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS

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

If the underwriters create a short position in the common stock in
connection with this offering, i.e., if they sell more shares of common stock
than are stated on the cover page of this prospectus, the representatives may
reduce that short position by purchasing common stock in the open market. The

77
<PAGE>
representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.

Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the representation that the representatives will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.

NEW UNDERWRITERS

Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in this offering as one of the underwriters. The National
Association of Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997. Since that time, Wit Capital has acted as an underwriter
or co-manager in over 95 public offerings.

Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has been named as a lead or co-manager on 71 filed
public offerings of equity securities, of which 39 have been completed, and has
acted as a syndicate member in an additional 33 public offerings of equity
securities. Jack Kemp, one of our directors, sits on the Advisory Board of
Thomas Weisel Partners. Other than Mr. Kemp's affiliation, Thomas Weisel
Partners does not have any material relationship with us or any of our officers,
directors or other controlling persons, except with respect to its contractual
relationship with us pursuant to the underwriting agreement entered into in
connection with this offering.

OTHER RELATIONSHIPS

Some of the underwriters and their affiliates engage in transactions with,
and perform services for, our company in the ordinary course of business and
have engaged, and may in the future engage, in commercial banking and investment
banking transactions with our company, for which they have received or may
receive customary compensation.

LEGAL MATTERS

The validity of the common stock offered hereby is being passed upon by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, San
Francisco, California. As of the date of this prospectus, an investment
partnership composed of certain current and former members of and persons
associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, as
well as certain individual attorneys of this firm, beneficially own an aggregate
of 21,400 shares of ZapMe!'s Series D preferred stock, which, assuming an
initial public offering price of $11.00 per share and that the closing of the
offering occurs on September 30, 1999, will convert into approximately 22,987
shares of common stock.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our financial
statements as of December 31, 1997 and 1998, and for the period June 25, 1997
(inception) through December 31, 1997 and for the year ended December 31, 1998,
as set forth in their report. We have included our financial statements in the
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.

78
<PAGE>
AVAILABLE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement or the exhibits and schedules which are part of the registration
statement. For further information with respect to ZapMe! and its common stock,
see the registration statement and the exhibits and schedules thereto. Any
document ZapMe! files may be read and copied at the Commission's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the Commission at 1-800-SEC-0330 for further information about the
public reference rooms. Our filings with the Commission are also available to
the public from the Commission's Web site at http://www.sec.gov.

Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and,
accordingly, will file periodic reports, proxy statements and other information
with the Commission. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the Commission's
public reference rooms, and the Web site of the Commission referred to above.

79
<PAGE>
ZAPME! CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2

Balance Sheets........................................................................ F-3

Statements of Operations.............................................................. F-4

Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity
(Deficit)........................................................................... F-5

Statements of Cash Flows.............................................................. F-6

Notes to Financial Statements......................................................... F-7
</TABLE>

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

The Board of Directors and Stockholders
ZapMe! Corporation

We have audited the accompanying balance sheets of ZapMe! Corporation (a
development stage company) as of December 31, 1997 and 1998, and the related
statements of operations, redeemable convertible preferred stock and
stockholders' equity (deficit) and cash flows for the period June 25, 1997
(inception) through December 31, 1997 and for the year ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ZapMe! Corporation (a
development stage company) at December 31, 1997 and 1998, and the results of its
operations and its cash flows for the period June 25, 1997 (inception) through
December 31, 1997 and for the year ended December 31, 1998 in conformity with
generally accepted accounting principles.

Walnut Creek, California
April 2, 1999,
except for Note 8, as to which the date is
October , 1999

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

The foregoing report is in the form that will be signed upon final computation
of the number of common shares which may be received by holders of Series C and
D preferred stock and computation of an additional dividend amount, if any, as
described in Note 3 to the financial statements, the effect on pro forma
weighted average shares as described in Note 1 to the financial statements, and
approval of the certificate of incorporation in the state of Delaware as
described in Note 8 to the financial statements.

/s/ ERNST & YOUNG LLP

Walnut Creek, California
September 27, 1999

F-2
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
DECEMBER 31, JUNE 30, JUNE 30,
1997 1998 1999 1999
--------- --------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 275 $ 815 $ 19,855
Restricted cash........................................................... -- -- 560
Accounts receivable....................................................... -- -- 14
Other receivables......................................................... -- 105 1,168
Notes receivable from stockholder......................................... -- 127 131
Prepaid expenses and other current assets................................. 13 45 362
--------- --------- -----------
Total current assets........................................................ 288 1,092 22,090

Equipment, net.............................................................. 43 2,471 9,781
Other assets................................................................ 18 40 275
--------- --------- -----------
Total assets................................................................ $ 349 $ 3,603 $ 32,146
--------- --------- -----------
--------- --------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses..................................... $ 157 $ 1,541 $ 3,217
Accrued compensation and related expenses................................. 242 446 882
Deferred revenue.......................................................... -- -- 302
Current portion of capital lease obligations.............................. -- 118 2,092
--------- --------- -----------
Total current liabilities................................................... 399 2,105 6,493

Capital lease obligations................................................... -- 269 4,613
Notes payable to stockholders............................................... 462 -- --
--------- --------- -----------
Total liabilities........................................................... 861 2,374 11,106

Commitments
Redeemable convertible preferred stock, $0.01 par value, issuable in series:
Authorized shares--600,000 (none pro forma)
Issued and outstanding shares--600,000 in 1998, and 1999 and none pro
forma (liquidation preference at June 30, 1999--$4,542)................. -- 3,352 6,080 $ --

Stockholders' equity (deficit):
Convertible preferred stock, $0.01 par value:
Authorized shares--12,857,671 in 1998 and 16,357,671 in 1999 (including
600,000 shares designated as redeemable convertible preferred stock)
(5,000,000 pro forma)
Issued and outstanding shares--9,557,671 in 1998 and 15,151,781 in 1999,
and none pro forma (liquidation preference at June 30,
1999--$30,893)........................................................ -- 2,783 30,155 --
Common stock, $0.01 par value:
Authorized shares--50,000,000 (200,000,000 pro forma)
Issued and outstanding shares--11,858,730 in 1997, 14,208,730 in 1998,
14,359,380 in 1999, and 30,111,161 pro forma.......................... 69 5,212 9,504 45,739
Deferred stock compensation............................................... -- (4,900) (5,643) (5,643)
Accumulated deficit during the development stage.......................... (581) (6,218) (19,056) (19,056)
--------- --------- ----------- -------------
Total stockholders' equity (deficit)........................................ (512) (2,123) 14,960 $ 21,040
--------- --------- ----------- -------------
-------------
Total liabilities, redeemable convertible preferred stock and stockholders'
equity (deficit).......................................................... $ 349 $ 3,603 $ 32,146
--------- --------- -----------
--------- --------- -----------
</TABLE>

SEE ACCOMPANYING NOTES.

F-3
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
PERIOD FROM JUNE PERIOD FROM JUNE
25, 1997 SIX MONTHS ENDED JUNE 25, 1997
(INCEPTION) YEAR ENDED 30, (INCEPTION)
THROUGH DECEMBER DECEMBER 31, ------------------------ THROUGH JUNE 30,
31, 1997 1998 1998 1999 1999
------------------ ------------ ----------- ----------- ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue................................. $ -- $ -- $ -- $ 147 $ 147

Costs and expenses:
Cost of services...................... -- 135 8 1,247 1,382
Research and development.............. 231 1,140 429 1,034 2,405
Sales and marketing................... 40 1,197 176 2,456 3,693
General and administrative............ 299 1,458 415 1,975 3,732
Amortization of deferred stock
compensation........................ -- 1,065 -- 2,531 3,596
------- ------------ ----------- ----------- --------
Total costs and expenses................ 570 4,995 1,028 9,243 14,808
------- ------------ ----------- ----------- --------
Loss from operations.................... (570) (4,995) (1,028) (9,096) (14,661)
Interest income (expense), net.......... (11) (36) (35) 29 (18)
------- ------------ ----------- ----------- --------
Net loss................................ (581) (5,031) (1,063) (9,067) (14,679)
Accretion and dividend on redeemable
convertible preferred stock........... -- (606) -- (3,771) (4,377)
------- ------------ ----------- ----------- --------
Net loss applicable to common
stockholders.......................... $ (581) $ (5,637) $ (1,063) $ (12,838) $ (19,056)
------- ------------ ----------- ----------- --------
------- ------------ ----------- ----------- --------
Net loss per share:
Basic and diluted..................... $ (0.05) $ (0.48) $ (0.09) $ (0.95)
------- ------------ ----------- -----------
------- ------------ ----------- -----------
Pro forma basic and diluted
(unaudited)......................... $ (0.32) $ (0.36)
------------ -----------
------------ -----------
Shares used in calculation of net loss
per share:
Basic and diluted..................... 11,183 11,685 11,859 13,517
------- ------------ ----------- -----------
------- ------------ ----------- -----------
Pro forma basic and diluted
(unaudited)......................... 15,993 25,462
------------ -----------
------------ -----------
</TABLE>

SEE ACCOMPANYING NOTES.

