NETZERO INC, 10-Q, 2000-11-14

NETZERO INC
10-Q, 2000-11-14
COMPUTER PROGRAMMING, DATA PROCESSING, ETC.

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

-----------

FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ----------- TO ----------

COMMISSION FILE NUMBER 000-27405

-----------

NETZERO, INC.

(Exact name of registrant as specified in its charter)

DELAWARE 95-4644384
(State or other jurisdiction of (I.R.S. Employer Identification No.
incorporation or organization)

2555 TOWNSGATE ROAD, 91361
WESTLAKE VILLAGE, CALIFORNIA (Zip Code)
(Address of principal executive office)

(805) 418-2000
(Registrant's telephone number, including area code)

NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)

-----------

Indicate by check mark whether the registrant (1) has filed all documents
and reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

Number of shares of common stock outstanding as of November 1, 2000:
124,879,016 shares.

<PAGE>

INDEX

PAGE
----
PART I FINANCIAL INFORMATION

Item 1. Consolidated Balance Sheets at September 30, 2000 and June
30, 2000 3

Consolidated Statements of Operations for the three months
ended September 30, 2000 and 1999 4

Consolidated Statements of Cash Flow for the three months
ended September 30, 2000 and 1999 5

Notes to Consolidated Financial Statements 6

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk 26

PART II OTHER INFORMATION

Item 1. Legal Proceedings 27

Item 2. Changes in Securities and Use of Proceeds 27

Item 3. Defaults Upon Senior Securities 27

Item 4. Submission of Matters to a Vote of Security Holders 27

Item 5. Other Information 27

Item 6. Exhibits and Reports on Form 8-K 27

A. Exhibits
B. Reports on Form 8-K

SIGNATURES 28

In this Report, "NetZero," the "Company," "we," "us" and "our"
collectively refers to NetZero, Inc. and its wholly-owned subsidiaries.

2
<PAGE>

PART I. FINANCIAL INFORMATION

NETZERO, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
-------------- -------------
(unaudited)
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents $ 132,696,000 $ 201,512,000
Short-term investments 80,163,000 36,353,000
Restricted cash 4,618,000 6,982,000
Accounts receivable, net of allowance for doubtful accounts of $1,697,000 and
$1,651,000 at September 30, 2000 and June 30, 2000, respectively 18,679,000 15,748,000
Other current assets 7,878,000 3,941,000
------------- -------------
Total current assets 244,034,000 264,536,000
Property and equipment, net 36,890,000 37,662,000
Restricted cash 2,775,000 2,692,000
Intangible assets 57,849,000 19,523,000
Other assets 1,621,000 1,545,000
------------- -------------
Total assets $ 343,169,000 $ 325,958,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 23,718,000 $ 18,727,000
Accrued liabilities 2,745,000 2,506,000
Deferred revenue 561,000 825,000
Current portion of notes payable 1,701,000 1,641,000
Current portion of capital leases 5,835,000 6,247,000
------------- -------------
Total current liabilities 34,560,000 29,946,000

Notes payable less current portion 1,695,000 2,143,000
Capital leases less current portion 7,064,000 8,135,000
------------- -------------
Total liabilities 43,319,000 40,224,000
------------- -------------
Stockholders' equity
Convertible preferred stock, $0.001 par value; 10,000,000 shares authorized
and no shares issued and outstanding at September 30, 2000 and
June 30, 2000, respectively - -
Common stock, $0.001 par value; 500,000,000 shares authorized at
September 30, 2000 and June 30, 2000, respectively; 126,192,000 and
116,712,000 shares issued and outstanding at September 30, 2000 and
June 30, 2000, respectively 125,000 118,000
Additional paid-in capital 466,333,000 405,847,000
Notes receivable from stockholders (808,000) (799,000)
Deferred stock-based charges (30,324,000) (12,821,000)
Accumulated deficit (135,476,000) (106,611,000)
------------- -------------
Total stockholders' equity 299,850,000 285,734,000
------------- -------------

Total liabilities and stockholders' equity $ 343,169,000 $ 325,958,000
============= =============
</TABLE>

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

3
<PAGE>

NETZERO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Net revenues $ 16,466,000 $ 7,720,000
Cost of revenues (excluding stock-based charges of $150,000 and $88,000
for the three months ended September 30, 2000 and 1999, respectively) 17,458,000 12,093,000
------------- -------------
Gross loss (992,000) (4,373,000)
------------- -------------
Operating expenses:
Sales and marketing (excluding stock-based charges of $1,138,000 and $244,000
for the three months ended September 30, 2000 and 1999, respectively) 12,867,000 4,885,000
Product development (excluding stock-based charges of $751,000 and $74,000 for
the three months ended September 30, 2000 and 1999, respectively) 4,220,000 1,369,000
General and administrative (excluding stock-based charges of $2,693,000 and
$898,000 for the three months ended September 30, 2000 and 1999, respectively) 5,750,000 3,060,000
Stock-based charges 4,732,000 1,304,000
Amortization of intangible assets 3,818,000 -
------------- -------------
Total operating expenses 31,387,000 10,618,000
------------- -------------
Loss from operations (32,379,000) (14,991,000)
------------- -------------
Interest income 3,917,000 285,000
Interest expense (403,000) (221,000)
------------- -------------
Net loss $ (28,865,000) $ (14,927,000)
============= =============
Basic and diluted net loss per share $ (0.27) $ (1.04)
============= =============
Weighted average number of shares used to calculate basic and diluted net loss
per share 107,688,000 14,365,000
============= =============
</TABLE>

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

4
<PAGE>

NETZERO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)

<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------- -------------
2000 1999
-------------- -------------

<S> <C> <C>
Cash flows from operating activities:
Net loss $ (28,865,000) $ (14,927,000)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 7,451,000 1,618,000
Loss on disposal of property and equipment 71,000 -
Allowance for doubtful accounts 46,000 239,000
Stock-based charges 4,732,000 1,304,000
Accrued interest - notes receivable from stockholders (9,000) (27,000)
Changes in operating assets and liabilities (excluding the
effects of the acquisitions):
Restricted cash 2,523,000 (95,000)
Accounts receivable (2,907,000) (2,811,000)
Other assets (2,629,000) (5,969,000)
Accounts payable and accrued expenses 2,297,000 8,197,000
Deferred revenue (309,000) 1,978,000
------------- -------------
Net cash used for operating activities (19,449,000) (10,495,000)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (1,624,000) (4,337,000)
Purchase of patent rights (50,000) -
Purchase of short-term investments (43,778,000)
Cash paid for acquisitions, net of cash acquired (2,050,000)
Proceeds from sale of fixed assets - -
------------- -------------
Net cash used for investing activities (47,502,000) (4,337,000)
------------- -------------
Cash flows from financing activities:
Payments on capital leases (1,496,000) (408,000)
Payments on notes payable (388,000) (413,000)
Proceeds from notes payable - 3,498,000
Proceeds from exercise of stock options 19,000 120,000
Net proceeds from issuance of common stock - 169,718,000
------------- -------------
Net cash provided by (used for) financing activities (1,865,000) 172,515,000
------------- -------------
Change in cash and cash equivalents (68,816,000) 157,683,000
Cash and cash equivalents, beginning of period 201,512,000 24,035,000
------------- -------------
Cash and cash equivalents, end of period $ 132,696,000 $ 181,718,000
============= =============

Supplemental disclosure of cash flow activities:
Cash paid for interest $ 386,000 $ 162,000
============= =============
Supplemental disclosure of non-cash investing and financing activities:
Equipment obtained under capital leases - $ 637,000
============= =============
Common Stock issued for acquisitions $ 49,802,000 $ -
============= =============
</TABLE>

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

5
<PAGE>

NETZERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. ORGANIZATION AND BUSINESS.

NetZero, Inc. was incorporated in July 1997 and launched its service in October
1998. The Company is a leading provider of advertising- and commerce-supported
Internet access, offering a broad range of interactive marketing, research and
measurement solutions. NetZero offers consumers free access to the Internet,
free e-mail and custom navigation tools that provide "speed dial" to key sites
on the Internet. Through proprietary technologies, the Company offers
advertisers targeting capabilities through numerous online advertising and
sponsorship channels. The Company's CyberTarget division offers marketers and
advertisers mass-scale, online market research and measurement services.

2. BASIS OF PRESENTATION.

The consolidated financial statements are unaudited, other than the balance
sheet information for the Company as of June 30, 2000 and, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) that are necessary for a fair presentation of the results for the
periods shown. The results of operations for such periods are not necessarily
indicative of the results expected for the full fiscal year or for any future
period. Certain amounts in the prior year's financial statements have been
reclassified to conform with the presentation of the current period. These
consolidated financial statements should be read in conjunction with the audited
financial statements and related notes included in the Company's Annual Report
on Form 10-K for the year ended June 30, 2000 filed on September 28, 2000 with
the Securities and Exchange Commission (the "SEC").

At September 30, 2000, the Company had cash, cash equivalents and short-term
investments of approximately $212.9 million. The Company considers its existing
cash, cash equivalents and short-term investments to be adequate to fund its
operating activities, capital expenditures and other obligations for at least
the next 12 months. However, in the longer term, additional capital may be
needed in order to fund more rapid growth, expand marketing activities, develop
new or enhance existing services or products, to respond to competitive
pressures or to acquire complementary services, businesses or technologies. If
the Company is not successful in generating sufficient cash flow from
operations, additional capital through public or private financings, strategic
relationships or other arrangements will be necessary. This additional funding
might not be available on acceptable terms, or at all. Failure to raise
sufficient capital when needed could have a material adverse effect on the
business, results of operations and financial condition. If additional funds
were raised through the issuance of equity securities, the percentage of stock
owned by the then-current stockholders would be reduced. Furthermore, such
equity securities might have rights, preferences or privileges senior to those
of the common stock holders.

