ASHFORD COM INC, S-8, 1999-09-29

ASHFORD COM INC
S-8, 1999-09-29
HOBBY, TOY & GAME SHOPS

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<PAGE> 1
As filed with the Securities and Exchange Commission on September 29, 1999
Registration No. 333-
================================================================================

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

FORM S-8
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------

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

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<S> <C> <C>
DELAWARE 5945 76-0565398
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

3800 BUFFALO SPEEDWAY, SUITE 400
HOUSTON, TEXAS 77098
(713) 369-1300
(Address of principal executive offices) (Zip Code)
-------------------

ASHFORD.COM, INC. 1998 STOCK INCENTIVE PLAN
ASHFORD.COM, INC. 1999 EQUITY INCENTIVE PLAN
ASHFORD.COM, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN
KENNETH E. KURTZMAN STOCK OPTION AGREEMENT
SHARES ACQUIRED UNDER KENNETH E. KURTZMAN STOCK OPTION AGREEMENT
(Full title of the Plans)
-------------------

KENNETH E. KURTZMAN
CHIEF EXECUTIVE OFFICER
ASHFORD.COM, INC.
3800 BUFFALO SPEEDWAY, SUITE 400
HOUSTON, TEXAS 77098
(Name and address of agent for service)
(713) 369-1300
(Telephone number, including area code, of agent for service)
-------------------

CALCULATION OF REGISTRATION FEE
================================================================================

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Title of Proposed Maximum Proposed Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Offering Registration
Registered Registered (1) per Share Price Fee
---------- -------------- --------- ----- ---
<S> <C> <C> <C> <C>
Ashford.com, Inc.
1998 Stock Incentive Plan
Options 3,622,322 N/A N/A N/A
Common Stock (par value $0.001) 3,622,322 $13 (2) $ 47,090,186 (2) $13,092

Ashford.com, Inc.
1999 Equity Incentive Plan
Options 2,375,000 N/A N/A N/A
Common Stock (par value $0.001) 2,375,000 $13 (2) $30,875,000 (2) $8,584

Ashford.com, Inc.
1999 Employee Stock Purchase Plan
Rights to Purchase 950,000 N/A N/A N/A
Common Stock (par value $0.001) 950,000 $13 (2) $12,350,000 (2) $3,434

Shares Acquired under Kenneth E. Kurtzman
Stock Option Agreement
Common Stock (par value $0.001) 1,852,500 $13 (2) $24,082,500 (2) $6,695
</TABLE>

<PAGE> 2

(1) This Registration Statement shall also cover any additional shares of
Common Stock which become issuable under the Ashford.com, Inc. 1998
Stock Incentive Plan, the Ashford.com, Inc. 1999 Equity Incentive Plan,
the Ashford.com, Inc. 1999 Employee Stock Purchase Plan, and the
Kenneth E. Kurtzman Stock Option Agreement (including the shares
already acquired under this stock option agreement) by reason of any
stock dividend, stock split, recapitalization or other similar
transaction effected without the receipt of consideration which results
in an increase in the number of the outstanding shares of Common Stock
of Ashford.com, Inc.

(2) Calculated solely for purposes of this offering under Rule 457(h) of
the Securities Act of 1933, as amended, on the basis of the fair market
value per share of Common Stock of Ashford.com, Inc. on September 22,
1999.

EXPLANATORY NOTE

Ashford.com, Inc. ("Ashford.com" or the "Company") has prepared this
Registration Statement in accordance with the requirements of Form S-8 under the
Securities Act of 1933, as amended (the "1933 Act"), to register shares of its
Common Stock, $0.001 par value per share. Under cover of this Form S-8 is a
Reoffer Prospectus that Ashford.com prepared in accordance with Part I of Form
S-3 under the Securities Act of 1933, as amended. The Reoffer Prospectus may be
utilized for reofferings and resales of up to 1,852,500 shares of Common Stock
acquired by Kenneth E. Kurtzman under the Kenneth E. Kurtzman Stock Option
Agreement.

<PAGE> 3

ASHFORD.COM, INC.

FORM S-8 CROSS REFERENCE SHEET SHOWING LOCATION OF INFORMATION
REQUIRED BY PART I OF FORM S-3

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<CAPTION>
Form S-3 Item Number Location/Heading in Prospectus
- -------------------- ------------------------------
<S> <C>
1. Forepart of Registration Statement and Outside Cover page
Front Cover page of Prospectus

2. Inside Front and Outside Back Cover Page of Available Information; Incorporation of Certain
Prospectus Information by Reference

3. Summary Information, Risk Factors and Ratio of Risk Factors
Earnings to Fixed Charges

4. Use of Proceeds Use of Proceeds

5. Determination of Offering Price Not applicable

6. Dilution Not applicable

7. Selling Security Holder Selling Security Holder

8. Plan of Distribution Plan of Distribution

9. Description of Securities to be Registered Not Applicable

10. Interests of Named Experts and Counsel Not Applicable

11. Material Changes Not Applicable

12. Incorporation of Certain Information Documents Incorporated by Reference

13. Disclosure of Commission Position on Indemnification
Indemnification for Securities Act Liabilities
</TABLE>

<PAGE> 4

REOFFER PROSPECTUS

SHARES OF COMMON STOCK
ASHFORD.COM, INC.

This Reoffer Prospectus relates to 1,852,500 shares of the common
stock, par value $0.001 (the "Common Stock"), of Ashford.com, Inc.
("Ashford.com" or the "Company"), which may be offered from time to time by
Kenneth E. Kurtzman (the "Registered Stockholder"). It is anticipated that the
Registered Stockholder will offer shares for sale at prevailing prices on the
Nasdaq National Market System on the date of sale. The Company will receive no
part of the proceeds of sale made hereunder. All expenses of registration
incurred in connection with this offering are being borne by the Company, but
all selling and other expenses incurred by the Registered Stockholder will be
borne by such Registered Stockholder.

The Common Stock is traded on the Nasdaq National Market System.

The Registered Stockholder and any broker executing selling orders on
behalf of the Registered Stockholder may be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, as amended (the "1933 Act"), in which
event commissions received by such broker may be deemed to be underwriting
commissions under the 1933 Act.

THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SHOULD BE
CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

No person is authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offering described herein, and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or any Registered Stockholder. This Prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, nor shall there be any sale of these
securities by any person in any jurisdiction in which it is unlawful for such
person to make such offer, solicitation or sale. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create an
implication that the information contained herein is correct as of any time
subsequent to the date hereof.

The date of this Prospectus is September 29, 1999.

<PAGE> 5

AVAILABLE INFORMATION

The Company will be subject to the informational reporting requirements
of the Securities Exchange Act of 1934, as amended (the "1934 Act") upon the
first date on which its Common Stock is registered under Section 12(g) of the
1934 Act and in accordance therewith will file reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). Such
reports, proxy statements and other information can be inspected and copied at
the Public Reference Room of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the SEC's regional offices at 219 South Dearborn Street, Chicago,
IL 60604; 26 Federal Plaza, New York, NY 10007; and 5757 Wilshire Boulevard, Los
Angeles, CA 90036, at prescribed rates. The Common Stock is quoted on the Nasdaq
National Market System. Reports, proxy statements, informational statements and
other information concerning the Company can be inspected at the offices of the
National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006.

The Company intends to furnish its stockholders with annual reports
containing additional financial statements and a report thereon by independent
certified public accountants.

A copy of any document incorporated by reference in the Registration
Statement (not including exhibits to the information that is incorporated by
reference unless such exhibits are specifically incorporated by reference into
the information that the Registration Statement incorporates) of which this
Reoffer Prospectus forms a part but which is not delivered with this Reoffer
Prospectus will be provided by the Company without charge to any person
(including any beneficial owner) to whom this Reoffer Prospectus has been
delivered upon the oral or written request of such person. Such request should
be directed to David Gow, Ashford.com, Inc., 3800 Buffalo Speedway, Suite 400,
Houston, Texas 77098. The Company's telephone number at that location is (713)
369-1300.

TABLE OF CONTENTS

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PAGE
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THE COMPANY.................................................................... 3

RISK FACTORS................................................................... 5

REGISTERED STOCKHOLDER......................................................... 19

PLAN OF DISTRIBUTION........................................................... 19

USE OF PROCEEDS................................................................ 20

DOCUMENTS INCORPORATED BY REFERENCE............................................ 20

INDEMNIFICATION................................................................ 20
</TABLE>

<PAGE> 6

THE COMPANY
OUR BUSINESS

We ("Ashford.com" or the "Company"), are a Web-based retailer focused
exclusively on luxury and premium products, including new and vintage premium
watches, fine writing instruments, fragrances, sunglasses and other luxury
goods. We currently carry over 7,000 new and vintage watch SKUs, or styles, and
currently offer a total of more than 8,000 styles across all of our product
categories. We believe that our current luxury and premium product offerings, as
well as other product categories such as leather goods, ties, scarves and
jewelry, are well suited for online commerce given brand recognition, generally
high average sales prices and relatively low average distribution and shipping
costs.

OUR MARKET OPPORTUNITY

We believe that many people find shopping for luxury and premium products
to be time-consuming and inconvenient because few traditional store-based
retailers are able to combine an extensive selection, convenient shopping hours,
broad geographic coverage and knowledgeable staff. Our online store is designed
to provide consumers with a convenient and enjoyable shopping experience in a
Web-based retail environment. The key components of the Ashford.com experience
include:

- - EXTENSIVE PRODUCT SELECTION. We offer a variety of luxury and premium
products, including what we believe is one of the largest selections of
premium watches available on the Internet.

- - COMPELLING CONTENT AND DETAILED PRODUCT INFORMATION. Our goal is to help
customers make informed purchasing decisions by providing significant content
and detailed product information.

- - COMPETITIVE PRICES AND COMPELLING VALUE. We believe we offer our customers
products at competitive prices and, combined with our high-quality shopping
experience, provide compelling value.

- - COMMITMENT TO EXCELLENT CUSTOMER SERVICE. Luxury and premium goods consumers
expect the highest level of personalized customer service and we aim to exceed
our customers' expectations by providing superior customer service, extended
warranties, complimentary shipping and gift-wrapping, and a generous return
policy.

- - PERSONALIZED SHOPPING EXPERIENCE. We provide convenient and useful shopping
services, such as an innovative online private reserve that allows customers
to choose and compare products side-by-side, gift suggestions and software
that allows real-time online customer interaction.

- - GEOGRAPHIC COVERAGE. By selling online, we are able to offer an extensive
selection of products throughout the U.S. and worldwide where the products
might not otherwise be available.

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<PAGE> 7

OUR STRATEGY

Our objective is to be one of the leading online retailers of luxury and
premium products. Key elements of our strategy include:

- - FOCUS ON THE PREMIUM RETAIL WATCH MARKET. We intend to capitalize on our
online market position in watches to become the primary destination for
consumers to purchase premium watches.

- - EXTEND LEADERSHIP POSITION IN FINE WATCHES TO OTHER LUXURY AND PREMIUM PRODUCT
CATEGORIES. We intend to enhance our product offerings by expanding into
additional luxury and premium product categories that we believe are well
suited for online commerce.

- - BUILD ASHFORD.COM EXPERIENCE AND BRAND. We intend to establish a brand
identity that will support the creation of an Internet luxury community and
provide leading brand owners a powerful new distribution channel consistent
with their luxury identities.

- - EXPAND RELATIONSHIPS WITH LEADING LUXURY BRANDS. Our intent is to be the
Internet retailer of choice for leading luxury and premium brand owners.

- - PURSUE WAYS TO INCREASE OUR SALES. We intend to pursue new opportunities to
increase our sales by expanding into new product categories, increasing
product selection in our existing departments and continuing to take steps to
add new customers and to promote repeat purchases.

- - EXPAND OUR OPERATIONAL AND SYSTEMS INFRASTRUCTURE. We plan to continue to
devote resources to growing our systems and operational infrastructure to
handle increased volume, enhance our service offerings and take advantage of
the unique characteristics of online luxury goods retailing.