F-4
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------
REDEEMABLE
CONVERTIBLE CONVERTIBLE COMMON
PREFERRED STOCK PREFERRED STOCK STOCK
---------------------- ---------------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Issuance of common stock to founders at $0.005 per share in June
1997........................................................... -- $ -- -- $ -- 10,000,000
Issuance of common stock for services at $0.10 per share in
September 1997................................................. -- -- -- -- 1,858,730
Net loss and comprehensive loss.................................. -- -- -- -- --
--------- ----------- --------- ----------- ---------
Balances at December 31, 1997...................................... -- -- -- -- 11,858,730
Issuance of Series A preferred stock at $0.10 per share for
conversion of notes payable, net of issuance cost of $11 in
August 1998.................................................... -- -- 9,097,671 899 --
Issuance of Series B preferred stock at $2.50 per share for
conversion of notes payable, net of issuance costs of $4 in
August 1998.................................................... -- -- 160,000 396 --
Issuance of Series C redeemable convertible preferred stock at
$5.00 per share, net of issuance costs of $254 in August
1998........................................................... 600,000 2,746 -- -- --
Issuance of Series D preferred stock at $5.00 per share, net of
issuance costs of $12 in December 1998......................... -- -- 300,000 1,488 --
Issuance of common stock upon exercise of stock options at prices
ranging from $0.015 to $0.0165 per share....................... -- -- -- -- 1,000,000
Issuance of common stock at $0.25 per share for services for note
receivable in August 1998...................................... -- -- -- -- 1,350,000
Deferred stock compensation...................................... -- -- -- -- --
Amortization of deferred stock compensation...................... -- -- -- -- --
Accretion of redeemable convertible preferred stock.............. -- 531 -- -- --
Accrued Series C dividends....................................... -- 75 -- -- --
Net loss and comprehensive loss.................................. -- -- -- -- --
--------- ----------- --------- ----------- ---------
Balances at December 31, 1998...................................... 600,000 3,352 9,557,671 2,783 14,208,730
Issuance of common stock at prices ranging from $0.02 to $0.25
per share upon exercise of stock options (unaudited)........... -- -- -- -- 150,650
Issuance of Series D preferred stock at $5.00 per share, net of
issuance costs of $1,811 in March 1999. (unaudited)............ -- -- 5,554,110 25,960 --
Issuance of Series D preferred stock at $5.00 per share for
conversion of note payable in February 1999. (unaudited)....... -- -- 40,000 200 --
Issuance of common stock options to non-employees in
consideration for services rendered (unaudited)................ -- -- -- -- --
Warrants issued in connection with lease financing in March 1999.
(unaudited).................................................... -- -- -- 169 --
Deferred stock compensation (unaudited).......................... -- -- -- -- --
Amortization of deferred stock compensation (unaudited).......... -- -- -- -- --
Accretion of redeemable convertible preferred stock
(unaudited).................................................... -- 780 -- -- --
Accretion of mandatory dividends and guaranteed return
(unaudited).................................................... 1,792 1,043
Accrued Series C dividends (unaudited)........................... -- 156 -- -- --
Net loss and comprehensive loss (unaudited)...................... -- -- -- -- --
--------- ----------- --------- ----------- ---------
Balances at June 30, 1999 (unaudited).............................. 600,000 $ 6,080 15,151,781 $ 30,155 14,359,380
--------- ----------- --------- ----------- ---------
--------- ----------- --------- ----------- ---------

<CAPTION>
STOCKHOLDERS' EQUITY
(DEFICIT)
---------------------------
ACCUMULATED
DEFICIT TOTAL
DEFERRED DURING THE STOCKHOLDERS'
STOCK DEVELOPMENT EQUITY
AMOUNT COMPENSATION STAGE (DEFICIT)
----------- --------------- ------------ -------------
<S> <C> <C> <C> <C>
Issuance of common stock to founders at $0.005 per share in June
1997........................................................... $ 50 $ -- $ -- $ 50
Issuance of common stock for services at $0.10 per share in
September 1997................................................. 19 -- -- 19
Net loss and comprehensive loss.................................. -- -- (581) (581)
----------- ------- ------------ -------------
Balances at December 31, 1997...................................... 69 -- (581) (512)
Issuance of Series A preferred stock at $0.10 per share for
conversion of notes payable, net of issuance cost of $11 in
August 1998.................................................... -- -- -- 899
Issuance of Series B preferred stock at $2.50 per share for
conversion of notes payable, net of issuance costs of $4 in
August 1998.................................................... -- -- -- 396
Issuance of Series C redeemable convertible preferred stock at
$5.00 per share, net of issuance costs of $254 in August
1998........................................................... -- -- -- --
Issuance of Series D preferred stock at $5.00 per share, net of
issuance costs of $12 in December 1998......................... -- -- -- 1,488
Issuance of common stock upon exercise of stock options at prices
ranging from $0.015 to $0.0165 per share....................... 16 -- -- 16
Issuance of common stock at $0.25 per share for services for note
receivable in August 1998...................................... 672 (510) -- 162
Deferred stock compensation...................................... 5,455 (5,455) -- --
Amortization of deferred stock compensation...................... -- 1,065 -- 1,065
Accretion of redeemable convertible preferred stock.............. -- -- (531) (531)
Accrued Series C dividends....................................... -- -- (75) (75)
Net loss and comprehensive loss.................................. -- -- (5,031) (5,031)
----------- ------- ------------ -------------
Balances at December 31, 1998...................................... 6,212 (4,900) (6,218) (2,123)
Issuance of common stock at prices ranging from $0.02 to $0.25
per share upon exercise of stock options (unaudited)........... 18 -- -- 18
Issuance of Series D preferred stock at $5.00 per share, net of
issuance costs of $1,811 in March 1999. (unaudited)............ -- -- -- 25,960
Issuance of Series D preferred stock at $5.00 per share for
conversion of note payable in February 1999. (unaudited)....... -- -- -- 200
Issuance of common stock options to non-employees in
consideration for services rendered (unaudited)................ 362 (362) -- --
Warrants issued in connection with lease financing in March 1999.
(unaudited).................................................... -- -- -- 169
Deferred stock compensation (unaudited).......................... 2,912 (2,912) -- --
Amortization of deferred stock compensation (unaudited).......... -- 2,531 -- 2,531
Accretion of redeemable convertible preferred stock
(unaudited).................................................... -- -- (780) (780)
Accretion of mandatory dividends and guaranteed return
(unaudited).................................................... (2,835) (1,792)
Accrued Series C dividends (unaudited)........................... -- -- (156) (156)
Net loss and comprehensive loss (unaudited)...................... -- -- (9,067) (9,067)
----------- ------- ------------ -------------
Balances at June 30, 1999 (unaudited).............................. $ 9,504 $ (5,643) $ (19,056) $ 14,960
----------- ------- ------------ -------------
----------- ------- ------------ -------------
</TABLE>

SEE ACCOMPANYING NOTES.

F-5
<PAGE>
ZAPME! CORPORATION

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
PERIOD FROM
JUNE 25, 1997 PERIOD FROM
(INCEPTION) SIX MONTHS ENDED JUNE JUNE 25, 1997
THROUGH YEAR ENDED 30, (INCEPTION)
DECEMBER 31, DECEMBER 31, ------------------------ THROUGH JUNE
1997 1998 1998 1999 30, 1999
--------------- ------------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................... $ (581) $ (5,031) $ (1,063) $ (9,067) $ (14,098)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred stock compensation.......... -- 1,065 -- 2,290 3,355
Depreciation and amortization........................ 10 205 27 770 985
Common stock issued for services..................... 19 -- -- 241 260
Changes in operating assets and liabilities:
Restricted cash.................................... -- -- -- (560) (560)
Accounts receivable................................ -- -- -- (14) (14)
Other receivables.................................. -- (105) -- (1,063) (1,168)
Prepaid expenses and other current assets.......... (13) (32) (36) (317) (362)
Other assets....................................... (18) (22) -- (75) (115)
Accounts payable and accrued expenses.............. 157 1,384 155 1,676 3,217
Accrued compensation and related expenses.......... 242 204 256 436 882
Deferred revenue................................... -- -- -- 302 302
----- ------------- ----------- ----------- -------------
Net cash used in operating activities.................. (184) (2,332) (661) (5,381) (7,897)

INVESTING ACTIVITIES
Purchase of equipment, net............................. (53) (2,243) (378) (1,303) (3,599)
Notes receivable from stockholder...................... -- (127) -- (4) (131)
----- ------------- ----------- ----------- -------------
Net cash used in investing activities.................. (53) (2,370) (378) (1,307) (3,730)

FINANCING ACTIVITIES
Proceeds from issuance of preferred stock, net......... -- 4,229 -- 25,960 30,189
Proceeds from issuance of common stock................. 50 178 -- 18 246
Proceeds from borrowings on notes payable.............. 462 1,000 1,026 700 2,162
Payments on notes payable.............................. -- (162) -- (500) (662)
Payments on lease obligations.......................... -- (3) -- (450) (453)
----- ------------- ----------- ----------- -------------
Net cash provided by financing activities.............. 512 5,242 1,026 25,728 31,482
----- ------------- ----------- ----------- -------------
Increase (decrease) in cash and cash equivalents....... 275 540 (13) 19,040 19,855
Cash and cash equivalents at beginning of period....... -- 275 275 815 --
----- ------------- ----------- ----------- -------------
Cash and cash equivalents at end of period............. $ 275 $ 815 $ 262 $ 19,855 $ 19,855
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
SUPPLEMENTAL DISCLOSURES:
Conversion of notes payable to stockholders to
preferred stock...................................... $ -- $ 1,300 $ -- $ 200 $ 1,500
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
Issuance of common stock for notes receivable.......... $ -- $ 162 $ -- $ -- $ 162
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
Accretion and dividends of redeemable preferred stock.. $ -- $ 606 $ -- $ 936 $ 1,542
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
Accretion of mandatory dividends and guaranteed return $ -- $ -- $ -- $ 2,835 $ 2,835
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
Capital lease obligations incurred..................... $ -- $ 390 $ -- $ 6,768 $ 7,158
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
Warrants issued in connection with lease financing..... $ -- $ -- $ -- $ 169 $ 169
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
Cash paid for interest................................. $ -- $ 26 $ 10 $ 110 $ 136
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
</TABLE>

See accompanying notes.

