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INTERNET CAPITAL GROUP INC
424B1, 1999-08-05
BUSINESS SERVICES, NEC

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Underwritten Public Offering		Per Share		Total
Public offering price		$12.00		$136,800,000
Underwriting discount		$.84		$9,576,000
Proceeds, before expenses, to Internet Capital Group, Inc.		$11.16		$127,224,000
Directed Share Subscription Program		Per Share		Total
Public offering price		$12.00		$42,000,000
Financial advisory fee to Merrill Lynch		$.60		$2,100,000
Proceeds, before expenses, to Internet Capital Group, Inc.		$11.40		$25,080,000
Maximum proceeds, before expenses, to Safeguard Scientifics,                          Inc.		$11.40		$14,820,000
Aggregate Offering Proceeds				Total
Proceeds to Internet Capital Group, Inc. from the underwritten                          public offering and directed share subscription program				$152,304,000

BancBoston Robertson Stephens

Deutsche Banc Alex. Brown

Banc of America Securities LLC

Inside of front cover of prospectus:

 

[Graphic of "Internet Capital Group" surrounded by "Market Makers" and "Infrastructure Service Providers"]

Text of Artwork:

     Internet Capital Group is an Internet holding company actively engaged in business-to-business e-commerce through a network of partner companies. We provide operational assistance, capital support, industry expertise, and a strategic network of business relationships intended to maximize the long-term market potential of more than 30 business-to-business e-commerce partner companies. We focus on two types of business-to-business e-commerce companies--market makers and infrastructure service providers.

Inside of gatefold of front cover of prospectus:

 

[Graphic from inside front cover of prospectus with "Internet Capital Group" surrounded by the text: "Identify and Acquire Market Lenders," " Integrate into Network," "Influence Strategic Direction, " "Provide Best-of-Class Business Services" and " Share Best Practices." In an outer ring of the graphic the terms "Software," "Outsourced Services," " Messaging," "Strategic Consulting and Systems Integration " and "Logistics" appear as "Infrastructure Service Providers" and the terms "Construction," "Small Business," "Electronic Components," " Healthcare," "Printing," "Paper," " Food," "Plastics," "Chemicals," "Auto Parts," "Financial Services" and " Telecommunications" appear as "Market Makers."]

Text of Artwork:

• INTERNET CAPITAL GROUP leverages the collective knowledge and resources of our partner companies, strategic investors and Advisory Board to actively develop the business strategies, operations and management teams of our partner companies. In addition, our skilled management team helps guide our partner companies in areas such as sales and marketing, executive recruiting, human resources, technology and finance.
  
  
• MARKET MAKERS bring buyers and sellers in a particular industrial marketplace together to exchange products, services and information via the Internet. We place market makers into one of three categories--distributors, networks or communities. Distributors sell goods and services to buyers over the Internet. Networks streamline and automate communications and transactions between buyers and sellers, and own the customer relationship. Communities utilize content and communications to aggregate buyers and sellers of common interests in an effort to facilitate transactions.
  
  
• INFRASTRUCTURE SERVICE PROVIDERS assist traditional businesses in one of four ways--providing strategic consulting, systems integration, software or outsourced services. Strategic consultants assist businesses in developing their e-commerce strategies. Systems integrators develop and implement technological infrastructure that enables e-commerce. Software providers design and sell software applications that support e-commerce and integrate business functions. Outsourced service providers offer software applications, infrastructure and related services designed to help businesses reduce cost, improve operational efficiency and decrease time to market.

 

 

		Page
Summary		3
Risk Factors		8
Forward-Looking Statements		19
Use Of Proceeds		20
Dividend Policy		20
The Reorganization		21
Directed Share Subscription Program		21
Concurrent Offering		22
Capitalization		23
Dilution		24
Selected Consolidated Financial Data		25
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations		26
Our Business		42
Management		62
Certain Transactions		78
Principal And Selling Shareholders		82
Description Of Capital Stock		84
Shares Eligible For Future Sale		88
Principal United States Tax Consequences To Non-U.S. Holders		89
Underwriting		92
Legal Matters		99
Experts		99
Where You Can Find More Information		100
Index To Consolidated Financial Statements		F-1

Ÿ

Market makers bring buyers and sellers together by creating Internet-based markets for the exchange of goods, services and information in a particular industrial sector. Market makers enable more effective and lower cost commerce for traditional businesses by providing access through the Internet to a broader range of buyers and sellers. Market makers typically operate in a specific industry and tailor their business models to match a target market’s distinct characteristics. Our partner company network currently includes significant interests in 18 market makers: Arbinet Communications, BidCom, Collabria, CommerX, ComputerJobs.com, Deja.com, e-Chemicals, eMarketWorld, Internet Commerce Systems, iParts, ONVIA.com, PaperExchange, PlanSponsor Exchange, PointMent, RapidAutoNet, Star-Cite!, Universal Access and VerticalNet.

Ÿ

Infrastructure service providers sell software and services to businesses engaged in e-commerce. Many businesses need assistance in designing business practices to take advantage of the Internet and in building and managing the technological infrastructure needed to support B2B e-commerce. Our partner company network currently includes significant interests in 17 infrastructure service providers: Benchmarking Partners, Blackboard, Breakaway Solutions, ClearCommerce, CommerceQuest, Context Integration, Entegrity Solutions, LinkShare, PrivaSeek, SageMaker, ServiceSoft, Sky Alland Marketing, Syncra Software, Tradex Technologies, United Messaging, US Interactive and Vivant!.

Ÿ

the conversion of $90 million principal amount of our convertible notes into 7,499,893 shares of common stock; and

Ÿ

the issuance and sale of 2,200,000 shares of common stock in the directed share subscription program.

Ÿ

the issuance and sale to IBM Corporation upon closing of this offering of 3,750,000 shares of common stock in a concurrent offering, except where otherwise noted;

Ÿ

1,598,500 shares of common stock issuable upon exercise of stock options outstanding as of July 12, 1999 at a weighted average exercise price of $5.27 per share;

Ÿ

1,605,750 shares of common stock issuable upon exercise of options reserved for grant;

Ÿ

1,499,884 shares of common stock issuable upon exercise of warrants with an exercise price of $12.00 per share related to our outstanding convertible notes;

Ÿ

200,000 shares of common stock issuable upon exercise of warrants with an exercise price of $10.00 per share related to our revolving credit facility;

Ÿ

1,041,666 shares of our common stock issuable upon exercise of an option under an agreement related to the acquisition of a partner company ownership interest; and

Ÿ

the exercise of the underwriters’ over-allotment option.

Common stock offered in underwritten public offering:
U.S. offering		9,120,000 shares
International offering		2,280,000 shares
Total		11,400,000 shares
Common stock offered in directed share subscription program:
Internet Capital Group		2,200,000 shares
Safeguard Scientifics		1,300,000 shares
Total		3,500,000 shares
Shares outstanding after the U.S., international and      concurrent offerings		124,342,435 shares
Over-allotment option		1,710,000 shares
Use of proceeds		We estimate that the net proceeds to us from this offering will be about $151.1 million. We intend to use these net proceeds for acquisitions and working capital.
Risk factors		See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.
Nasdaq National Market symbol		“ICGE”

		March  4, 1996 (Inception) to December 31, 1996			Year Ended  December 31,									Three  Months Ended March 31,
											(Unaudited)			(Unaudited)
					1997 Actual			1998 Actual			1998 Pro Forma			1998 Actual			1999 Actual			1999 Pro Forma
		(In Thousands Except Per Share Data)
Consolidated Statements of Operations      Data:
Revenue		$285			$792			$3,135			$12,957			$377			$3,111			$4,340
Operating Expenses		2,348			7,510			20,156			23,420			3,087			5,401			7,671
		(2,063	)		(6,718	)		(17,021	)		(10,463	)		(2,710	)		(2,290	)		(3,331	)
Other income, net		—			—			30,483			30,640			12,322			28,677			28,677
Interest income (expense), net		88			138			924			970			(53	)		296			290
Income (Loss) Before Income Taxes, Minority
Interest and Equity Income (Loss)		(1,975	)		(6,580	)		14,386			21,147			9,559			26,683			25,636
Income taxes		—			—			—			—			—			663			3,239
Minority interest		427			(106	)		5,382			1,265			—			146			331
Equity income (loss)		(514	)		106			(5,869	)		(38,179	)		(290	)		(7,412	)		(13,372	)
Net Income (Loss)		$(2,062	)		$(6,580	)		$13,899			$(15,767	)		$9,269			$20,080			$15,834
Net income (loss) per share—     diluted		$ (0.10	)		$ (0.19	)		$ 0.25			$(0.28	)		$ 0.20			$ 0.27			$0.21
Weighted average shares     outstanding—diluted		20,396			34,099			56,149			56,102			46,784			73,700			73,700
Pro forma net income (unaudited)								$8,756									$12,233
Pro forma net income per share—     diluted (unaudited)								$ 0.16									$0.17

		March 31, 1999
		(Unaudited)
		Actual		Pro Forma		Pro Forma As Adjusted
Consolidated Balance Sheet Data:		(In Thousands)
Cash and cash equivalents		$19,372		$ 109,372		$303,189
Working capital		17,697		107,697		301,513
Total assets		132,065		222,065		415,881
Long-term debt		122		122		122
Convertible subordinated notes		—		90,000		—
Total shareholders ’ equity		123,235		123,235		407,052

Ÿ

fluctuations in the market price of the common stock of VerticalNet and other future publicly traded partner companies, which are likely to affect the price of our common stock;

Ÿ

lack of the widespread commercial use of the Internet, which may prevent our partner companies from succeeding; and

Ÿ

intensifying competition for the products and services our partner companies offer, which could lead to the failure of some of our partner companies.

Ÿ

the operating results of our partner companies;

Ÿ

changes in equity losses or income and amortization of goodwill related to the acquisition or divestiture of interests in partner companies;

Ÿ

changes in our methods of accounting for our partner company interests, which may result from changes in our ownership percentages of our partner companies;

Ÿ

sales of equity securities by our partner companies, which could cause us to recognize gains or losses under applicable accounting rules;

Ÿ

the pace of development or a decline in growth of the B2B e-commerce market;

Ÿ

intense competition from other potential acquirors of B2B e-commerce companies, which could increase our cost of acquiring interests in additional companies, and competition for the goods and services offered by our partner companies; and

Ÿ

our ability to effectively manage our growth and the growth of our partner companies during the anticipated rapid growth of the B2B e-commerce market.

Ÿ

a failure to agree on the terms of the acquisition, such as the amount or price of our acquired interest;

Ÿ

incompatibility between us and management of the company;

Ÿ

competition from other acquirors of B2B e-commerce companies;

Ÿ

a lack of capital to acquire an interest in the company; and

Ÿ

the unwillingness of the company to partner with us.

Ÿ

Our acquisitions may cause a disruption in our ongoing support of our partner companies, distract our management and other resources and make it difficult to maintain our standards, controls and procedures.

Ÿ

We may acquire interests in companies in B2B e-commerce markets in which we have little experience.

Ÿ

We may not be able to facilitate collaboration between our partner companies and new companies that we acquire.

Ÿ

To fund future acquisitions we may be required to incur debt or issue equity securities, which may be dilutive to existing shareholders.

Ÿ

lack of acceptance of the Internet as an advertising medium;

Ÿ

inability to develop a large base of users of its Web sites who possess demographic characteristics attractive to advertisers;

Ÿ

lower advertising rates;

Ÿ

slow development of the e-commerce market;

Ÿ

lack of acceptance of its Internet content;

Ÿ

loss of key content providers;

Ÿ

intense competition;

Ÿ

loss of key personnel; and

Ÿ

inability to manage growth.

Ÿ

the unwillingness of businesses to shift from traditional processes to B2B e-commerce processes;

Ÿ

the necessary network infrastructure for substantial growth in usage of B2B e-commerce may not be adequately developed;

Ÿ

increased government regulation or taxation may adversely affect the viability of B2B e-commerce;

Ÿ

insufficient availability of telecommunication services or changes in telecommunication services could result in slower response times for the users of B2B e-commerce; and

Ÿ

concern and adverse publicity about the security of B2B e-commerce transactions.

Ÿ

purchasing budget for services, materials and supplies with other online providers and traditional distribution channels;

Ÿ

dollars spent on consulting services with many established information systems and management consulting firms; and

Ÿ

advertising budget with online services and traditional off-line media, such as print and trade associations.

Ÿ

actual or anticipated variations in our quarterly results and those of our partner companies;

Ÿ

new sales formats or new products or services offered by us, our partner companies and their competitors;

Ÿ

changes in our financial estimates and those of our partner companies by securities analysts;

Ÿ

conditions or trends in the Internet industry in general and the B2B e-commerce industry in particular;

Ÿ

announcements by our partner companies and their competitors of technological innovations;

Ÿ

announcements by us or our partner companies or our competitors of significant acquisitions, strategic partnerships or joint ventures;

Ÿ

changes in the market valuations of our partner companies and other Internet companies;

Ÿ

our capital commitments;

Ÿ

additions or departures of our key personnel and key personnel of our partner companies; and

Ÿ

sales of our common stock.

Ÿ

development of an e-commerce market;

Ÿ

our ability to identify trends in our markets and the markets of our partner companies and to offer new solutions that address the changing needs of these markets;

Ÿ

our ability to successfully execute our business model;

Ÿ

our partner companies’ ability to compete successfully against direct and indirect competitors;

Ÿ

our ability to acquire interests in additional companies;

Ÿ

growth in demand for Internet products and services; and

Ÿ

adoption of the Internet as an advertising medium.

Ÿ

the automatic conversion of our convertible notes into 7,499,893 shares of our common stock upon completion of this offering;

Ÿ

the issuance and sale of 13,600,000 shares of our common stock by us in this offering; and

Ÿ

the issuance and sale of 3,750,000 shares of our common stock by us in the concurrent offering after deducting estimated underwriting discounts and commissions and estimated offering expenses.

Ÿ

the waiving of interest that would result upon the conversion of the convertible notes; and

Ÿ

the value attributed to the warrants issued together with the convertible notes and our credit facility.

Ÿ

the exercise of the underwriters’ over-allotment option;

Ÿ

the shares of common stock reserved for issuance under our 1999 Equity Compensation Plan, under which options to purchase 1,598,500 shares were outstanding as of July 12, 1999 at a weighted average exercise price of $5.27 per share;

Ÿ

the warrants outstanding to purchase 1,699,884 shares at a weighted average exercise price of $11.76 per share; and

Ÿ

1,041,666 shares of our common stock issuable upon exercise of an option under an agreement related to the acquisition of a partner company ownership interest.

		March 31, 1999
		Actual			Pro Forma			Pro Forma As Adjusted
Long-term debt		$121,665			$121,665			$121,665
Convertible subordinated notes		—			90,000,000			—
Shareholders’ equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized; none     issued and outstanding-actual, pro forma and pro forma as     adjusted		—			—			—
Common stock, $.001 par value; 300,000,000 shares authorized;     82,005,549 shares issued and outstanding-actual; 82,005,549     shares issued and outstanding-pro forma; 106,855,442 shares     issued and outstanding-pro forma as adjusted		82,006			82,006			106,855
Additional paid-in capital		103,758,063			103,758,063			387,549,773
Retained earnings		23,318,903			23,318,903			23,318,903
Unamortized deferred compensation		(6,661,692	)		(6,661,692	)		(6,661,692	)
Accumulated other comprehensive income		2,738,180			2,738,180			2,738,180
Total shareholders ’ equity		123,235,460			123,235,460			407,052,019
Total capitalization		$123,357,125			$213,357,125			$407,173,684

Ÿ

the issuance and sale by us of 13,600,000 shares of our common stock in this offering at the initial public offering price of $12.00 per share, and the application of the estimated net proceeds of $151.1 million; and

Ÿ

the sale by us to IBM Corporation of 3,750,000 shares at $12.00 per share and the application of the estimated net proceeds of $42.8 million,

Initial public offering price per share				$12.00
Pro forma net tangible book value per share at March 31, 1999		$2.31
Increase per share attributable to this offering		1.44
Pro forma as adjusted net tangible book value per share after this offering				3.75
Dilution per share to new investors in this offering				$8.25

		Shares Purchased					Total Consideration					Average Price Per Share
		Number		Percent			Amount		Percent
Existing shareholders		89,505,442		84	%		$200,500,000		49	%		$ 2.24
Concurrent offering		3,750,000		4			45,000,000		11			12.00
New investors		13,600,000		12			163,200,000		40			12.00
Total		106,855,442		100	%		$408,700,000		100	%		$3.82

		March 4, 1996 (Inception) to December 31, 1996			Year Ended December 31,						(Unaudited) Three Months Ended March 31,
					1997			1998			1998			1999
Consolidated Statements of Operations Data:
Revenue		$285,140			$791,822			$3,134,769			$377,371			$3,111,035
Operating Expenses
Cost of revenue		427,470			1,767,017			4,642,528			628,213			1,553,329
Sales and marketing		268,417			2,300,365			7,894,662			934,934			114,415
General and administrative		1,652,481			3,442,241			7,619,169			1,523,878			3,733,400
Total operating expenses		2,348,368			7,509,623			20,156,359			3,087,025			5,401,144
		(2,063,228	)		(6,717,801	)		(17,021,590	)		(2,709,654	)		(2,290,109	)
Other income, net		—			—			30,483,177			12,322,162			28,677,471
Interest income (expense), net		88,098			138,286			924,588			(53,620	)		295,979
Income (Loss) Before Taxes, Minority Interest     and Equity Income (Loss)		(1,975,130	)		(6,579,515	)		14,386,175			9,558,888			26,683,341
Income taxes		—			—			—			—			663,206
Minority interest		427,185			(106,411	)		5,381,640			—			146,018
Equity income (loss)		(514,540	)		106,298			(5,868,887	)		(289,847	)		(7,412,602	)
Net Income (Loss)		$ (2,062,485	)		$(6,579,628	)		$13,898,928			$9,269,041			$20,079,963
Net Income (loss) per share—diluted		$(0.10	)		$(0.19	)		$0.25			$0.20			$0.27
Weighted average shares outstanding—diluted		20,395,774			34,098,844			56,149,289			46,783,625			73,699,973
Pro forma net income (unaudited)								$8,756,325						$12,232,557
Pro forma net income per share—diluted     (unaudited)								$0.16						$0.17

		December 31,						(Unaudited) March 31,1999
		1996		1997		1998
Consolidated Balance Sheet Data:
Cash and cash equivalents		$3,215,256		$5,967,461		$26,840,904		$19,372,129
Working capital		4,883,129		2,390,762		20,452,438		17,696,769
Total assets		13,629,407		31,481,016		96,785,975		132,064,721
Long-term debt		167,067		399,948		351,924		121,665
Total shareholders ’ equity		12,858,856		26,634,675		80,724,378		123,235,460

				Voting Ownership
		Partner Company Since		December 31, 1998		March 31, 1999
EQUITY METHOD:
BidCom, Inc.		1999		N/A		25%
Blackboard, Inc.		1998		35%		35%
CommerX, Inc.		1998		34%		34%
ComputerJobs.com, Inc.		1998		33%		33%
Internet Commerce Systems, Inc.		1999		N/A		43%
LinkShare Corporation		1998		34%		34%
ONVIA.com, Inc.		1999		N/A		20%
PlanSponsor Exchange		1999		N/A		24%
SageMaker, Inc.		1998		22%		27%
Sky Alland Marketing, Inc.		1996		31%		31%
Syncra Software, Inc.		1998		53%		34%
VerticalNet, Inc.		1996		N/A		37%
Vivant! Corporation Management		1998		23%		23%

				Voting Ownership
		Partner Company Since		December 31, 1998		March 31, 1999
COST METHOD:
Benchmarking Partners, Inc.		1996		13%		12%
ClearCommerce Corp.		1997		17%		16%
Collabria, Inc.		1999		N/A		10%
CommerceQuest, Inc.		1998		0%		0%
Context Integration, Inc.		1997		18%		18%
Deja.com, Inc.		1997		0%		0%
e-Chemicals, Inc.		1998		0%		0%
Entegrity Solutions		1996		12%		12%
PrivaSeek, Inc.		1998		16%		16%
RapidAutoNet Corporation		1998		15%		15%
ServiceSoft Technologies, Inc.		1998		12%		6%
Universal Access, Inc.		1999		N/A		11%
US Interactive, Inc.		1996		4%		3%