CORPORATE INFORMATION

We were incorporated in Texas in March 1998 under the name NewWatch Company
and began conducting business as Ashford.com in May 1999. In July 1999, we
changed our name to Ashford.com, Inc. and reincorporated in Delaware. Our
corporate offices are located at 3800 Buffalo Speedway, Suite 400, Houston,
Texas 77098. The telephone number is (713) 369-1300. Information contained on
our Web site does not constitute part of this prospectus.

4
<PAGE> 8

RISK FACTORS

You should carefully consider the risks and uncertainties described below
and the other information in this prospectus before deciding whether to invest
in shares of our common stock. If any of the following risks actually occur, our
business, financial condition or operating results could be materially adversely
affected. In such case, the trading price of our common stock could decline and
you may lose part or all of your investment.

RISKS RELATED TO OUR BUSINESS

OUR LIMITED OPERATING HISTORY MAKES FUTURE FORECASTING DIFFICULT. BECAUSE MOST
OF OUR EXPENSES ARE FIXED BASED ON PLANNED OPERATING RESULTS, FAILURE TO
ACCURATELY FORECAST REVENUE COULD CAUSE NET LOSSES IN A GIVEN QUARTER TO BE
GREATER THAN EXPECTED.

We were incorporated in March 1998. We began selling products on our Web
site in April 1998 and the results for the 1999 fiscal year are the same as
those for the period from inception, March 6, 1998, through March 31, 1999.
Accordingly, we have an extremely limited operating history upon which to base
an evaluation of our business and prospects. Our business and prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as online commerce. As a
result of our limited operating history, it is difficult to accurately forecast
our net sales and we have limited meaningful historical financial data upon
which to base planned operating expenses. We base our current and future expense
levels on our operating plans and estimates of future net sales, and our
expenses are to a large extent fixed. Sales and operating results are difficult
to forecast because they generally depend on the volume and timing of the orders
we receive, which is uncertain. As a result, we may be unable to adjust our
spending in a timely manner to compensate for any unexpected revenue shortfall.
This inability could cause our net losses in a given quarter to be greater than
expected.

WE ANTICIPATE FUTURE LOSSES AND NEGATIVE CASH FLOW, WHICH MAY LIMIT OR DELAY OUR
ABILITY TO BECOME PROFITABLE.

Since our formation and through June 30, 1999, we have expended
approximately $4.3 million on our technology, Web site development, advertising,
hiring of personnel and startup costs. As a result, we have incurred losses
since our inception and expect to experience operating losses and negative cash
flow for the foreseeable future. We anticipate our losses will continue to
increase from current levels because we expect to incur additional costs and
expenses related to:

- - brand development, marketing and other promotional activities;

- - the expansion of our fulfillment operations, which includes supply
procurement, warehousing, order receipt, packaging and shipment;

- - the addition of customer service personnel;

- - the continued development of our Web site, the systems and staff that process
customer orders and payments, and our computer network;

- - the expansion of our product offerings and Web site content; and

- - development of relationships with strategic business partners.

As of June 30, 1999, we had an accumulated deficit of $4.4 million. We
incurred net losses of $1.3 million for the fiscal year ended March 31, 1999 and
$3.2 million for the quarter ended June 30, 1999.

5
<PAGE> 9

Our ability to become profitable depends on our ability to generate and
sustain substantially higher net sales while maintaining reasonable expense
levels. If we do achieve profitability, we cannot be certain that we would be
able to sustain or increase profitability on a quarterly or annual basis in the
future.

OUR OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE FAIL TO MEET
THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE OF
OUR COMMON STOCK MAY DECLINE SIGNIFICANTLY.

Our quarterly operating results have fluctuated in the past and we expect
both our quarterly and annual operating results to fluctuate significantly in
the future. Because our operating results are volatile and difficult to predict,
we believe that quarter-to-quarter comparisons of our operating results are not
a good indication of our future performance. In some future quarter our
operating results may fall below the expectations of securities analysts and
investors. In this event, the trading price of our common stock may decline
significantly. The following are material factors that may harm our business or
cause our operating results to fluctuate:

- - our inability to obtain new customers at reasonable cost, retain existing
customers or encourage repeat purchases;

- - seasonality;

- - our inability to manage inventory levels or control inventory theft;

- - our inability to manage our fulfillment operations;

- - our inability to adequately maintain, upgrade and develop our Web site, the
systems that we use to process customer orders and payments or our computer
network;

- - the ability of our competitors to offer new or enhanced Web sites, services or
products;

- - our inability to obtain product lines from our suppliers;

- - the availability and pricing of merchandise from vendors; and

- - increases in the cost of online or offline advertising.

A number of factors will cause our gross margins to fluctuate in future
periods, including the mix of watches and other products sold by us, inventory
management, marketing and supply decisions, inbound and outbound shipping and
handling costs, the level of product returns and the level of discount pricing
and promotional coupon usage. Any change in one or more of these factors could
reduce our gross margins in future periods.

WE EXPECT TO EXPERIENCE SEASONAL FLUCTUATIONS IN OUR NET SALES, WHICH WILL CAUSE
OUR QUARTERLY RESULTS TO FLUCTUATE AND COULD CAUSE OUR ANNUAL RESULTS TO BE
BELOW EXPECTATIONS.

We expect to experience significant seasonal fluctuations in our net sales
that will cause quarterly fluctuations in our operating results. In particular,
we realized approximately 40% of our net sales for fiscal year 1999 during the
fourth calendar quarter primarily due to gift purchases made during the holiday
season and this trend may continue in the future.

In anticipation of increased sales activity during the fourth calendar
quarter, we expect to hire a significant number of temporary employees to
bolster our permanent staff and significantly increase our inventory levels. For
this reason, if our net sales are below seasonal expectations during this
quarter, our annual operating results could be below the expectations of
securities analysts and investors.

6
<PAGE> 10

Due to our limited operating history, it is difficult to predict the
seasonal pattern of our sales and the impact of seasonality on our business and
financial results. In the future, our seasonal sales patterns may become more
pronounced, may strain our personnel and warehousing and order shipment
activities and may cause a shortfall in net sales as compared to expenses in a
given period.

IF WE ARE UNABLE TO PURCHASE OR CONTINUE TO PURCHASE PRODUCTS, PARTICULARLY
WATCHES, DIRECTLY FROM THE BRAND OWNERS, OUR NET SALES COULD DECREASE.

We currently purchase watches directly from the brand owner on
approximately 55 of the 70 watch brands that we sell and 9 of the 12 writing
instrument brands that we sell. Watches purchased directly from brand owners
accounted for approximately 70% of all watches that we sold through June 30,
1999. In particular, 17% of all watches sold were purchased from Seiko and 12%
were purchased from Citizen. We are negotiating with some of the remaining brand
owners to purchase those brands directly, in watches and other product
categories. We believe that purchasing directly from the brand owners will
provide us with a more predictable supply of products, as well as a lower cost
of goods. As a result, we believe that part of our success is contingent on
attaining or maintaining our ability to buy directly from the brand owners. If
we lose our ability to buy directly from the brand owners, our net sales or
margins may decrease.

OUR ABILITY TO MEET CONSUMER DEMAND IS IN PART DEPENDENT UPON THE AVAILABILITY
OF PRODUCTS PURCHASED INDIRECTLY FROM SOURCES OTHER THAN THE BRAND OWNERS. IF WE
ARE UNABLE TO OBTAIN POPULAR PRODUCTS THROUGH INDIRECT SOURCES, OUR NET SALES
WILL DECLINE.

We purchase brands indirectly from distributors and other third parties
that we do not purchase directly from the brand owners. Currently, we purchase
indirectly approximately 15 of the 70 watch brands that we sell, 3 of the 12
writing instrument brands that we sell and all of the fragrances and sunglasses
that we sell. Although no indirect source accounted for more than 3% of all
watches that we sold through June 30, 1999, watches purchased indirectly from
wholesalers, distributors and retailers accounted for approximately 30% of all
watches that we sold. The availability of products purchased indirectly depends
on many factors, including consumer demand, manufacturer production and fashion
trends. Since there are no guarantees that we will be able to obtain a
sufficient supply of products indirectly from third-party distributors and other
suppliers, customer demand may, at times, exceed our supply of those products.
If this occurs we could lose customers and our net sales would decline. In
addition, the luxury goods brand owners could establish procedures to limit or
control our ability to purchase products indirectly and several brand owners in
the U.S. have distinctive legal rights rendering them the only legal importer of
their respective brands into the U.S. In the event we acquire such products
indirectly from distributors and other third parties who may not have complied
with applicable Customs laws and regulations, such goods can be subject to
seizure from our inventory by U.S. Customs, and the importer may have a civil
action for damages against us. As it is often difficult to ascertain the
original circumstances of importation of certain goods offered to us by our
distributors and other third parties, this could impact our ability to obtain
sufficient quantities of popular luxury goods, such as watches, and cause
customer dissatisfaction.

IF WE ARE UNABLE TO OBTAIN SUFFICIENT QUANTITIES OF POPULAR LUXURY AND PREMIUM
PRODUCTS, OUR NET SALES COULD DECREASE.

If we are not able to offer our customers a sufficient supply and selection
of products in a timely manner, we could lose customers and our net sales could
be below expectations. Our success depends on our ability to purchase products
in sufficient quantities at competitive prices, particularly for the holiday
shopping season. As is common in the industry, we generally do not have
long-term or exclusive arrangements with brand owners, distributors or brokers
that guarantee the availability of products for resale.

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In the luxury goods market, a product or fashion style periodically becomes
intensely popular. From time to time, we may have trouble obtaining sufficient
product allocations of particularly popular brands. In addition, we believe that
some of our suppliers may establish their own online retailing efforts, which
may impact our ability to get sufficient product allocations from suppliers. In
several cases, the brands that we wish to carry have delayed establishing a
relationship with us until they have their own Web site up and running. In other
cases, the brand owners distribute only a small amount of product and rely
partially on the scarcity of that product to provide a merchandising mystique.
It is unlikely that we will obtain product for our Web site from brands who
follow the scarcity mystique, and there is no assurance that we will actually
obtain relationships within all sectors that we have planned to offer.
Therefore, we do not have a predictable or guaranteed supply of products.

BECAUSE WE CARRY ALMOST ALL OF THE PRODUCTS WE SELL IN INVENTORY, IF WE ARE
UNABLE TO ACCURATELY PREDICT AND PLAN FOR CHANGES IN CONSUMER DEMAND OUR NET
SALES AND GROSS MARGINS MAY DECREASE.

We carry inventory on approximately 75% of the products we sell. At June
30, 1999, we held approximately $6.2 million of products in inventory and we
expect this number will increase in the future in order to support possible
higher sales levels. As a result, the rapidly changing trends in consumer tastes
in the market for luxury and premium products subject us to significant
inventory risks. It is critical to our success that we accurately predict these
trends and do not overstock unpopular products. The demand for specific products
can change between the time the products are ordered and the date of receipt. We
are particularly exposed to this risk because we derive a majority of our net
sales in the fourth calendar quarter of each year. Our failure to sufficiently
stock popular products in advance of the fourth calendar quarter would harm our
operating results for the entire fiscal year. In the event that one or more
products do not achieve widespread consumer acceptance, we may be required to
take significant inventory markdowns, which could reduce our net sales and gross
margins. This risk may be greatest in the first calendar quarter of each year,
after we have significantly increased inventory levels for the holiday season.
We believe that this risk will increase as we begin to offer additional luxury
items due to our lack of experience in purchasing these items. In addition, to
the extent that demand for our products increases over time, we may be forced to
increase inventory levels. Any increase would subject us to additional inventory
risks.

IF WE EXPERIENCE SIGNIFICANT INVENTORY THEFT, OUR GROSS PROFIT MARGIN WOULD
DECREASE.

Although immaterial to date, in the past we have experienced theft of
merchandise shipments in route from our facility to our customers. In the
future, we expect that we may also experience theft of merchandise while it is
being held in our fulfillment facility. We have worked with our shipping
carriers and have taken steps aimed at preventing theft. If these steps are
inadequate or if security measures fail at our fulfillment facility, we could
incur significant inventory theft, which could cause gross profit margins and
results of operations to decrease significantly.

SALES OF LUXURY GOODS ARE PARTICULARLY SUSCEPTIBLE TO GENERAL ECONOMIC
DOWNTURNS. IF GENERAL ECONOMIC CONDITIONS DETERIORATE, OUR SALES COULD SUFFER.