F-6
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF THE COMPANY

ZapMe! Corporation (the "Company") was incorporated, under the name
Satellite Online Solutions Corporation, on June 25, 1997 in California for the
purpose of building a broadband interactive network that brings technology tools
and educational resources to schools at no cost. The Company changed its name to
ZapMe! Corporation in October 1998. The Company is planning to generate revenue
from corporate sponsorships on its network. The Company is in the development
stage, devoting its efforts to developing products and raising capital.

The Company has incurred operating losses since inception during the
development stage. Its activities to date have been financed primarily through
private placements of equity securities, including preferred stock issuances of
$10 million in March 1999 and $16 million in May 1999. The Company may seek to
raise additional capital through the issuance of debt or equity securities.
However, there can be no assurance that additional funding will be available to
the Company on acceptable terms, if at all.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

INTERIM FINANCIAL INFORMATION

The interim financial information as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 is unaudited, but includes all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of its financial position at such date and its
results of operations and cash flows for those periods. Operating results for
the six months ended June 30, 1999 are not necessarily indicative of results
that may be expected for any future periods.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of demand deposits and money market
accounts held with two financial institutions with insignificant interest rate
risk and original maturities of three months or less from the date of purchase.

EQUIPMENT

Equipment is stated at cost and depreciated using the straight-line method
over estimated useful lives of three to seven years.

DEPENDENCE ON THIRD PARTIES

The Company has relationships with three parties, one which installs the
Company's software on the computers, one which installs the Company's lab in
each school site and one which serves as the general contractor to oversee the
installation process. In addition, the Company relies on third parties to
provide the majority of support necessary to maintain the network and labs once
installed and are also dependent on transmissions from the satellite to customer
sites. The inability of any of these

F-7
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
parties to fulfill their obligations with the Company could negatively impact
the Company's future results.

SOFTWARE DEVELOPMENT COSTS

The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards Board ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,"
under which certain software development costs incurred subsequent to the
establishment of technological feasibility are capitalized and amortized over
the estimated lives of the related products. Technological feasibility is
established upon completion of a working model. To date, costs incurred
subsequent to the establishment of technological feasibility have not been
significant, and all software development costs have been charged to research
and development expense in the accompanying statements of operations.

REVENUE RECOGNITION

The Company earns revenue from sponsorship agreements, which include content
and public service announcement sponsorships, banner advertising and full screen
interactive ads, upon delivery of messages over the Company's network. Provided
that collectibility is probable, revenue is recognized ratably over the time
periods that the advertisement is delivered or sponsorship is acknowledged
unless such sponsorship is based on delivery of a minimum number of impressions,
in which case revenue is recognized as the impressions are delivered.

E-commerce revenue consists of referral fees and commissions on transactions
facilitated through the Company's network as well as referred transactions.
Revenue from e-commerce is recognized upon notification from the contracting
partner of the fact of the referral or sale upon which referral fees or
commissions is due. Network services and other revenue consist of revenue from
the distribution of content and products delivered through the Company's
network, and from educational services delivered in the ZapMe! labs such as
teacher training, tutoring and other educational programs offered through a
strategic alliance. Network services and other revenue is recognized in the time
period in which the underlying service is delivered. Network services and other
revenue also include revenue from the Company's five-year agreement with a
strategic partner which provides for a sharing of revenue derived from the
delivery of programs in ZapMe! computer labs. This agreement allows the
strategic partner to offer student tutoring, teacher training, and other
programs in the ZapMe! computer labs. For the calendar year 1999, the strategic
partner is committed to pay ZapMe! minimum fees. Thereafter, fees will be based
on a rate for installed schools available for use by the strategic partner. To
date, no programs have been offered under this arrangement, and additionally, no
e-commerce or network services have been delivered and no revenue has been
recognized by ZapMe!.

Deferred revenue consists of prepaid sponsorship fees.

AFFINITY PROGRAM

The Company has an affinity program designed to encourage ZapMe! users to
log onto the network and utilize various features of the Netspace and rewards
users with points which may be redeemed by connecting to participating
companies' websites through links inserted on the ZapMe! Netspace and selecting
items to purchase. The user will tender points and other consideration if

F-8
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

necessary to the e-commerce partner. For each purchase transacted by a user with
an e-commerce partner, the Company will earn a fee equal to a percentage of the
purchase. When the fee is earned from a transaction where points are tendered,
the Company will record the fee as a reduction to marketing expense. To the
extent the fee is earned on a transaction in which points are not tendered, the
fee will be recognized as revenue earned. The effect of fees earned through the
affinity program will be recorded in the statement of operations in the month in
which the purchase transaction occurs between the user and the e-commerce
partner. The Company will record a marketing for ZapPoints awards based upon the
full dollar equivalent of points which have been awarded and which are expected
to be redeemed.

STOCK-BASED COMPENSATION

The Company accounts for employee stock options using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25 and has
adopted the disclosure-only alternative of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123").

The value of warrants, options or stock exchanged for services is expensed
over the period benefitted. The warrants and options are valued using the
Black-Scholes option pricing model. To calculate the expense, the Company uses
either the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable.

INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires the use of the liability method in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are measured using enacted tax rates and laws that will be in effect
when the differences are expected to reverse.

NET LOSS PER SHARE

Basic and diluted net loss per share information for all periods is
presented under the requirement of SFAS No. 128, "Earnings per Share." Basic
loss per share has been computed using net loss applicable to common
stockholders divided by the weighted-average number of common shares outstanding
during the period, less shares subject to repurchase, and excludes stock
options, warrants, and convertible securities. Such securities have also been
excluded from the computation of diluted net loss per share as their inclusion
would be antidilutive.

Pro forma net loss per share has been computed using net loss as adjusted
for accrued redeemable convertible preferred stock dividends divided by the
weighted-average number of shares outstanding and also gives effect, under
Securities and Exchange Commission guidance, to the conversion of preferred
shares not included above that will automatically convert upon completion of the
Company's initial offering, using the if-converted method. The conversion
assumes a one-for-one conversion of the preferred stock into common stock. Such
conversion is subject to adjustment based on the final pricing of the Company's
common stock in an initial public offering. Such accretion of convertible
preferred stock of $531,000 and $780,000 for the year ended December 31, 1998
and the six months ended June 30, 1999, respectively, is based upon the
mid-point of the range of the expected initial public offering price ($11 per
share) and is included in the pro forma net loss per share calculation. Such

F-9
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

accretion may be adjusted based on the final pricing of the Company's common
stock in an initial public offering.

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

<TABLE>
<CAPTION>
PERIOD FROM
JUNE 25, 1997
(INCEPTION) SIX MONTHS ENDED JUNE
THROUGH YEAR ENDED 30,
DECEMBER 31, DECEMBER 31, ------------------------
1997 1998 1998 1999
------------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Historical:
Net loss................................................. $ (581) $ (5,031) $ (1,063) $ (9,067)
Accretion and dividend on redeemable convertible
preferred stock........................................ -- (606) -- (3,771)
------------- ------------ ----------- -----------
Net loss applicable to common stockholders............... $ (581) $ (5,637) $ (1,063) $ (12,838)
------------- ------------ ----------- -----------
------------- ------------ ----------- -----------
Weighted average shares of common stock outstanding...... 11,183 12,739 11,859 14,311
Less: weighted average shares subject to repurchase...... -- 1,054 -- 794
------------- ------------ ----------- -----------
Weighted average shares of common stock outstanding used
in computing basic and diluted net loss per share...... 11,183 11,685 11,859 13,517
------------- ------------ ----------- -----------
------------- ------------ ----------- -----------
Basic and diluted net loss per share..................... $ (0.05) $ (0.48) $ (0.09) $ (0.95)
------------- ------------ ----------- -----------
------------- ------------ ----------- -----------
Pro forma (Unaudited):
Net loss applicable to common stockholders (from
above)................................................. $ (5,637) $ (12,838)
Accretion on redeemable convertible preferred stock...... 531 780
------------ -----------
Pro forma net loss....................................... $ (5,106) $ (12,058)
------------ -----------
------------ -----------
Weighted average shares used in computing basic and
diluted net loss per share (from above)................ 11,685 13,517
Adjustment to reflect the effect of the assumed
conversion of preferred stock from the date of
issuance............................................... 4,308 11,945
------------ -----------
Weighted average shares used in computing pro forma basic
and diluted net loss per share......................... 15,993 25,462
------------ -----------
------------ -----------
Pro forma basic and diluted net loss per share........... $ (0.32) $ (0.47)
------------ -----------
------------ -----------
</TABLE>

If the Company had reported net income, the calculation of historical and
pro forma diluted earnings per share would have included approximately an
additional 86,000, 938,000, 979,000 and 1,258,000 common equivalent shares
related to the outstanding stock options and warrants not included above
(determined using the treasury stock method at the estimated fair value) for the
period from

F-10
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
June 25, 1997 (inception) through December 31, 1997, the year ended December 31,
1998, and for the six months ended June 30, 1998 and 1999, respectively.