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

3. RECENT ACCOUNTING PRONOUNCEMENTS.

In June 1998, The Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." The statement
requires the recognition of all derivatives as either assets or liabilities in
the balance sheet and the measurement of those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the planned
use of the derivative and the resulting designation. Because the Company does
not currently hold any derivative instruments and does not engage in hedging
activities, the impact of the adoption of SFAS No. 133 did not have a material
impact on financial position, results of operations or cash flows. The Company
was required to implement SFAS No. 133 in the first quarter of fiscal 2001.

In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition," which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. In June 2000,
the SEC issued SAB 101B, which requires implementation of SAB 101 by the Company
no later than June 30, 2001. The SEC has recently issued additional guidance in
the form of its Frequently Asked Questions and Answers document issued in
October 2000. At this time, the Company is still assessing the impact of SAB
101 and this recently issued guidance and the effect, if any, on the Company's
financial position and results of operations.

6
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In March 2000, the FASB issued FASB Interpretation ("FIN") No. 44, "Accounting
for Certain Transactions Involving Stock Compensation." FIN 44 provides
guidance for issues arising in applying APB 25. FIN 44 applies
specifically to new awards, exchanges of awards in a business combination,
modification to outstanding awards and changes in grantee status that occur on
or after July 1, 2000, except for the provisions related to repricings and the
definition of an employee which apply to awards issued after December 15, 1998.
The application of FIN 44 has not had a material impact on the Company's
financial reporting.

4. ACQUISITIONS.

In December 1999, the Company acquired 100% of the outstanding capital stock and
options of AimTV, Inc. ("AimTV"). AimTV has developed a patent-pending
technology designed to enable advertisers to run broadcast-quality commercials
over narrowband Internet connections. Pursuant to the terms of the agreement,
the outstanding capital stock and options were exchanged for approximately
973,000 shares of common stock and options to purchase common stock of NetZero.
The transaction has been accounted for under the purchase method and,
accordingly, the results of operations of AimTV have been included in the
consolidated results of the Company since the date of acquisition. The excess of
the purchase price over the fair value of net liabilities acquired amounted to
approximately $23.7 million. The excess purchase price is comprised of
approximately $14.3 million of goodwill and $9.4 million of identifiable
intangible assets which are being amortized over their estimated useful lives
ranging from two to three years.

In August 2000, the Company acquired Simpli.com. Inc. ("Simpli.com") in a stock
and cash transaction. Simpli.com is a targeted marketing infrastructure and
search technology company. Pursuant to the terms of the agreement, the Company
issued 2.5 million shares of common stock and paid $2.6 million in cash. The
transaction has been accounted for under the purchase method and, accordingly,
the results of operations of Simpli.com have been included in the consolidated
results of the Company since the date of acquisition. The excess of the purchase
price over the fair value of net liabilities acquired amounted to approximately
$23.5 million. The excess purchase price is comprised of approximately $8.7
million of goodwill, $8.4 million of deferred stock-based compensation and $6.4
million of identifiable intangible assets all of which are being amortized over
periods ranging from two to three years.

In September 2000, the Company acquired RocketCash Corporation ("RocketCash") in
a stock for stock transaction. RocketCash is a leading online gateway that
enables consumers, particularly the rapidly growing teen market, to shop and buy
securely on the Internet without a credit card. Pursuant to the terms of the
agreement, the Company issued approximately 5.2 million shares of common stock
and options to purchase commmon stock. The transaction has been accounted for
under the purchase method and, accordingly, the results of operations of
RocketCash have been included in the consolidated results of the Company since
the date of acquisition. The excess of the purchase price over the fair value of
net liabilities acquired amounted to approximately $30.2 million. The excess
purchase price is comprised of approximately $18.1 million of goodwill, $9.0
million of identifiable intangible assets and $3.1 million of deferred
stock-based compensation all of which are being amortized over periods ranging
from two to three years.

As part of the acquisition of RocketCash, the Company issued 500,000 shares of
its common stock in connection with a RocketCash consumer marketing program and
recorded stock-based charges of approximately $2.8 million. These charges are
being amortized over the fifteen month term of the agreement.

The following summarized unaudited pro forma financial information for the three
month periods ended September 30, 2000 and 1999 assumes that the acquisitions of
AimTV, Simpli.com and RocketCash had occurred at the beginning of each period
presented:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
2000 1999
------------- ------------

<S> <C> <C>
Net revenues....................................... $ 16,466,000 $ 7,720,000
Net loss........................................... $(35,091,000) $(24,150,000)
Net loss per share................................. $ (0.31) $ (1.14)

</TABLE>

7
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. CONCENTRATION OF CREDIT RISK.

At September 30, 2000, one customer comprised 14% and at June 30, 2000
two customers comprised 16% and 14% of the accounts receivable balance,
respectively. For the quarter ended September 30, 2000, two customers
comprised 24% and 11% of revenues, respectively. For the quarter ended
September 30, 1999, two customers comprised 39% and 29% of revenues,
respectively.

6. EQUITY.

INITIAL PUBLIC OFFERING

In September 1999, the Company completed an initial public offering in which the
Company sold 11,500,000 shares of its common stock, including 1,500,000 shares
in connection with the exercise of the underwriters' over-allotment option, at
$16 per share. The proceeds to the Company from the offering, after deducting
offering expenses, including underwriting discounts and commissions, were $169.3
million. Upon the closing of the offering, all of the Company's then outstanding
preferred stock automatically converted into common stock on a one-for-one
basis.

PRIVATE PLACEMENT

In April 2000, the Company completed a private placement of 11.5 million shares
of the Company's common stock and realized proceeds of approximately $144
million.

RESTRICTED STOCK AWARDS

In July 2000, certain employees were granted restricted stock awards totaling
approximately 1.5 million shares of common stock. The shares of common stock
subject to such awards will vest and be issued in twelve successive equal
quarterly installments beginning in August 2000. The Company has recorded
deferred stock-based charges of approximately $7.8 million in connection with
these awards.

7. NET LOSS PER SHARE.

The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share" ("EPS"). SFAS No. 128 requires dual presentation of
basic and diluted EPS. Basic EPS represents the weighted average number of
shares outstanding divided into net income attributable to common stockholders
during a reported period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock. However, the Company has not included potential
common stock in the calculation of EPS as such inclusion would have an
anti-dilutive effect.

The following table sets forth the computation of basic and diluted net loss per
share:

THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
------------ ------------

Numerator:
Net loss........................... $(28,865,000) $(14,927,000)
------------ ------------
Denominator:
Weighted average common shares..... 118,997,000 30,933,000
Adjustment for common shares
subject to repurchase............ (11,309,000) (16,568,000)
------------ ------------
Adjusted weighted average common
shares........................... 107,688,000 14,365,000
============ ============

Basic and diluted net loss per share $ (0.27) $ (1.04)
============ ============

8. COMMITMENTS AND CONTINGENCIES.

The Company is not currently party to any material legal proceedings.

8
<PAGE>

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

This report on Form 10-Q contains forward-looking statements based on our
current expectations, estimates and projections about our operations, industry,
financial condition and liquidity. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "may," "will" or similar expressions are
intended to identify forward-looking statements. In addition, any statements
that refer to expectations, projections or other characterizations of future
events or circumstances, including any underlying assumptions, are
forward-looking statements. Such statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, our actual results could differ materially
and adversely from those expressed in any forward-looking statements as a result
of various factors. The section entitled "Risk Factors" set forth in this Form
10-Q and our Form 10-K for the year ended June 30, 2000, discuss some of the
important risk factors that may affect our business, results of operations and
financial condition. We undertake no obligation to revise or update publicly any
forward-looking statements for any reason.

OVERVIEW

We are a leading provider of advertising- and commerce-supported Internet access
offering a broad range of interactive marketing, research and measurement
solutions. We offer consumers reliable free access to the Internet, free e-mail
and customizable navigation tools that provide "speed dial" to key sites on the
Internet. Through September 30, 2000 approximately 5.7 million users registered
for our free Internet access service, of which approximately 2.3 million used
our service in the month of September 2000. Our service is available in more
than 5,000 cities across North America. We offer advertisers targeting
capabilities through numerous on-line advertising channels. We offer advertisers
and commerce partners a variety of additional services to build their brands and
market their products, including referring our users to partners' web-sites,
enabling customer registrations and facilitating electronic commerce
transactions. Our CyberTarget division offers marketers and advertisers
mass-scale, on-line market research and measurement services. Our RocketCash
subsidiary, acquired in September 2000, provides users with a secure online
gateway to make purchases without a credit card.

We incorporated in July 1997 and launched our Internet access service in October
1998. During that period, we had no revenues and our operating activities
related primarily to the development of our proprietary zCast software. Since
October 1998, we have focused on developing our business and building the
NetZero brand.

In December 1999, we acquired AimTV which has developed a patent-pending
technology to run broadcast quality commercials over narrowband Internet
connections resulting in the launch of NZTV in May 2000. The acquisition of
AimTV was accounted for under the purchase method of accounting. In August 2000,
we acquired Simpli.com which, when integrated into the NetZero service, is
intended to enhance our targeting capabilities. In September 2000, we acquired
RocketCash, an online gateway that enables users, particularly the rapidly
growing teen market, to shop online without the use of a credit card. These
acquisitions have been accounted for using the purchase method of accounting.

REVENUES

We generate revenues through media fees, direct marketing agreements, referring
our users to partners' web-sites, enabling customer registrations for partners
and facilitating electronic commerce transactions. We also intend to generate
revenues through our CyberTarget division by offering marketers, advertisers and
market research companies mass-scale, online market research and measurement
services using our zCast technology. We have only recently begun offering
several of our products and services, including CyberTarget, and there is no
assurance as to when, or if, these products or services will make a significant
contribution to our revenue.