Purchases of luxury products are typically discretionary for consumers and
may be particularly affected by negative trends in the general economy. The
success of our operations depends to a significant extent on a number of factors
relating to discretionary consumer spending and affecting disposable consumer
income, such as employment, wages and salaries, business conditions, interest
rates, exchange rates, availability of credit and taxation. In addition, because
the purchase of luxury products is relatively discretionary, any reduction in
disposable income in general may affect us more significantly than companies in
other industries.

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<PAGE> 12

TO MANAGE OUR GROWTH AND EXPANSION, WE NEED TO IMPROVE AND IMPLEMENT FINANCIAL
AND MANAGERIAL CONTROLS AND IMPROVE OUR REPORTING SYSTEMS AND PROCEDURES. IF WE
ARE UNABLE TO DO SO SUCCESSFULLY, WE MAY NOT BE ABLE TO MANAGE GROWTH
EFFECTIVELY AND OUR OPERATING RESULTS WOULD BE HARMED.

Our rapid growth in personnel and operations has placed, and will continue
to place, a significant strain on our management, information systems and
resources. In order to manage this growth effectively, we need to continue to
improve our financial and managerial controls and reporting systems and
procedures. Our management team has been assembled recently and has not worked
together extensively in the past. There can be no assurance that the management
team can work together effectively and can implement our internal growth and
acquisition strategies. Any inability of our management to integrate additional
companies, customer databases, merchandise lines, categories of merchandise,
technology advances, fulfillment systems, and customer service into operations
and to eliminate unnecessary duplication may have a materially adverse effect on
our business, financial condition and results of operations.

IF WE ARE UNABLE TO SUCCESSFULLY IMPLEMENT OUR NEW ACCOUNTING AND FINANCIAL
REPORTING SYSTEMS, OUR STOCK PRICE COULD DECLINE.

We anticipate expanding our financial and management information systems to
accommodate new data. If we fail to successfully implement and integrate our new
financial reporting and management information systems with our existing systems
or if we are not able to expand these systems to accommodate our growth, we may
not have adequate, accurate or timely financial information. Our failure to have
adequate, accurate or timely financial information would hinder our ability to
manage our business and operating results. If we grow rapidly, we will face
additional challenges in upgrading and maintaining our financial and reporting
systems.

WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.

We expect competition in the online sale of luxury and premium products to
intensify in the future. Increased competition is likely to result in price
pressure, reduced gross margins and loss of market share, any of which could
seriously harm our net sales and operating results. In addition, the retail
watch industry is intensely competitive. We currently or potentially compete
with a variety of other companies, including:

- - traditional retailers of luxury and premium products;

- - brand owners of the products we sell;

- - other online retailers of luxury and premium products; and

- - catalog retailers.

Many of our competitors have advantages over us including longer operating
histories, greater brand recognition and significantly greater financial, sales
and marketing and other resources. In addition, traditional store-based
retailers offer customers benefits that are not obtainable over the Internet,
such as enabling customers to physically inspect a product before purchase and
not incurring costs associated with maintaining a Web site.

IF WE ARE UNABLE TO BUILD AWARENESS OF THE ASHFORD.COM BRAND, WE MAY NOT BE ABLE
TO COMPETE EFFECTIVELY AGAINST COMPETITORS WITH GREATER NAME RECOGNITION AND OUR
SALES COULD BE ADVERSELY AFFECTED.

If we are unable to economically achieve or maintain a leading position in
online commerce or to promote and maintain our brand, our business, results of
operations and financial condition could suffer. We believe that the importance
of brand recognition will increase as more

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<PAGE> 13

companies engage in commerce over the Internet. Development and awareness of our
brand will depend largely on our success in increasing our customer base. If the
leading brand owners do not perceive us as an effective marketing and sales
channel for their merchandise, or consumers do not perceive us as offering a
desirable way to purchase merchandise, we may be unsuccessful in promoting and
maintaining our brand. Furthermore, in order to attract and retain customers and
to promote and maintain our brand in response to competitive pressures, we plan
to increase our marketing and advertising budgets and otherwise to increase
substantially our financial commitment to creating and maintaining brand loyalty
among vendors and consumers.

IF WE ENTER NEW BUSINESS CATEGORIES THAT DO NOT ACHIEVE MARKET ACCEPTANCE, OUR
BRAND AND REPUTATION COULD BE DAMAGED AND WE COULD FAIL TO ATTRACT NEW
CUSTOMERS.

If we launch or acquire a new department or product category that is not
favorably received by consumers, our brand or reputation could be damaged. This
damage could impair our ability to attract new customers, which could cause our
net sales to fall below expectations. An expansion of our business to include
other luxury goods will require significant additional expenses, and strain our
management, financial and operational resources. This type of expansion would
also subject us to increased inventory risk. We may choose to expand our
operations by developing other new departments or product categories, promoting
new or complementary products, expanding the breadth and depth of products and
services offered or expanding our market presence through relationships with
third parties. In addition, we may pursue the acquisition of other new or
complementary businesses, products or technologies.

IF OUR STRATEGY TO SELL PRODUCTS OUTSIDE OF THE UNITED STATES IS NOT SUCCESSFUL,
OUR INCREASES IN OPERATING EXPENSES MAY NOT BE OFFSET BY INCREASED SALES.

If we are not able to successfully market, sell and distribute our products
in foreign markets or if certain risks and uncertainties of doing business in
foreign markets prove insurmountable then these factors could have a material
adverse effect on our future global operations, and consequently, on our
operating margins. Although we currently may not sell merchandise to customers
outside the United States, we intend to do so in the future. We do not currently
have any overseas fulfillment or distribution facility or arrangement or any Web
site content localized for foreign markets, and we cannot be certain that we
will be able to establish a global presence. In addition, there are certain
risks inherent in doing business on a global level, including:

- - regulatory requirements;

- - export restrictions;

- - tariffs and other trade barriers;

- - difficulties in staffing and managing foreign operations;

- - difficulties in protecting intellectual property rights;

- - longer payment cycles;

- - problems in collecting accounts receivable;

- - political instability;

- - fluctuations in currency exchange rates; and

- - potentially adverse tax consequences.

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<PAGE> 14

IF WE DO NOT SUCCESSFULLY EXPAND OUR FULFILLMENT OPERATIONS, OUR NET SALES MAY
FALL BELOW EXPECTATIONS.

We must be able to quickly and efficiently fill customer orders. If we do
not successfully expand our fulfillment operations to accommodate increases in
demand, particularly during the fourth calendar quarter of each year, we will
not be able to increase our net sales in accordance with the expectations of
securities analysts and investors. In the retail industry, fourth quarter sales
are often as much as 50% of total annual sales. Our success depends on our
ability to rapidly expand our fulfillment operations and information systems in
order to accommodate increases in customer orders, whether due to seasonal
factors or growth of our business. Our planned expansion may cause disruptions
in our business. Our current fulfillment operations may not be adequate to
accommodate increases in customer demand that may occur during the fourth
calendar quarter of 1999.

IF WE EXPERIENCE PROBLEMS WITH OUR THIRD-PARTY SHIPPING SERVICES, WE COULD LOSE
CUSTOMERS.

We rely upon third-party carriers, primarily Federal Express and UPS, for
product shipments, including shipments to and from our warehouse. We are
therefore subject to the risks, including employee strikes and inclement
weather, associated with these carriers' ability to provide delivery services to
meet our shipping needs. In addition, failure to deliver products to our
customers in a timely manner would damage our reputation and brand.

OUR OPERATING RESULTS DEPEND ON OUR INTERNALLY DEVELOPED WEB SITE, NETWORK
INFRASTRUCTURE AND TRANSACTION-PROCESSING SYSTEMS. IF WE DO NOT SUCCESSFULLY
EXPAND OUR WEB SITE AND THE SYSTEMS THAT PROCESS CUSTOMER ORDERS, WE COULD LOSE
CUSTOMERS AND NET SALES COULD BE REDUCED.

The satisfactory performance, reliability and availability of our Web site,
transaction-processing systems and network infrastructure are critical to our
operating results, as well as to our ability to attract and retain customers and
maintain adequate customer service levels. Any system interruptions that result
in the unavailability of our Web site or reduced performance of the transaction
systems would reduce the volume of sales and the attractiveness of our service
offerings. This would seriously harm our business, operating results and
financial condition. We are currently upgrading our system architecture to
accommodate increased traffic and processing needs. We expect this process to be
time consuming and expensive and our upgrade may not be successful.

We use internally developed systems for our Web site and substantially all
aspects of transaction processing, including customer profiling and order
verifications. We have experienced periodic systems interruptions due to server
failure, which we believe will continue to occur from time to time. If the
volume of traffic on our Web site or the number of purchases made by customers
increases by more than 20 times our current sales levels, we will need to
further expand and upgrade our technology, transaction processing systems and
network infrastructure. We have experienced and expect to continue to experience
temporary capacity constraints due to sharply increased traffic during sales or
other promotions, which cause unanticipated system disruptions, slower response
times, degradation in levels of customer service, impaired quality and delays in
reporting accurate financial information.

If we fail to rapidly upgrade our Web site or toll-free call center in
order to accommodate increased traffic, we may lose customers, which would
reduce our net sales. Furthermore, if we fail to rapidly expand the computer
systems that we use to process and ship customer orders and process payments, we
may not be able to successfully fulfill customer orders. As a result, we could
lose customers and our net sales could be reduced. In addition, our failure to
rapidly upgrade our Web site or expand these computer systems without system
downtime, particularly

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<PAGE> 15

during the fourth calendar quarter, would further reduce our net sales. We may
experience difficulty in improving and maintaining our systems if our employees
or contractors that develop or maintain our computer systems become unavailable
to us. We have experienced periodic systems interruptions, which we believe will
continue to occur, while enhancing and expanding these computer systems.

OUR FACILITIES AND SYSTEMS ARE VULNERABLE TO NATURAL DISASTERS AND OTHER
UNEXPECTED PROBLEMS. THE OCCURRENCE OF A NATURAL DISASTER OR OTHER UNEXPECTED
PROBLEM COULD DAMAGE OUR REPUTATION AND BRAND AND REDUCE OUR NET SALES.

The occurrence of a natural disaster or unanticipated problems at our
leased or offsite hosting facilities that house substantially all of our
computer and communications hardware systems could cause interruptions or delays
in our business, destroy data or render us unable to accept and fulfill customer
orders. Any of these interruptions or delays at these facilities would reduce
our net sales. In addition, our systems and operations are vulnerable to damage
or interruption from fire, flood, power loss, telecommunications failure,
break-ins, earthquake and similar events. We have not established specific
procedures for handling damage or interruptions caused by these events and our
business interruption insurance may not adequately compensate us for losses that
may occur. In addition, the failure by the third-party facility to provide the
data communications capacity required by us, as a result of human error, natural
disaster or other operational disruptions, could interrupt our service. The
occurrence of any or all of these events could damage our reputation and brand
and impair our business.

OUR NET SALES COULD DECREASE IF OUR ONLINE SECURITY MEASURES FAIL.

Our relationships with our customers may be adversely affected if the
security measures that we use to protect their personal information, such as
credit card numbers, are ineffective. If, as a result, we lose many customers,
our net sales could decrease. We rely on security and authentication technology
that we license from third parties. With this technology, we perform real-time
credit card authorization and verification with our bank. We cannot predict
whether events or developments will result in a compromise or breach of the
technology we use to protect a customer's personal information. Furthermore, our
servers may be vulnerable to computer viruses, physical or electronic break-ins
and similar disruptions. We may need to expend significant additional capital
and other resources to protect against a security breach or to alleviate
problems caused by any breaches. We cannot assure that we can prevent all
security breaches.

OUR NET SALES AND GROSS MARGINS WOULD DECREASE IF WE EXPERIENCE SIGNIFICANT
CREDIT CARD FRAUD.