EFFECT OF NEW ACCOUNTING STANDARDS

The FASB issued Statement No. 131 ("SFAS 131"), "Disclosure about Segments
of an Enterprise and Related Information," which establishes standards for the
way public business enterprises report information in annual statements and
interim financial reports regarding operating segments, products and services,
geographic areas, and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997. The Company adopted
SFAS 131 in the year ended December 31, 1998, and operates in one business
segment which is building a broadband interactive network that brings technology
tools and educational resources to schools at no cost.

2. EQUIPMENT

Equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- ---------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Computer and office equipment..................................... $ 43 $ 2,510 $ 10,397
Furniture and fixtures............................................ 10 176 362
--- --------- ---------
53 2,686 10,759
Less accumulated depreciation and amortization.................... (10) (215) (978)
--- --------- ---------
$ 43 $ 2,471 $ 9,781
--- --------- ---------
--- --------- ---------
</TABLE>

3. STOCKHOLDERS' EQUITY

PREFERRED STOCK

Preferred stock consists of the following by series:

<TABLE>
<CAPTION>
SHARES ISSUED AND OUTSTANDING
AUTHORIZED SHARES ---------------------------------
----------------------
DECEMBER DECEMBER 31,
31, JUNE 30, ---------------------- JUNE 30,
SERIES 1998 1999 1997 1998 1999
- ---------------------------------------- ----------- --------- ----- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
A convertible........................... 9,097,671 9,097,671 -- 9,097,671 9,097,671
B convertible........................... 660,000 660,000 -- 160,000 160,000
C redeemable convertible................ 600,000 600,000 -- 600,000 600,000
D convertible........................... 2,500,000 6,000,000 -- 300,000 5,894,110
--
----------- --------- --------- ---------
12,857,671 16,357,671 -- 10,157,671 15,751,781
--
--
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>

The holders of Series A, Series B and Series D convertible preferred stock
are entitled to dividends when and if they are declared by the Board of
Directors prior to and in preference to any dividend on common stock. No
dividend or distribution can be declared or paid on any shares of

F-11
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)

3. STOCKHOLDERS' EQUITY (CONTINUED)
Series A, B or D convertible preferred stock unless all accrued but unpaid
dividends on the Series C redeemable convertible preferred stock have been paid.
The holders of Series C redeemable convertible preferred stock are entitled to a
mandatory dividend payable quarterly at the rate of 10% per annum of the
liquidation preference. In the event the corporation does not pay a dividend in
cash, the preferred liquidation value of each such share is automatically
increased by an amount equal to the unpaid dividend amount. The holders of
Series D convertible preferred stock are entitled to a mandatory rate increase
of 15% per annum of the liquidation preference, compounded quarterly. In the
event of an initial public offering of the Company's common stock, the
liquidation value per share will be issued in shares of the Company's common
stock at a conversion price of $5.00 per share.

Each share of preferred stock is convertible, at the option of the holder,
into one share of the Company's common stock, subject to certain anti-dilution
provisions. Each share of preferred stock will be automatically converted into
common stock upon completion of an initial public offering of the Company's
common stock with proceeds to the Company of a minimum of $25,000,000 at a
minimum offering price of $8.00 per share of common stock. The holders of
preferred stock are entitled to the number of votes equal to the number of
shares of common stock into which their preferred stock is convertible.

The Series C redeemable convertible preferred stock is redeemable in the
event that the Company has not consummated a public offering or merger event on
or before August 27, 2000. The redemption price per share will equal twice the
preferred liquidation amount for each such share, together with accrued but
unpaid dividends on such shares. The carrying value of Series C redeemable
convertible preferred stock is being accreted to its redemption value by charges
to accumulated deficit during the development stage. In the event of any
liquidation, dissolution, or winding up of the Company, the holders of the
Series A, Series B, Series C and Series D preferred stock have a liquidation
preference of $0.10, $2.50, $5.00 and $5.00 per share, respectively, over
holders of common stock plus any declared but unpaid dividends. If the assets
and funds of the Company are insufficient to pay the aforesaid potential
amounts, the holders of Series C redeemable convertible preferred stock have
preference to the holders of Series A, Series B and Series D convertible
preferred stock.

The Series C and Series D convertible preferred stockholders are guaranteed
a minimum amount if the initial public offering range is below $15 and $10,
respectively. In the event of an initial public offering of the Company's common
stock with an offering price of less than $15.00 or $10.00 per share, as
adjusted for stock splits or reverse splits, each holder of Series C redeemable
convertible and Series D convertible preferred stock, respectively, will be
immediately issued or deemed to hold additional shares of Series C and Series D
preferred stock which is convertible into shares of common stock at the closing
of a public offering using a conversion price pursuant to a pre-determined
formula which will compensate the holders for the lower offering price.

If the offering price is $11.00 per share and the offering closes on
September 30, 1999, the Series C stockholders, Series D stockholders and Series
E stockholders would be entitled to receive approximately 303,125 shares,
437,216 shares and 24,787 shares, respectively. When such issuance of additional
shares of common stock occurs, current and prospective stockholders will suffer
additional

F-12
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)

3. STOCKHOLDERS' EQUITY (CONTINUED)
dilution with a resulting increase in net loss applicable to common stockholders
of $8,416,000 which will also result in an increase in net loss per share
applicable to common stockholders.

If the offering price is $10 per share and the offering closes on September
30, 1999, the Series C stockholders and Series D stockholders would be entitled
to receive 393,348 shares and 437,216 shares, respectively. When such issuance
of additional shares of common stock occurs, current and prospective
stockholders will suffer additional dilution with a resulting increase in net
loss applicable to common stockholders of $8,306,000 which will also result in
an increase in net loss per share applicable to common stockholders.

BRIDGE FINANCINGS

Between August 1997 and June 1998, the Company issued notes payable with
aggregate principal totaling $900,000 and interest rates of 5.87% to 6.50% per
annum. The principal amount of these notes was converted into 9,097,671 shares
of Series A convertible preferred stock in August 1998.

In May 1998, the Company issued notes payable with aggregate principal
totaling $400,000 and an interest rate of 8.5% per annum together with warrants
to purchase 500,000 shares of Series B convertible preferred stock. The
principal amount of these notes was converted into 160,000 shares of Series B
convertible preferred stock in August 1998.

In February 1999, the Company issued a $200,000 note payable with an
interest rate of 10% per annum. The principal amount was converted into 40,000
shares of Series D preferred stock in April 1999.

STOCK PLANS

The Company has two stock plans which provide for the granting of stock
options or shares of common stock to employees, directors and consultants. Stock
options are exercisable immediately upon issuance (subject to vesting
requirements) and generally have a term of 10 years. The Company typically
reserves the right of first refusal to purchase all shares held by the
participant upon termination of employment. Unvested options are canceled upon
termination of employment. Fully vested shares may be repurchased by the Company
at the higher of the original purchase price or the fair market value of the
shares as determined by the Board of Directors. The vesting schedule is
determined by the Board of Directors at the time of issuance. Stock options
generally vest over a period of between three and four years. The repurchase
right for vested shares expires upon the completion of an initial public
offering of the Company's common stock. The Company has reserved 4,400,000
shares of common stock for issuance under the plans. In January 1999, the
Company reserved an additional 1,000,000 shares of common stock for issuance
under the Plan.