We anticipate that we will receive higher advertising rates for targeted
advertisements and sponsorships than for non-targeted banner advertisements.
However, we have limited experience in selling and managing these types of
arrangements and there can be no assurance that we will successfully sell all of
the various advertising services we offer or intend to offer or that such
arrangements will generate significant revenues or higher advertising rates. To
date, we have sold targeted advertising based upon web-sites visited, key word
searches, and users' demographic and geographic information. In addition, the
growth in the user base has resulted, and may result in the future, in
situations where advertising inventory capacity has increased faster than the
ability to sell such inventory at desired rates. We have in the past relied on

9
<PAGE>

third parties to sell a portion of our banner advertisements, but intend to rely
primarily on our in-house sales force in the future. The failure of the efforts
of the in-house sales force to sell increased inventory at reasonable rates may
materially and adversely affect operating results. In addition, success with
performance-based fee arrangements may depend on our ability to effectively
target users. We are still in the early stages of that process and may encounter
technical and other limitations on our ability to successfully target users,
including limitations associated with privacy concerns. There can be no
assurance that we will adequately perform under these arrangements or that we
will be able to replace such arrangements on comparable terms, if at all. The
failure to generate significant relationships with advertisers or the failure to
replace significant contracts when they expire could adversely affect our
revenues and results of operations.

Banner advertising and sponsorship revenues are recognized in the periods in
which the advertisement or sponsorship placement is displayed, based upon the
lesser of impressions delivered over the total number of guaranteed impressions
or ratably over the period in which the advertisement is displayed, provided
that no significant obligations on our part remain and collection of the related
receivable is probable. Our obligations typically include the guarantee of a
minimum number of impressions or the satisfaction of other performance criteria.
The guaranteed minimum number of impressions are generally required to be
delivered over the term of the commitment. Revenues from performance-based
arrangements, including click-throughs, are recognized as the related
performance criteria are met. Referral revenues are recognized in the periods in
which the referrals are made to advertisers' or sponsors' web-sites, provided
that no significant obligations on our part remain and collection of the related
receivable is probable.

Our advertising revenues are subject to the effects of seasonality. Advertisers
typically purchase impressions on a forward basis. If purchasing patterns or
timing of purchasing by advertisers were to change, operations could be
materially affected.

Advertising on the Internet, particularly the products and services we offer, is
a relatively new industry, and there is no assurance that the products and
services we offer now or in the future will meet with commercial acceptance. In
addition, competition for Internet-based advertising revenues is intense and the
amount of available advertising inventory on the Internet is increasing at a
significant rate. These factors are causing Internet advertising rates to
decline, and it is possible that rates will continue to decline in the future.
Many of the purchasers of Internet advertising have been companies with
Internet-based business models. Certain of these companies have come under
financial pressure and have not been able to access the capital markets to fund
their operations. This trend has impacted our ability to generate revenues and
could continue to do so in the future. This trend could also result in increased
allowances for doubtful accounts. Due to market forces and other factors, our
revenues and results of operations may fluctuate from period to period.

We do not currently anticipate that inflation will have a material impact on our
results of operations.

COST OF REVENUES

Cost of revenues consists of telecommunications costs, depreciation of network
equipment, occupancy costs and personnel and related expenses of our network
department. We have expended significant funds on our network infrastructure.
While we may expend significant additional funds on capital expenditures in the
future, such expenditures may be dependent upon our expectation of user growth
and usage patterns, as well as needs associated with acquired businesses and new
products. Telecommunications costs for network access are expensed as incurred.
Our failure to accurately forecast users' needs could result in significant
overcapacity, which would adversely impact our results of operations.
Conversely, under-forecasting usage could adversely impact the ability of users
to receive adequate service and adversely impact our reputation and our ability
to maintain or increase our subscriber base. We have limited history in
forecasting our user requirements, and there can be no assurance that we will be
able to accurately forecast such requirements in the future.

SALES AND MARKETING

Sales and marketing expenses include advertising and promotion expenses,
salaries, sales commissions, employee benefits, travel and related expenses for
our direct sales force, fees paid to third-party advertising sales agents and
sales support functions. We have expended, and intend to continue to expend,
significant amounts on sales and marketing including a national branding
campaign comprised of television, radio and print advertising, sponsorships and
a variety of other promotions. Due to the timing of these promotions, amounts
expended may vary significantly from period to period. Marketing costs
associated with increasing brand awareness and user base are expensed in the
period incurred.

10
<PAGE>

PRODUCT DEVELOPMENT

Product development costs include expenses for the development of new or
improved technologies and products, including salaries and related expenses for
the software engineering department, as well as costs for contracted services,
facilities and equipment. We believe that a significant level of product
development is necessary for the business and intend to increase, as necessary,
the amount of spending to fund this activity.

GENERAL AND ADMINISTRATIVE

General and administrative expenses include salaries, employee benefits and
expenses for executive, finance, legal, human resources and internal and
customer support personnel. In addition, general and administrative expenses
include fees for professional services, third-party customer support and
occupancy costs.

STOCK-BASED CHARGES

In connection with the issuance of restricted shares of our common stock and
options to purchase our common stock for the acquisitions of Simpli.com, and
RocketCash, we recorded deferred stock-based charges of approximately $11.5
million in the September quarter. We are amortizing these charges over the
vesting period of the applicable shares, generally three years.

As part of the acquisition of RocketCash, we issued 500,000 shares of our common
stock in connection with a RocketCash consumer marketing program and we recorded
stock-based charges of approximately $2.8 million. We are amortizing these
charges over the fifteen month term of the agreement.

In connection with the grant of restricted shares and stock options to employees
and the imposition of restrictions on shares of stock held by certain founders
through September 30, 2000, we recorded deferred stock-based charges of
approximately $19.6 million. These deferred stock-based charges represent the
difference between the deemed fair value of common stock for accounting purposes
and the exercise price of these options or shares at the date of grant. We are
amortizing this amount over the vesting periods of the applicable options or
shares, generally three to four years.

In December 1999, we entered into a CD distribution agreement under which we
issued an immediately exercisable, fully vested and non-forfeitable warrant to
purchase 575,000 shares of our common stock at $28.71 per share. We determined
that the fair value of the warrant approximated $8.6 million at the date of
issuance which is being amortized to stock-based charges over the four year term
of the agreement.

Deferred stock-based charges are presented as a reduction of stockholders'
equity.

CONSOLIDATED RESULTS OF OPERATIONS.

The following tables set forth, for the periods presented, selected unaudited
consolidated statements of operations data in dollars and as a percentage of
total revenues:

11
<PAGE>

Three Months Ended September 30,
--------------------------------
2000 1999
------------ -----------
(in thousands)

<S> <C> <C>
Net Revenues.............................. $ 16,466 $ 7,720
Cost of Revenues.......................... 17,458 12,093
-------- --------

Gross Loss................................ (992) (4,373)
Operating Expenses:
Sales and marketing..................... 12,867 4,885
Product development..................... 4,220 1,369
General and administrative.............. 5,750 3,060
Stock-based charges..................... 4,732 1,304
Amortization of intangible assets....... 3,818 -
-------- --------
Total operating expenses.................. 31,387 10,618
-------- --------

Loss from operations...................... (32,379) (14,991)
Net interest income....................... 3,514 64
-------- --------
Net loss.................................. $(28,865) $(14,927)
======== ========
</TABLE>

Three Months Ended September 30,
--------------------------------
2000 1999
------------- ------------

<S> <C> <C>
As a percentage of net revenues:
Net Revenues.............................. 100% 100%
Cost of Revenues.......................... 106 157
---- ----
Gross Loss................................ (6) (57)
Operating Expenses:
Sales and marketing..................... 78 63
Product development..................... 26 18
General and administrative.............. 35 39
Stock-based charges..................... 29 17
Amortization of intangible assets....... 23 -
---- ----
Total operating expenses.................. 191 137
---- ----

Loss from operations...................... (197) (194)
Net interest income....................... 22 1
---- ----
Net loss.................................. (175)% (193)%
==== ====
</TABLE>

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<PAGE>

THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999

REVENUES.

Revenues for the three months ended September 30, 2000 were $16.5 million, which
represented an increase of $8.8 million, or 113%, from $7.7 million for the
three months ended September 30, 1999. The increase was primarily attributable
to revenues generated from sponsorships on the ZeroPort, increased sales of
banner advertisements, primarily through our in-house sales force, our start
page agreement with LookSmart and sales of NZTV. Specifically, we generated
approximately $3.9 million, or 24% of our total revenues for the three months
ended September 30, 2000, from our start page agreement. This amount represented
an increase of approximately $0.9 million from the $3.0 million of revenues
generated from our start page agreement for the three months ended September 30,
1999, which represented approximately 39% of our total revenues for that period.

COST OF REVENUES.

Cost of revenues for the three months ended September 30, 2000 was $17.5
million, which represented an increase of $5.4 million, or 44%, from $12.1
million for the three months ended September 30, 1999. The increase was
primarily attributable to increased telecommunications usage related to the
growth in our user base and increased depreciation related to our internal
network costs, partially offset by a reduction in cost per user hour. During the
September 2000 quarter, the Company's cost of telecommunications services
purchased averaged less than $0.20 per user hour.

SALES AND MARKETING.

Sales and marketing expenses for the three months ended September 30, 2000 were
$12.9 million, which represented an increase of $8.0 million, or 163%, from $4.9
million for the three months ended September 30, 1999. The increase was
primarily due to our sponsorship of the NBC telecast of the 2000 Summer Olympics
in Sydney, an increase in other media advertising and promotion expense and an
increase in sales and marketing personnel and related costs.

PRODUCT DEVELOPMENT.

Product development expenses for the three months ended September 30, 2000 were
$4.2 million, which represented an increase of $2.8 million, or 208%, from $1.4
million for the three months ended September 30, 1999. The increase was
primarily due to the hiring of additional personnel and increased depreciation
related to equipment used in product development and testing.