A failure to adequately control fraudulent credit card transactions would
reduce our net sales and our gross margins because we do not carry insurance
against this risk. We have developed procedures to help us to detect the
fraudulent use of credit card information. Nonetheless, to date, we have
realized losses of approximately $36,000 as a result of orders placed with
fraudulent credit card data even though the associated financial institution
approved payment of the orders. Under current credit card practices, we are
liable for fraudulent credit card transactions because we do not obtain a
cardholder's signature.

IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR SERVICES COULD BECOME
OBSOLETE AND WE COULD LOSE CUSTOMERS.

If we face material delays in introducing new services, products and
enhancements, our customers may forego the use of our services and use those of
our competitors. To remain competitive, we must continue to enhance and improve
the functionality and features of our online store. The Internet and the online
commerce industry are rapidly changing. If competitors

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<PAGE> 16

introduce new products and services, or if new industry standards and practices
emerge, our existing Web site and proprietary technology and systems may become
obsolete. To develop our Web site and technology entails significant technical
and business risks. We may use new technologies ineffectively or we may fail to
adapt our technology to meet customer requirements or emerging industry
standards.

INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD IMPAIR OUR
BUSINESS.

Other parties may assert infringement or unfair competition claims against
us. We cannot predict whether they will do so, or whether any future assertions
or prosecutions will harm our business. If we are forced to defend against any
infringement claims, whether they are with or without merit or are determined in
our favor, then we may face costly litigation, diversion of technical and
management personnel, or product shipment delays. Further, the outcome of a
dispute may be that we would need to develop non-infringing technology or enter
into royalty or licensing agreements. Royalty or licensing agreements, if
required, may be unavailable on terms acceptable to us, or at all.

IF THE PROTECTION OF OUR TRADEMARKS AND PROPRIETARY RIGHTS IS INADEQUATE, OUR
BRAND AND REPUTATION COULD BE IMPAIRED AND WE COULD LOSE CUSTOMERS.

The steps we take to protect our proprietary rights may be inadequate. We
regard our copyrights, service marks, trademarks, trade dress, trade secrets and
similar intellectual property as critical to our success. We rely on trademark
and copyright law, trade secret protection and confidentiality or license
agreements with our employees, customers, partners and others to protect our
proprietary rights. In April and in May 1999, we filed applications with the
United States Patent and Trademark Office for registration of the trademarks
"ASHFORD" and "Ashford.com" for multiple classes of goods. In September 1999, we
filed applications with the United States Patent and Trademark Office for
registration of the Ashford.com design mark and the stylized "A" design mark for
multiple classes of goods. Effective trademark, service mark, copyright and
trade secret protection may not be available in every country in which we will
sell our products and services online. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. Therefore, we may be unable to prevent third
parties from acquiring domain names that are similar to, infringe upon or
otherwise decrease the value of our trademarks and other proprietary rights.

THE LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY PERSONNEL, OR OUR FAILURE TO
ATTRACT, ASSIMILATE AND RETAIN OTHER HIGHLY QUALIFIED PERSONNEL IN THE FUTURE,
COULD DISRUPT OUR OPERATIONS AND RESULT IN LOSS OF NET SALES.

Our future performance will depend on the continued services of our
management and key personnel and the ability to attract additional management
and key personnel. The loss of the services of one or more of our key personnel
could seriously interrupt our business. We depend on the continued services and
performance of our senior management and other key personnel. Our future success
also depends upon the continued service of our executive officers and other key
sales, marketing and support personnel. Several of our senior management joined
us in the last six months, including our Chief Executive Officer, Chief
Financial Officer, Vice President of Marketing, Vice President of Business
Development, Vice President of Merchandising and Vice President, General Counsel
and Secretary. Our future success depends on these officers effectively working
together with our original management team. Our relationships with these
officers and key employees are at will and none of our officers or key employees
is bound by an employment agreement for any specific term. We currently have key
person life insurance policies covering Kenneth E. Kurtzman and James H.
Whitcomb, Jr. While the proceeds of these policies might assist us in recruiting
executive officers, the proceeds would not address the potential disruption to
our business of recruiting and integrating new senior management.

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<PAGE> 17

WE MAY NOT ACHIEVE EXPECTED BENEFITS OF ANY INVESTMENTS OR ACQUISITIONS THAT WE
COMPLETE.

As we identify appropriate opportunities, we intend to make acquisitions of
or investments in complementary companies, products or technologies. We may not
correctly identify or realize the anticipated benefits of any acquisition or
investment. For example, we may not be able to successfully assimilate the
additional personnel, operations, acquired technology and products into our
business. Acquisitions may further strain our existing financial and managerial
controls and reporting systems and procedures. In addition, key personnel of
acquired companies may decide not to work for us. These difficulties could
disrupt our ongoing business, distract our management and employees or increase
our expenses. Further, any physical expansion in facilities due to an
acquisition may result in disruptions that seriously impair our business. We are
not experienced in managing facilities or operations in geographically distant
areas. Finally, in connection with any future acquisitions, we may incur debt or
issue equity securities as part or all of the consideration for the acquired
company's assets or capital stock. We may be unable to obtain sufficient
additional financing on favorable terms, or at all. Equity issuances could be
dilutive to our existing stockholders or us.

CONSUMER DEMAND FOR OUR PRODUCTS AND SERVICES WOULD DECREASE IF THE SOFTWARE,
COMPUTER TECHNOLOGY AND OTHER SYSTEMS WE USE ARE NOT YEAR 2000 COMPLIANT.

Any failure of our material systems, our suppliers' material systems or the
Internet to be year 2000 compliant would materially impact our operating
expenses and sales. Other consequences would include difficulties in operating
our Web site effectively, taking product orders, making product deliveries or
conducting other fundamental parts of our business. We are currently assessing
the year 2000 readiness of the software, computer technology and other services
that we use. At this time, we have not yet developed a contingency plan to
address situations that may result if we or our suppliers are unable to achieve
year 2000 compliance. The cost of developing and implementing a plan, if
necessary, could be material. We also depend on the year 2000 compliance of the
computer systems and financial services used by consumers. A significant
disruption in the ability of consumers to reliably access the Internet or
portions of it or to use their credit cards would have an adverse effect on
demand for our services, our net sales and our gross profit.

EXECUTIVE OFFICERS, DIRECTORS AND ENTITIES AFFILIATED WITH THEM WILL CONTINUE TO
HAVE SUBSTANTIAL CONTROL OVER ASHFORD.COM AFTER THE OFFERING WHICH COULD DELAY
OR PREVENT A CHANGE IN OUR CORPORATE CONTROL FAVORED BY OUR OTHER STOCKHOLDERS.

Executive officers, directors and entities affiliated with them, if acting
together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions. These
stockholders will, in aggregate, beneficially own approximately 51% of our
outstanding common stock following the completion of the initial public
offering.

IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR STOCKHOLDERS.

Provisions of our certificate of incorporation, our by-laws and Delaware
law could make it more difficult for a third party to acquire us, even if doing
so would be beneficial to our stockholders. In particular, our certificate of
incorporation provides for a board of directors that is divided into three
classes which may issue preferred stock without any stockholder action. Our
certificate of incorporation also does not allow stockholders to act by written
consent or for cumulative voting in the election of directors. In addition,
Section 203 of the Delaware General

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<PAGE> 18

Corporation Law places restrictions on business combinations with interested
stockholders.

INVESTORS IN THE INITIAL PUBLIC OFFERING WILL EXPERIENCE IMMEDIATE DILUTION.

The initial public offering price was substantially higher than the book
value per share of the outstanding common stock immediately after the initial
public offering. Accordingly, if you purchased common stock in the initial
public offering, you have:

- paid a price per share that substantially exceeded the value of our
assets after subtracting liabilities; and

- contributed 64% of our capital but only own 17% of the shares
outstanding.

RISKS RELATED TO OUR INDUSTRY

WE DEPEND ON INCREASING USE OF THE INTERNET AND ON THE GROWTH OF ONLINE
COMMERCE.

Our future revenues substantially depend upon the increased acceptance and
use of the Internet and other online services as a medium of commerce. Rapid
growth in the use of the Internet, the Web and online services is a recent
phenomenon. As a result, acceptance and use may not continue to develop at
historical rates and a sufficiently broad base of customers may not adopt,
and/or continue to use, the Internet and other online services as a medium of
commerce. Demand and market acceptance for recently introduced services and
products over the Internet are subject to a high level of uncertainty and there
exist few proven services and products.

In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. If the Internet continues to
experience significant expansion in the number of users, frequency of use or
bandwidth requirements, the infrastructure for the Internet may be unable to
support the demands placed upon it. In addition, the Internet could lose its
viability as a commercial medium due to delays in the development or adoption of
new standards and protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. Changes in, or
insufficient availability of, telecommunications services to support the
Internet also could result in slower response times and adversely affect usage
of the Internet generally.

Our business, financial condition and results of operations would be
seriously harmed if:

- - use of the Internet, the Web and other online services does not continue to
increase or increases more slowly than expected;

- - the infrastructure for the Internet, the Web and other online services does
not effectively support expansion that may occur;

- - the Internet, the Web and other online services do not become a viable
commercial marketplace; or

- - traffic to our Web site decreases or fails to increase as expected or if we
spend more than we expect to attract visitors to our Web site.

IF WE ARE UNABLE TO ACQUIRE THE NECESSARY WEB DOMAIN NAMES, OUR BRAND AND
REPUTATION COULD BE DAMAGED AND WE COULD LOSE CUSTOMERS.

We may be unable to acquire or maintain Web domain names relating to our
brand in the United States and other countries in which we may conduct business.
As a result, we may be

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<PAGE> 19

unable to prevent third parties from acquiring and using domain names relating
to our brand, which could damage our brand and reputation and take customers
away from our Web site. We currently hold the "Ashford.com" and "newwatch.com"
domain names and may seek to acquire additional domain names. Governmental
agencies and their designees generally regulate the acquisition and maintenance
of domain names. The regulation of domain names in the United States and in
foreign countries is subject to change in the near future. The changes in the
United States are expected to include a transition from the current system to a
system that is controlled by a non-profit corporation and the creation of
additional top-level domains. Governing bodies may establish additional
top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names.

WE MAY NEED TO CHANGE THE MANNER IN WHICH WE CONDUCT OUR BUSINESS IF GOVERNMENT
REGULATION INCREASES.

The adoption or modification of laws or regulations relating to the
Internet could adversely affect the manner in which we currently conduct our
business. In addition, the growth and development of the market for online
commerce may lead to more stringent consumer protection laws, both in the United
States and abroad, that may impose additional burdens on us. Laws and
regulations directly applicable to communications or commerce over the Internet
are becoming more prevalent. The United States Congress recently enacted
Internet laws regarding children's privacy, copyrights, taxation and the
transmission of sexually explicit material. The European Union recently enacted
its own privacy regulations. Laws regulating the Internet, however, remain
largely unsettled, even in areas where there has been some legislative action.
It may take years to determine whether and how existing laws such as those
governing intellectual property, privacy, libel, and taxation apply to the
Internet.

In order to comply with new or existing laws regulating online commerce, we
may need to modify the manner in which we do business, which may result in
additional expenses. For instance, we may need to spend time and money revising
the process by which we fulfill customer orders to ensure that each shipment
complies with applicable laws. We may need to hire additional personnel to
monitor our compliance with applicable laws. We may also need to modify our
software to further protect our customers' personal information.

WE MAY BE SUBJECT TO LIABILITY FOR THE INTERNET CONTENT THAT WE PUBLISH.

As a publisher of online content, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement, or other
claims based on the nature and content of materials that we publish or
distribute. If we face liability, then our reputation and our business may
suffer. In the past, plaintiffs have brought these types of claims and sometimes
successfully litigated them against online companies. In addition, we could be
exposed to liability with respect to the unauthorized duplication of content or
unauthorized use of other parties' proprietary technology. Although we carry
general liability insurance, our insurance currently does not cover claims of
these types. We cannot be certain that we will be able to obtain insurance to
cover the claims on reasonable terms or that it will be adequate to indemnify us
for all liability that may be imposed on us. Any imposition of liability that is
not covered by our insurance or is in excess of insurance coverage could
decrease our gross profit.

OUR NET SALES COULD DECREASE IF WE BECOME SUBJECT TO SALES OR OTHER TAXES.