F-13
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. STOCKHOLDERS' EQUITY (CONTINUED)

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

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Options granted................................................. 1,120,000 $ 0.02
--------- -----
Outstanding at December 31, 1997.................................. 1,120,000 0.02
Options granted................................................. 1,720,230 0.84
Options exercised............................................... (1,000,000) 0.02
Options canceled................................................ (91,000) 0.59
--------- -----
Outstanding at December 31, 1998.................................. 1,749,230 0.80
Options granted (unaudited)..................................... 1,192,946 2.94
Options exercised (unaudited)................................... (150,650) 0.12
Options canceled (unaudited).................................... (278,669) 0.55
--------- -----
Outstanding at June 30, 1999 (unaudited).......................... 2,512,857 $ 1.87
--------- -----
--------- -----
Vested and Exercisable at December 31, 1997....................... 166,666 $ 0.02
--------- -----
--------- -----
Vested and exercisable at December 31, 1998....................... 152,742 $ 0.42
--------- -----
--------- -----
Vested and exercisable at June 30, 1999 (unaudited)............... 167,773 $ 2.34
--------- -----
--------- -----
Outstanding shares of common stock that may be repurchased at
December 31, 1998............................................... 977,684
---------
---------
Outstanding shares of common stock that may be repurchased at June
30, 1999 (unaudited)............................................ 654,215
---------
---------
</TABLE>

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

<TABLE>
<CAPTION>
OPTIONS VESTED AND
OPTIONS OUTSTANDING EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE
NUMBER PRICE CONTRACTUAL LIFE NUMBER PRICE
EXERCISE PRICES OF SHARES PER SHARE (YEARS) OF SHARES PER SHARE
- ------------------ --------- ------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$0.02 - $0.275.... 699,730 $ 0.16 9.23 118,742 $ 0.11
$1.00 - $1.10..... 628,500 $ 1.05 9.74 -- --
$1.50............. 421,000 $ 1.50 9.95 34,000 $ 1.50
--------- -----------
1,749,230 152,742
--------- -----------
--------- -----------
</TABLE>

F-14
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options at June 30, 1999:

<TABLE>
<CAPTION>
OPTIONS VESTED AND
OPTIONS OUTSTANDING EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE
NUMBER PRICE CONTRACTUAL LIFE NUMBER PRICE
EXERCISE PRICES OF SHARES PER SHARE (YEARS) OF SHARES PER SHARE
- ------------------ --------- ------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$0.02 - $0.275.... 326,411 $ 0.18 8.77 48,573 $ 0.19
$1.00 - $1.10..... 627,500 $ 1.05 9.28 -- --
$1.50 - $2.50..... 1,182,846 $ 2.14 9.67 39,200 $ 1.63
$3.00 - $4.00..... 376,100 $ 3.89 9.98 80,000 $ 4.00
--------- -----------
2,512,857 167,773
--------- -----------
--------- -----------
</TABLE>

DEFERRED COMPENSATION

During the year ended December 31, 1998, the Company also granted 1,350,000
shares of common stock to an officer of the Company (Note 6) under the 1998
Stock Plan at a price of $0.12 per share which was below the deemed fair market
value at the date of grant of $0.50 per share. As a result, the Company recorded
deferred compensation of $510,000 during the year ended December 31, 1998
representing the difference between the price paid per share and the deemed fair
value of the Company's common stock. These amounts are being amortized by
charges to operations over the vesting period of the stock of approximately four
years resulting in amortization of approximately $73,000 for the year ended
December 31, 1998 and $143,000 for the six months ended June 30, 1999. The
Company has the right to buy back the unvested portion of this common stock if
certain milestones are not met by the officer. If the Company elects to
repurchase the unvested portion, the Company will retire the stock using the
treasury method.

The Company recorded deferred stock compensation of approximately $5,455,000
during the year ended December 31, 1998 and $2,912,000 during the six months
ended June 30, 1999 representing the difference between the exercise price and
the deemed fair value of the Company's common stock on the grant date for
certain of the Company's stock options granted to employees. In the absence of a
public market for the Company's common stock, the deemed fair value was based on
the price per share of recent preferred stock financings, less a discount to
give effect to the superior rights of the preferred stock. These amounts are
being amortized by charges to operations over the vesting periods of the
individual stock options using a graded vesting method. Such amortization
amounted to approximately $1,065,000 for the year ended December 31, 1998 and
approximately $2,531,000 for the six months ended June 30, 1999.

F-15
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. STOCKHOLDERS' EQUITY (CONTINUED)

Future amortization expense is as follows (in thousands):

<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
YEAR ENDED DECEMBER 31:
1999............................................................... $ 4,120
2000............................................................... 2,245
2001............................................................... 1,088
2002............................................................... 326
---------
$ 7,779
---------
---------
</TABLE>

In 1997 and 1998, the Company issued 1,858,730 and 1,350,000 shares,
respectively, of common stock to employees in exchange for services. The common
stock issued was recorded at the estimated fair value of the commmon stock at
the time the services were performed and the expense was recorded. The Company's
management believes that the value of the common stock issued approximates the
value of the services received.

PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION

Pro forma information regarding results of operations and net loss per share
is required by SFAS 123, which also requires that the information be determined
as if the Company had accounted for its employee stock options under the fair
value method of SFAS 123. The fair value for these options was estimated at the
date of grant using a Black-Scholes option valuation model with the following
weighted average assumptions: a risk-free interest rate of 5.5% for the period
from June 25, 1997 (inception) through December 31, 1997 and the year ended
December 31, 1998, no dividend yield or volatility factors of the expected
market price of the Company's common stock, and a weight-average expected life
of the option of three and one-half years.

The option valuation models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

Had compensation cost for the Company's stock-based compensation plans been
determined using the fair value at the grant dates for awards under those plans
calculated using the minimum value

F-16
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. STOCKHOLDERS' EQUITY (CONTINUED)
method of SFAS 123, the Company's net loss (in thousands) and pro forma basic
and diluted net loss per share would have been increased to the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
PERIOD FROM
JUNE 25, 1997
(INCEPTION)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
------------- ------------
<S> <C> <C>
Net loss--pro forma.............................................. $ (584) $ (5,046)
------ ------------
------ ------------
Net loss per share--pro forma.................................... $ (0.05) $ (0.43)
------ ------------
------ ------------
</TABLE>

The weighted-average fair value of options granted for the period from
inception to December 31, 1997, the year ended December 31, 1998, and for the
six months ended June 30, 1999 was $0.01, $0.16, and $0.56, respectively.

The effect on pro forma net loss is not necessarily indicative of the effect
on pro forma net loss in future years, as future years will include the effects
of additional years of stock option grants.

SHARES RESERVED FOR FUTURE ISSUANCE

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

<TABLE>
<CAPTION>
PREFERRED
COMMON STOCK STOCK
-------------- --------------
<S> <C> <C>
Convertible preferred stock, including effect of preferred
stock warrants............................................. 10,663,171 10,157,671
Warrants to purchase stock................................... -- 505,500
Stock options outstanding.................................... 1,749,230 --
Stock options and shares available for grant................. 300,770 --
-------------- --------------
12,713,171 10,663,171
-------------- --------------
-------------- --------------
</TABLE>

WARRANTS

The Company had the following warrants outstanding at June 30, 1999 to
purchase shares of stock:

<TABLE>
<CAPTION>
PREFERRED EXERCISE PRICE
NUMBER OF SHARES STOCK PER SHARE EXPIRATION OF WARRANTS
- ----------------- ---------- --------------- -------------------------------------------------------------------
<C> <C> <C> <S>
250,000 Series B $ 3.00 May 2003
250,000 Series B 3.50 May 2003
5,500 Series D 5.00 Earlier of November 2005 or close of an initial public offering
390 Series D 5.00 February 2007
100,000 Series D 5.00 June 2004
150,000 Common 5.00 December 2003
-------
755,890
-------
-------
</TABLE>

F-17
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. INCOME TAXES

Significant components of the Company's deferred tax assets are as follows
(in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998
--------- ---------
<S> <C> <C>
Net operating loss carryforwards........................................... $ 138 $ 1,633
Accrued compensation....................................................... 82 101
Other...................................................................... -- 118
--------- ---------
Total deferred tax assets.................................................. 220 1,852
Valuation allowance........................................................ (220) (1,852)
--------- ---------
Net deferred tax assets.................................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>

Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net deferred
tax assets have been fully offset by a valuation allowance. The valuation
allowance increased by approximately $220,000 and $1,632,000 in the years ended
December 31, 1997 and 1998, respectively.

A reconciliation of income taxes at the statutory federal income tax rate to
net income taxes included in the accompanying statements of operations is as
follows:

<TABLE>
<CAPTION>
PERIOD FROM
JUNE 25, 1997
(INCEPTION)
THROUGH YEAR ENDED DECEMBER SIX MONTHS ENDED
DECEMBER 31, 1997 31, 1998 JUNE 30, 1999
----------------------- ------------------- -----------------
<S> <C> <C> <C>
U.S. federal taxes (benefit) at statutory rate...... 34% 34% 34%
State............................................... 6% 6% 6%
Valuation allowance................................. (40)% (40 )% (40 )%
----- ----- -----
Total............................................... 0% 0% 0%
----- ----- -----
----- ----- -----
</TABLE>

At December 31, 1997 and 1998, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $344,000 and
$4,082,000, respectively, which expire in tax years 2012 through 2018.
Utilization of the net operating losses may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986. The annual limitation may result in the expiration of net
operating losses before utilization.

5. COMMITMENTS AND CONTINGENCIES

The Company leases its office facility and certain office equipment under
non-cancelable lease agreements, which require the Company to pay a portion of
operating costs, including property taxes, insurance, and normal maintenance.
Rent expense amounted to approximately $41,000 and $206,000 for the period from
June 25, 1997 (inception) through December 31, 1997 and the year ended December
31, 1998, respectively.

Capital lease obligations represent the present value of future rental
payments under capital lease agreements for equipment. The original cost of the
equipment under capital leases is $390,000 at December 31, 1998 (none in 1997) .
The related amortization is included with depreciation expense. As

F-18
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
part of one of its capital lease agreements, the Company has issued warrants to
purchase 5,500 shares of Series D convertible preferred stock which are
outstanding at December 31, 1998.