GENERAL AND ADMINISTRATIVE.

General and administrative expenses for the three months ended September 30,
2000 were $5.8 million, which represented an increase of $2.7 million, or 88%,
from $3.1 million for the three months ended September 30, 1999. The increase
was primarily due to the hiring of additional administrative personnel,
increased customer support costs and increased occupancy costs.

STOCK-BASED CHARGES.

For the three months ended September 30, 2000 and September 30, 1999,
amortization of deferred stock-based charges was $4.7 million and $1.3 million,
respectively. The increase of $3.4 million, or 263%, is due to amortization of
deferred stock-based charges related to warrants issued in connection with a
four-year CD distribution agreement, amortization of restricted shares issued to
certain employees and shares issued in connection with the acquisitions of
Simpli.com and RocketCash.

AMORTIZATION OF INTANGIBLE ASSETS.

Amortization of intangible assets for the three months ended September 30, 2000
was $3.8 million as a result of our acquisitions of AimTV in December 1999,
Simpli.com in August 2000 and RocketCash in September 2000.

INTEREST INCOME AND INTEREST EXPENSE.

Interest income consists of earnings on our cash and cash equivalents,
short-term investments and restricted cash. Interest expense consists primarily
of interest expense on capital leases and notes payable. Interest income, net,
for the three months ended September 30, 2000 was $3.5 million, which
represented an increase of $3.4 million from net interest income of $0.1 million
for the three months ended September 30, 1999. The increase was primarily due to
interest earned on cash balances from the proceeds of our initial public
offering and a private placement of our common stock in April 2000, partially
offset by an increase in interest expense on capital leases and notes payable.

13
<PAGE>

INCOME TAXES.

As a result of operating losses and our inability to recognize a benefit from
our deferred tax assets, we have not recorded a benefit for income taxes for the
three months ended September 30, 2000 and September 30, 1999.

LIQUIDITY AND CAPITAL RESOURCES

From inception of the business to September 2000, our operations were financed
primarily through the sale of equity securities, cash generated from sales of
our products and, to a lesser extent, equipment lease financing. At September
30, 2000 we had approximately $213 million in cash, cash equivalents and
short-term investments and approximately $7.4 million in restricted cash.

Net cash used for operating activities was $18.5 million and $10.5 million for
the three months ended September 30, 2000 and 1999, respectively, and consisted
primarily of operating losses, increases in accounts receivable and other
assets, partially offset by depreciation and amortization, stock-based charges
and increases in accounts payable and accrued expenses.

Net cash used for investing activities was $47.5 million for the three months
ended September 30, 2000. $43.8 million represented the purchase of short-term
investments and the balance was for acquisitions and capital expenditures. In
the three months ended September 30, 1999, cash used for investing activities of
$4.3 million related to capital expenditures.

Net cash used for financing activities was $2.8 million for the three months
ended September 30, 2000 and was due primarily to payments on capital lease and
notes payable obligations. In the three months ended September 30, 1999 cash
provided from financing activities was $172.5 million and was principally due to
the proceeds from our initial public offering.

We have incurred significant operating losses since we began our business and we
expect this trend to continue for the foreseeable future. In order to succeed we
must increase our revenues while controlling our telecommunications costs, our
operating expenses and our capital expenditures. Many factors will impact our
ability to grow revenues including, but not limited to, the growth in our user
base, the rate of increase in Internet advertising and our ability to sell our
existing products and develop new products to further monetize our users. We
have invested significantly in our network infrastructure, software licenses and
furniture, fixtures and equipment and we may need to make further significant
investments in the future. The actual amount of capital expenditures will depend
on the rate of growth in our user base, which is difficult to predict and which
could change dramatically over time. Technological advances may also require us
to make capital expenditures to develop or acquire new equipment or technology.
We intend to use cash to fund our operating losses and a combination of cash and
capital lease financing to fund our capital expenditures. However, there is no
assurance that lease financing will be available on favorable terms, if at all,
in which case we would be required to use a greater portion of cash to fund
capital expenditures.

We currently anticipate that our existing cash, cash equivalents and short-term
investments will be sufficient to fund our operating activities, capital
expenditures and other obligations for at least the next 12 months. However, we
may need additional capital in order to fund more rapid growth, expand our
marketing activities, develop new or enhance existing services or products, to
respond to competitive pressures or to acquire complementary services,
businesses or technologies. If, in the future, we are not successful in
generating sufficient cash flow from operations, we may need to raise additional
capital through public or private financings, strategic relationships or other
arrangements. This additional funding, if needed, might not be available to us
on acceptable terms, or at all. Our failure to raise sufficient capital when
needed could have a material adverse effect on our business, results of
operations and financial condition. If additional funds were raised through the
issuance of equity securities, the percentage of stock owned by the then-current
stockholders would be reduced. Furthermore, such equity securities might have
rights, preferences or privileges senior to holders of our common stock.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, The Financial Accounting Statndards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." The statement
requires the recognition of all derivatives as either assets or liabilities in
the balance sheet and the measurement of those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the planned
use of the derivative and the resulting designation. Because the Company does
not currently hold any derivative instruments and does not engage in hedging
activities, the impact of the adoption of SFAS No. 133 did not have a material
impact on financial position, results of operations or cash flows. The Company
was required to implement SFAS No. 133 in the first quarter of fiscal 2001.

14
<PAGE>

FUTURE RESULTS OF OPERATIONS MAY VARY DUE TO CERTAIN FACTORS

Our operating results may fluctuate substantially in the future as a result of a
variety of factors, many of which are outside of our control, including those
discussed elsewhere in this Form 10-Q. The Company may significantly increase
its operating expenses and capital expenditures for a variety of reasons
including, without limitation, the expansion of its sales and marketing efforts,
the promotion of the NetZero brand, the enhancement of the features and
functionality of our services, the development of new services and products, the
integration of acquired companies, the upgrading of the internal network
infrastructure, pursuit of new distribution channels and the hiring of new
personnel across all levels of the organization. Expenditures in each of these
categories may vary significantly from period to period. While some expenses are
fixed in the short-term, total operating expenses are principally determined on
the basis of anticipated growth in revenues. There are risks associated with the
timing and achievement of revenue targets due to a variety of factors, and there
can be no assurance that revenues will increase commensurately with expenses. We
believe that expenses will significantly exceed revenues for the foreseeable
future. As a result of these and other factors, operating results may vary
substantially from quarter to quarter.

In addition, seasonal trends could affect revenues generated. To the extent that
revenues depend on the amount of usage by users, any seasonal fluctuations in
Internet usage could affect revenues during such periods of fluctuation. We
anticipate that the summer and year-end vacation and holiday periods will impact
user traffic levels. Moreover, the rate at which new users sign up for our
service may be related to gifts or purchases of personal computers, which
typically increase during the fourth calendar quarter because of the holiday
season and may decline during other periods. As a result, new user registration
may be subject to seasonality. However, because our operating history is
limited, it is difficult to accurately predict these trends and plan
accordingly. Since operating expenses are based on expectations of future
revenues, it is possible that seasonal fluctuations could materially and
adversely affect our business, results of operations and financial condition.

In addition to seasonality, there are several other factors that may cause our
quarter to quarter revenues to fluctuate significantly, including changes in
advertising rates due to increased competition, fluctuations in our user count,
termination of our material contracts, such as the LookSmart agreement, and the
effect of short term contracts which provide significant revenues in one quarter
but do not provide significant revenues in subsequent quarters. These and other
factors may cause significant fluctuations in our quarter to quarter revenues.

A small number of customers have accounted for, and may in the future account
for, a significant portion of revenues. For example, in the quarter ended
September 30, 2000, LookSmart accounted for 24% of our revenues. The agreement
with LookSmart was renewed in February 2000 and will extend through February
2001. There is no assurance that such agreement will be renewed or, if renewed,
will continue to generate comparable revenues. We no longer have any agreements
in effect with third party sales organizations that we believe will result in
significant revenues. We intend to focus primarily on our in-house sales
organization for our advertising sales. The termination of material agreements,
as well as the timing of orders under material agreements, may cause significant
fluctuations in our results. Our business, results of operations and financial
condition will be materially and adversely affected if we are unable either to
renew material agreements or to replace such agreements with similar agreements
with new customers.

15
<PAGE>

RISK FACTORS

Before deciding to invest in our Company or to maintain or increase your
investment, you should carefully consider the risks described below, in addition
to the other information in this report and our other filings with the SEC. The
risks and uncertainties described below are not the only ones facing our
Company. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also affect our business operations. If any of
these risks actually occur, our business, financial condition or results of
operations could be seriously harmed. In that event, the market price of our
common stock could decline and you may lose all or part of your investment.

WE FACE RISKS ASSOCIATED WITH OUR OPERATIONS

WE CANNOT PREDICT OUR SUCCESS BECAUSE OUR FREE INTERNET SERVICE PROVIDER
BUSINESS MODEL IS UNPROVEN, AND WE HAVE OPERATED OUR BUSINESS FOR ONLY A SHORT
PERIOD OF TIME.

Our business model is unproven and a number of other businesses offering free
Internet access have failed. Since we only began offering Internet access in
October 1998, we have a limited operating history, which makes it difficult to
evaluate our performance. Our business model, unlike traditional Internet
service providers, does not have a measurable and predictable revenue stream
from user access fees. If we are not able to successfully address these risks,
we will not be able to grow our business, compete effectively or achieve
profitability.

OUR MARKET SHARE AND REVENUES WOULD SUFFER IF WE WERE NOT ABLE TO COMPETE
EFFECTIVELY FOR USERS WITH ESTABLISHED AND NEW PROVIDERS OF INTERNET ACCESS
SERVICES.