If one or more states or any foreign country successfully asserts that we
should collect sales or other taxes on the sale of our products, our net sales
and results of operations could be harmed. We do not currently collect sales or
other similar taxes for physical shipments of goods into states other than
Texas. However, one or more local, state or foreign jurisdictions may seek to
impose sales tax collection obligations on us. In addition, any new operation
could subject our shipments in other states to state sales taxes under current
or future laws. If we become

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<PAGE> 20

obligated to collect sales taxes, we will need to update our system that
processes customer orders to calculate the appropriate sales tax for each
customer order and to remit the collected sales taxes to the appropriate
authorities. These upgrades will increase our operating expenses. In addition,
our customers may be discouraged from purchasing products from us because they
have to pay sales tax, causing our net sales to decrease. As a result, we may
need to lower prices to retain these customers.

RISKS RELATED TO SECURITIES MARKETS

WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.

We cannot be certain that additional financing will be available to us on
favorable terms when required, or at all. If we raise additional funds through
the issuance of equity, equity-related or debt securities, the securities may
have rights, preferences or privileges senior to those of the rights of our
common stock and our stockholders may experience additional dilution. We require
substantial working capital to fund our business. Since our inception, we have
experienced negative cash flow from operations and expect to experience
significant negative cash flow from operations for the foreseeable future. We
currently anticipate that the net proceeds of this offering, together with our
available funds, will be sufficient to meet our anticipated needs for working
capital and capital expenditures through at least the next 12 months. After
that, we may need to raise additional funds.

PRIOR TO THE INITIAL PUBLIC OFFERING, NO PUBLIC MARKET FOR OUR COMMON STOCK
EXISTED AND AN ACTIVE TRADING MARKET MAY NOT DEVELOP OR BE SUSTAINED FOLLOWING
THE INITIAL PUBLIC OFFERING.

Prior to the initial public offering, there was no public market for our
common stock. We cannot be certain that an active trading market for our common
stock will develop or be sustained. Further, we cannot be certain that the
market price of our common stock will not decline below the initial public
offering price. The initial public offering price was determined by negotiation
among us and the underwriters based upon several factors and may not be
indicative of future market prices for our common stock.

OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
FOR INDIVIDUAL STOCKHOLDERS.

The market price for our common stock is likely to be highly volatile and
subject to wide fluctuations in response to factors including the following,
some of which are beyond our control:

- - actual or anticipated variations in our quarterly operating results;

- - announcements of technological innovations or new products or services by us
or our competitors;

- - changes in financial estimates by securities analysts;

- - conditions or trends in the Internet and/or online commerce industries;

- - changes in the economic performance and/or market valuations of other
Internet, online commerce or retail companies;

- - announcements by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;

- - additions or departures of key personnel;

- - release of lock-up or other transfer restrictions on our outstanding shares of
common stock or sales of additional shares of common stock; and

- - potential litigation.

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<PAGE> 21

In addition, the stock market has from time to time experienced extreme
price and volume fluctuations. These broad market fluctuations may adversely
affect the market price of our common stock.

IF OUR STOCK PRICE IS VOLATILE, WE COULD FACE A SECURITIES CLASS ACTION LAWSUIT.

In the past, following periods of volatility in the market price of their
stock, many companies have been the subject of securities class action
litigation. If we were sued in a securities class action, it could result in
substantial costs and a diversion of management's attention and resources and
would cause our stock price to fall.

AFTER THE INITIAL PUBLIC OFFERING, 30,614,429, OR 83%, OF OUR TOTAL OUTSTANDING
SHARES ARE RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN
THE NEAR FUTURE. THIS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP
SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.

After the initial public offering, we have outstanding 36,864,429 shares of
common stock. This includes the 6,250,000 we sold in the initial public
offering, which may be resold in the public market immediately. The remaining
83%, or 30,614,429 shares, of our total outstanding shares will become available
for resale in the public market from time to time beginning 180 days after the
closing of the initial public offering.

As restrictions on resale end, the market price could drop significantly if
the holders of these restricted shares sell them or are perceived by the market
as intending to sell them.

SOME SHARES IN THE INITIAL PUBLIC OFFERING MAY HAVE BEEN OFFERED OR SOLD IN
VIOLATION OF THE SECURITIES ACT OF 1933.

Prior to the effectiveness of the registration statement covering the
shares of our common stock sold in the initial public offering, Deutsche Banc
Alex. Brown, an underwriter of this offering, provided written materials to
approximately 485 persons that we had designated as potential purchasers of up
to 437,500 shares of common stock in the initial public offering through a
directed share program. These materials may constitute a prospectus that does
not meet the requirements of the Securities Act of 1933. No person who received
these written materials should rely upon them in any manner in making a decision
whether to purchase shares of common stock in the initial public offering.

If the distribution of these materials by Deutsche Banc Alex. Brown did
constitute a violation of the Securities Act of 1933, the recipients of these
materials who purchased common stock in the initial public offering through the
directed share program would have the right, for a period of one year from the
date of their purchase of common stock, to obtain recovery of the consideration
paid in connection with their purchase of common stock or, if they had already
sold the stock, sue us for damages resulting from their purchase of common
stock. These damages could total up to approximately $5.7 million, plus
interest, based on the initial public offering price of $13.00 per share, if
these investors seek recovery or damages after an entire loss of their
investment. If this occurs, our business, results of operations and financial
condition would be harmed.

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<PAGE> 22

REGISTERED STOCKHOLDER

The Reoffer Prospectus relates to shares of Common Stock which have
been acquired by Kenneth E. Kurtzman (the "Registered Stockholder"). The
Registered Stockholder acquired shares of Common Stock to be offered hereunder
pursuant to the exercise of an option granted under the Kenneth E. Kurtzman
Stock Option Agreement.

The following table sets forth certain information with respect to the
Registered Stockholder as of September 27, 1999:

<TABLE>
<CAPTION>
Number of
Number of Number of Shares Owned Percentage of
Registered Position with Shares Owned Shares to be After Ownership
Stockholder the Company Before Offering Offered Hereby Offering After Offering
------------------------- ----------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Kenneth E. Chief Executive Officer 1,852,500 1,852,500 0 0%
Kurtzman and Director
</TABLE>

PLAN OF DISTRIBUTION

The shares of Common Stock covered by this Reoffer Prospectus are
being registered by the Company for the account of the Registered Stockholder.

The Registered Stockholder may sell the shares in one or more
transactions (which may involve one or more block transactions) on the Nasdaq
National Market, in sales occurring in the public market off such system, in
privately negotiated transactions or in a combination of such transactions.
Each such sale may be made either at market prices prevailing at the time of
such sale or at negotiated prices. The Registered Stockholder may sell some
or all of the shares in transactions involving broker-dealers, who may act as
agent or acquire the shares as principal. Any broker-dealer participating in
such transactions as agent may receive commissions from the Registered
Stockholder (and, if they act as agent for the purchaser of such shares, from
such purchaser). The Registered Stockholder will pay usual and customary
brokerage fees. Broker-dealers may agree with the Registered Stockholder to
sell a specified number of shares at a stipulated price per share and, to the
extent such a broker-dealer is unable to do so acting as agent for the
Registered Stockholder, to purchase as principals any unsold shares at the
price required to fulfill the respective broker-dealer's commitment to the
Registered Stockholder. Broker-dealers who acquire shares as principals may
thereafter resell such shares from time to time in transactions (which may
involve cross and block transactions and which may involve sales to and
through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market, negotiated transactions or otherwise,
at market prices prevailing at the time of sale or at negotiated prices, and
in connection with such resales may pay to or receive from the purchasers
of such shares commissions.

To the knowledge of the Company, there is currently no agreement with
any broker or dealer respecting the sale of the shares offered hereby. Upon
the sale of any such shares, the Registered Stockholder or anyone effecting
sales on behalf of the Registered Stockholder may be deemed an underwriter, as
that term is defined under the Securities Act of 1933, as amended. The Company
will pay all expenses of preparing and reproducing this Reoffer Prospectus, but
will not receive the proceeds from sales by the Registered Stockholer. Sales
will be made at prices prevailing at the time of such sales.

The Company is bearing all costs relating to the registration of the
shares. Any commissions or other fees payable to broker-dealers in connection
with any sale of the shares will be borne by the Registered Stockholder or other
party selling such shares. In order to comply with certain states' securities
laws, if applicable, the shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In certain states the shares may not
be sold unless the shares have been registered or qualified for sale in such
state, or unless an exemption form registration or qualification is available
and is obtained.

<PAGE> 23
USE OF PROCEEDS

The Company will not receive any of the proceeds from the offering
hereunder. All expenses of registration incurred in connection with this
offering are being borne by the Company, but all selling and other expenses
incurred by the Registered Stockholder will be borne by such Registered
Stockholder.

DOCUMENTS INCORPORATED BY REFERENCE

Ashford.com, Inc. ("Ashford.com" or the "Company") hereby incorporates
by reference into this Registration Statement the following documents previously
filed with the Securities and Exchange Commission (the "SEC"):

(a) The Company's prospectus filed with the SEC pursuant to Rule
424(b) of the Securities Act of 1933, as amended (the "1933
Act"), in connection with the Registration Statement No.
333-82759 on Form S-1 filed with the SEC on July 13, 1999,
together with any and all amendments thereto, in which there
is set forth audited financial statements for the Company's
fiscal year ended March 31, 1999; and

(b) The Company's Registration Statement No. 000-27357 on Form 8-A
filed with the SEC on September 16, 1999, together with all
amendments thereto, pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended (the "1934 Act") in which
there is described the terms, rights and provisions applicable
to the Company's outstanding Common Stock.

All reports and definitive proxy or information statements filed
pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act after the date of
this Registration Statement and prior to the filing of a post-effective
amendment which indicates that all securities offered hereby have been sold or
which deregisters all securities then remaining unsold shall be deemed to be
incorporated by reference into this Registration Statement and to be a part
hereof from the date of filing of such documents.

INDEMNIFICATION

Section 145 of the Delaware General Corporation Law permits a
corporation to include in its charter documents and in agreements between the
corporation and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law. Article IX
of Ashford.com's Amended and Restated Certificate of Incorporation, to be filed
in connection with the offering, provides for indemnification of directors to
the fullest extent permissible under Delaware law. Article VII of Ashford.com's
Amended and Restated By-laws provides for the indemnification of officers,
directors and third parties acting on behalf of Ashford.com if such person acted
in good faith and in a manner reasonably believed to be in and not opposed to
the best interests of Ashford.com, and, with respect to any criminal action or
proceeding, the indemnified party had no reason to believe his or her conduct
was unlawful. Ashford.com has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
Ashford.com's Amended and Restated By-laws, and intends to enter into
indemnification agreements with any new directors and executive officers in the
future. Delaware law permits Ashford.com to purchase and maintain insurance on
behalf of any director, officer, employee or agent of Ashford.com against any
liability asserted against or incurred by them in such capacity or arising out
of their status as such whether or not Ashford.com would have the power to
indemnify such director, officer, employee or agent against such liability under
the applicable provisions of Delaware law, the Amended and Restated Certificate
of Incorporation or the Amended and Restated By-laws. The general effect of the
foregoing provisions is to reduce the circumstances in which an officer or
director may be required to bear the economic burdens of the foregoing
liabilities and expenses.

<PAGE> 24

PART II

INFORMATION REQUIRED IN THE REGISTRATION STATEMENT

Item 3. Incorporation of Documents by Reference

Item 4. Description of Securities

Not Applicable.

Item 5. Interests of Named Experts and Counsel

Not Applicable.

Item 6. Indemnification of Directors and Officers

II-1

<PAGE> 25

Item 7. Exemption from Registration Claimed

Not Applicable.

Item 8. Exhibits

Exhibit Number Exhibit

4 Instrument Defining Rights of Stockholders. Reference is made
to Company's Registration Statement No. 000-27357 on Form 8-A,
together with all amendments thereto, which is incorporated
herein by reference pursuant to Item 3(b) of this Registration
Statement.

5 Opinion and consent of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP.

23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.