Future minimum payments under capital and operating leases are as follows
(in thousands):

<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31: LEASES LEASES
- ------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
1999................................................................... $ 142 $ 244
2000................................................................... 149 244
2001................................................................... 146 240
2002................................................................... 1 156
----- -----
Total minimum lease payments............................................. 438 $ 884
-----
-----
Less amount representing interest........................................ (51)
-----
Present value of minimum lease payments.................................. 387
Less current portion of capital lease obligations........................ (118)
-----
$ 269
-----
-----
</TABLE>

As of June 30, 1999, the Company has obtained credit lines from a number of
lease finance companies for the purpose of acquiring computer and network
equipment in schools. In aggregate, the Company has entered into lease finance
agreements which allow for borrowings of up to approximately $20,145,000, bear
per annum interest rates from 10.5% to 18%, and have terms ranging from 24 to 36
months. In addition, the Company has issued a letter of credit to two companies
as security against the leases. As of June 30, 1999, the Company has drawn down
approximately $6,768,000 from these credit lines.

In June 1999, the Company entered into an agreement whereby a minimum of 500
school sites would be established and maintained for a fixed monthly fee of $221
per month, for a minimum of three years. In the event the Company fails to
establish 500 sites within three months, an unordered site fee would be assessed
at $150 per site until the site has been installed. As of June 30, 1999, the
maximum obligation on installed sites is $3,978,000. In July 1999, the agreement
was amended and the fixed monthly fee of the first 500 sites was changed to $185
per site. This reduces the maximum obligation on installed sites on $3,330,000.

The Company is a party to an arbitration and related counterclaim with a
former officer of the Company relating to this officer's employment with the
Company. Management believes the Company is adequately covered by insurance, or
that the ultimate liability, if any, would not have a materially adverse effect
on the Company's results of operations or financial position. However, depending
on the amount and timing, an unfavorable resolution of these matters could
materially affect the Company's future results of operations or cash flows in a
particular period.

F-19
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. NOTES RECEIVABLE FROM STOCKHOLDER

During the year ended December 31, 1998, the Company loaned an officer
$125,000 in exchange for a promissory note. The unsecured note bears interest at
5.35% per annum, with interest and principal due December 31, 1999.

7. RELATED PARTY TRANSACTIONS

An officer of the Company owns other businesses which engage in financing
transactions with the Company. Amounts paid to these related entities were
approximately $12,000 and $163,000 for the period from June 25, 1997 (inception)
through December 31, 1997 and during the year ended December 31, 1998,
respectively.

Between June and October 1997, the Company issued promissory notes to an
officer of the Company aggregating approximately $156,000, which bore interest
at 12.0% per annum and was repaid, along with accrued interest, in September
1998.

In March 1999, the Company entered into an agreement with a stockholder in
which the Company has granted the stockholder an exclusive right to deliver
certain products and services on the Company's systems in schools. The Company
will earn fees based upon the number of eligible schools and the length of time
eligible schools have been operational. The initial term of the agreement will
expire on December 31, 2003 with a five year renewal option subject to the
Company earning certain minimum fees from the agreement. As consideration for
the agreement, the Company issued the stockholder a warrant to purchase 150,000
shares of the Company's common stock at $5.00 per share. The warrant is
exercisable in whole if the Company earns a minimum fee per eligible school
during the year ended December 31, 2003. The Company will recognize a charge to
operations based on the value of the warrant at the time the milestones are
achieved.

The Company purchases certain data communications equipment from one of its
stockholders. Through June 30, 1999, the Company has paid approximately $1.8
million to the stockholder for equipment, consulting services, and software
license fees.

In September 1998, the Company paid a stockholder $180,000 in consulting
fees in connection with the issuance of Series C preferred stock.

In January 1999, the Company issued a promissory note in the amount of
$500,000 to a member of the Company's board of directors, bearing an interest
rate of 12.0% per annum. The note and approximately $12,000 of interest was paid
in April 1999.

In August 1999, a majority of ZapMe!'s directors, approved the issuance of
an immediately exercisable non-statutory option to purchase 300,000 shares of
the Company's common stock to an officer of the Company at an exercise price of
$5.00 per share. The shares are subject to a right of repurchase in favor of
ZapMe!, which will expire at a rate of one third on each anniversary of the date
of grant. ZapMe! has agreed to loan the officer, at his request, the amount
necessary to pay for the aggregate exercise price of the option, which loan will
be secured by the shares purchased on exercise of the option.

F-20
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. SUBSEQUENT EVENTS

PROPOSED PUBLIC OFFERING OF COMMON STOCK

In August 1999, the Board of Directors authorized the Company to proceed
with an initial public offering of its common stock. If the offering is
consummated as presently anticipated, all of the outstanding preferred stock
will automatically convert into common stock. The unaudited pro forma
stockholders' equity at June 30, 1999 gives effect to the conversion of all
outstanding shares of convertible preferred stock at that date into 15,751,781
shares of common stock upon the completion of the offering.

REINCORPORATION

In connection with the Company's reincorporation in the state of Delaware,
the Board of Directors authorized an increase in the number of authorized shares
of common stock to 200,000,000 and an increase in the number of authorized
shares of preferred stock to 23,357,671 shares, subject to stockholder approval.
Effective immediately prior to the closing of the initial public offering of its
common stock, the Board of Directors authorized, subject to stockholder
approval, a decrease in the number of authorized shares of preferred stock to
5,000,000.

OPTION PLAN

In August 1999, the Company's Board of Directors approved, subject to
stockholder approval, the amended and restated 1998 Stock Plan. The plan allows
for the addition of 1,500,000 shares of common stock to be offered under the
plan as well as an annual increase commencing January 1, 2000 equal to the
lowest of 2,000,000, 5% of the outstanding shares of the Company's common stock
on the first day of the fiscal year, or such other amount as determined by the
Board of Directors.

1999 EMPLOYEE STOCK PURCHASE PLAN

The Company's 1999 Employee Stock Purchase Plan was adopted by the Board of
Directors in August 1999 to be effective upon the completion of the Company's
initial public offering of its common stock, subject to stockholders' approval.
The Company has reserved a total of 500,000 shares of common stock for issuance
under this plan. Eligible employees may purchase common stock at 15% of the
lesser of the fair market value of the Company's common stock on the first day
of the applicable six-month offering period at the date of purchase. In
addition, the plan provides for automatic annual increases in the number of
shares available for issuance on the first day of each fiscal year equal to the
lowest of 1,000,000, 2% of the outstanding shares of the Company's common stock
on the first day of the fiscal year, or such other amount as determined by the
Board of Directors.

SERIES E PREFERRED STOCK

In August 1999, the Board of Directors authorized 2,030,000 shares of Series
E preferred stock. The holders of Series E preferred stock are entitled to
dividends when and if they are declared by the Board of Directors prior to and
in preference to any dividend or common stock. In the event of any liquidation,
dissolution, or winding up of the Company, the holders of the Series E preferred
stock have a liquidation preference of $5.00 over holders of common stock plus
any declared but unpaid dividends. The holders of Series E preferred stock are
entitled to a mandatory rate increase of 7.5% per annum of the liquidation
preference, compounded quarterly. In the event of an initial public

F-21
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. SUBSEQUENT EVENTS (CONTINUED)
offering of the Company's common stock, the liquidation value per share will be
issued in shares of common stock at a conversion price of $5.00. In August 1999,
the Company issued 2,030,000 shares of Series E preferred stock, with gross
proceeds to the Company of approximately $10,150,000.

The $5.00 per share price of Series E preferred stock does not necessarily
represent the fair value of the preferred stock issued. The difference between
the value, which will be determined upon the completion of an initial public
offering of the Company's stock, and the $5.00 per share price will be recorded
as an increase in the net loss available to common shareholders.

WARRANTS

The Company has agreed to issue warrants to a number of lease financing
companies. As of June 30, 1999, the Company is obligated to issue warrants for
100,000 shares of Series D convertible preferred stock and 140,000 shares of
common stock, of which 100,000 was issued subsequent to June 30, 1999. The value
of the warrants, if any, will be determined by management at the issuance date.

STOCK OPTIONS

In July, August and September 1999, the Company has granted stock options
and stock purchase rights as follows:

<TABLE>
<CAPTION>
SHARES EXERCISE DEEMED FAIR DEFERRED
RECIPIENT GRANT DATE GRANTED PRICE VALUE COMPENSATION VESTING PERIOD
- -------------------------------- -------------- --------- ----------- ------------- ------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Beverly Weinstein (non-employee) July 1999 6,800 4.00 10.00 $ 43,400 Vests upon grant
Kemp, Jack (director) July 1999 20,000 4.00 10.00 120,000 Vests upon grant
Employees July 1999 43,600 4.00 10.00 261,600 3-year vesting, 1/3
each anniversary
Lance Mortensen (Chairman) August 1999 300,000 5.00 11.00 1,800,000 3-year vesting,1/3
each anniversary
Employees August 1999 31,050 5.00 11.00 186,300 3-year vesting, 1/3
each anniversary
Delcom Marketing September 1999 10,000 5.00 To be determined Performance-based,
expires 12/31/1999
Employees September 1999 79,100 5.00 11.00 474,600 3-year vesting, 1/3
each anniversary
Rick Inatome (CEO) September 1999 1,000,000 5.00 11.00 6,000,000 4-year vesting, 25%
on first year,
monthly thereafter
--------- -------------
Total 1,490,550 $ 8,885,900
--------- -------------
--------- -------------
</TABLE>

EMPLOYMENT AGREEMENT

In September 1999, the Company hired a new chief executive officer. As part
of the officer's employment agreement the Company granted a non-statutory option
to purchase one million shares of the company's common stock at an exercise
price of $5.00 per share. The shares are subject to a right of repurchase in
favor of ZapMe!, which will expire at a rate of twenty-five percent on the first
anniversary of the grant date and one forty-eighth of the shares at the end of
each month thereafter.