		March  4, 1996 (Inception) to December 31, 1996			Year Ended  December 31,						(Unaudited) Three Months Ended March 31,
					1997			1998			1998			1999
Summary of Consolidated Net Income (Loss)
Partner Company Operations		$ (796,202	)		$(4,778,902	)		$(14,081,522	)		$(2,374,716	)		$(7,812,789	)
General ICG Operations		(1,266,283	)		(1,800,726	)		27,980,450			11,643,757			27,229,546
Income taxes		—			—			—			—			663,206
Net income (loss) — Consolidated Total		$(2,062,485	)		$(6,579,628	)		$13,898,928			$9,269,041			$20,079,963
Partner Company Operations
Revenue		$285,140			$791,822			$3,134,769			$377,371			$3,111,035
Operating expenses
Cost of revenue		427,470			1,767,017			4,642,528			628,213			1,553,329
Sales and marketing		268,417			2,300,365			7,894,662			934,934			114,415
General and administrative		291,660			1,388,123			4,106,583			823,159			2,000,272
Total operating expenses		987,547			5,455,505			16,643,773			2,386,306			3,668,016
		(702,407	)		(4,663,683	)		(13,509,004	)		(2,008,935	)		(556,981	)
Other income (expense), net		—			—			—			—			(6,994	)
Interest income		7,491			10,999			212,130			3,937			31,526
Interest expense		(13,931	)		(126,105)			(297,401)			(79,871	)		(13,756	)
Income (loss) before income taxes, minority interest and equity         income (loss)		(708,847	)		(4,778,789	)		(13,594,275	)		(2,084,869	)		(546,205	)
Income taxes		—			—			—			—			—
Minority interest		427,185			(106,411	)		5,381,640			—			146,018
Equity income (loss)		(514,540	)		106,298			(5,868,887	)		(289,847	)		(7,412,602	)
Loss from Partner Company Operations		$(796,202	)		$(4,778,902	)		$(14,081,522	)		$(2,374,716	)		$(7,812,789	)
General ICG Operations
General and administrative		$1,360,821			$2,054,118			$3,512,586			$700,719			$1,733,128
		(1,360,821	)		(2,054,118	)		(3,512,586	)		(700,719	)		(	1,733,128)
Other income (expense), net		—			—			30,483,177			12,322,162			28,684,465
Interest income		94,538			253,392			1,093,657			52,463			278,209
Interest expense		—			—			(83,798	)		(30,149	)		—
Income (loss) from General ICG Operations before income         taxes		$(1,266,283	)		$(1,800,726	)		$27,980,450			$11,643,757			$27,229,546
Consolidated Total
Revenue		$285,140			$791,822			$3,134,769			$377,371			$3,111,035
Operating expenses
Cost of revenue		427,470			1,767,017			4,642,528			628,213			1,553,329
Sales and marketing		268,417			2,300,365			7,894,662			934,934			114,415
General and administrative		1,652,481			3,442,241			7,619,169			1,523,878			3,733,400
Total operating expenses		2,348,368			7,509,623			20,156,359			3,087,025			5,401,144
		(2,063,228	)		(6,717,801	)		(17,021,590	)		(2,709,654	)		(2,290,109	)
Other income (expense), net		—			—			30,483,177			12,322,162			28,677,471
Interest income		102,029			264,391			1,305,787			56,400			309,735
Interest expense		(13,931	)		(126,105	)		(381,199	)		(110,020	)		(13,756	)
Income (loss) before income taxes, minority interest and equity         income (loss)		(1,975,130	)		(6,579,515)			14,386,175			9,558,888			26,683,341
Income taxes		—			—			—			—			663,206
Minority interest		427,185			(106,411	)		5,381,640			—			146,018
Equity income (loss)		(514,540	)		106,298			(5,868,887	)		(289,847)			(7,412,602	)
Net income (loss) — Consolidated Total		$(2,062,485	)		$(6,579,628	)		$13,898,928			$9,269,041			$20,079,963
Pretax income								$13,898,928						$19,416,757
Pro forma income taxes								(5,142,603	)					(7,184,200	)
Pro forma net income								$8,756,325						$12,232,557

VerticalNet-Analysis of Three Year Period Ended December 31, 1998

General and Administrative

Other Income

		Year  Ended December 31, 1998			Three Months Ended March 31,
					1998			1999
Sale of Matchlogic to Excite		$12,822,162			$12,822,162			$—
Sales of Excite holdings		16,813,844			—			2,050,837
Sale of WiseWire to Lycos		3,324,238			—			—
Sales of Lycos holdings		1,471,907			—			—
Sale of stock by VerticalNet		—			—			28,253,956
Partner company impairment charges		(3,948,974	)		—			(1,620,328	)
Other		—			(500,000	)		—
		$30,483,177			$12,322,162			$28,684,465

Interest Income

Income Taxes

Equity Income (Loss)

VerticalNet

Growth of the Internet

Growth of B2B E-Commerce

Ÿ

Expanded Access to New and Existing Customers and Suppliers . Traditional businesses have relied on their sales forces and purchasing departments to develop and maintain customer and supplier relationships. This model is constrained by the time and cost required to exchange current information regarding requirements, prices and product availability, and the difficulty of cost-effectively locating new customers and suppliers and managing existing relationships. Traditional businesses can leverage the Internet to obtain real-time, accurate information regarding requirements, prices and products to a global audience, including suppliers, customers and business partners. This makes it easier for businesses to attract new customers and suppliers, improve service and increase revenue.

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Increased Efficiency and Reduced Cost. Traditional businesses can utilize the Internet to automate their internal operations, including manufacturing, finance, sales and purchasing functions. The Internet can also be used to increase information flow and access throughout an organization. This increases operational efficiency by reducing the time, costs and resources required to transact business, lowering inventory levels and procurement costs, and improving responsiveness to customers and suppliers.

Market Opportunities for Emerging B2B E-Commerce Companies

Ÿ

Market Makers. Market makers bring buyers and sellers together by creating Internet-based markets for the exchange of goods, services and information in a particular industrial sector. Market makers enable more effective and lower cost commerce for traditional businesses by providing access through the Internet to a broader range of buyers and sellers. Market makers typically operate in a specific industry and tailor their business models to match a target market’s distinct characteristics. To understand the different types of markets, we divide market makers into three categories: distributor, network and community.

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Distributor. Distributor markets are characterized by comparatively inefficient distribution channels. To service these markets, distributor market makers act as principals in transactions, distributing goods and services between buyers and sellers who connect with each other over the Internet. Distributor market makers may charge a fee based on the value of the transactions facilitated.

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Network. Network markets are characterized by comparatively efficient distribution channels. Although network market makers do not act as principals in transactions, they automate existing business processes so as to make them more efficient. Network market makers may generate revenue by charging fees for transactions conducted on their Web sites, and may charge a fee for access to their Web-based services.

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Community. Community market makers bring together buyers and sellers that are typically businesses and professionals with common interests. Existing relationships among these businesses and professionals are unstructured, but community market makers facilitate interaction and transactions among them by providing an electronic community. Community market makers may charge a fee for facilitated transactions and receive advertising revenue.

Ÿ

Infrastructure Service Providers. Infrastructure service providers sell software and services to businesses engaged in e-commerce. Many businesses need assistance in designing business practices to take advantage of the Internet, and in building and managing the technological infrastructure needed to support B2B e-commerce. Infrastructure service providers help businesses in the following ways:

Ÿ

Strategic Consulting and Systems Integration. Consultants assist traditional businesses in developing their e-commerce strategies. Systems integrators develop and implement a technological infrastructure that enables e-commerce. Systems integrators also integrate e-commerce applications with existing enterprise applications. Strategic consultants and systems integrators typically charge their clients on a project-by-project basis.

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Software Providers . Software providers design and sell software applications, tools and related services that support e-commerce and integrate business functions. Software providers may sell or license their products.

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Outsourced Service Providers. Outsourced service providers offer software applications, infrastructure and related services designed to help traditional businesses reduce cost, improve operational efficiency and decrease time to market. Outsourced service providers may charge fees on a per-use or periodic basis.

Ÿ

Developing a Successful Business Model. B2B e-commerce companies must develop business models that capitalize on the Internet’s capabilities to provide solutions to traditional companies in target industries. B2B e-commerce companies require industry expertise because each industry has distinct characteristics including existing distribution channels, levels of concentration and fragmentation among buyers and sellers, procurement policies, product information and customer support requirements. B2B e-commerce companies also require Internet expertise in order to apply its capabilities to their target industries.

Ÿ

Building Corporate Infrastructure. Many B2B e-commerce companies have been recently formed and require sales and marketing, executive recruiting and human resources, information technology, and finance and business development assistance. These companies also require capital as significant resources may be required to build technological capabilities and internal operations.

Ÿ

Finding the Best People. Entrants into the B2B e-commerce market require management with expertise in the applicable market, an understanding of the Internet’s capabilities, the ability to manage rapid growth and the flexibility to adapt to the changing Internet marketplace. We believe that very few people have these skills, and those that do are highly sought after. To be successful, companies must attract and retain highly qualified personnel.

Ÿ

create or identify companies with the potential to become industry leaders;

Ÿ

acquire significant interests in partner companies and incorporate them into our collaborative network;

Ÿ

provide strategic guidance and operational support to our partner companies; and

Ÿ

promote collaboration among our partner companies.

Create or Identify Companies With the Potential to Become Market Leaders

Ÿ

Industry Criteria

Ÿ

Inefficiency. We consider whether the industry suffers from inefficiencies that may be alleviated through e-commerce. We also consider the relative amount of inefficiency, as more inefficient industries present greater profit potential.

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Competition. We evaluate the amount of competition that a potential partner company faces from e-commerce and traditional businesses.

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Market Maker Profit Potential. When evaluating market makers, we consider the number and dollar value of transactions in the industry. In the multi-billion dollar industries that we target, offering even incremental efficiency improvements presents significant profit potential.

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Centralized Information Sources. When evaluating market makers, we consider whether the industry has product catalogs, trade journals and other centralized sources of information regarding products, prices, customers and other factors. The availability of this information makes it easier for a market maker to facilitate communication and transactions. We generally avoid industries where this information is not available.

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Infrastructure Service Provider Profit Potential. When evaluating infrastructure service providers, we examine the size of the market opportunity, the profit potential in serving the target market and whether the infrastructure service provider can provide assistance to our market maker partner companies.

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Partner Company Criteria

Ÿ

Industry Leader. We partner with a company only if we believe that it has the products and skills to become a leader in its industry.

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Management Quality. We assess the overall quality and industry expertise of a potential partner company’s management.

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Significant Ownership. We consider whether we will be able to obtain a significant position in the company and exert influence over the company.

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Network Synergy. We consider the degree to which a potential partner company may contribute to our network, and benefit from our network and operational resources.

Acquire Interests in Partner Companies

Provide Strategic Guidance and Operational Support to Our Partner Companies

Ÿ

Strategic Guidance. We provide strategic guidance to our partner companies regarding market positioning, business model development and market trends. In addition, we advise partner company management and directors on day-to-day management and operational issues. Our exclusive focus on the B2B e-commerce market and the knowledge base of our partner companies, strategic investors, management and Advisory Board give us valuable experience that we share with our partner company network. Advisory Board members who provide strategic guidance to our partner companies include Jeff Ballowe, a former President of Ziff-Davis Inc. and the current Chairman of Deja.com, Inc., Alex W. Hart, a former Chief Executive Officer of MasterCard International, Ron Hovsepian, Vice President of Business Development at IBM Corporation and Yossi Sheffi, Ph.D., a co-founder of Syncra Software, Inc. and e-Chemicals, Inc. and currently a Professor at the Massachusetts Institute of Technology.

Ÿ

Operational Support. B2B e-commerce companies often have difficulty obtaining senior executive level guidance in the many areas of expertise successful companies need. We assist our partner companies by providing access to skilled managers who guide our partner companies in the following functional areas:

Ÿ

Sales and Marketing. Several members of our Advisory Board and management team provide guidance to our partner companies’ sales, marketing, product positioning and advertising efforts. These individuals include Michael H. Forster, a former Senior Vice President of Worldwide Field Operations at Sybase, Inc. and currently one of our Senior Partners, Christopher H. Greendale, a former Executive Vice President at Cambridge Technology Partners and currently one of our Managing Directors, Rowland Hanson, a former Vice President of Corporate Communications at Microsoft Corporation and currently founder of C. Rowland Hanson & Associates, Charles W. Stryker, Ph.D., President, Marketing Information Solutions, at IntelliQuest, Inc., and Sergio Zyman, a former Vice President and Chief Marketing Officer of the Coca-Cola Company.

Ÿ

Executive Recruiting and Human Resources. Members of our management team assist our partner companies in recruiting key executive talent. These individuals include Rick Devine, one of our Managing Directors and a former partner at Heidrick & Struggles, Inc., an executive recruiting firm. In providing this assistance, we leverage the contacts developed by our network of partner companies, management and Advisory Board. We believe that this is one of the most important functions that we perform on behalf of our partner companies. B2B e-commerce companies must locate executives with both industry and Internet expertise. The market for these professionals is highly competitive since few persons possess the necessary mix of skills and experience.

Ÿ

Information Technology. Our Chief Technology Officer, Richard G. Bunker, is dedicated to helping our partner companies with their information systems strategies and solving problems relating to their current information technology. Members of our Board of Directors and Advisory Board who provide guidance in this area include K.B. Chandrasekhar, Chairman of the Board of Directors of Exodus Communications, and Peter A. Solvik, the Chief Information Officer of Cisco Systems, Inc.

Ÿ

Finance. One of our Managing Directors, John N. Nickolas, an experienced finance executive, is dedicated to providing financial guidance to our partner companies in areas such as corporate finance, financial reporting, accounting and treasury operations. In providing these services, Mr. Nickolas leverages the skills and experience of our internal finance and accounting group, our partner company network and outside consultants.

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Business Development. B2B e-commerce companies may be involved in evaluating, structuring and negotiating joint ventures, strategic alliances, joint marketing agreements, acquisitions or other transactions. We provide assistance to our partner companies in all these areas. Our management team, Advisory Board, strategic investors and partner companies all assist in this function.

Promote Collaboration Among Our Partner Companies

Ÿ

VerticalNet and e-Chemicals are collaborating to provide customer leads for e-Chemicals. This relationship enables VerticalNet to provide a greater breadth of services to its customers in the chemicals business and provides more buyers for the products distributed by e-Chemicals.

Ÿ

Deja.com, which provides a Web-based community for potential purchasers to access user comments on a variety of products and services, has formed a strategic alliance with VerticalNet to provide VerticalNet’s Web sites with discussion content. In addition, Deja.com and ComputerJobs.com have created a discussion forum that accesses ComputerJobs.com’s database of technology employment opportunities, increasing ComputerJobs.com’s exposure to Deja.com’s broad user base.

Market Maker Categories

Ÿ

Distributor.     Distributor markets are characterized by comparatively inefficient distribution channels. To service these markets, our distributor partner companies act as principals in transactions, distributing goods and services between buyers and sellers who connect with each other over the Internet. Our partner companies in this category generate revenue by charging fees for transactions conducted on their Web sites. An example of one of our distributor partner companies is e-Chemicals. e-Chemicals believes that traditional distribution channels for chemicals burden customers with excessive transaction costs, high administrative costs and inefficient logistics. To solve these problems, e-Chemicals has developed a Web site through which it will sell a wide range of industrial chemicals to business customers. e-Chemicals provides products based on streamlined Web-based ordering processes, outsourced logistics systems and online support.

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Network.     Network markets are characterized by comparatively efficient distribution channels. Our network partner companies automate existing business processes so as to make them more efficient. Our partner companies in this category may charge a fee based on the value of the transactions facilitated and an ongoing fee for access to their Web sites. An example of one of our network partner companies is Internet Commerce Systems, Inc. Internet Commerce Systems is in the process of establishing an Internet-based product introduction and promotion service for the food industry. Internet Commerce Systems’ FoodOne system seeks to replace the traditional practice of weekly distribution of physical product catalogs and follow-up calls by telemarketers, food brokers or field salespeople. Internet Commerce Systems believes that it will increase retail store sales coverage and provide market feedback to grocery manufacturers while decreasing order entry, sales and marketing costs.

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Community.     Community market makers bring together buyers and sellers that are typically businesses and professionals with common interests. Existing relationships among these businesses and professionals are unstructured, but our partner companies stimulate interaction and facilitate transactions among them by providing an electronic community. Our partner companies may charge a fee for each facilitated transaction and receive advertising revenue. One example of our community partner companies is VerticalNet. As of June 30, 1999, VerticalNet owned and operated 43 industry-specific Web sites designed to act as online B2B communities. These vertical trade communities act as comprehensive sources of information, interaction and e-commerce.

Market Maker Profiles

Category  and Name		Industry		Description  of Business		Our Ownership Percentage			Partner Company Since
Distributor:
CommerX, Inc. www.commerx.com		Plastics		Provides Internet-based procurement and sales of raw materials, tools and maintenance and repair products for the plastics industry.		42	%		1998
e-Chemicals, Inc. www.e-chemicals.com		Chemicals		Provides Internet-based sales and distribution of industrial chemicals.		36	%		1998
iParts www.ipartsupply.com		Electronic Components		Provides Internet-based sales and distribution of electronic components.		85	%		1999
ONVIA.com, Inc. www.onvia.com		Small Business Services		Provides small businesses with a wide breadth of tailored products and services over the Internet.		20	%		1999
PaperExchange www.paperexchange.com		Paper		Provides Internet-based sales and distribution of all grades of pulp and paper.		27	%		1999
Universal Access, Inc. www.universal accessinc.com		Telecommunications		Provides Internet-based ordering for provisioning and access and transportation exchange services for network service providers focused on business customers.		26	%		1999
Network:
Arbinet Communications, Inc. www.arbinet.com		Telecommunications		Provides an Internet-based trading floor and clearinghouse for telecommunications carriers to purchase bandwidth.		16	%		1999
BidCom, Inc. www.bidcom.com		Construction		Provides Internet-based project planning and management services for the construction industry.		25	%		1999
Collabria Inc. www.collabria.com		Printing		Provides Internet-based procurement and production services for the commercial printing industry.		10	%		1999

Category  and Name		Industry		Description  of Business		Our Ownership Percentage			Partner Company Since
ComputerJobs.com, Inc. www.computerjobs.com		Technology Employment		Provides Internet-based job screening and resume posting for information technology professionals, corporations and staffing firms.		33	%		1998
Internet Commerce Systems, Inc. www.icsfoodone.com		Food		Provides Internet-based product introduction and promotion services to wholesale and retail food distributors.		43	%		1999
PointMent, Inc. www.pointment.com		Healthcare		Provides Internet-based solutions for employee health benefits management across the health care industry.		50	%		1999
RapidAutoNet Corporation www.rapidautonet.com		Auto Parts		Provides Internet-based auto parts procurement for professional automotive and truck repair shops.		15	%		1998
Star-Cite! www.starcite.com		Travel		Provide Internet-based services for planning and managing corporate meetings for event planners.		43	%		1999
Community:
Deja.com, Inc. www.deja.com		Media		Provides a Web-based community for potential purchasers to access user comments on a variety of products and services.		29	%		1997
eMarketWorld, Inc. www.emarketworld.com		Special Event Services		Provides industry specific Web- based conferences and expositions that help businesses understand the Internet.		42	%		1999
PlanSponsor Exchange www.plansponsor exchange.com		Asset Management		Provides a Web-based community for asset managers to reach fund sponsors.		24	%		1999
VerticalNet, Inc. www.verticalnet.com		Industrial Services		Provides industry-specific Web- based trade communities for businesses and professionals.		36	%		1996

Process Group   Ÿ Adhesives and Sealants Online (adhesivesandsealants.com)     Manufacturing and Production of Adhesive,     Sealant, and Grout Materials   Ÿ Chemical Online (chemicalonline.com)     Manufacturing and Processing Chemicals   Ÿ Hydrocarbon Online (hydrocarbononline.com)     Hydrocarbons and Petrochemicals Processing   Ÿ Oil and Gas Online (oilandgasonline.com)     Production and Exploration of Oil and Gas   Ÿ Paint and Coatings Online (paintandcoatingsonline.com) Manufacturing and Production of Paint Coatings, Inks and Thick Film Printable Conductors   Ÿ Pharmaceutical Online (pharmaceuticalonline.com) Development, Design and Manufacturing of Pharmaceuticals   Ÿ Semiconductor Online ( Semiconductoronline.com ) Manufacturing of Semiconductors, Photovoltaics and Magnetic Data Storage   Communication Group   Ÿ Fiber Optics Online (fiberopticsonline.com)     Design and Production of Fiber Optic      Networks and Network Components   Ÿ Photonics Online ( photonicsonline.com )     Design and Manufacturing of Lasers, Optics,     Optoelectronics, Fiber Optics and Imaging     Devices   Ÿ Premises Networks.com (premisesnetworks.com)     Facilities and Network Infrastructure Design     and Administration   Ÿ RF Globalnet (rfglobalnet.com)     Information, Bookstore and Educational      Center for Radio Frequency, Wireless and      Microwave Engineers   Ÿ Wireless Design Online (wirelessdesignonline.com)     Design and Development of Wireless      Communications Systems and Equipment   Ÿ Digital Broadcasting.com (digitalbroadcasting.com) Digital Television Marketplace for Broadcast, Cable, Satellite and Telco Employees

Environmental Group   Ÿ Pollution Online (pollutiononline.com)     Industrial Pollution Control   Ÿ Power Online ( poweronline.com )     Power Generation, Electric Utility      Deregulation, Emissions Control, Alternative     Fuels, Power Industry   Ÿ Public Works Online (publicworks.com)     Public Works and Municipal Maintenance   Ÿ Solid Waste Online (solidwaste.com)     Solid Waste Disposal   Ÿ Water Online (wateronline.com)     Municipal Water Supply and Municipal      Wastewater Treatment   Ÿ ElectricNet.com (electricnet.com) Online Buyer’s Guide and Other Information for Power Transmission and Distribution Industry   Ÿ Pulp and Paper Online ( pulpandpaperonline.com) Manufacturing and Production of Pulp and Paper Products   Ÿ Safety Online (safetyonline.com)     Industrial and Environmental Safety   Food & Packaging Group   Ÿ Bakery Online (bakeryonline.com)     Production and Procurement of Baking      Ingredients   Ÿ Beverage Online (beverageonline.com)     Production and Procurement of Equipment     used in the Production of Beverages   Ÿ Dairy Network.com (dairynetwork.com)     Production, Procurement and Distribution of     Dairy Products   Ÿ Food Ingredients Online (foodingredientsonline.com)     Manufacturing and Processing of Food      Ingredients   Ÿ Food Online (foodonline.com)     Manufacturing and Processing of Food      Products   Ÿ Meat and Poultry Online (meatandpoultryonline.com)     Production, Procurement and Distribution of     Meat and Poultry Products   Ÿ Packaging Network.com (packagingnetwork.com)     Production, Purchase, Design and Marketing     of Packaging for All Consumer and      Industrial Products

Foodservice/Hospitality Group   Ÿ Foodservice Central.com (foodservicecentral.com) Commercial and Institutional Foodservice   Healthcare Group   Ÿ Hospital Network.com (hospitalnetwork.com)     Information for Hospital Purchasing      Decision-Makers   Ÿ Nurses.com (nurses.com)     Clinical, Professional and Other Information     for Nurses   Ÿ E-dental.com (e-dental.com) Clinical, Professional, Educational and other information for Dentists and Dentist Professionals   Advanced Technologies Group   Ÿ Aerospace Online (aerospaceonline.com)     Design and Manufacturing of Products and     Services Relating to the Aerospace Industry   Ÿ Computer OEM Online (computeroemonline.com)     Design and Manufacturing of Computers      and Computerized Electronics Devices   Ÿ Embedded Technology Online (embeddedtechnology.com)      Design and Manufacturing of Embedded     Systems, Computers, Software and Devices   Ÿ Medical Design Online (medicaldesignonline.com)     Design, Manufacturing and Procurement of     Medical Devices   Ÿ Plant Automation.com (plantautomation.com)     Hardware and Software Used in Industrial     Manufacturing Including Robotics and      Automated Control Systems   Ÿ Test and Measurement (testandmeasurement.com)     Design, Manufacturing and Procurement of     Test, Measurement, Data Acquisition, Data     Analysis and Instrumentation Equipment

Sciences Group   Ÿ Bioresearch Online (bioresearchonline.com)     Covers all Aspects of Experimental and      Applied Biology Including Biotechnology,      Genomics and Genetics   Ÿ Drug Discovery Online (drugdiscoveryonline.com)     Early-Stage Pharmaceutical Discovery and     Development   Ÿ Laboratory Network.com (laboratorynetwork.com)     Covers all Aspects of the Research Industry     Focusing on Analytical Instrumentation and     Materials Science   Services Group   Ÿ Property and Casualty.com (propertyandcasualty.com)     Property and Casualty Insurance   Manufacturing and Metals Group   Ÿ TechSpex (techspex.com) Machine Tools and Related Peripherals

Ÿ

offer consistent content and services in its current vertical trade communities and replicate these offerings as it launches new communities;

Ÿ

realize cost savings and operating efficiencies in its technology, marketing, infrastructure and management resources; and

Ÿ

increase its overall audience, making its individual sites more appealing to a broad array of advertisers and suppliers who sell their goods and services over the Internet.