23.2 Consent of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP is contained in Exhibit 5.

24 Power of Attorney. Reference is made to page II-3 of this
Registration Statement.

99.1 Kenneth E. Kurtzman Stock Option Agreement.

Item 9. Undertakings

A. The undersigned Company hereby undertakes: (1) to file, during any
period in which offers or sales are being made, a post-effective amendment to
this Registration Statement (i) to include any prospectus required by Section
10(a)(3) of the 1933 Act, (ii) to reflect in the prospectus any facts or events
arising after the effective date of this Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in this
Registration Statement and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in this
Registration Statement or any material change to such information in this
Registration Statement; provided, however, that clauses (1)(i) and (1)(ii) shall
not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with or
furnished to the SEC by the Company pursuant to Section 13 or Section 15(d) of
the 1934 Act that are incorporated by reference in this Registration Statement;
(2) that for the purpose of determining any liability under the 1933 Act each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof and
(3) to remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
Company's Ashford.com, Inc. 1998 Stock Incentive Plan, the Ashford.com, Inc.
1999 Equity Incentive Plan, the Ashford.com, Inc. 1999 Employee Stock Purchase
Plan and the Kenneth E. Kurtzman Stock Option Agreement.

B. The undersigned Company hereby undertakes that, for purposes of
determining any liability under the 1933 Act, each filing of the Company's
annual report pursuant to Section 13(a) or Section 15(d) of the 1934 Act that is
incorporated by reference in this Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

C. Insofar as indemnification for liabilities arising under the 1933
Act may be permitted to directors, officers or controlling persons of the
Company pursuant to the indemnification provisions summarized in Item 6 or
otherwise, the Company has been advised that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the 1933 Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.

II-2

<PAGE> 26
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended,
the Company certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-8 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Houston, State of Texas on this 27th day of
September, 1999.

ASHFORD.COM, INC.

By: /s/ Kenneth E. Kurtzman
---------------------------------------
Kenneth E. Kurtzman
Chief Executive Officer and Director

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

That the undersigned officers and directors of Ashford.com, Inc., a
Delaware corporation, do hereby constitute and appoint Kenneth E. Kurtzman and
David F. Gow, and either of them, the lawful attorneys-in-fact and agents with
full power and authority to do any and all acts and things and to execute any
and all instruments which said attorneys and agents, and either one of them,
determine may be necessary or advisable or required to enable said corporation
to comply with the Securities Act of 1933, as amended, and any rules or
regulations or requirements of the Securities and Exchange Commission in
connection with this Registration Statement. Without limiting the generality of
the foregoing power and authority, the powers granted include the power and
authority to sign the names of the undersigned officers and directors in the
capacities indicated below to this Registration Statement, to any and all
amendments, both pre-effective and post-effective, and supplements to this
Registration Statement, and to any and all instruments or documents filed as
part of or in conjunction with this Registration Statement or amendments or
supplements thereof, and each of the undersigned hereby ratifies and confirms
all that said attorneys and agents, or either one of them, shall do or cause to
be done by virtue hereof. This Power of Attorney may be signed in several
counterparts.

IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Kenneth E. Kurtzman Chief Executive Officer and Director September 27, 1999
- --------------------------------------- (Principal Executive Officer)
Kenneth E. Kurtzman

/s/ David F. Gow Vice-President, Finance and Chief Financial September 27, 1999
- --------------------------------------- Officer (Principal Financial and Accounting
David F. Gow Officer)
</TABLE>

II-3

<PAGE> 27

<TABLE>
<S> <C> <C>
/s/ J. Robert Shaw Chairman of the Board of Directors September 27, 1999
- ---------------------------------------
J. Robert Shaw

/s/ James H. Whitcomb, Jr. President, Chief Operating Officer September 27, 1999
- --------------------------------------- and Director
James H. Whitcomb, Jr.

/s/ Kevin R. Harvey Director September 27, 1999
- ---------------------------------------
Kevin R. Harvey

/s/ Colombe M. Nicholas Director September 27, 1999
- ---------------------------------------
Colombe M. Nicholas
</TABLE>

II-4

<PAGE> 28

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
4 Instrument Defining Rights of Stockholders. Reference is made
to Company's Registration Statement No. 000-27357 on Form 8-A,
together with all amendments thereto, which is incorporated
herein by reference pursuant to Item 3(b) of this Registration
Statement.

5 Opinion and consent of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP.

23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.

23.2 Consent of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP is contained in Exhibit 5.

24 Power of Attorney. Reference is made to page II-3 of this
Registration Statement.

99.1 Kenneth E. Kurtzman Stock Option Agreement.
</TABLE>

<PAGE> 1
EXHIBIT 5

September 28, 1999

Ashford.com, Inc.
3800 Buffalo Speedway, Suite 400
Houston, Texas 77098

Re: Ashford.com, Inc. (the "Company")
Registration Statement for
an aggregate of 8,799,822 Shares of Common Stock

Ladies and Gentlemen:

We refer to your registration on Form S-8 (the "Registration
Statement") under the Securities Act of 1933, as amended, of (i) 3,622,322
shares of Common Stock available for issuance under the Company's 1998 Stock
Incentive Plan, (ii) 2,375,000 shares of Common Stock available for issuance
under the Company's 1999 Equity Incentive Plan, (iii) 950,000 shares of Common
Stock available for issuance under the Company's 1999 Employee Stock Purchase
Plan, and (iv) and 1,852,500 shares of Common Stock issued to Kenneth E.
Kurtzman under the Kenneth E. Kurtzman Stock Option Agreement (collectively, the
"Plans"). We advise you that, in our opinion, when such shares have been issued
and sold pursuant to the applicable provisions of the Plans and in accordance
with the Registration Statement, such shares will be validly issued, fully paid
and nonassessable shares of the Company's Common Stock.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.

Very truly yours,

/s/ Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP

Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement on Form S-8 pertaining to the
Ashford.com, Inc. 1998 Stock Incentive Plan, the Ashford.com, Inc. 1999 Equity
Incentive Plan, the Ashford.com, Inc. 1999 Employee Stock Purchase Plan, and the
Kenneth E. Kurtzman Stock Option Agreement, of our report dated July 9, 1999,
included in Ashford.com, Inc.'s Registration Statement on Form S-1 for the year
ended March 31, 1999 and to all references to our Firm included in this
Registration Statement.

/s/ Arthur Andersen LLP

Houston, Texas
September 24, 1999

<PAGE> 1

NEWWATCH COMPANY

NOTICE OF STOCK OPTION GRANT

You have been granted the following option to purchase Common Stock of
NewWatch Company (the "Company"):

Name of Optionee: Kenny Kurtzman

Total Number of Shares Granted: 390,000

Type of Option: Nonstatutory Stock Option

Exercise Price Per Share: $2.00

Date of Grant: May 15, 1999

Date Exercisable: This option may be exercised, in whole
or in part, for 100% of the Shares
subject to this option at any time
after the Date of Grant.

Vesting Commencement Date: April 1, 1999

Vesting Schedule: The Right of Repurchase shall
lapse with respect to 1/48th of the
Shares subject to this option when the
Optionee completes each month of
continuous Service following the
Vesting Commencement Date.

Expiration Date: May 14, 2009

By your signature and the signature of the Company's representative below, you
and the Company agree that this option is granted under and governed by the
terms and conditions of the Stock Option Agreement, both of which are attached
to and made a part of this document.

OPTIONEE: NEWWATCH COMPANY

- ---------------------------------- By:
----------------------------------
Title:
-------------------------------

<PAGE> 2

THE OPTION GRANTED PURSUANT TO THIS AGREEMENT AND THE SHARES ISSUABLE UPON THE
EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL,
SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT
REQUIRED.

NEWWATCH COMPANY
STOCK OPTION AGREEMENT

SECTION 1. GRANT OF OPTION.

(a) OPTION. On the terms and conditions set forth in the Notice of Stock
Option Grant and this Agreement, the Company grants to the Optionee on the Date
of Grant the option to purchase at the Exercise Price the number of Shares set
forth in the Notice of Stock Option Grant. The Exercise Price is agreed to be at
least 100% of the Fair Market Value per Share on the Date of Grant.

(b) DEFINED TERMS. Capitalized terms are defined in Section 14 of this
Agreement.

SECTION 2. RIGHT TO EXERCISE.

All or part of this option may be exercised prior to its expiration at
the time or times set forth in the Notice of Stock Option Grant. Shares
purchased by exercising this option may be subject to the Right of Repurchase
under Section 7.

SECTION 3. NO TRANSFER OR ASSIGNMENT OF OPTION.

Except as otherwise provided in this Agreement, this option and the
rights and privileges conferred hereby shall not be sold, pledged or otherwise
transferred (whether by operation of law or otherwise) and shall not be subject
to sale under execution, attachment, levy or similar process.

SECTION 4. EXERCISE PROCEDURES.

(a) NOTICE OF EXERCISE. The Optionee or the Optionee's representative
may exercise this option by giving written notice to the Company pursuant to
Section 13(c). The notice shall specify the election to exercise this option,
the number of Shares for which it is being exercised and the form of payment.
The notice shall be signed by the person exercising this option. In the event
that this option is being exercised by the representative of the Optionee, the
notice shall be accompanied by proof (satisfactory to the Company) of the
representative's right to exercise this option. The Optionee or the Optionee's
representative shall deliver to the

<PAGE> 3
Company, at the time of giving the notice, payment in a form permissible under
Section 5 for the full amount of the Purchase Price.

(b) ISSUANCE OF SHARES. After receiving a proper notice of exercise, the
Company shall cause to be issued a certificate or certificates for the Shares as
to which this option has been exercised, registered in the name of the person
exercising this option (or in the names of such person and his or her spouse as
community property or as joint tenants with right of survivorship). The Company
shall cause such certificate or certificates to be deposited in escrow or
delivered to or upon the order of the person exercising this option.

(c) WITHHOLDING TAXES. In the event that the Company determines that it
is required to withhold any tax as a result of the exercise of this option, the
Optionee, as a condition to the exercise of this option, shall make arrangements
satisfactory to the Company to enable it to satisfy all withholding
requirements. The Optionee shall also make arrangements satisfactory to the
Company to enable it to satisfy any withholding requirements that may arise in
connection with the vesting or disposition of Shares purchased by exercising
this option.

SECTION 5. PAYMENT FOR STOCK.

(a) CASH. All or part of the Purchase Price may be paid in cash or cash
equivalents.

(b) SURRENDER OF STOCK. All or any part of the Purchase Price may be
paid by surrendering, or attesting to the ownership of, Shares that are already
owned by the Optionee. Such Shares shall be surrendered to the Company in good
form for transfer and shall be valued at their Fair Market Value on the date
when this option is exercised. The Optionee shall not surrender, or attest to
the ownership of, Shares in payment of the Purchase Price if such action would
cause the Company to recognize compensation expense (or additional compensation
expense) with respect to this option for financial reporting purposes.

(c) PROMISSORY NOTE. All or a portion of the Purchase Price may be paid
with a full-recourse promissory note. The Shares shall be pledged as security
for payment of the principal amount of the promissory note and interest thereon.
The interest rate payable under the terms of the promissory note shall not be
less than the minimum rate (if any) required to avoid the imputation of
additional interest under the Code. Subject to the foregoing, the Board of
Directors (at its sole discretion) shall specify the term, interest rate,
amortization requirements (if any) and other provisions of such note.

(d) EXERCISE/SALE. If Stock is publicly traded, all or part of the
Purchase Price and any withholding taxes may be paid by the delivery (on a form
prescribed by the Company) of an irrevocable direction to a securities broker
approved by the Company to sell Shares and to deliver all or part of the sales
proceeds to the Company.

(e) EXERCISE/PLEDGE. If Stock is publicly traded, all or part of the
Purchase Price and any withholding taxes may be paid by the delivery (on a form
prescribed by the Company) of an irrevocable direction to pledge Shares to a
securities broker or lender approved by the Company, as security for a loan, and
to deliver all or part of the loan proceeds to the Company.

3
<PAGE> 4

SECTION 6. TERM AND EXPIRATION.

(a) BASIC TERM. This option shall in any event expire on the expiration
date set forth in the Notice of Stock Option Grant, which date is 10 years after
the Date of Grant.