F-22
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. SUBSEQUENT EVENTS (CONTINUED)

The Company will be required to record deferred compensation during the three
months ending September 30, 1999 representing the difference between the price
paid and the deemed fair value of the Company's common stock. This amount will
amortized by charges to operations over the vesting period of the stock. The
Company has also agreed to loan the amount necessary to pay for the aggregate
purchase price of the option, which will be secured by a full recourse
promissory note. The promissory note has a term of four years and bears an
interest rate of 5.96%.

F-23
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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

9,000,000 SHARES

[LOGO]

COMMON STOCK

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

P R O S P E C T U S

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

MERRILL LYNCH & CO.
DEUTSCHE BANC ALEX. BROWN
THOMAS WEISEL PARTNERS LLC
WIT CAPITAL CORPORATION

, 1999

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
The information contained in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION. DATED SEPTEMBER 28, 1999

454,545 SHARES

[LOGO]

COMMON STOCK

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

PROSPECTUS

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

This prospectus relates to the offering of 454,545 shares of common stock
directly to various Series D stockholders associated with Gilat Satellite
Networks. Concurrently with this offering, we are offering 9,000,000 shares of
common stock in an underwritten public offering.

Prior to this offering, there has been no public market for the common
stock. The price per share of the common stock offered hereby will be the price
per share of the shares offered in the underwritten public offering, less the
underwriting discount and commissions. It is currently estimated that the
underwritten public offering price per share will be between $10.00 and $12.00.
The common stock has been approved for quotation on the Nasdaq National Market
under the symbol "IZAP."

SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
-------------------

Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.

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

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

This prospectus relates to an aggregate of 454,545 shares of common stock
which are being offered directly to various Series D stockholders associated
with Gilat Satellite Networks. The price at which the shares are being offered
to the employees and affiliates of Gilat is the public offering price minus the
underwriters' discount and commissions. Concurrently with this offering, we are
offering 9,000,000 shares of common stock to the public in an underwritten
offering.
<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................
Risk Factors..............................................................
Special Note Regarding Forward Looking Statements.........................
Use of Proceeds...........................................................
Dividend Policy...........................................................
Capitalization............................................................
Dilution..................................................................
Selected Financial Data...................................................
Management's Discussion and Analysis of Financial Condition and Results of
Operations..............................................................
Business..................................................................
Management................................................................
Principal Stockholders....................................................
Description of Capital Stock..............................................
Shares Eligible for Future Sale...........................................
Plan of Distribution......................................................
Legal Matters.............................................................
Experts...................................................................
Additional Information....................................................
Index to Financial Statements.............................................
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

454,545 SHARES

ZAPME! CORPORATION

COMMON STOCK

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

[LOGO]

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

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts, commissions and certain accountable expenses, payable by
the Registrant in connection with the sale of Common Stock being registered. All
amounts are estimates except the SEC registration fee, the NASD filing fee and
the Nasdaq National Market Initial Listing Fee.

<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 35,938
NASD Filing Fee................................................. 13,428
Nasdaq National Market Listing Application Fee.................. 95,000
Printing Fees and Expenses...................................... 150,000
Legal Fees and Expenses......................................... 250,000
Accounting Fees and Expenses.................................... 250,000
Blue Sky Fees and Expenses...................................... 5,000
Transfer Agent and Registrar Fees............................... 15,000
Miscellaneous................................................... 185,634
---------
Total......................................................... $1,000,000
---------
---------
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Our bylaws provide that we will indemnify our directors and executive
officers and may indemnify our other officers, employees and other agents to the
fullest extent permitted by the General Corporations Law of the State of
Delaware, as amended. We are also empowered under our bylaws to enter into
indemnification agreements with our directors and officers and to purchase
insurance on behalf of any person whom we are required or permitted to
indemnify. We have entered into indemnification agreements with each of our
directors and executive officers and intend to obtain a policy of directors' and
officers' liability insurance that insures such persons against the cost of
defense, settlement or payment of a judgment under certain circumstances.

II-1
<PAGE>
director derived an improper personal benefit, for improper transactions between
the director and us and for improper distributions to stockholders and loans to
directors and officers. This provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since June 1997 (inception), we issued and sold the following unregistered
securities:

1. On June 25, 1997 we issued and sold an aggregate of 5,000,000
shares of common stock to Lance Mortensen for an aggregate purchase
price of $50,000. On September 3, 1997, we issued 743,492 shares of
common stock to Darryl Deaton and 185,873 shares of common stock to
John Evleth, each in lieu of wages owed. On June 1, 1998 these
shares were split two-for-one pursuant to a stock dividend.

2. On August 1, 1997, October 17, 1997, December 22, 1997, January 22,
1998, March 23, 1998 and June 9, 1998, we issued convertible
promissory notes to certain investors for an aggregate amount of
$900,000. On August 5, 1998, the principal of the notes and the
interest which had accrued converted into 9,097,671 shares of our
Series A preferred stock.

3. On May 7, 1998 we issued a warrant to Wharton Capital Partners,
Ltd. to purchase up to 500,000 shares of our Series B preferred
stock, 250,000 of which at an exercise price of $3.00 per share and
250,000 of which at an exercise price of $3.50 per share.

4. On August 5, 1998, we issued and sold 160,000 shares of our Series
B preferred stock to certain investors for an aggregate purchase
price of $400,000.

5. On August 27, 1998, we issued and sold 600,000 shares of our Series
C preferred stock to certain investors for an aggregate purchase
price of $3,000,000.

6. On December 3, 1998, February 1, 1999, March 31, 1999 and May 28,
1999, we issued and sold an aggregate of 5,894,110 shares of our
Series D preferred stock to certain investors for an aggregate
purchase price of $29,470,550.

7. On November 30, 1998 and March 9, 1999, in connection with the
execution of an equipment financing agreement, we issued warrants
to FirstCorp to purchase up to an aggregate of 5,890 shares of
Series D preferred stock at an exercise price of $5.00 per share.

8. On March 9, 1999, we issued a warrant to Sylvan Learning Systems,
Inc., a corporate partner, to purchase up to 150,000 shares of
common stock at an exercise price of $5.00 per share.

9. On August 4, 1999, we issued and sold an aggregate of 2,030,000
shares of our Series E preferred stock to certain investors for an
aggregate purchase price of $10,150,000.

II-2
<PAGE>
10. From October 15, 1997 to June 30, 1999 we granted options and
rights under our 1997 Stock Option Plan and 1998 Stock Plan to
purchase an aggregate of 5,383,176 shares of our common stock at
exercise prices ranging from $0.015 to $4.00 to employees,
directors and consultants.

11. From August 6, 1998 through June 30, 1999 an aggregate of 2,500,650
shares of common stock were issued pursuant to option and right
exercises at exercise prices ranging from $0.015 to $0.25 to
employees, directors and consultants.

The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving a public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and warrants issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Registrant.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<C> <S>
1.1(**) Form of Underwriting Agreement.

2.1(*) Agreement and Plan of Merger dated , 1999 of ZapMe! Delaware Corporation,
a Delaware corporation, and ZapMe! Corporation, a California corporation.

3.1(*) Amended and Restated Articles of Incorporation effective prior to
reincorporation of the Company in Delaware.

3.2(*) Bylaws effective prior to reincorporation of the Company in Delaware.

3.3(*) Form of Amended and Restated Certificate of Incorporation to be filed and become
effective prior to effectiveness of this Registration Statement.

3.4(*) Form of Bylaws to become effective prior to effectiveness of this Registration
Statement.

3.5(*) Form of Second Amended and Restated Certificate of Incorporation to be filed and
become effective upon the closing of this offering.

4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.

4.2(*) Specimen Stock Certificate of Registrant.

5.1(*) Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, with
respect to the securities being issued.

10.1(*) Fourth Amended and Restated Investors' Rights Agreement.

10.2(*) ZapMe! Corporation f.k.a. Satellite Online Solutions Corporation, 1997 Employee
Stock Option Plan and form of Agreement.

10.3(*) ZapMe! Corporation 1998 Stock Plan, as amended and restated August 2, 1999, and
forms of Agreement.

10.4(*) ZapMe! Corporation 1999 Employee Stock Purchase Plan and form of Agreement.

10.5(*) Common Stock Purchase Agreement dated September 1, 1997 by and between the
Company and John Evleth.
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<C> <S>
10.6(*) Common Stock Purchase Agreement dated September 1, 1997 by and between the
Company and Darryl Deaton.