Infrastructure Service Provider Categories

Ÿ

Strategic Consulting and Systems Integration. Strategic consultants assist traditional businesses in developing their e-commerce strategies. Systems integrators develop and implement technological infrastructure that enables e-commerce. Systems integrators also integrate e-commerce applications with existing enterprise applications. Strategic consultants and systems integrators typically bill their clients on a project-by-project basis.

Ÿ

Software Providers. Software providers design and sell software applications that support e-commerce and integrate business functions. Software providers may sell or license their products.

Ÿ

Outsourced Service Providers. Outsourced service providers offer software applications, infrastructure and related services designed to help traditional businesses reduce cost, improve operational efficiency and decrease time to market. Outsourced service providers may charge fees on a per-use or periodic basis.

Infrastructure Service Provider Profiles

Category and Name		Description of Business		Our Ownership Percentage			Partner Company Since
Strategic Consulting and Systems Integration:
Benchmarking Partners, Inc. www.benchmarking.com		Provides e-commerce best practices research and consulting services to optimize supply and distribution network management.		12	%		1996
Context Integration, Inc. www.context.com		Provides systems integration services focused on customer support, data access and e-commerce.		18	%		1997
US Interactive, Inc. www.usinteractive.com		Provides a range of consulting and technical services relating to Internet marketing solutions.		3	%		1996
Software Providers:
Blackboard, Inc. www.blackboard.com		Provides universities and corporations with applications that enable them to host classes and training on the Internet.		30	%		1998
ClearCommerce Corp. www.clearcommerce.com		Provides comprehensive e-commerce solutions including transaction and payment processing, credit card authorization, fraud tracking and reporting functions.		15	%		1997
Entegrity Solutions www.entegrity.com		Provides encryption software to secure transactions and communications between business applications.		12	%		1996
ServiceSoft Technologies, Inc. www.servicesoft.com		Provides tools and services used by its customers to create Internet customer service applications consisting of self-service, e-mail response and live interaction products.		6	%		1998
Syncra Software, Inc. www.syncra.com		Provides software that improves supply chain efficiency through collaboration of trading partners over the Internet.		35	%		1998
Tradex Technologies, Inc. www.tradex.com		Provides e-commerce application software that enables enterprises to create on-line marketplaces and exchanges.		13	%		1999
Outsourced Service Providers:
Breakaway Solutions, Inc. www.breakaway.com		Provides application service hosting, e-commerce consulting and systems integration services to growing companies.		53	%		1999
CommerceQuest, Inc. www.commercequest.com		Provides a messaging service for data sharing across separate enterprises. Also provides software, systems integration services and managed network services for application integration within enterprises or with external trading partners and customers.		29	%		1998

Category and Name		Description of Business		Our Ownership Percentage			Partner Company Since
LinkShare Corporation www.linkshare.com		Establishes affiliate relationships for online merchants with other Web sites to facilitate e-commerce.		34	%		1998
PrivaSeek, Inc. www.privaseek.com		Provides consumers with control of their Web-based personal profiles, allowing merchants to offer consumers incentives for selective disclosure.		16	%		1998
SageMaker, Inc. www.sagemaker.com		Provides services that combine an enterprise’s external and internal information assets into a single, Web-based knowledge management platform.		27	%		1998
Sky Alland Marketing, Inc. www.skyalland.com		Provides services to improve customer communications and relationships.		31	%		1996
United Messaging, Inc. www.unitedmessaging.com		Provides high performance electronic messaging services for organizations with mission critical e-mail networks.		41	%		1999
Vivant! Corporation Management www.vivantcorp.com		Provides process automation and decision support services that enable companies to strategically manage contractors, consultants and temporary employees.		23	%		1998

Ÿ

Integration. Coordinating diverse business functions such as manufacturing, logistics, sales and marketing to maximize efficiency.

Ÿ

Optimization. Developing strategies that increase the efficiency of supply networks.

Ÿ

Collaboration. Creating collaborative solutions that incorporate key trading partners.

Ÿ

Taxes. Congress recently enacted a three-year moratorium, ending on October 21, 2001, on the application of “discriminatory” or “special” taxes by the states on Internet access or on products and services delivered over the Internet. Congress further declared that there will be no federal taxes on e-commerce until the end of the moratorium. However, this moratorium does not prevent states from taxing activities or goods and services that the states would otherwise have the power to tax. Furthermore, the moratorium does not apply to certain state taxes that were in place before the moratorium was enacted.

Ÿ

Online Privacy. Both Congress and the Federal Trade Commission are considering regulating the extent to which companies should be able to use and disclose information they obtain online from consumers. If any regulations are enacted, B2B e-commerce companies may find certain marketing activities restricted. Also, the European Union has directed its member nations to enact much more stringent privacy protection laws than are generally found in the United States, and has threatened to prohibit the export of certain personal data to United States companies if similar measures are not adopted. Such a prohibition could limit the growth of foreign markets for United States B2B e-commerce companies. The Department of Commerce is negotiating with the Federal Trade Commission to provide exemptions from the European Union regulations, but the outcome of these negotiations is uncertain.

Ÿ

Regulation of Communications Facilities. To some extent, the rapid growth of the Internet in the United States has been due to the relative lack of government intervention in the marketplace for Internet access. Lack of intervention may not continue in the future. For example, several telecommunications carriers are seeking to have telecommunications over the Internet regulated by the Federal Communications Commission in the same manner as other telecommunications services. Additionally, local telephone carriers have petitioned the Federal Communications Commission to regulate Internet service providers in a manner similar to long distance telephone carriers and to impose access fees on these providers. Some Internet service providers are seeking to have broadband Internet access over cable systems regulated in much the same manner as telephone services, which could slow the deployment of broadband Internet access services. Because of these proceedings or others, new laws or regulations could be enacted which could burden the companies that provide the infrastructure on which the Internet is based, thereby slowing the rapid expansion of the medium and its availability to new users.

Ÿ

Other Regulations. The growth of the Internet and e-commerce may lead to the enactment of more stringent consumer protection laws. The Federal Trade Commission may use its existing jurisdiction to police e-commerce activities, and it is possible that the Federal Trade Commission will seek authority from Congress to regulate certain online activities. The Federal Trade Commission has already issued for public comment proposed regulations governing the collection of information online from children.

Competition From our Shareholders and Within our Network

Competition Facing our Partner Companies

Ÿ

purchasing budget for services, materials and supplies with other online providers and traditional distribution channels;

Ÿ

dollars spent on consulting services with many established information systems and management consulting firms; and

Ÿ

advertising budget with online services and traditional off-line media, such as print and trade associations.

Competition for Partner Companies

Name		Age		Position
Walter W. Buckley, III		39		President, Chief Executive Officer and Director
Douglas A. Alexander		38		Managing Director
Richard G. Bunker		37		Managing Director and Chief Technology Officer
Richard S. Devine		41		Managing Director, Executive Recruiting
Kenneth A. Fox		29		Managing Director and Director
David D. Gathman		51		Chief Financial Officer and Treasurer
Christopher H. Greendale		47		Managing Director, Operations
Gregory W. Haskell		42		Managing Director, Operations
Todd G. Hewlin		32		Managing Director, Corporate Strategy and Research
Victor S. Hwang		30		Managing Director, Acquisitions
Sam Jadallah		35		Managing Director, Operations
Mark J. Lotke		31		Managing Director, Acquisitions
Henry N. Nassau		45		Managing Director, General Counsel and Secretary
John N. Nickolas		32		Managing Director, Finance and Assistant Treasurer
Robert A. Pollan		38		Managing Director, Operations
Sherri L. Wolf		31		Managing Director, Investor Relations
Michael H. Forster		56		Senior Partner, Operations
Robert E. Keith, Jr. (1)		58		Chairman and Director
Julian A. Brodsky (2)		65		Director
E. Michael Forgash (2)		41		Director
Thomas P. Gerrity (1)		57		Director
Peter A. Solvik(1)		40		Director

(1)	Member of the compensation committee

(2)	Member of the audit committee

General Management Guidance

Sales and Marketing Guidance

Information Technology Management Guidance

Class		Expiration		Member
Class I		2000		Messrs. Brodsky and Forgash
Class II		2001		Messrs. Keith and Solvik
Class III		2002		Messrs. Buckley, Fox and Gerrity

		Annual Compensation						Long-Term Compensation Awards
Name and Principal Position		Salary		Bonus		Other Compensation (1)		Shares Underlying Options
Walter W. Buckley, III
President and Chief Executive Officer		$159,769		$96,000		—		1,300,000
Douglas A. Alexander
Managing Director		225,000		100,000		—		1,250,000
Kenneth A. Fox
Managing Director		119,538		75,000		—		1,250,000
Robert A. Pollan
Managing Director, Operations		133,808		50,000		—		1,250,000

(1)	The value of certain perquisites and other personal benefits is not included in the amounts disclosed because it did not exceed for any officer in the table above the lesser of either $50,000 or 10% of the total annual salary and bonus reported for such officer.

		Number of Securities Underlying Options Granted (1)		Percentage of Total Options Granted to Employees in 1998		Exercise Price per Share (2)		Expiration Date		Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term (3)
Name										5%		10%
Walter W. Buckley, III		1,300,000		22%		$2.00		Dec. 18, 2008		$22,810,756		$37,862,382
Douglas A. Alexander		1,250,000		21%		2.00		Dec. 18, 2008		21,933,419		36,406,137
Kenneth A. Fox		1,250,000		21%		2.00		Dec. 18, 2008		21,933,419		36,406,137
Robert A. Pollan		1,250,000		21%		2.00		Dec. 18, 2008		21,933,419		36,406,137

(1)

All options granted to employees are immediately exercisable, are nonqualified stock options and generally vest over five years at the rate of 20% of the shares subject to the option per year. Unvested shares are subject to a right of repurchase upon termination of employment. Options expire ten years from the date of grant.

(2)	We granted options at an exercise price equal to the fair market value of our common stock on the date of grant, as determined by our Board of Directors.

(3)

These amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock price appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration dates, based upon the initial public offering price of $12.00 per share. These assumptions are not intended to forecast future appreciation of our stock price. The potential realizable value computation does not take into account federal or state income tax consequences of option exercises or sales of appreciated stock.

		Shares Acquired on Exercise (#)		Value Realized ($)		Number of  Securities Underlying Unexercised Options at Fiscal Year-End				Value of  Unexercised  in-the-Money Options at Fiscal Year-End (1)
Name						Exercisable  (2)		Unexercisable		Exercisable		Unexercisable
Walter W. Buckley, III		—		—		1,300,000		—		$13,000,000		—
Douglas A. Alexander		—		—		1,250,000		—		12,500,000		—
Kenneth A. Fox		—		—		1,250,000		—		12,500,000		—
Robert A. Pollan		—		—		1,250,000		—		12,500,000		—

(1)	Based on the initial public offering price of $12.00 per share, less the exercise price, multiplied by the number of shares underlying the option.

(2)	All the options listed below were exercised in May 1999.

Membership Profit Interest Plan

Internet Capital Group, Inc. 1999 Equity Compensation Plan

Ÿ

designated employees of Internet Capital Group and its subsidiaries;

Ÿ

certain advisors who perform services for Internet Capital Group or its subsidiaries; and

Ÿ

non-employee members of our board of directors,

Ÿ

non-employee directors who at any time during their membership on our board of directors are employees of Safeguard Scientifics, Inc. or any of its subsidiaries or affiliates;

Ÿ

non-employee directors who at any time during their membership on our board of directors are employees of TL Ventures, Inc. or any of its subsidiaries or affiliates; or

Ÿ

non-employee directors who are granted options under the general option provisions of the 1999 Equity Compensation Plan are each entitled to receive an option to purchase 47,000 shares of our common stock, vesting in equal installments over four years, upon their initial election to our board of directors, and a service grant to purchase 20,000 shares every two years, vesting in equal installments over two years. The plan also allows our board of directors to grant an option to any of the eligible non-employee directors who were members of the board of directors immediately following the execution of the Reorganization to compensate any of those non-employee directors for the cancellation of outstanding options held immediately prior to the Reorganization. No non-employee director may be granted more than 107,000 shares of our common stock under the automatic and conversion grants described above. Such automatic and conversion grants will otherwise be generally subject to the terms provided for options under the 1999 Equity Compensation Plan.

Ÿ

determine that the outstanding grants, whether in the form of options and stock appreciation rights shall immediately vest and become exercisable;

Ÿ

determine that the restrictions and conditions on all outstanding restricted stock or performance share awards shall immediately lapse;

Ÿ

require that grantees surrender their outstanding options and stock appreciation rights in exchange for payment by us, in cash or common stock, in an amount equal to the amount by which the then fair market value of the shares of common stock subject to the grantee’s unexercised options or stock appreciation rights exceeds the exercise price of those options; and/or

Ÿ

after giving grantees an opportunity to exercise their outstanding options and stock appreciation rights, terminate any or all unexercised options and stock appreciation rights.

Ÿ

require that grantees surrender their outstanding options in exchange for payment by us, in cash or common stock, at an amount equal to the amount by which the then fair market value of the shares of common stock subject to the grantee’s unexercised options exceeds the exercise price of those options; and/or

Ÿ

after accelerating all vesting and giving grantees an opportunity to exercise their outstanding options or SARs, terminate any or all unexercised options and SARs.

Ÿ

the fair market value of the stock received pursuant to such exercise as though the stock were not subject to a substantial risk of forfeiture or transferable, minus

Ÿ

the exercise price paid for the stock.

Internet Capital Group, Inc. Equity Compensation Loan Program

Internet Capital Group, Inc. Long-Term Incentive Plan

Internet Capital Group, Inc. 401(k) Plan

Name		Shares of  Common Stock Purchased		Date of Purchase		Amount  Received by Internet Capital Group
Walter W. Buckley, III		250,000		April 1996		$250,000
		250,000		November 1996		250,000
		250,000		April 1997		250,000
		250,000		November 1997		250,000
Kenneth A. Fox		250,000		May 1996		$250,000
		250,000		November 1996		250,000
		250,000		June 1997		250,000
		250,000		December 1997		250,000
Safeguard Scientifics (Delaware), Inc.		6,139,074		May 1996		$6,139,074
		360,926		November 1996		360,926
		3,250,000		April 1997		3,250,000
		3,250,000		November 1997		3,250,000
Safeguard 98 Capital L.P.		4,062,500		June 1998		$8,125,000
		4,062,500		February 1999		8,125,000

Name of Holder		Relationship to Internet Capital Group		Amount of Convertible Note
Ann B. Alexander		family member of executive officer		$ 63,000
Bradley Alexander		family member of executive officer		155,000
Douglas E. Alexander		family member of executive officer		160,000
Susan R. Buckley		family member of executive officer		55,000
Walter W. Buckley, Jr.		family member of executive officer		200,000
Walter W. Buckley, III		executive officer and director		600,000
Comcast ICG, Inc.		principal shareholder		15,000,000
E. Michael Forgash		director		100,000
Kenneth A. Fox		executive officer and director		1,000,000
David D. Gathman		executive officer		25,000
Thomas P. Gerrity		director		77,000
Internet Assets, Inc.		principal shareholder		1,525,000
Robert E. Keith, Jr.		director		46,000
Henry N. Nassau		executive officer		36,000
Robert A. Pollan		executive officer		31,000
Peter A. Solvik		director		1,068,000
In May 1999, some of our officers and directors exercised options to purchase our common stock. Instead of paying us in cash, the officers and directors delivered promissory notes to us in the aggregate amount of $21,765,000. The promissory notes bear interest at the rate of 5.22%, mature on or about May 5, 2004 and are secured by 8,910,000 shares of our common stock. The following table sets forth the names of the makers of the promissory notes, their relationship to us and the amounts owed to us by each of these makers.
Name of Maker		Relationship to Internet Capital Group		Amount of Promissory Note
Walter W. Buckley, III		executive officer and director		$ 2,600,000
Douglas A. Alexander		executive officer		2,500,000
Richard G. Bunker		executive officer		1,350,000
Kenneth A. Fox		executive officer and director		2,500,000
David D. Gathman		executive officer		1,300,000
Christopher H. Greendale		executive officer		300,000
Victor S. Hwang		executive officer		4,005,000
Henry N. Nassau		executive officer		3,660,000
John N. Nickolas		executive officer		800,000
Robert A. Pollan		executive officer		2,866,000
Thomas P. Gerrity		director		400,000
In June 1999, some of our executive officers exercised options to purchase our common stock. Instead of paying us cash, the officers and directors delivered promissory notes to us in the aggregate amount of $14,783,223. The promissory notes bear interest at the rate of 5.37%, mature on or about June 4, 2004 and are secured by 2,247,750 shares of our common stock. The following table sets forth the names of the makers of the promissory notes, their relationship to us and the amounts owed to us by each of these makers.
Name of Maker		Relationship to Internet Capital Group		Amount of Promissory Note
Gregory W. Haskell		executive officer		$ 6,311,000
Richard S. Devine		executive officer		7,114,223
Richard G. Bunker		executive officer		1,358,000

Name of Maker		Relationship to Internet Capital Group		Amount of Promissory Note
Douglas A. Alexander		executive officer		$3,395,000
Walter W. Buckley, III		executive officer and director		6,790,000
Kenneth A. Fox		executive officer and director		6,111,000
Robert A. Pollan		executive officer		3,395,000
Todd G. Hewlin		executive officer		2,430,000
Mark J. Lotke		executive officer		7,058,000
Sam Jadallah		executive officer		10,125,000
In May 1999, some of our officers and directors incurred tax liabilities as a result of exercising their options to purchase our common stock. These directors and officers borrowed money from us to pay these tax liabilities. The loans are evidenced by promissory notes delivered by these officers and directors to us in the aggregate principal amount of $7,463,307. The promissory notes bear interest at a rate of 5.22% and mature on May 5, 2004. The following table sets forth the names of the makers of the promissory notes, their relationship to us and the amounts owed to us by each of these makers.
Name of Maker		Relationship to Internet Capital Group		Amount of Promissory Note
Walter W. Buckley, III		executive officer and director		$ 1,207,440
Douglas A. Alexander		executive officer		1,161,000
Richard G. Bunker		executive officer		272,835
Kenneth A. Fox		executive officer and director		1,395,000
David D. Gathman		executive officer		603,720
Christopher H. Greendale		executive officer		66,552
Victor S. Hwang		executive officer		973,092
John N. Nickolas		executive officer		371,520
Robert A. Pollan		executive officer		1,478,700
In January 1999, while a limited liability company, we paid a distribution to some of our officers, directors and principal stockholders who were members of Internet Capital Group, L.L.C. The following table sets forth the names of the recipients of the distribution, their relationships to us and the amount paid by us to the recipient.
Name of Recipient		Relationship to Internet Capital Group		Amount Paid to Recipient
Walter W. Buckley, III		executive officer and director		$ 685,092
Douglas A. Alexander		executive officer		249,702
Kenneth A. Fox		executive officer and director		514,597
Thomas P. Gerrity		director		6,100
Christopher H. Greendale		executive officer		37,304
Henry N. Nassau		executive officer		305
Robert A. Pollan		executive officer		2,440
Peter A. Solvik		director		29,216
Comcast ICG, Inc.		principal shareholder		1,401,198
Internet Assets, Inc.		principal shareholder		122,007
Safeguard Scientifics (Delaware), Inc.		principal shareholder		2,602,424
Safeguard Capital 98 LP		principal shareholder		198,262

Ÿ

each person (or group of affiliated persons) who is known by us to own more than five percent of the outstanding shares of our common stock;

Ÿ

each of our directors and our executive officers named in the summary compensation table; and

Ÿ

all of our executive officers and directors as a group.

		Options and Warrants Exercisable Within 60 Days		Number of Shares Beneficially Owned Including Options and Warrants Exercisable Within 60 Days		Percent of Shares Outstanding
5% Beneficial Owners, Directors, Named Officers						Before the Offering			After the Offering
Comcast ICG, Inc. (1)		316,999		12,166,998		11.3	%		9.8	%
c/o Comcast Corporation
1500 Market Street
Philadelphia, Pennsylvania 19102
Internet Assets, Inc.		25,416		5,152,499		4.8			4.1
Sahab Tower
Fahad Alsalim Street, 10th Floor
P.O. Box 3216
Safat, 13033, Kuwait
Safeguard Scientifics, Inc. (2)		—		19,061,794		17.8			14.3
435 Devon Park Drive
Wayne, Pennsylvania 19087
Douglas Alexander (3)		—		3,066,375		2.9			2.5
Julian A. Brodsky (4)		—		—		—			—
Walter W. Buckley, III (5)		10,916		6,075,999		5.7			4.9
E. Michael Forgash (6)		1,666		80,624		*			*
Kenneth A. Fox (7)		16,666		5,536,549		5.2			4.5
Dr. Thomas P. Gerrity (8)		1,283		457,699		*			*
Robert E. Keith, Jr.		766		154,599		*			*
Robert A. Pollan (9)		516		1,928,099		1.8			1.6
Peter A. Solvik		217,799		526,834		*			*
All executive officers and directors      as a group (21 persons) (3) (4)      (5) (6) (7) (8) (9)		651,461		27,198,567		25.3	%		21.8	%

(1)	Includes convertible notes that convert to 208,333 shares and warrants to purchase 41,666 shares of common stock held by Comcast Interactive Investments, Inc. as to which Comcast ICG, Inc. disclaims beneficial ownership.