COMPETITORS

Competition for users is increasing. We currently compete or expect to compete
for users with the following types of companies that provide access services:

o companies that provide free Internet access under their own brands,
such as Juno Online Services, Inc., as well as companies such as
1stUp.com and Spinway that provide free Internet access co-branded
with, or under the brands of, third parties;

o established online service and content providers, such as America
Online and The Microsoft Network;

o independent national Internet service providers, such as EarthLink
and Prodigy;

o national long-distance carriers, such as AT&T, GTE and MCI WorldCom;

o local telephone companies and regional Bell operating companies,
such as Pacific Bell;

o numerous regional and local commercial Internet service providers;

o computer hardware and software and other technology companies, such
as IBM and Microsoft;

o cable operators and online cable services, such as Excite@Home;

o Internet portals and search engines such as Yahoo!, Alta Vista and
Lycos;

o retail companies such as K-Mart and Costco; and

o nonprofit or educational Internet service providers.

We expect that competition for users will continue to intensify for the
foreseeable future. We believe that additional competitors for Internet users,
including major computer manufacturers, retail companies, and software, media
and telecommunications companies, will continue to enter the Internet access
market. Existing competitors may take steps such as reducing their subscriber
fees, offering promotions for access services, or bundling free access services
with other product offerings. For example, Alta Vista, Excite and Lycos, leading
portals and search engines, now offer free Internet access solutions in
conjunction with 1stUp.com; K-Mart, SOFTBANK, Spinway and Yahoo, have invested
in, or entered into relationships with, Bluelight.com to form a new free
Internet access provider; and both Microsoft and CompuServe have partnered with
personal computer makers and consumer electronics retailers to offer consumers
rebates on computer equipment when the consumer signs up for their Internet
access services. New entrants have announced Internet access models similar to

16
<PAGE>

ours, and the implementation of similar models by new entrants or existing
competitors could limit the value of our consumer proposition. As awareness of
the Internet grows, existing competitors are likely to further increase their
emphasis on their Internet access services, resulting in even greater
competition for us.

We believe that increased competition has impacted our growth and will likely
continue to impact our growth in the future, resulting in increased user
turnover and additional sales and marketing expenses that increase user
acquisition cost. Increased competition could also result in decreased
advertising revenue. Since we do not charge our users membership fees, we may
not be able to offset the effect of these increased costs, and we may not have
the resources to continue to compete successfully. The ability of our
competitors to acquire other Internet providers or to enter into strategic
alliances or joint ventures could also put us at a significant competitive
disadvantage.

TELECOMMUNICATIONS SERVICES

In addition, telecommunications companies with far greater resources,
distribution channels and brand awareness offer, or have announced that they
will offer, their own Internet access services to users. Since these companies
have their own telecommunications network infrastructure, they have lower
communications costs than we do. These advantages reduce the overall cost of
Internet access for such companies and may significantly increase competitive
pressures on us. In addition, each of our telecommunications providers supplies
network access to some of our competitors, and could choose to grant those
competitors preferential network access, potentially limiting our users' ability
to access the Internet. If our telecommunications service providers were to
decrease the levels of service or access provided to us, or if they were to
terminate their relationships with us for competitive or other reasons, and we
were not able to develop alternate sources of supply, we would not be able to
provide Internet access to our customers, which could ultimately result in a
significant loss of users and revenues.

BROADBAND PROVIDERS

We also face competition from companies that provide broadband Internet access,
including local and long-distance telephone companies, cable television
companies, electric utility companies, wireless communications companies and
other Internet service providers. Most of our service is offered via dial-up
modems, which are generally limited to access speeds of up to 56 kbps. Broadband
technologies enable users to transmit and receive print, video, voice and data
in digital form at significantly faster access speeds. We may have to develop
new technologies or add broadband access services to remain competitive, which
could require substantial time and expense. We cannot be certain that we will
succeed in adapting our Internet access service business to compete effectively
with these technologies.

The telephone, cable and other companies that own broadband networks may prevent
us from offering broadband Internet access through the wire and cable networks
that they own. Our ability to compete with telephone and cable television
companies that are able to support broadband transmission may depend on future
regulation to guarantee open access to their broadband networks. However, in
January 1999, the Federal Communications Commission declined to take any action
to mandate or otherwise regulate access by Internet service providers to
broadband cable facilities at this time. We do not know whether local, state or
federal regulatory agencies will take any initiatives to implement this type of
regulation, and whether they will be successful in establishing their authority
to do so.

In addition to competing directly in the Internet access market, both cable and
telephone companies are also aligning themselves with Internet service providers
who would receive preferential or exclusive use of broadband local connections
to users. If broadband Internet access becomes the preferred mode by which users
access the Internet and we are unable to gain access to broadband networks on
reasonable terms, our ability to compete could be materially and adversely
affected.

We are in the process of developing, and plan to implement, a strategy to
deliver broadband services. There is no assurance that we will be successful in
developing or implementing this strategy. It is anticipated that implementing a
broadband strategy will result in significant operating costs, which could
adversely impact our financial position and results of operations.

IF WE FAIL TO GROW OUR USER BASE, WE MAY NOT BE ABLE TO GENERATE REVENUES,
DECREASE PER-USER TELECOMMUNICATIONS COSTS OR IMPLEMENT OUR STRATEGY.

If we are unable to grow our user base, we may not be able to generate revenues,
decrease per-user telecommunications costs or implement our strategy. We intend

17
<PAGE>

to generate new users through other distribution channels, such as television,
radio and print media advertising, direct marketing campaigns, and bundling,
co-branding and retail distribution arrangements. However, we have limited
experience with marketing our service through these channels. If these
distribution channels prove more costly or less effective than anticipated, it
could adversely impact our ability to grow. We would also be unable to grow our
user base if a significant number of our current registered users stopped using
our service. There are a variety of reasons why users would discontinue using
our service, including:

o users may decide they do not like the always-present nature
of the ZeroPort;

o users may not like having their online activities tracked;

o reliability issues, which we have experienced in the past and
may experience in the future, may cause user dissatisfaction; and

o our limited user support may frustrate users who have difficulty
using our service.

There is no assurance that we will be able to successfully address these issues
and retain our existing user base.

OUR ADVERTISING REVENUES WILL SUFFER IF WE ARE UNABLE TO DEMONSTRATE THAT OUR
REGISTERED USERS ARE ACTIVELY USING OUR SERVICE.

If we are not able to demonstrate to our advertisers that our registered users
are actively using our service, advertisers may choose not to advertise with us
and our advertising revenues could be materially and adversely affected. While
approximately 5.7 million users had registered for our service as of September
30, 2000, approximately 2.3 million had used our service during the month of
September. We believe that a number of our users have Internet access accounts
with our competitors. As a result, these users may not use NetZero as their
primary Internet service provider. Also, some new users use the Internet only as
a novelty and do not become consistent users of Internet services and,
therefore, may be less likely to continue using our service.

IF WE FAIL TO GENERATE SUFFICIENT ADVERTISING REVENUES, WE MAY NOT BE ABLE TO
SUPPORT OUR OPERATIONS.

Since we do not charge our users any fees for our Internet access and e-mail
services, we depend primarily on our ability to generate advertising revenues.
Accordingly, if we fail to generate sufficient advertising revenues, we may not
be able to support our operations. We generate revenues from a variety of
different arrangements including sales of targeted and untargeted banner
advertising, sponsorships, performance-based arrangements and referrals to third
party web-sites. We have limited experience marketing and pricing these types of
arrangements, and have limited actual experience with respect to the performance
of such arrangements. As such, we do not know if we are appropriately pricing,
marketing or structuring these arrangements, or whether we will perform under
these arrangements to the satisfaction of the other parties. Our failure to
appropriately price, market or structure these arrangements could impact our
ability to enter into and perform under these arrangements, or to renew these
arrangements on similar or acceptable terms. In addition, the success of some of
these arrangements will depend on our ability to effectively target users based
on demographic and other information. We may encounter technical and other
limitations on this ability, including problems associated with the accuracy of
the information provided by our users, which we do not corroborate. In light of
these factors, there can be no assurance that we will be able to attract
sufficient advertising revenues to support our operations.

In addition, competition for Internet-based advertising revenues is intense and
the amount of available standard banner advertising space on the Internet is
increasing at a significant rate. These factors are causing Internet advertising
rates to decline, and it is possible that rates will continue to decline in the
future. Also, our growth in users has resulted in, and in the future may result
in, our advertising inventory growing faster than our ability to sell the
inventory at reasonable rates. Many of the purchasers of Internet advertising
have been companies with Internet-based business models. Many of these companies
have come under financial pressure and have not been able to access the capital
markets to fund their operations. This trend could impact our ability to
generate revenues in the future and could result in increased reserves for
doubtful accounts.

Many of our advertising competitors have longer operating histories, greater
name recognition, larger user bases, significantly greater financial, technical,
sales and marketing resources and more established relationships with
advertisers than we do. These advantages may allow such competitors to respond

18
<PAGE>

more quickly than we can to new or emerging technologies and changes in
advertiser requirements. They may also be able to devote greater resources than
we can to develop, promote and sell their products and services. Such
competitors may also engage in more extensive research and development,
undertake more far-reaching marketing campaigns, adopt more aggressive pricing
policies and make more attractive offers to existing and potential employees,
strategic partners, advertisers and Web publishers. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products or services to address the needs of our prospective customers. We
must also compete with television, radio, cable and print media for a share of
advertisers' total advertising budgets. Advertisers may be reluctant to devote a
significant portion of their advertising budget to Internet advertising if they
perceive the Internet to be a limited or ineffective advertising medium.

IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE ACQUISITIONS INTO OUR OPERATIONS,
THEN OUR RESULTS AND FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED.