10.7(*) Employment Agreement dated June 1, 1997 by and between the Company and Darryl N.
Deaton.

10.8(*) Employment Offer Letter dated March 24, 1999 between the Company and Robert J.
Rudy.

10.9(*) Employment Offer Letter dated April 7, 1999 between the Company and Donald D.
Kingsborough.

10.10(*) Settlement Agreement and Mutual Release dated January 29, 1999 between the
Company and Joshua K. Marks.

10.11(*) Warrant Agreement between the Company and FirstCorp, dated as of November 30,
1998.

10.12(*) Warrant Agreement between the Company and Sylvan Learning Systems dated as of
March 3, 1999.

10.13(*) Warrant Agreement between the Company and FirstCorp, dated as of February 23,
1999.

10.14(*) Warrant Agreement between the Company and Barry R. Minsky, dated as of May 7,
1998.

10.15(*) Office Lease between the Company and Alexander Properties Company, dated August
6, 1997, and Addendums dated August 7, 1998, September 15, 1998, October 14,
1998, October 22, 1998 and April 16, 1999.

10.16(*) Form of School Subscription Agreement.

10.17(*) Form of Indemnification Agreement entered into between the Registrant and its
directors and officers.

+10.18(*) Letter Services Agreement between the Company and Spacenet, Inc., dated February
10, 1999, Service Agreement dated June 11, 1999 and Amendment No. 1 to
Services Agreement dated July 19, 1999.

+10.19(*) Products and Services Agreement between the Company and Sylvan Learning Systems,
Inc., dated March 3, 1999.

+10.20(*) Letter of Understanding between the Company and Microsoft Corporation, dated
November 13, 1998.

+10.21(*) Marketing Agreement between the Company and New Sub Services, dated August 3,
1999.

+10.22(*) Memorandum of Understanding between the Company and School Specialty, Inc.

10.23(*) Advertising Pilot Agreement between the Company and Xerox Channels Group, dated
June 30, 1999.

10.24(*) Voting Agreement among the Company, Lance Mortensen and QuestMark Partners,
L.P., dated May 28, 1999.

21.1 Subsidiaries of the Registrant.

23.1 Consent of Ernst & Young LLP, Independent Auditors.

23.2(*) Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included
in Exhibit 5.1).
</TABLE>

II-4

<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<C> <S>
24.1(*) Power of Attorney (see Page II-6).

27.1(*) Financial Data Schedule.
</TABLE>

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

+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.

(*) Previously filed.

(**) To be filed by amendment.

(b) Financial Statement Schedules

Schedules have been omitted because the information required to be set forth
therein is not applicable or is shown in the financial statements or notes
thereto.

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

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

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereto which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; and (iii) to include
any material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.

(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

II-5
<PAGE>
SIGNATURES

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

<TABLE>
<S> <C> <C>
ZAPME! CORPORATION

By /s/ LANCE MORTENSEN
-----------------------------------------
Name: Lance Mortensen
Title: CHAIRMAN
</TABLE>

POWER OF ATTORNEY

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON SEPTEMBER 28,
1999 IN THE CAPACITIES INDICATED:

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

<C> <S>
/s/ LANCE MORTENSEN
- ------------------------------ Chairman and Director
Lance Mortensen

/s/ RICK INATOME
- ------------------------------ Chief Executive Officer
Rick Inatome and Director

Chief Financial Officer
/s/ ROBERT STOFFREGEN and Assistant Secretary
- ------------------------------ (Principal accounting
Robert Stoffregen and financial officer)

/s/ DARRYL DEATON
- ------------------------------ Vice President and
Darryl Deaton Director

/s/ MICHAEL ARNOUSE
- ------------------------------ Director
Michael Arnouse

/s/ DOUGLAS BECKER
- ------------------------------ Director
Douglas Becker

/s/ YOEL GAT
- ------------------------------ Director
Yoel Gat

/s/ THOMAS HITCHNER
- ------------------------------ Director
Thomas Hitchner

/s/ JACK KEMP
- ------------------------------ Director
Jack Kemp
</TABLE>

II-6
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NUMBER
--------
<C> <S>
1.1(**) Form of Underwriting Agreement.

2.1(*) Agreement and Plan of Merger dated , 1999 of ZapMe! Delaware Corporation, a Delaware corporation, and
ZapMe! Corporation, a California corporation.

3.1(*) Amended and Restated Articles of Incorporation effective prior to reincorporation of the Company in Delaware.

3.2(*) Bylaws effective prior to reincorporation of the Company in Delaware.

3.3(*) Form of Amended and Restated Certificate of Incorporation to be filed and become effective prior to
effectiveness of this Registration Statement.

3.4(*) Form of Bylaws to become effective prior to effectiveness of this Registration Statement.

3.5(*) Form of Second Amended and Restated Certificate of Incorporation to be filed and become effective upon the
closing of this offering.

4.1(*) Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.

4.2(*) Specimen Stock Certificate of Registrant.

5.1(*) Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, with respect to the securities being
issued.

10.1(*) Fourth Amended and Restated Investors' Rights Agreement.

10.2(*) ZapMe! Corporation f.k.a. Satellite Online Solutions Corporation, 1997 Employee Stock Option Plan and form of
Agreement.

10.3(*) ZapMe! Corporation 1998 Stock Plan, as amended and restated August 2, 1999, and forms of Agreement.

10.4(*) ZapMe! Corporation 1999 Employee Stock Purchase Plan and form of Agreement.

10.5(*) Common Stock Purchase Agreement dated September 1, 1997 by and between the Company and John Evleth.

10.6(*) Common Stock Purchase Agreement dated September 1, 1997 by and between the Company and Darryl Deaton.

10.7(*) Employment Agreement dated June 1, 1997 by and between the Company and Darryl N. Deaton.

10.8(*) Employment Offer Letter dated March 24, 1999 between the Company and Robert J. Rudy.

10.9(*) Employment Offer Letter dated April 7, 1999 between the Company and Donald D. Kingsborough.

10.10(*) Settlement Agreement and Mutual Release dated January 29, 1999 between the Company and Joshua K. Marks.

10.11(*) Warrant Agreement between the Company and FirstCorp, dated as of November 30, 1998.

10.12(*) Warrant Agreement between the Company and Sylvan Learning Systems dated as of March 3, 1999.

10.13(*) Warrant Agreement between the Company and FirstCorp, dated as of February 23, 1999.

10.14(*) Warrant Agreement between the Company and Barry R. Minsky, dated as of May 7, 1998.

10.15(*) Office Lease between the Company and Alexander Properties Company, dated August 6, 1997, and Addendums dated
August 7, 1998, September 15, 1998, October 14, 1998, October 22, 1998 and April 16, 1999.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NUMBER
--------
<C> <S>
10.16(*) Form of School Subscription Agreement.

10.17(*) Form of Indemnification Agreement entered into between the Registrant and its directors and officers.

+10.18(*) Letter Services Agreement between the Company and Spacenet, Inc., dated February 10, 1999, Service Agreement
dated June 11, 1999 and Amendment No. 1 to Services Agreement dated July 19, 1999.

+10.19(*) Products and Services Agreement between the Company and Sylvan Learning Systems, Inc., dated March 3, 1999.

+10.20(*) Letter of Understanding between the Company and Microsoft Corporation, dated November 13, 1998.

+10.21(*) Marketing Agreement between the Company and New Sub Services, dated August 3, 1999.

+10.22(*) Memorandum of Understanding between the Company and School Specialty, Inc.

10.23(*) Advertising Pilot Agreement between the Company and Xerox Channels Group, dated June 30, 1999.

10.24(*) Voting Agreement among the Company, Lance Mortensen and QuestMark Partners, L.P., dated May 28, 1999.

21.1 Subsidiaries of the Registrant.

23.1 Consent of Ernst & Young LLP, Independent Auditors.

23.2(*) Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1).

24.1(*) Power of Attorney (see Page II-6).

27.1(*) Financial Data Schedule.
</TABLE>

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

+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.

(*) Previously filed.

(**) To be filed by amendment.

<PAGE>

EXHIBIT 21

ZapMe!'s sole subsidiary is R-STAR, a Delaware corporation.

<PAGE>
EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and
"Selected Financial Data" and to the use of our report dated April 2, 1999
(except for Note 8, as to which the date is October , 1999) with respect to
the financial statements of ZapMe! Corporation as of December 31, 1997 and 1998,
and for the period June 25, 1997 (inception) through December 31, 1997 and for
the year ended December 31, 1998, in the Registration Statement (Form S-1), as
amended, and the related Prospectus of ZapMe! Corporation for the registration
of shares of its common stock.

Walnut Creek, California
October , 1999

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

The foregoing consent is in the form that will be signed upon final
computation of the number of common shares which may be received by holders of
Series C and D preferred stock and computation of an additional dividend amount,
if any, as described in Note 3 to the financial statements, the effect on pro
forma weighted average shares as described in Note 1 to the financial
statements, and approval of the certificate of incorporation in the state of
Delaware as described in Note 8 to the financial statements.

/s/ ERNST & YOUNG LLP

Walnut Creek, California
September 27, 1999