(2)	Venture capital funds affiliated with Safeguard Scientifics, Inc. own an additional 4,000,000 shares of common stock, convertible notes that convert into 122,727 shares and warrants to purchase 24,545 shares of common stock.

(3)	Includes shares of restricted common stock which have not vested pursuant to the Membership Profit Interest Plan and the 1999 Equity Compensation Plan. See “Management— Employee Benefit Plans” for a description of the Membership Profit Interest Plan and the 1999 Equity Compensation Plan.

(4)	Julian A. Brodsky is a Director and Vice-Chairman of Comcast Corporation. Mr. Brodsky disclaims beneficial ownership of shares held by Comcast ICG, Inc., a subsidiary of Comcast Corporation.

(5)

Includes shares of restricted common stock that have not vested pursuant to the Membership Profit Interest Plan and the 1999 Equity Compensation Plan. Also includes 142,500 shares of common stock and convertible notes that convert to 4,583 shares and warrants to purchase 916 shares of common stock held by Susan R. Buckley, wife of Walter W. Buckley, III.

(6)	E. Michael Forgash is Vice President-Operations of Safeguard Scientifics, Inc. Mr. Forgash disclaims beneficial ownership of shares beneficially owned by Safeguard Scientifics and Safeguard Scientifics, disclaims beneficial ownership of shares beneficially owned by Mr. Forgash.

(7)	Includes shares of restricted common stock that have not vested pursuant to the Membership Profit Interest Plan and the 1999 Equity Compensation Plan.

(8)	Includes shares of restricted common stock that have not vested pursuant to the 1999 Equity Compensation Plan.

(9)	Includes shares of restricted common stock which have not vested pursuant to the Membership Profit Interest Plan and the 1999 Equity Compensation Plan.

Section 203 of the Delaware General Corporation Law

Classified Board of Directors

No Shareholder Action by Written Consent; Special Meetings

Advance Notice Requirements for Shareholder Proposals and Director Nominees

Number of Directors; Removal; Filling Vacancies

Indemnification

Certificate of Incorporation

Bylaws

Ÿ

1% of the then outstanding shares of our common stock (approximately 124,342,435 shares immediately after the offering) or;

Ÿ

the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission.

Ÿ

a non-resident alien individual,

Ÿ

a foreign corporation,

Ÿ

a foreign partnership or

Ÿ

an estate or trust that in either case is not subject to U.S. federal income tax on a net income basis on income or gain from common stock.

You should consult your own tax advisors with regard to the application of the federal income tax laws to your particular situation, as well as to the applicability and effect of any state, local or foreign tax laws to which you may be subject.

Ÿ

the gain is effectively connected with your conduct of a trade or business in the U.S., and the gain is attributable to a permanent establishment that you maintain in the U.S., if that is required by an applicable income tax treaty as a condition for subjecting you to U.S. taxation on a net income basis on gain from the sale or other disposition of the common stock;

Ÿ

you are an individual, you hold the common stock as a capital asset and you are present in the U.S. for 183 or more days in the taxable year of the sale and certain other conditions exist; or

Ÿ

we are or have been a “United States real property holding corporation” for federal income tax purposes and you held, directly or indirectly, at any time during the five-year period ending on the date of disposition, more than 5% of our common stock, and you are not eligible for any treaty exemption.

Ÿ

subject to the 30% withholding tax discussed above, or

Ÿ

not subject to the 30% withholding tax because an applicable tax treaty reduces or eliminates such withholding tax,

Ÿ

is a U.S. person;

Ÿ

derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the U.S.;

Ÿ

is a “controlled foreign corporation” as to the U.S.; or

Ÿ

with respect to payments made after December 31, 2000, is a foreign partnership with certain connections to the U.S.

Underwriters		Number  of Shares
Merrill Lynch, Pierce, Fenner & Smith                             Incorporated		3,110,000
BancBoston Robertson Stephens Inc.		1,482,000
Deutsche Bank Securities Inc.		1,482,000
Banc of America Securities LLC		963,000
Wit Capital Corporation		373,000
Adams, Harkness & Hill, Inc.		150,000
First Union Capital Markets Corp.		150,000
Hambrecht & Quist LLC		150,000
Lehman Brothers Inc.		150,000
J.P. Morgan Securities Inc.		150,000
Pennsylvania Merchant Group		150,000
Prudential Securities Incorporated		150,000
Volpe Brown Whelan & Company, LLC		150,000
E*OFFERING Corp		150,000
William Blair & Company, L.L.C.		40,000
Broadmark Capital Corporation		40,000
First Montauk Securities Corp.		40,000
Janney Montgomery Scott Inc.		40,000
Pryor, McClendon, Counts & Co., Inc.		40,000
Scott & Stringfellow, Inc.		40,000
Tucker Anthony Cleary Gull		40,000
Utendahl Capital Partners, L.P.		40,000
H.C. Wainwright & Co., Inc.		40,000
Total		9,120,000

		Per  Share		Without Option		With Option
Public offering price		$12.00		$109,440,000		$125,856,000
Underwriting discount		$.84		$7,660,800		$8,809,920
Proceeds, before expenses, to Internet Capital      Group, Inc.		$11.16		$101,779,200		$117,046,080

		Amount
Securities and Exchange Commission registration fee		$54,178
NASD filing fee		19,833
Nasdaq National Market listing fee		69,911
Accounting fees and expenses		450,000
Blue Sky fees and expenses		1,000
Legal fees and expenses		375,000
Transfer Agent and Registrar fees and expenses		9,000
Printing and engraving expenses		91,000
Director and officer liability insurance		150,000
Miscellaneous fees and expenses		17,519
Total		$1,237,441

Ÿ

offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of our common stock or securities convertible into or exchangeable or exercisable for our common stock, whether now owned or later acquired by the person executing the agreement or with respect to which the person executing the agreement has or later acquires the power of disposition, or file a registration statement under the Securities Act relating to any of the foregoing; or

Ÿ

enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of our common stock,

Ÿ

the trading multiples of publicly-traded companies that the representatives believe to be comparable to us;

Ÿ

certain of our financial information;

Ÿ

the history of, and the prospects for, our company and the industry in which we compete;

Ÿ

an assessment of our management;

Ÿ

our past and present operations;

Ÿ

the prospects for, and timing of, our future revenue;

Ÿ

the present state of our development;

Ÿ

the percentage interest of Internet Capital Group being sold as compared to the valuation for the entire company; and

Ÿ

the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours. There can be no assurance that an active trading market will develop for our common stock or that our common stock will trade in the public market subsequent to the offering at or above the initial public offering price.

		Per Share		Total
Public offering price		$12.00		$42,000,000
Financial advisory fee		$.60		$2,100,000
Proceeds to Internet Capital Group, Inc.		$11.40		$25,080,000
Maximum proceeds to Safeguard Securities, Inc.		$11.40		$14,820,000

		Amounts
SEC registration fee		$19,353
NASD filing fees		7,117
Nasdaq National Market listing fee		25,089
Accounting fees and expenses		50,000
Legal fees and expenses		75,000
Transfer Agent and Registrar fees and expenses		1,000
Printing and engraving expenses		109,000
Miscellaneous fees and expenses		1,000
Total		$287,559

		PAGE
INTERNET CAPITAL GROUP, INC.
Report of Independent Auditors		F-3
Consolidated Balance Sheets		F-4
Consolidated Statements of Operations		F-5
Consolidated Statements of Shareholders’ Equity		F-6
Consolidated Statements of Comprehensive Income (Loss)		F-7
Consolidated Statements of Cash Flows		F-8
Notes to Consolidated Financial Statements		F-9
INTERNET CAPITAL GROUP, INC. UNAUDITED PRO FORMA INFORMATION
Unaudited Pro Forma Financial Information Basis of Presentation		F-30
Unaudited Pro Forma Condensed Combined Statements of Operations		F-31
Notes to Unaudited Pro Forma Condensed Combined Financial Statements		F-32
APPLICA CORPORATION
Independent Auditors’ Report		F-33
Balance Sheet		F-34
Statement of Operations		F-35
Statement of Stockholders’ Equity		F-36
Statement of Cash Flows		F-37
Notes to Financial Statements		F-38
BREAKAWAY SOLUTIONS, INC.
Independent Auditors’ Report		F-41
Balance Sheets		F-42
Statements of Operations		F-43
Statements of Stockholders’ Equity		F-44
Statements of Cash Flows		F-45
Notes to Financial Statements		F-46
COMMERCEQUEST, INC.
Report of Independent Accountants		F-55
Balance Sheets		F-56
Statements of Income		F-57
Statements of Changes in Stockholders’ (Deficit) Equity		F-58
Statements of Cash Flows		F-59
Notes to Financial Statements		F-60

		PAGE

COMPUTERJOBS.COM, INC.
Report of Independent Auditors		F-67
Balance Sheets		F-68
Statements of Income		F-69
Statements of Changes in Stockholders’ Equity (Deficit)		F-70
Statements of Cash Flows		F-71
Notes to Financial Statements		F-72
SYNCRA SOFTWARE, INC.
Report of Independent Accountants		F-78
Balance Sheet		F-79
Statement of Operations		F-80
Statement of Changes in Redeemable Preferred Stock and Stockholders’ Deficit		F-81
Statement of Cash Flows		F-82
Notes to Financial Statements		F-83
UNITED MESSAGING, INC.
Independent Auditors’ Report		F-92
Balance Sheets		F-93
Statements of Operations		F-94
Statements of Stockholders’ Deficit		F-95
Statements of Cash Flows		F-96
Notes to Financial Statements		F-97
UNIVERSAL ACCESS, INC.
Report of Independent Accountants		F-101
Balance Sheets		F-102
Statements of Operations		F-103
Statements of Cash Flows		F-104
Statements of Stockholders’ Deficit		F-105
Notes to Financial Statements		F-106
WEB YES, INC. AND SUBSIDIARY
Independent Auditors’ Report		F-114
Consolidated Balance Sheets		F-115
Consolidated Statements of Operations		F-116
Consolidated Statements of Stockholders’ Equity		F-117
Consolidated Statements of Cash Flows		F-118
Notes to Consolidated Financial Statements		F-119
WPL LABORATORIES, INC.
Independent Auditors’ Report		F-123
Balance Sheets		F-124
Statements of Income		F-125
Statements of Stockholders’ Equity		F-126
Statements of Cash Flows		F-127
Notes to Financial Statements		F-128

KPMG LLP

								(Unaudited)
		December 31,						March 31,
		1997			1998			1999
Assets
Current Assets
Cash and cash equivalents		$  5,967,461			$26,840,904			$19,372,129
Accounts receivable, less allowances for doubtful accounts                 ($30,000-1997; $61,037-1998; $142,560-1999)		721,381			1,842,137			2,711,325
Prepaid expenses and other current assets		148,313			1,119,062			351,716
Total current assets		6,837,155			29,802,103			22,435,170
Fixed assets, net		544,443			1,151,268			1,063,766
Ownership interests in and advances to partner companies		24,045,080			59,491,940			96,380,245
Available-for-sale securities		—			3,251,136			5,285,644
Intangible assets, net		34,195			2,476,135			6,806,927
Other		20,143			613,393			92,969
Total Assets		$31,481,016			$96,785,975			$132,064,721
Liabilities and Shareholders’ Equity
Current Liabilities
Current maturities of long-term debt		$      150,856			$      288,016			$275,928
Line of credit		2,500,000			2,000,000			1,001,991
Accounts payable		696,619			1,348,293			759,970
Accrued expenses		388,525			1,823,407			1,316,427
Note payable to partner company		—			1,713,364			1,285,023
Deferred revenue		710,393			2,176,585			99,062
Total current liabilities		4,446,393			9,349,665			4,738,401
Long-term debt		399,948			351,924			121,665
Minority interest		—			6,360,008			3,408,479
Deferred taxes		—			—			560,716
Commitments and contingencies (Note 16)
Shareholders ’ Equity
Preferred stock, $.01 par value; no shares authorized		—			—			—
Common stock, $.001 par value; authorized 130,000,000                 shares; 46,783,625 (1997), 66,043,625 (1998) and                 82,005,549 (1999) issued and outstanding		46,784			66,044			82,006
Additional paid-in capital		36,144,814			74,998,459			103,758,063
Retained earnings (accumulated deficit)		(8,642,113	)		5,256,815			23,318,903
Unamortized deferred compensation		(914,810	)		(1,330,011	)		(6,661,692	)
Accumulated other comprehensive income		—			1,733,071			2,738,180
Total shareholders’ equity		26,634,675			80,724,378			123,235,460
Total Liabilities and Shareholders’ Equity		$31,481,016			$96,785,975			$132,064,721

		March 4, 1996 (Inception) to December 31,			Year Ended  December 31,						(Unaudited)  Three Months  Ended March 31,
		1996			1997			1998			1998			1999
Revenue		$     285,140			$     791,822			$3,134,769			$377,371			$3,111,035
Operating Expenses
Cost of revenue		427,470			1,767,017			4,642,528			628,213			1,553,329
Sales and marketing		268,417			2,300,365			7,894,662			934,934			114,415
General and administrative		1,652,481			3,442,241			7,619,169			1,523,878			3,733,400
Total operating expenses		2,348,368			7,509,623			20,156,359			3,087,025			5,401,144
		(2,063,228	)		(6,717,801	)		(17,021,590	)		(2,709,654	)		(2,290,109	)
Other income, net		—			—			30,483,177			12,322,162			28,677,471
Interest income		102,029			264,391			1,305,787			56,400			309,735
Interest expense		(13,931	)		(126,105	)		(381,199	)		(110,020	)		(13,756	)

Income (Loss) Before Income Taxes,      Minority Interest and Equity      Income (Loss)		(1,975,130	)		(6,579,515	)		14,386,175			9,558,888			26,683,341
Income taxes		—			—			—			—			663,206
Minority interest		427,185			(106,411	)		5,381,640			—			146,018
Equity income (loss)		(514,540	)		106,298			(5,868,887	)		(289,847	)		(7,412,602	)
Net Income (Loss)		$(2,062,485	)		$(6,579,628	)		$13,898,928			$9,269,041			$20,079,963
Net Income (Loss) Per Share
Basic		$(0.10	)		$(0.19	)		$0.25			$0.20			$0.28
Diluted		$(0.10	)		$(0.19	)		$0.25			$0.20			$0.27
Weighted Average      Shares Outstanding
Basic		20,395,774			34,098,844			56,102,289			46,783,625			72,646,022
Diluted		20,395,774			34,098,844			56,149,289			46,783,625			73,699,973
Pro Forma Information (Unaudited)      (Note 2):
Pro forma net income
Pretax income								$13,898,928						$19,416,757
Pro forma income taxes								(5,142,603	)					(7,184,200	)
Pro forma net income								$  8,756,325						$12,232,557
Pro forma net income per share
Basic								$            0.16						$0.17
Diluted								$            0.16						$0.17
Pro forma weighted average shares      outstanding
Basic								56,102,289						72,646,022
Diluted								56,149,289						73,699,973

		Common Stock
		Shares			Amount			Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)		Unamortized Deferred Compensation		Accumulated Other Comprehensive Income		Total
Balance as of March 4, 1996		—			$      —			$                —		$               —		$            —		$           —		$                —
Issuance of common stock,     net		13,723,426			13,723			13,672,290			—			—			—			13,686,013
Issuance of common stock     (Note 10)		6,139,074			6,139			1,102,313			—			—			—			1,108,452
Issuance of restricted stock		6,027,017			6,027			1,013,639			—			(1,019,666	)		—			—
Amortization of deferred     compensation		—			—			—			—			126,876			—			126,876
Net loss		—			—			—			(2,062,485	)		—			—			(2,062,485	)
Balance as of December 31,     1996		25,889,517			25,889			15,788,242			(2,062,485	)		(892,790	)		—			12,858,856
Issuance of common stock		20,137,500			20,138			20,117,367			—			—			—			20,137,505
Issuance of restricted stock		1,773,053			1,773			416,562			—			(418,335	)		—			—
Forfeitures of restricted stock		(1,016,445	)		(1,016	)		(177,357	)		—			178,373			—			—
Amortization of deferred     compensation		—			—			—			—			217,942			—			217,942
Net loss		—			—			—			(6,579,628	)		—			—			(6,579,628	)
Balance as of December 31,     1997		46,783,625			46,784			36,144,814			(8,642,113	)		(914,810	)		—			26,634,675
Issuance of common stock,     net		19,260,000			19,260			38,185,359			—			—			—			38,204,619
Issuance of stock options to     non-employees		—			—			668,286			—			(668,286	)		—			—
Net unrealized appreciation in     available-for-sale securities		—			—			—			—			—			1,733,071			1,733,071
Amortization of deferred     compensation		—			—			—			—			253,085			—			253,085
Net income		—			—			—			13,898,928			—			—			13,898,928
Balance as of December 31,     1998		66,043,625			66,044			74,998,459			5,256,815			(1,330,011	)		1,733,071			80,724,378
Three months ended     March 31, 1999— Unaudited:
Issuance of common stock		15,990,000			15,990			31,964,010			—			—			—			31,980,000
Issuance of stock options to     non-employees		—			—			297,141			—			(297,141	)		—			—
Issuance of stock options to     employees below fair market     value		—			—			5,161,414			—			(5,161,414	)		—			—
Forfeitures of restricted stock		(28,076	)		(28	)		(5,025	)		—			5,053			—			—
Net unrealized appreciation in     available-for-sale securities		—			—			—			—			—			1,005,109			1,005,109
Amortization of deferred     compensation		—			—			—			—			121,821			—			121,821
Distribution to former LLC     members		—			—			—			(10,675,811	)		—			—			(10,675,811	)
LLC termination (Note 3)		—			—			(8,657,936	)		8,657,936			—			—			—
Net income		—			—			—			20,079,963			—			—			20,079,963
Balance as of March 31, 1999     (Unaudited)		82,005,549			$82,006			$103,758,063			$23,318,903			$(6,661,692	)		$2,738,180			$123,235,460

										(Unaudited)
					Year Ended December 31,					Three Months Ended March 31,
		March 4, 1996 (Inception) to  December 31, 1996			1997			1998		1998		1999
Net Income (Loss)		$(2,062,485	)		$(6,579,628	)		$13,898,928		$9,269,041		$20,079,963
Other Comprehensive Income (Loss) Before Tax
Unrealized holding gains on available-for-sale              securities		—			—			1,733,071		5,131,916		4,530,351
Reclassification adjustments		—			—			—		—		(2,050,837	)
Tax Related to Comprehensive Income (Loss)
Unrealized holding gains on available-for-sale              securities		—			—			—		—		(1,585,623	)
Reclassification adjustments		—			—			—		—		111,218
Net unrealized appreciation in available-for-sale              securities		—			—			1,733,071		5,131,916		1,005,109
Comprehensive Income (Loss)		$(2,062,485	)		$(6,579,628	)		$15,631,999		$14,400,957		$21,085,072

											(Unaudited)
					Year Ended December 31,						Three Months Ended March 31,
		March 4, 1996 (Inception) to December 31, 1996			1997			1998			1998			1999
Operating Activities
Net income (loss)		$(2,062,485	)		$(6,579,628	)		$13,898,928			$9,269,041			$20,079,963
Adjustments to reconcile to net cash used in operating     activities:
Other income		—			—			(30,483,177	)		(12,322,162	)		(28,684,465	)
Depreciation and amortization		481,796			446,289			1,135,269			146,189			551,037
Equity (income) loss		514,540			(106,298	)		5,868,887			289,847			7,412,602
Minority interest		(427,185	)		106,411			(5,381,640	)		—			(146,018	)
Deferred taxes		—			—			—			—			(913,689	)
Changes in assets and liabilities, net of effect of     acquisitions:
Accounts receivable, net		(2,176,869	)		1,574,374			(1,183,360	)		34,393			(673,501	)
Prepaid expenses and other assets		(69,558	)		(142,384	)		(1,346,515	)		(196,533	)		69,672
Accounts payable		43,727			565,672			620,127			271,306			(332,937	)
Deferred revenue		147,100			493,960			1,249,624			200,156			(97,163	)
Accrued expenses		145,977			204,645			1,415,265			1,421,968			903,002
Net cash used in operating activities		(3,402,957	)		(3,436,959	)		(14,206,592	)		(885,795	)		(1,831,497	)
Investing Activities
Capital expenditures		(100,480	)		(272,488	)		(545,432	)		(97,005	)		(156,116	)
Proceeds from sales of available-for-sale              securities		—			—			36,431,927			—			2,574,371
Proceeds from sales of Partner Company ownership              interests in and advances to a shareholder		—			—			300,000			—			2,654,880
Advances to Partner Companies		(60,000)			(2,800,000	)		(12,778,884	)		—			(1,892,502	)
Repayment of advances to Partner Companies		—			950,000			677,084			500,000			1,913,358
Acquisitions of ownership interests in Partner              Companies, net of cash acquired		(6,934,129	)		(14,465,874	)		(35,822,393	)		(3,552,712	)		(22,480,597	)
Other acquisitions (Note 5)		—			—			(1,858,389	)		—			—
Increase in cash surrender value of life insurance		—			—			—			—			(62,441	)
Reduction in cash due to deconsolidation of              VerticalNet		—			—			—			—			(5,645,895	)
Net cash used in investing activities		(7,094,609	)		(16,588,362	)		(13,596,087	)		(3,149,717	)		(23,094,942	)
Financing Activities
Issuance of common stock, net		13,686,013			20,137,505			38,204,619			—			31,980,000
Long-term debt and capital lease repayments		(30,191	)		(57,979	)		(321,857	)		(38,403	)		(59,316	)
Line of credit borrowings		1,208,000			2,500,000			2,000,000			—			576,248
Line of credit repayments		(1,106,000	)		(2,000	)		(2,500,000	)		—			—
Distribution to former LLC members		—			—			—			—			(10,675,811	)
Treasury stock purchase by subsidiary		(60,000	)		—			—			—			(4,463,457	)
Issuance of stock by subsidiary		15,000			200,000			11,293,360			—			100,000
Net cash provided (used) by financing                       activities		13,712,822			22,777,526			48,676,122			(38,403	)		17,457,664
Net Increase (Decrease) in Cash and Cash     Equivalents		3,215,256			2,752,205			20,873,443			(4,073,915	)		(7,468,775	)
Cash and cash equivalents at beginning of period		—			3,215,256			5,967,461			5,967,461			26,840,904
Cash and Cash Equivalents at End of Period		$3,215,256			$5,967,461			$26,840,904			$1,893,546			$19,372,129