We have made a number of acquisitions and may continue to make acquisitions or
undertake other business combinations that can complement our current or planned
business activities. Such acquisitions may not be available at the times or on
terms acceptable to us, or at all. In addition, acquiring a business involves
many risks, including:

o disruption of our ongoing business and diversion of resources
and management time;

o unforeseen obligations or liabilities;

o difficulty assimilating the acquired operations and personnel;

o risks of entering markets in which we have little or no direct
prior experience;

o potential impairment of relationships with employees or users
as a result of changes in management; and

o potential dilutive issuances of equity, large and immediate
write-offs, the incurrence of debt, and amortization of goodwill or
other intangible assets.

There can be no assurance that we will make any further acquisitions or that we
will be able to obtain additional financing for such acquisitions, if necessary.
There can be no assurance that we will be able to successfully integrate the
acquired businesses into our operations or that the acquired businesses will
perform as expected.

WE MAY NOT BE ABLE TO PROVIDE INTERNET ACCESS FOR OUR USERS IF OUR
TELECOMMUNICATIONS CARRIERS RAISE THEIR RATES OR IF THEY DISCONTINUE DOING
BUSINESS WITH US.

Our business substantially depends on the capacity, affordability, reliability
and security of our telecommunications networks. Only a small number of
telecommunications providers offer the network services we require. There has
been significant consolidation in the telecommunications industry, and there is
a significant risk that further consolidation could make us reliant on an even
smaller number of providers. Certain of our telecommunications services are
provided pursuant to short-term agreements that the providers can terminate or
elect not to renew. As a result, any or all of our current telecommunications
service providers could decide not to provide us with service at rates
acceptable to us, or at all, in which event, we may not be able to provide
Internet access to our users.

WE MAY LOSE OUR USERS IF OUR TELECOMMUNICATIONS PROVIDERS DELIVER
UNACCEPTABLE SERVICE QUALITY.

If our third-party telecommunications service providers deliver unacceptable
service, the quality of our Internet access service would suffer. In this event,
we would likely lose users who are dissatisfied with our service. Since we do
not have direct control over our telecommunications carriers' network
reliability and the quality of their service, there can be no assurance that we
will be able to provide consistently reliable Internet access for our users.

IF TELECOMMUNICATIONS PRICES INCREASE, OUR MARGINS WOULD BE ADVERSELY IMPACTED.

Our margins are highly sensitive to variations in prices for the
telecommunications services we purchase. Our business could be harmed if minimum
connection charges increase or become more prevalent. In addition, the
availability and pricing of telecommunications services varies geographically,

19
<PAGE>

and we may not be able to obtain new or substitute telecommunications services
in certain geographic areas on commercially reasonable terms, if at all.
Legislation has been proposed from time to time that would increase the cost of
doing business of many of our telecommunications providers. Any increase in
their costs could result in increased prices to us. There can be no assurance
that our telecommunications providers will continue to provide their services on
commercially acceptable price terms, or that alternative services will be
available on similar terms.

OUR ABILITY TO SERVE ADVERTISEMENTS ON THE ZEROPORT COULD BE SEVERELY LIMITED IF
THE SOFTWARE WE LICENSE FROM NETGRAVITY FAILS TO PERFORM OR IF WE ARE NOT ABLE
TO RENEW OUR LICENSE.

All of our advertisements are served using software licensed from NetGravity.
While there is other software available, it would substantially disrupt our

business to switch to another provider. As such, we are reliant on NetGravity
and its software. Our agreement with NetGravity expires in June 2001; however we
have an option to renew the agreement for an additional two-year term upon
initial expiration. If NetGravity's software fails to perform as expected, or if
we are not able to renew such agreement or license or internally develop similar
software in the future, we may not be able to effectively display advertisements
to our users. In this event, our ability to generate advertising revenues would
be severely limited. In October 1999, NetGravity was acquired by Double Click,
an Internet advertising provider. Since our agreement with NetGravity does not
expire until June 2001 and we have an option to renew for an additional two-year
term upon initial expiration, we do not believe the acquisition will have a
material effect on our contractual rights with NetGravity.

OUR STOCK PRICE COULD FALL AS A RESULT OF FUTURE LOSSES AND NEGATIVE CASH FLOW.

We have a significant accumulated deficit. We expect that our losses and
negative cash flow will increase for the foreseeable future as we continue to
expand our operations. Our ability to achieve profitability or positive cash
flow depends upon a number of factors, including our ability to increase revenue
and reduce per-user costs. We cannot be certain that we will be able to continue
to grow our revenues or that we will obtain sufficient revenues to achieve
profitability or positive cash flow. If we do achieve profitability, we cannot
be certain that we can sustain or increase profitability on a quarterly or
annual basis in the future. If we fail to do so, the market price for our common
stock could suffer.

OUR REVENUES WOULD SIGNIFICANTLY DECREASE IF WE LOSE KEY CUSTOMERS.

A small number of customers have accounted for, and may in the future account
for, a significant portion of our revenues. For example, we derived
approximately 24% of our revenues for the quarter ended September 30, 2000 from
an agreement with LookSmart. Our agreement with LookSmart was renewed in
February 2000 and will expire on February 15, 2001. There can be no assurance
that the agreement with LookSmart will be renewed or, if renewed, will result in
a comparable level of revenues. During the year ended June 30, 2000 we generated
a significant portion of our revenues from third party sales organizations. We
no longer have any agreements in effect with third party sales organizations
that we believe will result in significant revenues. We intend to focus
primarily on our in-house sales organizations for our advertising sales. The
termination of material agreements, as well as the timing of orders under
material agreements, may cause significant fluctuations in our quarterly
results. Our business, results of operations and financial condition will be
materially and adversely affected if we are unable either to renew our material
agreements or to replace such agreements with similar agreements with new
customers.

OUR REPUTATION AND ABILITY TO GENERATE REVENUES WILL BE HARMED IF USER DEMAND
FOR OUR SERVICE EXCEEDS OUR TELECOMMUNICATIONS AND SERVER CAPACITY.

We may from time to time experience increases in our telecommunications usage
which exceed our then-available telecommunications capacity and the capacity of
our internal servers. As a result, users may be unable to register or log on to
our service, may experience a general slow-down in their Internet access or may
be disconnected from their sessions. Excessive user demand could also result in
system failures of our internal server networks, which would prevent us from
generating advertising revenues. Inaccessibility, interruptions or other
limitations on the ability to access our service due to excessive user demand,
or any failure of our servers to handle user traffic, would have a material
adverse effect on our reputation and our revenues.

WE WILL NOT BE ABLE TO SUPPORT INCREASED NUMBERS OF USERS IF WE ARE UNABLE TO
ENHANCE OUR INTERNAL NETWORK INFRASTRUCTURE.

Our internal network infrastructure is composed of a complex system of
application, database, advertisement and e-mail servers. Service interruptions

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originating within our internal network have occurred in the past and may occur
in the future, especially when usage exceeds capacity. We will need to invest in
substantial financial, operational, and management resources to enhance our
systems, particularly our database servers and storage capabilities, to handle a
large number of users. We cannot be certain that we will be able to accomplish
this on a timely basis and at a commercially reasonable cost, or at all. If we
fail to do so, we will be unable to grow our business.

IF WE FAIL TO MANAGE OUR TELECOMMUNICATIONS CAPACITY, OUR SERVICE LEVELS MAY
SUFFER OR WE MAY EXPERIENCE INCREASED PER-USER COSTS.

We will have to accurately anticipate our future telecommunications capacity
needs within lead-time requirements. If we fail to procure sufficient quantities
of telecommunications products and services, we may be unable to provide our
current and future users with acceptable service levels. We also run the risk of
purchasing excessive amounts of telecommunications products and services based
on incorrect projections regarding increased usage. In that event, we would be
required to bear the costs of excess telecommunications capacity without
commensurate increases in revenues. There can be no assurance that we will be
able to effectively manage these and other aspects of our business. Our failure
to do so would likely have a material adverse effect on our business, results of
operations and financial condition.

WE MAY NOT BE ABLE TO GROW OUR USER BASE IF WE ARE UNSUCCESSFUL IN
ESTABLISHING AND MAINTAINING THE NETZERO BRAND.

If we are unsuccessful in establishing or maintaining the NetZero brand, we may
not be able to grow our user base. We believe that establishing and maintaining
the NetZero brand is critical to retain and expand our user base. Promotion of
the NetZero brand will depend on our success in providing high-quality Internet
products and services. However, such success will depend, in part, on the
services, products and efforts of third parties, over which we have little or no
control. For instance, if our third party telecommunications service providers
fail to provide quality service, our users' ability to access the Internet may
be interrupted, which may adversely affect the NetZero brand. If our users and
advertisers do not perceive our existing products and services as high quality,
or if we introduce new products or services or enter into new business ventures
that are not favorably received by our users and advertisers, then we may be
unsuccessful in building brand recognition and brand loyalty in the marketplace.
In addition, we may also need to devote substantial resources to create and
maintain a distinct brand loyalty among our users and to promote and maintain
the NetZero brand in a very competitive market. If we incur excessive expenses
in promoting and maintaining our brand, our financial results could be seriously
harmed.

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IF WE ARE NOT ABLE TO RESPOND TO
CHANGING INDUSTRY STANDARDS.

We may not be able to compete effectively if we are not able to adapt to changes
in technology and industry standards, and to develop and introduce new and
enhanced products and service offerings. We believe that our ability to compete
successfully will also depend upon the continued compatibility of our services
with products offered by various vendors. Although we intend to support emerging
standards in the market for Internet access, we may not be able to conform our
technology and equipment to support these new standards in a timely fashion. For
instance, Sun Microsystems continues to upgrade its JAVA language and
implementing new versions of JAVA may require additional memory to implement.
Our software uses the JAVA language extensively and we will have to modify our
resources accordingly to accommodate new versions. There can be no assurance
that we will be able to make such modifications, or any other modifications
which may be required to adapt to new or changing standards, in a cost-effective
and timely manner, or at all.

WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCT OR SERVICE OFFERINGS IF WE ARE
UNABLE TO OBTAIN NEEDED TECHNOLOGY.

We rely upon third parties to help us develop technologies that enhance our
current product and service offerings. If our relationships with these third
parties are impaired or terminated, then we would have to find other developers
on a timely basis or develop technology completely on our own. We cannot predict
whether we will be able to obtain the third-party technology necessary for
continued development and introduction of new and enhanced products and
services.

CONSUMERS MAY DECIDE NOT TO USE OUR SERVICE IF OUR TECHNOLOGY AND SERVICES
BECOME OBSOLETE.

Others may develop services or technologies that render our services or
technology noncompetitive or obsolete. For instance, a number of companies are
offering broadband and other high speed Internet access services, which allow
users to access the Internet at much faster speeds than the access services we

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currently provide. Our ability to remain technologically competitive may require
substantial expenditures and lead time.

WE MAY NOT SUCCESSFULLY DEVELOP AND MARKET NEW PRODUCTS IN A TIMELY MANNER.

We may expend significant resources developing and implementing new products.
Product development involves a number of uncertainties, including unanticipated
delays and expenses. New products may have technological problems or may not be
accepted by our users or advertisers. There is no assurance that new products
will be introduced in a timely manner or result in user satisfaction or
increased revenues. If we are unable to respond in a timely manner to
technological advances, we may not be able to compete effectively for users,
which could cause our revenues to decrease.

IF OUR SOFTWARE OR HARDWARE CONTAINS ERRORS, OUR BUSINESS COULD BE SERIOUSLY
HARMED.

The software and hardware used to operate and provide our services is complex
and, accordingly, may contain undetected errors or failures. We have in the past
encountered, and may in the future encounter, errors in the software or hardware
used to operate and provide our services. This has resulted in, and may in the
future result in, a number of adverse consequences, including:

o users being disconnected from our service or being unable to access
our service;

o loss of data or revenue;

o injury to reputation; and

o diversion of development resources.

We have experienced some technical and customer support issues associated with
our products and software releases. These issues have resulted in users
discontinuing our service and have adversely impacted our revenues. We cannot
assure you that we will not experience additional problems in the future.

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IF WE ARE NOT ABLE TO PROTECT OUR
PROPRIETARY RIGHTS.

If we are not able to protect our proprietary rights, we may not be able to
compete effectively. We principally rely upon patent, copyright, trade secret
and contract laws to protect our proprietary technology. We cannot be certain
that we have taken adequate steps to prevent misappropriation of our technology
or that our competitors will not independently develop technologies that are
substantially equivalent or superior to our technologies. In addition, since we
provide our Internet access software for free, we are extremely susceptible to
various forms of unauthorized use of our software. These actions could adversely
affect our brand name.

WE MAY INCUR SUBSTANTIAL COSTS AND DIVERSION OF MANAGEMENT RESOURCES IF WE
INFRINGE UPON THE PROPRIETARY RIGHTS OF OTHERS.

We have permission and, in some cases, licenses from each developer of the
software that we use in our software. Although we do not believe that the
software or the trademarks we use or any of the other elements of our business
infringe on the proprietary rights of any third parties, third parties may
assert claims against us for infringement of their proprietary rights and these
claims may be successful. In addition, a number of third-party owners of patents
have claimed to hold patents that cover various forms of online transactions or
online technology. As with other online service providers, patent claims could
be asserted against us based upon our services or technologies.

We could incur substantial costs and diversion of management resources in the
defense of any claims relating to proprietary rights. Parties making these
claims could secure a judgment awarding substantial damages as well as
injunctive or other equitable relief that could effectively block our ability to
use our products in the United States or abroad. If a third party asserts a
claim relating to proprietary technology or information against us, we may seek
licenses to the intellectual property from the third party. We cannot be
certain, however, that third parties will extend licenses to us on commercially
reasonable terms, or at all. If we fail to obtain the necessary licenses or
other rights, it could materially and adversely affect our ability to operate
our business.

OUR SERVICE COULD BE DISRUPTED BY A SECURITY BREACH, VIRUS OR INAPPROPRIATE
USE BY INTERNET USERS.

The future success of our business will depend on the security of our network
and, in part, on the security of the network infrastructures of our third-party

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telecommunications service providers, over which we have no control. Computer
viruses or problems caused by our users or other third parties, such as the
sending of excessive volumes of unsolicited bulk e-mail or "spam", could lead to
interruptions, delays, or cessation in service to our users. In addition, the
sending of "spam" through our network could result in third parties asserting
claims against us. There can be no assurance that we would prevail in such
claims and our failure to do so could result in large judgments against us.
Users or other third parties could also potentially jeopardize the security of
confidential information stored in our computer systems or our users' computer
systems by their inappropriate use of the Internet, including breaking into our
computer network, which could cause losses to us or our users. Users or third
parties may also potentially expose us to liability by "identity theft", or
posing as another NetZero user. Unauthorized access by current and former
employees or others could also potentially jeopardize the security of
confidential information stored in our computer systems and those of our users.
We expect that our users will increasingly use the Internet for commercial
transactions in the future. Any network malfunction or security breach could
cause these transactions to be delayed, not completed at all, or completed with
compromised security. Users or others may assert claims of liability against us
as a result of any failure by us to prevent these network malfunctions and
security breaches, and may deter others from using our services, which could
cause our business prospects to suffer. Although we intend to continue using
industry-standard security measures, such measures have been circumvented in the
past, and we cannot assure you that these measures will not be circumvented in
the future. We also cannot assure you that the security measures of our
third-party network providers will be adequate. In addition, to alleviate
problems caused by computer viruses or other inappropriate uses or security
breaches, we may have to interrupt, delay, or temporarily cease service to our
users, which could have a material adverse effect on our revenues and could also
result in inreased user turnover.

OUR REVENUES COULD BE ADVERSELY AFFECTED IF PROGRAMS TO DISABLE THE ZEROPORT
BECOME PREVALENT.

Various software programs have been developed that specifically target The
ZeroPort to disable our ability to deliver advertisements to a user. These
programs attempt to blank out, or block, banner advertisements on the ZeroPort
or completely delete the ZeroPort from users' computer screens. To date, such
programs have not interrupted our operations or caused us to fail to meet the
terms of our advertising agreements. While we believe we have been able to limit
the effectiveness of such attempts, there can be no assurance that we will be
able to continue to do so in the future. Widespread adoption of this type of
software would seriously damage our ability to operate our business and generate
revenues.

WE MAY NOT BE ABLE TO EXPAND OUR OPERATIONS IF WE ARE NOT ABLE TO OBTAIN
ADDITIONAL EQUIPMENT FROM THIRD-PARTY HARDWARE SUPPLIERS.

The expansion of our network infrastructure and Internet services in general is
placing, and will continue to place, a significant demand on our suppliers. From
time to time, we have experienced delayed delivery from suppliers of modems,
servers, and other equipment. We may be unable to implement our planned
expansion and our users may be unable to connect to our network if we are not
able to obtain additional equipment in a timely manner and on commercially
acceptable terms. In particular, our servers are a critical part of our
infrastructure and we will need additional servers to expand our operations. We
currently purchase, and expect to continue to purchase, all of our servers from
Sun Microsystems. Since we do not have an agreement with Sun Microsystems
regarding future server purchases, we have no assurance that Sun Microsystems
will continue to supply servers to us on commercially acceptable terms, if at
all.

WE MAY EXPERIENCE LOSS OF DATA, DISRUPTION OF OPERATIONS, OR ERRONEOUS
OVERCHARGES OR UNDERCHARGES TO ADVERTISING CUSTOMERS IF THE ORACLE SOFTWARE WE
USE TO RUN OUR OPERATIONS FAILS TO OPERATE CORRECTLY.

Virtually every aspect of our operations, including finance, billing,
accounting, storage and retrieval of user data, and advertisement tracking, uses
or interfaces with a centralized software system provided by Oracle. We have
only limited experience with the operation of this system. Difficulty with the
operation of, or errors, defects or malfunctions in the operation of, this
system could result in loss of data, erroneous overcharges or undercharges to
advertising customers or disruption of operations.

OUR ABILITY TO OPERATE OUR BUSINESS COULD BE SERIOUSLY HARMED IF WE LOSE MEMBERS
OF OUR SENIOR MANAGEMENT TEAM AND OTHER KEY EMPLOYEES.

Our business is largely dependent on the personal efforts and abilities of our
senior management and other key personnel. Any of our officers or employees can

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terminate his or her employment relationship at any time. The loss of these key
employees or our inability to attract or retain other qualified employees could
seriously harm our business and prospects. We do not carry key man life
insurance on any of our employees.

WE WILL NOT BE ABLE TO GROW OUR BUSINESS IF WE ARE NOT ABLE TO HIRE
ADDITIONAL PERSONNEL.

Our future success also depends on our ability to attract, retain and motivate
highly skilled technical, managerial, editorial, merchandising, sales, marketing
and user service personnel. We plan to hire additional personnel in all areas of
our business. Competition for such personnel is intense, particularly in the
Internet and high technology industry. As a result, we may be unable to
successfully attract, assimilate or retain qualified personnel. We may also be
unable to retain the employees we currently employ or attract additional
technical personnel. If we fail to retain and attract the necessary personnel,
we may not be able to operate and grow our business.

OUR BUSINESS COULD BE SHUT DOWN OR SEVERELY IMPACTED IF A NATURAL DISASTER
OCCURS.