(b) TERMINATION OF SERVICE (EXCEPT BY DEATH). If the Optionee's Service
terminates for any reason other than death, then this option shall expire on the
earliest of the following occasions:

(i) The expiration date determined pursuant to Subsection (a) above;

(ii) The date three months after the termination of the Optionee's
Service for any reason other than Disability; or

(iii) The date six months after the termination of the Optionee's
Service by reason of Disability.

The Optionee may exercise all or part of this option at any time before its
expiration under the preceding sentence, but only to the extent that this option
had become exercisable for vested shares before the Optionee's Service
terminated. When the Optionee's Service terminates, this option shall expire
immediately with respect to the number of Shares for which this option is not
yet exercisable and with respect to any Restricted Shares. In the event that the
Optionee dies after termination of Service but before the expiration of this
option, all or part of this option may be exercised (prior to expiration) by the
executors or administrators of the Optionee's estate or by any person who has
acquired this option directly from the Optionee by beneficiary designation,
bequest or inheritance, but only to the extent that this option had become
exercisable before the Optionee's Service terminated.

(c) DEATH OF THE OPTIONEE. If the Optionee dies while in Service, then
this option shall expire on the earlier of the following dates:

(i) The expiration date determined pursuant to Subsection (a) above;
or

(ii) The date 12 months after the Optionee's death.

All or part of this option may be exercised at any time before its expiration
under the preceding sentence by the executors or administrators of the
Optionee's estate or by any person who has acquired this option directly from
the Optionee by beneficiary designation, bequest or inheritance, but only to the
extent that this option had become exercisable before the Optionee's death. When
the Optionee dies, this option shall expire immediately with respect to the
number of Shares for which this option is not yet exercisable and with respect
to any Restricted Shares.

(d) LEAVES OF ABSENCE. For any purpose under this Agreement, Service
shall be deemed to continue while the Optionee is on a bona fide leave of
absence, if such leave was approved by the Company in writing and if continued
crediting of Service for such purpose is

4
<PAGE> 5

expressly required by the terms of such leave or by applicable law (as
determined by the Company).

SECTION 7. RIGHT OF REPURCHASE.

(a) SCOPE OF REPURCHASE RIGHT. Unless they have become vested in
accordance with the Notice of Stock Option Grant and Subsection (c) below, the
Shares acquired under this Agreement initially shall be Restricted Shares and
shall be subject to a right (but not an obligation) of repurchase by the
Company. The Optionee shall not transfer, assign, encumber or otherwise dispose
of any Restricted Shares, except as provided in the following sentence. The
Optionee may transfer Restricted Shares (i) by beneficiary designation, will or
intestate succession or (ii) to the Optionee's spouse, children or grandchildren
or to a trust established by the Optionee for the benefit of the Optionee or the
Optionee's spouse, children or grandchildren, provided in either case that the
Transferee agrees in writing on a form prescribed by the Company to be bound by
all provisions of this Agreement. If the Optionee transfers any Restricted
Shares, then this Section 7 shall apply to the Transferee to the same extent as
to the Optionee.

(b) CONDITION PRECEDENT TO EXERCISE. The Right of Repurchase shall be
exercisable with respect to any Restricted Shares only during the 60-day period
next following the later of:

(i) The date when the Optionee's Service terminates for any reason,
with or without cause, including (without limitation) death or disability;
or

(ii) The date when such Restricted Shares were purchased by the
Optionee, the executors or administrators of the Optionee's estate or any
person who has acquired this option directly from the Optionee by bequest,
inheritance or beneficiary designation.

(c) LAPSE OF REPURCHASE RIGHT. The Right of Repurchase shall lapse with
respect to the Shares subject to this option in accordance with the vesting
schedule set forth in the Notice of Stock Option Grant. If the Company is
subject to a Change in Control before the Optionee's Service terminates, then
the Right of Repurchase shall lapse and 25% of the remaining Restricted Shares
shall become vested. After the application of the previous sentence, the Board
of Directors, in its sole discretion, shall determine how any remaining
Restricted Shares shall be treated in connection with a Change in Control,
including but not limited to accelerating the vesting of all or a portion of the
remaining Restricted Shares. If the Optionee is terminated without Cause by the
Company, the Right of Repurchase shall lapse and an additional number of
Restricted Shares shall vest, as if the Optionee provided another nine (9)
months of Service from the termination date, provided that the Optionee must
execute a general release (in a form prescribed by the Company) of all known and
unknown claims that the Optionee may then have against the Company or persons
affiliated with the Company and agree not to prosecute any legal action or other
proceeding based upon any of such claims.

5
<PAGE> 6

(d) REPURCHASE COST. If the Company exercises the Right of Repurchase,
it shall pay the Optionee an amount equal to the Exercise Price for each of the
Restricted Shares being repurchased.

(e) EXERCISE OF REPURCHASE RIGHT. The Right of Repurchase shall be
exercisable only by written notice delivered to the Optionee prior to the
expiration of the 60-day period specified in Subsection (b) above. The notice
shall set forth the date on which the repurchase is to be effected. Such date
shall not be more than 30 days after the date of the notice. The certificate(s)
representing the Restricted Shares to be repurchased shall, prior to the close
of business on the date specified for the repurchase, be delivered to the
Company properly endorsed for transfer. The Company shall, concurrently with the
receipt of such certificate(s), pay to the Optionee the purchase price
determined according to Subsection (d) above. Payment shall be made in cash or
cash equivalents or by canceling indebtedness to the Company incurred by the
Optionee in the purchase of the Restricted Shares. The Right of Repurchase shall
terminate with respect to any Restricted Shares for which it has not been timely
exercised pursuant to this Subsection (e).

(f) ADDITIONAL SHARES OR SUBSTITUTED SECURITIES. In the event of the
declaration of a stock dividend, the declaration of an extraordinary dividend
payable in a form other than stock, a spin-off, a stock split, an adjustment in
conversion ratio, a recapitalization or a similar transaction affecting the
Company's outstanding securities without receipt of consideration, any new,
substituted or additional securities or other property (including money paid
other than as an ordinary cash dividend) which are by reason of such transaction
distributed with respect to any Restricted Shares or into which such Restricted
Shares thereby become convertible shall immediately be subject to the Right of
Repurchase. Appropriate adjustments to reflect the distribution of such
securities or property shall be made to the number and/or class of the
Restricted Shares. Appropriate adjustments shall also, after each such
transaction, be made to the price per share to be paid upon the exercise of the
Right of Repurchase in order to reflect any change in the Company's outstanding
securities effected without receipt of consideration therefor; provided,
however, that the aggregate purchase price payable for the Restricted Shares
shall remain the same.

(g) TERMINATION OF RIGHTS AS SHAREHOLDER. If the Company makes
available, at the time and place and in the amount and form provided in this
Agreement, the consideration for the Restricted Shares to be repurchased in
accordance with this Section 7, then after such time the person from whom such
Restricted Shares are to be repurchased shall no longer have any rights as a
holder of such Restricted Shares (other than the right to receive payment of
such consideration in accordance with this Agreement). Such Restricted Shares
shall be deemed to have been repurchased in accordance with the applicable
provisions hereof, whether or not the certificate(s) therefor have been
delivered as required by this Agreement.

(h) ESCROW. Upon issuance, the certificates for Restricted Shares shall
be deposited in escrow with the Company to be held in accordance with the
provisions of this Agreement. Any new, substituted or additional securities or
other property described in Subsection (f) above shall immediately be delivered
to the Company to be held in escrow, but only to the extent the Shares are at
the time Restricted Shares. All regular cash dividends on Restricted Shares (or
other securities at the time held in escrow) shall be paid directly to the
Optionee and shall not be held in escrow.

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Restricted Shares, together with any other assets or securities held in escrow
hereunder, shall be (i) surrendered to the Company for repurchase and
cancellation upon the Company's exercise of its Right of Repurchase or Right of
First Refusal or (ii) released to the Optionee upon the Optionee's request to
the extent the Shares are no longer Restricted Shares (but not more frequently
than once every six months). In any event, all Shares which have vested (and any
other vested assets and securities attributable thereto) shall be released
within 60 days after the earlier of (i) the Optionee's cessation of Service or
(ii) the lapse of the Right of First Refusal.

SECTION 8. RIGHT OF FIRST REFUSAL.

(a) RIGHT OF FIRST REFUSAL. In the event that the Optionee proposes to
sell, pledge or otherwise transfer to a third party any Shares acquired under
this Agreement, or any interest in such Shares, the Company shall have the Right
of First Refusal with respect to all (and not less than all) of such Shares. If
the Optionee desires to transfer Shares acquired under this Agreement, the
Optionee shall give a written Transfer Notice to the Company describing fully
the proposed transfer, including the number of Shares proposed to be
transferred, the proposed transfer price, the name and address of the proposed
Transferee and proof satisfactory to the Company that the proposed sale or
transfer will not violate any applicable federal or state securities laws. The
Transfer Notice shall be signed both by the Optionee and by the proposed
Transferee and must constitute a binding commitment of both parties to the
transfer of the Shares. The Company shall have the right to purchase all, and
not less than all, of the Shares on the terms of the proposal described in the
Transfer Notice (subject, however, to any change in such terms permitted under
Subsection (b) below) by delivery of a notice of exercise of the Right of First
Refusal within 30 days after the date when the Transfer Notice was received by
the Company. The Company's rights under this Subsection (a) shall be freely
assignable, in whole or in part.

(b) TRANSFER OF SHARES. If the Company fails to exercise its Right of
First Refusal within 30 days after the date when it received the Transfer
Notice, the Optionee may, not later than 90 days following receipt of the
Transfer Notice by the Company, conclude a transfer of the Shares subject to the
Transfer Notice on the terms and conditions described in the Transfer Notice,
provided that any such sale is made in compliance with applicable federal and
state securities laws and not in violation of any other contractual restrictions
to which the Optionee is bound. Any proposed transfer on terms and conditions
different from those described in the Transfer Notice, as well as any subsequent
proposed transfer by the Optionee, shall again be subject to the Right of First
Refusal and shall require compliance with the procedure described in Subsection
(a) above. If the Company exercises its Right of First Refusal, the parties
shall consummate the sale of the Shares on the terms set forth in the Transfer
Notice within 60 days after the date when the Company received the Transfer
Notice (or within such longer period as may have been specified in the Transfer
Notice); provided, however, that in the event the Transfer Notice provided that
payment for the Shares was to be made in a form other than cash or cash
equivalents paid at the time of transfer, the Company shall have the option of
paying for the Shares with cash or cash equivalents equal to the present value
of the consideration described in the Transfer Notice.

(c) ADDITIONAL SHARES OR SUBSTITUTED SECURITIES. In the event of the
declaration of a stock dividend, the declaration of an extraordinary dividend
payable in a form other than

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stock, a spin-off, a stock split, an adjustment in conversion ratio, a
recapitalization or a similar transaction affecting the Company's outstanding
securities without receipt of consideration, any new, substituted or additional
securities or other property (including money paid other than as an ordinary
cash dividend) which are by reason of such transaction distributed with respect
to any Shares subject to this Section 8 or into which such Shares thereby become
convertible shall immediately be subject to this Section 8. Appropriate
adjustments to reflect the distribution of such securities or property shall be
made to the number and/or class of the Shares subject to this Section 8.

(d) TERMINATION OF RIGHT OF FIRST REFUSAL. Any other provision of this
Section 8 notwithstanding, in the event that the Stock is readily tradable on an
established securities market when the Optionee desires to transfer Shares, the
Company shall have no Right of First Refusal, and the Optionee shall have no
obligation to comply with the procedures prescribed by Subsections (a) and (b)
above.

(e) PERMITTED TRANSFERS. This Section 8 shall not apply to (i) a
transfer by beneficiary designation, will or intestate succession or (ii) a
transfer to the Optionee's spouse, children or grandchildren or to a trust
established by the Optionee for the benefit of the Optionee or the Optionee's
spouse, children or grandchildren, provided in either case that the Transferee
agrees in writing on a form prescribed by the Company to be bound by all
provisions of this Agreement. If the Optionee transfers any Shares acquired
under this Agreement, either under this Subsection (e) or after the Company has
failed to exercise the Right of First Refusal, then this Section 8 shall apply
to the Transferee to the same extent as to the Optionee.