Description of the Company

Basis of Presentation

Principles of Consolidation

Available-for-Sale Securities

Accounting Estimates

Cash and Cash Equivalents

Financial Instruments

Intangibles

Fixed Assets

Revenue Recognition

Concentration of Credit Risk

Accounting for Impairment of Long-Lived Assets

Deferred Offering Costs

Stock Based Compensation

Comprehensive Income

Segment Information

Income Taxes

Net Income Per Share

Gain or Loss on Issuances of Stock By Partner Companies

Recent Accounting Pronouncements

Pro Forma Income Taxes

		December 31, 1997				December 31, 1998
		Carrying  Value		Cost  Basis		Carrying  Value		Cost  Basis
Equity Method		$  1,200,210		$  1,608,452		$21,311,324		$27,588,451
Cost Method		22,844,870		22,844,870		38,180,616		38,180,616
		$24,045,080				$59,491,940

		December 31,
		1997		1998
Current assets		$  7,042,767		$33,645,121
Non-current assets		3,876,167		7,147,665
Total assets		10,918,934		40,792,786
Current liabilities		5,406,510		11,712,289
Non-current liabilities		1,203,524		758,840
Shareholders ’ equity		4,308,900		28,321,657
Total liabilities and shareholders’ equity		$10,918,934		$40,792,786

					Year Ended December 31,
		March 4, 1996 (Inception) to December 31, 1996			1997		1998
Revenue		$9,365,872			$18,911,691		$21,495,832
Net income (loss)		$(1,369,774	)		$       255,280		$(14,969,192	)

		(Unaudited) Year Ended December 31,
		1997			1998
Revenue		$1,118,030			$3,606,027
Pro forma net income (loss)		$(7,590,016	)		$13,166,449
Pro forma net income (loss) per share		$(.22	)		$.23

		December 31,
		1997			1998
Computer equipment and software		$681,656			$1,564,297
Office equipment and furniture		148,430			271,809
Trade show equipment		34,079			40,587
Leasehold improvements		29,402			45,864
		893,567			1,922,557
Less: accumulated depreciation and amortization		(349,124	)		(771,289	)
		$   544,443			$1,151,268

Revolving Credit Facilities

Long-Term Debt

		December 31,
		1997			1998
Term notes with related parties		$100,000			$           —
Term bank notes		32,852			—
Capital leases		417,952			639,940
		550,804			639,940
Less: current portion		(150,856	)		(288,016	)
Long-term debt		$399,948			$351,924

1999		$288,016
2000		230,338
2001		95,718
2002		19,810
2003		6,058
Total		$639,940

		December 31,
		1997		1998
Accrued compensation and benefits		$90,833		$   454,230
Accrued marketing costs		—		446,334
Other		297,692		922,843
		$   388,525		$1,823,407

Restricted Stock

Stock Option Plans

		Shares			Weighted Average Exercise Price
Outstanding at January 1, 1997		—			$    —
Options granted		94,000			1.00
Options canceled/forfeited		—			—
Outstanding at December 31, 1997		94,000			1.00
Options granted		6,047,000			2.00
Options canceled/forfeited		(47,000	)		(1.00	)
Outstanding at December 31, 1998		6,094,000			$1.99

Exercise  Price		Number  Outstanding at December 31, 1998		Weighted  Average Remaining Contractual Life (in Years)
$1.00		47,000		7
$2.00		6,047,000		10

		Year Ended December 31,
		1997			1998
Net income (loss)
As reported		$(6,579,628	)		$13,898,928
SFAS 123 pro forma		$(6,648,952	)		$13,436,582
Net income (loss) per share
As reported		$(.19	)		$.25
SFAS 123 pro forma		$(.19	)		$.24

Dividend yield		0	%
Average expected option life		5 years
Risk-free interest rate		5.2	%

					Year Ended December 31,
		March 4, 1996 (Inception) Through December 31, 1996			1997			1998
Partner Company Operations
Revenue		$     285,140			$     791,822			$3,134,769
Operating expenses
Cost of revenue		427,470			1,767,017			4,642,528
Sales and marketing		268,417			2,300,365			7,894,662
General and administrative		291,660			1,388,123			4,106,583
Total operating expenses		987,547			5,455,505			16,643,773
		(702,407	)		(4,663,683	)		(13,509,004	)
Interest income		7,491			10,999			212,130
Interest expense		(13,931	)		(126,105	)		(297,401	)
Income (loss) before income taxes, minority interest and equity            income (loss)		(708,847	)		(4,778,789	)		(13,594,275	)
Income taxes		—			—			—
Minority interest		427,185			(106,411	)		5,381,640
Equity income (loss)		(514,540	)		106,298			(5,868,887	)
Loss from Partner Company Operations		$(796,202	)		$(4,778,902	)		$(14,081,522	)
General ICG Operations
General and administrative		$1,360,821			$2,054,118			$3,512,586
Other income, net		—			—			30,483,177
Interest income, net		94,538			253,392			1,009,859
Income (loss) from General ICG Operations		$(1,266,283	)		$(1,800,726	)		$27,980,450

		December 31,
		1997		1998
Assets
Partner Company Operations
Carrying value of equity method Partner Companies		$1,200,210		$21,311,324
Other		2,104,087		12,342,975
		3,304,297		33,654,299
General ICG Operations
Cash and cash equivalents		5,212,745		21,178,055
Carrying value of cost method Partner Companies		22,844,870		38,180,616
Other		119,104		3,773,005
		28,176,719		63,131,676
		$31,481,016		$96,785,975

		December 31,				(Unaudited)
		1997		1998		March 31, 1999
Assets
Current assets		$  5,245,064		$21,596,575		$16,437,857
Ownership interests in and advances to Partner Companies		24,045,080		59,491,940		104,271,808
Other		86,785		3,354,485		5,525,104
Total assets		29,376,929		84,443,000		126,234,769
Liabilities and shareholders’ equity
Current liabilities		318,729		2,082,463		2,438,593
Non-current liabilities		2,423,525		1,636,159		560,716
Shareholders ’ equity		26,634,675		80,724,378		123,235,460
Total liabilities and shareholders’ equity		$29,376,929		$84,443,000		$126,234,769

					Year Ended December 31,						(Unaudited) Three Months Ended March 31,
		March 4, 1996 (Inception) to December 31, 1996			1997			1998			1998			1999
Revenue		$                  —			$                  —			$—			$—			$—
Operating expenses
General and administrative		1,360,821			2,054,118			3,512,586			700,719			1,733,128
Total operating expenses		1,360,821			2,054,118			3,512,586			700,719			1,733,128
		(1,360,821	)		(2,054,118	)		(3,512,586	)		(700,719	)		(1,733,128	)
Other income, net		—			—			30,483,177			12,322,162			28,684,465
Interest income, net		94,538			253,392			1,009,859			22,314			278,209
Income (loss) before income taxes      and equity income (loss)		1,266,283			(1,800,726	)		27,980,450			11,643,757			27,229,546
Income taxes		—			—			—			—			663,206
Equity income (loss)		(796,202	)		(4,778,902	)		(14,081,522	)		(2,374,716	)		(7,812,789	)
Net income (loss)		$(2,062,485	)		$(6,579,628	)		$13,898,928			$9,269,041			$20,079,963

Sale of Matchlogic to Excite		$12,822,162
Sale of Excite holdings		16,813,844
Sale of WiseWire to Lycos		3,324,238
Sale of Lycos holdings		1,471,907
Partner Company impairment charges		(3,948,974	)
		$30,483,177

1999		$385,316
2000		402,565
2001		266,970
2002		239,984
2003		246,274
Thereafter		103,385

1999		$1,488,734
2000		65,500

Issuance of Common Stock

VerticalNet Initial Public Offering

Tax Distribution

Ownership Interests in and Advances to Partner Companies

Revolving Bank Credit Facility

Convertible Subordinated Notes

Initial Public Offering

		Internet Capital Group, Inc.			Breakaway Acquisition			Applica, WPL and WebYes Acquisitions			VerticalNet Deconsolidation		Pro Forma Adjustments			Pro Forma Combined
Revenue		$3,134,769			$10,017,947			$2,938,927			$(3,134,769)		$—			$12,956,874
Operating Expenses
Cost of revenue		4,642,528			5,903,843			1,870,064			(4,642,528)		—			7,773,907
Sales and marketing		7,894,662			—			37,092			(7,894,662)		—			37,092
General and administrative		7,619,169			4,814,288			691, 810			(3,823,593)		6,306,923	a		15,608,597
Total operating expenses		20,156,359			10,718,131			2,598,966			(16,360,783)		6,306,923			23,419,596
		(17,021,590	)		(700,184	)		339,961			13,226,014		(6,306,923	)		(10,462,722	)
Other income, net		30,483,177			156,945			—								30,640,122
Interest income		1,305,787			11,191			—			(212,130)		—			1,104,848
Interest expense		(381,199	)		(43,127	)		(8,117	)		297,401		—			(135,042	)
Income (Loss) Before Income Taxes, Minority Interest and Equity Income (Loss)		14,386,175			(575,175	)		331,844			13,311,285		(6,306,923	)		21,147,206
Income taxes		—			—			—			—		—	c		—
Minority interest		5,381,640			247,325			(142,693	)		(5,381,640)		1,159,980	e		1,264,612
Equity income (loss)		(5,868,887	)										(32,309,632	)b		(38,178,519	)
Net Income (Loss)		$13,898,928			$(327,850	)		$189,151			$7,929,645		$(37,456,575	)		$(15,766,701	)
Net Income (Loss) Per Share
Basic		$0.25														$(0.28)
Diluted		$0.25														$(0.28)
Weighted Average Shares Outstanding
Basic		56,102,289														56,102,289
Diluted		56,149,289														56,102,289

		Internet Capital Group, Inc.			Applica, WPL and WebYes Acquisitions			Pro Forma Adjustments			Pro Forma Combined
Revenue		$3,111,035			$1,229,506			$—			$4,340,541
Operating Expenses
Cost of revenue		1,553,329			498,227			—			2,051,556
Sales and marketing		114,415			68,721			—			183,136
General and administrative		3,733,400			412,068			1,291,074	a		5,436,542
Total operating expenses		5,401,144			979,016			1,291,074			7,671,234
		(2,290,109	)		250,490			(1,291,074	)		(3,330,693)
Other income, net		28,677,471			—			—			28,677,471
Interest income		309,735			—			—			309,735
Interest expense		(13,756	)		(6,011	)		—			(19,767)
Income (Loss) Before Income Taxes, Minority Interest and Equity Income (Loss)		26,683,341			244,479			(1,291,074	)		25,636,746
Income taxes		663,206			—			2,575,678	d		3,238,884
Minority interest		146,018			(105,126	)		289,995	e		330,887
Equity income (loss)		(7,412,602	)		—			(5,960,214	)b		(13,372,816)
Net Income (Loss)		$20,079,963			$139,353			$(4,385,615	)		$15,833,701
Net Income Per Share
Basic		$0.28									$0.22
Diluted		$0.27									$0.21
Weighted Average Shares Outstanding
Basic		72,646,022									72,646,022
Diluted		73,699,973									73,699,973

The unaudited pro forma condensed combined statement of operations for the year ended December 31, 1998, gives effect to the acquisition (purchase price and goodwill/intangibles in parenthesis) of Breakaway Solutions ($16.3 and $10.8 million), Applica ($1.6 and $1.4 million), WPL Laboratories ($9.9 and $8.5 million) and WebYes ($3.7 and $3.6 million), the deconsolidation of VerticalNet and the acquisitions of significant minority ownership interests in 19 equity method Partner Companies ($110.9 and $71.1 million) as if they had occurred on January 1, 1998.

The unaudited pro forma condensed combined statement of operations for the three months ended March 31, 1999, gives effect to the acquisition by Breakaway Solutions of Applica, WPL Laboratories and WebYes and the acquisition by the Company of significant minority ownership interests in 12 equity method Partner Companies ($84.9 and $56.9 million) as if they had occurred on January 1, 1998.

The effects of the acquisitions have been presented using the purchase method of accounting and accordingly, the purchase price was allocated to the assets and liabilities assumed based upon management’s best preliminary estimate of fair value with any excess purchase price being allocated to goodwill or other identifiable intangibles. The preliminary allocation of the purchase price will be subject to further adjustments, which are not anticipated to be material, as the Company and Breakaway finalize their allocations of purchase price in accordance with generally accepted accounting principles. The pro forma adjustments related to the purchase price allocation of the acquisitions represent management’s best estimate of the effects of the acquisitions.

The pro forma statement of operations adjustments for the year ended December 31, 1998, and the three months ended March 31, 1999, consist of:

(a)

General and administrative expense has been adjusted to reflect the amortization of intangible assets associated with the acquisitions of Breakaway Solutions, Applica, WPL Laboratories and WebYes over an estimated useful life of three to five years.

(b)

Equity (income) loss has been adjusted to reflect the Company ’s ownership interest in the (income) loss of the equity method Partner Companies and the amortization of the difference in the Company’s carrying value in the Partner Company and the Company’s ownership interest in the underlying net equity of the Partner Company over an estimated useful life of three years. For the year ended December 31, 1998 and the three months ended March 31, 1999, equity (income) loss includes $9.0 and $1.6 million, respectively, of equity (income) loss and $23.3 and $4.4 million, respectively, in amortization of the difference between cost and equity in net assets.

(c) No income tax provision is required due to the Company’s tax status as an LLC.

(d) Income tax benefit has been adjusted to reflect the tax effect of the pro forma adjustments.

(e)

Minority interest has been adjusted to reflect minority interest in amortization of goodwill associated with the acquisitions of Applica, WPL Laboratories and WebYes.

KPMG LLP

Assets
Current assets:
Cash		$474,205
Subscriptions receivable		3,000
Total current assets		477,205
Property and equipment, net		43,259
Deposits		7,332
Total assets		$527,796
Liabilities and Stockholders’ Equity
Accounts payable		$61,775
Total liabilities		61,775
Commitments and contingencies
Stockholders ’ equity:
Preferred stock $.001 par value, 5,000,000 shares authorized, 500,000 shares issued and                 outstanding (liquidation preference of $500,000)		500,000
Common stock $.001 par value, 10,000,000 shares authorized, 3,000,000 shares issued and                 outstanding		3,000
Deficit accumulated during development stage		(36,979	)
Total stockholders’ equity		466,021
Total liabilities and stockholders’ equity		$527,796

Operating expenses:
Organization costs		$25,911
Occupancy		7,331
Depreciation		1,483
Other		2,254
Total operating expenses		36,979
Net loss		$(36,979	)
Net loss per share—basic and diluted		$(0.01	)
Weighted average shares outstanding		3,000,000

		Preferred Stock				Common Stock				Deficit Accumulated During Development Stage			Total Stockholders’ Equity
		Shares		Amount		Shares		Amount
Balance, September 24, 1998		—		—		—		—		—			—
Subscription of common stock		—		$        —		3,000,000		$3,000		$        —			$3,000
Issuance of preferred stock		500,000		500,000		—		—		—			500,000
Net loss		—		—		—		—		(36,979	)		(36,979	)
Balance, December 31, 1998		500,000		$500,000		3,000,000		$3,000		$(36,979	)		$466,021

Cash flows from operating activities:
Net loss		$(36,979	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		1,483
Changes in operating assets and liabilities:
Accounts payable		61,775
Deposits		(7,332	)
Net cash provided by operating activities		18,947
Cash flows from investing activities:
Additions to property and equipment		(44,742	)
Net cash used in investing activities		(44,742	)
Cash flows from financing activities:
Issuance of preferred stock		500,000
Net cash provided by financing activities		500,000
Net increase in cash		474,205
Cash at beginning of period		—
Cash at end of period		$474,205

Office equipment		$41,683
Computer equipment		3,059
		44,742
Less: accumulated depreciation		(1,483	)
Property and equipment, net		$43,259

Deferred tax assets:
Intangible assets, principally due to differences in amortization		$5,372
Net operating loss carryforward		195
Total gross deferred tax assets		5,567
Valuation allowance		(5,567	)
Net deferred tax assets		$        —

KPMG LLP

		December 31,						March 31, 1999
		1997			1998
								(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$   879,136			$     16,954			$3,205,752
Accounts receivable, net of allowance for doubtful accounts of $65,000,                 $131,000 and $142,560 in 1997, 1998 and 1999, respectively		960,830			1,445,994			1,911,534
Unbilled revenues on contracts		232,258			625,609			799,791
Prepaid expenses		27,858			46,211			72,381
Advances to employees		—			13,273			7,855
Total current assets		2,100,082			2,148,041			5,997,313
Property and equipment, net		397,102			553,566			911,487
Intangible assets, net		—			—			1,437,974
Cash surrender value of life insurance		—			—			62,441
Deposits		35,726			40,877			30,528
Total assets		$2,532,910			$2,742,484			$8,439,743
Liabilities and Stockholders’ Equity
Current Liabilities:
Line of credit		$              —			$   425,743			$1,001,991
Notes payable		—			—			141,629
Long-term debt —current portion		10,417			—			—
Capital lease obligation—current portion		181,042			148,391			134,299
Accounts payable		246,060			814,074			298,347
Accrued compensation and related benefits		84,349			178,191			397,210
Accrued expenses		—			—			68,111
Accrued acquisition costs		—			—			159,159
Deferred revenue on contracts		—			196,225			99,062
Stockholder distributions payable		434,843			—			—
Total current liabilities		956,711			1,762,624			2,299,808
Capital lease obligation—long-term portion		84,368			67,040			121,665
Total long-term liabilities		84,368			67,040			121,665
Total liabilities		1,041,079			1,829,664			2,421,473
Commitments and contingencies
Stockholders ’ equity:
Series A preferred stock $.0001 par value, 5,853,000 shares authorized at                 December 31, 1998 and March 31, 1999, none issued and outstanding                 in 1997 and 1998, 5,853,000 shares issued and outstanding in 1999                 (liquidation preference of $8,291,945)		—			—			585
Common stock $.0001 par value, 22,100,000 shares authorized,                 9,600,000 shares issued in 1997 and 1998 and 7,420,711 shares                 issued in 1999, 8,016,000, 7,656,000 and 5,476,711 shares                 outstanding in 1997, 1998 and 1999, respectively		960			960			742
Additional paid-in capital		—			—			6,252,488
Less: Treasury stock, at cost		(26	)		(32	)		(32	)
Retained earnings (deficit)		1,490,897			911,892			(235,513	)
Total stockholders’ equity		1,491,831			912,820			6,018,270
Total liabilities and stockholders’ equity		$2,532,910			$2,742,484			$8,439,743

		Years Ended December 31,									(Unaudited) Three Months Ended March 31,
		1996			1997			1998			1998			1999
Revenues		$3,462,134			$6,118,058			$10,017,947			$2,124,132			$3,111,035
Operating expenses:
Project personnel costs		1,429,952			2,543,147			5,903,843			1,180,419			1,553,329
Sales and marketing costs		3,225			13,748			50,631			9,665			114,415
General and administrative expenses		1,364,895			2,545,580			4,763,657			780,620			1,689,580
Total operating expenses		2,798,072			5,102,475			10,718,131			1,970,704			3,357,324
Income (loss) from operations		664,062			1,015,583			(700,184	)		153,428			(246,289	)
Other income (expense):
Other income (expense)		—			—			160,000			(3,021	)		(6,994	)
Interest income		3,684			92,823			11,191			7,711			31,526
Interest expense		(28,557	)		(32,725	)		(43,127	)		(1,348	)		(13,756	)
Loss on disposal of equipment		(20,780	)		(2,030	)		(3,055	)		—			—
Total other income (expense)		(45,653	)		58,068			125,009			3,342			10,776
Income (loss) before income taxes		618,409			1,073,651			(575,175	)		156,770			(235,513	)
Income taxes		—			—			—			—			—
Net income (loss)		$   618,409			$1,073,651			$(575,175	)		$156,770			$(235,513	)
Net income (loss) per share:
Basic and diluted		$0.07			$0.13			$(0.07	)		$0.02			$(0.05	)
Weighted average shares outstanding:
Basic and diluted		8,301,633			8,016,000			8,000,877			8,016,000			4,698,186
Pro forma information (Unaudited)      (note 9):
Income (loss) before taxes, as                 reported		$   618,409			$1,073,651			$(575,175	)		$156,770			$ (235,513	)
Pro forma income taxes (benefit)		247,364			429,460			(195,560	)		62,708			(80,074	)
Pro forma net income (loss)		$   371,045			$   644,191			$(379,615	)		$94,062			$ (155,439	)
Pro forma net income (loss) per share— basic and diluted		$         0.04			$         0.08			$   (0.05	)		$         0.01			$ (0.03	)
Pro forma weighted average shares      outstanding		8,301,633			8,016,000			8,000,877			8,016,000			4,698,186