Our operations and services depend on the extent to which our computer equipment
and the telecommunications infrastructure of our third-party network providers
is protected against damage from fire, earthquakes, power loss,
telecommunications failures, and similar events. A significant portion of our
computer equipment, including critical equipment dedicated to our Internet
access services, is located at our headquarters and at facilities in Los Angeles
and San Jose, California. Despite precautions taken by us and our third-party
network providers, over which we have no control, a natural disaster or other
unanticipated problems at our headquarters or at a network hub, or within a
third-party network provider's network, could cause interruptions in the
services that we provide. For example, if an earthquake damages equipment at our
network operations center, we may have no means of replacing this equipment on a
timely basis or at all and our service would be shut down. We do not currently
maintain fully redundant or back-up Internet services, backbone facilities or
other fully redundant computing and telecommunications facilities. Furthermore,
we do not currently have any business disruption insurance. Any prolonged
disruption of our services due to system failure could result in user turnover
and decreased revenues.

WE FACE RISKS RELATED TO THE INTERNET INDUSTRY

WE COULD BE EXPOSED TO SIGNIFICANT LEGAL LIABILITY IF NEW CASE LAW IS DECIDED,
OR NEW GOVERNMENT REGULATION IS ENACTED, REGARDING THE INTERNET AND INTERNET
SERVICE PROVIDERS.

The law relating to our business and operations is evolving and in a state of
flux. The modification, repeal or adoption of laws or regulations may decrease
the growth in the use of the Internet, affect telecommunications costs or
increase the likelihood or scope of competition from regional telephone
companies. These results could decrease the demand for our services or increase
our cost of doing business, each of which would cause our gross margins and
revenues to fall. In particular, the following risks could occur:

REGULATION OF CONTENT AND ACCESS COULD LIMIT OUR ABILITY TO GENERATE REVENUES
AND EXPOSE US TO LIABILITY.

Prohibition and restriction of Internet content and access could dampen the
growth of Internet use, decrease the acceptance of the Internet as a
communications and commercial medium and expose us to liability. A variety of
restrictions on content and access, primarily as they relate to children, have
been enacted or proposed, including laws which would require Internet service
providers to supply, at cost, filtering technologies to limit or block the
ability of minors to access unsuitable materials on the Internet. Because of
these content restrictions and potential liability to us for materials carried
on or disseminated through our systems, we may be required to implement measures
to reduce our exposure to liability. These measures may require the expenditure
of substantial resources or the discontinuation of our product or service
offerings that subject us to this liability. Further, we could incur substantial
costs in defending against any of these claims and we may be required to pay
large judgments or settlements or alter our business practices. In addition, our
liability insurance may not cover potential claims relating to the Internet
services we provide or may not be adequate to indemnify us for all liabilities
that may be imposed on us.

WE COULD BE EXPOSED TO LIABILITY FOR DEFAMATION, NEGLIGENCE AND INFRINGEMENT.

Because users download and redistribute materials that are cached or replicated
by us in connection with our Internet services, claims could be made against us
for defamation, negligence, copyright or trademark infringement, or other

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theories based on the nature and content of such materials. While we have
attempted to obtain safe harbor protection against claims of copyright
infringement under the Digital Millennium Copyright Act of 1998, there can be no
guarantee that we will prevail in any such claims. We also could be exposed to
liability because of third-party content that may be accessible through our
services, including links to web-sites maintained by our users or other third
parties, or posted directly to our web-site, and subsequently retrieved by a
third party through our services. It is also possible that if any third-party
content provided through our services contains errors, third parties who access
such material could make claims against us for losses incurred in reliance on
such information. These types of claims have been successfully brought against
other online service providers. In particular, copyright and trademark laws are
evolving and it is uncertain how broadly the rights provided under these laws
will be applied to online environments. It is impossible for us to determine who
the potential rights holders may be with respect to all materials available
through our services.

OUR ABILITY TO SELL TARGETED ADVERTISING MAY BE LIMITED IF NEW LAWS RELATING
TO USER PRIVACY ARE ENACTED.

Our ability to sell targeted advertising partly depends on our ability to use
personal information collected from our users. We cannot assure you that our
current information collection procedures and disclosure policies will be found
to be in compliance with existing or future laws or regulations. Our failure to
comply with existing laws, or the adoption of new laws or regulations that
require us to change the way we conduct our business, could make it
cost-prohibitive to operate our business, and prevent us from pursuing our
business strategies including the sale of targeted advertising.

OUR MARGINS AND COSTS WOULD BE ADVERSELY AFFECTED IF OUR BUSINESS BECOMES
SUBJECT TO TAXATION.

The tax treatment of activities on or relating to the Internet is currently
unsettled. A number of proposals have been made at the federal, state and local
levels and by foreign governments that could impose taxes on the online sale of
goods and services and other Internet activities. Recently, the Internet Tax
Freedom Act was signed into law, placing a three-year moratorium on new state
and local taxes on Internet commerce. However, there can be no assurance that
future laws imposing taxes or other regulations on commerce over the Internet
would not substantially impair the growth of Internet commerce and, as a result,
negatively impact our margins or make it cost-prohibitive to operate our
business.

TELECOMMUNICATIONS REGULATION COULD MAKE IT MORE EXPENSIVE FOR US TO DO
BUSINESS.

As an Internet service provider, we are not currently directly regulated by the
Federal Communications Commission or any other governmental agency, other than
regulations applicable to businesses generally. Nevertheless, Internet-related
regulatory policies are continuing to develop, and it is possible that we could
be exposed to regulation in the future. We could be adversely affected if any
regulatory or statutory change results in the application of access charges to
Internet service providers, because this would substantially increase the cost
of using the Internet. Similarly, new laws or regulations could increase costs
to those entities who provide us with telecommunications services, and those
changes too could substantially increase our cost of doing business. Since one
of the largest components of our operating costs is telecommunications expense,
any increase in such costs would have a material adverse effect on our cost of
revenues and gross margins. We could also be affected by any change in the
ability of our users to reach our network through a dial-up telephone call
without any additional charges.

SEASONAL TRENDS IN INTERNET USAGE AND ADVERTISING SALES MAY NEGATIVELY AFFECT
OUR BUSINESS.

Seasonal trends could affect the advertising revenues we generate from operating
our Internet services. To the extent that our advertising revenues depend on the
amount of usage by our users, seasonal fluctuations in Internet usage could
affect our advertising revenues during these periods of fluctuation. In
addition, the rate at which new users sign up for our services may be lower
during certain seasons and holiday periods. Because our operating history is so
limited, it is difficult for us to accurately predict these trends and plan
accordingly. Since our operating expenses are based on our expectations of
future revenues, it is possible that seasonal fluctuations could materially and
adversely affect our revenues and our operating results.

IF INTERNET USAGE DOES NOT CONTINUE TO GROW, WE MAY NOT BE ABLE TO GROW OUR
BUSINESS AND INCREASE OUR REVENUES.

If our assumption that use of the Internet will continue to grow turns out to be
incorrect, we will not be able to grow our business and increase our revenues.
Substantially all of our revenues are dependent on the continued use and

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expansion of the Internet. Use of the Internet has grown dramatically, but we
cannot assure you that usage of the Internet will continue to expand. A decrease
in the demand for Internet services or a reduction in the currently anticipated
growth for such services could cause our user base and our advertising revenues
to decrease.

OUR BRAND AND BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO PROTECT
OUR DOMAIN NAMES OR ACQUIRE OTHER RELEVANT DOMAIN NAMES.

We currently hold the Web domain name relating to our brand, NetZero.com, as
well as numerous other related Web domain names. The acquisition and maintenance
of domain names generally is regulated by governmental agencies and their
designees. The regulation of domain names in the United States and in foreign
countries is subject to change in the near future. As a result, we may be unable
to acquire or maintain relevant domain names in the countries in which we
conduct, or plan to conduct, business. 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, dilute
or otherwise decrease the value of our trademarks and other proprietary rights.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

NetZero currently does not hold any derivative instruments and does not engage
in hedging activities. Also, NetZero is not currently party to any transactions
denominated in a foreign currency. Thus, NetZero's exposure to interest rate and
foreign exchange fluctuations is minimal.

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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(D) USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES. On September 29, 1999,
NetZero completed an initial public offering of its common stock, $.001 par
value. The shares of common stock sold in this offering were registered under
the Securities Act of 1933, as amended, on a Registration Statement on Form S-1
(Reg. No. 333-82827) that was declared effective by the SEC on September 23,
1999. The offering commenced on September 24, 1999. All 11.5 million shares of
common stock registered under the Registration Statement (including 1.5 million
shares sold pursuant to the exercise of the underwriters' over-allotment option)
were sold at a price of $16 per share. The aggregate price of the offering
amount registered was $184 million.

In connection with the initial public offering, NetZero paid an aggregate of
$12.9 million in underwriting discounts and commissions to the underwriters and
paid other expenses in the amount of approximately $1.8 million. After deducting
the underwriting discounts and commissions and offering expenses, NetZero
received net proceeds from the offering of approximately $169.3 million. As of
September 30, 2000, NetZero had used approximately $100 million of the net
proceeds from the offering to fund its operating losses and capital
expenditures. The balance of the proceeds will be used for general corporate
purposes including additions and enhancements to the Company's server and
network infrastructure, working capital, expansion of its sales and marketing
capabilities and brand-name promotions. NetZero may also use a portion of its
proceeds for acquisitions of complementary businesses, services or technology.
Pending these uses, the net proceeds of the offering will be invested in
short-term, interest-bearing, investment-grade instruments. None of the net
proceeds from the offering were paid directly or indirectly to any director,
officer, general partner of NetZero or their associates, persons owning 10% or
more of any class of equity securities of NetZero, or an affiliate of NetZero.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

27.1 Financial Data Schedule

(b) None

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SIGNATURES

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

NETZERO, INC.
(REGISTRANT)

By: /s/ Charles S. Hilliard
-----------------------------------
Charles S. Hilliard
SENIOR VICE PRESIDENT, FINANCE
AND CHIEF FINANCIAL OFFICER

Dated: November 14, 2000