(f) TERMINATION OF RIGHTS AS SHAREHOLDER. If the Company makes
available, at the time and place and in the amount and form provided in this
Agreement, the consideration for the Shares to be purchased in accordance with
this Section 8, then after such time the person from whom such Shares are to be
purchased shall no longer have any rights as a holder of such Shares (other than
the right to receive payment of such consideration in accordance with this
Agreement). Such Shares shall be deemed to have been purchased in accordance
with the applicable provisions hereof, whether or not the certificate(s)
therefor have been delivered as required by this Agreement.

SECTION 9. LEGALITY OF INITIAL ISSUANCE.

No Shares shall be issued upon the exercise of this option unless and
until the Company has determined that:

(a) It and the Optionee have taken any actions required to register the
Shares under the Securities Act or to perfect an exemption from the registration
requirements thereof;

(b) Any applicable listing requirement of any stock exchange or other
securities market on which Stock is listed has been satisfied; and

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<PAGE> 9

SECTION 10. NO REGISTRATION RIGHTS.

The Company may, but shall not be obligated to, register or
qualify the sale of Shares under the Securities Act or any other applicable law.
The Company shall not be obligated to take any affirmative action in order to
cause the sale of Shares under this Agreement to comply with any law.

SECTION 11. RESTRICTIONS ON TRANSFER.

(a) SECURITIES LAW RESTRICTIONS. Regardless of whether the offering and
sale of Shares have been registered under the Securities Act or have been
registered or qualified under the securities laws of any state, the Company at
its discretion may impose restrictions upon the sale, pledge or other transfer
of such Shares (including the placement of appropriate legends on stock
certificates or the imposition of stop-transfer instructions) if, in the
judgment of the Company, such restrictions are necessary or desirable in order
to achieve compliance with the Securities Act, the securities laws of any state
or any other law.

(b) MARKET STAND-OFF. In connection with any underwritten public
offering by the Company of its equity securities pursuant to an effective
registration statement filed under the Securities Act, including the Company's
initial public offering, the Optionee shall not directly or indirectly sell,
make any short sale of, loan, hypothecate, pledge, offer, grant or sell any
option or other contract for the purchase of, purchase any option or other
contract for the sale of, or otherwise dispose of or transfer, or agree to
engage in any of the foregoing transactions with respect to, any Shares acquired
under this Agreement without the prior written consent of the Company or its
underwriters. Such restriction (the "Market Stand-Off") shall be in effect for
such period of time following the date of the final prospectus for the offering
as may be requested by the Company or such underwriters. In no event, however,
shall such period exceed 180 days. The Market Stand-Off shall in any event
terminate two years after the date of the Company's initial public offering. In
the event of the declaration of a stock dividend, a spin-off, a stock split, an
adjustment in conversion ratio, a recapitalization or a similar transaction
affecting the Company's outstanding securities without receipt of consideration,
any new, substituted or additional securities which are by reason of such
transaction distributed with respect to any Shares subject to the Market
Stand-Off, or into which such Shares thereby become convertible, shall
immediately be subject to the Market Stand-Off. In order to enforce the Market
Stand-Off, the Company may impose stop-transfer instructions with respect to the
Shares acquired under this Agreement until the end of the applicable stand-off
period. The Company's underwriters shall be beneficiaries of the agreement set
forth in this Subsection (b). This Subsection (b) shall not apply to Shares
registered in the public offering under the Securities Act, and the Optionee
shall be subject to this Subsection (b) only if the directors and officers of
the Company are subject to similar arrangements.

(c) INVESTMENT INTENT AT GRANT. The Optionee represents and agrees that
the Shares to be acquired upon exercising this option will be acquired for
investment, and not with a view to the sale or distribution thereof.

(d) INVESTMENT INTENT AT EXERCISE. In the event that the sale of Shares
is not registered under the Securities Act but an exemption is available which
requires an investment

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<PAGE> 10

representation or other representation, the Optionee shall represent and agree
at the time of exercise that the Shares being acquired upon exercising this
option are being acquired for investment, and not with a view to the sale or
distribution thereof, and shall make such other representations as are deemed
necessary or appropriate by the Company and its counsel.

(e) LEGENDS. All certificates evidencing Shares purchased under this
Agreement shall bear the following legend:

"THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED,
ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE
TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER
OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES). SUCH
AGREEMENT GRANTS TO THE COMPANY CERTAIN RIGHTS OF FIRST REFUSAL UPON AN
ATTEMPTED TRANSFER OF THE SHARES AND CERTAIN REPURCHASE RIGHTS UPON
TERMINATION OF SERVICE WITH THE COMPANY. THE SECRETARY OF THE COMPANY WILL
UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF
WITHOUT CHARGE."

All certificates evidencing Shares purchased under this Agreement in an
unregistered transaction shall bear the following legend (and such other
restrictive legends as are required or deemed advisable under the provisions of
any applicable law):

"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH
ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL,
THAT SUCH REGISTRATION IS NOT REQUIRED."

(f) REMOVAL OF LEGENDS. If, in the opinion of the Company and its
counsel, any legend placed on a stock certificate representing Shares sold under
this Agreement is no longer required, the holder of such certificate shall be
entitled to exchange such certificate for a certificate representing the same
number of Shares but without such legend.

(g) ADMINISTRATION. Any determination by the Company and its counsel in
connection with any of the matters set forth in this Section 11 shall be
conclusive and binding on the Optionee and all other persons.

SECTION 12. ADJUSTMENT OF SHARES.

(a) GENERAL. In the event of a subdivision of the outstanding Stock, a
declaration of a dividend payable in Shares, a declaration of an extraordinary
dividend payable in a form other than Shares in an amount that has a material
effect on the Fair Market Value of the Stock, a combination or consolidation of
the outstanding Stock into a lesser number of Shares, a recapitalization, a
spin-off, a reclassification or a similar occurrence, the Board of Directors
shall

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make appropriate adjustments in the number and kind of Shares subject to this
option and the Exercise Price.

(b) RESERVATION OF RIGHTS. Except as provided in this Section 12, the
Optionee shall have no rights by reason of (i) any subdivision or consolidation
of shares of stock of any class, (ii) the payment of any dividend or (iii) any
other increase or decrease in the number of shares of stock of any class. Any
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or
Exercise Price of Shares subject to this option. The grant of this option shall
not affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure, to merge or consolidate or to dissolve, liquidate, sell or transfer
all or any part of its business or assets.

SECTION 13. MISCELLANEOUS PROVISIONS.

(a) RIGHTS AS A SHAREHOLDER. Neither the Optionee nor the Optionee's
representative shall have any rights as a shareholder with respect to any Shares
subject to this option until the Optionee or the Optionee's representative
becomes entitled to receive such Shares by filing a notice of exercise and
paying the Purchase Price pursuant to Sections 4 and 5.

(b) NO RETENTION RIGHTS. Nothing in this option shall confer upon the
Optionee any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Company (or
any Parent or Subsidiary employing or retaining the Optionee) or of the
Optionee, which rights are hereby expressly reserved by each, to terminate his
or her Service at any time and for any reason, with or without cause.

(c) NOTICE. Any notice required by the terms of this Agreement shall be
given in writing and shall be deemed effective upon personal delivery or upon
deposit with the United States Postal Service, by registered or certified mail,
with postage and fees prepaid. Notice shall be addressed to the Company at its
principal executive office and to the Optionee at the address that he or she
most recently provided to the Company.

(d) ENTIRE AGREEMENT. The Notice of Stock Option Grant and this
Agreement constitute the entire contract between the parties hereto with regard
to the subject matter hereof. They supersede any other agreements,
representations or understandings (whether oral or written and whether express
or implied) which relate to the subject matter hereof.

(e) CHOICE OF LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Texas, as such laws are applied to
contracts entered into and performed in such State.

SECTION 14. DEFINITIONS.

(a) "AGREEMENT" shall mean this Stock Option Agreement.

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(b) "BOARD OF DIRECTORS" shall mean the Board of Directors of the
Company, as constituted from time to time or, if a Committee has been appointed,
such Committee.

(c) "CAUSE" shall mean commission of any act of fraud, embezzlement or
dishonesty, any unauthorized use or disclosure of confidential information or
trade secrets of the Company or any other intentional misconduct that adversely
affects the business or affairs of the Company in a material manner.

(d) "CHANGE IN CONTROL" shall mean (i) the acquisition by any entity or
group of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Securities Exchange Act of 1934, as amended) of fifty percent (50%) or
more of the combined voting power of the then outstanding voting securities of
the Company entitled to vote generally in the election of directors, provided,
however, that any such acquisition by J. Robert Shaw or James H. Whitcomb, Jr.
shall not be deemed to be a Change in Control, (ii) the approval by the
shareholders of the Company of any merger, consolidation or other reorganization
pursuant to which the Company is not the surviving entity (or survives only as a
subsidiary of an entity other than a previously wholly-owned subsidiary of the
Company), (iii) the approval by the shareholders of the Company of the sale,
lease or exchange of all or substantially all of the assets of the Company to
any other person or entity (other than a wholly-owned subsidiary of the
Company), (iv) the approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company, (v) a merger, consolidation or other
reorganization in which the Company is not the surviving corporation (or
survives only as a subsidiary of an entity other than a previously wholly-owned
subsidiary of the Company), (vi) sale, lease or exchange or agreement to sell,
lease or exchange all or substantially all of the Company's assets to any other
person or entity (other than a wholly-owned subsidiary of the Company), or (vii)
dissolution or liquidation of the Company.

A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Company's incorporation or to create a holding company
that will be owned in substantially the same proportions by the persons who held
the Company's securities immediately before such transaction.

(e) "CODE" shall mean the Internal Revenue Code of 1986, as amended.

(f) "COMMITTEE" shall mean a committee of the Board of Directors.

(g) "COMPANY" shall mean NewWatch Company, a Texas corporation.

(h) "CONSULTANT" shall mean a person who performs bona fide services for
the Company, a Parent or a Subsidiary as a consultant or advisor, excluding
Employees and Outside Directors.

(i) "DATE OF GRANT" shall mean the date specified in the Notice of Stock
Option Grant, which date shall be the later of (i) the date on which the Board
of Directors resolved to grant this option or (ii) the first day of the
Optionee's Service.

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(j) "DISABILITY" shall mean that the Optionee is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment.

(k) "EMPLOYEE" shall mean any individual who is a common-law employee of
the Company, a Parent or a Subsidiary.

(l) "EXERCISE PRICE" shall mean the amount for which one Share may be
purchased upon exercise of this option, as specified in the Notice of Stock
Option Grant.

(m) "FAIR MARKET VALUE" shall mean the fair market value of a Share, as
determined by the Board of Directors in good faith. Such determination shall be
conclusive and binding on all persons.

(n) "NONSTATUTORY OPTION" shall mean a stock option not described in
Sections 422(b) or 423(b) of the Code.

(o) "NOTICE OF STOCK OPTION GRANT" shall mean the document so entitled
to which this Agreement is attached.

(p) "OPTIONEE" shall mean the individual named in the Notice of Stock
Option Grant.

(q) "OUTSIDE DIRECTOR" shall mean a member of the Board of Directors who
is not an Employee.

(r) "PARENT" shall mean any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.

(s) "PURCHASE PRICE" shall mean the Exercise Price multiplied by the
number of Shares with respect to which this option is being exercised.

(t) "RESTRICTED SHARE" shall mean a Share that is subject to the Right
of Repurchase.

(u) "RIGHT OF FIRST REFUSAL" shall mean the Company's right of first
refusal described in Section 8.

(v) "RIGHT OF REPURCHASE" shall mean the Company's right of repurchase
described in Section 7.

(w) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended.

(x) "SERVICE" shall mean service as an Employee, Outside Director or
Consultant.

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(y) "SHARE" shall mean one share of Stock, as adjusted in accordance
with Section 12 (if applicable).

(z) "STOCK" shall mean the Common Stock of the Company.

(aa) "SUBSIDIARY" shall mean any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.

(bb) "TRANSFEREE" shall mean any person to whom the Optionee has
directly or indirectly transferred any Share acquired under this Agreement.

(cc) "TRANSFER NOTICE" shall mean the notice of a proposed transfer of
Shares described in Section 8.