		Series A Preferred Stock				Common Stock						Additional Paid-in Capital			Treasury Stock						Retained Earnings (Deficit)
		Shares		Amount		Shares			Amount						Shares			Amount							Total Stockholders’ Equity
Balance, January 1, 1996		—		$   —		9,600,000			$960			$—			—			$ —			$330,815			$     331,775
Purchase of treasury stock		—		—		—			—			—			(1,584,000	)		(26	)		—			(26	)
Distributions to stockholders		—		—		—			—			—			—			—			(1,841	)		(1,841	)
Net income		—		—		—			—			—			—			—			618,409			618,409
Balance, December 31, 1996		—		—		9,600,000			960			—			(1,584,000	)		(26	)		947,383			948,317
Distributions to stockholders		—		—		—			—			—			—			—			(530,137	)		(530,137	)
Net income		—		—		—			—			—			—			—			1,073,651			1,073,651
Balance, December 31, 1997		—		—		9,600,000			960			—			(1,584,000	)		(26	)		1,490,897			1,491,831
Purchase of treasury stock		—		—		—			—			—			(360,000	)		(6	)		—			(6	)
Distributions to stockholders		—		—		—			—			—			—			—			(3,830	)		(3,830	)
Net loss		—		—		—			—			—			—			—			(575,175	)		(575,175	)
Balance, December 31, 1998		—		—		9,600,000			960			—			(1,944,000	)		(32	)		911,892			912,820
S Corporation termination		—		—		—			—			911,892			—			—			(911,892	)		—
Issuance of preferred stock		5,853,000		585		—			—			8,291,360			—			—			—			8,291,945
Repurchase and retirement of common stock		—		—		(3,154,500	)		(315	)		(4,468,665	)		—			—			—			(4,468,980	)
Issuance of common stock for acquired      business		—		—		904,624			90			1,417,908			—			—			—			1,417,998
Exercise of stock options		—		—		70,587			7			99,993			—			—			—			100,000
Net loss		—		—		—			—			—			—			—			(235,513	)		(235,513	)
Balance, March 31, 1999 (Unaudited)		5,853,000		$585		7,420,711			$742			$6,252,488			(1,944,000	)		$     (32	)		$(235,513	)		$6,018,270

		Years Ended December 31,									(Unaudited) Three Months Ended March 31,
		1996			1997			1998			1998			1999
Net income (loss)		$618,409			1,073,651			(575,175	)		156,770			(235,513	)
Adjustments to reconcile net income (loss) to net cash provided by     (used in) operating activities:
Depreciation and amortization		46,484			254,217			332,994			56,609			104,780
Loss on disposal of fixed assets		20,780			2,030			3,055			—			—
Changes in operating assets and liabilities, net of impact of acquisition of     business:
Accounts receivable		(361,107	)		(471,676	)		(485,164	)		(726,282	)		(499,219	)
Unbilled revenues on contracts		—			—			(393,351	)		—			(174,182	)
Inventory		12,831			—			—			—			—
Prepaid and other assets		(47,046	)		69,096			(18,353	)		(43,679	)		(5,741	)
Accounts payable		(39,707	)		222,239			568,014			84,707			(666,829	)
Accrued compensation and related benefits		—			63,387			93,842			(83,478	)		366,441
Accrued expenses		1,500			—			—			—			68,111
Deferred revenue on contracts		(77,070	)		—			196,225			—			(97,163	)
Net cash provided by (used in) operating activities		175,074			1,212,944			(277,913	)		(555,353	)		(1,139,315	)
Cash flows from investing activities:
Purchases of property and equipment		(18,950	)		(132,937	)		(502,461	)		(97,100	)		(72,442	)
Proceeds from disposal of fixed assets		—			13,200			9,948			—			—
Increase in cash surrender value of life insurance		—			—			—			—			(62,441	)
Net cash used in investing activities		(18,950	)		(119,737	)		(492,513	)		(97,100	)		(134,883	)
Cash flows from financing activities:
Proceeds from issuance of preferred stock		—			—			—			—			8,291,945
Proceeds from exercise of stock options		—			—			—			—			100,000
Repurchase and retirement of common stock		—			—			—			—			(4,468,980	)
Advances to employees		—			—			(13,273	)		—			—
Repayments of advances to employees		163			—			—			—			5,418
Payments on current portion of long-term debt		—			—			(10,417	)		(3,125	)		—
Proceeds from (repayments of) credit line		(125,000	)		—			425,743			—			576,248
(Increase) decrease in deposits		(216	)		(18,211	)		(5,151	)		(3,102	)		17,681
Distributions to stockholders		(1,841	)		(95,750	)		(438,673	)		—			—
Repurchase of treasury stock		(26	)		—			(6	)		—			—
Payments of capital lease obligations		(38,813	)		(184,224	)		(49,979	)		(6,522	)		(59,316	)
Net cash provided by (used in) financing activities		(165,733	)		(298,185	)		(91,756	)		(12,749	)		4,462,996
Net increase (decrease) in cash and cash equivalents		(9,609	)		795,022			(862,182	)		(665,202	)		3,188,798
Cash and cash equivalents at beginning of period		93,723			84,114			879,136			879,136			16,954
Cash and cash equivalents at end of period		$84,114			879,136			16,954			213,934			3,205,752
Supplemental disclosure of cash flow information:
Cash paid for interest		$28,557			32,725			43,127			1,348			13,756
Supplemental disclosures of non-cash investing and financing     activities:
Capital lease obligations		$42,742			331,511			13,720			—			99,849
Distributions payable to stockholders		$          —			434,843			—			—			—
Issuance of common stock in connection with acquisition of business		$          —			—			—			—			1,417,998
Acquisition of business:
Assets acquired		$          —			—			—			—			1,903,567
Liabilities assumed and issued		—			—			—			—			(485,569	)
Common stock issued		—			—			—			—			(1,417,998	)
Net cash paid for acquisition of business		$          —			—			—			—			—

Assembled workforce		$   201,000
Goodwill		1,236,974
		1,437,974
Less: accumulated amortization		—
		$1,437,974

		1997			1998
Computer equipment		$578,724			$1,116,829
Office equipment		—			11,756
Furniture and fixtures		134,490			70,481
		713,214			1,199,066
Less: accumulated depreciation and amortization		(316,112	)		(645,500	)
		$397,102			$   553,566

		1997			1998
Cost		$400,297			$394,637
Less: Accumulated amortization		(157,593	)		(332,053	)
		$242,704			$62,584

		Year Ended December 31, 1998					(Unaudited) Three Months Ended March 31, 1999
Fixed options		Shares			Weighted average exercise price		Shares			Weighted average exercise price
Outstanding at beginning of period		—			$    —		5,992,794			$1.00
Granted		6,120,879			.99		3,168,042			1.48
Exercised		—			—		(70,587	)		1.42
Forfeited		(128,085	)		.61		(83,283	)		.54
Outstanding at end of period		5,992,794			1.00		9,006,966			1.17
Options exercisable at end of period		2,610,630					3,064,927

		Options outstanding				Options exercisable
Exercise prices		Number outstanding		Weighted average remaining contractual life		Number exercisable		Weighted average exercise price
$.54		2,776,494		9.5 years		1,825,005		$.54
.81		129,900		9.75 years		21,000		.81
1.42		3,086,400		10 years		764,625		1.42
		5,992,794		9.76 years		2,610,630		.80

		Year Ended December 31, 1998			(Unaudited) Three Months Ended March 31, 1999
Net loss:
As reported		$(575,175	)		$(235,513	)
Pro forma		$(686,864	)		$(361,257	)
Loss per share:
As reported		$(0.07	)		$(0.05	)
Pro forma		$(0.09	)		$(0.08	)

		Operating leases		Capital leases
1999		$   770,762		$168,253
2000		702,665		72,118
2001		720,518		—
2002		488,280		—
		$2,682,225		240,371
Less: amount representing interest				(24,940	)
Net present value of minimum lease payments				215,431
Less: current portion of capital lease obligations				(148,391	)
Capital lease obligations, net of current portion				$   67,040

											(Unaudited)
		Years Ended December 31,									Three Months Ended March 31,
		1996			1997			1998			1998			1999
Customer A		—			19	%		27	%		30	%		26	%
Customer B		13	%		10			—			—			—
Customer C		18			13			—			—			—
Customer D		—			—			—			16			—
Customer E		—			—			—			—			11
Customer F		—			—			—			—			10
Customer G		—			—			—			—			10

		Years Ended December 31,							(Unaudited) Three Months Ended March 31,
		1996		1997		1998			1998		1999
Federal tax		$210,259		$365,042		$(195,560	)		$25,629		$(80,074	)
State taxes, net of federal		37,105		64,418		—			4,523		—
		$247,364		$429,460		$(195,560	)		$30,152		$(80,074	)

¨ Applica Corporation

On March 25, 1999, the Company entered into an agreement to acquire all the outstanding stock of Applica Corporation, a provider of application hosting services. The purchase price was comprised of 904,624 shares of Common Stock.

¨ WPL Laboratories, Inc.

On May 17, 1999, the Company entered into an agreement to acquire all the outstanding stock of WPL Laboratories, Inc., a provider of advanced software development services. The purchase price was comprised of: $5 million in cash, 1,705,175 shares of common stock and the assumption of all outstanding WPL stock options, which became exercisable for 393,506 shares of the Company ’s common stock at a an exercise price of $2.38 per share with a four-year vesting period. The WPL stockholders received one half of their cash consideration at closing and will receive the remainder incrementally over a four-year period so long as the stockholder does not voluntarily terminate his employment and is not terminated for cause. Of the shares of common stock issued to the former WPL stockholders, approximately fifty-percent are subject to the Company’s right, which lapses incrementally over a four-year period, to repurchase the shares of a particular stockholder, at their value at the time of the acquisition, upon the stockholder ’s resignation or the Company’s termination of the stockholder for cause. In connection with the stock issuance, the Company provided approximately $1,200,000 in loans to stockholders. The loans which bear interest at prime plus 1% are due at the earlier of the sale of stock or four years.

¨ Web Yes, Inc.

On June 10, 1999, the Company entered into an agreement to acquire all the outstanding stock of Web Yes, Inc., a provider of web hosting services. The purchase price was comprised of 571,135 shares of common stock. Of the shares of common stock issued to the former Web Yes stockholders, 428,351 are subject to the Company ’s right, which lapses incrementally over a four-year period, to repurchase the shares of the particular stockholder upon the termination of his employment with Breakaway. The repurchase price shall be either at the share value at the time of the acquisition if the stockholder terminates employment or is terminated for cause, or at the fair market value if the stockholder’s employment is terminated without cause.

Ÿ

Employees who are customarily employed for more than 20 hours per week and for more than five months per year; and

Ÿ

Employees employed for at least three months prior to enrolling in the purchase plan.

							(Unaudited)
		December  31, 1997		December 31, 1998			March 31, 1999
Assets
Current assets:
Cash and cash equivalents		$709,803		$1,807,369			$2,234,279
Accounts receivable, net of allowance of $48,000 at December                 31, 1997 and 1998 and March 31, 1999		3,639,098		3,678,627			2,480,205
Unbilled accounts receivable		647,206		2,465,292			864,375
Other current assets		48,744		234,505			279,058
Total current assets		5,044,851		8,185,793			5,857,917
Property and equipment, net		781,318		3,725,818			3,797,876
Other assets		15,780		363,846			436,511
Total assets		$5,841,949		$12,275,457			$10,092,304
Liabilities and Stockholders’ (Deficit) Equity
Current liabilities:
Accounts payable and accrued expenses		$2,927,494		$5,102,468			$2,169,170
Deferred revenue		493,674		1,013,760			3,017,127
Current portion of long-term debt		123,379		169,402			173,652
Total current liabilities		3,544,547		6,285,630			5,359,949
Other liabilities		—		231,518			417,929
Revolving lines of credit		—		233,744			932
Long-term debt		386,578		157,771			112,732
Total liabilities		3,931,125		6,908,663			5,891,542
Convertible subordinated debentures		—		10,800,000			10,800,000
Commitments and contingencies (Note 10)
Stockholders ’ (deficit) equity:
Common stock; $.002 par value, 40,000,000 shares authorized,                 25,000,000 shares issued		50,000		50,000			50,000
Additional paid-in capital		431,700		431,700			431,700
Retained earnings		1,429,124		1,385,059			219,027
		1,910,824		1,866,759			700,727
Less treasury stock of 12,725,420 shares, at cost		0		(7,299,965	)		(7,299,965	)
Total stockholders’ (deficit) equity		1,910,824		(5,433,206	)		(6,599,238	)
Total liabilities and stockholders’ (deficit) equity		$5,841,949		$12,275,457			$10,092,304

											(Unaudited)
		Year Ended December 31,									Three Months Ended March 31,
		1996			1997			1998			1998			1999
Revenues:
Licensed products		$4,226,208			$5,000,698			$  4,507,934			$527,078			$      682,498
Professional services		5,042,263			5,529,498			12,561,392			2,413,154			3,234,971
Reselling		9,184,437			13,680,505			14,029,063			1,785,145			770,624
		18,452,908			24,210,701			31,098,389			4,725,377			4,688,093
Cost of revenues:
Technical support		—			150,954			500,653			60,702			96,733
Services		3,191,054			3,817,452			8,094,721			1,561,174			2,048,659
Reselling		7,957,255			11,385,342			11,184,289			1,438,925			562,097
		11,148,309			15,353,748			19,779,663			3,060,801			2,707,489
Gross margin		7,304,599			8,856,953			11,318,726			1,664,576			1,980,604
Operating expenses:
Sales and marketing		848,681			1,388,530			2,802,482			322,312			1,329,696
Product development		1,542,867			2,540,529			2,146,653			354,620			462,488
General and administrative		2,932,577			3,003,253			3,964,803			743,730			1,172,845
Total operating expenses		5,324,125			6,932,312			8,913,938			1,420,662			2,965,029
Income (loss) from operations		1,980,474			1,924,641			2,404,788			243,914			(984,425	)
Other income (expense):
Interest expense		(26,506	)		(14,513	)		(362,040	)		(8,984	)		(206,194	)
Other income		11,155			190,283			83,187			4,929			24,587
Net income (loss)		$1,965,123			$2,100,411			$  2,125,935			$239,859			$(1,166,032	)

		Common Stock								Treasury Stock
		Shares			Amount			Additional Paid-In Capital		Shares		Amount			Retained Earnings (Deficit)			Total
Balance, January 1, 1996		20,000			$20,000			$1,700		—		$—			$(775,810	)		$(754,110	)
Stock canceled		(20,000	)		(20,000	)		20,000		—		—			—			—
Stock issued		25,000,000			50,000			410,000		—		—			—			460,000
Net income		—			—			—		—		—			1,965,123			1,965,123
Dividends declared		—			—			—		—		—			(985,600	)		(985,600	)
Balance, December 31, 1996		25,000,000			50,000			431,700		—		—			203,713			685,413
Net income		—			—			—		—		—			2,100,411			2,100,411
Dividends declared		—			—			—		—		—			(875,000	)		(875,000	)
Balance, December 31, 1997		25,000,000			50,000			431,700		—		—			1,429,124			1,910,824
Net income		—			—			—		—		—			2,125,935			2,125,935
Dividends declared		—			—			—		—		—			(2,170,000	)		(2,170,000	)
Purchase of treasury shares		—			—			—		12,725,420		(7,299,965	)		—			(7,299,965	)
Balance, December 31, 1998		25,000,000			50,000			431,700		12,725,420		(7,299,965	)		1,385,059			(5,433,206	)
Net loss (Unaudited)		—			—			—		—		—			(1,166,032	)		(1,166,032	)
Balance, March 31, 1999 (Unaudited)		25,000,000			$ 50,000			$431,700		12,725,420		$(7,299,965	)		$219,027			$(6,599,238	)

		Year Ended December 31,									(Unaudited) Three Months Ended March 31,
		1996			1997			1998			1998			1999
Cash flows from operating activities:
Net income (loss)		$1,965,123			$2,100,411			$2,125,935			$239,859			($1,166,032	)
Adjustments to reconcile net income (loss) to net cash provided         by operating activities:
Non-cash compensation expense		460,000			—			—			—			—
Depreciation and amortization		144,411			323,894			536,454			92,804			177,370
Changes in operating assets and liabilities:
Accounts receivable		(5,475,784	)		2,409,399			(39,529	)		360,672			1,198,422
Unbilled accounts receivable		—			(623,580	)		(1,818,086	)		(217,862	)		1,600,917
Other receivables		7,343			3,642			—			—			—
Other assets		(29,072	)		(30,740	)		(456,083	)		370,230			(117,290	)
Stockholder receivables		(139,347	)		3,877			—			—			—
Accounts payable and accrued expenses		4,754,771			(2,027,734	)		1,902,920			(482,590	)		(2,661,244	)
Deferred revenue		—			493,674			520,086			71,101			2,003,367
Other liabilities		—			—			231,518			—			186,411
Net cash provided by operating activities		1,687,445			2,652,843			3,003,215			434,214			1,221,921
Cash flows from investing activities:
Purchase of property and equipment		(453,591	)		(641,160	)		(3,208,611	)		(147,972	)		(521,410	)
Net cash used in investing activities		(453,591	)		(641,160	)		(3,208,611	)		(147,972	)		(521,410	)
Cash flows from financing activities:
Proceeds under convertible subordinated debenture		—			—			5,821,967			—			—
Borrowings under note payable agreements		138,000			400,000			102,343			—			—
Principal payments on notes payable		(248,939	)		(28,982	)		(146,188	)		(29,708	)		(40,789	)
Stockholder loans		531,020			—			729,003			—			—
Payments on stockholder loans		(1,266,703	)		(85,000	)		(867,942	)		—			—
Borrowings under line of credit		1,854,000			2,104,000			1,661,126			200,304			903,290
Payments on line of credit		(2,104,000	)		(2,104,000	)		(1,427,382	)		(200,304	)		(1,136,102	)
Dividends paid		—			(1,725,130	)		(2,170,000	)		—			—
Purchase of treasury stock, at cost		—			—			(2,399,965	)		—			—
Net cash (used in) provided by financing activities		(1,096,622	)		(1,439,112	)		1,302,962			(29,708	)		(273,601	)
Net increase in cash		137,232			572,571			1,097,566			256,534			426,910
Cash and cash equivalents, beginning of period		—			137,232			709,803			709,803			1,807,369
Cash and cash equivalents, end of period		$137,232			$709,803			$1,807,369			$966,337			$2,234,279
Supplemental disclosure of cash flow information:
Interest paid during the period		$26,506			$14,513			$130,522			$8,984			$ 19,783
Supplemental disclosure of non-cash financing activities:
See notes 2 and 6

		Sales															Accounts Receivable
											(Unaudited)
		Year Ended December 31,									Three Months Ended March 31,						December 31,						(Unaudited) March 31,
		1996			1997			1998			1998			1999			1997			1998			1999
Customer A		22	%		17	%		—			11	%		—			—			—			—
Customer B		32			15			23	%		19			—			26	%		33	%		—
Customer C		—			15			—			—			—			—			—			—
Customer D		—			—			—			—			—			25			—			—
Customer E		—			—			—			—			—			—			—			—
Customer F		—			—			12			—			20	%		—			24			19	%
Customer G		—			—			—			—			—			—			15			—
Customer H		—			—			—			—			—			—			—			19
Customer I		—			—			—			—			11			—			—			—
Customer J		—			—			—			13			—			—			—			—
Customer K		—			—			—			12			—			—			—			—

		Useful Lives		December 31,						(Unaudited) March 31,
				1997			1998			1999
Buildings		39 years		$—			$2,290,956			$2,466,165
Furniture and equipment		7 years		331,902			552,889			578,114
Computers		5 years		998,424			1,960,863			2,009,785
Leasehold improvements		7 years		7,059			13,342			13,342
				1,337,385			4,818,050			5,067,406
Less accumulated depreciation and amortization				(556,067	)		(1,092,232	)		(1,269,530	)
				$781,318			$3,725,818			$3,797,876

		December 31,						(Unaudited) March 31, 1999
		1997			1998
Notes payable, bearing interest at 9.95%, principal and interest      due in monthly installments; collateralized by certain fixed      assets		$371,018			$327,173			$286,384
Note payable to stockholder, non-interest bearing, principal      payable in January 1999. Paid in full during 1998		138,939			—			—
		509,957			327,173			286,384
Less current portion		(123,379	)		(169,402	)		(173,652	)
		$386,578			$157,771			$112,732

1999		$173,652
2000		112,732

Twelve months ending March 31:
2000		$121,000
2001		75,000
2002		15,000
Total minimum payments		$211,000

		Year Ended December 31,						(Unaudited) Three Months Ended March 31,
		1996		1997		1998		1998		1999
Pro forma net income:
As reported		$1,965,123		$2,100,411		$2,125,935		$239,859		$(1,166,032)
As adjusted		1,965,123		1,152,116		1,356,486		133,478		(1,166,032)

										(Unaudited)
		Year Ended December 31,								Three Months Ended March 31, 1999
		1997				1998
Fixed Options		Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
Outstanding at beginning of      period		—		$0.00		1,957,000		$1.20		3,530,000		$1.21
Granted		2,069,500		$1.20		1,982,500		$1.22		—		$0.00
Exercised		—		$0.00		—		$0.00		—		$0.00
Canceled		(112,500)		$1.20		(409,500)		$1.20		—		$0.00
Outstanding at end of period		1,957,000				3,530,000				3,530,000
Options exercisable at end of      period		—				551,750				1,262,750

Options Outstanding						Options Exercisable
Number Outstanding at 3/31/99		Weighted-Average Remaining Contractual Life		Exercise Prices		Number Exercisable at 3/31/99		Exercise Prices
3,480,000		8.55 years		$1.20		1,262,750		$1.20
50,000		9.44 years		$       1.80		—		$       0.00

ERNST & YOUNG LLP

		December 31,
		1997			1998
Assets
Current assets:
Cash and cash equivalents		$      315,213			$  9,385,180
Trade accounts receivable, net of allowance for doubtful accounts of $4,000           and $20,000 at December 31, 1997 and 1998, respectively		136,528			315,081
Unbilled trade accounts receivable		17,000			62,990
Prepaid expenses		—			1,197
Loan receivable from stockholder		1,086			—
Total current assets		469,827			9,764,448
Property and equipment:
Furniture and fixtures		15,291			35,728
Computer and office equipment		73,721			189,288
Accumulated depreciation		(21,159	)		(64,249	)
Net property and equipment		67,853			160,767
Other assets		2,000			99,721
Total assets		$539,680			$10,024,936
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses		$47,323			$136,209
Deferred income taxes payable		—			89,261
Note payable to stockholders		—			1,000,000
Distribution payable to stockholders		—			346,817
Current portion of notes payable		6,279			—
Deferred revenue		16,271			27,996
Total current liabilities		69,873			1,600,283
Notes payable, less current portion		6,354			—
Series A Preferred Stock, no par value — ($2 per share redemption value;      minimum liquidation value of $10,000,000 plus accrued and unpaid dividends      plus a portion of remaining assets, as defined), convertible to Class 2      common stock, 5,000,000 shares authorized, issued and outstanding		—			9,986,126
Stockholders ’ equity:
Class 1 common stock, no par value  — 5,500,000 shares authorized,            5,500,000 shares issued and outstanding		10,510			10,510
Class 2 common stock, no par value  — 14,000,000 shares authorized, no            shares issued or outstanding		—			—
Retained earnings (deficit)		452,943			(1,571,983	)
Total stockholders’ equity (deficit)		463,453			(1,561,473	)
Total liabilities and stockholders’ equity (deficit)		$539,680			$10,024,936

		Period from January 16, 1996 through December 31, 1996			Year Ended December 31,
					1997			1998
Revenue		$377,163			$1,504,742			$4,431,060
Expenses:
Operations		38,477			65,178			469,519
Sales and marketing		38,509			198,586			1,893,589
General and administrative		189,126			776,572			1,121,918
Depreciation		3,617			17,542			45,383
		269,729			1,057,878			3,530,409
Operating income		107,434			446,864			900,651
Other income (deductions):
Interest expense		(982	)		(1,646	)		(12,537	)
Interest income		401			8,258			53,610
		(581	)		6,612			41,073
Income before income taxes		106,853			453,476			941,724
Income tax expense		—			—			89,261
Net income		$   106,853			$   453,476			$   852,463
Supplemental unaudited pro forma information:
Income before taxes, as above		$   106,853			$   453,476			$   941,724
Pro forma provision for income taxes		(40,604	)		(172,320	)		(357,853	)
Pro forma net income		$     66,249			$   281,156			$   583,871
Basic pro forma earnings per common share		$0.01			$0.05			$0.09
Average outstanding common shares		5,500,000			5,500,000			5,500,000

		Class 1  Common Stock		Class 2  Common Stock		Retained Earnings (deficit)			Total Shareholders’ Equity (deficit)
Balance at January 16, 1996 (inception)		$10,510		—		$                  —			$       10,510
Net income		—		—		106,853			106,853
Distribution to stockholders		—		—		(33,879	)		(33,879	)
Balance at December 31, 1996		10,510		—		72,974			83,484
Net income		—		—		453,476			453,476
Distribution to stockholders		—		—		(73,507	)		(73,507	)
Balance at December 31, 1997		10,510		—		452,943			463,453
Net income		—		—		852,463			852,463
Distribution to stockholders		—		—		(2,796,817	)		(2,796,817	)
Accretion and dividends on Series A                 Preferred Stock		—		—		(80,572	)		(80,572	)
Balance at December, 31 1998		$       10,510		—		$(1,571,983	)		$(1,561,473	)

		Period from January 16, 1996 through December 31, 1996			Year Ended December 31,
					1997			1998
Operating activities
Net income		$     106,853			$     453,476			$     852,463
Adjustments to reconcile net income to net cash provided by      operating activities:
Depreciation		3,617			17,542			45,383
Provision for deferred taxes		—			—			89,261
Changes in operating assets and liabilities:
Trade accounts receivable		(30,880	)		(105,648	)		(178,553	)
Unbilled trade accounts receivable		—			(17,000	)		(45,990	)
Loan receivable from stockholder		—			(1,086	)		1,086
Prepaid expenses and other assets		—			(2,000	)		(98,918	)
Accounts payable and accrued expenses		12,394			34,930			88,886
Deferred revenue		21,903			(5,632	)		11,725
Net cash provided by operating activities		113,887			374,582			765,343
Investing Activities
Purchase of property and equipment		(23,980	)		(65,033	)		(138,297	)
Net cash used in investing activities		(23,980	)		(65,033	)		(138,297	)
Financing Activities
Sale of Series A Preferred Stock, less expenses		—			—			9,905,554
Distributions to stockholders		(33,879	)		(73,507	)		(1,450,000	)
Proceeds from notes payable		21,100			—			—
Repayment of notes payable		(2,817	)		(5,650	)		(12,633	)
Sales of common stock		10,510			—			—
Net cash provided (used) by financing activities		(5,086	)		(79,157	)		8,442,921
Net increase in cash and cash equivalents		84,821			230,392			9,069,967
Cash and cash equivalents, beginning of period		—			84,821			315,213
Cash and cash equivalents, end of year		$       84,821			$     315,213			$9,385,180

Cash and Cash Equivalents

Concentration of Credit Risk

Accounts Receivable

Property and Equipment

Revenue Recognition

Advertising Costs

Income Taxes

Use Of Estimates

Cash Flow Information

Reclassifications

		December 31,
		1997		1998
Note payable; interest at prime rate plus 2.0% (10.5% at December 31, 1997)		$5,052		$     —
Note payable; interest at prime rate plus 2.0% (10.25% at December 31, 1997)		7,581		—
		12,633		—
Less amounts due within one year		6,279		—
		$6,354		$     —

		Current			Deferred		Total
Federal		$(7,267	)		$86,665		$79,398
State		(481	)		10,344		9,863
		$(7,748	)		$97,009		$89,261

Property and equipment		$17,420
Net operating loss carryforwards		7,748
Accrual to cash adjustment		(114,429	)
Net deferred income taxes		$(89,261	)

		Period from January 16, 1996 through December 31, 1996		Year ended December 31,
				1997		1998
Computed using a 34% tax rate		$36,330		$154,182		$320,186
State income taxes, net of federal tax		4,274		18,138		37,667
		$40,604		$172,320		$357,853

Preferred Stock

Warrants

		1996		1997		1998
Numerator:
Pro forma net income		$   66,249		$281,156		$583,871
Accretion and dividends on Series A Preferred                 Stock		—		—		(80,572	)
Numerator for basic pro forma earnings per common                 share—income available to common                 stockholders		$   66,249		$281,156		$503,299
Denominator:
Denominator for basic pro forma earning per                 common share—weighted average shares		5,500,000		5,500,000		5,500,000
Basic pro forma earnings per common share		$       0.01		$       0.05		$       0.09

					(Unaudited)
		December 31, 1998			March 31, 1999
Assets
Current Assets:
Cash and cash equivalents		$1,700,370			$176,953
Prepaid expenses		185,506			149,366
Other current assets		22,704			19,991
Total current assets		1,908,580			346,310
Fixed assets, net		351,752			342,690
Deposits		136,998			136,998
		$2,397,330			$825,998
Liabilities, Redeemable Preferred Stock and Stockholders’ Deficit
Current Liabilities:
Accounts payable		$     233,281			$226,688
Accrued expenses		316,918			347,771
Notes payable to stockholders		3,926,370			—
Total current liabilities		4,476,569			574,459
Redeemable Preferred Stock:
Series A redeemable convertible preferred stock, $0.001 par value                 Authorized: 2,941,031 and 2,586,207 shares at December 31, 1998 and                 March 31, 1999 (unaudited), respectively; issued and outstanding:                 2,586,207 shares at December 31, 1998 and March 31, 1999 (unaudited)                 plus accrued dividends of $334,652 and $454,513 at December 31, 1998                 and March 31, 1999 (unaudited), respectively; liquidation value of                 $6,334,651 and $6,454,512 at December 31, 1998 and March 31, 1999                 (unaudited), respectively		6,334,651			6,454,512
Series B redeemable convertible preferred stock, $0.001 par value                 Authorized: 3,737,602 shares; subscribed and issued and outstanding:                 3,287,602 shares at March 31, 1999 (unaudited); liquidation value of                 $13,150,408 at March 31, 1999 (unaudited)		—			13,150,408
Subscriptions receivable (unaudited)		—			(9,000,000	)
Preferred stock warrants		120,000			120,000
Redeemable non-voting, non-convertible preferred stock, $0.001 par value                 Authorized: 150,000 and 130,000 shares at December 31, 1998 and March 31,                 1999 (unaudited), respectively; issued and outstanding: 130,000 shares at                 December 31, 1998 and March 31, 1999 (unaudited) plus accrued dividends                 of $89,468 and $116,001 at December 31, 1998 and March 31, 1999                 (unaudited), respectively; liquidation value of $1,389,468 and $1,416,001 at                 December 31, 1998 and March 31, 1999 (unaudited), respectively		1,389,468			1,416,001
Total redeemable preferred stock		7,844,119			12,140,921
Stockholders ’ Deficit:
Common stock, $0.001 par value; 10,000,000 shares authorized;                 396,000 shares issued and outstanding at December 31, 1998 and March                 31, 1999 (unaudited)		396			396
Deficit accumulated during the development stage		(9,923,754	)		(11,889,778	)
Total stockholders’ deficit		(9,923,358	)		(11,889,382	)
Commitments (Note 14)
		$2,397,330			$825,998

		For the Period from Inception (February 11, 1998) through December 31, 1998			(Unaudited) For the Three Months Ended March 31,
					1998			1999
Costs and Expenses:
Research and development		$1,501,267			$235,127			$480,701
Selling and marketing		2,425,532			271,723			767,148
General and administrative		1,950,153			685,788			355,164
Impairment charge for intangible assets		1,312,500			—			—
Settlement charge		1,795,333			—			—
Loss from operations		(8,984,785	)		(1,192,638	)		(1,603,013	)
Interest expense, net		(90,430	)		(2,565	)		(156,617	)
Net loss		$(9,075,215	)		$(1,195,203	)		$(1,759,630	)

		Series A Redeemable Preferred Stock				Series B Redeemable Preferred Stock				Subscriptions Receivable			Preferred Stock Warrants		Redeemable Non- voting Non-convertible Preferred Stock						Common stock						Deficit Accumulated During Development Stage			Total
		Shares		Carrying Value		Shares		Carrying Value					Carrying Value		Shares			Carrying Value			Shares			Par  Value
Issuance of common     stock to founders																					1,396,000			$1,396						$   1,396
Issuance of redeemable     non-voting, non- convertible     preferred stock															150,000			$1,500,000
Issuance of Series A     redeemable     convertible     preferred stock,     issuance costs of     $170,752:
Initial closing		948,276		$2,200,000
Second closing		646,551		1,500,000
Third closing		991,380		2,299,999																							$(170,752	)		(170,752	)
Repurchase and     retirement of     common stock																					(1,000,000	)		(1,000	)		(249,000	)		(250,000	)
Redemption of     redeemable non- voting, non- convertible     preferred stock															(20,000	)		(204,667	)
Series A redeemable     convertible     preferred stock     warrants													$120,000
Accrual of cumulative     dividends on     redeemable     preferred stock				334,652														94,135									(428,787	)		(428,787	)
Net loss																											(9,075,215	)		(9,075,215	)
Balance at December     31, 1998		2,586,207		6,334,651									120,000		130,000			1,389,468			396,000			396			(9,923,754	)		(9,923,358	)
Issuance of Series B     redeemable     convertible     preferred stock,     issuance costs of     $60,000     (Unaudited)						3,287,602		$13,150,408		$(9,000,000	)																(60,000	)		(60,000	)
Accrual of cumulative     dividends on     redeemable     preferred stock     (Unaudited)				119,861														26,533									(146,394	)		(146,394	)
Net loss (Unaudited)																											(1,759,630	)		(1,759,630	)
Balance at March 31,     1999 (Unaudited)		2,586,207		$ 6,454,512		3,287,602		$13,150,408		$(9,000,000	)		$120,000		130,000			$1,416,001			396,000			$396			$(11,889,778	)		$(11,889,382	)

		For the Period From Inception (February 11, 1998) Through December 31, 1998			(Unaudited) For the Three Months Ended March 31,
					1998			1999
Cash flows from operating activities:
Net loss		$(9,075,215	)		$(1,195,203	)		$(1,759,630	)
Adjustments to reconcile net loss to net cash used for      operating activities:
Depreciation		58,537			506			28,522
Amortization and impairment of intangible assets		1,500,000			125,000			—
Amortization of discounts on notes payable		46,370			—			73,630
Changes in assets and liabilities:
Prepaid expenses		(185,506	)		—			36,140
Other current assets		(22,704	)		(54,333	)		2,713
Accounts payable		233,281			1,691			(6,593	)
Accrued expenses		316,918			126,233			121,261
Net cash used for operating activities		(7,128,319	)		(996,106	)		(1,503,957	)
Cash flows from investing activities:
Purchases of fixed assets		(410,289	)		(28,543	)		(19,460	)
Increase in deposits		(136,998	)		—			—
Net cash used for investing activities		(547,287	)		(28,543	)		(19,460	)
Cash flows from financing activities:
Proceeds from issuance of notes payable to stockholders		4,000,000			—			—
Proceeds from Series A redeemable convertible preferred      stock, net of issuance costs		5,829,247			1,829,248			—
Proceeds from issuance of common stock		1,396			1,396			—
Redemption of non-voting, non-convertible redeemable      preferred stock and related dividends		(204,667	)		—			—
Repurchase of common stock		(250,000	)		—			—
Net cash provided by financing activities		9,375,976			1,830,644			—
Net increase (decrease) in cash and cash equivalents		1,700,370			805,995			(1,523,417	)
Cash and cash equivalents, beginning of period		—			—			1,700,370
Cash and cash equivalents, end of period		$1,700,370			$805,995			$176,953
Non-cash investing and financing activities:
Software acquired in exchange for 150,000 shares of      non-voting, non-convertible redeemable preferred      stock		$1,500,000			$1,500,000			$—
Conversion of notes payable to stockholders plus accrued      interest of $150,408 into 1,037,602 shares of Series B      Preferred Stock		$—			$—			$4,150,408

Cash and Cash Equivalents

Financial Instruments

Fixed Assets

Research and Development and Software Development Costs

Accounting for Impairment of Long Lived Assets

Stock-Based Compensation

Use of Estimates

Unaudited Interim Financial Statements

Trade shows and other marketing prepayments		$135,774
Others		49,732
		$185,506

		Estimated useful life (years)		December  31, 1998
Computer equipment		3		$246,631
Office equipment		5		71,783
Furniture and fixtures		7		91,875
				410,289
Less: accumulated depreciation				58,537
				$351,752

Voting

Dividends

Liquidation

Conversion

Redemption

Accretion

Voting

Dividends

Liquidation

Redemption

Restricted Stock Agreements

Reserved Shares

Net operating loss carryforward		$2,386,619
Fixed and intangible assets		482,690
Research and development credit carryforwards		90,891
Accrued vacation		35,687
Net deferred tax assets		2,995,887
Deferred tax asset valuation allowance		2,995,887
		$                —

Year  ending December 31,		Operating  Leases
1999		$   272,328
2000		254,728
2001		254,728
2002		254,728
Thereafter		127,364
		$1,163,876

KPMG LLP

		(Audited)			(Unaudited)
		December 31, 1998			March 31, 1999
Assets
Current assets:
Cash		$         613			$     1,909
Prepaid expenses		917			641
Due from employees		—			27,969
Total current assets		1,530			30,519
Property and equipment, net of accumulated depreciation of $1,572 and $2,682,      respectively (note 2)		19,192			20,241
Total assets		$   20,722			$   50,760
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable		$     6,973			$   16,612
Accrued expenses		53,669			125,005
Due to employees		10,882			23,614
Advances from stockholder (note 4)		53,197			84,945
Total liabilities		124,721			250,176
Stockholders ’ Deficit (note 4):
Preferred stock —Series A non-voting, authorized 250,000, $1 par value, no                 shares issued		—			—
Preferred stock —Series B non-voting, authorized 250,000, $1 par value, no                 shares issued		—			—
Common stock, authorized 9,500,000 shares, $.001 par value, 2,066,677                 shares issued and outstanding at December 31, 1998 and 3,333,350 at                 March 31, 1999		2,067			3,333
Additional paid-in capital		—			11,402
Deficit accumulated during the development stage		(106,066	)		(214,151	)
Total stockholders’ deficit		(103,999	)		(199,416	)
Total liabilities and stockholders’ deficit		$   20,722			$   50,760

		(Audited)						(Unaudited)
		Period From August 25, 1998 (Inception) Through December 31, 1998			(Unaudited) Three Months Ended March 31, 1999			Period From August 25, 1998 (Inception) Through March 31, 1999
Revenues		$              —			$              —			$              —
Expenses incurred in the development stage:
Selling and marketing		69,429			51,952			121,381
Operations		20,940			46,469			67,409
Administration		14,125			8,554			22,679
Depreciation		1,572			1,110			2,682
Total expenses		106,066			108,085			214,151
Net loss		$(106,066	)		$(108,085	)		$(214,151	)

		Series A Preferred Stock		Series B Preferred Stock		Common Stock (Shares)		Common Stock		Additional Paid-in Capital		Accumulated Deficit			Total Stockholders’ Deficit
Balance, August 25, 1998      (Inception)		$—		$—		—		$—		$—		$—			$—
Issuance of common stock		—		—		2,066,677		2,067		—		—			2,067
Net loss		—		—		—		—		—		(106,066	)		(106,066	)
Balance, December 31, 1998		—		—		2,066,677		2,067		—		(106,066	)		(103,999	)
Issuance of common stock		—		—		1,266,673		1,266		11,402		—			12,668
Net loss (Unaudited)		—		—		—		—		—		(108,085	)		(108,085	)
Balance, March 31, 1999      (Unaudited)		$              —		$—		3,333,350		$3,333		$11,402		$(214,151	)		$(199,416	)

		(Audited)			(Unaudited)			(Unaudited)
		Period From August 25, 1998 (Inception) Through December 31, 1998			Three Months Ended March 31, 1999			Period From August 25, 1998 (Inception) Through March 31, 1999
Cash flows from operating activities:
Net loss		$(106,066	)		$(108,085	)		$(214,151	)
Adjustments to reconcile net loss to net cash           used in operating activities:
Depreciation		1,572			1,110			2,682
Increase (decrease) in cash due to changes in:
Prepaid expenses		(917	)		276			(641	)
Due from employees		—			(27,969	)		(27,969	)
Accounts payable		6,973			9,639			16,612
Accrued expenses		53,669			71,336			125,005
Due to employees		10,882			12,732			23,614
Net cash used in operating activities		(33,887	)		(40,961	)		(74,848	)
Cash flows from investing activities:
Capital expenditures		(20,764	)		(2,159	)		(22,923	)
Net cash used in investing activities		(20,764	)		(2,159	)		(22,923	)
Cash flows from financing activities:
Proceeds from issuance of common stock		—			14,735			14,735
Advances from stockholder		55,264			29,681			84,945
Net cash provided by financing activities		55,264			44,416			99,680
Net increase in cash		613			1,296			1,909
Cash, beginning of period		—			613			—
Cash, end of period		$         613			$1,909			$1,909

Software		3 years
Computer equipment		5 years

		(Audited)		(Unaudited)
		December  31, 1998		March  31, 1999
Computer equipment		$20,764		$22,923
Less: accumulated depreciation		1,572		2,682
Property and equipment, net		$19,192		$20,241

		(Audited)		(Unaudited)
		December  31, 1998		March  31, 1999
Employee compensation and related taxes		$40,739		$109,781
Other		12,930		15,224
		$53,669		$125,005

Year Ended December 31,
1999		$115,788
2000		135,206
2001		110,834
2002		116,922

								(Unaudited)
		December 31, 1997			December 31, 1998			March 31, 1999
ASSETS
Current assets:
Cash and cash equivalents		$       1,000			$   844,000			$5,570,000
Accounts receivable, net		44,000			657,000			1,271,000
Prepaid expenses and other current assets		—			15,000			217,000
Security deposits		54,000			85,000			113,000
Total current assets		99,000			1,601,000			7,171,000
Restricted cash		—			149,000			134,000
Property and equipment, net		1,000			219,000			263,000
Total assets		$   100,000			$1,969,000			$7,568,000
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$     56,000			$   577,000			$   334,000
Accrued expenses and other current liabilities		2,000			75,000			278,000
Unearned revenue, net		—			381,000			625,000
Notes payable —shareholders		76,000			126,000			100,000
Short-term borrowings		—			—			500,000
Total current liabilities		134,000			1,159,000			1,837,000
Note payable		—			149,000			134,000
Commitments and contingencies (Note 6)
Redeemable cumulative convertible Series A Preferred Stock, no par      value; 1,000,000 shares authorized at December 31, 1998 and      March 31, 1999; 335,334 and 772,331 shares issued and outstanding      plus accrued dividends of $20,000 and $37,000 (liquidation value of      $903,000 and $2,039,000) at December 31, 1998 and March 31,      1999, respectively		—			903,000			2,039,000
Redeemable cumulative convertible Series A Preferred Stock warrants		—			36,000			83,000
Unissued redeemable cumulative convertible Series A Preferred Stock		—			1,004,000			—
Redeemable cumulative convertible Series B Preferred Stock, no par      value; 2,000,000 shares authorized, issued and outstanding plus      accrued dividends of $50,000 (liquidation value of $4,613,000) at      March 31, 1999—unaudited		—			—			4,613,000
Redeemable cumulative convertible Series B Preferred Stock      warrants—unaudited		—			—			1,197,000
Stockholders ’ deficit:
Common stock, no par value; 15,000,000, 150,000,000 and                 150,000,000 shares authorized at December 31, 1997,                 December 31, 1998 and March 31, 1999, respectively;                 11,899,500, 15,150,000 and 15,300,000 shares issued and                 outstanding at December 31, 1997, December 31, 1998 and                 March 31, 1999, respectively		136,000			225,000			225,000
Common stock warrants		—			—			13,000
Additional paid-in-capital		—			487,000			518,000
Deferred stock option plan compensation		—			(422,000	)		(394,000	)
Accumulated deficit		(170,000	)		(1,572,000	)		(2,697,000	)
Total stockholders’ deficit		(34,000	)		(1,282,000	)		(2,335,000	)
Total liabilities and stockholders’ deficit		$100,000			$1,969,000			$7,568,000

								(Unaudited)			(Unaudited)
		From Inception to December 31, 1997			For the Year Ended December 31, 1998			For  the Three Month Period Ended March 31, 1998			For  the Three Month Period Ended March 31, 1999
Revenues:
Access		$   77,000			$1,589,000			$168,000			$1,508,000
Co-location		—			40,000			—			23,000
Total revenues		$   77,000			$1,629,000			168,000			1,531,000
Operating expenses:
Cost of revenues		66,000			1,256,000			125,000			1,286,000
Operations and administration		180,000			1,516,000			135,000			1,175,000
Depreciation		—			47,000			—			24,000
Stock option plan compensation		—			65,000			—			28,000
Total operating expenses		246,000			2,884,000			260,000			2,513,000
Operating loss		(169,000	)		(1,255,000	)		(92,000	)		(982,000	)
Other income and expense:
Interest expense		(1,000	)		(27,000	)		(2,000	)		(3,000	)
Interest income		—			8,000			—			2,000
Other expense		—			(100,000	)		—			—
Total other income and expenses		(1,000	)		(119,000	)		(2,000	)		(1,000	)
Net loss		(170,000	)		(1,374,000	)		(94,000	)		(983,000	)
Accretion and dividends on redeemable cumulative      convertible preferred stock		—			(28,000	)		—			(142,000	)
Net loss applicable to common stockholders		$(170,000	)		$(1,402,000	)		$(94,000	)		$(1,125,000	)

								(Unaudited)			(Unaudited)
		From Inception to December 31, 1997			For the Year Ended December 31, 1998			For  the Three Month Period Ended March 31, 1998			For  the Three Month Period Ended March 31, 1999
Cash flows from operating activities:
Net loss		$(170,000	)		$(1,374,000	)		$(94,000	)		$(983,000	)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation		—			47,000			—			24,000
Stock option plan compensation		—			65,000			—			28,000
Provision for doubtful accounts		4,000			42,000			6,000			106,000
Changes in operating assets and liabilities:
Accounts receivable		(48,000	)		(655,000	)		(50,000	)		(720,000	)
Prepaid expenses and other current assets		—			(15,000	)		—			(202,000	)
Security deposits		(54,000	)		(31,000	)		(10,000	)		(28,000	)
Accounts payable		56,000			521,000			43,000			(243,000	)
Accrued expenses and other current liabilities		2,000			73,000			(1,000	)		203,000
Unearned revenue		—			381,000			—			244,000
Net cash used for operating activities		(210,000	)		(946,000	)		(106,000	)		(1,571,000	)
Cash flows from investing activities:
Purchase of property and equipment		(1,000	)		(265,000	)		(1,000	)		(68,000	)
Cash flows from financing activities:
Net borrowings on line of credit		—			—			—			500,000
Proceeds from notes payable		76,000			199,000			51,000			100,000
Payments on notes payable		—			—			—			(141,000	)
Proceeds from unissued redeemable Series A                 preferred stock		—			1,004,000			—			—
Proceeds from redeemable Series A preferred                 stock		—			875,000			—			70,000
Proceeds from redeemable Series B preferred                 stock		—			—			—			4,564,000
Proceeds from common stock		136,000			89,000			79,000			—
Proceeds from redeemable Series A preferred                 stock warrants		—			36,000			—			47,000
Proceeds from redeemable Series B preferred                 stock warrants		—			—			—			1,197,000
Proceeds from common stock warrants		—			—			—			13,000
Cash deposit to collateralize note payable, net		—			(149,000	)		—			15,000
Net cash provided by financing activities		212,000			2,054,000			130,000			6,365,000
Net increase in cash and cash equivalents		1,000			843,000			23,000			4,726,000
Cash and cash equivalents, beginning of period		—			1,000			1,000			844,000
Cash and cash equivalents, end of period		$     1,000			$844,000			$   24,000			$5,570,000

		Common Stock				Common Stock Warrants		Additional Paid-In Capital		Deferred Stock Option Plan Compensation			Accumulated Deficit			Total
		Shares Issued		No Par Value
Balance at October 2, 1997		—		$        —		$      —		$        —		$         —			$            —			$            —
Issuance of common stock		11,899,500		136,000		—		—		—			—			136,000
Net loss		—		—		—		—		—			(170,000	)		(170,000	)
Balance at December 31, 1997		11,899,500		136,000		—		—		—			(170,000	)		(34,000	)
Issuance of common stock		3,100,500		89,000		—		—		—			—			89,000
Exercise of stock options		150,000		—		—		—		—			—			—
Deferred stock option plan     compensation		—		—		—		487,000		(487,000	)		—			—
Stock option plan compensation		—		—		—		—		65,000			—			65,000
Net loss		—		—		—		—		—			(1,374,000	)		(1,374,000	)
Accretion and dividends on Series A     Preferred Stock		—		—		—		—		—			(28,000	)		(28,000	)
Balance at December 31, 1998		15,150,000		225,000		—		487,000		(422,000	)		(1,572,000	)		(1,282,000	)
Issuance of common stock warrants     (Unaudited)		—		—		13,000		—		—			—			13,000
Issuance of common stock options by     certain shareholders (Unaudited)		—		—		—		31,000		—			—			31,000
Exercise of stock options (Unaudited)		150,000		—		—		—		—			—			—
Stock option plan compensation     (Unaudited)		—		—		—		—		28,000			—			28,000
Net loss (Unaudited)		—		—		—		—		—			(983,000	)		(983,000	)
Accretion and dividends on Series A     Preferred Stock (Unaudited)		—		—		—		—		—			(62,000	)		(62,000	)
Accretion and dividends on Series B     Preferred Stock (Unaudited)		—		—		—		—		—			(80,000	)		(80,000	)
Balance at March 31, 1999     (Unaudited)		15,300,000		$225,000		$13,000		$518,000		$(394,000	)		$(2,697,000	)		$(2,335,000	)

Furniture and fixtures		3 years
Co-location equipment		3 years
Equipment		3 years

		December  31, 1997		December 31, 1998
Furniture and fixtures		$      —		$119,000
Co-location equipment		—		85,000
Equipment		1,000		62,000
		1,000		266,000
Less: Accumulated depreciation		—		(47,000	)
Property and equipment, net		$   1,000		$219,000

		December  31, 1997		December  31, 1998
Note payable (interest at 7.5%)		$         —		$149,000
Borrowings under line of credit		—		—
Notes payable to shareholders (weighted average interest at 9.7%)		76,000		126,000
Notes payable		$76,000		$275,000

Net operating loss		$   93,000
Stock option plan compensation		18,000
Allowance for doubtful accounts		19,000
Other		21,000
		151,000
Valuation allowance		(151,000	)
Total		$              —

1999		$74,000
2000		78,000
2001		34,000
2002		—
Total minimum lease payments		$186,000

Pro forma net loss		$1,375,000
Volatility		0	%
Dividend yield		0	%
Risk-free interest rate		5	%
Expected life in years		5

		Number of Shares			Weighted Average Exercise Price
Balance at December 31, 1997		—			—
Granted		1,725,000			$    0.0027
Exercised		(150,000	)		0.000007
Forfeited		—			—
Balance at December 31, 1998		1,575,000			$      0.003
Weighted average fair value of options granted during 1998		$         0.28

		Number  of Shares		Weighted Average Exercise Price
Balance at December 31, 1997		—		—
Granted		327,000		$0.18
Exercised		—		—
Forfeited		—		—
Balance at December 31, 1998		327,000		$0.18
Weighted average fair value of options granted during 1998		$     0.04

		Exercise Prices
		$0.000007  to $0.0033		$0.133  to $0.22		$0.5067  to $0.53
Stock Options Outstanding
Number		1,575,000		291,000		36,000
Weighted average exercise price		$       0.003		$     0.14		$0.5267
Weighted average remaining contractual life                 (years)		4.67		4.51		4.91
Stock Options Exercisable
Number		150,000		—		—
Weighted average exercise price		$0.000007		—		—

Redeemable Series A Preferred Stock		2,316,990
Employee stock options outstanding		1,752,000
Series A Warrants		231,699
Total		4,300,689

KPMG LLP

		December 31,					(Unaudited)
		1997			1998		March  31, 1999
Assets:
Current assets:
Cash		$   4,729			$10,204		$   1,480
Accounts receivable		15,415			13,899		31,764
Total current assets		20,144			24,103		33,244
Computer equipment		56,509			190,948		221,142
Less: Accumulated depreciation and amortization		6,667			26,095		37,601
Net computer equipment		49,842			164,853		183,541
Deposits		100			2,281		2,281
Total assets		$70,086			$191,237		$219,066
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of capital lease obligations		$   4,782			$18,633		$19,951
Loans and advances payable to stockholders		45,007			29,251		42,296
Accounts payable		12,652			49,414		30,563
Accrued expenses		2,010			14,925		28,134
Total current liabilities		64,451			112,223		120,944
Capital lease obligations, net of current portion		13,652			43,056		37,344
Total liabilities		78,103			155,279		158,288
Commitments and contingencies
Stockholders ’ equity:
Preferred stock, no par value, 200,000 shares authorized, none issued                 and outstanding in 1997, 70,000 shares issued and outstanding in                 1998 and 1999 (liquidation preference of $1 per share)		—			70,000		70,000
Common stock, no par value, 1,000,000 shares authorized, 13,395                 shares issued and outstanding in 1997, 691,897 shares issued and                 outstanding in 1998 and 1999		134			6,919		6,919
Additional paid-in capital		—			55,985		55,985
Accumulated deficit		(8,151	)		(90,726)		(65,906)
Less: Subscriptions receivable		—			(6,220)		(6,220)
Total stockholders’ equity (deficit)		(8,017	)		35,958		60,778
Total liabilities and stockholders’ equity (deficit)		$70,086			$191,237		$219,066

		Years Ended December 31,						(Unaudited) Three Months Ended March 31,
		1997			1998			1998			1999
Revenues		$108,669			$288,512			$54,464			$141,828
Operating expenses:
Direct personnel costs		—			38,750			—			37,067
Other direct costs		39,163			111,650			9,529			15,051
Selling, general and administrative expenses		70,894			214,238			23,375			57,953
Total operating expenses		110,057			364,638			32,904			110,071
Income (loss) from operations		(1,388	)		(76,126	)		21,560			31,757
Interest expense		(4,182	)		(6,449	)		(916	)		(6,937	)
Net income (loss)		$(5,570	)		$(82,575	)		$20,644			$24,820
Net income (loss) per share—basic and diluted		$(.42	)		$(.37	)		$1.52			$       .04
Weighted average shares outstanding		13,395			223,452			13,595			691,897

		Common Stock				Preferred Stock				Additional Paid-In Capital		Accumulated Deficit			Subscriptions Receivable			Total Stockholders’ Equity
		Shares		Amount		Shares		Amount
Balance, January 1, 1997		13,395		$134		—		$—		$—		$(2,581	)		$—			$(2,447	)
Net loss		—		—		—		—		—		(5,570	)		—			(5,570	)
Balance, December 31, 1997		13,395		134		—		—		—		(8,151	)					(8,017	)
Issuance of common stock to         founders		621,952		6,220		—		—		—		—			(6,220	)		—
Issuance of common stock in         exchange for services		56,550		565		—		—		55,985		—			—			56,550
Issuance of preferred shares		—		—		70,000		70,000		—		—			—			70,000
Net loss		—		—		—		—		—		(82,575	)		—			(82,575	)
Balance, December 31, 1998		691,897		6,919		70,000		70,000		55,985		(90,726	)		(6,220	)		35,958
Net income (Unaudited)		—		—		—		—		—		24,820			—			24,820
Balance, March 31, 1999     (Unaudited)		691,897		$6,919		70,000		$70,000		$55,985		$(65,906	)		$(6,220	)		$60,778

		Years Ended December 31,						(Unaudited) Three Months Ended March 31,
		1997			1998			1998			1999
Cash flows from operating activities:
Net income (loss)		$(5,570	)		$(82,575	)		$20,644			$24,820
Adjustments to reconcile net income (loss) to net cash            provided by (used in) operating activities:
Depreciation and amortization		6,018			20,023			3,000			11,507
Common stock issued to non-employees for services		—			56,550			—			—
Changes in operating assets and liabilities:
Accounts receivable		(14,552	)		1,516			1,634			(17,865	)
Accounts payable		11,346			36,762			(9,426	)		(18,851	)
Accrued expenses		1,716			12,915			500			13,209
Net cash provided by (used in) operating                                       activities		(1,042	)		45,191			16,352			12,820
Cash flows from investing activity:
Purchase of computer equipment		(19,724	)		(78,286	)		(6,147	)		(30,195	)
Net cash used in investing activity		(19,724	)		(78,286	)		(6,147	)		(30,195	)
Cash flows from financing activities:
Proceeds from issuance of preferred stock		—			55,000			5,000			—
Increase in deposits		(100	)		(2,181	)		—			—
Proceeds from loans and advances payable to stockholders		37,007			15,033			22,543			8,651
Repayment of capital lease obligations		(750	)		(8,967	)		—			—
Proceeds (repayment) of loans payable		(11,008	)		(20,315	)		(30,007	)		—
Net cash provided by financing activities		25,149			38,570			(2,464	)		8,651
Increase (decrease) in cash		4,383			5,475			7,741			(8,724	)
Cash, beginning of period		346			4,729			4,729			10,204
Cash, end of period		$ 4,729			$10,204			$12,470			$ 1,480
Supplemental disclosure of cash flow information:
Cash paid for interest		$ 2,466			$ 8,460			$916			$ 1,796
Supplemental disclosures of non-cash investing and financing      activities:
Issuance of preferred stock in exchange for advances from                 stockholders		—			$15,000			—			—
Capital lease obligations		$19,150			$56,748			—			—

1999		$27,184
2000		26,228
2001		17,146
2002		7,459
Total minimum lease payments		78,017
Less: amount representing interest		16,328
Net present value of minimum lease payments		61,689
Less: current portion of capital lease obligations		18,633
Capital lease obligations, net of current portion		$43,056

		Years ended December 31,						(Unaudited) Three months ended March 31,
		1997			1998			1998			1999
Customer A		29	%		24	%		22	%		49	%
Customer B		—			35			10			22

		1997			1998
Deferred tax assets:
Accrued expenses		$    492			$    978
Net operating loss carryforward		714			3,735
Total gross deferred tax assets		1,206			4,713
Valuation allowance		(1,206	)		(4,713	)
Net deferred tax asset		$      —			$      —

KPMG LLP

		December 31,						(Unaudited) March 31, 1999
		1997			1998
Assets
Current assets:
Cash		$81,232			$240,310			$415,368
Accounts receivable		371,869			746,982			983,462
Employee advances		—			103,300			103,300
Total current assets		453,101			1,090,592			1,502,130
Property and equipment
Office and computer equipment		103,703			169,668			203,230
Software		5,000			9,512			10,334
Automobile		7,500			—			—
		116,203			179,180			213,564
Less: Accumulated depreciation and amortization		(64,556	)		(83,737	)		(94,647	)
Net property and equipment		51,647			95,443			118,917
Other assets		1,915			103,909			244,503
		$506,663			$1,289,944			$1,865,550
Liabilities and Stockholders’ Equity
Current liabilities:
Related-party advance and accrued interest		$23,333			$25,000			$—
Accounts payable		10,947			8,278			11,862
Accrued compensation and related benefits		68,341			206,192			266,689
Other accrued expenses		19,469			23,052			12,500
Total current liabilities		122,090			262,522			291,051
Commitments and contingencies
Stockholders ’ equity:
Common stock $.01 par value, 10,000,000 shares authorized,                 1,248,980 shares issued and outstanding in 1997 and                 1,800,000 shares issued and outstanding in 1998 and 1999		12,490			18,000			18,000
Additional paid-in capital		99			242,589			242,589
Retained earnings		371,984			766,833			1,313,910
Total stockholders’ equity		384,573			1,027,422			1,574,499
Total liabilities and stockholders’ equity		$506,663			$1,289,944			$1,865,550

		Years Ended December 31,						(Unaudited) Three Months Ended March 31,
		1997			1998			1998		1999
Revenues		$1,611,284			$2,650,415			$434,585		$1,087,678
Operating expenses:
Project personnel costs		1,191,193			1,719,664			193,316		446,109
Sales and marketing		45,579			37,092			12,271		10,768
General and administrative		186,461			497,143			52,333		84,650
Total operating expenses		1,423,233			2,253,899			257,920		541,527
Operating income		188,051			396,516			176,665		546,151
Other income (expense):
Interest expense		(2,250	)		(1,667	)		—		—
Interest income		—			—			—		926
Total other income (expense)		(2,250	)		(1,667	)		—		926
Net income		$   185,801			$   394,849			$   176,665		$   547,077
Net income per share—basic		$0.15			$0.24			$         0.14		$0.30
Net income per share—diluted		$0.15			$0.24			$         0.14		$0.29
Weighted average shares outstanding		1,248,980			1,664,132			1,248,980		1,800,000
Weighted average stock equivalents		—			—			—		66,415
Weighted average shares outstanding and stock equivalents		1,248,980			1,664,132			1,248,980		1,866,415

		Common Stock
		Shares		Amount		Additional Paid-In Capital		Retained Earnings		Total Stockholders’ Equity
Balance, January 1, 1997		1,248,980		$12,490		$99		$267,993		$280,582
Stockholders ’ distributions		—		—		—			(81,810	)		(81,810	)
Net income		—		—		—			185,801			185,801
Balance, December 31, 1997		1,248,980		12,490		99			371,984			384,573
Common stock issued to                 employees for services                 rendered		551,020		5,510		242,490			—			248,000
Net income		—		—		—			394,849			394,849
Balance, December 31, 1998		1,800,000		18,000		242,589			766,833			1,027,422
Net income (Unaudited)		—		—		—			547,077			547,077
Balance, March 31, 1999      (Unaudited)		1,800,000		$     18,000		$242,589			$1,313,910			$1,574,499

		Years Ended December 31,						(Unaudited) Three Months Ended March 31,
		1997			1998			1998			1999
Operating activities:
Net income		$185,801			$394,849			$176,665			$547,077
Adjustments to reconcile net income to net cash            provided by operating activities:
Depreciation and amortization		14,300			26,681			6,671			10,910
Common stock issued to employees for services                 rendered		—			248,000			—			—
Changes in operating assets and liabilities:
Accounts receivable		(68,745	)		(375,113	)		30,936			(236,480	)
Employee advances		—			(103,300	)		—			—
Accounts payable		(2,902	)		(2,669	)		868			3,584
Accrued compensation and related benefits		59,033			137,851			(87,810	)		60,497
Accrued expenses		—			3,583			—			(10,552	)
Net cash provided by operating                                       activities		187,487			329,882			127,330			375,036
Cash flows from investing activities:
Purchases of property and equipment		(41,106	)		(70,477	)		(1,025	)		(34,384	)
Increase in other assets		(1,240	)		(101,994	)		(1,119	)		(140,594	)
Net cash used in operating activities		(42,346	)		(172,471	)		(2,144	)		(174,978	)
Cash flows from financing activities:
Proceeds from (repayment of) related party            advance		—			1,667			—			(25,000	)
Stockholders’ distribution		(81,810	)		—			—			—
Net cash provided by (used in)                                       financing activities		(81,810	)		1,667			—			(25,000	)
Net increase in cash		63,331			159,078			125,186			175,058
Cash at beginning of period		17,901			81,232			81,232			240,310
Cash at end of period		$81,232			$240,310			$206,418			$415,368
Supplemental disclosure of cash flow information:
Cash paid for interest		$       584			—			—			—

								(Unaudited)
		Years Ended December 31,						Three Months Ended March 31,
		1997			1998			1998			1999
Customer A		52	%		38	%		53	%		32	%
Customer B		—			18			31			—
Customer C		—			15			—			22
Customer D		25			—			—			—
Customer E		—			—			—			12
Customer F		—			—			—			12

---

---

---

---

Underwritten Public Offering		Per Share		Total
Public offering price		$12.00		$136,800,000
Underwriting discount		$.84		$9,576,000
Proceeds, before expenses, to Internet Capital Group, Inc.		$11.16		$127,224,000
Directed Share Subscription Program		Per Share		Total
Public offering price		$12.00		$42,000,000
Financial advisory fee to Merrill Lynch		$.60		$2,100,000
Proceeds, before expenses, to Internet Capital Group, Inc.		$11.40		$25,080,000
Maximum proceeds, before expenses, to Safeguard Scientifics, Inc.		$11.40		$14,820,000
Aggregate Offering Proceeds				Total
Proceeds to Internet Capital Group, Inc. from the underwritten public offering and                            directed share subscription program				$152,304,000

BancBoston Robertson Stephens International Limited

Deutsche Bank

Bank of America International Limited

Underwriters		Number  of Shares
Merrill Lynch International		932,400
BancBoston Robertson Stephens International Limited		444,000
Deutsche Bank AG London		444,000
Bank of America International Limited		310,800
Hambrecht & Quist LLC		148,800
Total		2,280,000

		Per  Share		Without Option		With Option
Public offering price		$12.00		$27,360,000		$31,464,000
Underwriting discount		$.84		$1,915,200		$2,202,480
Proceeds, before expenses, to Internet      Capital Group, Inc.		$11.16		$25,444,800		$29,261,520

		Amount
Securities and Exchange Commission registration fee		$54,178
NASD filing fee		19,833
Nasdaq National Market listing fee		69,911
Accounting fees and expenses		450,000
Blue Sky fees and expenses		1,000
Legal fees and expenses		375,000
Transfer Agent and Registrar fees and expenses		9,000
Printing and engraving expenses		91,000
Director and officer liability insurance		150,000
Miscellaneous fees and expenses		17,519
Total		$1,237,441

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offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of our common stock or securities convertible into or exchangeable or exercisable for our common stock, whether now owned or later acquired by the person executing the agreement or with respect to which the person executing the agreement has or later acquires the power of disposition, or file a registration statement under the Securities Act relating to any of the foregoing; or

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enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of our common stock,

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the trading multiples of publicly-traded companies that the representatives believe to be comparable to us;

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certain of our financial information;

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the history of, and the prospects for, our company and the industry in which we compete;

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an assessment of our management;

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our past and present operations;

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the prospects for, and timing of, our future revenue;

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the present state of our development;

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the percentage interest of Internet Capital Group being sold as compared to the valuation for the entire company; and

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the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours. There can be no assurance that an active trading market will develop for our common stock or that our common stock will trade in the public market subsequent to the offering at or above the initial public offering price.

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